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MENA Region Case-Study: Morocco

Sylvia I. Bergh

(M.A., M.Phil. (Oxon.), D.Phil. candidate in Development Studies at the University of Oxford, UK

Presented at the conference on Globalization and Economic Success: Policy Options for Africa Cairo, 13-14 November 2006

[Revised version 20.11.06. Comments welcome.]

Introduction1 The year 2006 is a very appropriate moment to take stock of Morocco's development policies and their outcomes. The country is this year celebrating its 50th anniversary of independence from the French protectorate, and has used this symbolic moment to mobilize important human resources to try to learn from past experience and project its future.2 Morocco is also becoming increasingly important in geo-strategic terms, both with regard to (illegal) migration to Europe and the US-led initiative to bring democracy to the Greater Middle East. Finally and most importantly for this conference, the country has positioned itself relatively successfully as a promising emerging market for investors, an experience from which many African countries could learn. It is useful to briefly situate Morocco with regard to other African countries: in terms of Jeffrey Herbst's categories of African countries, it would be classed as a `high performer ready to globalize' (2005: 10). Indeed, as an oil-importer, Morocco probably has more in common with the African countries in this category than with most Middle East and North African countries. Contrary to the other African countries though, Morocco is a relatively small country, its colonial inheritance has some notable positive elements (such as the foundations for a modern transport infrastructure, at least in the areas of `Useful Morocco' [Le Maroc Utile]3), it is not entirely dependent on raw materials, it enjoys a very advantageous geographical position, it has on the whole been spared from major natural disasters, and it is not experiencing a major governance crisis (Herbst 2005: 6). These inherent characteristics point to the limitations of applying the lessons from the Moroccan case too rigidly to an African context. However, it is hoped that by pin-pointing some of the successes and failures in government policies that explain Morocco's recent growth path, this paper will constructively contribute to the debate on globalization and how developing countries might best take advantage of it. Although drawing on a wealth of recent economic and political analysis on Morocco (see the comprehensive bibliography at the end of the paper), the principal arguments in this paper are mainly based on the World Bank's recent Country Economic Memorandum (CEM ­ World Bank 2006a and 2006b).4 Inspired by Dani Rodrik's approach (Rodrik

2004), the CEM identifies four government failures (called "binding" constraints) and three market failures that Morocco must overcome to encourage productive diversification and enhance its competitiveness in the global economy.5 The four "binding" constraints are: a rigid labor market; a burdensome tax regime that penalizes firms and creates obstacles to hiring skilled workers; a fixed exchange rate regime that has regained price stability but worked against international competitiveness in light of rigidities in the labor market; and an anti-export bias featuring high trade protectionism despite recent progress in tariff reductions and several Free Trade Agreements (FTAs). The three market failures are: first, information failures that encourage the violation of intellectual property rights and reduce the rates of return for investing in new productive activities; second, coordination failures between the public and private sectors; and third, training failures that place Morocco among countries with the least training offered by businesses, thereby discouraging competitiveness and innovation. Following the conference organizers' guidelines, the paper is structured as follows. Section A provides a background summary of the country's main features. Section B briefly outlines the main socio-economic challenges, while section C reviews the recent economic and political reforms that qualify the country as a relative `success story'. Section D then reviews the macro-economic policies over a longer time period and discusses the government failures in more detail. Section E turns to the market failures, and section F attempts to draw out the lessons for Africa from both the Moroccan and the East Asian experiences. A map of the country can be found at the end. A) Background summary of the country

The historical context

Morocco was colonized by the French and Spanish in 1912. An anti-colonial, nationalist movement sprang up during World War II, and conflict during the 1950s led France and Spain to recognize Moroccan independence in 1956.6 In 1961, King Mohamed V was succeeded by his son, who became King Hassan II. King Hassan II ruled until his death in 1999 when he was succeeded in turn by his son who became King Mohamed VI. For more than the last 50 years, Morocco has thus been a relatively stable monarchy.

The population and ethnic character

Morocco has a population of almost 30 million, with an average annual rate of demographic growth of 1,4 percent during 1994-2004. The urban population continues to increase, from 42.7 percent of the total population in 1982 to 55.1 percent in 2004 (UNDP Maroc 2006: 18). While it is very plausible that due to intermarriage virtually every Moroccan carries some Berber (Amazigh) blood, about 40 percent of the population speaks a dialect of Berber language (Tamazight). Pressure for Amazigh linguistic and cultural rights has led to the broadcasting of programs in Tamazight and the establishment of the Royal Institute of Amazigh Culture in 2001.

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GDP composition, growth rate, and GDP per capita

Morocco's GDP composition has not changed much in the past 25 years. Agriculture accounts for about 16 percent of GDP (although its share is highly volatile with between 11 and 21 percent of GDP). It is a dual sector in which the majority of operating units are very small and only a few large operations produce for exports. The share of the industrial sector has not expanded significantly. The latter oscillates between 16 and 19 percent of GDP and is concentrated in three manufacturing exports: agri-food, chemical (Morocco is the world's largest exporter of both raw phosphates and processed products), textiles, and leather products. The service sector accounts for around 38 percent of GDP with more recent dynamism in tourism and communications (World Bank 2006a: 9; World Bank 2006b; Zouhar 2005: 4; World Bank Morocco Data Profile). In terms of economic growth, Morocco was the second-best performer in the Middle East North Africa (MENA) region in the 1960s. However, by the 1990s, it had become the worst performer with growth averaging 2.5 percent. This mirrors the "lost decades" of the 1980s and 1990s in the rest of the African continent when Asian countries were making spectacular gains (Herbst 2005: 2). For example, only 40 years ago, China had a per capita income five times lower than Morocco; it is now 20 percent higher. More recently however, thanks to good agricultural seasons and important efforts in stabilization and structural reform, GDP growth averaged 4,7 percent during 20012006.7 This average masks strong yearly fluctuations, as will be discussed below.8 As for the GDP per capita growth rate, it averaged below 2 percent during the period 19702004, and GNI per capita reached $1,730 in 2005 (Oualalou 2006: 2; World Bank 2006a: i, 5; Zouhar 2005: 4).

Human Development Index (HDI)

In 2003, Morocco's HDI was 0.631, placing the country in the 124th position (after Gabon and before Namibia, and behind the other Maghreb countries). This is a very disappointing score for a lower middle-income country, but can be explained mainly by the very low adult literacy rate of 50.7 percent (UNDP 2005).9

Governance, democracy, electoral history, and stability

Morocco's Head of State is the King who is also by constitution the highest religious leader (Amir al-mu'minin or `Commander of the Faithful'). Officially described in the 1996 constitution as a democratic monarchy, it is de facto an excecutive monarchy, given that Morocco's hereditary monarch has wide executive power. He can dismiss the government, dissolve parliament and sign international treaties. The King also heads a "second cabinet" composed of former politicians, business leaders and army chiefs. This runs in parallel to the government and is widely known as the focal point for the Makhzen, the popular name given to the Moroccan establishment. The King also appoints the ministers of the Interior, Foreign Affairs, Justice and Islamic affairs - often from outside party politics. The government is headed by the prime minister,10 who is appointed by the monarch following legislative elections. The prime minister heads a

