'All in World Bank': Manipulation in the Name of Deregulation

In November 2015, the Tunisian Observatory of Economic (TOE) published a critical analysis of a recent World Bank report, the latter of which is entitled "All in the Family: State Capture in Tunisia." What follows is a summarized version of the TOE`s critical analysis

I - General Frame

1.1. On the 27 March 2014, World Bank researchers published the study "All in the Family: State Capture in Tunisia." The conclusions of this study demonstrated how Ben Ali used the Investment Incentives Code for his own profit and to promote his clan`s interests. According to the study, the state`s interventions, through a protectionist regulatory framework, permitted the clan to capture certain sectors of the economy and protect themselves from competition.

1.2. This study comes in the context of attempts to reform the Investment Incentives Code. Since 2012, the IFC (International Finance Corporation), the financial instrument of the World Bank, has financed, written, and promoted these efforts. This reform aims to suppress all levers by which the state can regulate investment.

1.3. This study has been conveniently timed to support the aims of the World Bank to deregulate the investment framework in Tunisia. For this purpose, it focuses on the excesses of regulation that characterized the Ben Ali clan`s style of corruption, or "crony capitalism." Antonio Nucifora, Chief Economist for the MENA region, has affirmed that the legal framework inherited from Ben Ali favors corruption. However, in doing so, the World Bank overlooks its own complicity in the promulgation of this legal framework. It must be remembered that the World Bank conditioned its 1991 loan (the Economic and Financial Reform Support Loan) on the adoption of the current Investment Incentives Code. It even congratulated itself for the adoption of this code in 1993 under the reign of Ben Ali.

2. The Dubious Methodology of the World Bank

2.1. In order to demonstrate the link between the investment regulatory framework and capture of sectors by the Ben Ali clan, the researchers proceeded in the following way:

• They identified the sectors in which the Ben Ali clan`s companies were present
• They compared the financial results of these companies with those of their competitors in order to examine to what extent the regulatory barriers (permissions, FDI restrictions) caused these differences
• Finally, they examined the extent to which the clan`s companies benefited more from new restrictions, that is to say to measure "State Capture."

2.2. However, this methodology is not scientifically impartial. To understand this, one has to bear in mind that the Investment Incentives Code is composed of four lists: two regulatory lists (permissions, restrictions to FDI) and two incentivizing lists (general and specific to the agricultural sector). The researchers of the World Bank have deliberately chosen to focus on the link between capture and regulation (regulatory lists) while ignoring the link between capture and incentives (incentivizing lists), in order to present regulation as the “cause” of corruption. Thus they weakened the impartiality of the study.

2.3. After having intentionally drawn attention to the regulatory lists of the Investment Incentives Code, the researchers used a very wide definition of what a regulated sector means. Instead of considering a sector regulated when the majority of the activities are regulated, they admitted that any sector with at least one regulated activity can be considered regulated. Thus, with this subterfuge, they deliberately inflated the number of regulated sectors, in order to support their pre-established conclusion.

3. The Shameful Falsification by the World Bank

3.1. To measure the state capture, the researchers listed the new activity regulations (permissions or restrictions of the FDI) and established connections between these and the Ben Ali clan companies. To illustrate their argument, the researchers gave the example of a company that belongs to the uncle of Slim Chiboub. The company reportedly benefited from adding the activity of red meat transportation to the list of activities subject to restrictions, as it was able to invest in this sector and protect itself from competition. However, when we verified the list, it emerged that the activity was not added to the regulatory list of FDI. In reality, it was added to the incentivizing list specific to the agricultural sector. Hence, the researchers falsified the decree to demonstrate a fact that supports their argument.

3.2. This falsification is not isolated, it is generalized. When we verified, year by year, activity by activity, the presidential decrees by Ben Ali who supposedly added activities on regulatory lists to protect his clan, it comes out that several decrees have literally been falsified by the World Bank researchers:

• The number of activities added to the list of activities subject to permission (Article II of the IIC): Out of the fifty-one activities counted by the World Bank, only twenty-eight were actually added and twenty-three were falsified. The falsification rate is forty-five percent.
• The number of activities added to the list of activities subject to the FDI restriction (Article III of the IIC): Out of the thirty-eight activities counted by the World Bank, only four were actually added and thirty-four were falsified. The falsification rate is eighty-nine percent.

3.3. For the majority of cases, the falsification consists in counting activities on the regulatory list when they were not actually added to this list, or when they were, in reality, added to the incentivizing list. The roughest falsification concerns the decree 1997-503. The researchers counted twenty-three activities added to the list of activities subject to the FDI restrictions, whereas the decree stipulates clearly that they were suppressed from the list. Those falsifications put a question mark on the whole study and its conclusions.

4. Conclusions to be drawn from this study:

4.1. The first conclusion to be drawn from these manipulations and falsifications is that, contrary to what researchers of the World Bank have argued, what attracted the Ben Ali clan was the bait of easy gain, made possible by the incentives, and not by the possibility of using restrictions to get protection from competition. The entire logic behind the World Bank’s deregulation agenda collapses in light of such a conclusion.

4.2. The second conclusion, which is more important, concerns the ethics and credibility of the World Bank. Our investigation into the “All in the Family” report provides evidence on how the World Bank uses subjective methodology, as well as falsifications and subterfuge to inflate the number of regulated sectors.The suspect methods used by the researchers of the World Bank bring into question the impartiality and the scientific credibility of its studies. It appears that the researchers start first by establishing conclusions then adapt their methodologies accordingly, and regardless of the code of ethics they are bound to respect.

4.3. As in the Lafontaine`s Fables, there is always a moral to be drawn from the story. When trying to demonstrate that Ben Ali manipulated the use of regulations, the World Bank itself tried to manipulate the opinion by a study using falsified datas. The biter bit.

[The full version of the Tunisian Observatory on Economy report can be found here.]