Chapter 1

as a whole, but the related transition costs will be higher for progress in both resource reallocation and closer integration
some groups than for others. Lessons from the political between the production and investment patterns of the two
economy of reform around the world show that interest parties. Several East European countries are moving quite
groups hurt by policies designed to increase competition rapidly (within five to seven years) to remove their trade bar-
(for example, public enterprises, heavily protected private riers against EU products and seek closer integration and
enterprises, traders with import monopolies) will exert an wider access for their goods and services in the EU market.
increasing pressure on the government to delay and even The Tunisian trade agreement with the EU is more gradual.
stop the reforms. Reversals can be extremely costly in terms For products that are sensitive to Tunisian producers, some
of the government's credibility and the public's expectation tariff reductions wiDl be introduced very slowly over twelve
that improvements in the standard of living will actually years and for other products, reductions will be postponed
materialize. for four more years and then introduced gradually over eight
As an illustration, consider the following simple exercise. years, thereby extending substantial protection for many
Assuming that the average per capita GDP growth rate in domestic producers. The agreement also provides ample
the last five years, around 2.4 percent, remains in the future, provisions (safeguard mechanisms in conformity with
it will take sixty-six years for Tunisia to reach the per capita GATT regulations) enabling domestic producers to reverse
GDP level of France in 1994. However, if because of an the tariff reduction process. Discussions on improved access
acceleration of the pace of reforms, the per capita GDP in the EU market for services and agricultural products has
growth rate rises to 4.5 percent in the medium term (say, in been postponed for at least four years (although the access
five years) after having decreased (by, for example, 1 per- for some agricultural products has been increased). These
centage point) due to transition and implementation costs, features could increase the likelihood of reversals, which
it will take thirty-nine years for Tunisia to reach the same slow down the reallocation of resources and delay the econobjective.
omy's ability to reap the benefits of reform. Reversals could
also undermine the credibility of Tunisia's gradual reform
Decisive trade and investment liberalization strategy.
Tunisian authorities should (1) consider compressing
The process of achieving international competitiveness is an the tariff reduction schedule from twelve years to at most
effect of trade liberalization and not a prerequisite for it. The eight years, (2) begin lowering tariffs on all manufactured
argument for protection as a means of helping enterprises goods in the first year (1996), and (3) apply reductions to
upgrade their products has been discredited by international all its trade partners. By making a clear schedule of trade
experience, and there is no reason to believe it is any differ- reform well-known to key groups (labor unions, the acadeent
in Tunisia. The report argues strongly that the best way mic and business communities) and by adhering to the diffor
Tunisia to respond to the challenges and reap the bene- ferent reform schedules, the government will demonstrate
fits of globalization is by liberalizing trade rapidly and deci- its strong, irreversible political commitment to
sively and by significantly reducing impediments to foreign
investment. One of the primary objectives of trade liberal-
competition.
ization is to use competition and efficient resource allocation
as an engine of growth. Increased openness to international
Refocusing the role of the state
trade and foreign investment promotes domestic competi- Privatization, including the dismantling of government
tion, enhances the marginal product of capital, and speeds up monopolies, is central to the structural reform of the econgrowth.
International competition and liberalization of omy and to the process of refocusing the role of the state in
investment regulations will promote cooperation between the economy. Ownership does matter, because it determines
Tunisian and foreign companies that will encourage the tech- the incentive structure of the enterprise, which, in turn, is
nological upgrading of Tunisian industries and the realloca- the force that promotes productivity in a competitive envition
of resources to more productive activities. ronment. The deregulation of public sector monopolies is
The free trade agreement with the EU is a major step, also critical to increasing competition and improving probut
in order to succeed, the agreement needs to show rapid ductivity. In the cases where these measures were under-
52 TUNIsIA's GLOBAL INTEGRAnON AND SUSTAINABLE DEVELOPMENT STRATEGIC CHOICES FOR THE 21ST CENTURY