politically connected firms in tunisia

Politically connected firms in Tunisia

Bob Rijkers, Leila Baghdadi, Hassen Arouri

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=fXup9Nims9O--M&tbnid=l-Zf89BlR9leqM:&ved=0CAUQjRw&url=http://www.dailymail.co.uk/news/article-1347779/Tunisia-riots-1-500-Britons-face-machete-mobs-BA-fly-tourists-war-zone.html&ei=K4uCUpPICNfe4AP1roGgAQ&bvm=bv.56146854,d.dmg&psig=AFQjCNFtYDvj1jLzvaSOEBURInPA3fn_uA&ust=1384373351290665

Introduction

Why Study State-Business Relationships?

• Arab Spring often blamed on inequality, corruption, and economic stagnation– Stipulated Common Cause: Abuse of power by ruling elite

• Examining state-business relationships can– Unveil mechanisms by which rent seeking arises – Help identify reform priorities

• Case-Study: Tunisia

How Do Dictators Get Rich? Mechanisms and Hypotheses

– Regulatory Capture H0: Entry regulation was not (ab)used to serve the

president’s (family’s) business interests

– Privatization H0: Privatization served the public interest

– Tax Evasion H0: Connected entrepreneurs are not more likely to evade taxes

Why Tunisia?• Celebrated development model & (Pre-)Arab Spring “Success” Story

– Highly interventionist policies & extensive interaction between Ben Ali and investors– Stable growth – but also persistent unemployment– The Birthplace of the Arab Spring

• Data Availability– Information on Ben Ali owned firms confiscated in the aftermath of the revolts– Other data:

• firm census (1996-2010)• tax data (2000-2010)• data on investment regulations (1994-2010)• data on privatizations (1998-2010)• customs transactions records (by firm-product and country – 2000-2009)

– Complemented with ‘mirror’ statistics

Why Tunisia?

Outline • Introduction

• Data & Descriptive Statistics

• Regulatory Capture

• Privatization

• Tax Evasion

• Conclusion

Outline

Main Findings• Ben Ali’s business interests were important in aggregate

– 662 connected firms (0.2% of all firms) account for 5% of private output and 16% of profits

• The Ben Ali clan engaged in– (i) regulatory capture– (ii) perverted privatizations– (iii) tax evasion

…. and these were resulted in fiscal losses, inequity and inefficiency – Ben Ali presence is associated with reduced competition– 1.2 billion in foregone import tariffs alone

• State-Business relationships continue to be problematic– The Revolution reduced privileges enjoyed by Ben Ali firms– But evidence that corruption “democratized”: Tax evasion has increased– Laws that Ben Ali put in place have not been changed

• Connected firms are more likely to evade import tariffs

Main Findings



• The Ben Ali clan engaged in (i) regulatory capture (ii) perverted privatizations (iii) tax evasion

…. and these were resulted in fiscal losses, inequity and inefficiency – Ben Ali presence is associated with reduced competition– 1.2 billion in foregone import tariffs alone

• State-Business relationships continue to be problematic– The Revolution reduced privileges enjoyed by Ben Ali firms– But evidence that corruption “democratized”: Tax evasion has increased– Laws that Ben Ali put in place have not been changed


Main Findings



• The Ben Ali clan engaged in(i) regulatory capture(ii) perverted privatizations (iii) tax evasion

• State-Business relationships continue to be problematic– The Arab Spring may have “democratized” corruption: Tax evasion has

increased– Laws that enable capture put in place by Ben Ali have not been changed


Main Findings

Data & Descriptive Statistics

Ben Ali Firms: A Family Portrait

05

10%

Ben

Ali

0 20 40 60 80 100Percentile

L YProfits

Free Entry and Modestly Restricted

05

10%

Ben

Ali

0 20 40 60 80 100Percentile

L YProfits

Highly Restricted

Connected Firms are Largerand Sort into Regulated Sectors

Ben Ali Ownership by Presence of Entry Restrictions

Regulatory Capture

Assessing Performance DifferentialsWhy do Ben Ali Firms outperform their peers?

