Mekki Mouaddeb

09/03/2014

Tunisian FDIs: Between traditionally identified opportunity costs for foreign investors and a private sector turned to speculation and short-term goals

This is not a scientific article, in the sense that I dont go as deep as the experts in every subject explored. It only represents my own views, which I am happy to share and receive critics on them, as financial experts always say that in the stock market, an idea is strengthened when it is challenged. The arguments and sources cited are only for the purpose of inducing credibility and logic.

Before beginning to write this article, I realized the difficulty of choosing a subject to focus on when it comes to the economy of Tunisia. There are so many flaws in the current and past models that one would wonder where to start. However, a reasonable approach would be starting from what we already know, and develop our understanding the more we advance in our analysis and the more we get the facts clear. I have chosen to start from a specific subject, FDIs, because I like to begin focusing on subjects where the causes involve a philosophical and sociological dimension, and I will detail this further in my analysis. No one argues against the benefits of adopting a model that attracts FDIs through an advantageous cost based system for foreign investors, which focuses more on their income statements than their balance sheets. This would indeed yield a higher demand for export based investments which doesnt involve a high upstream cost to be carried out by a local entity. It therefore represents a guarantee for the central bank to increase its inventory of foreign reserves and to have a flexible monetary policy. It also helps the government to increase its spending in different sectors, such as education or infrastructure, so that we enter in a positive inertial effect, where an increasing productivity yields increasing investments, and so on. The government policy since the 70s was supportive of this policy that was able to yield satisfying results, though not reflecting the ratified texts. In the 00s, we began focusing on high added value investments, less manpower consuming, by advancing the acceptable quality of our educational system and the positive low cost/high quality trade-off that foreign investors would have. This is the synonym of a higher productivity, an adaptation of the educational system to the new labor demand standards and the high profit margins which boost the velocity of foreign reserves accumulation. This shift in the 00s was indeed a remarkable approach in theory. However, it still lacks a strategic dimension that could ensure a long-run prosperous economy. I am somehow an adept of Milton Friedman in my thoughts; thereby I think that politicians always induce inefficiencies in the economy. This makes sense when we

consider the bureaucracy that a new law to be ratified should go through, or the political considerations of an economic decision. When it comes to the Tunisian context, this is even worsened by the background of the political personalities, representing the whole spectrum, who usually dont have an economic background, and cannot make painful but productive economic decisions which would decrease their popularity in the shortrun. Lets take the example of Germany to prove this point, where Gerhard Schroder had to explain, explicitly, to his voters in his 2002 campaign, why Germany stood at a 10% unemployment rate and how is he going to revive its economy. He won the elections and his cabinet was successful in making Germany a healthy country, unlike its neighbors. Mr. Schroder reforms were painful, as he simply attacked the welfare state. He reduced labor costs, decreased employers health insurance costs, made firing easier in order to make hiring easier in the future, cut corporate taxation from 25% to 19% and made companies less exposed to employees lawsuits. If an audacious Tunisian leader has made those reforms, he would either be obliged to step down due to a popular uprising enhanced by unions or face a revoke of support and a decrease in popularity. But today the facts are here, German GDP growth has so far kept the euro zone from falling into another recession, and the German unemployment rate stands at 6%. Mr. Schroder was able to recognize the place of Germany in the world and to leverage its potential. He was able to see the future coming from emerging markets and reacted in that sense. If Germany kept its taxes and labor costs high, it wont be in a position today where it competes with the Chinese increasing productivity and advantageous costs. What makes Germany unique in its economic model is its traditional industrial tissue, of a high and reliable quality. In order to keep this tissue running, you have to give companies a relief from exogenous factors engagement, such as trade unions and state intervention. In Germany today, the equation is simple: In order to consume, you have to produce, and thats a pivotal point in Mr. Schroders thinking. This example should inspire us. Indeed many argue that Germany and Tunisia are incomparable, but needless to say that the philosophy of supply and demand is the same regardless of the boundaries. Tunisia has to have a strategic orientation in order to attract investors, an orientation that is disengaged from any flaws induced by politicians, some uninformed and corrupted businessmen or trade-unions. I think that this strategic orientation should focus on four levels: Leveraging efficiently the intrinsic assets of the country, accompanying the FDI inflow with a technological transfer, inducing more openness in the labor market and creating a strong financial system, while limiting the state engagement.

