Chapter 1

try an opportunity to accelerate a series of reforms which Government approvals continued to play an important role.
should contribute to the improved competitiveness and The 1987 law offered generous incentives on a sectoral
dynamism of the Tunisian economy. An Institutional basis, and two sectors also benefited from preferential inter-
Development Fund (IDF) grant study constructed a gen- est rates: tourism and agriculture. The incentives were large
eral equilibrium model to estimate the expected impact of (exceeding 1 percent of GDP), they created distortions in
the agreement on the Tunisian economy. the allocation of investment resources, and-in the case of
The total long-term gain in value added is substantial, as agriculture and tourism-encouraged debt as opposed to
resources are reallocated to more productive activities and equity financing. Figure 3.2 compares private investment
as Tunisia receives EU assistance to upgrade standards and patterns in the early 1980s and 1990s. Except for transport
services. The unquantifiable gains in terms of providing services, which grew from a low base in the early 1980s, the
increased security and momentum to strengthen the imple- pattern has not changed significantly. The decline in manumentation
of Tunisia's reform agenda are equally impor- facturing investment may be due to high positive real intertant.
The EU's policy support and technical assistance est rates, incentives that encouraged the misallocation of
should speed up the transfer of technology and enhance resources, and uncertainties stemming from the preparainvestment
opportunities that will help Tunisian enterprises tion of reforms in investment regulations and incentives.
compete more effectively in international markets. In December 1993 Parliament passed the Unified
Preferential and guaranteed access to the EU market, at Investment Code which replaced sectoral investment incenleast
for the next ten years,' should enable Tunisia to tives with common, horizontal incentives: promotion of
increase its exports and attract foreign investment. For the exports; regional development; technological upgrading;
EU, the cost of promoting a closer trade and investment protection of the environment; and enlargement of the
relationship with Tunisia would be modest-the total value entrepreneurship base (les jeunes entrepreneurs). The
of Tunisia's non-oil merchandise exports represents less 1993/94 law provides that no approvals are necessary for
than 2 percent of the EU's annual outlays for agricultural investments seeking only the common incentives, it reduces
subsidies alone. The expected benefits to the EU include incentive distortions (preferential credit for tourism has
not only enhanced political and social stability in the region, been replaced by grants), and it strengthens the investment
but also an opportunity to integrate EU manufacturers with liberalization commitment begun in 1987. However, prior
a lower cost producer, and thereby improve the EU's com- government authorization is still required for numerous
petitiveness. The FTA with the EU is a major step, but in domestic activities, particularly in the services sector: fishorder
to succeed, the agreement needs to show rapid ing; tourism; handicrafts; transportation; telecommunicaprogress
in removing all trade barriers, ensuring access to tions; education; vocational training; cultural activities;
the EU market for all Tunisian goods and services, and in health and real estate development. Investments in other
integrating the production and investment patterns of the FIGURE 3.2
two parties. limisia: Private Investment
(Pern composition)
Domestic investment liberalization 45
40
The ratio of private investment to GDP dropped sharply 35
between 1982-87, and then began increasing after 1987 30
(surpassing the level of public enterprise investment), but 25
even by 1992/93, it had still not reached its 1982 level (fig- 20
ure 2.1). In 1987 a manufacturing investment law was intro- IS
duced that abolished capacity licensing and removed prior I *
5
government investment authorization for all projects not 0 L
requesting investment incentives. This was an important Agricre Mancturing Tourisrn Housing Other servces
step toward investment liberalization, but since most pri- * 1983O85 0en 1990 93
vate investors wanted fiscal and financial incentives, Soure: Mnistry oE Economnc Development INS and World Bank estimates.
32 TUNISiA'S GLoBAL INTEGRATION AND SUSTAINABLE DEVELOPMENrl STRATEGIC CHOICES FOR THE 21ST CENTURY