Assessing Performance DifferentialsBeing connected is especially valuable in

regulated sectors

Dependent Variable: Market Share (Output)

Quantile Regressions OLS (1) (2) (3) (4) (5) (6) (7)

Quantile 10 50 90 95 99 Simple Weighted coef/se coef/se coef/se coef/se coef/se coef/se coef/se

Ben Ali firm (BA)0.000**

* 0.004 0.083*** 0.107*** 0.129*** 0.038** 0.024(0.000) (0.003) (0.013) (0.005) (0.010) (0.015) (0.038)

BA*Highly Regulated 0.000 0.002 -0.012 0.139*** 0.758*** 0.044 0.358**(0.000) (0.003) (0.013) (0.009) (0.015) (0.051) (0.165)

Firm Controls Yes Yes Yes Yes Yes Yes YesSector Dummies Yes Yes Yes Yes Yes Yes YesYear Dummies Yes Yes Yes Yes Yes Yes YesWeights None None None None None None OutputNumber of observations 49,446 49,446 49,446 49,446 49,446 49,446 49,446R2 0.150 0.189 0.247 0.220 0.176 0.288 0.872Note: *,**,*** denote significance at the 10%, 5% and 1% significance level respectively. Standard errors are clustered by sector The sample is confined to 2006-2010 and to firms which report using hired labor, producing more than 1600 USD worth of output and having labor productivity in excess of 400 USD operating in sectors governed by the investment code in which at least one Ben Ali firm is contemporaneously active. Standard errors are clustered at the 5-digit sector level. Highly Regulated (de Jure) is a dummy variable indicating whether the particular 5 digit sub-sector the firm operates in is subject to both authorization requirements and FDI restrictions at time t. Firm controls include offshore, foreign and log firm age.


regulated sectors





* 0.004 0.083***

0.107*** 0.129*** 0.038*

* 0.024(0.000) (0.003) (0.013) (0.005) (0.010) (0.015) (0.038)

BA*Highly Regulated 0.000 0.002 -0.012 0.139*** 0.758*** 0.044 0.358**(0.000) (0.003) (0.013) (0.009) (0.015) (0.051) (0.165)

Firm Controls Yes Yes Yes Yes Yes Yes YesSector Dummies Yes Yes Yes Yes Yes Yes YesYear Dummies Yes Yes Yes Yes Yes Yes YesWeights None None None None None None OutputNumber of observations 49,446 49,446 49,446 49,446 49,446 49,446 49,446R2 0.150 0.189 0.247 0.220 0.176 0.288 0.872Note: *,**,*** denote significance at the 10%, 5% and 1% significance level respectively. Standard errors are clustered by sector The sample is confined to 2006-2010 and to firms which report using hired labor, producing more than 1600 USD worth of output and having labor productivity in excess of 400 USD operating in sectors governed by the investment code in which at least one Ben Ali firm is contemporaneously active. Standard errors are clustered at the 5-digit sector level. Highly Regulated (de Jure) is a dummy variable indicating whether the particular 5 digit sub-sector the firm operates in is subject to both authorization requirements and FDI restrictions at time t. Firm controls include offshore, foreign and log firm age.

Connected Firms Outperform Their Competitors


regulated sectors





* 0.004 0.083***

0.107*** 0.129*** 0.038** 0.024

(0.000) (0.003) (0.013) (0.005) (0.010) (0.015) (0.038)BA*Highly Regulated 0.000 0.002 -0.012 0.139*** 0.758*** 0.044 0.358**

(0.000) (0.003) (0.013) (0.009) (0.015) (0.051) (0.165)Firm Controls Yes Yes Yes Yes Yes Yes YesSector Dummies Yes Yes Yes Yes Yes Yes YesYear Dummies Yes Yes Yes Yes Yes Yes YesWeights None None None None None None OutputNumber of observations 49,446 49,446 49,446 49,446 49,446 49,446 49,446R2 0.150 0.189 0.247 0.220 0.176 0.288 0.872Note: *,**,*** denote significance at the 10%, 5% and 1% significance level respectively. Standard errors are clustered by sector The sample is confined to 2006-2010 and to firms which report using hired labor, producing more than 1600 USD worth of output and having labor productivity in excess of 400 USD operating in sectors governed by the investment code in which at least one Ben Ali firm is contemporaneously active. Standard errors are clustered at the 5-digit sector level. Highly Regulated (de Jure) is a dummy variable indicating whether the particular 5 digit sub-sector the firm operates in is subject to both authorization requirements and FDI restrictions at time t. Firm controls include offshore, foreign and log firm age.