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coalition government of six parties and a 31-member cabinet known as the Council of Ministers (Oxford Business Group 2005). The wide royal powers mean that the prime minister becomes the executive of royal decisions rather than presiding over the governing majority. Moreover, policy implementation at the decentralised levels of government (regional, provincial and municipal) is largely dependent on the decisions by representatives of the King (in the Ministry of the Interior) rather than the elected councils (FEMISE 2004: 182). Despite the wide royal powers, the Constitution guarantees a multi-party system, with the main opposition party currently being the "moderate" Islamic party "Justice and Development". In September 1996, a constitutional referendum divided the Parliament into two chambers. One is the lower house (Chamber of Representatives), which is directly elected, and the second one is the upper house (Chamber of Councilors) made up of representatives elected by professional and business organizations, labor unions, communal councils, and chambers of commerce. Over twenty political parties are represented in the Chamber of Representatives. This fragmented nature of the political landscape means that complicated political bargains need to be struck in the coalition government which hinder the government's overall effectiveness.11 This also makes it more difficult to formulate and implement a shared vision for the country's socioeconomic development (World Bank 2005: 1). As for electoral freedoms, the last parliamentary elections of September 2002 were widely considered the first free and fair elections. However, the ballot saw a low turnout of 52 percent. This is probably due to the boycott by the more hardcore Islamist parties (such as the al-Adl wa al-Ihsan [Justice and Charity] party), but also the widespread disillusionment with politicians, given the history of electoral fraud scandals. Since 2002 though and thanks to a special quota, there are 30 women in Parliament, which is unprecedented in the Arab world. Local elections took place in September 2003. Although participation rates were again low (not exceeding 50 percent at the national level and around 40 percent in urban areas), these elections were also considered transparent and free (Achy and Sekkat 2004b: 15). Other achievements in the field of governance include the adoption of a new Family Law in 2004 (a.o., it established the minimum age for marriage at age 18 for both men and women and expanded women's' rights to divorce), and the establishment of the Equity and Reconciliation Commission (IER), which aimed at compensating victims of state violence between 1958 through 1999. Its mission ended in November 2005, but it is not clear if its recommendations, which include reinforcing the separation of powers and adopting national measures against impunity, will be implemented. Most importantly, those who committed the crimes have not been prosecuted in courts (see Hazan 2006). Given these governance features, Morocco has been called a `virtual democracy' and a `liberalized autocracy' (Cavatorta 2005: 549). In short, both the political and economic governance systems are characterized by dualism: formally liberal political institutions are undercut by authoritarian modes and culture, and a modern, externally oriented economy coexists with systemic rent seeking and patronage (Holden 2005: 478).

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B) Socio-economic challenges The main socio-economic challenge for Morocco, as it is indeed for most of the MENA countries, is unemployment. It is officially at 11 percent (but at around 19 percent in urban areas), but since the labor force is growing at 3 percent per year, a reduction in unemployment will require sustained annual growth above the 5-6 percent range (World Bank 2006a: i, 53; Wolfowitz 2006; Zouhar 2005: 7; FEMISE 2004: 22). As the World Bank (2006a: i) points out, in the absence of such growth, poverty reduction will stall and socio-political tensions will increase. Indeed, while the relative poverty rate declined to 14,2 percent in 2004 at the national level, it is still 22 percent in rural areas, and 39.3 percent of the population is considered economically vulnerable (UNDP Maroc 2006: 10). However, social expenditure is highly biased in favor of urban areas at the expense of rural areas. The former absorb 75 percent of the total social expenditure as compared to 25 percent for the latter (Achy and Sekkat 2004b: 132). Similarly, public spending on social assistance programs decreased from its already low level of 0.6 percent of GDP in 2000 to 0.37 percent of GDP in 2004.12 The World Bank's 2004 Poverty Report (World Bank 2004) highlighted the need for social protection programs to accompany the reform of cereals compensation, but the government has so far taken few actions to implement the Bank's recommendations (World Bank 2005: 42; see also FEMISE 2004: 123).13 This should not detract from the fact that substantial improvements have been made over the last decade with regard to the provision of basic infrastructure in rural areas. For example, the massive investments in the PAGER program launched in 1995 led to improved water access ratios from 18 percent in 1994 to more than 60 percent in 2004, and the PERG rural electrification program increased coverage in rural areas from 19 percent in 1995 to 70 percent in 2004. Similarly, the Agency for Social Development was created in 1999 and is co-financing NGO projects in rural areas (World Bank 2006b: 17). Micro-finance associations aim to reach 1.5 million borrowers by 2010 (up from 500,000 in 2004; AfDB/OECD 2006: 379). However, the proliferation of shantytowns around the big cities14 is arguably one of `the most shocking manifestations of the social deficit' in Morocco, and provides fertile ground for Islamic political fundamentalism. This phenomenon goes hand in hand with rural out-migration (Achy and Sekkat 2004b: 46).15 As for social services, the deficits in the education sector have already been illustrated above in pointing out the low literacy rate. 16 The health sector is also facing major challenges as currently, only 16 percent of the population has health insurance, and most of them live in urban areas and work for the public sector. The budget allocated to the health sector, which amounted to 5 percent of the government total budget in 2005, is insufficient to meet the needs of the population. However, since November 2005, the government is implementing the Mandatory Health Insurance designed to provide health cover to 7.8 million people (AfDB/OECD 2006: 382 and DPEF 2005: 8-9). These socio-economic challenges are not helped by the fact that the Western Sahara dispute with Algeria is still not resolved. This means that considerable resources are diverted towards to the military and the sparsely populated Southern Provinces.17

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However, with the launch of the National Initiative for Human Development (known by its acronym "INDH") in May 2005, the King has sent a very strong signal that he intends to make the fight against poverty and social exclusion the centerpiece of his reign. This program has three main priorities: 1) to strengthen the fight against poverty in rural areas; 2) to reduce social exclusion in urban localities; and 3) to intensify the fight against precarious living conditions.18 The INDH established a priority 5-year plan over 2006-2010, globally valued at 10 billion Dirhams. To succeed however, the strategy requires both high growth rates and targeted spending on the poorest (AfDB/OECD 2006: 383; World Bank 2006: 3). C) The (relative) success story From the evidence reviewed above, it is obvious that Morocco is not a clear-cut success story. While notable progress has been made in the field of governance, economic growth is still not high enough to significantly reduce unemployment and poverty. Nevertheless, the fundamentals are good, as the macroeconomic framework has been stable along many dimensions: inflation has remained low, the balance of payments has remained positive, international reserves are high, and the public-debt-to-GDP ratio, especially the external one, is low and moderately declining. The fiscal deficit and public debt ratios should in fact improve further as the government has adopted measures to reach their respective targets of 3 percent of GDP and 65 percent of GDP by 2008. These measures include reducing the wage bill through a Voluntary Retirement Program for public servants.19 Mainly thanks to large tourism and remittance receipts, the savings-investment gap shifted to a significant surplus in recent years (3.7 percent of GDP in 2001-2004). Real interest rates are below 10 percent, which is very low in international terms.20 However, due to credit information and legal enforcement problems, banks are reluctant to place their excess liquidity in SMEs, preferring instead the large and well-known companies and central bank deposits. External finance conditions are favorable, given that foreign direct investment (FDI) has increased to above 4 percent of GDP on average in 2003-2005. Indeed, the country is among the 10 top economies in Africa (see graph 1) and has become the fastest growing recipient of FDI flows in the MENA region, although they are concentrated in the telecommunications sector, and some key sectors (such as banking, transport and manufacturing services) remain relatively "closed" to FDI. Another shortcoming is the low levels of non-privatization-related FDI (World Bank 2006a: 7-10, 15, 18, 21-22, 73; Giovannetti et al 2005: 16; Sgard 2006: 10).21 Graph 1: Africa FDI inflows, top 10 economies, 2004-2005 (Ranked on the basis of the magnitude of the 2005 FDI inflows)

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Source: UNCTAD (2006: 41)

