Interview: Economic Reform in Tunisia

Ten years ago, Tunisia led the Arab Spring, sparking mass protests for democratic reform throughout the Arab world. Tunisians have kept the democratic spark alive, while political freedom movements have been repressed and otherwise frustrated elsewhere throughout North Africa and the Middle East. Commonly overlooked, however, has been the cause of economic freedom. In self-immolating himself and setting off the Arab Spring, Mohamed Bouaziz was protesting the daily harassment by Tunisian officials who kept him from selling fruit and making a living, restricting his economic freedom. While most observers believe that Tunisia has made democratic progress over the last ten years, economic reform has lagged.

Anthony Kim, Research Manager at the Davis Institute for National Security and Foreign Policy at the Heritage Foundation, has visited Tunisia several times in the last decade and recently wrote an article “On the 10th anniversary of the Arab Spring, Tunisia is Leading the Way on Democracy.” He also serves as the editor of the Index of Economic Freedom, one of the Heritage Foundation’s flagship publications.

The Index, a world-renowned, annual ranking of economic freedom across the globe is now in its 27th edition. Among its many policy impacts, the U.S. Millennium Challenge Corporations uses its findings in determining country eligibility for “compact” funding. Policymakers and investors worldwide rely on the Index for economic analysis. The Index of Economic Freedom ranks Tunisia 119th of the 169 countries it analyzes. The Tunisian economy is considered “Mostly Unfree.” The highest-ranking countries in North Africa and the Middle East in the 2021 Index are the United Arab Emirates (14), Israel (26), and Bahrain (40).

Below is a recent conversation between Kim and Olfa Hamdi, President & Founder of CSST, on economic freedom and the Tunisian economy. Olfa brings a unique and very hands-on perspective, having recently acted as the chief executive officer of Tunisair, one of the country’s largest firms. The two shed light on why the Tunisian government badly needs to increase economic freedom if it’s to meet the aspirations of the Tunisian people.

Olfa Hamdi: Why is economic freedom important?

Anthony Kim: Since its inception in 1995, the Index of Economic Freedom has chronicled hundreds of examples of government policy changes that have enhanced economic freedom, thereby promoting human progress and greater prosperity. As the Index has cataloged, nations with higher degrees of economic freedom prosper because they capitalize more fully on the ability of the free-market system not only to generate, but also to reinforce dynamic growth through efficient resource allocation, value creation, and innovation. Policies that promote freedom, whether through improvements in the rule of law, the promotion of competition and openness, or suitable restraints on the size and economic reach of government, turn out in practice to offer and advance practical solutions to a wide range of economic and social challenges. Economic freedom matters more than ever.

OH: You recently wrote that in Tunisia, economic reform has been difficult.  Based on the Index’s analysis, how has economic freedom trended over the last decade and what does that mean for Tunisia’s economy?

AK: Undeniably, Tunisia remains a notable exception in the region that faces critical challenges on various fronts, as the country continues to pursue the democratic and economic goals of its revolution. To be sure, Tunisia’s democracy is fragile and still developing, and the economic reform process has been difficult, to say the least. While important progress has been made on the political transition toward an open, democratic system of governance, the economic transition has not kept pace. As with any young democracy, Tunisia’s government continues to face daunting tasks. At the top of the government’s to-do list are revitalizing the economy and building the public’s confidence in a fledgling democracy.

That’s a tall order, and on the broader economic front, structural reforms must be carried out more decisively to show that democracy can bring measurable prosperity for the ordinary Tunisian. According to the latest edition of our Index, Tunisia’s economic freedom score is 56.6 out of 100, making its economy the 119th-freest in the world. Its overall score has increased slightly due to an improvement in property rights and other rule-of-law indicators. However, Tunisia’s political leaders and policymakers will need to continue working with the country’s civil society and youth population to make its economy work, particularly in the policy areas of market openness and regulatory efficiency.

OH: Let’s discuss Tunisia’s Index score in detail.  Tunisia scores best –that is, has the highest degree of economic freedom- in the area of “business freedom.”  What’s the importance of having a high degree of business freedom?

AK: In a nutshell, business freedom is an overall indicator of the efficiency of government regulation of business. An individual’s ability to establish and run an enterprise without undue interference from the state is one of the most fundamental indicators of economic freedom. Tragically, that’s what Mohamed Bouaziz was protesting. Burdensome and redundant regulations are the most common barriers to the free conduct of entrepreneurial activity. By increasing the costs of production, regulations can make it difficult for entrepreneurs to succeed in the marketplace. In recent years, Tunisia’s policymakers have advanced much-needed structural reforms to improve the country’s business climate, including improved bankruptcy law and investment code, while encouraging more vibrant entrepreneurship through the passage of the Start-Up Act in an attempt to attract more foreign as well as domestic investment.

Sectors such as agribusiness, aerospace, renewable energy, telecommunication technologies, and services are areas of great potential. Nevertheless, substantial bureaucratic barriers to investment remain.  State-owned enterprises play a large role in Tunisia’s economy, and some sectors are not open to foreign investment.  The informal sector, estimated at 40 to 60 percent of the overall economy, remains problematic as legitimate businesses are forced to compete with smuggled goods.

OH: One of Tunisia’s lowest scores is in the area of “government integrity.”  Could you please discuss this?