There is a premium on being connected Which is especially big for large firms in highly regulated sectors

Taking Stock

• Ben Ali firms are important from a macroeconomic perspective

• Being connected is especially valuable for large firms in sectors subject to severe entry restrictions

• Causality is difficult to establish, but the results are consistent with regulatory capture

Taking Stock

Privatization

Perverted Privatizations?• 8 out of 84 privatizations since 1998 ended up in the

hands of the Ben Ali family– 2 of them coincided with family events

• ENNAKL was privatized to Sakhr el-Matri (husband of Nesrine Ben Ali – following their marriage)

• STAFIM-PEUGEOT was privatized to Mehdi Ben Gaied (fiancé of Halima Ben Ali -following their engagement)

• Were prices appropriate?– Example: ENNAKL:

• Sold for 17 million TND in 2006 (annual profits 3 million TND)• Cumulative profits 2007 & 2008: 39 million TND

Privatization to the family was associated with improved performance

Tax Evasion

Taking Stock

• Strategy: Identify discrepancies between different administrative databases– Do firms that report hiring workers to the social security

administration and/or exporting or importing submit tax declarations?

– Are the sales reported to the tax authorities consistent with the amount they spent on wages, and their reported imports and exports?

Testing for Tax Evasion (1)

Connected Firms are More Likely to Evade Taxes

Testing for Tax EvasionMissing

DeclarationAnomalous Declaration

1 2Ben Ali firms 0.046*** 0.084***

(0.018) (0.022)Mean dep var non-Ben Ali firms 0.090 0.153Year (4) Yes YesFirm Controls Yes YesGovernorate (24) Yes YesIndustry (580) Yes YesN 241839 212900# Firms 80199 70737 Adjusted R2 0.180 0.217

Connected firms are More Likely to Evade Taxes

Taking StockTesting for Tax Evasion (2)

Evasion Gaps

Ben Ali Firms Are More Likely to Evade Tariffs

What Happened After the Revolution?

Conclusion

Conclusion

• The Ben Ali clan enriched itself both by (ab)using the law and by breaking it, resulting in:– Fiscal Losses

• Connected firms are estimated to have evaded at least 1.2 billion USD worth of import tariffs

– Inequity• BA firms accounted for a disproportionate share of profits & enjoyed

regulatory privileges

– Inefficiency• Evasion endows perpetrators with a cost advantage not based on

performance• BA presence was associated with less competition in highly regulated

sectors

Conclusion

Conclusion• The Arab Spring reduced regulatory privileges enjoyed by the Ben

Ali clan – Competition improved in highly regulated sectors in which the clan had

extensive interests– Tariff evasion diminished in product lines previously dominated by Ben Ali

• Yet state-business relationships continue to be problematic – arguably more now than ever before– Tax evasion is on the rise– Laws put in place by Ben Ali that facilitate capture have remained in place

What happened after the Arab Spring?

Extra Slides

Data• Identification of Ben Ali’s Business Interests

– 662 firms owned by Ben Ali or his family confiscated in the aftermath of the Jasmin Revolution

• Administrative data on firm performance– Firm census data: 1996-2010: all private firms– Tax data: 2000-2010: all private firms– Customs transactions data by firm-product-origin: 2000-2009:

all firms• And “mirror” data from WITS

– Privatizations: 1998-2010

• Data on investment regulations (coded manually)

Data

Provisions in the Investment Code

• Tunisian Investment Code (Law 93-120)– Governs investments in all sectors of the economy except mining,

finance, and domestic commerce.– Amended by 25 presidential decrees provides variation over time

• Decrees were signed by Ben Ali and ratified by the cabinet

• Two Types of Restrictions on Entry: – Authorization Requirements – e.g. need government approval to be

able to run a firm.• E.g. in fishing, tourism (travel agencies), air transport, maritime transport,

road transport, telecommunication, education, the film industry, real estate, marketing, health related industries

– FDI Restrictions – need permission from the Commission superieure d’Investissement – notoriously difficult

• e.g. in transport, communications, tourism, education, cultural production, entertainment, construction, real estate

Entry Regulation in Tunisia

0.1

.2.3

.4P

ropo

rtion

Ben

Ali

Ow

ned

1 5 10 15 20 25Within Sector Rank

Other Highly Restricted95% CI 95% CI

Ben Ali firms are larger within industries - especially if they are highly regulated

Strategy #1: Do Evasion Gaps Increase with Ben Ali Presence?

