Chapter 1

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panies in offshore activities and promote higher levels of pri- Government is reassessing labor legislation with the objecvate investment. Price liberalization Considerable progress has been made in reducing producer tive of increasing employer flexibility to adjust the size of the work force. Reforming agriculture price controls and regulated distribution margins in the agri- Input subsidies have been reduced significantly, but the cultural and manufacturing sectors. By ond 1994, only 13 Government should reassess its agricultural policies that percent of producer prices in agriculture and manufactur- hinder private sector participation in marketing some ing were still regulated and 30 percent were regulated at the agroindustrial products. Policies that entail price supports distribution stage. The two main sectors where controls and credit subsidies to maintain or increase cereal producaccount for a significant share of production are agroindus- tion need to be reassessed in light of trade integration with tries and construction materials, and, at the distribution Europe and the expected impact of the Uruguay Round stage, for machinery and equipment. Regulated distribution agreement. The land tenure system (characterized by poorly margins for fresh fruits and vegetables should be removed, defined property rights) hinders the use of market mechagiven the extent of domestic competition in this subsector nisms as a means of ensuring that land and agricultural and the need to transmit dear price signals back to produc- inputs are used as efficiently as possible. The state, as a ers. Cereal prices are not incduded in the price liberalization major owner of prime crop land (11 percent of total culcalculation, but are set by the Government, and the prices tivable land) should consider expanding its program of leasof many services and nonmanufactured goods continue to ing land to the private sector and reassess the costs and be regulated. benefits of selling state lands to the private sector. Labor markets Banking reform The population growth rate of 2 percent (and the young age Tunisia has come quite far in creating a healthier and more structure of the population), the entrance of more women efficient banking sector. Prudential regulations were reininto the work force, and rural to urban migration flows are forced in 1994, including stringent capital adequacy increasing the urban labor force at the rate of an estimated requirements, and the supervisory role of the central bank 5 percent a year. Unemployment is estimated by the Bank has been strengthened. The most notable feature of the to be between 11-12 percent, with the main unemployment banking sector is the predominance of public sector banks, problem being for first-time job seekers. The growing size which account for 70 percent of the banking sector's total of the urban work force puts pressure on the authorities to assets and whose performance is significantly weaker than increase economic growth and create more jobs. Between that of the private banks. 1989-93, job creation has been faster than the average for The Government's efforts have focused on recapitalizing the economy in the services sector (4.3 percent) which the public sector banks and improving the quality of their accounts for the largest share of total employment (24 per- portfolios. In order for these efforts to succeed, the policy cent). Employment in government administration is high environment has to encourage competition-based on the (18 percent of total employment and 25 percent of total provision of services and on interest rates. A gradual divestiwage earners), and it has also been growing faster than the ture of these banks (through selling some shares on the economy's average (3.2 percent compared to 2.1 percent). stock exchange) would be an ineffective substitute for sell- The authorities may wish to introduce quarterly or annual ing a controlling interest to a core group of shareholders that labor surveys, which are used in many countries to give pol- can appoint key board members and managers that can run icymakers more up-to-date information on labor market the banks after divestiture. With respect to the governmentchanges. The Government is currently preparing a strategic owned development banks, the Government should explore study of labor issues for the Ninth Plan covering labor leg- options with its partners (the governments of other Arab islation, costs, productivity and wages. In particular, the states) to reorient the development banks' activities toward xviii TuNIsEs GLOBAL INTEGRATnON AND SuSrAINABLE DEVELOPMENT STRATEGIC CHOICES FOR THE 21sT CENTURY
investment banking, restructure some, or link some of them This work has been applied to the case of Tunisia, by up with commercial banks. comparing per capita GDP growth improvements from 1981-86 (the period prior to undertaking adjustment Financial market development reforms) with those during 1987-94 (the period during which structural reforms have been under implementation). After being dormant for more than 20 years, since 1989, the The analysis compares the predicted improvement with the Government has strengthened the necessary laws and reg- actual improvement, and it estimates the growth impact of ulations which have encouraged the stock and primary several policy measures, as determined by the cross-country bond markets to begin functioning. Between 1990 and empirical analysis. The main elements that contributed to 1994 primary bond market activity grew steadily, while improved growth in Tunisia were estimated to be (1) an stock market activity increased dramatically. Over this increased openness of the economy, (2) a reduction in price period, the stock index increased 350 percent, the capital- distortions, (3) imnprovement in population health indicaization of the 20 listed