By Clara Capelli, Senior Economist, Cooperation and Development Network – Pavia
Jobs and fairness will come with economic growth. Growth will come with improved business and investor confidence, which in turn will come once Tunisia can cut its deficits, and control debt and inflation”
IMF’s response[1] to an article published by The Guardian[2] criticizing the organization’s austerity-based requirements in Tunisia is a clear indication of the theoretical framework and the causal links inspiring its operations.
IMF is not the only international donor promoting supply-side policies in Tunisia as well as in the MENA region. Domestic governments in the area have hardly changed their economic agendas, although 2011 uprisings made clear how social discontent was fueled by dire economic conditions and widespread, long-term unemployment.
However, the IMF’s Extended Fund Facility (EFF), a 4-year programme approved in May 2016 of US $ 2.9 billion, has played a significant role in shaping Tunisia’s macroeconomic policies, which have in turn contributed to impact on Tunisians’ purchasing power and prospects. In early January 2018 – a very eventful month in Tunisia’s history – people took once again to the streets to protest against 2018 Finance Law, which incorporates several IMF’s recommendations on fiscal discipline.
This law includes a number of fiscal measures to cut the budget deficit to 4.9 of the GDP and comply with the requirements of EFF, meant to promote macroeconomic stability and improve the business climate for private investors.
Nevertheless, this law will hardly unleash sustained private investment rates, let alone growth. It introduces a package of increases in indirect taxation (e.g. the VAT rates, purchase taxes on several consumer goods, the cost of fuel and electricity, etc.) and raises the fiscal burden on enterprises and formal public and private employees, with serious and worrying implications on social justice and redistribution.
The importance of facilitating private initiative in an efficient and transparent way through better governance and institutional reforms may sound as a reasonable point for everybody to agree upon. Yet, a serious discussion is needed on what kind of private initiative is to be promoted and in which sectors.
Tunisia is still stuck in a stagnant economic model consolidated over the past decades, characterized by a huge dependency on foreign demand and capital, driven by tourism, export-oriented manufacturing (mostly consisting of mere assembling and/or low-value-added activities, mostly in the textile, mechanical and electronic sectors) and call centers[3]. This model has proven to be extremely polarizing – both socially and geographically -, as it is traditionally based on low wages and a productive structure concentrated along the coastal areas, marginalizing the hinterland and unable to evolve into a model that can prompt productivity gains and long-term growth.
It is not a coincidence that most of the governorates where the protests recently took place are among the poorest and underserved of the country, together with the many peripheries of the biggest cities in Tunisia, starting from the suburbs of Tunis. The same pattern can be observed going back to the protests, sit-ins and demonstrations of January 2016 – mainly criticizing the government for the lack of job opportunities and the long-term prospects of growth – as well as to the uprising that led to Ben Ali’s resignation and escape in January 2011.
Over the recent years, the most vulnerable as well as the middle class have also been suffering from the dramatic fall of the Tunisian dinar (approximately -10 percent between 2015 and 2016 and -20 percent between 2016 and 2017 with respect to the euro), a measure required within the framework of the EFF as a more flexible exchange rate regime is seen as “instrumental in supporting Tunisia’s export sector”[4].
It is true that Tunisia is extremely dependent on the foreign sector: trade accounted for almost 90 percent of the GDP in 2016. However, its productive structure does not seem to allow for significant reallocations in trade in the future. According to the most recent data of the Tunisian Institute for Statistics on merchandise trade (in constant prices), exports contracted by 0.1 percent between 2015 and 2016, but rebounded by 4.3 percent in 2017, while imports increased by 2.8 percent in 2016 and 2.6 percent in 2016.
The recovery in exports was largely driven by agricultural products (+7.1 percent) and fuels exports (+6.7 percent), which had shrunk by 21.8 percent and 13.4 percent in 2016, respectively; the textile sector decreased by 0.7 percent in 2016 and increased by 1.1 percent in 2017, while mechanical and electronic exports increased both years by 8.1 and 5.5 percent.