1. Leveraging the intrinsic assets of the country:

An intrinsic asset is a one that is natural, that we do not need to import and that allows reconciling opportunity cost thinking of foreign investors with the insurance of a wealth generation for the local population. This includes the geographic position, the crops that we grow in a certain land that would cost higher if we grow them elsewhere, the authentic cultural values that the local population has and that could be exported. Lets go through an example and then illustrate ways to implement this policy. My family originates from the south, specifically from a city whose main income is based on dates sales. People in this city are indeed knowledgeable in terms of the traditional ways to grow this fruit and sell it, but they dont know its intrinsic value and the demand characteristics of foreign markets. Some people would argue that Tunisia is already the world number 1 exporter of this fruit and that it is exploiting it efficiently. But we tend to ignore that dates are simply a commodity that doesnt exist in a lot of countries around the world, and if it exists, it requires higher costs to grow, like in California. This makes Tunisia competitive at this level. But still, if we see the problem from an added value standpoint, we can understand that we are far away from being efficient. The exhibits below show the world date exports in terms of value and volume in 2008. By examining them, one thing that could strike us is the value of one metric ton of exports for each country. Tunisia realizes 2.45 $/ton, while France has 3.54$/ton and Israel 5.37$/ton. One explanation why France stands behind Israel is that France is not a producer of this commodity, but the 120% higher value for Israel over Tunisia has to be justified. Israel, always praised for its good economic choices by focusing on R&D and high technology, has adopted an approach where it leverages its natural dates assets to the highest possible value. It is not only producing dates, though of a lower quality than Tunisia, but it is also exploiting their chemical and nutritive benefits to launch a whole industry. The gap between Tunisia and Israel could therefore be explained by the moving up in the value chain for the latter, thus capturing new markets and a higher value.

Date exports
Iraq United Arab Emirates Iran (Islamic Republic of) Pakistan Tunisia Saudi Arabia Algeria Israel Egypt France 0 100 200 300

Date export values

Tunisia Iran (Islamic Republic of) United Arab Emirates Iraq Saudi Arabia Israel Pakistan France United States of America Algeria 0 50 100 150 200

1,000 metric tons

Million US$

Source: US department of agriculture

So why are we standing behind? The answer is political and economical in the same time. In order to leverage the assets of a country, you have to identify where are those assets located as well as who can exploit them, through cultural and scientific understanding, ways of production and salesforce. Once you identify these features, you should target your investments, in terms of quality and quantity. Dates and date derivatives, for instance, should be produced by people living in the south, because it is simply cost effective and more productive to let people who have the highest proximity from the asset exploit it. But we should help those people have a better understanding of the cultural and scientific value as well as the market potential of this fruit. This will yield a public awareness of the need to innovate in order to target the new markets and generate wealth. Then come the ways of production, the key here is R&D investments. You cannot have a higher value added product without R&D expenditure. It is worthwhile noting that we have today some small R&D centers in the south, but they lack substance. They lack the cultural and scientific understanding of the fruit that comes in the upstream. R&D expenditure should span the establishment of universities specialized in this matter with state of art research centers where we train the locals, and private research centers financed by date producers and foreign capital in order to induce competition at this level. R&D centers once settled up, will simply give birth to new derived products or optimized ways of growing the fruit with higher yields and quality.

Salesforce is the third part of our analysis; it includes the marketing of the products in the international markets. It is a very important part of the value chain and comes also after the promotion of a cultural understanding of the crop. If we are aware of the potential of the fruit, for ourselves first of all, we can easily market it for others, because we are simply subscribing to a blue ocean strategy where we attract new people for a new product that poses natural cost barriers to entry and is therefore hardly replicable. The question that stills to be answered at this level is: Who will finance the exploitation of the intrinsic assets and what are the political conditions for this strategy to be successful? At a political level, the central government should promote the autonomy of each region in the country. Each region should be able to exploit its assets without an external intervention. Each region should be able to deal directly with external stakeholders for the sales of its products and the attraction of new investments. In order to move to that level, we need to ensure that each region has a human power that is coherent with its assets and has an executive local governing entity that possesses good standards of know-how so that we can delegate to it the task of running the local affairs of the region. These however are very difficult steps to attain in Tunisia, although not impossible. The government wants to keep its hands on some strategic assets such as oil and phosphate, and is fearful that autonomy means weakness of the state. This is legitimate, but the main greed of everyone is for money, and if the government wants to generate more income overall, it could do it by delegating the management of local resources to one region or a group of regions, while guaranteeing an equitable division of wealth across all regions in order to avoid high flows of migration. If Gafsa for example had to be delegated the exploitation of Phosphate through a public private partnership or simply a national company who should agree with the conditions of the local government, it will certainly have a more social stability, a higher productivity through the local understanding of the asset that we mentioned before and a higher income that could be transformed into investments for other purposes. We would worry at this level about the discrepancies yielded by such a policy between regions, but we should take into account that the income from phosphate exploitation will be higher than capital demand in Gafsa, and therefore the remaining of the income would be retained by the central government in Tunis for cross-regional or national investments. Foreign investors would like this concept; the reason is that they will deal with institutions which are knowledgeable of their proper assets, which have a genuine willingness to develop their local economies, by promoting investments, reducing unemployment and increasing productivity.

