* Slowdown after revolution worse than expected
* Protests, strikes hurting business
* Number of foreign firms leaving small, may rise
* Government says economic programmes disrupted
* May be bellwether for Arab Spring economies
By Tarek Amara
TUNIS, Feb 1 (Reuters) - Last May, a public relations agency hired by Tunisia's government placed an advertisement in some of the world's leading newspapers and business magazines. "Invest in Democracy," read the tagline.
The thinking behind the ads was to attract foreign investment and revive the economy by harnessing the feel-good factor attached to Tunisia after it ousted its autocratic leader, triggering a series of revolts across the Arab world.
It was a good idea but so far, it hasn't worked.
Thirteen months after the revolution, the economy continues to slump. Investment has slowed, tourism -- a mainstay of the economy -- is down, unemployment is rising and the government's target of 4.5 percent economic growth this year is looking over-optimistic.
The problem, say businessmen and government officials, is that people exercising their newfound freedom to protest for better living conditions are bringing the economy to its knees by staging almost daily strikes and sit-ins.
"Achieving a 4.5 percent growth rate in the current year is becoming more difficult with every day that passes because the sit-ins are causing huge economic losses," said Samir Dilou, a spokesman for the new, Islamist-led government.
In effect, Tunisia's economy is stuck in a feedback loop: people are protesting over poverty and unemployment, yet by slowing the economy, they are entrenching the problems that inspired the protests in the first place.
With a gross domestic product about the same size as that of the Dominican Republic, Tunisia is not a global economic player. But it could be a bellwether for how the economy will fare in other, bigger states emerging from "Arab Spring" revolts, particularly Egypt.
The state of Tunisia's economy is likely to come into sharper international focus when Christine Lagarde, managing director of the International Monetary Fund, visits early this month.
Up to now, the narrative put out by Tunisia's new rulers has been that the downturn is a temporary blip. Investors and visitors were scared off by the instability following the revolution and will return once they realise things are back on track, the narrative runs.
That positive spin is becoming more difficult to sustain, especially in the last few weeks as the release of economic data for last year has shown the situation is worse than previously thought.
The government started out forecasting GDP growth would fall from 3 percent in the year before the revolution to around 1 percent in 2011. Later, this was revised downwards to between 0.2 percent and zero growth.
Last week, Minister of Regional Development and Planning Jamel Gharbi said the economy had actually shrunk last year, by 1.8 percent. That compares poorly to Tunisia's fellow North African states with comparable economies; Morocco grew roughly 4.5 percent last year and Algeria about 3 percent.
Tunisia's unemployment rate -- one of the biggest grievances behind the revolution -- has gone up to 18 percent from 13 percent a year ago, and is much higher among young people.
"The revolution has made some gains, including in freedom of expression, but the downturn continues," said Tunisian economist Fathi Jerbi.
"The structure of the economy is still the same in all sectors...nothing has changed and the government is unable to cope with high prices and unemployment. This is a very serious indicator."
There has been more bad news from the tourist trade, Tunisia's biggest source of foreign currency and an industry which employs about 400,000 people in a country of 10 million. Foreign tourist numbers in 2011 were down by about 2 million to 4.4 million, an official at the Tourism Ministry told Reuters. Earnings from tourism fell to 2.1 billion dinars ($1.4 billion) last year from 3.2 billion dinars in 2010, the official said.
Phosphate exports are another important earner. The government said this sector lost 1.2 billion dinars last year, despite strong world prices for phosphates. The principal reason is that in phosphate mining areas, protests are regularly closing down mines and blocking the roads.
JOBS AND DIGNITY
One of those areas is Redayef, a mining town about 300 kilometres (190 miles) southwest of the capital Tunis, and near the Algerian border. There, the revolution has changed little.
In 2008, people in the town protested to demand more development and a bigger share of the revenue from phosphates. Their action was unusual at the time because under Zine al-Abidine Ben Ali, the president ousted last year, the police cracked down ruthlessly on protests.
Last week, the town protested again over the same grievances, paralysing the transport of phosphates.
"Redayef will announce (a campaign of) civil disobedience if the government does not respond immediately to our demands for jobs and dignity," local trade union leader Andan Haji said in January.
Roughly halfway between Redayef and Tunis, the town of Makhtar held a six-day general strike in January to demand jobs and public investment. Shops, factories and bakeries closed down and roads were blocked.
It is a similar story in towns all over Tunisia's interior, the deprived regions where last year's revolution began. In the past few weeks, protests to demand jobs have disrupted the towns of Ghar Dimaou, Beja, Jendouba, Kairouan, Nabeul, Tataouine and Gafsa. In Sidi Makhlouf, 350 km south of Tunis, protesters detained the provincial governor for several hours to press their demands for jobs.
The Tunisian Union for Industry and Commerce has been charting the impact of the unrest on business. It says 170 foreign enterprises have closed their operations permanently since the revolution. That is a small fraction of the total number of foreign firms operating in the country -- there were 3,135 in 2010, according to the investment promotion agency -- but the business association said many more firms could follow.
Prime minister Hamadi Jbeli, from the Islamist Ennahda party, put it more colourfully. "Some foreign companies have put the key under the door," Jbeli said in a speech to the interim parliament last week.
TOUTING FOR INVESTMENT
The unrest this month spread to the presidential palace in Carthage, outside Tunis. Dozens of people gathered in front of the complex, a symbolic first because the area around the presidential palace has for years been a heavily guarded citadel off limits to ordinary people.
The new government is trying to respond. It has secured billions of dollars in loans and aid from foreign governments and international institutions to get it through the slump. The prime minister and a team of his senior officials travelled to the past week's World Economic Forum in Davos, Switzerland to tout for investment.
The government has unveiled a programme of public investment targeting the poorest and most restive parts of the country. Employment Minister Abdel-Wahab Maatar said 250,000 jobs would be created this year in the public and private sectors.
Yet the unrest is hampering the government's development plans. "We now have about 260 projects ready, which will provide about 30,000 jobs," said Jbeli. "But they are currently disabled because of the security situation and the sit-ins."
His government is in a race against time. It needs to put a lid on the protests and strikes in time for this year's tourist season, or face a second year of costly cancellations.
Jbeli said the protests were being deliberately fanned by political opponents unwilling to accept that, after decades of strictly secular rule in Tunisia, an Islamist party had won a democratic election and was now in power.
"They will not overthrow the government," he said. "The government will not allow the threat of revolution and the law will be imposed on offenders."
At least in Makhtar, the town that staged a general strike in January, the prime minister's tough talk does not seem enough to halt the unrest.
"Our patience has run out," said Ahmed Ben Faraj, a young unemployed man in Makhtar. "We will not be intimidated by government threats to use force...We will continue to protest and we will lead a second revolution if we are not given the right to work."