Applied international macroeconomics projet between 1956 1986 - Essay Example

APPLIED INTERNATIONAL MACROECONOMICS: TUNISIA PROJECT 1956 - 1986 Applied International Macroeconomics: Tunisia Project 1956 - 1986 Introduction Tunisia, officially known as the Tunisian Republic, is a country situated on the Mediterranean coast of North Africa, bordering with Algeria to the west and Libya to the southeast. Tunisia got its independence from the French colonialism in March 20, 1956 and Habib Bourguib became the president of new state. He established a strict one-party political system with a strong hold on economy and state resources and their allocation. One of Tunisia's outstanding characteristics is its remarkable economic development, sustained over many decades and currently driven by a process of market liberalization and integration into world markets (Country Cooperation Strategy for WHO and Tunisia 2005-2009, 2006, p. 7). Historically, Tunisian economy has gone through fluctuating periods of growth and instability. Its has gone through a transition period of a centrally planned to a more privately managed economy and stabilization and later as a structural reform programs. The purpose of following paper is to briefly highlight the important aspects of Tunisian economy during1956 to 1986 period. The paper discusses important economical during this era by splitting it into two sub-periods; namely; - Transition period of a centrally planned to a more privately managed economy and the stabilization (1956- 1970), and - An era of structural reform programs (1971- 1986). Tunisia, officially known as the Tunisian Republic, is situated on the Mediterranean coast of North Africa, bordering with Algeria to the west and Libya to the southeast. Tunisia gained its independence from the French colonial rule on March 20th , 1956, and Habib Bourguib became the first president of new state. Habib Bourguib establishing a strict one-party system having a strong hold on economy, state resources and their allocation. Tunisia has a diverse economy, with important agricultural, mining, energy, tourism, petroleum, and manufacturing sectors. Historically, Tunisian economy has gone through different periods of growth and stability alternating with short periods of crisis and instability. Its has gone through a transition periods of a centrally planned economy to a more privately managed economy and the stabilization (since 1956 to 1970) , and structural reform programs 1986-87. W can divide this entire period of economic developments into two sub- periods namely; - Transition period of a centrally planned to a more privately managed economy and the stabilization (1956- 1970), and - An era of structural reform programs (1971- 1986). Transition Period of a Centrally Planned to a more Privately Managed Economy and the Stabilization ;1956- 1970. At the time of independence in 1956, Tunisia was facing a crippling economic position mainly because of the huge transfer of money abroad by the wealthy Europeans, who had left the country. Yet the country and its leadership were quite optimistic and had strong determination in their potential and progress. They set their targets mainly focusing on education, modernization agriculture and infrastructure and industrialization and heavily invested in these sectors. Although these were fine priorities, yet unfortunately in sixties, they could not reap enough of the benefits to the masses because of their long term investment requirements and strict government policy control over theses sectors. During this period per capita income could not increase with an increase in investment. Government strict policy control over economy resulted a rapid increase of money supply and aggregate demands. These factors considerable increased the inflation rate and above all raised foreign payment imbalance. More than 70% of investment was public. More than half of total investment was based on foreign capital. Around one third of these investments, were allocated to basic equipment, a little more than one third to agricultural, including dams and other water works, around 15% to education sector and not much more than 7% to subsidize industries. The Government was facing a big deficit between its revenue and its total expenditures and was trying to bridge this gap either by foreign debt or by domestic borrowing. In late 1958, Tunisian government replaced old Tunisian franc with a new currency known as Tunisian dinar with an exchange rate of 1,000 Tunisian francs = 1 Tunisian dinar and about US$2.38 both to stabilize the economy and to emphasize a distinctive Arab identity (Exchange rate arrangements: Tunisia, n. d., p. 3). Obviously, such policies could not sustained too long. Macro imbalances, high inflation rats and foreign payment deficits quickly manifested the first shock to economy. It also led to a formal stabilization plan, including a first devaluation of the newly created national currency. During 1964-65 period, although the policy makers were well aware of the danger of inflation and tried to slow down investments in development sectors, yet because of political constrains, they failed to cut education, health or other expenditures, those were the lion shares of the budget. They tried to stabilize the economy by spending and implementing the stabilization programs, yet their strategy could work too long. In 1965, Tunisian started to cripple down again because of the stagnating per capita real income and nationalization of land and commerce in the form of cooperatives. The end result was a profound economical crisis which were resolved in 1970 by a change within the government and in the economic strategy (Bouhhzala, 2002, pp. 2-11). An Era of Structural Reform Programs (1971- 1986) During seventies, the Tunisian Government allowed to develop a partial open free market concept while keeping a strict control over economy. It abandoned the creation of cooperative and quasi nationalization of land and only cooperatives created on state owned lands were allowed. Private sector investment was strongly encouraged yet it did not lead to any privatization of public enterprises or to the elimination of private or public monopolies. During this period 1971-1986, more public enterprises were created, and public enterprises continued to be heavily subsidized. Although investment in education and agriculture sectors continued yet they were toppled down among top priority sectors. During 1970 and 1980s, Tunisia, continued with a fixed exchange rate system. Since France was Tunisia's major trading partner at that time, Tunisia continued to pegged its exchange rate to French franc till 1973. During 1973-74, increase in oil prices collapsed the Bretton Woods fixed exchange rate system and many industrialized economies had to moved to a flexible exchange rate regime. Tunisia was fortunate to tide over the crisis because it was a net oil exporter and hence the government could maintain a managed floating exchange rate system within a stable band in relation with French franc till the early 1980s. With an increase in oil prices, it became an important source of revenues, thus many important public investment projects were launched and total spending had increased. During 1970-86 periods, per capita income increased around 6%. At the end of the seventies, an increase in macro economic imbalances with increasing debt service raised the inflation rate. During 1979 to 1987, inflation remained above 8%, with its peak value of 14.1% in 1982. An increase in the debt services, depletion of foreign reserves, along with an increase in inflation and unemployment rates, triggered a movement of dissidence and social unrest even of rioting among the working class and an increasing number of dissident youth. In 1983, the government and the new prime minister tried to stabilizing the economy by substantially raising the wages yet the economic constraints could not be ignore for a long time government had no choice but to negotiate the stabilization and adjustment plans with the International Monetary Fund and the World Bank. Their implementation started in 1987, but in November 1987, not so surprisingly, it was also the end of the Bourguiba regime, and the beginning of more important reforms (Bouhhzala, 2002, pp. 12-13). . Works Cited Boughzala, M. (2001) Budget Institutions and Expenditure Reforms In Tunisia. UNIVERSITE DE TUNIS EL MANAR [Internet], December, pp. 2-12. Available from: [Accessed 14 March 2008]. Country Cooperation Strategy for WHO and Tunisia 2005-2009. (2006). World Health Organization Regional Office for the Eastern Mediterranean; WHO- EM/ARD/017/E/R [Internet], Available from: [Accessed 14 March 2008]. Exchange rate arrangements: Tunisia. (n. d). pp. 1-8. Read More