Identifier
Created
Classification
Origin
06RABAT386
2006-03-02 11:28:00
CONFIDENTIAL
Embassy Rabat
Cable title:  

GROWTH CONSTRAINTS -- APPLYING RODRIK'S MODEL TO

Tags:  ECON EFIN EAID MO 
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FM AMEMBASSY RABAT
TO RUEHC/SECSTATE WASHDC 2961
INFO RUEHAS/AMEMBASSY ALGIERS 3764
RUEHEG/AMEMBASSY CAIRO 1629
RUEHNK/AMEMBASSY NOUAKCHOTT 3003
RUEHTU/AMEMBASSY TUNIS 8650
RUEHCL/AMCONSUL CASABLANCA 1327
RUEATRS/DEPTTREAS WASHDC
C O N F I D E N T I A L RABAT 000386 

SIPDIS

SIPDIS

STATE FOR NEA/MAG AND NEA/OFI
STATE ALSO FOR EB/IFD
TREASURY FOR OASIA - D. PETERS
USAID FOR ANE JENNIFER RAGLAND

E.O. 12958: DECL: 03/01/2011
TAGS: ECON EFIN EAID MO
SUBJECT: GROWTH CONSTRAINTS -- APPLYING RODRIK'S MODEL TO
MOROCCO


Classified By: Economic Counselor Michael Koplovsky for Reasons 1.4 (b)
and (d)

C O N F I D E N T I A L RABAT 000386

SIPDIS

SIPDIS

STATE FOR NEA/MAG AND NEA/OFI
STATE ALSO FOR EB/IFD
TREASURY FOR OASIA - D. PETERS
USAID FOR ANE JENNIFER RAGLAND

E.O. 12958: DECL: 03/01/2011
TAGS: ECON EFIN EAID MO
SUBJECT: GROWTH CONSTRAINTS -- APPLYING RODRIK'S MODEL TO
MOROCCO


Classified By: Economic Counselor Michael Koplovsky for Reasons 1.4 (b)
and (d)


1. (C) Summary and introduction: When judged against
traditional "Washington Consensus" criteria (e.g. fiscal
discipline, liberalization, privatization, and openness to
investment) Morocco receives consistently high grades from
international financial institutions and credit rating
agencies. In its annual Article IV assessment, the IMF lauds
Morocco for its macroeconomic stability and prudence. Yet
dependable economic growth eludes the kingdom. Renowned
Harvard Economist Dani Rodrik posits an alternative paradigm
for explaining constraints to growth in developing countries.
Using Rodrik,s criteria, Morocco's failure to spark
sustained high level growth can be attributed to inadequate
levels of private investment and entrepreneurship. Low
levels of private investment, especially in the small and
medium enterprises (SME) sector, may be due to scarcity of
investible funds, exorbitant cost of capital, and/or
insufficient social returns on capital (or the fact that
investors cannot appropriate these returns.) While Moroccans
pride themselves on centuries of experience as traders,
entrepreneurialism (characterized by innovation and
risk-taking) is not ingrained in the country's hierarchical
and somewhat fatalist culture. Using Rodrik's model, the
failure of investment to flow and of entrepreneurialism to
flourish in Morocco, can be traced to two major factors 1)
microeconomic risk rooted in poor property rights,
corruption, and high taxation; and 2) low factor productivity
arising from low levels of entrepreneurial rents,
insufficient research and development, a lack of
&self-discovery8 ) i.e. innovation. Two other factors --
rigid labor markets and poor human capital and too little
bank competition leading to high interest rate spreads
between deposits and loans ) also characterize the Moroccan
experience. End summary and introduction.


