Report No.32948-MORMoroccoof Kingdom MemorandumEconomic Country I 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 I: Synthesis 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 ACKNOWLEDGMENTS This report is the result of a team effort; and as such, it benefited from an invaluable array of contributions. Preparation involved a unique collaboration between researchers at Harvard University and advisors from the Development Economic Research group of the World Bank, with input from staff at the International Monetary Fund. Synthesis of the full report, Volume I,was prepared by Jose R. Lopez-Calix (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 and Sheldon Annis edited the English version of both volumes. Khalid El Massnaoui, GCrald Collange, and Adelaide Barbey revised and edited the French translation ofVolume I. Volume I1provides background studies, which were prepared as follows. Chapter Iwas written by Jacques Bougha-Hagbe and Jerome Vandenbussche ofthe IMF (the sections on growth accounting and labor productivity were issued to the Fund’s Executive Board as part of the 2005 Article IV consultation report for Morocco); and from the World Bank, JosC R. Lopez-Calix and Khalid El Massnaoui (who contributed the section on macroeconomic stance). Chapter I1 was written by JosC R. Lbpez-Calix and Ricardo Hausmann, with inputs from Bailey Klinger (the section on product discoveries) from Harvard; Mariem Malouche (the section on product discoveries); and KhalidEl Massnaoui (the sections on tourism and remittances). Chapter I11 was written by Najy Benhassine of the World Bank (the section on the Investment Climate Assessment Survey), with input from Patrick Tardy (consultant). Chapter IV was written by Peter Walkenhorst (World Bank) and Mariem Malouche. Chapter V was written by Luis G. Hakim (World Bank), Khalid El Massnaoui, and JosC R. Lopez-Calix, with inputs from Paul Dyer ofthe World Bank (labor trends), and Wendy Cunningham of the World Bank (the box on minimum wages). Helene Talon crafted a detailed translation of the French version of Volume 11, which was later revised and edited by Khalid El Massnaoui. N. Roberto Zagha, Stefan0 Scarpetta, Paul Brenton, and Philip Keefer provided guidance and useful suggestions as peer reviewers. Valuable inputs are gratefully acknowledged from Mustapha Nabli, Miria Pigato, Jennie Litvack, Setareh Razmara, Farrukh Iqbal, Ferid Belhaj, Theodore Ahlers, Jennifer Keller, Dipak Dasgupta, Paloma Ancis Casero, Ndiame Diop, Norman Loayza, Daniel Lederman, Luis ServCn, Edgardo Favaro, Nadereh Chamlou, Carmen PagCs, David Robalino, Ingrid Ivins, Dani Rodrik (Harvard University), AndrCs Velasco (Harvard University), Barry Eichengreen, Sena Eken, Abdourahmane Sarr, and staff members of the IMF Policy and Research Departments. Carlos Chceres (summer intern, Oxford University) provided excellent research support. Production support at various stages was provided by Michael Geller, Khalid Alouane, Muna Abeid Salim, and Mary Lou Gomez. 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 headed by Abdellatif Loudyi, Mohammed Chafiki, Zouhair Chorfi, and Karim El Maynaoui that provided extensive comments and written inputs to early drafts of this report. The team was integrated by Nizar Baraka, Abdelkader El Ghrib, Mohamed Mouime, Bouameur Ragbi, Mohamed Lezar, Houssine Ihnach, Hassan Hmamou, and Abdeslam Chebli. Finally, the team wishes to express its sincere gratitude for the close cooperation provided by other Moroccan officials, the private sector, labor organizations, 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, Zahya 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 Dierckx, Isabelle Gravihe-Troadec, Michael Koplovsky, Martial Laurent, Marie Pierre Longtin, Enrique Verdeguer, Guy Boreux, Monica Stein Olsen, Tsujioka Hakkaku, Lorenzo Kluzer, 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 Hafhaoui, Majid Boutaleb, Abdellaziz Taanji, Yvon Gravel, Nouzha Taanji, and Jamal Eddine Mohamed. KINGDOM OF MOROCCO COUNTRY ECONOMIC MEMORANDUM FOSTERINGHIGHER GROWTH AND EMPLOYMENT WITH PRODUCTIVE DIVERSIFICATIONAND COMPETITIVENESS TABLEOF CONTENTS ACKNOWLEDGMENTS EXECUTIVE SUMMARY ............................................................................................................................ i I. MOTIVATION ..................................................................................................................................... 1 I1. MOROCCO’S LOW GROWTH RATES INHISTORICAL PERSPECTIVE ............................. 5 I11. STYLIZED FACTS ABOUT MOROCCO’S GROWTH................................................................. 9 IV. THE BINDING CONSTRAINTS TO GROWTH INMOROCCO ............................................... 13 First Step: The Close Relationship between Export Diversification. Self Discovery. and .............. Growth............................................................................................................................................ 24 Second Step (Part A): Identifying Government Failures that Limit Productive Diversification ..... and Competitiveness ...................................................................................................................... 27 Second Step (Part B): Identifying Market Failures that Limit Productive Diversification........... 34 How Governance Issues Might Indirectly Relate to Binding Constraints ..................................... 38 V . HOW DO MOROCCO’S OBSTACLES TO THE BUSINESS ENVIRONMENT ......................... AFFECT PRODUCTIVE DIVERSIFICATION? ........................................................................... 41 VI . REDUCING ANTI-EXPORT BIAS TO FOSTER DIVERSIFICATION AND ............................. EXPORT GROWTH.......................................................................................................................... 47 VI1. LABOR RIGIDITIES AND EMPLOYMENT CREATION.......................................................... 53 VI11 . THE NEED FOR A NEW GROWTH STRATEGY ...................................................................... 59 IX. THE VISION OF A NEW PACT FOR GROWTH AND EMPLOYMENT: POLICY ................. PROPOSALS FOR PRODUCTIVE DIVERSIFICATION ........................................................... 63 REFERENCES ............................................................................................................................................. 77 FIGURES Figure 1. Volatility ofReal GDP Growth (in percent) .............................................................................. 5 Figure 2 . No Convergence Across the Strait of Gibraltar or with Turkey ................................................ 6 Figure 3 . China Caught Up with Morocco Income Per Capita in PPP 2000 Dollars ................................ 6 Figure 4 . Comparator: The World (Maddison Data) ................................................................................. 7 Figure 5 . Growth of Components ofReal Demand ................................................................................... Figure 6 . National Savings and Investment Rates (in percent of GDP) .................................................... 9 Figure 7 . Growth Diagnostic: Decision Tree on the Main Constraints to Growth.................................. 17 Figure 8 . Credit Availability is Relatively High ..................................................................................... 18 Figure 9 . Sectoral Shares in Total FDI.................................................................................................... 18 Figure 10. Morocco’s Country Risk (Basis Points) .................................................................................. 19 Figure 11. Secondary School Enrollment and Per Capita Income (2001-WDI, 2005) ............................ 20 Figure 12. Governance and Per Capita Incomes in MENA .....................................................................