With a rating of one step below investment grade, Morocco does not encounter much difficulty in accessing capital markets. Similarly, growth trends are not primarily constrained by a lack of human capital; rather, the demand for highly skilled labor is simply not there, apart from in a few specialized areas. This is illustrated by the high unemployment rates for workers with higher levels of education (35 percent among university graduates in 2004) and the low levels of education prevailing among workers in manufacturing firms. This is not to deny that there is much room to improve educational quality, skills matching, as well as the labor productivity of recruited graduates (World Bank 2006a: 18-20, 53, 57; Dyer 2005). Morocco also enjoys a favorable geographical position with its proximity to European markets, and relatively good infrastructure (it is ranked among the top 40 countries with regard to telephone, electricity supply, and postal services according to the Global Competitiveness Report 2003-2004), although energy costs are high compared to competitors, and certain port charges and sea shipment costs are excessively high (World Bank 2006a: 20-21, 64; World Bank 2006b: 28; Royaume du Maroc, Ministère de l'Equipement et du Transport and World Bank 2006a: 58).22 The Moroccan government has also strengthened the prudential regulation and supervision of the financial system by approving new banking and Central Bank laws, and is restructuring two troubled state-banks. The government has also issued new public procurement regulations, initiated judiciary reforms through the creation of commercial courts, passed new laws on competition policy, and established a competition council, as well as liberalized prices. These structural forms provide a strong foundation to jump-start growth (World Bank 2005: 4). On the microeconomics side, Morocco's governance indicators are above the MENA average, especially on the quality of public administration. For example, the time to register a business does not exceed five days, and customs clearance is among the fastest in the developing world. Crime rates are low, and even after the Casablanca

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bombings in 2003, security concerns did not prevent tourist flows from recovering within a few months.23 The mainly good scores on these indicators explains why Morocco was considered a "top reformer" by the World Bank's Doing Business 2007 report.24 However, the country scores low on public accountability and high on corruption indicators. Indeed, corruption seems to be getting worse; Morocco fell from 37th place in 2000 to 78th place in 2005 in the Corruption Perception Index (World Bank 2006a: 2122, 44). The World Bank has called the absence of vigorous economic growth in such generally good conditions an "enigma". As stated in the introduction, based on extensive research and an endogenous growth model, the Country Economic Memorandum (World Bank 2006a and 2006b) attempts to solve this "enigma". It argues that many of the reforms undertaken by Morocco may have improved secondary aspects of growth dynamics, but did not address four main government failures, or "binding constraints" (World Bank 2006a: i-ii, 13). These will be reviewed in the next section. D) A review of the macro-economic policies and the four "binding constraints" to growth As indicated in section A, Morocco's economic growth experienced a severe decline from the 1960s until the 1990s. The main reason for this decline is the development strategy adopted in the 1970s, which relied on the so-called "Moroccanization drive" of the economy. This policy consisted of import-substitution industrialization, agricultural selfsufficiency, restriction of foreign ownership,25 promotion of national control over natural resources, and public sector involvement in large capital-intensive and protected industries. These measures were financed mainly by tax revenues from export-earnings associated with phosphates and agricultural crops, and external borrowing. The strategy was not sustainable however as the international recession, the rise in oil prices and the decline in phosphate prices led to a severe deterioration of the terms of trade and a huge decline in export earnings at the end of the 1970s. This explains the dramatic figures for 1981: the external current account deficit reached 12.2 percent of GDP and the overall fiscal deficit was 14.2 percent of GDP. The external debt kept increasing and in 1983, Morocco's foreign exchange-denominated debt was approximately 120 percent of GDP. Morocco therefore underwent a Structural Adjustment Program, signing two loans in 1985 and 1987.26 As in most countries, the prescribed policy-mix included large cuts in capital expenditure, wage restraint, limits on hiring, tight monetary policy, and credit controls. However, growth rates during 1981 to 1985 still averaged only 3.4 percent, due to severe droughts and popular resistance against tax and subsidy reforms. From 1986 onwards, the adjustment measures therefore came to be accompanied by structural reforms and a greater reliance on market forces aimed at improving savings, encouraging productive investment, and shifting resources toward the export sector. The government also pursued an active exchange rate policy.27 These reforms led to a steady increase in export growth, which brought overall growth to an average of 4.7 percent during 1986-89. Unfortunately though, this recovery was short-lived, as droughts, falling phosphate prices and a sharp rise in oil prices led to a severe recession

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in the early 1990s. Growth rates turned negative in 1992 and 1993 and remained low for the rest of the decade (World Bank 2006: 1-2). We have already reviewed earlier the more encouraging growth rates in recent years, but it is worth emphasizing that the current rate of growth is insufficient to reduce unemployment. Most importantly, growth recovery is mainly attributable to the renewed dynamism of domestic demand, stimulated by strong tourism receipts and increased remittances from abroad, rather than export dynamism. This is illustrated by the fact that exports grew at 5 percent during the current decade, while imports grew at double digits. The consequence is therefore a historically high trade deficit: 15.7 percent of GDP in 2005. Moreover, Moroccan exports show low and slow levels of diversification: the top 10 products (garments and textiles as well as phosphates in particular) account for almost 80 percent of exports, and less than 20 percent of total exports are advanced manufactures.28 As for the export of services, they cover half of Morocco's merchandise trade deficit, and are driven mainly by tourism receipts, followed by call centers and other telecom services, and transportation. Exports also show a strong geographical focus: Western Europe absorbed more than three-quarters of Moroccan exports and was the origin of more than 60 percent of the country's imports in 2004. The key challenge that faces Morocco's growth is therefore to develop new export products (World Bank 2006a: 2-3, 24-26, 47, and World Bank 2006b: 91).29 This means that the status quo is a high-risk option for Morocco. While Morocco's prudent macroeconomic policies and its sizeable savings work in its favor, it remains vulnerable to domestic and external shocks, as underlined by the downturn in 2005, when the GDP growth rate was only 1.7 percent. This downturn illustrates the most important domestic shock, namely Morocco's continued vulnerability to droughts. Graph 2 illustrates this comparatively high volatility of GDP growth.

Graph 2: Growth of GDP and Agricultural Output

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Source: World Bank (2005: 5)

External shocks include the end of the Multi-Fibre Agreement (MFA), which is exposing textile and clothing exporters to direct competition with low-cost producers in Eastern Europe (Ukraine and Russia) and East Asia (see below for more on this; World Bank 2006a: 47; Naciri Bensaghir 2005; Amoroso 2005). Another external shock is the deceleration of economic activity in France, Spain, and other EU countries since 2000. This has highlighted the risks for Morocco of having a geographically highly concentrated export structure (World Bank 2006a: 2-3, and World Bank 2006b: 91). The remainder of this section will now review the four main government failures, or "binding constraints" to growth as identified by the World Bank (2006a and 2006b). 1. A rigid labor market A new Labor Code was adopted in 2004, but it did not address Morocco's high indexes of labor rigidity.30 On the contrary, it actually doubled the already expensive firing costs, at least in theory. In practice though, there is only limited compliance with the severance payments prescribed by the Labor Code. Hourly labor costs have increased however, following a 10 percent increase in 2004 (World Bank 2006a: 27; World Bank et al. 2005; Dennis 2006b: 6ff.). Morocco's minimum wage is now well above that of its main competitors, but due to insufficient labor productivity, about 40 percent of declared workers in formal firms receive less than the monthly minimum wage.31 This low productivity, as well as tight fiscal and labor regulations, explain the widespread informal employment. The informal sector produces an estimated third of GDP in Morocco, and accounts for about 39 percent of non-agricultural employment. It is clear that this large informal sector contributes to unfair competition, fraud, and corruption (Mejjati Alami 2006; Akesbi (undated); World Bank 2006a: 42, 56-57; Royaume du Maroc, undated; FEMISE 2004: 26). 2. A burdensome tax regime that penalizes firms and creates obstacles to hiring skilled workers

