An Elusive Target: Inclusive Economic Growth in the Maghreb

 Some of the governments in the Maghreb are facing a dilemma: how do they balance the demands from their citizens for more jobs, services, transparency, and training, when they don’t have the budgets to address short term needs without mortgaging their futures. They are caught in a bind; on the one hand, economic growth has stagnated due to decreased trade and investment with their major partners in Europe. This leads to contracting markets, decreasing FDI, and fiscal policies directed at cutting costs.

On the other hand, governments, energy and non-energy producers alike, are under pressure to generate economic expansion that either stimulates growth through exports or benefits from increased external monies from tourism and remittances. Governments from Mauritania to Libya are struggling to implement policies that both build stronger, more transparent and robust economies, while providing at least some relief to citizens with high expectations for jobs and services.

On June 13, The Center for Strategic and International Studies (CSIS) hosted, “Building Stability through Inclusive Economic Growth in the Maghreb,” which brought together experts and a senior US government official to offer their insights on the prospects for development that will benefit the broadest range of stakeholders. This notion of “inclusive economic growth” is the latest buzzword for describing the new social contracts that are emerging, albeit with some difficulty, between government and its people.

My takeaways from the presentations are that we have both learned a lot and understand a little, and that is especially true for the new governments struggling to meet rising expectations that are rapidly becoming demands. While, in hindsight, we saw everything coming, the dilemma for those countries experiencing the greatest change, i.e., Tunisia and Libya, is the lack of certain assumptions about how to proceed.

The conference focused on “political-economic factors shaping economic growth strategies,” which basically means “what do governments want to do and what tools do they have to make it happen,” and the proposition of greater regional trade and investment as an effective option for growth.

While there was agreement on the long term need for jobs, reducing wealth disparity, reforming business regulations and the financial sector, and better integration with the global economy, it is the short-terms fixes that are generating concerns. Mohsin Khan of the Atlantic Council called them a “populist economic model” that promotes government employment programs, food and fuel subsidies, cash transfers, increases in direct taxes, expansionary low interest rates, and other immediate remedies.

The obvious consequences of these actions are that governments are increasing their debt in the short and medium term without a clear formula for how to pay for these expenses down the road. The impact is broadly felt across the region’s economies in terms of decreased value of the local currency, higher inflation offset by government subsidies for basic goods, budget deficits, and deferred reforms.

Over the longer term, Maghreb countries need to reduce the role of state owned enterprises, build friendlier and more transparent business environment, strengthen robust financial sectors, and figure out how to operationalize “inclusive growth.” Conference participants did not have any magic bullets as to how to balance the short term consequences with long term imperatives.

Yet there is a case to be made for greater regional trade and investment as a vehicle for growth. The often-quoted statistics about the low level of intra-regional trade make it obvious that any real growth will be beneficial. The ground-breaking Peterson Institute study in late 2008, the IMF series on the Maghreb private sector, and the latest World Bank study on the growth potential of regional integration, all point to the benefits of greater cooperation. In his remarks, Geoff Porter concluded that more economic integration is inevitable, that businesses across the region are optimistic about cooperating for the future, and that regional political obstacles are fading in importance for the private sector.

Given the still transitory nature of most of the Maghrebi governments, Morocco and Mauritania being the only exceptions, another expert source underscored how “much has changed and has not changed,” citing concerns that a populist economic model may impede the needed reforms to spur domestic investment and hopes that subsidies over time would lead to a new, more targeted social safety net strategy for each country.

The presentations mirrored the reality on the ground…no startling breakthroughs in how to satisfy citizens weary of politicians’ promises and impatient with policies that seem to benefit only those already in power. Most of the panelists were complimentary to Morocco for its stable transition under a new constitution, but its new government faces the same demands as the others.

Conflicting perceptions of what needs to be done and what can be done by governments and the private sector do not make it clear how the benefits of the short term solutions will play out over time. Since, with the advent of the Arab uprisings, it is clear that economic and political reforms are two sides of the same coin, the path forward is neither obvious nor readily accessible for most decision-makers who must craft effective solutions that do more than buy time.

Morocco Launches Initiatives to Meet Economic Challenges

Morocco’s new government, King Mohammed VI, and the country’s private sector—with a significant assist from the international finance community—are focused on generating economic growth and job creation. While it certainly faces great challenges, Morocco is building from a much more stable and secure political and social base than its neighbors in the region. Its economic efforts have notched a number of business wins and undertaken key initiatives that hold promise as positive signposts for the future.

