Export Diversification and Sophistication and Industrial Policy in Tunisia

This paper explores the Tunisian experience of exports diversification and the role played by industrial policies. It describes the general trends and the dynamics of diversification using a very disaggregated data set on exports for the period 1995-2017, for both primary and resource-based products and manufactured products. It has been generally recognized that openness and export promotion policies established since the early 1970s succeeded in allowing Tunisia to achieve significant export growth, especially in low-technology manufacturing. But, until recently, the general wisdom has been that the country has achieved limited success in moving up the technological ladder, with diversification, and sophistication of exports. In this paper, we show that this view is not warranted and that extensive diversification and sophistication has taken place over the last couple of decades, and more significantly the most recent period, in which Tunisia has been remarkably resilient, despite the political upheavals which have rocked the country.The paper highlights the successes and failures of the process of diversification and investigates the role of both the "horizontal" and "vertical" policies pursued. It focuses on the “how” issue and explores whether and how specific policies are successful or not in meeting their objectives. Most importantly it presents a novel approach to study the dynamics of diversification and tries to identify the basic reasons behind the success or failure of diversification. It shows that the dynamics of innovation is extremely rich and varied. Diversification may be successful with products becoming "mature" exports or "emerging" exports. But there may also be failures with products experiencing "stalled" exports or "episodic" exports processes. These empirical findings lead to a questioning of one major argument in the literature that the main constraint to diversification is a market failure due to the fact that innovators (who introduce new products or new markets in exports) bear the major cost of their innovation, but later entrants reap the benefits. Discovery and innovation seem to be very extremely common, but success and consolidation are much more difficult.The paper draws important conclusions about the effectiveness of “horizontal vs vertical policies”, “single vs packages of policies”, and the focus on spurring discovery and innovation per say vs supporting the growth of already emerged innovations