Making Ibn Khaldun Proud
May 25, 2006
Serhan Cevik (London)
Tunisia’s economic performance is a glowing example for the rest of the continent. Ibn Khaldun, born in Tunisia in 1332, may not be the best known philosopher in the world, but he certainly made important contributions to philosophy of history and the development of sociology. In his masterpiece on the rise and fall of civilizations, known as Muqaddimah, he also discussed economic subjects ranging from utility functions to capital accumulation-driven growth and even developed a theory of taxation based on modern concepts like aggregate effective demand and the multiplier effect. The central thesis of Ibn Khaldun’s arguments focused on the size and role of government and called for ‘liberal’ policies to promote economic growth. Almost eight centuries later, modern Tunisia is trying to do just that and has indeed achieved a promising degree of progress. With prudent management and an intensifying focus on structural reforms, the Tunisian economy has enjoyed average real GDP growth of 5.0% a year in the last ten years, raising per capita income from $1,498 in 1990 to $2,850 last year.
Output growth has surged to a higher plateau, even enough to lower unemployment. Real GDP growth accelerated from the low of 1.7% in 2002 to an average of 5.2% in the past three years, and is likely to be around 5.5% this year. With faster output expansion, the unemployment rate eased from the peak of 15.8% in 1999 to 13.7% last year. Though Tunisia needs to maintain an even higher growth rate, the performance so far is a significant achievement, especially against strong headwinds caused by higher commodity prices, the removal of quotas on textiles and clothing, and the volatility of agricultural production. Furthermore, without resulting in macroeconomic imbalances, output growth is broad-based (both on production and spending fronts) and driven increasingly by the private sector. Thanks to fiscal consolidation and structural adjustments, the economy has also become far more diversified and the manufacturing base is competitive. The expiration of the Multi-Fibre Agreement certainly caused problems for Tunisia’s textiles and clothing sectors (which still account for more than 40% of total exports), but greater diversification, increasing foreign participation in the economy, and exchange rate flexibility are helping to keep export growth at around 13.5% on an annual basis. Improving fiscal conditions lessen the vulnerability to shocks and help to boost growth. The budget deficit already narrowed from an average of 4.4% of GDP in the 1990s — and the peak of 7.6% in 1997 — to 3.2% in the last six years. As a result, public-sector indebtedness ratios showed significant improvements. For example, the total government debt stock declined from the recent peak of 62.5% of GDP in 1997 to 59.5% and, with the sale of a 35% stake in Tunisie Telecom, will come down to around 53% this year. However, although privatisation revenues, enhanced tax collection and stricter spending guidelines improve the state of public finances, the growing burden of wage payments and subsidies remains a structural problem. Lowering subsidies may create inflation in the short run, but supports macroeconomic stability. Inflation, measured by the consumer price index, steadily declined from the peak of 9.4% in 1991 to as low as 1.1% — and to an average of 2.1% — last year. Given the government’s commitment to macroeconomic stability, the Central Bank of Tunisia is well positioned to maintain price stability, but we may see an increase in domestic prices in the short term, as the authorities rationalise energy subsidies. Domestic oil price increases already pushed the annual inflation rate from an average of 1.5% in the first half of last year to 3.9% in December and then 5.0% last month. And we are likely to observe further adjustments in the coming months, reflecting the rise in production costs across all sectors of the economy. However, the rationalisation of administered prices would ensure the sustainability of public finances and therefore price stability in the long run. Of course, in the interim period, the central bank needs to be extra cautious and may need to make the monetary policy stance less accommodative in the future. With strong growth, the government now needs to focus on structural weaknesses. Tunisia’s overall economic performance has been impressive, and the outlook remains encouraging, but the authorities must now deal more aggressively with structural weaknesses. For example, despite all the liberalisation efforts, restructuring of the country’s financial sector is still far from complete. The disproportionate allocation of credit lines and non-performing loans are significant threats to the balance-sheet quality of the banking sector and therefore to financial stability in general. On the other hand, the real economy needs more flexibility in the exchange rate regime as well as in the labour market. Indeed, a business climate shaped by simple, transparent rules and supported by stronger financial institutions is key to faster investment and output growth and to reducing unemployment to a socially acceptable level, in our view. All in all, the Tunisian experience confirms Ibn Khaldun’s vision that prudent policies and economic liberalisation — aiming to create a small, but efficient government — can help to raise the rate of income growth on a sustainable basis.
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Buoyant Asset Markets Support Spending in 1Q06
May 25, 2006
Denise Yam (Hong Kong)
Stronger-than-expected growth in 1Q06… The Hong Kong economy powered full-steam ahead in 1Q06, as real GDP growth re-accelerated to 8.2% YoY, from 7.5% in 4Q05. On a QoQ seasonally adjusted basis, growth picked up to 2.4%, from 0.6% in 4Q. Nominal GDP growth slipped by 0.4 percentage points to 7.8% YoY, hurt by a loss in terms of trade, which drove the GDP deflator into negative territory yet again (-0.3% YoY). …buoyed by exports… Robust export growth on a further pick-up in IT shipments to developed markets underpinned a key sector in the Hong Kong economy. Total merchandise trade grew 14.2% YoY in volume terms, the strongest since 3Q04. China’s credit and investment boom also supported Hong Kong’s trade growth. Services exports maintained 8.9% YoY growth in real terms, and the services trade surplus continued to expand, to 17.7% of GDP (15.5% in 1Q05). …and asset-price-dependent consumption. Private consumption growth picked up to a stronger-than-expected 4.5% YoY in real terms (+3.4% in 4Q). In our view, the positive wealth effect from buoyant asset markets has more than offset the pressure from global monetary tightening. The ongoing gradual appreciation in the renminbi and persistent optimism on the currency continued to draw liquidity into the region, so the unwinding of the liquidity boom was gradual. Consumer spending was especially strong in services (+5.8%, 57% of consumption in domestic market), outpacing that in consumer goods (+3.7%, 32% of consumption in domestic market). Clouded by China tightening, maintaining forecasts. Although growth beat expectations in 1Q06, the latest round of macro tightening in China and asset price corrections make us cautious in our outlook again. We maintain our forecast of 5% real GDP growth in 2006.
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