2. (U) Morocco has followed the Washington Consensus

prescription for many years. As a result, for more than a
decade, Morocco has achieved macroeconomic stability by most
yardsticks. Inflation has remained in low single digits for
several years, and below two percent for the last four.
Although there is a visible trade deficit, thanks to
remittances, tourism, and investment, Morocco's current
account registers surpluses. Consistent Balance of Payments
surpluses maintain high foreign reserves (currently equal to
about one year's imports). Morocco's official debt to GDP
ratio stands at only 77 percent and continues to decline, its
external debt is just 26 percent of GDP. While the economy
is slowly diversifying away from its overdependence on the
volatile agricultural sector, this sector, accounting for 40
percent of all employment and 15 percent of GDP, is directly
dependent on unreliable rainfall. Morocco has signed free
trade agreements with the United States and Turkey, and with
Arab and Mediterranean partners. Under an EU Association
Agreement, it has an evolving free trade relationship with
its largest trading partner (over 80 percent of bilateral
trade). Morocco boasts world class intellectual property
rights protection and has made efforts to encourage and
support foreign direct investment in key sectors.
Liberalization of capital controls and exchange rates is
underway, but at a slow pace. Privatization continues apace
) the national telecommunications monopoly and the tobacco
company have been sold, the shipping line is next on the
block. Morocco has even pursued many "expanded" Washington
Consensus criteria, including increased central bank
independence, adherence to WTO rules and to international
financial codes and standards (including Basel II),social
safety nets, and poverty reduction programs.


3. (C) And yet, sustained, high levels of GDP growth elude
the kingdom. In the past five years, Morocco's GDP has only
had one year of six percent growth. Less volatile
non-agricultural GDP growth figures are consistently below
four percent. Morocco is unable to sustain economic growth
levels sufficient to create enough jobs or to reduce poverty.
World Bank economists estimate that sustained growth of at
least six percent is needed to create jobs for the growing
ranks of 18-25 year olds; currently about 180 thousand new
workers per year enter the labor market. The expanding base
of Morocco's population pyramid indicates this problem will

endure for at least another decade. Unemployment (officially
around 11 percent, but up to double this level in urban areas
and among young university graduates) remains a prime
concern. Local economists, donor representatives and
international development institution officials say that
"corruption," inefficient and inept governance and structural
obstacles are to blame. Moroccan government officials
sometimes blame external shocks like high fuel prices
(Morocco imports all its fossil fuel),investment flows, or
terrorism's effect on tourism. Rodrik's paradigm offers a
new way of explaining Morocco's predicament.


4. (C) Central to Rodrik's argument is his premise that the
single most important symptom of low growth is inadequate
levels of private investment and entrepreneurship. In
countries where returns on investment and/or entrepreneurial
activities are insufficient to attract economic activity (or
are unable to be captured),economic development and reform
programs, development aid, and investment promotion are
doomed to fail at the goal of promoting economic growth.
Rodrik notes that growth has been achieved absent reforms and
countries that reform do not always grow. In Morocco's case,
it can be argued that private investors are unable to
appropriate the social and economic returns on their
investments due mainly to high taxation (defined broadly to
include not only government fees and duties, but also the
inability to enforce contracts or property rights,
institutional weaknesses, and corruption).


5. (C) High taxation, corruption, and weakly enforced
property rights make up the microeconomic "private
approbability" (i.e. the ability of firms to realize and
internalize profits) problem in Morocco. With their highest
marginal rate at around 40 percent, Moroccan personal income
and corporate taxes are a brake on economic activity. A
burdensome system of taxes and fees suffocates the minority
of small businesses that do not choose the path of tax
evasion. Widespread tax avoidance necessitates the
maintenance of high rates for those who do pay. Low-level
corruption is endemic to Morocco, but observers agree that
petty bribes, nepotism, tax evasion, and informal networks do
not add a burdensome cost to most significant investments or
large-scale economic activities. They can and do, however
stifle entrepreneurialism and small investments.
Expatriates, including NGO executives and Peace Corps
Volunteers, report regular small bribes to traffic police and
local municipal administrators, but large foreign investors
rarely complain of corruption in large government
procurement, investment policies, or treatment by the
judicial system. Property rights systems, particularly for
land titles, are opaque and unenforceable, according to many
foreign operators. Only with the recent entry into force of
the U.S.-Morocco bilateral FTA have intellectual property
rights been strengthened to international standards.
Enforcement remains weak. Anyone who walks through a
Moroccan market will find pirated and counterfeit goods and
widespread trademark infringement.