Despite these growth rates, it is yet to be understood how this export pattern may ‘trickle down’ to the rest of the economy and benefit Tunisia in an ‘inclusive’ way, being these activities localized in very specific areas, based on low wages coupled with low productivity and often part of the so-called ‘offshore regime’, which involved a number of fiscal incentives and exceptions for export-oriented enterprises.
On the other side, the import pattern seems to show a strong reliance on imports from abroad for consumption that hardly be substituted with domestic products. Therefore, the depreciation of the Tunisian dinar is very likely to have harsh redistributive repercussions, impoverishing the majority of the population while favoring businesses that a rather limited growth potential and that cannot allow for substantial wage raises or sustained job creation rates.
More than 7 years after the 2011 uprising, Tunisian political leaders have not been able to set a new course for the country’s economy and growth and international donors have not helped in discussing a new development model. While claiming to have private sector development and FDI promotion as their main ultimate economic objective, they fail to elaborate a strategy tailored to Tunisia’s limited economic size and challenges. The country is sandwiched between Algeria and Libya, in one of the least economically integrated regions of the world, which also remains strictly linked to much larger and stronger European economies.
Foreign investors seem to be not particularly attracted by the small Tunisian economy despite the incentives of the offshore system (introduced in 1972 to facilitate export-oriented investment), largely preferring other destinations such as Morocco, which has put in place very aggressive investment-attraction policies over the last years. Tunisia is a rather peripheral country in the global capitalist world, dependent on foreign capital but only able to attract it mostly through generous fiscal incentives and wage compression.
This became clear in November 2016, following the flop of the investment conference Tunisia 2020: Road to Inclusion, Sustainability and Efficiency, which aimed at finding potential investors for 141 projects of an overall value of 50-60 billion Euros) and collected only 14 billion euros of pledges from international organizations and donors. How is macroeconomic discipline going to encourage private investment and FDIs in particular in an economy with these very specific constraints?
Private sector development policies do not necessarily foster sustained private investment if investors do not find a business profitable. Growth driven by private investment does not necessarily come with job creation and fairness, as redistribution is neither an automatic nor a ‘natural’ process. It is the result of a political process. On the contrary, such a growth pattern may create distortions and bottlenecks that can hamper long-term development.
A radical rethinking of the redistribution and social consequences of macroeconomic stability and private sector development is more than ever necessary, and the Tunisian case is paradigmatic in showing that reversing causal links may be the first step for economic theory to contribute in it.
_________
[1] http://www.imf.org/en/News/Articles/2018/01/18/vc01182018-response-to-guardian-article#.WmHCD9q3O0U.facebook
[2] https://www.theguardian.com/commentisfree/2018/jan/17/imf-tunisia-people-rioting-2011-economic-reforms
[3] http://ineteconomics.org/ideas-papers/blog/tunisia-in-turmoil-when-supply-side-orthodoxy-meets-an-angry-citizenry
[4] From the page IMF in Tunisia, FAQs section (last accessed: 22nd January 2018), https://www.imf.org/en/Countries/Tunisia/QandA/tunisia-qandas#q3
17 comments
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So — Can you give some specific examples of the right way to do things?
Excellent question.
Do unto others as you would have them do you
is the quickest, most comprehensive response I can muster.
Argentina, 2002-15. After years of being the IMF’s model student and implementing the “reforms” now decimating the vast majority of Tunisians, Argentina told the IMF to go screw, and instead prioritised rebuilding local industry, jobs and aggregate demand over repaying international loan sharks. Furthermore, Tunisia still retains sovereignty over its own currency, so it’s not in the same roach motel as other IMF victims such as Greece.
That said, kicking out the IMF is a good in and of itself, as they are the ones who create these problems to begin with. That’s a feature, not a bug.
For insider’s look at the process, see John Perkins’ Confessions of an Economic Hitman.
The Argentine peso is worth 1/20th of it’s value since the turn of the century against all other major currencies-all while retaining their own sovereign currency.
I read John Perkins book years ago, and wasn’t sure if it was a work of fiction or fantasy or fact, really hard to tell.
Perkins, op cit., preface, p. x.
And for what it’s worth, depreciation against other currencies is of little use to the domestic population, most of whom are more interested in buying bread than yen. Look at real wage growth and median net wealth instead.
