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FEATURE STORY

“All in the Family, State Capture in Tunisia” : Question and Answers

April 3, 2014

World Bank Working Paper by Bob Rijkers, Antonio Nucifora (both World Bank) and Caroline Freund (Peterson Institute of International Economics) 

What is this about: Ben Ali clan manipulated regulations to reap astonishing profits

  • Ben Ali’s extended family captured the privileges and rents created by the existing set of laws and regulations to their benefit—and they even manipulated the laws to suit their private interests.
  • 220 firms confiscated to the Ben Ali clan by the end of 2010 accounted for less than 1% of jobs but were capturing an astounding 21% of all private sector profits (more than 0.5% of GDP, or USD233 million in 2010 only).
  • Ben Ali firms outperform other firms on all levels (profits, output, and market share).
  • The choice of sectors was not random:  Ben Ali’s family chose lucrative sectors where competition was restricted, either through prior authorization requirements of FDI restrictions, such as air and maritime transport, telecoms, retail and distribution, real estate, hotels and restoration, and financial services.
  • If regulations did not protect a lucrative sector, Ben Ali would use executive powers to change the legislation in his favor (proven through 25 decrees signed by Ben Ali himself introducing new authorization requirements in 45 different sectors, new FDI restrictions in 28 sectors, and new fiscal advantages in 23 sectors).
  • While anecdotes of Ben Ali’s predation of the country are well known, yet little quantitative data has previously shown the extent to which he was able to capture large parts of the economy. 

Why is this important: Corruption and social exclusion

  • The problem of “crony capitalism” is not just about Ben Ali and his clan.  It remains one of the key development challenges facing Tunisia today. 
  • The economic policies and regulatory system that allowed Ben Ali’s corruption still remain largely in place and prone to abuse.
  • Hence, it would be a mistake to assume that following the departure of President Ben Ali and his family the cronyism and rent seeking have disappeared in Tunisia.
  • Most Tunisian businesses and unconnected firms continue to suffer because they face barriers to market entry and their efforts are stymied by the unfair advantages enjoyed by privileged firms.
  • These regulations also perpetuate social exclusion, as unconnected Tunisians face very limited economic opportunity.
  • A few people who have access to those in power and in the administration can capture these benefits, while those who do not have those contacts are excluded from the economic system. 
  • This system generates deep social injustice, and is at the root of the frustration of most Tunisians who felt and feel excluded from economic opportunity.
  • Efforts to attack some these problems are ongoing (e.g. reform the Investment Code and regulatory simplification in 9 ministries), but so far little progress has been made.
  • There is a possibility that Tunisia will have completed its transition without reforming what, as this paper shows, was one of the principle facilitators of the corruption and cronyism that so many Tunisians to the streets three years ago.

How come Tunisia was hailed as good example by the international community (and including by the international financial institutions)?

The Ben Ali regime was very effective at controlling information and restricting access to data.  It successfully portrayed the image of a modern economy, open to foreign investors and in which development was taking place uniformly across the country.  We also bought into the positive image of the country portrayed by Ben Ali.  This masked the severe underlying problems in the Tunisian economy, and also that the level of economic development and the access to economic opportunity was far from being the same for all. 

It is true that for a variety of reasons these issues weren't emphasized or weren't acknowledged - at least as strongly as they should have been. At the World Bank, we clearly were not immune to getting behind the image the Ben Ali regime tried to create for itself. And while we regularly detailed the regulatory failures, the barriers to entry, and the privileges of the old system, this was often masked in bureaucratic language that did not get to the heart of what was clearly a system asphyxiated by its own corruption. It's certainly a lesson we'll take forward and it's one of the key reasons we've put access to information, transparency, and accountability on the top of our agenda with Tunisia (and across the region) since the revolution.

Why this study only now? What has made the study possible?

Tunisia’s post-2011 opening has given researchers the opportunity to explore data that was previously inaccessible to the public. After the revolution, the National Statistical Office and the Ministry of Finance gave us access to the data and indeed supported and collaborated in the preparation of this study. 

The extent of crony capitalism is difficult to measure since data are not usually available. The confiscation of the firms from the 114 people close to Ben Ali provided us with a unique set of data to explore and quantify this problem. 

Again this shows the power of access to information and the tremendous value of making data available to researchers, think-tanks and the public at large to promote a healthy and informed debate on economic policies within countries.   

Have there been other studies like this in other countries?

Yes, but very few. There has been a study on Indonesia’s Suharto, and also Nazi Germany (see footnote 1 in the paper). As mentioned, getting hold of this type of data is very difficult.

Crony capitalism is not exclusive to Tunisia.  It affects many countries in MENA and across the world (e.g. Russia’s and Ukraine’s oligarchs, the USA in the early 20th century, etc.) 

Why this research only in Tunisia?  What about other countries? 

Measuring the impact of cronyism on economic activity is challenging since data is not usually available.

We are doing similar work on Egypt which we plan to publish in June 2014, as part of a report on the economic challenges facing the MENA region.

Similarly, in 2010, the World Bank published a regional report, "From Privilege to Competition: Unlocking Private-Led growth in the Middle East and North Africa."

Is the recommendation from the study to reduce State intervention and accelerate market liberalization?

No. These findings do not suggest a need to ‘reduce’ the role of the State. The role of State, however, needs to support, not to impede, the private sector.

Current policies have failed to achieve Tunisians’ objectives (reduce unemployment and foster the creation of good quality jobs, they have undermined the ability of competitive firms to grow and climb up the value added ladder, and have not reduced regional disparities). It is sensible therefore to review those policies to ensure they achieve the intended objectives.

What should be done to reduce/ eliminate this problem?

  • Tunisia has taken a first and very important step: offering wider access to data and information to improve accountability.  Now it is time for the second step, removing the regulatory barriers that protected the few at the expense of many.
  • Removing regulatory barriers that protect the elite few at the expense of the public is critical to accelerate job creation and bring greater prosperity to all Tunisians.  
  • At present these barriers exists through several pieces of legislation, notably the investment incentives code, the commerce code, many of the sectoral legislation regulating services sectors, and also the competition law. Key areas of improvement:
    • Increase competition in “backbone” services sectors (such telecoms, air and maritime transport, commerce and distribution, etc , which affect the competitiveness of the entire economy) and high potential growth sectors (health services, education services, etc.)
    • Pursue a very ambitious regulatory and administrative simplification to reduce the room for discretion in the application of the regulations.
    • Reform the banking sector to improve its governance, notably the state owned banks.
  • There is a need to open up the economy to move from a system based on privileges and rents to one based on competition and productivity, and to bring economic opportunity to all Tunisians.
  • It is important to accelerate these reforms, as time increases the risks that vested interests will capture existing opportunities for rent-seeking and be in a stronger position to prevent change, and perpetuate social exclusion.