Morocco: Growth, Employment, and Policies to Avoid the Middle-Income Trap

Since the early 1990s, Morocco has pursued a growth model based essentially on the sustained expansion of domestic demand, particularly in public investment. In an environment characterized by prudent macroeconomic policies and an improved business climate, this model has served the country well; between 1990 and 2013, for instance, real growth rates in gross domestic product (GDP) averaged 3.9 percent annually, life expectancy increased, and (despite persistent unemployment across all categories of labor) poverty fell significantly. However, it has become increasingly clear that this model has reached its limits. Fundamental changes in the international environment in the past two decades (with respect most notably to the international division of labor and the global distribution of production through value chains) have meant that it is imperative for the government and stakeholders in Morocco to think of a new approach to promote growth and employment in the medium and long term and achieve high-income status. Without a basic change in direction, it is possible that Morocco, like many other countries, may fall into and become stuck in a middle-income trap, from which it may be difficult to escape. A new growth model is thus needed which could focus on the following pillars: (i) improve the quality and adequacy of human capital to promote productivity and reduce the skills mismatch; (ii) reform the labor market to reduce production costs and facilitate the adjustment of supply and demand; (iii) enable the country to capitalize more effectively on the opportunities created by the new international division of labor; (iv) promote innovation and economic diversification both horizontal and vertical, partly through the adoption of new technologies by firms and investment in key sectors; (v) improve the business environment to help the country evolve toward the world technology frontier and compete in international markets for goods and services that are intensive in technology and skilled labor; (vi) promote women’s return to the labor force and implement policies that can raise women’s productivity and enhance their contribution to economic growth; (vii) encourage geographical trade diversification; and (viii) reconsider the role that the state should play in facilitating this transition, particularly through investment incentives for private agents, public services that would increase private investment and the productivity of production inputs in strategic sectors, such as agriculture, manufacturing, phosphates, and renewable energy, and support for a regional integration strategy. The quantification of the proposed reform agenda, combined with an ambitious governance reform program, which would translate into increased public investment efficiency and the implementation of some core policies aimed at reducing gender inequality, could enable Morocco to accelerate annual growth by up to 3 percentage points of growth relative to a baseline scenario of 4 percent. The country could thus enjoy growth rates in the range of 6–7 percent, which would enable it to reach high-income status and create quality jobs within the next two decades.