It’s a good thing nobody in Argentina buys any imported goods, and every last item they need is produced there.
There is some peer-reviewed evidence to support Perkins. From Harvard, no less.
Slate covered it in 2010, explicitly in the context of supporting Perkins. Albeit in a backhanded, limited hangout fashion. Right there, in plain sight, are known facts about US crimes against international law, blandly stated in passing: invading, overthrowing, terrorizing other countries. The author admits it literally parenthetically. And what are we talking about? Perkins’s cred.
Here’s the conclusion. Note the bit about peer review toward the end.
Industrial Espionage: How the CIA Got the World to Buy American During the Cold War
Skeletons in the closet? What about overthrowing democratically elected governments and installing dictators right out in the open? And no, it wasn’t because Cold War. We still do it.
“On a more enlightened path?!” FU. Sure, we were recently an empire, but we’ve changed, honey.
The IMF was an imperial tool then. It’s an imperial tool to this day.
And the bit about peer review? Here ya go:
Wikipedia says Perkins’s boss at Chas T. Main first confirmed the story, then nitpicked.
At Evonomics in 2016, Perkins claimed domestic targeting is in progress.
Maybe we should wait another decade, until the blatant facts of yet more grotesque criminality are mentioned only in passing, never directly. And it’s gotta be peer reviewed, naturally.
Yo doubters, wake up and smell the imperial coffee already.
Bill Mitchell has discussed this issue extensively in his blog over the years.
Most recently earlier this week on Tunisia, http://bilbo.economicoutlook.net/blog/?p=37962.
Follow his links to other articles on the subject and search his index and archives.
Argentina is another good example, and Mitchell has articles on it also.
OMG, you have to read the IMF rebuttal to the Guardian article. It’s even more fantasy island than the usual technocratic dreck they regularly slough off.
Of course, no harms of government spending are mentioned: it’s just a self-evident evil, because economists. And this in spite of the fact that the IMF itself found that cutting public sector spending is directly correlated to slower economic growth.
Oops sorry about using the wrong terminology: not ‘austerity’, ‘reforms’; “not sh*t, energy”. Because when we say “austerity” we mean hiking the (highly regressive) VAT, cutting jobs and hiking energy prices– exactly what the masses are protesting against in the 2018 budget. Hey speaking of which, what do you think of that 2018 budget?
OK then.
No wonder their economy sucks.
I don’t know about Tunisia, but in the developed world public investment accounts for about 45-50% of GDP (officially). In the US public investment is roughly $4.2T while business investment was $3.2T (2016). And half of the $3.2T was borrowed.
I consider bank lending a form of government spending. In that vein I don’t think banks are entitled to having a toll gate on the economy. Banks should be publicly owned.
So only roughly 5% of the $ in existence are being re-invested, and over 90% of those $ are owed to the banking system.
On the other hand, if governments didn’t spend and run deficits the real money supply (the one that matters) couldn’t grow and there would be little reason for business investment.
No one gets in a poker game where they are the only ones with money. If the only money businesses could win was money invested by other businesses, profits would put your customers out of work, because gains/losses would be zero-sum.
In the old days when government spending was much lower big business interests had other sneaky ways of squeezing capital out of the sovereign.
Wowzers 20% of their workforce is in the public sector? Good thing we are in sanity ville with 15%. Tunisia better watch it or it’s gonna end up like these economic basket cases: Australia 20.4%, UK 21.5%,, France 28%, Sweden 29.9%, Denmark 31.1%, or Norway 35.6%. Catastrophe averted!
Oh, so they don’t advocate austerity, they advocate cutting deficits and controlling debt and inflation. Thanks for clearing that up for us, IMF!
The really worrying thing here is that Tunisia is (correctly I think) seen as the last best hope of the Arab Spring. In Tunis, and in the North more generally, you do actually feel closer to Europe than anywhere else in the Maghreb. If this goes on, there’s every chance that ordinary Tunisians will once again turn to Ennahada, who still have around 30% of the seats in Parliament after the 2014 elections. Heaven alone knows what the consequences would be.