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Morocco's tax structure is biased against productive diversification and competitiveness. The main shortcomings are unproductive indirect taxation (VAT was only 0.31 percent of GDP in 2004), the resulting high corporate taxes (35 percent), and a prohibitive personal income tax (44 percent for workers with higher levels of education). A further factor is the relatively small tax base and weak tax enforcement. The comprehensive FEMISE report (2004: 126ff.) claims that the 2.4 million people who were subject to the general income tax in 2001 represented less than 50 percent of the active population, and only 19 percent of them actually paid this tax. This is because two-thirds of private sector employees are below the taxation threshold. Similarly, 80 percent of corporate tax receipts come from 5 percent of taxed companies. Indeed, various tax exemptions correspond to 3.4 percent of GDP (World Bank 2006a: 69). Furthermore, Mansouri (2006: 16) claims that tax evasion is widespread due to the perceived random and discriminatory nature of tax administration, which encourages a shift to the informal sector.32 There are also other indirect charges on labor, accounting on average for one third of a formal firm's profits. It is clear that such a tax structure depresses the economy's demand for skilled workers (rather, it encourages their emigration) and households' demands for schooling (World Bank 2006a: 28). Trade liberalization (see below) means a gradual but significant loss in tariff revenues (Chouchani Cherfane et al. 2005: 9).33 And while the 2006 budget introduced some measures including a new tax code and some VAT rates simplification, the core components of a comprehensive tax reform are still pending (World Bank 2006a: 69). 3. A fixed exchange rate regime that has regained price stability but worked against international competitiveness in light of rigidities in the labor market Morocco's exchange rate regime can be described as a "fixed" exchange rate regime with a moving band of plus or minus 2 percent around the Euro. The Moroccan Dirham is officially pegged to a basket of currencies dominated by the Euro, but it also includes US dollar and other currencies, weighted according to Morocco's trade pattern. While there are arguments in favor of adopting a flexible regime as well as of maintaining the current regime, it is clear that in terms of its outcomes, the current regime has been instrumental in reducing the volatility of the Dirham, achieving low inflation rates, positive current account surpluses, increased investment flows, and comfortable levels of external reserves. However, the Moroccan Dirham has since 2000 appreciated by 20 percent vis-à-vis the dollar, and hence for a Moroccan entrepreneur (e.g. in the textile sector) interested in exporting to dollar zone countries, the combination of the increase in hourly wages and the currency appreciation represents a major loss in competitiveness (World Bank 2006a: 30; World Bank 2006b: 37). 4. An anti-export bias featuring high trade protectionism despite recent progress in tariff reductions and several Free Trade Agreements (FTAs). The Maghreb countries remain amongst the least integrated both regionally and in the global economy (see Graph 3). Trade within the Maghreb region as a share of total trade is the lowest of any region. To some extent this is not surprising since the border between Morocco and Algeria remains effectively closed since 1994 (Brenton et al 2006: 4).

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Graph 3: The Maghreb's low regional and global economic integration

Source: Brenton et al (2006: 4)

Most of Morocco's main fast-growing competitor countries (China, Poland, Romania, Tunisia, and Turkey) have relied on rapid export growth. To boost nontraditional exports, the existing bias against exports must be significantly reduced. This bias originates in the very restrictive multilateral import regime that has generated substantial transfers from consumers to domestic producers. In addition, export producers do not receive the same policy-generated support as producers for the domestic market. There is therefore a protective blanket over overprotected, rentseeking and inefficient sectors with little or no comparative advantage. This protective blanket has converted Morocco into one of the 10 most highly protected markets in the world in terms of the simple average of Most-Favored Nation (MFN) tariffs. However, the Euro-Med Agreement with the European Union (EU) and its implementation since 2000 has led to a gradual opening of the domestic market through preferential trade liberalization. From the Moroccan perspective, this agreement is aimed at helping Moroccan exporters defend their position in established markets (World Bank 2006a: 4749).34 The FTAs with the United States and Turkey signed in 2004 (and which both became effective on 1 January 2006) are aimed at, respectively, enhancing Moroccan exporters' presence in currently under-exploited markets and at procuring intermediate inputs at lower costs.35 Overall, Morocco has signed 11 FTAs and seven conditional tariff agreements. The resulting ongoing shift in trade policy paradigms in principle creates new opportunities for export-led economic growth and employment generation (World Bank 2006b: 89, World Bank 2006a: 50). However, there are several issues that could delay the expected benefits from these agreements, such as very long phase-out periods (EU), multiple rules of origin, technical standards required by EU and US markets which might become non-tariff barriers, and low trade complementarities.36 With regard to the impact of the end of the MFA, the World Bank estimates that it will lead to a reduction of 11 and 18 percent respectively

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for textile and clothing exports in the longer term (World Bank 2006a: 51; Brenton et al 2006).37 However, it is also possible that Chinese companies may soon set up shop in Morocco to be closer to European clients and to take advantage of US import quotas ("Textiles: Morocco." In: Africa Research Bulletin 2006; Sayah et al 2004: 38).38 Most importantly, resolving the political issue of closed borders with Algeria would lead to a boost of an estimated $780 million in exports and another $220 million in tourism receipts, equivalent to 2 percent increase of GDP (World Bank 2006a: 50). E) A review of the micro-economic policies: Three market failures The lack of an effective export-led growth strategy should be seen in the context of these four "binding" constraints. Although many policy measures were adopted to encourage export diversification and enhance competitiveness, such as fiscal incentives, customs facilitation, free trade zones, hard-currency facilities for exporters, and preferential trade arrangements, they were not coordinated and ultimately insufficient.39 The World Bank (2006a) identifies three underlying market failures to do with information, coordination and training. 1) Information failures that give incentives to violate intellectual property rights and reduce the rates of return for investing in new productive activities (World Bank 2006a: ii) Information externalities arise from the fact that it is easier to copy or imitate than it is to create. In other words, part or even most of the returns to innovation in a new product are likely to spill over to other firms. This reduces the expected private return to innovation, and ultimately affects growth negatively unless intellectual property can be protected. In Morocco, a good example of this are the call centers. Introduced in 1999 by a Moroccan entrepreneur, Morocco has become the main service provider in French and other languages, mainly in the provision of interactive information and marketing services to French telecom companies. Between 2001 and 2005, the number of call centers grew from 3 to between 70 and 100, with annual net profits of an estimated $100 million, and creating 7,500 jobs, mostly for women.40 Due to the information externalities though, profits per firm have declined. Moreover, rapid staff turnover has contributed to a generalized wage increase (World Bank 2006a: 35-36).41 2) Coordination failures between the public and private sectors The information failures in the call center sectors could be addressed by government intervention, for example improving the education system with regard to language skills and information technology, enforcing ISO standards to improve service quality,42 and giving new fiscal and financial incentives (World Bank 2006a: 36). A successful example of public-private coordination however is the tourism sector. Morocco received 5.3 million tourists in 2004, doubling from about 2.5 million tourists in 1995. Similarly, tourism receipts increased from about 4 percent of GDP in 1995 to 9

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percent in 2004. This success is in large part due to the formulation of a national tourism strategy in 2001, which set the target of 10 million tourists by 2010. The strategy is based on attracting tourism wholesalers with a supply-driven enhanced lodging capacity, and aims to create some 600,000 new direct and indirect jobs. Under the implementation agreement, both public and private sector representatives have agreed to fund major investments ($9 billion) in infrastructure and personnel training. Progress has been notable; six coastal tourism sites have been identified and five have already been awarded to well-known investor-developers, and air transportation has been liberalized under an Open Sky policy. As noted above, tourism flows also remained unaffected by terrorist attacks and the war in Iraq (World Bank 2006a: 37 and AFIIANIMA 2006: 36ff).43 3) Learning externalities also constrain private investment: Training failures place Morocco among countries with the least training offered by businesses, thereby discouraging competitiveness and innovation (World Bank 2006a: ii) In-service training in Morocco ranks among the lowest in the world, and the call center example showed the problem of worker retention (World Bank et al. 2005; World Bank 2006a: 37, 45; Education Development Center for USAID 2003). Hence, learning externalities remain a major problem, given the scarce supply of skilled workers. This could easily be addressed by government investments in vocational training, public transport, and housing (World Bank 2006a: 38-39). F) Lessons for Africa44 An important lesson that the Moroccan government seems to have recently taken more fully on board from the Asian experience is trade integration and the emphasis on exports. As Noland and Pack (2005: 11) point out with regard to the Asian "tigers", export orientation essentially accomplished three things: it provided a vent for output, thereby maintaining the productivity of capital; it impeded the development of balance of payments problems; and finally, export performance provided a clear, neutral standard to evaluate the performance of firms receiving industrial policy favors (and to terminate support to under-performers). This lesson also applies to African countries, as the average annual rate of growth of African exports between the early eighties and the mid-nineties was ­1 percent, compared to 7 percent for Asia, 5 percent for Latin America and a world average of 6 percent. The principal question is how African countries can build comparative advantages in sectors that yield significantly higher value added and are also less prone to price shocks than the commodities that currently dominate their exports (Ohiorhenuan 2006: 17, 23). This is in line with Teal (2005), who claims that the most important policy recommendation in the Report of the Africa Commission is to export more. Without success in this area all the other possible policies will fail. Morocco has made a start to apply this lesson, although of course changes in the nature of the global trade regime make it even harder to emulate the Asian success stories today.45 Both the government and the private sector recently became convinced that

