More Jobs, Higher Wages Essential for Tunisian Growth

U.N. Secretary-General Ban Ki-moon was in Tunisia last month to participate in the first round of the National Dialogue on Employment, which gathered 270 representatives of the government, political parties, unions, civil society and experts.. The participation of the secretary-general underscores the international importance of preserving Tunisia’s democratic gains, as well as the U.N.'s hope to offer Tunisia as a successful model of reform for the region.

At the closing ceremony of the dialogue, Moon stated: “Employment stands for self-esteem and dignity. The young men and women who are excluded from employment find themselves in difficulty, alienated and separated, (from society) to the point where they might be vulnerable to the entreaties of extremists.” A sense of urgency is palpable as ISIS multiplies its attacks in Tunisia—the last one occurring in March in the border town of Ben Guerdane, leaving 18 casualties, among them seven civilians.

The dialogue resulted in an “Eleven-Point Blueprint”[1] document aimed at promoting jobs and economic growth. The blueprints focused on job creation; supporting interior regions that have struggled economically; vocational training with public investment; improving the business environment by reducing red tape; improving overall governance of ongoing job programs; and increasing public resources to support job seekers. Although the document’s focus on job numbers and economic growth is important, it must take care not to ignore other aspects essential for development. There remains the crucial need for the Tunisian government to improve access to clean water, electricity, affordable housing and healthcare, and a plan for alleviating the debt burden on the middle and low income classes. The dialogue must also focus on broader political necessities such as building respect for the new constitution, advancing the rights and liberties it enshrines and preventing the return of old regime practices, such as torture and police brutality. There must be a greater emphasis on giving a political voice to all citizens, not only powerful businessmen and dominant unions. In other words, Tunisia must create a reformed dynamic to engage all of its citizens in a vibrant Tunisian society.

The Eleven-Point Blueprint that resulted from the first round of the national dialogue is correct in emphasizing the importance of the public sector in promoting reform. However, there are many aspects of reform that remain unaddressed by the document.

1. Relying Too Heavily on the Existing Private Sector

Although incentives to encourage investment by the private sector should lead to job creation, this may not automatically be the case in Tunisia. Indeed, it is important to understand the specificity of the Tunisian economic fabric and develop a targeted strategy. Decades of cronyism have resulted in a severely unequal distribution of wealth. Per the World Bank in its 2014 report on Tunisia[2], “by the end of 2010 some 220 firms connected to Ben Ali and his extended family were capturing an astounding 21 percent of all private sector profits annually in Tunisia (or $233 million, corresponding to over 0.5 percent of GDP). That such a small group of 114 people could appropriate such a large share of Tunisia’s wealth creation illustrates how corruption has been synonymous with social exclusion.” Additionally, some sectors of the Tunisian economy are controlled by a few families well-known by the Tunisian public. In his book Lineages of Revolt, Adam Hanieh provides examples of the agribusiness sector where the Poulina group, owned by the Ben Ayed family, controls 60 percent of imports for food retail businesses. The industry is shared between three families: the Mabrouk, the Chaabi and the Ben Ayed[3]. The elite families are mainly interested in maintaining their wealth and control, and may consider broad investments into the public’s well-being fraught with risk. When referring to the private sector, the National Dialogue should target small and medium businesses and young entrepreneurs, instead of relatively large companies owned by politically connected families. These efforts will have the benefit of diversifying the private sector, which today remains risky due to the high level of capital concentration owned by connected families. Similarly, the National Dialogue must be cautious with Foreign Direct Investment (F.D.I.). According to the World Bank, more than 60 percent of F.D.I. in Tunisia between 2006 and 2011 was concentrated in the extractive sector. A fiscal policy based on attracting F.D.I. might fail to increase local jobs through long-term business ventures since foreign investors are most interested in extracting the country’s natural resources. As per the World Bank[4], “it is important to emphasize that these foreign investments are desirable and create jobs; the challenge for Tunisia is how to also attract investments in higher value added activities that create more wealth and can employ skilled workers.” Until now, fiscal policy has focused on attracting F.D.I. without imposing conditions of local employment or targeting higher value added activities.