As I said before, there is a sociological dimension in this thinking. I like sociology because I consider it as one of the cheapest investments that drains the highest returns. The sociology of competition is present in our thinking at this level, as we could face a scenario, where every region wants to offer the best conditions for investors in order to be the wealthiest. This will yield a knock-on effect on regional development and country wise productivity growth. This policy indeed needs a strong legal framework to be implemented, as we are putting in competition several bodies and we need to link them together by ensuring the rights and duties of everyone as well as the benefits for the country as a whole. What is certain is that we werent successful in the past under a centralized system, which kept the power in the hands of the government in Tunis, and we can be successful under a decentralized one.

2. A new approach to FDI inflows: Services and technological transfer

As I mentioned before, FDIs in Tunisia have kept increasing, as the country offers an advantageous legal framework for totally exporting industries: Dismantling of customs barriers, administrative simplification and a facilitated access to financing. However, we should be aware that FDIs orientate themselves to the country that offers the best possible conditions, not only at a legal level but also in terms of infrastructure, living standards, protection of the rights of private investors, trade-unions intervention, bureaucracy, local services and openness of the labor market. Thus, the equation doesnt only depend on Tunisia but also on the behavior of its competing countries. The UAE for example, has been able to completely turn its focus to how better to serve foreign investors while guaranteeing an optimal income for the country. They made a thorough investigation of the meaning of an opportunity cost, they were able to identify that it is not only a question of erasing custom barriers and establishing a tax-free system, but it also includes a guarantee of service incomparable with other countries in the region, facilitated procedures through IT means, an open labor market, a strong and open financial market and a strategic decision from the UAE government to act as a service provider for foreign investors through a win/win relationship. Is Tunisia really capable of replicating the UAE model? If yes what are the conditions? The answer to the first question is more philosophical than practical. If we, as Tunisians, have a willingness to become a prosperous nation, we have to change our state of mind. It is necessary that we erase the word incapability from our vocabulary and focus on the path through which we can achieve our goals, whatever it takes. At a practical level, the Dubai government was able to borrow large amounts of money to finance its development programs thanks to the oil assets of Abu-Dhabi. What about Tunisia? I think the answer is that we are not aware enough of the bargaining power we

have in front of foreign investors, especially Europeans. We tend to ignore that in the next decade, frontier markets, especially in Africa, are the focus of foreign investors, given the abundance of opportunities, the large assets and the relative immunity to fluctuation in international markets. Tunisia should profit from this trend and convince Europeans that we can be a good trading and industrial platform to flood European products to Africa as well as the Maghreb and back to Europe. They wont refuse to put the money on the table if they clearly see the opportunity. However, we need also to offer investors a transparent pricing of our assets. What I mean is that we need to clean-up our mess inside before turning ourselves to the outside. The big issue at this level is speculation and the banking system. I will stick to speculation right now and will deal with the banking system in my next writings. I was surprised when I knew that companys profits, if invested in the real -estate market, are exempted from taxation. I am even surprised when I see that there are no biding conditions for people who buy buildings and keep them empty, waiting for a double or triple price offer before selling. I will talk about an anecdote at this level: I went one day to el-Mghira industrial zone, located in the outskirts of Tunis, and I saw some factories for rent. I went 1 month after that and I saw the same factories for rent, as well as new other ones. This is a sign that speculation has reached a dangerous level where we even speculate about the means of production. It is the duty of the government and the central bank to fight against speculation, by simply adopting the German approach, in order to consume, you have to produce. If we are able to eliminate speculation, we will be able to have a fair value for our assets, and we will therefore give a transparent view for foreign investors, who would accompany us in building our infrastructure so that they could have a remarkable framework in order to create value. I dont see the Europeans refusing such an engagement, because they know that we are an opportunity for them that if they let it go, others will hold it. From the other hand, in order for this approach to have a strategic dimension, we need to look beyond the numbers. It is totally fair to have more attractiveness for FDIs in order to boost the economy of the Country. But what is going to happen in 2 or 3 decades if we remain indifferent to what we can leverage from the presence of high added value investments in our country. I think that the World changes and we always have new comers proposing better incentives for investors. We therefore need to hedge ourselves against this possible upcoming price war and focus on not only how to make investors remain in our country but also how we can profit from their presence and develop our own industry. After the end of the Second World War, Japan has doted itself with an aggressive economic intelligence system, whose purpose is to look for the best practices in the west

