May 2000 - North Africa Journal Monthly

Investing in Tunisia:

THE US PERSPECTIVE AND THE PROSPECTS FOR ECONOMIC COOPERATION

In April of this year, we traveled to Tunisia to examine, on the ground, the state of economic relations between the United States and Tunisia. Much ado has been made recently about the US-North Africa Economic Partnership (USNAEP), formerly the so-called Eizenstat initiative. The Eizenstat initiative in essence was a US effort that sought to integrate the markets of Tunisia, Morocco, and Algeria to increase the market size of these three countries, in part so US companies would find the region more attractive economically and invest more heavily there.

Also in April of this year, a USNAEP Ministerial Meeting was held in Washington, D.C., where representatives from the US and North African governments, as well as private sector representatives, met to discuss USNAEP progress and other related issues. The USNAEP continues the efforts of the Eizenstat initiative.

While fraught with political and economic challenges, prospects for the success of the USNAEP are very good. Tunisia itself presents a special case, as it does not have the oil and natural gas that its neighbor Algeria has, and is the smallest country in the current partnership in terms of population and economic activity. Here we examine at the US/Tunisian level prospects for bilateral cooperation, and for the viability of Tunisia’s role in the USANEP.

The US government characterizes economic relations as "good" between the US and Tunisia, but low-level. The North Africa Journal found that both sides would like to see an increase in economic exchange, in terms of trade and investment. The United States sells, depending on the year, between $215 – 300 million worth of goods to Tunisia each year. Also, the US buys roughly $60 million worth of goods per year from Tunisia. However, even though the trade balance in this case favors the US, the US government considers the level of trade to be far too low and would like to see an increase on both sides.

To create some context for Tunisia’s economic activity, Tunisia exports about $7 billion each year, and imports roughly $9 billion. In terms of US foreign direct investment (FDI), the US has about $200 million in FDI inside the country, and 42 American companies operate there. Again, the US finds the latter figures to be quite small, especially when one sees that US companies have about $3 billion invested in Algeria (primarily in the hydrocarbons sector).

Ultimately, the question for US investors seeking to do business in Tunisia is how easy or difficult the process is. According to a US official who spoke with the North Africa Journal on condition of anonymity, there are two unofficial investment "regimes" that exist in Tunisia: one where the Tunisian government has decided they want foreign investment – particularly in tourism (the tourist industry, a large source of revenue for the country, is clearly open to US investment) and the export/manufacturing sectors – and another where foreign investment is implicitly or explicitly closed off. "If investing in other services," the US official stated, "Finance, insurance, portfolio investment firms, restaurants, it’s very difficult." One brief example is that foreign visitors to Tunis will not find any of those markedly "Western" restaurants ubiquitous elsewhere throughout the globe: McDonald’s, Burger King, etc. can not gain entry into Tunisia. As the US official noted, Tunis "Had Pizza Hut, but [it] was shut down by the government on a technicality." In sum, depending on the sector US companies seek to invest in, US firms will either find a very friendly investment climate or no opportunities whatsoever.

An area that the US feels the Tunisian government should improve is building a better business climate in general. The US believes, for example, that good investment regimes exist for export-oriented companies but government tenders and procurement lack clear, standardized, transparent procedures. Deals appear to be made on a case-by-case basis. Standardizing procedures and building transparency will contribute, notes the US official, to the feeling that "Tunisia is open for business."

Notably, the US government has identified consumer products as a major investment opportunity for investors, as Tunisia has both a strong middle class and domestic demand, and access to international markets. Most importantly, Tunisia has relatively cheap labor but very strong labor relations, and respects worker rights. So, for companies worried about media relations, and with recent unwanted attention some firms have received about their complicity in promoting sweatshop conditions in developing countries, Tunisia presents a cost-effective and public relations friendly investment opportunity.

Yet the big issue for Tunisia in general is that the country’s name does not resonate in the US. The most obvious example of this is in Tunisia’s tourism statistics: over 5 million tourists came to Tunisia in 1999, but only 12 thousand were Americans. The biggest challenge facing the Tunisian government is tapping into the US business and tourism markets. The USNAEP could be the most expeditious means to do this.

The US argument for the USNAEP is quite simple. In the growing world capital market it’s hard for a developing country of Tunisia’s size to compete, hence the US initiative to build a regional market with Tunisia, Morocco, and Algeria together to become more attractive to US investors collectively. It’s a simple matter of leveraging the 80 million consumers in the three North African countries together to attract investors, versus attempting to do the same with Tunisia’ population of only 9 million.

Interviews with US officials revealed that the US is emphasizing that Tunisia should execute high-profile privatization efforts, for example with TunisAir, the state airline, and Tunisia Telecom. The US stance is that Tunisia could greatly benefit from such initiatives, which would not only raise much-needed capital but also international awareness of the country as an area open to investment. For example, based on the widespread publicity generated by Morocco’s GSM tender last year, those American companies who may not be interested in Tunisia Telecom may begin to investigate other opportunities in other sectors of the Tunisian economy.