2. Aiming for Employment Numbers without Aiming for Fair Wages

In Tunisia, it is common to see a skilled worker holding many jobs in order to pay the bills. The challenge here is not only the scarcity of jobs in general, but the fact that one person often needs to take more than one job to make ends meet. Unless the government enforces a decent minimum wage, its job creation strategies will not be effective in lifting people out of poverty. Moreover, the wage discrepancy between the public and private sectors needs to be narrowed. For example, an engineer working for the Tunisian Company of Petroleum Activities makes on average only 900DT a month ($450), whereas an equivalent position in the private sector would earn the employee 4,000DT monthly ($2,000). Competitive salaries are essential so that skilled labor can be retained in the public sector and domestic innovation rewarded.

3. Unfettered Competition can Lead to Low Growth

The National Dialogue has mostly stressed the importance of competitiveness without defining which competitiveness they are targeting. In the global market, Tunisian companies have to compete with subsidized European goods and products. While the government should not necessarily subsidize the local economy, it could give priority to Tunisian goods and services to boost local production and job growth. In their point of view, being competitive means a reduction of costs of production in order to be able to sell at global market prices and generate profits. However, decreasing production costs results in reducing labor costs and lower salaries and benefits—the precise scenario Tunisia wishes to avoid. Furthermore, decreasing wages in the formal sector is a factor that pushes workers into the informal economy. On the other hand, competitiveness in terms of higher wages and better benefits meant to retain skilled workers and prevent a brain-drain leads to innovation, quality and sustainability of companies. This is why the National Dialogue on Employment should clarify that it is the competitiveness in terms of wages, benefits, innovation and quality that should be pursued.

4. Enforcement of Labor Laws is a Necessity

Weak enforcement of existing labor laws creates a toxic business environment where large companies can exert pressure on public institutions. Indeed, local authorities and regulatory agencies prefer closing their eyes to illegal labor practices under the threat of closing and firing an entire workforce. For example, the JAL Group closed a factory and laid off 4,000 workers without indemnity in July 2013. In contrast, the JAL Group saved jobs and paid indemnities in their branches in France and Italy where labor laws are enforced by local authorities. The current Tunisian labor law stipulates that in the case of collective dismissal of a workforce that is approved by local authorities, the employer is required to pay compensation to the workers. This was not enforced upon JAL Group.

5. How to Deal with the Informal Economy

The national dialogue has not addressed the implications of the informal economy on employment. The informal economy has provided economic opportunities, revenue, fuel and cheap products mainly from China to the local population[5]. There is no doubt that the situation of the unemployed population would have been much worse without the existence of a black market. In its strategy to curb the informal economy, the government will have to measure the repercussions of such a policy on the population. In order to bring back employment to the regulated market and revenue to the state, the government has been thinking about creating tax-free zones along the Libyan and Algerian borders. This strategy will be incomplete since it overlooks the fact that informal trade exists due to cheap contraband fuel and Chinese merchandise arriving through Libyan ports and flooding the African market via Tunisia. Before considering a tax-free zone, a strategic choice should take into consideration both formal and informal trade. Two possible approaches are: (1) the Tunisian government could decide to stimulate its domestic market and, therefore, create jobs by temporarily restricting all cheap foreign products and services until their domestic equivalents reach a standard that allows them to compete globally; or (2) the Tunisian government could decide to fully formalize trade with China and become a key hub for the African market with the objective to generate a trade surplus. The governor of Tunisia’s Central Bank, Chedly Ayari, seemed to have been tempted by the latter option as he recently held discussions with the People’s Bank of China concerning a proposal to peg the Tunisian Dinar to the Yuan.[6]

