The original version of the report is in French Morocco’s Growth Diagnostic Identifying Morocco’s Binding Constraints to Broad-Based Growth 4 MOROCCO’S GROWTH DIAGNOSTIC Contributors African Development Government of the MCC Bank Kingdom of Morocco Members of the analytical and Coordination: Members of the analysis team editorial team: economic: Presidency of the Government Vincent Castel John Underwood Samia Mansour Team members: Chief Economist Kaouther Abderrahim Head of the Government Stefan Osborne Gilles Nancy (SCG) Economist Marion Dovis Abdelghni Lakhdar, Guyslain Ngeleza Ishac Diwan Team Leader, Economic Economist Advisor For their special contributions, Brad Cunningham we thank: Abdelkader El Ghrib, Economist Patricia Augier Economist Emmanuel Diarra With contributions from: Mohamed Mahroug, Ashraf Tarsim Economist Management – Regional Department Ariane Gauchat Country Team Lead (North Africa) & Representation in Abdelatif Naanaa, Statistician-Economist Morocco: Dana Binnendijk Program Officer Jacob Kolster High Commission for Yacine Fal Planning Melissa Adams Social and Gender Assessment Management – Economic Complex, Ayache Khellaf, Jason Bauer Research Department: Director Finance, Investment and Trade Steve Kayizzi-Mugerwa Abdelaziz Nihou, Shimeles Abebe Director With the contribution of: Driss Charrier Other contributors (SCG): Amine Mouaffak Olivier Breteche Essaid Azzouzi Adama Moussa Thami Elmaaroufi Driss Khiati Leila Jaafor-Kilani Mohamed Hammoumi Laurence Lannes Salah Eddine Laissaoui Mohamed El Arkoubi Mohamed El Ouahabi Sara Chajae Pierre More Ndong Ikrame El houdali Belgacem Ben Sassi Mouhamed Gueye Mamadou Yaro Rafaa Marouki William Dakpo Wadii Rais MOROCCO’S GROWTH DIAGNOSTIC 5 Table of Contents 5 TABLE OF CONTENTS 11 LIST OF FIGURES 17 LIST OF TABLES 19 LIST OF BOXES 20 LIST OF ACRONYMS 23 PREFACE 25 CONSULTATIVE PROCESS 28 EXECUTIVE SUMMARY 28 Introduction 30 Methodology 33 Major Constraints to Growth in Morocco 37 CHAPTER 1: OVERVIEW OF THE MOROCCAN ECONOMY 40 Introduction 40 1.1 ECONOMIC POLICIES IN SUPPORT OF GROWTH 40 1.1.1 Stabilization of Macroeconomic Balances 42 1.1.2 Openness of the Economy 44 1.1.3 Facilitation of Access to Financing 45 1.1.4 Growth and Employment-Oriented Industrial Policy 46 1.1.5 Improvement of Physical Investment Environmemt 46 1.1.6 Improvement of Social Cohesion 47 1.2 A MODEL INDUCING RELATIVELY SUSTAINED GROWTH BUT WITH SERIOUS LIMITATIONS 50 1.2.1 Volatile Economic Growth 50 1.2.2 A Fairly Static Production Structure 51 1.2.3 Domestic Demand-driven Growth 54 1.2.4 Limited Private Sector Dynamism 57 1.2.5 Weak Export Competitiveness Impacting Negatively on the External Balances 59 1.2.6 Low Factor Productivity Contribution 61 1.2.7 Weak Employment-Generating Growth, especially among Young People 64 1.2.8 Largely Non-Inclusive Growth 67 CHAPTER 2: COST OF FINANCING 70 Introduction 71 2.1 THE MOROCCAN ECONOMY’S FINANCING REQUIREMENTS 71 2.1.1 Counter-cyclical Trend of Financing Requirements 71 2.1.2 Insufficient National Savings 73 2.1.3 Savings-Investment Balance 6 MOROCCO’S GROWTH DIAGNOSTIC 74 2.1.4 Unbalanced Financing Needs Among Institutional Sectors 76 2.2 THE MOROCCAN ECONOMY’S