Evasion Gaps (NSH6-country-year)

Log Exports Reported by Partners-Log Imports Reported in Tunisia1 2 3 4 5 6

coef/se coef/se coef/se coef/se coef/se coef/seLog (Tariff+1) 0.058*** 0.012 0.018 0.078*** 0.040 0.050

(0.022) (0.051) (0.053) (0.023) (0.053) (0.056)Ben Ali % of value 0.419*** 0.422*** 0.174 -0.850* -0.534 -0.759

(0.133) (0.120) (0.150) (0.474) (0.462) (0.480)Offshore % of value -0.034 -0.288*** -0.464*** 0.246 0.150 0.011

(0.061) (0.051) (0.060) (0.182) (0.164) (0.219)Public % of value -0.312*** -0.339*** -0.459*** -0.229 -0.612 -0.621

(0.076) (0.082) (0.089) (0.324) (0.404) (0.436)Ben Ali % of value* Log (Tariff+1) 0.370*** 0.279** 0.275**

(0.133) (0.130) (0.136)Offshore % of value* Log (Tariff+1) -0.080 -0.130*** -0.143**

(0.053) (0.047) (0.061)Public % of value* Log (Tariff+1) -0.025 0.085 0.050

(0.095) (0.120) (0.130)log (1+ NTB) 0.015 -0.064 -0.078 0.013 -0.061 -0.076

(0.022) (0.040) (0.050) (0.022) (0.040) (0.050)Country*year FE Yes Yes Yes Yes Yes YesProduct FE Yes YesCountry*product FE Yes YesN 49349 49349 49349 49349 49349 49349R2 0.036 0.258 0.627 0.037 0.258 0.627*** p=<0.01, ** p<0.05, * p=0.10, Standard errors clustered at the product level

Evasion Gaps Increase with Tariffs




(0.022) (0.051) (0.053) (0.023) (0.053) (0.056)Ben Ali % of value 0.419*** 0.422*** 0.174 -0.850* -0.534 -0.759


(0.061) (0.051) (0.060) (0.182) (0.164) (0.219)Public % of value -0.312*** -0.339*** -0.459*** -0.229 -0.612 -0.621




(0.095) (0.120) (0.130)log (1+ NTB) 0.015 -0.064 -0.078 0.013 -0.061 -0.076


Especially when tariffs are high




(0.022) (0.051) (0.053) (0.023) (0.053) (0.056)Ben Ali % of value 0.419*** 0.422*** 0.174 -0.850* -0.534 -0.759


(0.061) (0.051) (0.060) (0.182) (0.164) (0.219)Public % of value -0.312*** -0.339*** -0.459*** -0.229 -0.612 -0.621




(0.095) (0.120) (0.130)log (1+ NTB) 0.015 -0.064 -0.078 0.013 -0.061 -0.076





(0.022) (0.051) (0.053) (0.023) (0.053) (0.056)Ben Ali % of value 0.419*** 0.422*** 0.174 -0.850* -0.534 -0.759


(0.061) (0.051) (0.060) (0.182) (0.164) (0.219)Public % of value -0.312*** -0.339*** -0.459*** -0.229 -0.612 -0.621




(0.095) (0.120) (0.130)log (1+ NTB) 0.015 -0.064 -0.078 0.013 -0.061 -0.076


And with Ben Ali presence




(0.022) (0.051) (0.053) (0.023) (0.053) (0.056)Ben Ali % of value 0.419*** 0.422*** 0.174 -0.850* -0.534 -0.759


