The microeconomic impact of political instability: Firm‐level evidence from Tunisia

• Author: Michael Bleaney,Samer Matta,Simon Appleton
• DOI: http://doi.org/10.1111/rode.12388
• Published date: 01 November 2018
• Date: 01 November 2018

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The microeconomic impact of political instability:

Firm-level evidence from Tunisia

Samer Matta

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Simon Appleton

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Michael Bleaney

1

1

University of Nottingham, Nottingham,

U.K

2

University of Nottingham, Ningbo,

China

Correspondence

Samer Matta, School of Economics,

University of Nottingham, University

Park, Nottingham NG7 2RD, United

Kingdom.

Emails: matta.samer@gmail.com;

samer.matta@nottingham.ac.uk

Abstract

This paper explores the impact of political instability on

firms in the context of Tunisia, which experienced a

surge in political instability events after the 2011 Jasmine

revolution. Using a new dataset, we show that political

instability was a major concern for small and exporting

firms as well as those that were operating in the tourism

sector, those that suffered from acts of vandalism or

arson, and those that were located in the interior region

of Tunisia. More importantly, we find strong evidence

that political instability was the most damaging constraint

to firm growth in Tunisia after the Arab Spring.

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INTRODUCTION

Five years after the Jasmine revolution of January 2011, the Tunisian economy is still struggling

to recover despite the successful, albeit rocky, transition to a democratic regime crowned by the

adoption of a new constitution in 2014 (World Bank, 2015). Economists and international organi-

zations,

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have found that political instability, which increased considerably after the Arab Spring

as evident by the 18-fold surge in the number of protests/riots in 2011 to 2014 compared with

1997 to 2010, adversely affected the macroeconomic environment in Tunisia. However, to date

and to our knowledge, the microeconomic implications of political instability on Tunisian firms

remain unexplored.

In this context, this paper explores which Tunisian firms perceived political instability as an

impediment to their operations and examines which business constraint was the most damaging to

firm growth after the revolution. To do so, we use firm-level data from the Tunisian Enterprise

Survey (TES) conducted between March 2013 and July 2014. Unlike other surveys, this database

contains a firm-level measure of political instability defined as the manager’s response to how

much he/she considers political instability as a constraint to the firm’s operations. In addition, the

TES includes a lot of information on firm characteristics, which enables us to control for different

DOI: 10.1111/rode.12388

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©2018 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/rode Rev Dev Econ. 2018;22:1590–1619.

factors and thus minimize any possible omitted variable bias. Nonetheless, we fully acknowledge

the limitations of the cross-sectional nature of our data and the use of a subjective measure of

political instability. These empirical challenges, which are often encountered by researchers when

using micro-level surveys to investigate the effects of political instability (Br€

uck, Justino, Ver-

wimp, Avdeenko, & Tedesco, 2016), call for designing systematic surveys that would provide

valuable micro-data on political incidents across place and time.

This paper is mainly related to the literature that examined the determinants and effects of busi-

ness constraints on firm performance.

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Batra, Kaufmann, and Stone (2003) were the first to assess

the relation between business constraints and firm growth. Using data from 80 countries, they

found that firm performance is negatively related to: financing constraints, corruption, higher taxes,

inefficient business regulations, and policy uncertainty. Following this work, and given that World

Bank Enterprise Surveys (WBESs) were later made available to the public,

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researchers have

extensively used these surveys to better understand the relation between business obstacles and

firm performance. For instance, Beck, Demirg€

ucß-Kunt, and Maksimovic (2005) found that legal,

financing and corruption constraints adversely impact firm growth, which they measured as the

three years sales growth. In related studies, Aterido, Hallward-Driemeier, and Pages (2011) found

that inefficient business regulations and lack of finance reduce the growth of full-time employees,

while Ayyagari, Demirg€

ucß-Kunt, and Maksimovic (2008) found that finance, crime, and policy

uncertainty are the most damaging business constraints to firms across countries.

Although these studies have examined the effects of various business constraints on firm perfor-

mance, political instability has not caught the attention of researchers so far, mainly because it was

not explicitly mentioned as an obstacle in earlier surveys. Thus, this paper fills this gap by analyz -

ing, for the first time, which firms perceive political instability as a significant obstacle to their

operations. Moreover, most of the earlier studies in the literature have focused on cross-country

regressions that suffer from two main caveats. First, they ignore heterogeneity among countries

with distinct legal, regulatory, and financial systems. Second, their estimation results might be dri-

ven by trends in big countries such as India and China (Krauss, 2015). Therefore, this study also

adds to the literature by examining the previously unexplored implications of business constraints

on firm growth in a context of mass civil protests and post-revolutions.

Our results suggest that political instability was a major concern for small and exporting firms

as well as those that were operating in the tourism sector, those that suffered from acts of vandal-

ism or arson and those that were in the interior region of Tunisia. More importantly, we find

strong evidence that political instability was the most damaging constraint to firm growth in Tuni-

sia after the Arab Spring. This result, which is confirmed using an instrumental variable (IV) esti-

mation strategy with region–sector–size averages as benchmark instruments, is robust after (i)

using employment growth as an alternative measure of firm performance and (ii) accounting for

various business constraint levels.

The remainder of this paper is organized as follows. Section 2 introduces and describes the

data, while Section 3 explores which firms perceive political instability as a significant obstacle to

their operations. This is followed by Section 4, which determines the most damaging constraint to

firm growth and performs some robustness checks. Finally, Section 5 concludes.

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DATA AND DESCRIPTIVE STATISTICS

This section introduces the dataset and analyzes descriptively the business environment constraints

to Tunisian firms. In this study, we use the 2013 Tunisian Enterprise Survey (TES), which was

MATTA

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