6. (C) Due to its risk-averse, fatalist culture and a
top-down hierarchical system of governance (in both the
private and public sectors),the level of entrepreneurialism
in Morocco is low. Under past regimes, risk-taking and
creative innovation could be punished severely. An education
system inherited from the French encourages rote memorization
of correct answers over creative problem solving and research
skills. These factors combine to make Moroccans less
innovative. While Moroccans welcome and regularly utilize
new discoveries from abroad, one sees little indigenous
research and development and hears of few new groundbreaking
discoveries in Morocco. The entrepreneurial spirit is
missing. Even if entrepreneurial culture existed, the
economic policy deck is stacked against the returns to small
and medium businesses, which reportedly account for 90
percent of enterprises and employ between three and four
million Moroccans. High taxation, low level corruption,
informal sector competition, and the disdain of the cosseted
establishment conspire to undermine and de-motivate energetic
entrepreneurs in Morocco.


7. (SBU) Two other less prominent, but problematic
obstacles to private investment and entrepreneurship are poor

local finance due to insufficient competition in the banking
sector and a rigid labor market characterized by poor human
capital. The protected banking sector is sheltered and
inefficient. It does not allow new entrants despite being
unwilling or unable to offer many products and services
available in developed countries. Unsecured small business
loans or mortgages to relatively unknown clients are rare.
Banks are able to invest deposited funds in government
securities or in large, well-known corporations by keeping
their interest rate spreads (loans versus deposits) at
profitably comfortable levels, ranging from four up to nine
percent. Moroccan workers are typically unskilled for modern
technological work. The ranks of university graduates with a
liberal arts background boast many prepared to take on
managerial and bureaucratic positions, but include few
engineers or scientists. Although it has recently improved,
Morocco's European model labor laws include requirements
(e.g. high severance costs, strict and costly health and
safety requirements, and minimum wages) that make the labor
market quite rigid, and deter small enterprises from hiring
new employees. Morocco's labor rules especially deter growth
beyond 10 employees (when employers must adhere to additional
rules). Donor experts continuously point to this as a major
growth constraint.


8. (SBU) Comment: The policy prescriptions of applying
Rodrik's model to Morocco are clear. What is needed to
create the proper climate for economic development, growth
and job creation are more transparent and more rigorously
enforced property rights, stronger anti-corruption measures
(including efforts to absorb the large informal economy) and
tax reduction and reform. Overcoming ingrained cultural
obstacles to entrepreneurialism may be more difficult, but
Moroccan officials and donor partners could help promote
research and development and entrepreneurialism through
training and exchanges (as the Middle East Partnership
Initiative has already begun doing). The Moroccan government
has already begun reforming its rigid labor regime and it
recognizes the need to invest in 21st century educational
systems and methods to bolster its flagging stock of human
capital. USAID, the World Bank, and other donors are funding
modern vocational training and basic education programs to
this end. Financial sector liberalization is underway. Two
important sector reform laws have already been passed by
parliament. The U.S.-Morocco FTA will, in theory, open
banking and finance to international competition, expanding
options for credit-seekers and squeezing commercial banks'
margins.


9. (SBU) Comment (cont): However, observers should adopt
these conclusions in the context of other measures of
economic liberalization and reform. Just as Morocco's
fulfillment of Washington consensus criteria was insufficient
to ensure vigorous economic growth, addressing Morocco's
shortcomings according to this analysis may not result in job
creating growth and prosperity. This model provides only
another way of diagnosing a frustratingly durable phenomenon
of slow Moroccan growth.



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Riley