in terms of technological know-how and import them to Japan. Generally speaking, Economic intelligence is developed as a discipline through the dual process of standardization of practices and the establishment of a community made up of specialists. The community is not only made up of students, teachers and researchers but also of professionals. I will argue that legal specialists are a pillar of the team, in order to ensure the transparency of the work and tackle the legal barriers posed by the replication of technologies. Japan has reached a level of know-how equivalent to that of the US in the 70s. It was capable to capitalize its experience in order to engage thereafter in innovation rather than replication. We can understand this by looking at the evolution of productivity levels in the 20th century, shown below.

Source: US monthly labor review

Indeed, we tend to ignore in our analysis the diminishing returns to scale, where the TFP of one country decreases, the higher the capital stock, as the Solow model teaches us. But the pace of increase for Japan compared to the US is such that we cannot ignore the influence of endogenous decisions made by the government to boost productivity levels. In 23 years, Japan equaled the US in its manufacturing TFP, while this figure represented 20% of the US level in 1955. We already have an economic intelligence network in Tunisia. But is it at the level of expectations? What is its impact on the transfer of technology? Is it profiting from the presence of foreign companies manufacturing high added value products in order to cost-effectively transfer their know-how? Well, we are actually facing a transfer of technology that is deliberately done by foreign multinationals for the purpose of a vertical integration. This means that multinationals transfer the parts manufacturing technology

for local suppliers in order to be more profitable. However, this transfer occurs only if the local targets are able to incorporate the know-how and produce the same quality as the synthetizing company. The success of the vertical integration occurs when we begin to have a horizontal spillover, in other words, when the market has become so competitive that some companies, unable to cope with this change, crowd out. For now, we are not clearly seeing this horizontal spillover in Tunisia, which is a sign that the market is still uncompetitive and that the density of local SMEs with high added value products is still marginal. It is therefore our duty to import more technological know-how at lower costs by leveraging the local presence of international firms through the establishment of a strong economic intelligence network. It is also our duty to make R&D a centric point in our strategy. We will have a natural transfer of technology if the research centers in Tunisian universities are able to respond to multinational needs for their future products development. Meanwhile, FDIs are not the only possible way of transferring technology. We need also a flexible labor policy, where foreign labor with high qualifications can have a facilitated access to the market. Lets recall that the situation of the French industry was difficult when Colbert became the Minister of Finance under the authority of Louis XIV. He thus thought that the implementation of an industrial policy was urgent. In order to boost French production, he tried to attract European workers with specific talents to France. This was done through a network of agents who identify and attract the interesting profiles. This clearly illustrates what we call today economic intelligence.
I will explore in my next article the two other levels that we should consider in order to implement an efficient policy to attract FDIs: The reforms of the financial system and the labor market.

This is the first time I write an article about Tunisia. I would like to finish it with some French poetic sentences. Mark Twain, the famous US humorist, used to remember his speeches through identifiable patterns. For example, you have a succession of arguments to talk about in front of an audience, you take the argument number 7, and you link SEVEN to HEAVEN-a street paved with gold, and angels playing on harps, which should be similar to what he actually intends to say. I have therefore chosen poems, for my writings to be remembered.
To be continued

De retour en Tunisie, jai dcouvert un bon samedi Que de la confiance accorde lhumain, que de la dfiance de ses mfiances Que de lexgse sans prjugs, de ce texte crit par ce cur cass, Emerge un instrument, capable de le remettre en fonction Encore faut-il affirmer, quil ne rpond toujours pas aux conditions Maudis sois-tu comme cur, si tu as donn la lgitimit De tout remettre en question, sa faon et sa comprhension Le mrite exige des efforts, les efforts exigent une volont Hlas, on a enfin compris, que notre existence est un compromis Entre une prsence de lesprit, et une absence du feu des sentiments, qui cuit