Regulation in Tunisia – A double-edged sword?

Many argue that the Arab spring came as a result of the abuse of power by the ruling elite; Arab societies witnessed a significant increase in inequality and corruption, as well as economic stagnation and concentration of wealth. But can one argue that nepotism may have led to some economic growth?

In their paper, Caroline Freund (Peterson Institute of International Economics), Antonio Nucifora (World Bank), and Bob Rijkers (World Bank, MENA) examine the industrial policy in Tunisia under Ben-Ali’s rule, and whether it was a pro-growth policy or rather one designed and implemented to serve the president’s private interests and the ones of his family. The research team chose Tunisia as a case study for its open economy being at the forefront of the Arab Spring, successful and celebrated development model, stable growth despite the persistent unemployment and high corruption the country has witnessed, as well as the close interactions that existed between Ben Ali and investors.

Freund, Nucifora and Rijkers use information on firms owned by the Ben-Ali family, which were confiscated in the aftermath of the Jasmin revolution. This small group of 220 connected firms, accounting for 3% of the private sector, was able to bring more than 21% of the profits in the country, and therefore, outperformed their competitors. The question is how and why were they able to be so much more profitable?

The paper argues that it is regulatory abuse that is behind these connected firms’ performance. Ben-Ali firms are particularly active in sectors that are more prone to regulation; they especially outperform their peers in sectors with authorization requirements and FDI restrictions.  In other words, when restrictions are in place connected firms are more profitable. Freund, Nucifora and Rijkers also show that the introduction of new regulations is much more likely to happen in sectors where connected firms operate. This means that not only connected firms abuse regulations when they implement them, but also they institute new regulations that serve their own interests.

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