Anatomy of a Kleptocracy: State Capture in Tunisia

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ryan tunisia(Image: Ruins, Tunisia via Shutterstock)

When Tunisian entrepreneur Ramzi el Fekih decided to launch the country’s first mobile money service, he was in for a shock.

The idea was simple enough: Create a service to allow people to transfer money and pay for things online. It was aimed at people living in rural areas, where people were underserviced and forced to travel long distances to do basic banking operations. No one else was offering a similar service.

It was 2009, however, and former President Zine El Abidine Ben Ali was still in power.

Naively, El Fekih filed the extensive paperwork and got all the painstaking necessary approvals. Suddenly, three weeks before the company’s planned launch, he received a letter ordering him to halt his plans until further notice.

A year passed, without any news. And then, in late 2010, the Ben Ali family launched a mobile money service of their own.

“Obviously, that was done to help the Ben Ali family launch the service first,” El Fekih said. “It’s eliminating the competition before it even starts. And the reason they gave officially was that this sector was not regulated yet, and we need to see how we’re going to regulate it.”

There is a logical relationship between kleptomania and revolution. When the ruling elite’s desire to rule is mostly motivated by the pursuit of its own economic interests and citizens are neglected, at a certain point, people have had enough.

Tunisia’s 2010-11 uprising began in poverty-stricken towns in the center of the country such as Sidi Bouzid and Kasserine, where people were angry about high rates of unemployment, inequality and lack of basic infrastructure.

The upper and middle classes also were sick of the rampant cronyism practiced by Ben Ali and his insatiable “nouveau riche” in-laws, the Trabelsis.

The rising tide of anger started in the late 1990s and became progressively worse as the family accelerated its takeover of the most profitable sectors. With little freedom to vent their rage, Tunisians’ knowledge was limited to whispered rumors and suspicions.

Then, the leaked US diplomatic cables on Tunisia were published in December 2010, revealing that American diplomats considered Ben Ali and those close to him as “quasi-mafia.”

“Seemingly half of the Tunisian business community can claim a Ben Ali connection through marriage, and many of these relations are reported to have made the most of their lineage,” Ambassador Robert F. Godec wrote in a June 2008 cable.

A World Bank report published on Thursday provides the first detailed empirical study into how Ben Ali and his kin used legislation to satisfy their greed, placing a stranglehold on much of the economy in the process.

“All in the Family: State Capture in Tunisia,” by Bob Rijkers, Caroline Freund and Antonio Nucifora, analyzes data on 220 of the firms that were once owned by the Ben Ali family, offering a rare degree of insight into cronyism.

“We believe that the revolution was partly a plea for greater equality of opportunity, politically but also economically,” Rijkers said.

Few studies dig so deeply into the mechanisms of nepotism. Existing literature on crony capitalism includes Raymond Fisman of Columbia University’s influential 2001 paper on the link between political connections and economics under Indonesian dictator Suharto and Thomas Ferguson and Hans-Joachim Voth’s 2008 study of the value of political connections in Nazi Germany. There have also been studies on bailout and finance.

What sets this study apart, its authors say, is that they were given access to previously inaccessible data on the entire economy. This was not evident in a country that was an opaque police state for decades, but the Tunisian finance ministry cooperated with the World Bank in the study.

“The statistical office is now much better at having their information available onto the statistical office website,” Nucifora said. “This shows the power of access to information and gives [the public and researchers] the ability to quantify some of these problems which affect economic performance.”

The study shows that the 220 firms, which were confiscated by Tunisian authorities after the revolution, represented a massive 21 percent of all net private-sector profits. They accounted for about 3 percent of private-sector output.

The Ben Ali clan were world-class kleptomaniacs, particularly when the relatively small size of the Tunisian economy is taken into account. Ben Ali, his own relatives and his infamous in-laws managed to get their hands on some 550 properties and 400 companies, not all of which were included in the study, because many were identified at a later stage. The total value of the assets confiscated is estimated at $13 billion. They are estimated to have taken another $17 billion of the country’s wealth, which Tunisian authorities are still struggling to recover.

The companies they owned enjoyed “spectacularly higher” levels of output, profits, market share and growth. It proves empirically that they benefited from the legal bureaucratic hurdles blocking their competitors and that restriction on foreign direct investment helped them to dominate the markets.

