Report No. 6714-MOR

Morocco:The Impact of Liberalization onTrade and Industrial Adjustment(In Three Volumes) Volume l: Executive Summary ReportMarch 15, 1988

Europe, Middle East & North AfricaCountry Department IICountry Operatiions Division

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KINGDOM OF MOROCCO

CURRENCY EQUIVALENT

Currency Unit: Dirham (DU)

Officid Exchange Rate: Drhamu (DH) per US Dollar

1975 4.053 1981 5.1721976 4.419 1982 6.0231977 4.503 1983 7.1111978 4.167 1984 8.8111979 3.899 1985 10.0621980 3.937 1986 9.104

1987 8.359

FISCAL YEAR

January 1 - December 31

GLOSSARY OF ABBREVIATIONS

BNDE - Banque Nationale pour le Developpement Economique (NationalBank for Economic Development)

BTN a Brussels Tariff NomenclatureCAP = Common Agricultural PolicyCCCN = Customs Cooperation Council NomenclatureCGE * Computable General Equilibrium ModelCIH * Credit Industriel et Hotelier (Housing Finance)DRC - Domestic Resource CostGATT = General Agreement on Tariffs and TradeIBP Corporate Income TaxIHS * International Harmonized SystemITPA * Industrial and Trade Policy Adjustment LoanMC * Domestic Market RegimeMCIT Ministere du Commerce, de l'Industrie et du Tourisme

(Ministry of Commerce, Industry and Trade)MFA * Multifiber ArrangementMFN = Most-Favored NationNTB * Non-Tariff BarrierONT = Office National du TransportPERL = Public Enterprise Rationalization LoanPMIs = Petites et Moyennes Entreprises (Small- and Medium-Scale

Firms)QR - Quantitative RestrictionSAL = Structural Adjustment LoanSIT = Special Import TaxTA = Temporary Admission RegimeTFP 2 Total Factor ProductivityTPS = Taxe sur les Produits et les Services (Turnover Tax)VAT = Value-Added TaxVER Voluntary Export Restraint

FOR OFFIAL UE ONLY

This report was prepared by an economic mission that visited Moroccoin December 1986. The mission was composed of Messrs. John Porter (Chief ofMission), Riccardo Faini (Macro-economist), Julio N0ogus (Trade Economist),Carlos Basterra (Financial Analyst), Benott Morin (Economist), Brendan Horton(Consultant) and Mmes. Orsalia Kalantzopoulos (Industrial Economist) andAysegil Akin-Karasapan (Economist). Statistical and logistical assistancefrom the Moroccan Departments of Industry and Foreign Trade is gratefullyacknowledged.

I This document iw a raicted distibuton and may be wud by epiet only in the perfomanceof their official duties. Its contents may not owis be dihosd wtout Wodd Bank suthrraln

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TABLE OF CONTENTS

Pate No.

VOLE IEXECUT'IVESIWMI&ARY REPORT ............... 1

L EINRODUCTION **Ie4400.-o 4*4*ee..440444*****e*0444 1

IL STAAUATION,ADJUSTMENT, AND THE ICRO-SECONOMiY 4

A. Macro-economic Developments since theFinancial Crisis of 1983 4............................. 4

B. The Interaction of Stabilization and Adjustmet ....... 8Budgetary Impact on Savings and Investment Behavior . 9Internal Consistency of Macro Policies ................... * 12Budgetary Effects of Structural Measures ..... ....... 15

C. The Social Impact of Adjustment ................................. 18

11 THE EVOLUTION OF TRADE POLICY REFORM IN MOROCCO . 21

A. The Political Economy of Trade Reform in Morocco ...... 21

B. Changes in the Instruments of Trade Policy ............ 22Import Policies ............................ 23Export Policies ......... ............................ 25Accession to the GATT ................... 26

C. The Impact of Trade Policy Reform on theStructure of Incentives ...... ....................... 28

Iv. THE IbPACT OF LHJERAUZATION ON EXTERNALTRADE PERFORMIANCE . 36

A. Export Performance Under Liberalization ...............o 37Export Diversification ................... 37Exchange Rate Policy and Export Response ............ 39Market Penetration of Moroccan Exports .............. 39

B. Import Performance Under Liberalization ............... 41Global Import Trends .... ............................ 41Policy Change and Import Behavior .... ............... 43Import Performance by Economic Regime . 45

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Page No.