AK: The systemic corruption of government or even private institutions is always an issue that any country cannot ignore and must pay constant attention to so that meaningful and lasting economic development can truly take place. Practices such as bribery, nepotism, cronyism, patronage, embezzlement, and graft result in the severe erosion of economic freedom. Though not all are crimes in every society or circumstance, these practices erode the trust and confidence in government wherever they are practiced. By allowing some individuals or special interests to gain government benefits at the expense of others, they are grossly incompatible with the principles of fair and equal treatment that are essential ingredients of an economically free society.

There is a direct relationship between the extent of government intervention in economic activity and the prevalence of corruption. In particular, excessive and redundant government regulations provide opportunities for bribery and graft. Corrupt practices like bribery and graft, in turn, are detrimental to economic growth and development. Needless to say, Tunisia must confront these problems and address them.

OH: That’s right. There are various anti-corruption entities in Tunisia, but their power is limited and they are reactive.  They need to work to attack the root causes of the problems you cite.  

OH: Tunisia scores poorly too on labor freedom.  I saw the power of the unions when I was at Tunisair.  Even though the company had lost 70 percent of its revenues due to the Covid-19 pandemic, and was in financial crisis, the union resisted pulling back on bonuses.  It rejected decentralization efforts aimed at ensuring that employees across the country could better access their health care benefits.  The idea of using productivity as the basis for salary negotiations and layoffs was also rejected.  The union even rejected my efforts to improve the role and standing of women in the workplace.

AK: Yes, the ability of individuals to find employment opportunities and work is a key component of economic freedom. By the same token, the ability of businesses to contract freely for labor and dismiss redundant workers when they are no longer needed is essential to enhancing productivity and sustaining overall economic growth. The core principle of any economically free market is voluntary exchange. That is just as true in the labor market as it is in the market for goods.

Due to various factors like outdated labor market policies, special interests, the lack of overall economic dynamism, Tunisia’s current labor market, unfortunately, lacks the efficiency of facilitating labor supply and demand. It sounds like Tunisair suffers badly from these issues.

OH: Anthony, the Index notes that “the overall benefits of trade remain undercut by institutional shortcomings” in Tunisia.  Why is trade important to Tunisia, and what could be done to increase it?

AK: A free and open trade environment provides maximum entrepreneurial opportunities and incentives for expanded economic activity, greater productivity, and job creation. Many governments restrict their citizens’ ability to interact freely as buyers or sellers in the international marketplace. Trade restrictions can manifest themselves in the form of tariffs, export taxes, trade quotas, or outright trade bans. However, these are not the only impediments to the freedom to trade, which may be hampered as well by non-tariff barriers that are related to various licensing, standard-setting, and other regulatory actions, needless to say about corruption.
The critical task of enhancing Tunisia’s trade freedom lies in how to effectively tackle these non-tariff barriers. Inevitably, this is the task of advancing overall economic freedom so that the market openness of Tunisia, particularly through participation in the greater global market places as both producers and consumers, can truly help ordinary Tunisians.

OH: What’s the relationship between economic reform and democracy in Tunisia?

AK: I truly think that Tunisia has shown that democracy can work in the Arab world. Let’s remember that Tunisia is a young democracy that will grow but needs some good attention and guiding encouragement, particularly in terms of connecting the evolving democracy to much-needed dynamic economic growth. Ultimately, the two will reinforce each other. As with any young democracy, Tunisia’s government continues to face daunting tasks. At the top of the government’s to-do list is revitalizing the economy and building the public’s confidence in a fledgling democracy.

That’s a tall order, and government leaders will need to continue working with Tunisia’s robust and vibrant civil society and youth population to make it work. That’s the direction we have to pave and build together. To solidify support for greater democracy, it is vital that the younger generation experiences, early on, the benefits of a free economy. Failure to meet expectations could result in disillusionment with democracy itself and bring the risk of instability. On the broader economic front, structural reforms must be carried out more decisively to show that democracy can bring measurable prosperity for the ordinary Tunisian.

OH: How does economic freedom play into U.S. policy?  How should it play into U.S. policy?

AK: For the United States, Tunisia’s embrace of democracy makes the country a critical asset of untapped potential value. A steady and democratic Tunisia not only provides the U.S. with a strategic ally but also serves as a model for future democracies in the region. The success of Tunisia’s bottom-up pursuit of democracy and economic freedom will be a success for the United States, too. Tunisia is a strategic partner in a region where stable, democratic allies are rare and critically needed. The United States and Tunisia should continue to embrace their challenging yet rewarding partnership as the two counties move forward. The result can be a Tunisia that serves as an example of democracy for the larger Arab world. The bottom line is that a stable, prosperous, and democratic Tunisia is in the best interests of the US as well.

OH: Thank you Anthony. The Index makes a compelling case that with greater economic freedom comes greater national prosperity.  And that will boost Tunisian democracy.  There is no reason for Tunisia to wait.  These economic reforms should and could be undertaken now.

AK: Thank you, Olfa. Tunisia is a special country for me. In my humble view, determined and courageous, the Tunisians have been moving forward despite new and lingering challenges. Defying the cynics, the bottom-up transition to democracy continues apace in the birthplace of the Arab Spring. This is and will be a journey of friendship among like-minded and willing friends. I am privileged to be a small part of the ongoing process that aims to ensure the success of Tunisia’s bottom-up pursuit of democracy and economic freedom.