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Report No.32948-MOR KingdomofMorocco Economic Memorandum Country II Volume Report No. 32948-MOR Kingdom of Morocco Country Economic Memorandum Fostering Higher Growth and Employment with Public Disclosure Authorized Public Disclosure Authorized Productive Diversification and Competitiveness (In Two Volumes) Volume II: Background Studies March 14, 2006 Social and Economic Development Group Middle East and North Africa Region Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank Public Disclosure Authorized Public Disclosure Authorized LBO Leveraged Buyouts PPP Purchasing Power Parity LFPRs Labor Force Participation Rates PRICAM Canada’s PRICAM Program LFSS Labor Force Sample Survey PROPARCO AFD group (Societe de Promotion et de la LHA Left Hand Axis Participatibn pour la Cooperation Economique) LSMS Living Standard Measurement Survey PSG Issuance of the Performance Security Guarantee LAC Latin America and the Caribbean PT Poverty Threshold LBO Leveraged Buyouts PTAs Preferred Trade Agreements LFPRs Labor Force Participation Rates R&D Research and Development LSMS Living Standard Measurement Survey Ro-RO Roll-on/Roll-off LAC Latin America and the Caribbean SA SociCtCs Anonyma LBO Leveraged Buyouts SMG Minimum Guaranteed Salary MAD Morrocan Dirham SMIG SalaiTe Minimum Industriel Garanti MAMDAiMCMA Mutuelle Agricole Marocaine d’Assurances SNECMA Airplane Engine’ Parts Manufacturer MEDA I& I1 Euro-MediterraneanPartnership so2 Sulfur Dioxide MENA Middle East and North Africa SOE Small Open Economy MFA Multi-Fibre Agreement SOEs State-owned enterprises MFN Most-Favored Nation SOMED Soci6t6 Maroc Emirats Arabes Unis de MLSS Moroccan Living Standards Surveys Dkveloppement MW Minimum Wage SSA Sub-Saharan Africa NAFTA North American Free Trade Agreement TFP Taxe de Formation Professionnelle NGO Nongovernmental Organization TFP Total Factor Productivity NAFTA North American Free Trade Agreement TFZ Tangier Free Zone NGO Nongovernmental Organization TPL Tariff Preference Levels OECD Organization for Economic Co-operation and TRQ Tariff Rate Quotas Development ULC Unit Labor Cost OFPPT System of Professional Training UMT Employees through the UMT union OLS Ordinary Least Squares UN United Nations OMPIC Office Marocain de la PropriCtC Industrielle et UNCOMTRADE UN Commodity Trade Statistics Database Commerciale UNCTAD UN Conference on Trade and Development ONE Office National d’ElectricitC USD US Dollar ONS Office National de Statistiques VA Value Added ONT Office National du Transport VAM Value Added at Domestic Market Prices PA Public Administration VAT Value-Added Tax PAGER Programme d’Approvisionnement Group6 en Eau VAW Value Added at World Market Prices Potable des Populations Rurales VECM Vector Error-CorrectionModel PE Private Equity WAFA Moroccan Banking and Insurance company PEI Private Equity Institutions WB World Bank PERG Programme d’Electrification Rurale Globale WITS World Integrated Trade Solution PISA Program for International Student Assessment WTO World Trade Organization PNAZI Programme National d’Amenagement des Zones XGS Exports of Goods and Services Industrielles Vice President: Christiaan J. Poortman Country Director: Theodore 0.Ahlers Sector Director: Mustapha K. Nabli Sector Manager: Miria Pigato Lead Economist and Task Team Leader: Jose R. Lopez-Calix ACKNOWLEDGMENTS This whole report is the result of a team effort and, as such, has benefited from an array of invaluable contributions. Its preparation involved a unique collaboration with a group of professors of Harvard University and a group of advisors fi-om the Development Economic Research group of the World Bank, as well as inputs from staff of the International Monetary Fund. The synthesis of the full report, Volume I,was prepared by JosC R. L6pez-Chlix (Task Team Leader) with contributions from Ricardo Hausmann (Harvard University), Mustapha Nabli, Theodore Ahlers, Miria Pigato, Khalid El Massnaoui and Mariem Malouche (all World Bank). Diane Stamm edited the English version of both volumes. Khalid El Massnaoui, Gerald Collange and Adelaide Barbey did a wonderful job in revising and editing the translation to the French version of Volume I. HClkne Talon and Khalid El Massnaoui did a wonderful job in translating, revising and editing the French version ofVolume 11. Volume I1 has the background studies and was prepared as follows: Chapter Iwas written by Jacques Bougha-Hagbe and Jerome Vandenbussche, both staff of the IMF (sections on growth accounting and labor productivity issued to the Fund’s Executive Board as part of the 2005 Article N consultation report for Morocco), and JosC R. Lopez-Chlix and Khalid El Massnaoui (World Bank, section on macroeconomic stance). Chapter I1 