C. Direction of Trade ..... .................. 45The Structure of Morocco's External Markets ......... 45Effects of Foreign Trade Practices on MoroccanMarket Access ...... ............................... 46

Market Diversification: A Strategic Issue for theFuture ............a .. . . . * ...lb . ...........a...... * 48

V. THE IMPACT OF INDUSTRIAL AND TRADE POLICEFS ON THESMUCTURE AND PERFORMANCE OF INDUSTRY ............. 50

A. Structural Characteristics of the Industrial Sector ... 51The Evolution of Moroccan Manufacturing ............. 51Outward-Orientation and Patterns of Sectoral Growth . 51Industrial Concentration ............................ 55

B. Industrial Promotion Policies and Sectoral Constraints 57The Structure of Fiscal and Financial Incentives .... 57The Regulatory Environment ....................... 58Labor Mobility ...................................... 60Constraints to Industrial Performance ............... 60

C. Productivity and Sources of Industrial Growth:The Micro-economic Effects of Adjustment .............. 62International Comparisons of Productivity Growth .... 62Components of Productivity Growth ................... 64The Impact of Stabilization on Industrial Productivity 68International Competitiveness in a Dynamic Context 69

VL A FRAMEWORK FOR FURTHERING TRADE ANDINI)USTNRIAL POICY REFORM 73

A. Conclusions ... .. ... a........ 73

B. Issues for Future Policy Reform 75

C* Recomumendations . 77

D. Policy Simulations 79

VOLUNlE III

I. L OF TECICAL ANNEXFS

Annex I Cost of Capital Calculations. ............. l. 1

Annex II The Structural Deficit....................... 3Appendix A .1l................ 8

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Pae No.

Annex III The Industrial Survey........................ 9

Annex IV The External Trade Regime of Morocco&......... 11

Annex V Model of the External Sector................. 15

Annex VI The Industrial Investment Codes ............. 25

Annex VII The Financing of Industry .................... 29

Annex VIII The Labor Market............................. 31

Annex IX Energy Pricing in Morocco.................... 33

Annex X Total Factor Productivity..................... 35

Annex XI The Relationship of Capacity Utilization,Output, and TFP Growth....................... 37

Annex XII Productivity and International Competitiveness 39

:I. IaST OF STATIMSTCAL ANNEXES

Table A.II.1 Real Exchange Rate Indicesc.......... 41Table A.II.2 Average Saving Propensities......... 42Table A.II.3 Distribution of Credit to the Economy 42Table A.II.4 Evolution of Trade Tax Revenues...... 43Table A.II.5 Sectoral Employment and Wages...s.... 44

Table A.III.1 Characteristics of Tariff Bindings ofMorocco's Accession to the GATT...... 45

Table A.III.2 Number of Tariff Bindings Grantedto Different Countries***********#** 46

Table A.III.3 Quantitative Restrictions (1983-1986) 47Table A.III.4 Distribution of Trade Taxes*********. 48Table A.III.5 Average Trade Taxes by Sector........ 49Table A.III.6 Average Customs Dutiesi.............. 50Table A.III.7 Comparison of Tariff Structures...... 51Figure A.III.la Distribution of Imports by Trade Tax

Range (2 CIF Imports).o.............. 52Figure A.III.lb Distribution of Trade Taxes by Range

(2 CCCN Positions) ...... ... 53

Page No.

Table A.IV.I Value of Traditional Exports1978-1986 ............................ 54

Table A.IV.2 Value of Manufactured Exports bySector, 1978-86........... ........... 55

Table A.IV.3 Value and Structure of Imports forSelected Years....... ................ 56

Table A.IV.4 Value of Imports by Regime 1983,1985, 98 57

Table A.IV.5 Structure of Exports by Destination.. 58Table A.IV.6 Structure of Imports by Originn...... 59Table A.IV.7 EECs Preferential Imports from

Morocco, 1983........... ............. 60Table A.IV.8 UEC Import Quotas Granted to Morocco

under the MFA 61

Table A.V.1 Industrial Output by Subsector..r6*00 62Table A.V.2 Structure of Exports of Manufactures,

1977-1985 ..... .................... 63Table A.V.3 Principal Characteristics of

Industrial Firms............... ..... . 64Table A.V.4 Industry-Specific Characteristics

of Selected Exporting Sectors*....... 64Table A.V.5 Sources of Industrial Growth, 1977-85 65

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MOROCCO

THE IPACT OF LERALIZATION ON

TRADE AND INDUSTRIAL ADJU lTME

Volume k Executive Summary Report

1. The origins of Morocco's economic difficulties can be traced to thephosphate boom of the mid-1970s, which coincided with rising defenseexpenditures and an unprecedented expansion of the public investment program,signaling the end of the conservative fiscal policies of the past. The suddenreversal in the terms of trade in the late 1970t as a result of the plunge inphosphate prices and the second oil shock, prompted Morocco to resortincreasingly to external capital markets in order to maintain the higher rateof public investment. The viability and expediency of this developmentstrategy were conditioned by the abundance of foreign financing opportunitieson highly attractive terms (interest rates were negative in real terms).

