Association with Europe
It is the view at the top of the Tunisian government that the quickest, most decisive way of modernising the economy is to link it more closely to Europe. This should have the direct effects of forcing Tunisian companies to make their operations more competitive and encouraging European investment in Tunisia, in services as well as industry. It is also a clever way of persuading the Tunisian public, particularly the bureaucracy and business classes, to accept some of the government's reforms. Given that the Tunisian middle classes, like their counterparts in Algeria and Morocco, regard themselves as being as much European as Arab or African, reforms that can be presented as being necessary to bring the country into line with European practice become more palatable. This applies to changes in the tax regime, the removal of protective tariff barriers and privatisation.
Tunisia responded more promptly than any other non-EU Mediterranean state to the EU proposal, mooted at the end of 1992, that the various co-operation protocols between the Union and its neighbours should be replaced with a new style of association agreement. Negotiations between Tunisia and the Commission moved ahead rapidly in 1994 and the early months of 1995, and on 17 July Tunisia became the first partner country to sign a treaty. The most important part of the accord, which will come into effect at the beginning of 1997, will give European exports tariff-free access to Tunisia. Tariffs on 40 per cent of Union members' exports to Tunisia will be phased out over five years, and on the remaining types of exports they will be phased out over twelve years. Tunisia's own exports are relatively little affected by the treaty. Its industrial goods have entered Europe tariff-free since 1978, and the Europeans have not been able to make major concessions on access for its agricultural products. The agreement provides for small annual increases in the tariff-free quotas for such items as new potatoes, tomato concentrate, oranges and apricots, and endorses the existing regime for olive oil, which is Tunisia's most important agricultural export. The olive oil agreement is due to be renegotiated in 1999.
To aid flows of investment the two parties have agreed to treat each other's companies as if they are their own nationals, and, in stages, to open their service industries to each other. There are certain exceptions to these provisions, mainly concerning air transport. To help ease the changes that parts of the treaty will involve for Tunisia, the Europeans are making available some financial and technical assistance.
The fiscal reforms and company restructuring required of the Tunisians are considerable. Although they have liberalised their tariff regime a little in the course of structural adjustment since 1986, average import tariffs are still 43 per cent and on some items, mainly luxury goods, they run as high as 300 per cent. There will be significant losses to the government's budget as these taxes are scaled down and eliminated. In the first year of the treaty's operation it is reckoned that the loss will be equivalent to 2 per cent of the 1996 budget. The government will make up the shortfall mainly by extending the scope of VAT.
The impact on Tunisian companies will be more painful still. Very rough calculations - which are much the same as similar calculations made in Morocco - suggest that if they do not restructure themselves a third of Tunisian companies, public and private, will fail and another third will experience difficulties. To help those companies which are capable of changing and surviving, the government has established programmes to determine what their problems are and how they might solve them. It will also assist companies in finding the finance they need. It insists that it will not allow companies to survive if they do not have the potential to be profitable. In general terms its view is that companies that need radical restructuring should think of making themselves niche industries, producing specialist goods for export. Given that Tunisia has a population of only 8.7 million it is not thought there will be much scope for companies improving their performance by introducing major economies of scale.
The whole programme of change, if it is to be success, will need to be underpinned by substantial inflows of foreign investment. In recent years Tunisia has been receiving about $70m a year of investment outside the oil and gas sector. Much of this capital has been going into garments manufacture, which is the country's biggest industrial employer. There are now more than 300 foreign companies operating in this sector. For the free trade deal to be a success from Tunisia's point of view, and for the economy to absorb all the young people coming onto the labour market, the country will need to more than double the foreign investment inflow, outside the hydrocarbons business. And it needs to have companies putting their money into bigger projects. If it can attract this volume of investment, the World Bank calculates it will be able to increase its growth rate by 1-2 per cent, to around 6 per cent a year. (The Bank also believes it could have increased its growth by 2 per cent if it had privatised faster.)
It is far from certain that Tunisia will be able to attract the capital it needs. Its domestic market is too small to appeal to European investors - and, under the rules currently in force, any foreign company that is interested in manufacturing primarily for the domestic market needs a Tunisian partner. As a base for export orientated manufacturing Tunisia is only moderately attractive. Its government exempts from taxes foreign companies that export more than 80 per cent of their output - though the Moroccan government, which is its competitor for investment, gives companies similar tax advantages. The Tunisian labour force is, on average, better educated than the Moroccan or Egyptian, but it is considerably more expensive. Foreign companies already in Tunisia complain of rigidities in employment law, low productivity and absenteeism.
The flow of investment may also be held back by companies feeling that Tunisia is somewhat hesitant about turning itself into a liberal, free market economy with the attitudes towards business that European, American and Far Eastern companies have become accustomed to in south-east Asia and Latin America.
Investors may likewise be concerned about the country's political stability. Companies need to feel confident about places in which they invest, and at present, although Tunisia seems stable, there is no question that this stability is, in part, a product of repression. It might be that Tunisia would be stable under a softer, more liberal government - it seems that most Tunisians are disenchanted with militant Islam - but until the government allows a freer expression of people's opinions it is difficult to be certain about this.
Part of the purpose of the association treaty is to encourage liberal, democratic political development - there are references in the treaty to political co-operation - although they do not impose any obligations on the Tunisians. From the European point of view the original purpose of the new type of treaty was to help stabilise the north African countries and reduce pressures for immigration into Europe. The European governments were responding to the north Africans warning them in 1990 not to forget their southern neighbours when they turned their attention to the east. A popular cry of the Tunisian, Algerian and Moroccan intelligentsia at that time, and since, was la misère et la richesse ne peuvent pas cohabiter - extreme poverty and wealth cannot live together. The Tunisian government may feel that all that is required to give it stability, now that it has the new treaty, is increased investment and flourishing trade. But it may be that unless it can liberalise politically, and in doing so prove to foreign investors that its country is set to evolve in a stable fashion in the long term, it will not enjoy quite the level of confidence that will bring it the investment it wants.
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