FINANCING ARRANGEMENTS 76 2.2.1 Public Sector Financing 76 2.2.2 Bank Credit and Private Sector Financing 77 2.2.3 Capital Market 78 2.2.4 Micro-finance 79 2.3 COST OF FINANCING 79 2.3.1 Cost of Public Sector Financing 80 2.3.2 High Cost of Private Sector Financing 82 2.4 GROWTH DIAGNOSTIC TESTS 82 2.4.1 Type 1 Test : Correlation between Real Interest Rate and GDP per capita 83 2.4.2 Type 2 Test : Correlation between the Real Interest Rate and Private Investment 83 2.4.3 Type 2 Test : Causal Relationship between Bank Credit to the Private Sector and GDP per capita 85 2.4.4 Type 3 & 4 Tests : Bypassing of the Financing Constraint by Firms 87 2.5 SECOND-ROUND EFFECTS 88 2.5.1 Crowding-Out Effects 88 2.5.2 Price Distortions 91 CHAPTER 3: HUMAN CAPITAL 94 Introduction 95 3.1 DEMOGRAPHIC CONTEXT 97 3.2 HEALTH ENVIRONMENT 99 3.3 EDUCATION AND TRAINING 100 3.3.1 Enrolment Rate 102 3.3.2 Length of Schooling 103 3.3.3 Education Quality 104 3.3.4 Vocational Training in Morocco 104 3.4 GROWTH DIAGNOSTIC TESTS 104 3.4.1 Type 1 Test : Education and Training Performance 105 3.4.2 Type 2 Test : Correlation between Level of Education and GDP per capita 106 3.4.3 Type 3 Test : Bypassing the Constraint 108 3.4.4 Type 4 Test : Camels & Hippos 110 3.5 SECOND-ROUND EFFECTS 113 CHAPTER 4: INFRASTRUCTURE 115 Introduction 115 4.1 THE MOROCCAN ECONOMY’S INFRASTRUCTURE SUPPLY 115 4.1.1 Quantitative and Qualitative Improvement of Transport in Morocco 123 4.1.2 Significant Electricity Development MOROCCO’S GROWTH DIAGNOSTIC 7 125 4.1.3 Persistent Disparities in Water and Sanitation Facilities 127 4.1.4 Telecommunications 129 4.2 GROWTH DIAGNOSTIC TESTS 129 4.2.1 Infrastructure Quality Comparison 130 4.2.2Type2 Test : Estimate of the Correlation Between an Infrastructure Quality Indicator and GDP per capita 131 4.2.3 Type 3 Test : How Firms Bypass the Constraint? 132 4.2.4 Type 4 Test : Does Limited Infrastructure Impede the Development of Firms? 132 4.3 SECOND-ROUND EFFECTS 135 CHAPTER 5: NATURAL CAPITAL 137 Introduction 137 5.1 BASIC RESOURCES 137 5.1.1 Geographical Position 137 5.1.2 Land 138 5.1.3 Water 139 5.2 EXTRACTIVE RESOURCES 139 5.2.1 Fossil Fuels 140 5.2.2 Phosphate, an Exceptional Endowment 140 5.3 RESOURCES DEVELOPMENT 140 5.3.1 Capitalizing on Geographical Proximity 141 5.3.2 Land Development 142 5.3.3 Water Development 143 5.3.4 Alternative Energy Development 144 5.3.5 Phosphate Development 144 5.4 GROWTH DIAGNOSTIC TESTS 144 5.4.1 Comparison of Water and Land Availability 145 5.4.2 Type 2 Test : Estimate of the Correlation Between (Water and Land) and Resources Level of Economic Development 146 5.4.3 Type 3 Test : Are Firms Obliged to Bypass the Constraint? 146 5.4.4 Type 4 Test :Are Firms Requiring more Water and/or Land Impeded in their Development? 