2. During this period, Morocco's external debt had grown exponentiallyfrom US$1.8 billion in 1975 to U$'11.3 billion in 1983, representing 852 ofGDP and 290X of exports. The structure of Moroccan debt had changed,moreover, with 40% of outstanding liabilities owed to commercial bankscompared to nil a decade earlier and over 601 at non-concessional rates. Thedeclining productivity of public investment and the unfavorable externalenvironment, viz. continued deterioration in the terms of trade compounded bya severe drought in 1980-84 which reduced agricultural and hydroelectricproduction, served to erode debt service capacity. The unanticipated rise ininternational interest rates proved more than Morocco's balance of paymentscould endure. Bereft of foreign exchange reserves and access to externalfunds, Morocco was unable to shoulder its debt service burden - the debtservice ratio reached 522 in 1983 with interest payments alone accounting for201 of exports.

3. In 1983, it became clear that the solution to Morocco's financialdistress lay in a medium-term program of economic reform supported byconsiderable debt rescheduling. In the immediate, the Government imposedemergency, across-the-board import restrictions and effected draconiancutbacks in public expenditures. Debt service payments to official andcommercial creditors were rescheduled, initiating a process that has alreadyspanned five years and is expected to continue for some time into the future.A comprehensive set of stabilization and adjustment policies was evolved bythe Government and supported by a series of IMF standby arrangements and WorldBank sectoral adjustment loans. Restrictive fiscal and monetary policies wereemployed to contain aggregate domestic demand, while structural reforms wereinitiated to augment the supply response of the economy.

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4. The adjustment program was initially comprised of measures in thetrade and industrial sector to improve the allocative efficiency of resourceuse and make the economy more resilient to external shocks. The flexiblemanagement of the exchange rate was considered critical in order to maintainthe competitiveness of Moroccan exports and to compensate for the reduction inbarriers to external trade, thereby maintaining balance-of-paymentsviability. The relaxation of trade barriers through the dismantling ofquantitative restrictions, the lowering of tariffs, and the freeing ofdomestic price controls was expected to improve industrial productivity andraise export potential by attenuating the existing bias against exports. Therationalization of the investment codes would realign factor prices in linewith resource endowments, leading to the adoption of production techniqueswhich reflect Morocco's comparative advantage.

5. Following the release of the second and final tranche of the secondindustrial and trade policy adjustment loan (ITPA II), a Bank economic missionvisited Morocco in December 1986 to: (i) assess the reaction of the economyat the macro, sectoral, and micro levels to the program of trade andindustrial liberalization and (ii) evolve a set of policy recommendations tofurther trade reform in the context of a proposed Structural AdjustmentLoan (SAL). Although the full impact of the measures on the underlyingeconomic structures is expected to be felt only in the medium-term, thepresent analysis indicates that the adjustment strategy followed by theGovernment since 1983 is working. Changes in trade and industrial policyinstruments have led to a significant improvement in the structure ofincentives. Producers have responded favorably thus far and the scope forfurther adjustment at the firm level is considerable. The overallmacro-economic situation remains difficult, however, with too muchdisabsorption having occurred via reductions in investment, and debt servicepayments continuing to absorb a substantial share of national savings. If theprogress achieved under the liberalization program is not to be undermined,the sectoral reforms must be complemented and strengthened by an array ofmacro policies that raises the investment rate and reduces the ratio of debtservice to total savings, while reining in aggregate demand and inflation.

6. Results show that considerable progress has been achieved inliberalizing the external trade regime since 1983. Following the generalizedcontrol of imports in March 1983, quantitative restrictions have beensignificantly reduced and the prohibited list of imports has been officiallyabolished with the result that 861 of total import value is no longer subjectto licensing compared to 381 at end-1983. The maximum customs duty rate hasbeen reduced from 4002 in 1983 to 451 at present and the special import tax(SIT), an across-the-board, uniform surtax, has declined from 15% to 5% overthe same period. These measures lowered the unweighted average cumulativerate of trade taxes to 35.9% down from 58.4% and the maximum protective rateto 621 down from 466%. The dispersion of rates across the 8050 positions ofthe Moroccan tariff code was also significantly reduced. The standarddeviation decreased from 40.5 to 15.4.