The USNAEP and Tunisia’s Role

This fiscal year in economic support funds appropriated by the US Congress, there is a $5 million budget for USNAEP. Also, the United States Agency for International Development (USAID) has agreed to add $1 million of development assistance.

The overarching goal is to encourage the three countries of Tunisia, Morocco, and Algeria to build a regional market and increase the volume of trade intra-regionally, and between North Africa and the US. The US recognizes, however, that these three countries are different economically. Politically speaking, the countries are more interested in bilateral relations with the US versus a regional relationship.

An interesting contrast is the European Union’s "one-to-one" relationship with these North African countries. Europeans deal bilaterally with Tunisia, Morocco, and Algeria, as they have had a long history of relations with North Africa, and have the benefit of geographical proximity as well. Hence, bilateral relations work very well for the EU. However, it is far easier for the US without any deep history of relations with North Africa, a lack of proximity, and a paucity of knowledge and awareness of North African affairs possessed by the US population, for the US government to encourage a regional relationship.

Particularly, the US is also optimistic about intra-regional cooperation in North Africa as Tunisia and Morocco have signed economic agreements with the EU, and ultimately the US believes that the EU’s relationship with these countries will force them to adopt many of the same economic policies, enforcing a regional approach to trade and investment. Similarly, a free trade agreement exists between Arab League members that have free trade agreements with Europe (such as Morocco and Tunisia), so the above EU agreement does not act as a disincentive for trade in the Arab world. Thus, the most important theme is that many countries recognize that the regional approach has value.

The US is dividing the available $5 million dollars and distributing it evenly, giving $1.3 million each to Tunisia, Morocco, and Algeria. This will be bilateral assistance, but the remaining $1.1 million will go to regional initiatives only. Likewise, the USAID money will also go only to regional initiatives, for example OPIC would like to set up an annual investment conference in the region.

The rationale for dividing up the support funds in this matter is based on the economic needs of each North African country. Algeria and Morocco, for example, have asked the US for technical assistance with economic reform. Tunisia, however, requires efforts to raise awareness in the US about business opportunities in the country. On the one hand, a regional OPIC-sponsored investment conference would contribute to Tunisia’s goal; yet the US and Tunisia have yet to decide how to spend the $1.3 million in bilateral assistance. Part of the difficulty lays in the general nature of Tunisia’s request. If Algeria, for example, wants technical assistance on designing a program to promote bank reforms, the US has prior experience to draw upon in the region and $1.3 million is certainly enough funding. Tunisia’s "public relations" request is far more vague, and it is uncertain whether the allocated funds would be enough for such an effort.

From the North Africa Journal’s perspective, it appears the US would like to see more effort on Tunisia’s part in improving the overall legal climate in this North African country. For example, recently USAID contracted out a report that showed Tunisia maintaining duplicate or contradictory regulations in their investment regime, in addition it detailed how Tunisia stacks up against other countries and how they could improve the investment regime overall. Curiously, we found that while the US has submitted the report to the Tunisian government, and is willing and able to help the Tunisians in this area, the Tunisian government has yet to respond or even acknowledge the report. Nor have any of the USAID recommendations been acted upon, leading to some frustration felt on the US side.

Political Cooperation: Is it Possible?

Political obstacles exist that hamper the implementation of USNAEP, the biggest challenge being diplomatic tensions between Algeria and Morocco. The Western Sahara issue is perhaps the thorniest issue with which these two countries struggle. Algeria favors the former Spanish colony’s independence, while Morocco, which occupied the territory in the 1970s, would like to maintain control there. This and other issues between the neighboring countries is the main reason why an equal portion of the $5 million allocated by Congress to USNAP was divided equally for bilateral initiatives.

For example, US representatives at 1999’s Ministerial meeting observed "obvious tension" between the Algerian and Moroccan ministers. Unsurprisingly, no mention was made at the 1999 meeting about the regional aspects of the now-titled USNAEP. However at the 2000 USNAEP Ministerial meeting, the North African governments all openly discussed the need for regional cooperation, the need for example to coordinate customs procedures, to move production more freely across the borders of the North African countries, etc.

But political divisions run deep in North Africa, nonetheless. Nothing demonstrates this more clearly than the simple facts that there is virtually no direct trade between Morocco and Algeria, and Tunisia’s trade with Algeria stands at only $100 million per year, and Tunisia’s trade with Morocco is only slightly higher. Often, goods are shipped through Europe first before returning to North Africa, directly hurting North African business profits and government revenue. The costs of these political tensions are indeed high.

But here the US sees opportunities. In the final analysis, the US government believes that the American private sector with all of its economic clout can help convince the Tunisian government, and the Moroccan and Algerian governments, also, that it is in each government’s interest to improve economic and political cooperation in the region. It is important to remember that the USNAEP is in its nascent stages, and as the world economy continues to become more tightly integrated, such regional efforts will help prepare these North African countries for this global marketplace. Without such cooperation it is difficult to imagine how these three countries could compete standing alone.