Tunisia's economy is 59.3 percent free

Tunisia's economy is 59.3 percent free, according to our 2008 assessment, which makes it the world's 84th freest economy. Its overall score is 0.2 percentage point lower than last year, reflecting a deteriorated score in freedom from corruption. Tunisia is ranked 10th out of 17 countries in the Middle East/North Africa region, and its overall score is higher than the regional average.
Tunisia has high scores in business freedom and government size, which indicates a government limited in size and scope. Inflation is moderate, although the state can set prices in some circumstances. Tunisia maintains moderately high tax rates, but overall tax revenue is not particularly large as a percentage of GDP. There are regulatory obstacles, but businesses can be opened and closed without undue difficulty. The labor market is fairly flexible, and redundant workers can be fired without significant cost.
Tunisia faces challenges in labor freedom, investment freedom, and financial freedom. Protectionist economic policies have limited the opportunities for foreign investment. The financial sector is subject to heavy political influence, and much of its regulation and oversight falls short of international standards.
Background:Tunisia gained its independence from France in 1956 and developed a socialist economy. President Zine al-Abidine Ben Ali has undertaken gradual free-market economic reforms since the early 1990s, including privatization of state-owned firms, simplification of the tax code, and more prudent fiscal restraint. The country's diverse economy includes significant agricultural, mining, energy, tourism, and manufacturing sectors. Tunisia's 1998 association agreement with the European Union, which has helped to create jobs and modernize the economy, was the first such agreement between the EU and a Maghreb country. The economy has also benefited from expanded trade and tourism.
Business Freedom - 79.2%
The overall freedom to start, close, and operate a business is relatively well protected by Tunisia's regulatory environment. Starting a business takes an average of 11 days, compared to the world average of 43 days. Obtaining a business license takes much less than the world average of 234 days, although costs are fairly high. Bankruptcy proceedings are easy and straightforward.
Trade Freedom - 71.8%
Tunisia's weighted average tariff rate was 9.1 percent in 2005. Import restrictions, some prohibitively high tariffs, import taxes and fees, import licensing requirements, export promotion programs, and inconsistent customs administration add to the cost of trade. An additional 10 percentage points is deducted from Tunisia's trade freedom score to account for non-tariff barriers.
Fiscal Freedom - 76.4%
Tunisia introduced a tax cut early in 2007. The top income tax rate is 35 percent, and the top corporate tax rate is 30 percent, down from 35 percent. Other taxes include a value-added tax (VAT) and a vehicle tax. In the most recent year, overall tax revenue as a percentage of GDP was 15.3 percent.
Freedom from Government - 77.1%
Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 27.6 percent of GDP. Privatization has been uneven and sluggish, and the state retains a large role in economic activities.
Monetary Freedom - 77.6%
Inflation is moderate, averaging 3.8 percent between 2004 and 2006. Relatively unstable prices explain most of the monetary freedom score. The government can set prices for subsidized goods and influences prices through regulation, subsidies, and state-owned utilities and enterprises. An additional 10 percentage points is deducted from Tunisia's monetary freedom score to account for policies that distort domestic prices.
Investment Freedom - 30%
Tunisia restricts investment in some sectors to minimize the impact on domestic competitors. The Investment Code Law covers all major sectors except mining, energy, finance, and domestic trade. Foreign investment is screened. Foreign ownership of agricultural land is prohibited. The entry of French and Gulf capital indicates that discouragement of foreign investment in areas like restaurants, real estate, and retail distribution is moderating. The state telecommunications service privatized a major stake to a foreign investor in 2006. Non-tourism onshore companies with a capital share larger than 49 percent require government authorization. Residents and non-residents may hold foreign exchange accounts, subject to restrictions and approval. There are some controls, quantitative limits, and other restrictions on payments and transfers. There are many restrictions and controls on capital transactions.
Financial Freedom - 30%
Supervision and regulation are slowly being brought up to international standards but remain insufficient, although increased provisioning requirements have strengthened the banking environment. There are 14 commercial banks, six development banks, two merchant banks, and eight offshore banks. Five banks control 70 percent of deposits. The government sold its stake in two banks in 2002 and 2005 but remains the controlling shareholder in at least four banks that control 50 percent of assets. The percentage of non-performing loans remains high. State-mandated lending and the legal difficulty of settling with debtors have hindered financial development. The insurance sector is small, and the largest insurer is state-owned. Capital markets are nominal, but the stock market is active, although with little foreign participation.
Property Rights - 50%
The executive branch is the supreme arbiter of events in the cabinet, government, judiciary, and military. Commercial cases take long to resolve and face complex legal procedures. Tunisia's intellectual property rights law is designed to meet the WTO's Trade-Related Aspects of Intellectual Property Rights (TRIPS) minimum standards. Copyright violations are not actively investigated by customs agents without a complaint by the copyright holder.
Freedom from Corruption - 46%
Corruption is perceived as significant. Tunisia ranks 51st out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. Corruption is less pervasive than in neighboring countries. Most foreigners involved in the Tunisian market have not identified corruption as a primary obstacle to direct investment. There are no laws to provide government documents to citizens.
Labor Freedom - 55.3%
Somewhat flexible employment regulations could be improved to enhance overall productivity growth. The non-salary cost of employing a worker is high, and the rigidity of hiring and firing a worker creates a risk aversion for companies that would otherwise employ more people and grow.