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Morocco needs a new growth strategy, and they commissioned McKinsey consultancy with a study of the industrial sector and potential focus areas. The government adopted the study as the "Emergence" program, announced in December 2005. Under the Emergence program, Morocco intends to modernize and strengthen the existing industrial sectors (especially textiles), and to multiply special zones and the number of FTZs in the areas of car, electronics, and aeronautics manufacturing, agro-industry and seafood products, and off-shoring services. It is aimed at creating 440,000 jobs by 2013. The authorities have implemented a broad range of incentives, including tax incentives, subsidies for training activities to develop the required skills and competencies, and developed and outfitted four offshore zones. In addition, an Employment Initiative was announced in September 2005, aimed at creating 200,000 jobs mainly for young unemployed by giving hiring incentives to companies and a self-employment program. Although some of these measures have already borne fruit, it is important to ensure that this proactive approach does not further complicate the tax system, create distortions and eventually lead to a two-track economy (World Bank 2006a: ii, 39, 59-60, 73; Mezouar 2006; La Nouvelle Tribune, 27 July 2006; IMF 2006a).46 Indeed, concluding from the East Asian experience, Noland and Pack (2005: 18) caution that `nations may be well advised to avoid the extraordinarily difficult task of the ex ante identification of likely successful sectors' (i.e. "picking winners"), given the potential costs that lie in the encouragement of corruption and discouraging the acquisition of skills in the financial system.47 This view should be nuanced by applying Rodrik's Ten Principles to a productive diversification policy. This essentially means minimizing the costs of picking losers; while a certain degree of rents (through trade protection, temporary monopolies, subsidized credits, and tax incentives) is needed to stimulate industrial diversification, discipline in weeding out poor performers ex post is crucial (Rodrik 2002: 4; World Bank 2006a: 72). Hence, export promotion can have a sectoral flavor, such as government support in the reconversion of agriculture from old (protected) sectors into exports as happened in Costa Rica; but what is mainly needed is a permanent attention to business climate and competitiveness (Trejos 2005). This is related to the second main lesson from East Asia that Morocco and most African countries have so far applied only partially, namely to reverse the brain drain and to encourage human capital technology transfer. This means improving the protection of property rights and physical security, as well as the general business environment. Indeed, it is clear that obstacles to the business environment affect Morocco's productive diversification by limiting private investment in new activities. The findings from the Investment Climate Assessment surveys (in 2000 and 2005) on 857 manufacturing firms in Morocco show that Morocco's industrial fabric is undergoing very slow change: it is dominated by garment, textile, and leather industries, mostly in the form of family-run small and medium enterprises (SMEs), and very few are engaged in research and development (R&D).48 Moreover, only five percent of manufacturing firms in the sample produce under a foreign franchise and only the same proportion have obtained ISO certification (World Bank 2006a: 41-42, 45; World Bank et al 2005).49 These survey findings are mirrored by Morocco's ranking in the Knowledge Economy Index where Morocco ranks well below midpoint ­ 85th out of 128 countries and 12th out of 19 MENA countries (World Bank 2006a: 46 and Driouchi 2005). Again, some of these problems are related to the political structure of the country: the World Bank's Country

15

Assistance Strategy for 2005-2009 (World Bank 2005: 7) talks of an "unleveled" playing field which favors the large, established, well-known Moroccan firms. This refers implicitly to those firms that are connected to the Makhzen. These firms benefited the most from the privatization of state-owned enterprises and now stand to loose the most from economic reforms (Perrin 2002: 80).50 This points to the third important lesson from the East Asian experience that is relevant for Morocco and other African countries, namely that governance matters.51 Most if not all of the constraints identified here can be addressed with governance-related solutions. The institutional setting must provide for safeguards against capture, rentseeking, corruption, and cronyism. While the World Bank does not specify the precise weaknesses in Morocco's governance (probably due to their political sensitivity), it is clear that tax exemptions (the agricultural sector remains exempt until 2020), activities favored by special tax regimes, monopolistic practices, and high trade barriers to entry account for much of the underlying reasons why economic growth in Morocco has been slow (World Bank 2006a: 39-40).52 Fourthly, the most important but probably irreproducible condition of economic success in East Asia was comprehensive land reforms. These led to "growth with equity" (Noland and Pack 2005: 15). However, the issue of land reform is not thought through in the World Bank's recent growth diagnostic on Morocco (2006a and 2006b), nor is there a clear indication of strategies to promote off-farm employment. 53 As the Korean experience shows, these are clearly needed for rural employment creation once agriculture becomes more export-oriented and efficient (Choi 1986: 235). A reform of the land tenure system is also necessary for urban-based growth, as limited access to an equipped industrial site and as financial collateral is perceived as a major obstacle to the development of enterprises (World Bank 2006a: 45). Finally, a more obvious and often-cited lesson that both Morocco and other African countries should learn from East Asia is the importance of human capital and quality standards in public education (see Noland and Pack 2005: 14). To conclude, Morocco and many African countries would do well to ponder the fundamental message of the East Asian experience, namely that improvements in the macroeconomic, microeconomic, and institutional dimensions of the economic environment are more likely to contribute to accelerated growth and enhanced welfare than sector-specific "picking winner" strategies (Noland and Pack 2005: 22; and Desker and Elms 2005 for a similar argument). Most importantly, as Herbst (2005: 16) argued for the African countries, Morocco too needs to deepen the political consensus around growth in order to engender the widespread popular support for market-based growth (with a high degree of involvement in the international economy) that is necessary to overcome the constraints discussed in this paper.

16

Map of Morocco

Source: AfDB/OECD (2006: 370)