147 5.4.5 Cross Testing between Natural Resources and Infrastructure 148 5.5 SECOND-ROUND EFFECTS 151 CHAPTER 6: MACROECONOMIC RISKS 153 Introduction 153 6.1 BALANCE OF PAYMENTS CURRENT ACCOUNT IMBALANCES 154 6.1.1 External Macroeconomic Rrisk Factors 154 6.1.2 Current Account Balance Trend and Financing Gap 8 MOROCCO’S GROWTH DIAGNOSTIC 156 6.1.3 Trend of Net Foreign Assets 157 6.1.4 Sustainability of the Current Account Deficit 157 6.2 SOUND PUBLIC FINANCES 157 6.2.1 Public Debt Sustainability 158 6.2.2 Assessment by Markets 160 6.3 THE BANKING SECTOR 160 6.3.1 Bank Capitalization 161 6.3.2 Return on Capital 161 6.3.3 Risk Management 163 CHAPTER 7: MICROECONOMIC RISKS 167 Introduction 167 7.1 THE JUDICIAL SYSTEM 167 7.1.1 Situation and Challenges 169 7.1.2 Type 1Test : High Cost of Justice 171 7.1.3 Type 2 Test : Relationship Between Judicial System Quality and GDP per capita 171 7.1.4 Type 3 Test : By-passing the Constraints 172 7.2 LAND TENURE 172 7.2.1 Situation and Challenges 175 7.2.2 High Cost and Perception of Firms 177 7.2.3 Type 3 Test : By-passing the Constraint 179 7.2.4 Type 4 Test : Camels & Hippos 181 7.3 THE TAX SYSTEM 181 7.3.1 Situation and Challenges 184 7.3.2 Type 1 Test : High Cost 187 7.3.3 Type 2 Test : Relationship between Tax System Indicators and GDP per capita 188 7.3.4 Type 3 Test : By-passing the Constraint 189 7.3.5 Type 4 Test : Camels & Hippos 190 7.3.6 Second-Round Effects 191 7.4 THE LABOR MARKET: FINANCIAL AND REGULATORY COST OF LABOR 191 7.4.1 Situation and Challenges 192 7.4.2 Type 1 Test : High Cost of Labor 194 7.4.3 Type 3 Test : By-passing the Constraint 196 7.4.4 Type 4 Test : Camels & Hippos 196 7.5 GOVERNANCE, CORRUPTION AND TRANSPARENCY 196 7.5.1 Situation and Challenges 199 7.5.2 Type 1 Test : High Cost of Corruption 200 7.6 TRADE BARRIERS 200 7.6.1 Introduction 200 7.6.2 Situation and Challenges MOROCCO’S GROWTH DIAGNOSTIC 9 206 7.6.3 Trade Freedom Comparison 207 7.6.4 Type 2 Test :Estimate of the Correlation Between Trade Openness and the Level of Economic Development 208 7.6.5 Type 3 Test : Are Firms Able to Trade? 208 7.6.6 Type 4 Test : Import Trend by Major Sectors 211 CHAPTER 8: INNOVATION 213 Introduction 214 8.1 TRANSFORMATION AND DIVERSIFICATION PERFORMANCE 217 8.1.1 Type 1 Test : Level of Complexity in Relation to GDP per capita 218 8.1.2 Type 2 Test : Relationship Between Private Investment in Percentage of GDP and Export Sophistication 219 8.2 GOVERNMENT POLICIES TO ADDRESS MARKET FAILURES IN INNOVATION 220 8.2.1 Industrial Policies and Strategies 223 8.2.2 Industrial Parks – A Key Factor in Sector Policy 224 8.3 OTHER EXPLANATORY FACTORS OF MOROCCO’S MIXED PERFORMANCE IN INNOVATION AND SOPHISTICATION 10 MOROCCO’S GROWTH DIAGNOSTIC Appendices 228 ANNEX 1.1: LIST OF PARTICIPANTS IN THE CONSULTATIONS TO ECONOMIC GROWTH IN MOROCCO 228 Moroccan Public Administration and Institutions 229 Financial Organizations and Banks 230 Technical and Financial Partners and Other International Organizations 230 Private Sector 231 Civil Society Organizations 231 Representatives of Trade Union Bodies 231 Academic Staff 231 Several Resource Persons 232 ANNEX 2.1: PRESIMO MODEL: FORECASTING SCENARIOS FOR THE MOROCCAN ECONOMY 232 ANNEX 2.2: CORRELATION TEST BETWEEN REAL INTEREST RATE AND GDP PER CAPITA 233 ANNEX 2.3: CORRELATION TEST BETWEEN REAL INTEREST RATE AND PRIVATE INVESTMENT 233 ANNEX 2.4: GRANGER CAUSALITY TEST 234 ANNEX 3.1: RANKING ON EDUCATIONAL SYSTEM QUALITY, THE GLOBAL COMPETITIVENESS REPORT 2013 - 2014 234 ANNEX 4.1: STATIONARITY TEST OF CERTAIN TYPES OF INFRASTRUCTURE AND INCOME PER CAPITA