7. In order to promote the expansion and diversification of exportingactivities, several important reforms were introduced since 1983 to eliminateexport barriers, reduce existing disparities between exporting and

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import-substituting activities, and simplify admininstrative procedures in thearea of external trade. For example, export licensing requirements have beenvirtually abolished, all export taxes have been repealed, and the temporaryadmission (TA) scheme, maintained even during the financial crisis of 1983,has since been expanded and made more attractive. A committee for thesimplification of foreign trade procedures was established in order to improvethe flow of information and eliminate institutional constraints pertaining tointernational trade transactions. Preferential financing arrangements forexporting activities have been broadened and the fiscal incentives embodied inthe existing Export Code extended.

8. Morocco's commitment to free trade was reaffirmed by its accession tothe GATT on June 15, 1987. The binding of 157 tariff lines, corresponding tonearly 35% of total import value, consolidates the gains achieved thus far inliberalizing the trade regime. Membership in the GATT will confer greaterstability on Moroccan trade policy, help the Government resist politicalpressures from special interest groups for higher protection, and enablepolicy makers to extract concessions from trading partners in exchange forfurther trade liberalization in Morocco.

9. Analysis of the change in the structure of incentives as a result ofliberalization-induced policy reforms reveals that a growing proportion oflocal industry is being subjected to increased competition from abroad.Nearly one-quarter of total industrial production has been completelyliberalized. According to a production-weighted index of protection, theshare of domestic manufacturing subject to QRs during the period 1983 to 1986has declined from 601 to 401 and from 451 to 151 as a function of tariff lineand import value respectively. The proportion of license requests approvedhas increased steadily, reaching 84% in 1986, and the time necessary toprocess license applications has declined significantly, indicating that thelicensing regime is being managed more flexibly.

10. Reductions in trade tax rates have led to a fall in theimport-weighted mean tariff net of wheat and oil from 29.41 to 20.71 and inthe production-weighted tariff index from 66.41 in 1983 to 38.71 in 1986.Although not calculated explicitly, effective protection has falleninferentially by at least 111 across-the-board on products which are notsubject to licensing. The compression of the tariff structure from above hasdramatically limited the potential for effective protection. In 1983,effective protection could have ranged from negative to over 15001 compared toa range of 1801 in 1986 under the same conditions.

11. Analysis of Moroccan trade and industrial performance since 1983clearly indicates that the economy is reacting positively to the moreefficient incentive structure. Buoyant export growth has sustained arelatively higher level of imports, leading to an increase in the ratio ofexternal trade flows to GDP from 42.71 in 1983 to 54.71 in 1986-87.Econometric analysis shows that the depreciation of the exchange rate (22.11in real terms since May 1983) was a determinant factor underlying the 141average annual export growth of finished manufactures during the period1983-87. This trend led, in turn, to an increase in market shares abroad.

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After stagnating at 1.52 during the period 1982-84, Moroccan manufacturingexports as a percentage of EEC imports rose to 1.9% in 1986. The strongexport performance of Moroccan manufactures, moreover, stood the economy Inbetter stead to absorb the sharp decline in external phosphate demand whichoccurred in 1985-86.

12. Judicious exchange rate management and appropriate macro policiesinitially served to contain import demand at sustainable levels following thedismantling of external trade barriers. Temporary admission imports increasedtheir share in total imports from 9.12 in 1983 to 14.22 in 1986, reflectingthe improved functioning of the TA regime and the growth in manufacturedexports. Consumption imports have risen by 17.42 in real terms since thebeginning of the liberalization program.

13. The supply-side effects of the adjustment program are manifest at themicro level. Recent evidence reveals that outward-oriented industries grew atrelatively higher rates than import-substituting firms, induced by the policychanges which have occurred since 1983. Whereas some of these industries havepreviously exported a relatively high share of production, others haveundergone a significant shift in orientation towards external markets.Analysis of export performance at both the sectoral and firm level as afunction of relative factor intensities of production techniques reveals thatindustries characterized by high export-output ratios are also the mostlabor-intensive. Typical of this category are goods produced throughsubcontracting arrangements, exports of which have risen by 822 in real termsfrom 1983 to 1985* thus increasing their share in total merchandise exportvalue from 3.4% to 6.92 between 1983 and 1985. The recent expansion oflabor-intensive exports can be attributed, in part, to the narrowing ofcertain fiscal incentives and the adoption of a more realistic interest ratepolicy. This served to attenuate, if not eliminate, the previous bias againstlabor. The realignment of factor prices in line with the prevailingconditions of supply and demand has tended to reorient investment decisionsaway from the relatively capital-intensive technologies that were advantagedin the past.