17

Endnotes

In addition to thanking the Brenthurst Foundation for inviting me to contribute this paper, I would like to thank Prof. Dr. Wantje Fritschy at the Free University in Amsterdam and Dr. Clive George at the Institute for Development Policy and Management, University of Manchester, for their valuable comments on an earlier draft of this paper. 2 See the papers under `50 ans de développement humain au Maroc et perspectives pour 2025' at www.rdh50.ma and resources on `Prospective Maroc 2030' at www.hcp.ma. 3 See Pennell (2000) for an excellent history of Morocco since 1830. Especially Chapter 5 on `Conquest' would help to nuance this statement about the negative and positive consequences of French (and Spanish) rule. 4 For other useful recent overviews of the major economic developments in Morocco, see Baraka and Benrida (2006), FEMISE (2004), Baddock (2004), Mansouri (2006), Pelzman (2004) and Sgard (2006). Achy and Hassani (2005) provide a historical overview of developments in the Moroccan banking sector. See Diwan and Sqiure (1992 and 1993) for a historical assessment of growth problems in MENA countries. 5 This approach applies an innovative procedure known as "growth diagnostic." It is countryspecific, comprehensive in its assessment, and heterodox in the measures that it recommends. It calls for activist policies for productive diversification and enhanced competitiveness of the economy. These selective reforms differ from "traditional" policy recommendations, which give equal weight to simultaneously implemented, multiple reforms (World Bank 2006a: i). Note that Williamson (2005:12) in principle also recommends using such an approach. 6 See again Pennell (2000) for the historic analysis of this period. 7 Mainly due to the rise in oil prices, the MENA region as a whole has grown at an average of 6.2 percent per year in the last three years, compared to an average of 3.6 percent in the 1990s (Wolfowitz 2006). 8 After slow growth in 2005 (1.7 percent) due to a drought, growth rates were well above 6.0 percent in the first two quarters of this year (Aka 2006a), and the 2007 draft budget is based on the assumption of 3.5 percent GDP growth (Oualalou 2006). 9 See also UNDP Maroc (2006) for the 2005 Human Development Report for Morocco, and HCP (2005) and DPEF (2005a) for Morocco's MDG report for 2005. See Zouhar (2005) for an evaluation of the human capital stock for Morocco. 10 The current Prime Minister is the former Minister of the Interior, Mr. Driss Jettou, a technocrat not affiliated to any party. 11 The King tried to address this by promoting a new law on political parties to reduce their number and fragmentation but decision-making is still complex and lines of authority and accountability are still unclear (World Bank 2005: 1). 12 A further significant socio-economic challenge is the problem of illegal immigration, mainly to Europe. In addition, Morocco has become a major transit country for sub-Saharan illegal immigrants seeking to cross over to Europe. Addressing these problems demands major investments in securing the country's long land and sea borders, which the EU has so far been somewhat reluctant to co-fund. 13 See Ravallion and Lokshin (2004) for a study measuring the short-term welfare impacts of deprotecting cereals. The main finding is that there are both winners and losers and (contrary to past claims) the rural poor are worse off on average after de-protection. See also Karaky and Arndt (2002) and Löfgren et al. (1999) who examine the impact of trade liberalization in the wheat sector. 14 25 percent of the urban population, around 4 million people, are calculated to be living in precarious, non-regulated and unhealthy habitation, especially in Casablanca (Achy and Sekkat 2004b: 46). 15 The agricultural sector represents 40 percent of total employment, 80 percent of rural sector employment, and 22 percent of total exports. There is no space here to provide a comprehensive overview of the problems facing the agriculture sector in Morocco (see Hoebink 2005: 46-47 for a

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good summary). Suffice it to say that it is marked by low productivity and limited competitiveness due to price distortions, inefficient use of public funds, poor networking on commodity chains, and severe institutional shortcomings on land tenure and agricultural services (Achy and Sekkat 2004b: 9). The 2020 Rural Development Strategy adopted in 1999 aimed to address these issues, but its implementation so far has been uneven (see Royaume du Maroc, Ministère de l'Agriculture et du Développement Rural et al, 2005). Another major constraint is resistance by the lobby of large farmers to fundamentally reform agriculture. Although exempt from direct taxation until 2020, see Azam (1994) for a study of the indirect taxes and levies borne by the agricultural sector. For the shortcomings in the agro-food industry, see AFII-ANIMA (2005: 42). 16 See Bougroum and Ibourk (2006) for a discussion of the factors that encourage child labor. 17 Military expenditure represents a comparatively high 4 percent of GDP (FEMISE 2004: 116). 18 See AfDB/OECD (2006: 383) for details of each of the three sub-programs. 19 The budget deficit (excluding privatization receipts and grants) averaged 5.1 percent of GDP in 2001-2004; and the wage bill represented about 13 percent of GDP in 2004. Total external government debt has decreased from 34 percent of GDP in 2000 to an estimated 16 percent in 2004, but domestic debt has risen from 42 percent to 51 percent of GDP over the same period. The total public debt declined from 76 percent of GDP in 2000 to 67 percent in 2004 (World Bank 2005: 3). It increased again in 2005, due to the financing of the voluntary retirement program and the recognition of the government's liabilities to the pension fund for public employees (Caisse Marocaine de Retraites, CMR). There are several caveats to achieving the fiscal deficit target for 2008. First, the increased cost of energy and food subsidies (1.6 percent and 0.8 percent of GDP in 2005, respectively) due to soaring oil prices put a strain on this year's budget. Following the three increases that have taken place since 2005 though, the authorities plan to gradually align domestic prices of petroleum products with international prices (IMF 2006b). Second, although the wage bill should go down, the savings on the wage bill (following the voluntary retirement program) could be lower than anticipated in the budget following the regularizations and new promotions granted after the budget was adopted (IMF 2006a). Indeed, the problem is with the wage level rather than the size of the public sector, as the public sector staff represent 2.3 percent of the total population, compared to 2.6 percent in Turkey, 3.7 percent in Tunisia, 4.2 percent in Algeria, and 6.2 percent in Egypt (FEMISE 2004: 186).Third, privatization proceeds, which largely helped to finance the fiscal deficit in the past, are projected to phase out rapidly from 2006 on (World Bank 2005: 3; see also Ghazouani 2005: 10ff. for a history of privatization in Morocco). Fourth, should another drought hit the country in the medium term, the government is likely to fund a package of emergency aid for farmers as it did in 2005. Fifth, rising domestic interest rates will increase the cost of servicing an already high domestic debt, which will put pressure on government spending. Sixth, the loss of customs revenues is likely to resume as import growth eases and tariffs continue to be reduced in the context of the Association Agreement with the European Union and the FTA with the United States (Aka 2006b). 20 A notable exception here are small and medium enterprises which face constraints in access to financing due to higher interest rates and higher guarantees (World Bank et al. 2005; see also FEMISE 2004: 157). 21 Morocco received $2.9 billion in 2005 in FDI compared to $1,07 billion in 2004 and $2,4 billion in 2004 (UNCTAD 2006: 41 and annex table B.1.). Note that the MENA region as a whole attracted only $5.3 billion of foreign investment in 2004, compared to $7.2 billion in South Asia and $11.3 billion in Sub-Saharan Africa (Wolfowitz 2006). See Giovannetti et al (2005) and Martín (2000) for a discussion of FDI patterns in Southern Mediterranean Countries. An interesting development is the upsurge in FDI from the Gulf states to Morocco, especially in real estate projects (see Oxford Analytica Daily Brief, June 26, 2006). Mansouri (2005) argues that for Morocco to benefit from technology transfer and spillover effects, FDI should be encouraged, but it should be accompanied by trade openness. See also Eedes (2005) for Morocco's FDI strategy, and Achy (2005) for developments in the telecommunications sector.

