CORRUPTION IN TUNISIA PART I: AN ECONOMIC SUCCESS?

C O N F I D E N T I A L TUNIS 001622



SIPDIS



SIPDIS



STATE FOR NEA/MAG - HARRIS

STATE PLEASE PASS USTR - BELL

USDOC FOR CLDP - TEJTEL AND ITA/MAC/ONE (NMASON)



E.O. 12958: DECL: 06/27/2016

TAGS: PREL, ECON, PGOV, EFIN, ETRD, EINV, TS

SUBJECT: CORRUPTION IN TUNISIA PART I: AN ECONOMIC SUCCESS?



REF: TUNIS 357



Classified By: AMBASSADOR WILLIAM HUDSON FOR REASONS 1.4 (b) AND (d)



1. (C) SUMMARY: This is the first of a four cable series on

corruption's impact on Tunisia's economic and political

future. The Tunisian economy is a model for the region in

many respects, applauded by international financial

institutions for GOT efforts to reform, modernize and

liberalize the economy. But puzzling contradictions exist:

perceptions are that rates of investment are erratic or are

slowing; average Tunisians talk openly and angrily about the

lack of jobs, concerns over rising prices, and a generally

poor economy, and there is little entrepreneurial activity

despite a stated public policy of supporting small business

development. External factors (regional unrest, terrorism,

rising oil prices) may contribute to this dichotomy, but

Tunisians are increasingly focused on corruption -- and

specifically, the disproportionate power and influence

wielded by a few elites, chief among them Tunisia's First

Family. Part one of this series discusses Tunisia's historic

economic success and future challenges. END SUMMARY.



A Country that Works

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2. (SBU) A small country of about ten million with minimal

oil and gas resources, Tunisia has faced economic challenges

in its 50 years of independence, but has always found a way

to overcome them and develop its economy. Through sound

public and social policy, it avoided many of the calamities

that hit other developing states and continues to be cited as

a model in that respect. The numbers support this: Tunisia

has the highest per capita income (USD 2,770 in 2005) in

North Africa and is second only to South Africa on the

continent. Official GDP growth over the last 10-15 years has

exceeded five percent per year, thanks to good

infrastructure, an educated population, and a stable

macroeconomic environment.



3. (SBU) In the early part of this decade, regional unrest,

terrorism, and recovery after a 4-year drought hit Tunisia's

economy hard, though many of these concerns have abated over

the last three years. Tourism returned to pre-2001 levels

and had its best year ever in 2005 with more than 6 million

visitors. Unemployment, however, is a growing concern and is

one on which every GOT official is focused. Official

unemployment figures leveled off at 14 percent in 2005, after

a steady declines dating from 1999s 15.8 percent. Even at 14

percent, however, this figure is consistently challenged as

too optimistic by first hand accounts of university graduates

unable to find jobs and reports of increasing numbers of

ever-more qualified applicants seeking Embassy jobs.

President Zine el Abidine Ben Ali and his ministers

repeatedly announce that increasing investment and services

as a component of GDP is the most essential development

concern behind Tunisia's job and enterprise creations efforts.



But does it?

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4. (SBU) According to World Bank and IMF estimates, Tunisia's

GDP growth will dip to mid-4 percent levels in 2006 (breaking

its decade-long 5-plus percent streak),which will raise

risks of higher unemployment levels. Tunisia's five percent

GDP growth rate has historically created approximately 70,000

new jobs annually, but experts note that over six percent

growth is required to create the extra jobs that university

graduates will demand by 2010 when approximately 80,000 job

seekers enter the economy annually.



5. (SBU) Foreign investment and trade are considered the two

best drivers of growth in the near term. Tunisia's Foreign

Investment Promotion Agency (FIPA) reports positive and

growing U.S. investment (from USD 54 million in 2003 to

nearly USD 90 million in 2005),but such investment is

typically concentrated in narrow sectors, such as

manufacturing and industries aimed at export-led job

creation. Overall foreign investment has been erratic over

the past five years, with significant gyrations difficult to

assess given the heavy monetary infusions by international

institutions such as the African Development Bank and the

European Bank for Investment that are public-sector

investment, and which help conceal declining private

investment that economists view as more accurate in measuring

economic health. The Tunisian government's steady

privatization of its state-owned enterprises also distorts

the true level of investment by injecting additional monetary

infusions into the economy, without creating new economic

wealth.



6. (SBU) According to local polls, business confidence is

also declining, and business leaders stress that foreign and

domestic investment is insufficient for continued growth. In

early 2006, Tunisia's Arab Institute of Business Leaders and

the Young Entrepreneurs Center released separate investment

climate surveys that pointedly criticize Tunisia's declining

levels of business confidence, suggesting the "good

connections required for business success" is a chief culprit

(reftel). A "cumbersome administration" and difficulty

accessing capital are also notable obstacles for businesses

here. Fostering entrepreneurship and bolstering creativity

and innovation are recognized "areas for improvement,"

essential if Tunisia is to tap its only plentiful resource:

its people.



7. (C) The importance of "connections" is a common phrase

used to express the growing disgruntlement over influence and

corruption by the country's elite. Tunisia's small

population and intimate business environment produce a

multiplier-effect for this dissatisfaction, and news travels

fast among those with business and financial interests. The

result is a growing chorus of complaints from the local

business community who feel their ambition stifled in an

increasingly frustrated business milieu. As a result, a new

element is clearly emerging - younger and desiring more rapid

progress, impatient to carve out their own livelihoods,

reactive to restrictions on the spirit and energy of the most

talented and educated citizens, and disdainful of the

persistent government pronounced directives of a planned

economy.



8. (C) Corruption, perception of lack of opportunity and

weakness in the rule of law work to exacerbate other problems

(such as lack of financing opportunities) that limit

entrepreneurship and local investment. The small local

entrepreneur has to weed through complicated tax and other

regulations that s/he believes the connected few circumvent.

Increasingly, Tunisian contacts report that those with family

connections to President Ben Ali are exploiting the market to

line their own pockets (see part two of this series).

Economic regulations and legal procedures do not apply to

them, which creates confusion and discourages domestic

entrepreneurship and investment. Tunisians now view real

estate or offshore accounts as the only safe options for

investment, yet neither effectively contributes to sustained

economic growth. The lack of transparency also harms

Tunisia's international profile and discourages the foreign

investment that is essential to continued growth. (NOTE:

Transparency International's 2005 Corruption Index ranked

Tunisia 43 of 159 countries with a score of 4.9, or slightly

below the 5.0 borderline score which distinguishes countries

that do and do not have a serious corruption problem. END

NOTE.)



9. (C) COMMENT: Tunisia's economy remains a positive -- if

paradoxical -- model for the region and there is no sign that

the system is headed for a near-term collapse. Clearly, the

GOT recognizes that Tunisia needs real growth and real job

creation. Various protected sectors will gradually be

opened, which will assist the GOT in attracting the

investment needed to support job and enterprise creation.

Improving the rule of law and rooting out corruption will

remain key if Tunisia is to realize its positive potential.

The extent of corruption and its manifestation in Tunisia

will be reported in part two of this series. END COMMENT.

HUDSON