In this third installment of the MATIC (Moroccan American Trade & Investment Center) series on Morocco’s economy, I take a look at short and medium-term programs that target economic and job growth, and challenges from the declining European economy, drought, and the need to aggressively support new business development, that require more long-terms remedies.

According to the African Economic Outlook, Morocco is the most consistent non-energy producing economy in North Africa.  “In spite of the uncertainties raised by the Arab Spring, Morocco showed resilient growth in 2011, a trend expected to continue in 2012 and 2013 thanks in particular to robust domestic demand and steady progress in agricultural and non-agricultural production.” In addition to budget reforms, the government is keen to enhance the role of small and medium-sized enterprises (SMEs).

“Morocco’s SMEs have been the target of a broad set of initiatives in recent years by a variety of public and private institutions to help improve SME access to funding and capacity building. The access to funding by banks is still limited because of the security required…they are a major engine of the economy and currently account for around 93% of all registered businesses, 46% of employment, and 38% of GDP. Their overall contribution in terms of added value to the economy represents only 20%, due mainly to lack of financing and bureaucratic hurdles.” The article in North Africa United goes on to mention that:

Following a recent conference in Casablanca, the European Bank for Reconstruction and Development (EBRD) announced a plan to establish a new lending initiative, via local lenders, to improve access to credit for smaller firms by July…The bank has also announced it plans on providing venture capital to SMEs as a way of boosting financing, while at the same time providing advice, and improving back office functions.

As reported previously, the PNB NAPEO conference in Marrakesh in January stressed the importance of entrepreneurship in the region, targeting emerging and growing businesses are a prime vehicle for job and wealth creation. A range of programs emerging in Morocco matches aspiring entrepreneurs with business professions. Also, the US government has announced a $4 million program to assist young entrepreneurs in the Maghreb to obtain financing for their projects, while the Moroccan government has two programs managed by the National Agency for SME Promotion, (ANPME )— Moussanada and Imtiaz that specifically support SMEs through financing and advisory services. A detailed study of these initiatives and results has been published by the Oxford Business Group.

Multilateral agencies are also doing their part. A new World Bank project will help increase employment in Morocco by matching vocational skills and higher education systems with the needs of the labor market. A second project will strengthen the justice sector to deliver efficient and transparent services to citizens and businesses. The $100 million First Skills and Employment Development Policy Loan (DPL) and the $15.8 million Justice Sector Reform Investment loan were approved in May by the World Bank’s Board of Directors.

Social development programs are also being emphasized in the country’s growth strategies as both education and health care are essential for an effective workforce. King Mohammed VI recently inaugurated RAMED, a large-scale projects aimed at improving access to health care. It is based on the principles of social aid and nationwide solidarity for the benefit of disadvantaged people who are not eligible for mandatory health insurance, according to the Minister of Health El Hossein El Ouardi. He noted that this public system enables the beneficiaries to have access to health care in public hospitals and state-owned health services institutions. The government is also looking at “best practices” from Latin America and SE Asia regarding social safety needs serving the most disadvantaged. Spending in the public sector – up 25 percent from 2011 levels – has been allocated into funds for social programs, education, health, housing, and industrial relations, putting additional pressures on the budget.

Of the many challenges facing Morocco today, most pressing in the mind of the average Moroccan, is the gap between labor skills, available jobs, and efforts to restructure the educational system. According to government statistics, unemployment nationwide is conservatively estimated at 9 percent, with at least 30 percent unemployment among youth. To obtain some quick results in lowering unemployment, the government has generated thousands of public sector jobs. This projected increase by 40 percent of public sector jobs, “mostly in home affairs and education,” is accompanied by an investment of another 93.5 billion dirhams in public wages.

Subsidy reforms is the forefront of Morocco’s legislative agenda, since, as some argue, the program should more directly target the poor rather than all citizens since it is the wealthiest who are likely to consume the most goods that receive subsidies.

Will these initiatives contribute to improving the Moroccan economy? To be sure, the country is faced with a number of problems: a lackluster harvest and a slowing of foreign direct investment among them. Weakness in demand, particularly in Europe, where the country has many financial ties –reinforces the need to look for new international customers and investors. Economic realities have forced lawmakers to expand the national debt in order to pay for their initiatives.

It is the combination of government commitment, the King’s leadership, the heightened role of the private sector, and the support of the international community that holds the most promise for stable and continuous economic growth. The task of building a stronger economy by mobilizing the entrepreneurial spirit of Moroccans in tandem with other positive forces in the regional and globally has begun in earnest.

Derek Gildea and Garth Neuffer contributed to this article, which was originally published on Morocco On The Move.