And if the IMF measures throw Tunisia into chaos and strife, who is going to sort that mess out? Would that not mean another part of the North African coastline destabilized where refugees could funnel themselves through on their way to Europe? Could that not open up the way for mobs like ISIS to get in and establish themselves? After all, a lot of people went from Tunisia to fight with the Jihadists in Syria. The IMF had said themselves that austerity measures only make economic situations worse – so now they want to introduce austerity measures to Tunisia?
By jove, I think he’s got it.
Who’s going to sort it out? Surely you jest. What’s the use of having AFRICOM if you can’t use it?
Nick Turse is the one to read.
The IMF predicted Greek GDP would have recovered by 2015 with austerity.
By 2015 it was down 27% and still falling.
The money supply ≈ public debt + private debt
The IMF didn’t know this equation and pushed Greece into debt deflation. The “private debt” component was going down with deleveraging from a debt fuelled boom. The IMF then trashed the Greek economy by cutting the “public debt” component.
Richard Koo had to explain things to the IMF, they didn’t know what they were doing.
https://www.youtube.com/watch?v=8YTyJzmiHGk
How can they still be making the same old mistakes?
It’s time to call things by their proper name: IMF and World Bank are terrorist and fascist organizations and if they fail to do the job of destroying a country and turning it back into colonial status (despite a false “independence”), only then CIA, Pentagon and the NATO are pulled in to do the job “better”. The USA and NATO together with Al-Qaeda, ISIS, Saudis and Israel smashed the Arab Spring. Medieval butchery in the Middle East is Big Business in Western currencies, and that’s how it’s got to go on and that’s what makes the world a “better place” according to all those who profit from it. THIS is the ruling concept of “democracy”.
It’s time to understand that there is an ANTAGONISTIC difference between the Marshall Plan and 2nd for Japan adopted by Grl. McArthur on one hand, and the IMF recipes on another. The first plan for Japan was what later became the IMF “classic”: to supress industrial development (or independent development of any sort) and to bill the export of raw materials in winner’s currency so to present it all as “generous help”. Industrial products would be imported only or produced with “imported” machinery (actually dumped after serving their useful time in Master’s factories), receivers of all this would be presented as “the unfortunate ones in need” and the pro-dollar elites concentrating the land, the property and the income (in dollars) as “the best” of their societies. After it became clear that Japan had no other basic products to export but rice, that it wouldn’t afford “reconstruction” of any sort and that would only provoke famine in the country, and with the circumstance of Mao Zedong winning the war in neighbour China, the USA cut the deal with elites that sustained the Japanese Empire: re-industrialization on condition of getting disarmed. The same thing – and for all the same reasons – was done in West Germany after the overthrow of the Morgenthau Plan (it pretended to condemn Germany to live on agriculture alone not because of fear to “German genes”, but because Morgenthau had discovered all the money the Nazis had deposited in Swiss banks for future adventures). The former elites of both German and Japanese Empires were industrialists and bankers depending upon each Empire’s domestic potential. They were transfered under Pentagon’s umbrella which gave them the same thing their own Empires were pursuing in their colonial adventures: natural resources for their industries and their domestic markets (and then exports to the USA). The “traditional” elites in hotter places of the planet, however, turned their “feudal” or “backwards” looks into a capitalist merchandise and sold in the North for North’s currencies. The Third World countries were kept in underdevelopment=continuation of colonial status under the mask of a phony “independence” (with colonial elites in power). That’s what the smashing of Arab Spring was all about, it was a replay of Condor Operation in Latin America in the 70s, of J. Edgar Hoover’s Cointelpro Operation in the USA itself (war on Civil Rights Movement, on Black Panthers and most likely the killings in the 60s to begin with), Bay of Pigs, and frankly, the Indian Wars on North American continent itself. Nothing has changed except the weapons. Tillerson is now cooking up a military intervention in Venezuela – economic warfare failed – thinking that turning Latin America into another Middle East is something he and Pentagon Grls. can handle. Bringing a TRUE peace – with justice and tolerance – passes through bringing all this system and all this mentality down, as violent and destructive – unfortunately – as it may sound.