Ben Ali firms dominated the telecommunications and air transport sectors. The clan members were also big players in other transport sectors, real estate, finance, the hotel business and media. The list includes some of the largest companies in Tunisia, such as Orange Tunisia, Tunisian, Carthage Cement.

The average Ben Ali-linked company could boast a 6.3 percent higher market share than an average Tunisian firm. They employed an astounding 137 percent more employees than average firms in sectors requiring government authorization. There were only three Ben Ali firms in the postal and telecommunications sectors, yet these companies took home 44 percent of profits in their sector.

Existing firms brought by the clan had a tendency to become spectacularly more profitable once they had changed hands.

Could it be that the Ben Alis and Trabelsis were simply phenomenal businessmen? Probably not, because according to the study, they made significantly less profit than competitors in unrestricted sectors.

The authors say that identifying sectors that are particularly prone to opportunistic and self-interested legislation could help draw lessons for other countries.

“This issue of cronyism is an issue in the Middle East but also in countries like Russia, in Asia; perhaps one could argue it’s really a global problem,” Nucifora said.

The current investment code dates to December 27, 1993. It was introduced a year after the former president had married his longtime mistress, former hairdresser Leila Trabelsi, and helped pave the way for her extended family to go from small-time crooks to big business owners.

Likewise, Sakhr el Materi came from a wealthy family, but marrying Ben Ali’s daughter proved to be a shrewd move, giving him the “competitive edge” over other businessmen. The Ben Alis rewarded their son-in-law by smoothing his entry into sectors ranging from media to banking to telecommunications to shipping. His monopoly on the sale of so many leading car brands left other aspiring car dealers in the dust.

Joel Rozen, an anthropologist who has spent the past three years researching Tunisia’s entrepreneurial culture for his doctorate at Princeton, says that even with the Ben Alis and Trabelsis out of the picture, there is an ongoing climate of fear within the business community.

“This cronyism and this corruption really does impact on young entrepreneurs,” he said. “It’s not just a question of teaching people of how to start a business, it’s also about teaching them to not be afraid.”

Post-revolution, many Tunisians have been hesitant to invest in new project. Partly, this is because of serious economic and political instability, but Rozen says their reluctance is also rooted in the country’s recent history.

“Throughout Tunisian society, there’s [the] idea that as soon as you were successful in business, the Ben Ali family would swoop in,” he said.

“People who were working with the Ben Ali clan are still in business,” he said. They’re not working with the Ben Ali family now, but the ways in which they’re working in the market economy may still be corrupt.”

The financial ministry needs as much reforming as the judiciary and the security services, Rozen said.

Elyes Fakhfakh, a member of the social-democrat Ettakatol Party who was finance minister from December 2012 until January 2014, promises change is coming but disagrees with the World Bank on the timeframe.

“We all agree that there must be reforms,” he said. “But the transitional period is not the ideal time for economic reform.”

During the transitional period, the government has no legislative authority and any reforms must pass by the constituent assembly, which has been focused on political reforms, especially the new constitution.

Nonetheless, he points to new laws on investment and public-private partnerships, which have been drafted and are likely to be passed in the coming months.

Ouided Bouchamaoui, head of the Tunisia’s union for industry, commerce and handicrafts, also says changing investment law is “not a priority” for Tunisia at this stage of its transition.“It’s a bit early for major [economic] reforms,” says Bouchamaoui, who represents the private sector. She does agree that decentralizing bureaucracy and creating more administrative flexibility is a fundamental issue.

For El Fekih, like many other entrepreneurs, the revolution brought new opportunity. He was finally granted authorization to launch his company in March 2011.

With the same bureaucracy in place, however, he still faces many of the costly frustrations of the past, and change cannot come fast enough. Tunisia remains a tough country for small and medium-size businesses – which could play a crucial role in creating desperately needed new jobs – to start out.

“Part of the problem is with the mindset of the administration,” he said. “The administration has so much power, and sometimes they abuse that power.”

Legislation aside, unraveling the cultural legacy of crony capitalism, as well as the legislation, will be one of Tunisia’s most important challenges.