The World Bank office in Rabat has published the Country Economic Memorandum for Morocco (CEM) : the report is untitled "Fostering Higher Growth and Employment with Productive Diversification and Competitiveness".
April 2006 - This report involved a unique collaboration with a group of professors of Harvard University and a group of advisers form the Development Economic Research group of the World Bank, as well as inputs from staff of the International Monetary Fund. Its preparation has also been based on government's consultations, economic operators ans moroccan researchers.The report proposes policies for a new pact for growth and employment in Morocco for productive diversification.
This report does a central diagnostic : Moroccan economy suffers from a too slow process of structural transformation for achieving higher growth, especially on its exports that have to face unfavorable external shocks arising from competitor countries in the main markets for Moroccan exports. This process of so-called “productive diversification” requires that Morocco enhances its competitiveness and accelerates its transition from low- to high- value added. International experience shows that it is not how much you export, but what you export that matters for achieving a strong economic performance.
Main recommendations of the report
This Country economic memorandum (CEM) identifies the binding constraints to growth of Morocco and identifie four failures of economic policies as the binding constraints :
a taxation regime that represents a heavy burden for firms and an obstacle to hiring skilled human capital;
an anti-export bias, featuring a still high level of trade protectionism despite recent progress in tariff reductions and the signing of several Free Trade Agreements (FTA);
a rigid labor market;
a fixed exchange rate regime that has allowed regaining price stability, but given existing rigidities in the labor market does not favor international competitiveness.
Besides these constraints, three market failures are also identified as responsible of low growth and that affect competitiveness and innovation :
information failures that incentive the violation of property rights and reduce the rates of return for investing in new productive activities;
coordination failures between the public and private sector;
training failures that rank the country among those with the lowest level of training offered by businesses.
The CEM proposes a set of selected policies to encourage productive diversification and enhanced competitiveness.A set of measures are proposed for the short term:
- design and implement a neutral tax modernization reform mainly based on a reduction of the corporate income tax and the IGR rates and a simplified value-added tax;
- accelerate the reduction of tariff and non-tariff barriers;
- keep real minimum wages constant;
- move toward a flexible exchange rate regime gradually.
Additional measures are needed to face market failures.These involve :
- strengthened property rights;
- the adoption of a set of fiscal incentives to new productive activities, as transversal as possible and as sectoral as needed; les dernières en coordination avec les chantiers identifiés par le Programme Emergence;
- additional incentives to training by firms. The extended use of Contrats Programme is also advisable to encourage discipline and transparency.
The CEM also selects other policies.To prevent potential future growth constraints, the report proposes to :
- continue with the agenda of fiscal consolidation, bringing the fiscal deficit toward 3 percent and the public debt ratio down to at least 65 percent of GDP by 2008;
- reduce the port and shipment fees of crossing the strait of Gibraltar;
- complete and implement an anti-corruption agenda supported by an independent Commission;
- apply new measures to adapt abundant available financing to small and medium enterprises (SMEs), including the softening of collateral and guarantees applied; and
- develop a contractual framework between the government, universities and vocational centers so as to increase graduation rates.
Among policies to improve the business climate, the CEM proposes the creation of a unique identifier for each enterprise; the development of a credit information system; strengthened contracts enforcement of court decisions; and measures to enhance access to real estate by firms.
Finally, among policies to promote employment and working conditions, the CEM supports the government's program for job creation, approved last September and complements its proposal for wage moderation with incentives for hiring first time job seekers and female workers through the temporarily reduction of the minimum wage; the eventual introduction of an unemployment insurance scheme; and the reform of the social security system with a view to reduce the too high gross income replacement rate, while strengthening the mandatory payment scheme.
A new approach, "growth diagnostic"
While applying an innovative procedure known as “growth diagnostic”, this new approachis country-specific, comprehensive in its assessment, selective in its policies and heterodox because it calls for activist policies for productive diversification and enhanced competitiveness of the economy. Hence, the unique character of reforms required by Morocco differs from the traditional set of standard policy recommendations giving the same weigh to multiple reforms implemented simultaneously.
This report addresses five main questions of importance:
What can be learned from past growth performance, and what remains unexplained?
What are the main binding—actual and potential—constraints to growth?
How can Morocco improve its business environment while addressing productive diversification?
What are the key elements of a trade strategy that would eliminate the anti-export bias and contribute to exports diversification, enhanced competitiveness and growth?
What are the key elements of an employment strategy that would also complement a growth strategy?