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RESTRICTED FILE COPY Report No. AF-39a Public Disclosure Authorized This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized REVIEW OF 1965 - 1968 DEVELOPMENT PLAN TUNISIA VOLUME IV Industry Public Disclosure Authorized November 22, 1965 Public Disclosure Authorized Africa Department CURRENCY EQUIVALENTS Prior to September 1964 U.S. $ a .420 Dinars Since September 1965 U. S. $ a . 525 Dinars INDUSTRY Table of Contents Page As RECENT GROWTH TRENDS AND STRUCTURAL CHARAlCTERISTICS 1 B. THE THREE-YEAR PLAN, 1962-1964 8 C. THE FOUR-YEAR PAN, 1965-1968 10 General 10 Mining 12 Petroleui 15 Chemicals 16 Construction materials 17 Paper and printing 18 lVoodworking, furniture 20 Food industries and tobacco 20 Textiles and clothing 22 Itiechanical and electrical industries 26 Tourism 29 Conclusions 32 Appendix I - Incentives for Private Investment in Tunisia 34 - Organization of Private Foreign Investment - Preliminary Approval 34 - Incentive for Foreign Private Investments 35 - The Guarantee of Foreign Private Investments 40 Appendix II - Fertilizer Project - "Industries Chimiques Maghrebines" 43 Table of Contents (continued) ANNEX: I. Value Added in Manufacturing and Ivlining II. Industrial Activity Index III. Output and Export of Industrial Products IV. Industrial Employment V. Estimated Net Industrial Profits After Tax VI. Sample of Industrial Companies Controlled by the Government of Tunisia VII. Three-Year Plan (1962-1964) - Industrial Investments VIII. Investments in Tourism (1962-1964) IX. Industrial Product by Branch - Tentative Comparison of the Plan Targets with Actual Results (1960-1964) X. Incremental Capital-Output Ratios by Branch (1960-196)4) XI. Value Added and Growth Rate by Industrial Sector XII. Mining Sector XIII. Chemical Industries XIV. Construction Materials XV. Agricultural Industries and Food Processing XVI. Textiles, Clothing and Leather XVII. IMechanical Industries XVIII. Investments in Tourism (1965-1968) XIXo Net Capital Formation in Industry (1965-1968) XXe Estimated Industrial Employment by Sector INDUSTRY 1. Tunisia does not have a large domestic market, nor - broadly speaking - rich raw material resources lending themselves to a major industrial transformation. Tunisians have a long standing tradition of trade and prefer investment in commerce. Finally, the technical and managerial skills essential for the successful running of industrial undertakings are still very limited, On the other hand, Tunisia has some compensating advantages. There is a substantial reservoir of unemployed labor and labor costs are still low. And, small as the market is, the potential for import substitution has not yet been entirely tapped. Finally, and probably more important, for the long run industrial pros- pects, Tunisia is favorably located near Western Europe, in the center of the growing Mediterranean market and,if the Maghreb becomes an economic entity, Tunisia is in a good position to profit from its larger markets. The possibilities of attracting European management and capital and the opportunities to produce and sell labor intensive manufactures abroad should be quite favorable in the long term, especially if Tunisia has free access to Western European markets. 2. Since independence, in 1956, the bulk of investment in the indus- trial sector has been carried out through public enterprises, either fully owned by the State or with capital participation by private investors, but in both cases with management directly responsible through various ways to the Administration. The rationale for the State's direct capital and managemient participation in commodity producing activities was the belief that the private sector, at the initial stage of industrialization, could not be adequately relied upon to introduce modern enterprises in a traditionally-oriented society because Tunisian entrepreneur expertise, wvhen independence came, was available only in the traditional sectors of the economy: agriculture, commerce and artisanat. All activities in the modern sectors of the economy at that time were directed by non-Tunisians. In addition, it was obvious that, if rapid industrial expansion were to be achieved, the Government would anyhow have to assist financially due to the scarcity of capital in the private sector. A. Recent growth trends and structural characteristics 3. At independence, in 1956, Tunisia had a much smaller industrial base than Algeria or Morocco, as a result chiefly of its more meager natural resources and smaller market. Processing of raw materials for export (phosphates, olives) and manufacture of building materials (cement, plaster, bricks and tiles) were the main industrial activities. A few consumer goods (soap, shoes) were produced on an industrial scale. Almost all large scale industry was French owned. There was also a very extensive handicraft sector, turning out art goods such as carpets, clothing, fur- niture, ceramics and jewelry. Industry grew only by 3.5 percent per year - 2 - from 1950 to 1956 and did practically not grow at all from 1957 to 1959. However, in recent years, manufacturing and mining production has increased rapidly. The value added by manufacturing and mining output,which had only increased from Dinars 26.0 million in 1950 to Dinars 32.9 million in 1957, reached about Dinars 53.0 million in 1964. i In 1964, industry contributed 14 percent of gross domestic product at factor cost. 4. Changes in the industrial structure between 1960 and 1964 are shown below in percentages of value added: 1960 1964 Food processing 41.6 % 40.0 IlMining 16.2 14. 