14. The analysis of changes in total factor productivity (TFP) andsources of industrial growth provides further evidence of the reform'spositive impact. Nearly all industrial subsectors exhibited higher capitaland labor productivity growth following the onset of the adjustment program.These trends were confirmed by the findings of an industrial survey carriedout by the mission which revealed increasing cost-consciousness and concernwith efficiency as a result of greater competition from abroad induced byliberalization. Many firms sought to economize on labor costs by substitutingseasonal for permanent employment, while others began to retool as a means ofimproving product quality. The realignment of the wage-rental ratio inkeeping with market forces was an important factor underlying the labor andcapital productivity gains which have taken place in Moroccan manufacturing todate.

15. Despite the considerable progress achieved in liberalizing the tradeand industrial regime, there exist constraints which may impede the adjustmentprocess in the future. At the macro level, the narrowing of the fiscaldeficit from 12.2% of GDP in 1983 to 6.01 of GDP in 1987 has been achieved, in

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large part, at the expense of public investment. Chronic budgetary imbalancesand exchange rate disequilibria are presently evident in the virtual depletionof official reserves, the buildup of external arrears, and the protracteddelays in obtaining foreign exchange. Acute foreign exchange shortages haveinduced producers to hold higher inventories of imported inputs than wouldotherwise be necessary in order to avoid disruptions in operations, obtaincostly letters of credit, face additional foreign exchange risk, and incurpenalties for late payments. Firms have also suffered from decliningcreditworthiness abroad, as well as foregone interest earnings onnon-remunerated prior import deposits introduced by the Central Bank in anattempt to control the availability of credit to the economy. The increasedoperating costs translated into a financial deterioration of materialproductivity, which constrained overall TFP growth.

16. Greater recourse to non-monetary domestic financing in order tocontain inflationary pressures has contributed to a 19.5 percentage pointincrease in real interest rates since the mid-1970s. This, along with othermacro-financial indicators, indicates an increasing danger of crowding-out.The reliance by the Treasury on forced savings in the form of domestic arrearsfrom the public enterprise and private sectors, representing 7.72 of GDP atend-1987, has caused liquidity problems for some firms and underscores theunasustainability of the budget deficit. A windfall tax on petroleum levied bythe Treasury to capture the benefit of the decline in oil prices has raisedproduction costs and eroded the competitiveness of energy-intensivemanufactures without addressing the structural weaknesses of the fiscal system.

17. The past financing strategy, which helped lower inflation from 12.5%in 1983 to 2.4% in 1987 by depleting net foreign assets and building uparrears, is no longer sustainable. An analysis of the structural fiscaldeficit reveals that additional monetary financing will be required in thefuture leading, in turn, to significantly higher rates of inflation than thoserecorded in the past. In order to alleviate these repressed inflationarypressures and halt the rise in real interest rates, the budget deficit shouldbe narrowed further4'. In view of the foreign borrowing constraint,disquilibria in the foreign exchange markets should be addressed by a flexibleexchange rate policy. This will serve to maintain the internationalcompetitiveness of Moroccan exports in the short run-' and to compensate forthe elimination of the remaining quantitative restrictions and the reductionin tariffs.

18. Although considerable progress has been achieved in reducing both thelevel and dispersion of effective protection, the present structure exhibitscertain characteristics which indicate the need for further reform. An

1/ Recommendations for improving domestic resource mobilization andincreasing public savings are adduced in Morocco: Public Finance andEconomic Growth, World Bank Mimeo, March 1986.

2/ This recommendation takes on added significance in view of the activeexchange rate policy which has been adopted by close competitors ofMorocco since 1983.

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analysis of QR and tariff coverage by end-use shows that final goods are morehighly protected by both instruments than are inputs, resulting in a cascadingstructure which reinforces rates of effective protection. For example, 67.51of all consumer goods are subject to QRs, compared to 9.51 of intermediatesand 17.51 of capital goods. Similarly, intermediates, capital goods, andconsumer items had mean tax rates of 27.91, 31.72, and 50.1X, respectively, onan unweighted basis in 1986 and 20.41, 21.21, and 26.51 when weighted byimport value.