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See Naciri Bensaghir (2005) for an analysis of the logistics in the textile sector. The government launched a vast Transport Sector Reform Program in 2003 (see AfDB/OECD 2006: 380 for details). 23 See Aboudrar and El Hasnaoui (2006) for a study on Corporate Social Responsibility in Morocco, and CGEM (2005) for a survey on corporate governance. Aysan et al. (2006) calculate the potential increase in private investment for Morocco if the institutional governance framework had improved earlier. The study by Méon and Sekkat (2004: 1495) finds that institutional improvement in Morocco (including political risk as well as corruption, government effectiveness and the rule of law) entails an increase of the ratio of manufactured exports to GDP at least equal to one-half of the impact of the liberalization policy initiated 20 years ago. 24 Morocco improved in three of the 10 areas studied by Doing Business: 1) It reduced the minimum capital required to start a new business from 100,000 to 10,000 dirham; 2) Eased transfer of property by cutting the transfer tax from 5 percent to 2.5 percent of the property's value; and 3) Simplified its tax rules by combining multiple tax regulations into one source, making compliance easier (see www.worldbank.org.ma for the press release on the Doing Business report accessed on 18.10.06). 25 The 1973 law on the "Moroccanization" of companies precluded foreign interests to own more than 50% of any company's equity. Mansouri (2006: 24) states that during this process, firms previously owned by foreigners were attributed to powerful groups and individuals in the private as well as public sector, therefore creating quasi-feudalities operating around the political regime. The restriction on foreign ownership was abolished only with the new Investment Charter in force since January 1, 1996 (Martín 2000: 7). See Pelzman (2004) for an overview of Morocco's investment codes including this Charter. Foreign investment is now permitted in all sectors except agricultural land and a few sectors reserved for the state (e.g. phosphate mining). 26 See Pfeifer (1999) for a critical assessment of Structural Adjustment policies in Morocco, Tunisia, Jordan and Egypt. 27 As a result of a depreciation of the real effective exchange rate, Morocco's exports became far more attractive. At the same time, import duties were liberalized: the special import tax was reduced from 15 to 10 percent; the remaining prior import deposit requirements were reduced from 15 to 10 percent in January 1984 and eliminated in July; and the maximum rate of customs duty was reduced to 60 percent so as to decrease the excessively high incentives previously granted to some import-substituting industries. Finally, the emergency quantitative import restrictions that had been imposed in March 1983 were progressively removed. On the export side, special customs regimes for exporters were extended and improved; export licensing was removed for all but a few products; and the monopoly of the state marketing board on exports of processed food products was abolished. To further aid domestic exporters, in 1983 and 1984 Morocco implemented a reform of its export credit and export credit insurance system and offered a substantial increase in interest rates on remittances of its overseas workers (Pelzman 2004). 28 For a historical account of changes in the composition of Moroccan manufacturing exports and the Net-Trade Specialization Index, see Montalbano et al (2005: 13ff.). Note also that according to a UN report, the cannabis cultivated in Morocco's Rif region supplies 31 percent of the total world supply and 80 percent of sales in Europe (Africa Research Bulletin 2006: 16981). The estimated income for the Moroccan farmers is equal to 0.8 percent of GDP, but this is in turn only 2.5 percent of the total income from the drugs trade (13 billion dollars), as the majority of profits go to middlemen (Sgard 2006: 17). 29 Note that already in 1993, a World Bank discussion paper argued that Morocco needs to diversify its industrial structure (Alavi 1993: 35). 30 The new Labor Code introduced modern institutions such as works councils and implemented the core International Labor Organization (ILO) conventions, reducing weekly working hours from 48 to 44 hours, increasing the minimum working age to 15 (previously 12), and facilitating the creation and functioning of new trade unions (Martín 2004: 440).

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The labor productivity in the manufacturing sector, measured by the ratio of the real valueadded to the employment, has increased by less than 1 percent annually during 1985-2003 (Zouhar 2005: 5). Zarouali Derkaoui (2004) also points to the low productivity gains in the services sector. See Gasiorek et al (2006) for the influence of trade on Moroccan firms' productivity. Agénor and El Aynaoui (2003) show the positive impacts of a reduction in the minimum wage on the employment of unskilled labor in the formal sector (also cited in FEMISE 2006: 32). See also Dyer (2005) on the challenge of job creation in the Maghreb. 32 Given these high corporate tax rates, it is no surprise that they exceed the average for middleincome countries when their revenues are calculated as a share of GDP. See Nashashibi (2002: 6). Tax exemptions have increased in absolute terms in the draft 2007 budget (L'Economiste 20.10.06). 33 Between 1995 and 2003, customs tariff's share decreased from 4.9 to 3.0 percent of nonagricultural GDP. For 2003, the loss has been estimated at more than Euro 225m, an amount that far exceeds the Euro142m commitments in MEDA funds during the same year (Euro 426m are allocated for the 2002­04 period). Rough calculations show that each additional year of tariff dismantling until 2012 will cause an extra Euro 50m of tariff revenue loss for Morocco. In order to compensate for this loss with an increase of VAT receipts, the latter should grow at a rate of 2.9 per cent each year up to 2012 (World Bank 2006a: 28 and Martín 2004: 437-438). 34 The agreement between the EU and Morocco was signed in February 1996 and came into force in March 2000. It provides for the gradual establishment of an industrial free-trade zone by 2012 and progressive liberalization of trade in agriculture. It also foresees the start of negotiations for a free trade area in services. The agreement contains, however, no binding commitments. But Morocco is expected to deepen further its relationships with Europe within the framework of the Neighborhood Policy (Achy and Hassani 2005: 95; and Müller-Jentsch 2005). In November 2005 the EU Council authorized negotiations with the EU's Mediterranean partners on the liberalization of services and investment, and such negotiations were launched with seven Mediterranean partners at the March 2006 meeting of trade ministers in Marrakech (Nsouli 2006). An evaluation of the MEDA partnership (launched by the Barcelona Declaration in 1995) finds that EU imports to Morocco have only slightly increased, from 57 percent of total imports in 1996 to 58.7 percent in 2003 (DPEF 2005b:8). See Hoebink et al (2005: 41ff) for a good historical overview of EUMorocco relations. See FEMISE (2004: 63ff) for a detailed overview of the EU FTA provisions, Martín (2004) for its social impacts, and Hunt (2005) for its implications on employment in the Maghreb. See Elbehri and Hertel (1999 and 2004) for simulation studies of the market and growth impacts of Morocco's FTA with the EU. See Evans et al. (2006) for a similar study (including a comparison with Egypt), which finds a positive impact on poverty reduction for Morocco. Augier and Gasiorek (2003) study the welfare implications of trade liberalization between the Southern Mediterranean and the EU; Bchir et al (2006) discuss the potential improvements induced by a larger inclusion of agriculture in the Euromed partnership, and Brenton and Manchin (2003) discuss the shortcomings of the Barcelona economic integration process in terms of coverage, depth, and rules. Note that a sustainability impact assessment of a Euro-Mediterranean Free Trade Area by 2010, using a meta-analysis of 80 economic modeling studies, finds that in terms of economic impacts of Mediterranean trade liberalization on Mediterranean countries, the change in economic welfare is generally positive but fairly small (Chouchani Cherfane et al. 2005: 8 and Kirkpatrick et al 2006). Kuiper and van Tongeren (2005:13) even find that `the one-sided liberalization implied by the current Association Agreements yields negative welfare effects for both Morocco and Tunisia, with losses amounting to 3.5 and 2.6 percent of GDP, respectively.' Brenton et al (2006) provide interesting comparisons of the level of economic integration between the Maghreb and other regions. See also Dennis (2006a) on the welfare impact of MENA and EU regional integration. 35 Under the FTA with the US, immediate duty-free access for 95 percent of Morocco's industrial and consumer goods on a reciprocal basis leads to significant trade liberalization but it also entails significant risks for domestic firms (World Bank 2005: 6). All remaining tariffs will be