(0.061) (0.051) (0.060) (0.182) (0.164) (0.219)Public % of value -0.312*** -0.339*** -0.459*** -0.229 -0.612 -0.621




(0.095) (0.120) (0.130)log (1+ NTB) 0.015 -0.064 -0.078 0.013 -0.061 -0.076



Evasion Gaps – Driven by Discrepancies in Prices or Quantities? Dependent Variable Weight Gap Price Gap

(1) (2) (3) (4) coef/se coef/se coef/se coef/se

Log (Tariff+1) -0.016 -0.007 0.031 0.052(0.063) (0.067) (0.030) (0.033)

Ben Ali % -0.150 -0.009 0.321*** -0.786**(0.168) (0.595) (0.102) (0.324)

Offshore % -0.372*** -0.221 -0.092** 0.218*(0.070) (0.226) (0.038) (0.117)

Public % 0.006 -0.361 -0.470*** -0.274(0.119) (0.638) (0.069) (0.308)

Ben Ali % * Log (Tariff+1) -0.041 0.327*** (0.170) (0.093)

Offshore % * Log (Tariff+1) -0.045 -0.093*** (0.064) (0.033)

Public % * Log (Tariff+1) 0.114 -0.061 (0.189) (0.091)

log (1+ NTB) -0.024 -0.023 -0.047* -0.045* (0.060) (0.060) (0.025) (0.026)Country*year FE Yes Yes Yes YesCountry*product FE Yes Yes Yes YesN 48726 48726 48726 48726*** p=<0.01, ** p<0.05, * p=0.10, Standard errors clustered at the product level

Evasion Gaps – Driven by Discrepancies in Prices or Quantities? PRICES! Dependent Variable Weight Gap Price Gap

(1) (2) (3) (4) coef/se coef/se coef/se coef/se

Log (Tariff+1) -0.016 -0.007 0.031 0.052(0.063) (0.067) (0.030) (0.033)

Ben Ali % -0.150 -0.009 0.321*** -0.786**(0.168) (0.595) (0.102) (0.324)

Offshore % -0.372*** -0.221 -0.092** 0.218*(0.070) (0.226) (0.038) (0.117)

Public % 0.006 -0.361 -0.470*** -0.274(0.119) (0.638) (0.069) (0.308)

Ben Ali % * Log (Tariff+1) -0.041 0.327*** (0.170) (0.093)

Offshore % * Log (Tariff+1) -0.045 -0.093*** (0.064) (0.033)

Public % * Log (Tariff+1) 0.114 -0.061 (0.189) (0.091)

log (1+ NTB) -0.024 -0.023 -0.047* -0.045* (0.060) (0.060) (0.025) (0.026)Country*year FE Yes Yes Yes YesCountry*product FE Yes Yes Yes YesN 48726 48726 48726 48726*** p=<0.01, ** p<0.05, * p=0.10, Standard errors clustered at the product level

Strategy #2: Differential Elasticity with respect to Tariffs?

Firm-level DescriptivesMean Import Values, Quantities, and Prices

Normalized by product-origin-year-industry (product-origin-year-industry average=1)

Firm Type Ben Ali Offshore Onshore Public

Mean Import Value All 1.170 1.011 0.928 1.409 Low Tariffs 1.161 1.018 0.932 1.370High Tariffs 1.177 1.007 0.924 1.458

Mean Import Quantity All 1.214 0.996 0.924 1.376 Low Tariffs 1.174 1.007 0.934 1.346High Tariffs 1.244 0.989 0.915 1.414

Mean Unit Prices All 0.936 1.015 1.012 1.074 Low Tariffs 0.990 1.000 1.002 1.088High Tariffs 0.897 1.022 1.019 1.055






Mean Unit Prices All 0.936 1.015 1.012 1.074 Low Tariffs 0.990 1.000 1.002 1.088High Tariffs 0.897 1.022 1.019 1.055

Ben Ali firms are bigger (i.e. import more)