2 Textiles, clothing 16.2 15.4 Construction materials 8.7 8.7 Others 17.3 21.7 Total 100.0 % 100.0 % 5. The enlarged share of 'others" in total added value between 1960 and 1964 is due to the increase in petroleum products and in pulp and wood products, reflecting a tendency to growing diversification of Tunisian large scale industries. But food industriew rei-vrin tie larDjest singlc industrial branch in Tunisia. 6. From 1960 to 1964, industrial activity grew at the average rate of about 6 percent Fer year. For food processing, groTwth has been about 5 percent per year. The main products which contributed to that expansion were wine, olive oil, fruit and vegetable canning, and sugar. Processed cereals and semolina have declined somewhat. Among the other manufacturing industries, building materials, ceramics and glass grew at the average annual rate of 6.1 percent, due to increases in output of cement, lime and bricks. Mechanical and electrical industries developed at the high rate of 9.1 percent per year (the largest increase of output was in metal goods); wood products and furniture grew by 9.7 percent per year and paper and miscellaneous by 8.0 percent per year. In the other sectors growth has been smaller, inferior to the growth rate of GNP. ChenCica.S gre-T onl: by 2., -percent ner In. -4-:icl cr.r -e explainec I lol incre!se in swerphosnhatcs outm T. ?zxtilez outnUt incre--sod by 4.0 percent pernnnur. In ni-din-, pcrformance has not been i; ?ressive due to n~ decline in lead and iron ore out'mt. Tlhis decline -as coupen8ated b-- -n increase in p1osp'-te outtiit ut the sector, as a - .cle, grew only o-. 2.7 ?ercent 'ierarnuui froii 1960 to 1964. ./ 7. Tunisian industry has been established both through the processing of domestic materials and the use of imported inputs. Alanufacturing industries produce largely for the local Tunisia market (Annex III). 1/ Data are in 1957 Dinars. The figure for 1964 is estimated. 2/ See Annex II for indent of ind-udriTl output'-4 r-.nc/i 1960-1960. -3 - Export industries are mainly thosein which very little if no processing at all is involved, such as for wine, olive oil and mining products. The only exception is superphosphates, which is an industry largely built for export. The ratio of' manufactured exports to manufacturing output stood at 21.2 in 1963D 1/ 8. The Mission tried to obtain some rough indications of the degree of baclkvard linkage to the import sector and to the domestic economy of various manufacturing industries. About 20 to 25 percent of the value of domestically produced manufactured goods in 1961 are heavily dependent on imports. On the other hand, important industries such as food products, chemicals and cement, to name a few, make substantial use of local raw materials. Forward linka-,es are, in most cases, small since the bulk of manufacturing output goes directly to final demand. There are excep- tions - cement, chemicals and oil products provide important inputs into construction and other domestic manufacturing sectors. 9. A substantial part of recent increases in production of manufactured goods has substituted for imports (petroleum products, sugar, textiles, vehicle assembly, etc.); indeed, in certain cases this is already clearly notice able in terms of reductions in import volumes in recent years. The import substitution is likely to be relatively less important in the future with the foreseen expansion of fertilizers, oil and rock phosphate which are mostly for export. 10. Tunisian industry has not yet everywhere reached a high standard of productivity and economic efficiency. There is much variation as between different sectors in their degree of international competitiveness, as is illustrated by the following examples: (a) Superphosphates: Tunisian fertilizers are exported to the world market at competitive prices. At present prices, the largest ferti- lizer company in Tunisia breaks even at 60 percent of capacity. For phosphate fertilizers sold in the Tunisian market, the selling price is fixed by Government below cost. (b) Esparto pulp: Local output is too small to be sold at com- petitive prices. World competition is stiff. However, if the present capacity can be increased, as expected, to 80-90 tons per day, Tunisia should be able to eyxport its production at competitive prices.