companies on the Tunis stock tors, (4) advancement in the level of education, and (5) exchange jumped from TD 543 million to TD 2.4 billion, financial deepening. All these elements significantly and the demand for stocks exceeded the supply by 200-500 increased the economy's total factor productivity. Given percent. The average price/earnings ratio on the Tunisian that physical capital investment as a ratio to GDP was lower stock market is high (25), compared to average ratios in in 1987-94 than in 1981-86, the rise in total factor producother emerging markets that range between 10 and 15. The tivity was the main source of the improved growth perfor- Government should consider: (1) speeding up the privati- mance in the reform period. zation program to increase the supply of stock offerings and Conditional on a timely completion of the reform prohelp to satisfy the excess demand for stocks and (2) remov- gram, real GDP is projected to grow at an average of 6.2 ing fiscal distortions in the form of large tax benefits that percent over the next nine years. It is estimated that about encourage investors to oversubscribe to initial stock offer- one third of the growth improvement with respect to the ings. It will nevertheless take time for many of Tunisia's tra- period 1987-94 would be explained by a larger investment ditional, family-owned companies to go public. The rate. Thus, most of the growth improvement would come Government has overseen the development of an increas- through a further rise in total factor productivity, generated ingly sophisticated financial sector. With the implementa- by both stronger market incentives for private activity and tion of reforms to strengthen institutional investors, and by more efficient public services. Given the environmental ensuring market-driven interest rates and an active sec- constraints facing Tunisia, agriculture's share in total proondary market for government securities, the financial sec- duction is projected to decrease in the coming years at the tor will be significantly strengthened. same time as manufacturing and nongovernment services (with a slightly decreased role for tourism) become the lead- Policies for higher growth (chapter 4) ing growth sectors. Tunisia's extemal position would remain sustainable, particularly under the high-growth scenario, as In the mid-1980s, several prominent economists began private savings respond favorably to financial sector reforms focusing their attention on how long-run growth is enhanced and as the exports to GDP ratio rises due to Tunisia's by socioeconomic developments and govemment policies. This theoretical and empirical research uses cross-country enhanced intemational competitiveness. data to measure to what extent different structural reforms promote economic growth. Their main conclusion is that The challenges of globalization (chapter 5) economic growth is maximized when the incentives to invest Successful economic performance will be increasingly deterin physical and human capital as well as in technological mined by a country's adaptability to accelerating change in innovation are detemiined by free-market forces. the rest of the world. A strong human capital base, trans- Govemments assist this process by providing an environ- parent rules and regulations, and private sector dominated ment of macroeconomic and political stability and the enterprise management structures offer Tunisia its best appropriate public infrastructure. chance to compete successfully in the global economy. The ExEcuTm SUMmMAY xix
Page 1: Public Disclosure Authorized Public
Page 4 and 5: Copyright i 1996 The International
Page 6 and 7: Education policies 20 Basic educati
Page 8 and 9: 2.4 Demand for telephone connection
Page 10 and 11: Acknowledgments The report is a pro
Page 12 and 13: STIL Soci&e Tunisienne d'Industrial
Page 15 and 16: Executive summary Elements of Tunis
Page 17 and 18: ments and controlling the expansion
Page 19: Progress in strengthening market fo
Page 23 and 24: Chapter 1 Macroeconomic policy The
Page 25 and 26: Box .I Monetary policy Instruments,
Page 27 and 28: TALE 1.3 Main monetary Indicators 1
Page 29 and 30: national markets and ensure the sus
Page 31 and 32: domestic production, and inducing a
Page 33 and 34: was actually higher than that for t
Page 35: public banks and enterprises reveal
Page 38 and 39: (10 percent), and Malaysia (12 perc
Page 40 and 41: Infrastructure services: Provision
Page 42 and 43: on a pilot basis and is studying th
Page 44 and 45: or in the public sector. The Bank i
Page 46 and 47: onmental issues and their relation
Page 48 and 49: several industrial zones. Despite t
Page 50 and 51: vocational education more relevant
Page 52 and 53: also showed high effective rates of
Page 54 and 55: try an opportunity to accelerate a
Page 56 and 57: BOX 3.2 Free trade zones: Maximizin
Page 58 and 59: largest share of total employment (
Page 60 and 61: encouraging results and provides us
Page 62 and 63: ill market and to modernize the leg
Page 64 and 65: price/earnings ratio of about 25 in
Page 66 and 67: achieve their intended objectives i
Page 68 and 69: TABLE 4.2 crisis brought about an 7
Page 70 and 71:
costly process of adjustment, the a
Page 72 and 73:
ented economy The growth of exports
Page 74 and 75:
as a whole, but the related transit
Page 76 and 77:
Land degradation and water scarcity
Page 78 and 79:
TABLE 5.1 Poky otfecdt Short term M
Page 80 and 81:
TABLE 5.2 Complementary reforms (co
Page 82 and 83:
IMF (International Monetasy Fund).
Page 84 and 85:
Statistical Annex TABLE SA. I Exter
Page 86 and 87:
TABLE SA.3 Public sector accounts,
Page 88 and 89:
TABLE Sk6 GNP, output, and governme
Page 90 and 91:
TABLE SA.8 Money, credit, prices, a
Page 92 and 93:
TABLE SA IO Key economic variables,
Page 96:
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Chapter 1

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