was written by JosC R. L6pez-Calix and Ricardo Hausmann, with inputs from Bailey Klinger (Harvard University, section on product discoveries), Mariem Malouche (section on product discoveries), and Khalid El Massnaoui (sections on tourism and remittances). Chapter I11 was written by Najy Benhassine (World Bank, Investment Climate Assessment Survey) with inputs from Patrick Tardy (consultant). Chapter N was written by Peter Walkenhorst (World Bank) and Mariem Malouche. Chapter V was written by Luis G. Halum (World Bank), Khalid El Massnaoui, and JosC R. L6pez-Calix, with inputs fi-om Paul Dyer (World Bank, labor trends), and Wendy Cunningham (World Bank, box on minimum wages). Helene Talon crafted a detailed translation of the French version ofVolume 11, which was later revised and edited by Khalid El Massnaoui. N. Roberto Zagha, Stefan0 Scarpetta, Paul Brenton, and Philip Keefer provided precious guidance and multiple suggestions as peer reviewers. Valuable inputs and suggestions received from Mustapha Nabli, Miria Pigato, Jennie Litvack, Setareh Razmara, Fan-ukh Iqbal, Ferid Belhaj, Theodore Ahlers, Jennifer Keller, Dipak Dasgupta, Paloma Anos Casero, Ndiame Diop, Norman Loayza, Daniel Lederman, Luis Serven, Edgardo Favaro, Nadereh Chamlou, Carmen Pages, David Robalino, Ingrid Ivins, Dani Rodrik (Harvard university), AndrCs Velasco (Harvard University), Barry Eichengreen, and Sena Eken, Abdourahmane Sarr and staff members of the IMF Policy and Research Departments are gratefully acknowledged. Carlos CBceres (summer intern, Oxford University) provided excellent research assistance support. Production support at various stages was provided by Michael Geller, Khalid Alouane, Muna Abeid Salim, and Mary Lou G6mez. Khadija Sebbata, Soumia Driouch, Najat Yamouri, and Yasser Charafi (IFC) provided excellent operational support to field research in Rabat. Special thanks go to the Moroccan counterpart team in charge ofproviding extensive comments and written inputs to early drafts of this report, headed by Abdellatif Loudyi, Mohammed Chafiki, Zouhair Chorfi, and Karim El Aynaoui; and integrated by Nizar Baraka, Abdelkader El Ghnb, Mohamed Mouime, Bouameur Ragbi, Mohamed Lezar, Houssine Ihnach, Hassan Hmamou and Abdeslam Chebli. Finally, the team would like to express its sincere gratitude for the close cooperation provided by other Moroccan officials, representatives from the private sector, unions and donors, in particular Fathallah Oualalou, Salah Eddine Mezouar, Rachid Talbi Alami, Mustapha Mansouri, Adil Douiri, Ahmed Lahlimi, M’Hammed Karmouni, Bousselham Hilia, Abdellatif Bennani, Samir Tazi, Benyoussef Saboni, Mohamed Benayad, Sabah Benchekroun, Mohamed Abzahd, Nourredine Benacer, Abdelwahed Kabbaj, Abdelhamid Afi, Karim Taghi, Jamal E. El Jamali, Ahmed Benrida, Mohssine Semmar, Georges Guibert, Bousselham Hilia,Abderrahmane Chaoui, My El Hassan Alaoui Slimani, Hassan Chami, Karim Tazi, Zakiya Sekkate, Khalid Lahbabi, Chakib Benmoussa, Mahjoub Ben Seddik, Abderrazak Afilal, Hamad Kassal, Noubir El Amaoui, El Hadi Chaibainou, Larry Dewitt, Carl Dawson, Azzedine Kettani, Abdellatif Bel Madani, Jamal Mikou, Adil Rais, Mohamed Yacoubi, Abderrahim Daoudi, Abderrafii Hamdi, Emmanuel Diercloc, Isabelle Graviere-Troadec, Michael Koplovsky, Martial Laurent, Marie Pierre Longtin, Enrique Verdeguer, Guy Boreux, Monica Stein Olsen, Tsujioka Hakkaku, Lorenzo Kluzer, Mme Castagno, Driss Benali, Abdelatif Lahlou, Mohamed Boutata, Mohamed Raja Amrani, Ahmed Laaboudi, Mohamed Tahraoui, Touhami Abdelkhalek, Abdelali Benamour, Saad Belghazi, Heinrich Winnen, Uwe Miess, Mohamed Ali Enneifer, Julianne Furman, Abderrafie Hanouf, Bachir Rachdi, Mmaoun Marrakchi, Chemsedine Ould Sidi-Baba, Mohamed Hafnaoui, Majid Boutaleb, Abdellaziz Taariji, Yvon Gravel, Nouzha Taariji, and Jamal Eddine Mohamed. The reader should consider that these background papers were concluded with information available until November 2005 and, in some instances, but more in particular in chapter 11, its findings slightly differ with those of the most updated version contained in Volume I. KINGDOM OF MOROCCO COUNTRYECONOMIC MEMORANDUM FOSTERINGHIGHER GROWTH AND EMPLOYMENT WITH PRODUCTIVE DIVERSIFICATIONAND COMPETITIVENESS TABLEOF CONTENTS ACKNOWLEDGEMENTS I. STYLIZED FACTSAND GROWTHACCOUNTING APPLIED TO MOROCCO........................................ 1 A . The Macroeconomic Environment .............................................................................................. 1 B. Stylized Trends in Growth .......................................................................................................... 4 Overall Growth ..........................................................................................................................