Mean Unit Prices All 0.936 1.015 1.012 1.074

Low Tariffs 0.990 1.000 1.002 1.088

High Tariffs 0.897 1.022 1.019 1.055

Ben Ali firms report lower unit prices


Elasticity of Imports to Tariffs at the firm-product-source country levelDependent Variable Log V Log Q Log P

coef/se coef/se coef/seLog (Tariff+1) -0.133* -0.133 0.001

(0.073) (0.098) (0.059)Ben Ali *Log (Tariff+1) 0.098 0.211*** -0.113**

(0.062) (0.078) (0.057)Offshore *Log (Tariff+1) -0.070 0.223 -0.293**

(0.144) (0.183) (0.129)Public*Log (Tariff+1) 0.251 0.152 0.099

(0.066) (0.081) (0.055)Ben Ali firm -0.279 -0.498* 0.218

(0.226) (0.289) (0.190)Offshore 0.251*** 0.152* 0.099*

(0.213) (0.300) (0.214)Public 1.168** 0.177 0.991**

(0.515) (0.651) (0.460)Log Y 0.136*** 0.142*** -0.006

(0.027) (0.029) (0.016)Log L 0.100*** 0.029 0.071**

(0.024) (0.033) (0.029)N 48032 48032 48032Number of firms 3052 3052 3052FE: Sector, Country*Year, Product Yes Yes YesR2 0.363 0.577 0.703Note: Standard errors are and clustered at the firm-level. *** p=<0.01, ** p<0.05, * p=0.10.






(0.066) (0.081) (0.055)Ben Ali firm -0.279 -0.498* 0.218

(0.226) (0.289) (0.190)Offshore 0.251*** 0.152* 0.099*

(0.213) (0.300) (0.214)Public 1.168** 0.177 0.991**

(0.515) (0.651) (0.460)Log Y 0.136*** 0.142*** -0.006

(0.027) (0.029) (0.016)Log L 0.100*** 0.029 0.071**


Imports by Ben Ali firms are not more elastic with respect to tariffs






(0.066) (0.081) (0.055)Ben Ali firm -0.279 -0.498* 0.218

(0.226) (0.289) (0.190)Offshore 0.251*** 0.152* 0.099*

(0.213) (0.300) (0.214)Public 1.168** 0.177 0.991**

(0.515) (0.651) (0.460)Log Y 0.136*** 0.142*** -0.006

(0.027) (0.029) (0.016)Log L 0.100*** 0.029 0.071**



Quantities imported are less elastic






(0.066) (0.081) (0.055)Ben Ali firm -0.279 -0.498* 0.218

(0.226) (0.289) (0.190)Offshore 0.251*** 0.152* 0.099*

(0.213) (0.300) (0.214)Public 1.168** 0.177 0.991**

(0.515) (0.651) (0.460)Log Y 0.136*** 0.142*** -0.006

(0.027) (0.029) (0.016)Log L 0.100*** 0.029 0.071**



Quantities imported are less elastic

But Prices Decline More Rapidly

Prices after privatizatonThe evolution of Log unit prices Before and After Privatization

Dependent Variable: log priceStandard errors clustered by Firm-product Product Product

Excluding outlier firm(1) (2) (3)

Post-Privatization -0.003 -0.003 -0.008(0.051) (0.069) (0.071)

Post-Privatization*Ben Ali Owned -0.179** -0.179 -0.556**(0.080) (0.230) (0.280)

Firm-Product-Source Country FE Yes Yes YesPorduct-Source Country-Year FE Yes Yes YesN 55452 55452 38409Firms 1016 1016 984Privatized Firms 23 23 22Privatized to the Ben Ali family 5 5 4R2 0.849 0.849 0.857Note: Standard errors are and clustered at the firm-level. *** p=<0.01, ** p<0.05, * p=0.10.

Bob Rijkers







Privatization per se is not associated with lower prices

Bob Rijkers







But prices drop when firms become connected

How Big Were the Losses Due to Evasion?

• Losses due to underreporting alone: 1.2 Billion USD (between 2002-2009) MORE than other firms

• Key assumption– Unit price difference between Ben Ali and other private firms

are due to evasion

• Conservative: – Tariff data often missing & Don’t always have a private sector

reference price s– Do not account for other types of fraud

• E.g. abuse of duty suspension regimes, under-reporting of quantities, smuggling etc.

politically connected firms in tunisia

Government & Nonprofit