TUNESS Chart of the Week (TCW), Monday March 25, 2013
We compiled a comparative analysis of the Foreign Direct investment (FDI) inflows to Tunisia and its neighboring and direct competitor countries in the Mediterranean region throughout the past four decades. FDIs are direct capital flows invested in the domestic production systems and businesses by an external party (e.g., multinational firms). While the positive impact of those capital flows on the long term growth of the economy are very often put forward in the literature and advocated by international organizations, recent experiences of developing countries have shown that such an impact can only be achieved in presence of prerequisite conditions in the country
Education, adequate financial infrastructure, legal framework (e.g., intellectual property rights protection) and trade and tax policy are among the few conditions that are required to ensure the highest performance level of those flows. This week’s chart focuses on the historical ranking of the capacity of those countries to attract FDI into their domestic markets. The chart suggests that Tunisia has been losing ground over the years. In the 70 and 80 Tunisia was as an investment appealing market as was Israel and much better than Morocco, Lebanon and an oil exporting country i.e., Iraq. Over the recent years however, Tunisia has lost its competitive edge over its neighboring countries and its rank got much worse, literally doubled, going from 47 to 83 globally, despite some improvements recorded in the internal conditions with a literacy rate substantially increasing from approximately 50 to 80% and a devaluation of the local currency which has favored more investments and gave a boost to the tourism sector. On the global scene, the total FDI stock has also climbed substantially from 8% in 1990 to 26% in 2006 as reported by OECD. It’s surprising to observe that while Tunisia got its independence around the same period as South Korea and has at the time shared a similar ranking, yet South Korea’s position in this ranking has remained relatively constant. Other countries in the region have actually substantially managed to attract more capital flows over the recent period. The importance of the prerequisite conditions laid out above in addition to other institutional factors (e.g., government corruption, political instability, privatization policy, market size, etc…) could partly explain this declining trend in Tunisia. The counter-intuitive findings of this chart is the improvement of the positions seen in Lebanon and Iraq which we believe is the result of the growing appetite of international investors to build local infrastructure after the war has ended.
Inarguably, FDI remain today a good indicator of the economic health for a given country and its capacity to attract investors. The FDI impact goes beyond the initial investment and immediate job creation it generates. This impact contributes to the revival of the domestic economies and constitutes ultimately a catalyst for supporting industries. In this regard, David P, and Fenwick Y, reported that in the US, FDI induced 10% to 30% higher salaries relative to local businesses, a fact that’s been echoed by reports from the OECD (albeit with lower proportions as we anticipate to be the case in Tunisia). The reasons why FDI declined in Tunisia are beyond the scope of the present analysis but we deeply believe that the latter is mainly due to the crisis in leadership and entrepreneurship in our country. With the current rate of unemployment and relatively better educated workforce, Tunisia needs to set the right policies and to find creative ways to attract FDI inflows to get back at least in this stage to its ranking levels of the 70s, 80s and hopefully better.
Study conducted by Zied Driss, Ms.c, TUNESS Research Team
References:
The social impact for Foreign Direct Investment, Policy Brief, OECD, July 2008.
David Pane, Fenwick Yu, (2011), US Department of Commerce Economic and Statistic Administration. ESA Issue June 2011