Picking winners and losers An Empirical Analysis of

Picking winners and losers An Empirical Analysis of Industrial Policy in Morocco Najib Harabi Professor of Economics University of Applied Sciences, Northwestern Switzerland

Contents • • Introduction Industrial Policy in Morocco Evaluation of Industrial Policy in Morocco Summary and Conclusions

Introduction • Two views of the role of the state in economic development • Two views of the relevance of industrial policy for development policy • Objectives of my paper

Activist Industrial Policy (1960 -82) • Incentive programs for investments in industrial sectors • Subsidized Loans for investors • Public procurement policy • Policy of “Moroccanization”

More Liberal IP (1983 -05) • • • Macroeconomic stabilizations programs Liberalization of trade Liberalization of some domestic markets Privatization of state-owned companies Policies of targeting certain sectors (tourism, textile and clothing etc. ) • Policies of targeting groups of firms (SME, Upgrading (Mise à Niveau) • Policies of targeting “national champions”

Evaluation of IP • Two possible approaches for evaluation: - Normative approach - Positive approach • Research question: what is the impact of IP on the performance of the private sector in Morocco?

Theoretical Framework Theory of optimal Firm Size: • Technical economies of scale • Pecuniary economies of scale • External economies of scale and • Dynamic economies of scale

Empirical Approach • Data • Econometric analysis - Econometric Specification - Econometric Issues • Results

Data • • World Bank Survey: 2004 Sample: 850 Firms covering all firm sizes All major economic manufacturing sectors

Econometric Specification • S (t) = S* + S (t-1) + (t). • S* (t) = c + X (t) + (t). • S (t) = c + X (t) + S (t-1) + (t), where (t) + (t).

Determinants of firm Growth • Size; age; legal form; location; innovative activity; diversification; market size; market structure; industry specific environment; state regulations and policies

Results Firm size seems to have a positive impact on firm growth. Larger firms grow faster than smaller ones. Firm age has, however, a negative impact on firm growth. Younger firms grow faster.

Results • Firm location. In comparison with firms located in large urban centers, firms in medium urban centers and other smaller centers expect less growth. In this respect geography matters.

Results • In addition to geographic location the legal form also affects the growth process of firms. Being a limited liability company, for instance, is negatively correlated with growth prospects.

Results • Innovation behavior. The ability of the firm to innovate is not significantly correlated with growth of employment. • Product diversification. A further positive source of firm’s growth is its ability to diversify its existing products and, especially markets.

Results Access or not access to some major inputs also has an impact on firm growth. Lack of access to external financial resources and to basic infrastructure, such as electricity seems to be detrimental to the growth process of Moroccan firms. Less severe impediments are lack of access to qualified labor force, industrial land telecommunications.

Results • Market structure and the competitive environment under which firms are operating affect their behavior regarding the quantity of products to be produced and pricing policy. • In our case, this market structure (measured by the number of competitors in a specific market) and by the qualitative perception of competitive pressure by firms interviewed , has a negative impact on firm’s employment growth.

Results • Market demand seems to exert an important impact on firm growth. Firms operating in the industries, such as leather & footwear, rubber & plastics, food processing, chemical industries and electrical machinery have experienced a less favorable growth environment than those in the garment (benchmark) and textile industries. Industry-specific factors, as measured here by industry dummies, do matter for the growth process of firms operating in those industries.

Results • State regulations and policies appear to have mixed effects. Effective government policies aiming at improving the quantity and quality of public goods, such a infrastructure, public transportation, security, education and health, seem to affect firm growth positively All other government policies included in our econometric analysis seem, however, to have a negative impact on firm growth. Especially, tax policy towards firms and interest rate policy seem to be detrimental to employment growth of Moroccan firms.

Policy Implications • If confirmed by further analysis, these results have important policy implications for both business leaders and policymakers in Morocco. • For business leaders, is it important to emphasize that an explicit and sound growth strategy matters. Important points of such a strategy include the choice of the right location and legal form, and the choice of markets with sufficiently strong and expanding demand. A promising way for firms to grow in Morocco is to diversify both the products or services offered and their markets (export). • For policymakers, the analysis suggests several policy areas where improvements may be needed. First, the regulatory and administrative framework has to be adjusted, to become more responsive to the needs of firms willing and able to grow. In this respect, competition policy has an important role in achieving fair play among competing firms. •

Con. • Second, policies regarding education and professional training have to be targeted to the needs of firms. • Third, regional disparities with regard to infrastructure (roads and utilities, among others), manpower, life, and work quality have to be addressed, because these disparities present major obstacles for firms seeking to grow in certain parts of the country. • On the other hand, excessive government intervention is not conducive for firm growth. • A major lesson of this case study is that they are indirect clues of the inefficacy of industrial policies in Morocco, at least measured by their impact on firm growth.