6. Negotiations of Free Trade Agreement should be Linked to Employment Strategy

The government has been actively negotiating a Free Trade Agreement (F.T.A.) with Europe despite lacking an assessment of the former trade agreement of 1995. For Tunisian companies, which are generally not competitive with the exception of the cable industry, opening the market with Europe will mean that at best they will have to reduce their production cost. Any F.T.A. will have an impact on domestic employment in sectors that are already fragile. A study on the assessment of the impacts of the F.T.A. of 1995 with the European Union[7] found that “when tariffs against the E.U. fall, (Tunisian) consumers pay less for the imports that they now buy from the E.U. instead of third countries but they lose even more as the transfer of tariffs revenue reduces as well.” Furthermore “in terms of absolute in economic welfare, the gain of the E.U. 12 member countries amounts to $2.4 billion compared to the $26.8 million reduction in Tunisian welfare.” The study concludes that “Tunisia may not have a great deal to gain in economic terms from entering into a F.T.A. with the E.U. The reason is that the F.T.A. amounts essentially to Tunisia eliminating its bilateral tariffs vis-a-vis the E.U., since Tunisia already has had duty free access to the E.U. except for some agricultural products and certain types of clothing exports. The trade diverting effects of such discriminatory tariff reduction are likely to be harmful, especially in the short run. Further F.T.A. does not in itself appear likely to generate an inflow of capital into Tunisia that would materially increase Tunisian welfare.” Should the Tunisian government persist in moving forward with the F.T.A., negotiations must be discussed within the national dialogue. Additionally, there should be a targeted strategy to remove only the necessary tariffs that will not negatively impact Tunisian welfare and open markets only for competitive sectors such as the cable and olive oil industries to minimize loss of local jobs.

7. The Job Creation Program should Consider how to Finance its Cost

The blueprint makes no mention of how the government will finance its job-creation program. This implies that the government will continue to rely on conditioned loans in foreign currencies when most of Tunisia’s needs are in Tunisian dinars. Unfortunately, the political class has been reluctant to reform the pre-revolution economic model that is responsible for wealth and income inequality and regional development disparity. Worst, the Tunisian government has recently decided to task Dominique Strauss-Kahn, the former I.M.F. managing director who praised Zine el-Abidine Ben Ali for his “sound economic policy,” with implementing a five-year economic plan. The current five-year plan is no different from Ben Ali’s economic platform that relied on privatization, deregulation and fiscal incentive policies to the benefit of capital owners and F.D.I. We know from past experience in Tunisia that previous export-led and debt-driven growth models have failed and that the private sector potential is limited not only due to corruption, but the concentration of wealth and interests.

Conclusion

Serving as a starting point to guide strategic discussions, the blueprint proposed by the National Dialogue on Employment needs to be revised. The dialogue cannot deliberate on strategies to increase the number of jobs created without giving priority to improving the dignity of the people through fair wages and benefits. Nor can it ignore the specificities of the Tunisian economic fabric shaped by the legacy of decades of cronyism. Most importantly, the dialogue should reflect on Tunisia’s economic model and learn from past failed experiences.

Tunisians cannot wait any longer for the same neoliberal policies to yield the fruits promised decades ago. Tunisia should reform its economic model to explore an employment-driven growth model and work with fiscal and monetary policies to achieve this goal. A ‘Job Guarantee’ program where the government becomes an ‘Employer of Last Resort’[8] could achieve full employment if the Central Bank and the government work in concert to control inflation. Such a program should not necessarily result in a bloated bureaucracy, but offer more leverage to the government to create markets that do not exist, such as the solar energy sector. Unfortunately, last month, lawmakers decided to restrict this economic model by approving an amendment that forbids the Tunisian Central Bank from buying government bonds. With this amendment, the Tunisian Central Bank can no longer affect the money supply by buying or selling government bonds. In other words, Tunisia is condemned to finance its deficit either through its own resources, which are scarce, or by seeking more conditioned loans in foreign currencies. While the intention among Tunisia’s leaders to improve the economy is clear, the approach thus far has left a lot to be desired.