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eliminated within nine years. Before this FTA, US products entering Morocco faced an average tariff of over 20 percent, while Moroccan products were subject to an average tariff of 4 percent as they entered the US market (Pelzman 2004). The negotiations produced a comprehensive agreement covering not only market access but also intellectual property rights protection, transparency in government procurement, investments, services, and e-commerce (US Dept of State 2006). Given the small trade volumes though (imports and exports together are worth less than $1bn per year), it is clear that this policy restructuring is among the main gains of the agreement. Indeed, the agreement is probably more important politically than economically. As the 21 January, 2003 `Notification Letter to Congress' from the US Trade Representative states, `Trade liberalization with Morocco will support this Administration's commitment to promote more tolerant, open, and prosperous Muslim societies.' (cited in Brown et al 2005: 1476; Crombois 2005). For impact assessments of the US FTA on the Moroccan economy, see Abdelmalki et a. (2006), Brown et al (2005), and Ait El Mekki and Tyner (2006). See Aloui and Kenny (2004) for a study on the cost of compliance with sanitary and phyto-sanitary standards for Moroccan agricultural exports. For a comprehensive impact assessment for the US economy, see USITC (2004). 36 The Agadir Agreement was signed by Morocco, Tunisia, Jordan and Egypt in 2005. This agreement allows for cross rules of origin among the four partners vis-à-vis the EU, but it is not implemented yet (IMF 2006a). However, Brenton et al (2006: 13, 15, 18) note the complex and administratively burdensome structure that has resulted from the large number of overlapping trade agreements in the Maghreb region that can raise the costs of firms and governments in benefiting from and implementing the agreements. They also note that services are excluded from the trade agreements amongst Maghreb countries, and that the tariff barriers on exports of key agricultural products to the EU remain important constraints upon the development of processed food sectors in the Mediterranean countries. Most importantly, without any acceleration in regional and sub-regional liberalization, bilateral trade liberalization such as that with the EU could result in a hub and spoke effect, through which, for example, goods are shipped from Algeria to Morocco via France (IARC 2006). Similarly, Martín (2000: 14) argues that the failure to implement the Arab Maghreb Union has deterred many investors from opening plants in the Maghreb region to serve this whole regional market. The EU has, however, sought to strengthen the incentives for South-South trade integration. For example, by an October 2005 decision of the European Council the system of cumulation of origin was extended to Mediterranean countries, permitting goods processed in one or more countries to benefit from the same preferential access to the EU market as goods exported directly from the country of origin, provided that the countries involved have a free trade agreement in place. This constitutes a new inducement for the Euro-Mediterranean countries to conclude free trade agreements among themselves, and at the Marrakech trade ministers' meeting in March 2006 they reaffirmed their willingness to do so (Nsouli 2006, Ben Ahmed 2006: 6 and Müller-Jentsch 2005 Annex B for rules of origin as an impediment to deeper regional integration). 37 As expected, Morocco's export performance worsened in 2005, after the phasing out of the MFA in January 2005 and the resulting increased competition from Asian countries textile producers. Export earnings fell by 6 percent in value compared with the same period in 2004. This downturn is related primarily to a 17 percent decline in clothing exports, Morocco's largest export sector. Official estimates from the Ministry of Industry forecast that as much as 30 percent of the sector's jobs and 20 percent of its exports could be lost over the next five years. Despite these mediocre results, big international firms announced plans to invest $300 million in Morocco over the next few years, thus generating 2 500 new jobs. Among these investments, Fruit of the Loom is investing $16 million, the Spanish Tavex is planning to spend $75 million over the next three years, and Legler is investing $87 million in a denim factory near Rabat. These investments could be explained by the recent vertical international integration policies adopted by the Moroccan government, one result of which was the FTA recently signed with Turkey. Note also that the government and the Moroccan Association of Textiles (AMITH) signed an agreement to

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modernize the textile and clothing industry in October 2005. Called the Textile and Clothing Emergence Plan, this agreement offers an array of measures and facilities supposed to support companies' restructuring programs, but its implementation is slow (AfDB/OECD 2006: 373-376). 38 See Sayah et al 2004 for a study of Moroccan-Chinese trade relations. 39 The Tangier Free Trade Zone (FTZ) is a good example of dealing with government failures and attracting foreign capital. The Tangier FTZ main strategic goal is to capture foreign investment mobilizing away from Southern Europe. The tax, tariff, customs, infrastructure, and geographic advantages provided to FTZ industries have helped attract labor-intensive assembly operations as an investment opportunity for domestic and foreign investors. Although only in operation since 2001, is has achieved impressive outcomes: employment has tripled to 18,000, exports more than doubled ($200 million), and all available slots from the first construction phase have been sold. The FTZ is crowded by foreign firms from France, Germany, Italy, Japan, Portugal, Spain, and the United States engaged in more than 100 export-integrated activities: textiles and leather, electric parts (car cables for Volkswagen), electronic components (Phillips), mechanical parts (Airbus parts); fish industry, chemical products (paramedical equipment), manufacturing (textiles), plastic products, and offshore services. Another FTZ will be established in the new Tangier deep-sea port, a container hub to be completed by 2007. This port is expected to reduce the high transportation costs (World Bank 2006a: 38). The port is also aimed a developing a historically neglected part of the country. However, it could be argued that the links of these offshore export processing zones to the domestic economy are very weak. They do not increase competition for local firms in the local markets, their contribution to tax revenue of the Government is low (since they are mostly exempt from taxes and import duties) and they create little value-added (Martín 2000: 14). 40 See Assaad (2005) for a comparison of the feminization of the labor force in Morocco and Egypt, and Nordman and Wolff (2006) for a study of the gender wage gap in Moroccan manufacturing firms. 41 Intellectual property rights protection was the main issue delaying the implementation of the FTA agreement with the US (World Bank 2006a: 46; see Mission Économique de Rabat 2006 for the new laws passed in March 2006). TechnoPark is the public agency in charge of identifying and incubating new products but its performance is hard to evaluate (World Bank 2006a: 72). 42 See Brenton et al (2006: 9) for a comparison of the level of ISO certification between the Maghreb and Eastern Europe. 43 The aging populations in Europe might also increasingly choose Morocco as their primary residence after retiring, given the decreasing pensions. Pensioners might therefore become a promising sub-sector for the tourism industry, as it is also labor-intensive (Sgard 2006: 17). 44 The lessons discussed here include both those that Morocco can learn from the East Asia success story, and those that African countries can learn from the economic reforms in Morocco. 45 Changes in the global trade regime include tightened WTO rules on export subsidies and changes in the dispute settlement mechanism which mean the rules are enforced more strictly now than before (Noland and Pack 2005: 13). Of course, the opening up of EU agricultural markets to the products coming from the (North) African countries would be a major advance but not likely in the short- to medium-term (see Martín 2004). 46 The Moroccan government should also carefully look at the lessons from the EU-Sponsored Mise à Niveau program of manufacturing firms. This program did not meet with great interest from its targeted beneficiaries (only 14 million Euros were disbursed during 1997 to 2005) mainly due to insufficient government ownership, delays in creation of counterpart financing mechanism, lack of incentives, and institutional rigidities. Moreover, there was not much emphasis on strengthening export readiness (Bougault and Filipiak 2005: 122ff.; Hoebink 2005: 45; Bähr 2004). 47 In East Asia, state influence in the allocation of capital meant that bankers did not develop the necessary skills to evaluate alternative business plans and models (Noland and Pack 2005: 17).

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See Choi (1986) for a fascinating account of the role of science and technology policies for industrialization in Korea. 49 See World Bank et al (2005) and Achy and Sekkat (2004a) for results of the 2000 Firm Analysis and Competitiveness Survey. See also UNIDO's competitive industrial performance index, where Morocco lost 7 positions compared to 1990, occupying the 52nd rank out of 93 countries in 2000. Tunisia gained 3 positions over the same period (UNIDO 2004: 162). See also Royaume du Maroc (2006b) for a quantitative study on the Moroccan manufacturing sector. 50 Most recently, four state sugar companies were sold to the Moroccan Holding Company Omnium Nord African in September 2005, in which the royal family is a shareholder (AfDB/OECD 2006: 378). See Orth (2005) for a detailed discussion. 51 As Noland and Pack (2005: 6) observe, industrial policies by their very nature involve the distribution of rents, which is an inherently political activity; therefore a proper evaluation of industry policy must consider the political economy of policy formation and implementation. Indeed, Noland and Pack (2005: 8-9) argue that the East Asian industrial policies cannot have been the primary explanation of these countries' growth performance and that the actual patterns of government interventions were largely determined by political competition among various self-interested groups. 52 I have argued elsewhere (Bergh 2005) that the governance-related issues of representation, commitment and coordination go a long way in explaining Morocco's slow economic growth. Another example of vested interests undermining economic institutions is the weak enforcement of bankruptcy laws (Sgard 2006: 14). 53 I am indebted to Dr. Clive George (IDPM, Manchester University) for this point. See also Christiaensen et al (2006) on the role of enhancing agricultural productivity in poverty reduction.

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