19. The mutually reinforcing cascading of tariffs and QRs hasexacerbated, moreover, the dispersion of effective protection across sectors.An analysis of sectoral disparities reveals mining as having the lowest meantrade tax rate (19.91) in 1986, followed by agriculture (32.61) andmanufacturing (36.51). When weighted by import value, all means aresignificantly reduced with manufacturing continuing to exhibit the highestrate (21.61), followed by mining (9.21) and agriculture (3.61).

20. An international comparison of Morocco's trade tax structure withthose of inediate competitors and comparable economies underscores the needfor further simplification. Most of the tariff reforms implemented to datehave focused on the reduction of rates; however, the Moroccan tariffnomenclature remains unduly detailed, reflecting historical attempts to"fine-tune" protection on a tailor-made, firm-specific basis. This isparticularly evident in the case of such consumer goods as food, beverages,tobacco, and textiles. The intricacy of the Moroccan tariff structure seemshardly justified in view of the fact that other countries manage more complexforeign trade structures with fewer codes.

21. In order to correct these irregularities and induce greaterefficiency in the allocation of productive resources, it is recommended torationalize the existing structure of protection by eliminating the remainingquantitative restrictions over the next eighteen months and replacing them bytariffs. A generalized reform of the trade tax structure should be initiatedin order to simplify the customs nomenclature and attenuate the cascading ofrates by product end-use. The various trade taxes should be collapsed into asingle levy, namely the customs duty, even if a temporary suspension of themaximm nominal rate is warranted so as not to lose revenues. All exemptionsof customs duties should be abrogated except those granted under the temporaryadmission regime. It is recommended, moreover, that every product category atthe four-digit level be taxed at a uniform rate. While awaiting theratification of the International Harmonized System (IHS), the authoritiesshould prepare a provisional target tariff structure that is consistent withthe objective of establishing a 251 maximum level of protection. Thesereforms will serve to increase the transparency of the tariff structure,reduce dispersion among rates, limit the potential for relatively high ratesof effective protection, and help ward off pressures from special interestgroups.

22. Recourse to non-tariff barriers to trade, such as floor and referenceprices, should be eschewed, except to counter unfair trading practices fromabroad. Institutional capacity should be reinforced so as to permit theevaluation of dumping claims in a framework which is transparent,

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non-discretionary, and less subject to potential abuse. An officialindependent commission representing the national interest should beestablished in Morocco and empowered to rule on allegations of unfair tradingpractices from abroad and requests for exceptional protection. Compensatorymeasures which are transparent and comply with GATT regulations should beidentified for use only in proven cases of dumping or other practices whichcontravene international agreements. Customs valuation should be guided byconsiderations of tax fraud rather than protection. In this vein, it isrecommended that the law giving effect to the Customs Valuation Commission bepromulgated forthwith.

23. One of the major challenges of Moroccan trade strategy in the futureshould be the diversification of export markets. Continued reliance byMorocco on the EEC as its primary trading partner could prove costly for tworeasons. First, Morocco's preferential tariff treatment in the EEC may sufferas a result of the upcoming round of multilateral trade talks. Thepreferential tariff margins enjoyed by Morocco could be eroded by a generalreduction in tariff rates agreed in the context of the Uruguay round of tradenegotiations, thereby weakening the export opportunities of Moroccan productsin the future. Second, quotas on certain categories of Moroccan exports tothe EEC will not be forever negotiable upwards, particularly in view of theCommunity's recent enlargement. In contrast, the United States is arelatively unrestricted market with enormous potential for Moroccan exports.Despite the rapid expansion of its labor-intensive exports and the relativelylow import barriers applied to these products, Morocco's share of theUS market is negligible. It is therefore recommended that studies beundertaken to identify ways to diversify export markets. Greater penetrationof North American markets is clearly warranted and should constitute anintegral part of Morocco's trade strategy in the future.

24. The extensive reforms implemented since 1983 have initiated asignificant transformation of Morocco's underlying economic structure withoutstraining the social fabric. The growing importance of foreign trade andfurther diversification of the export base should, in time, improve thecountry's capacity to manage its debt and balance of payments, as well aswithstand exogenous shocks, such as the recent decline in the demand forphosphates. The positive employment effect in manufacturing which resultedfrom the reduction in the anti-labor bias offsets to some extent the fall inreal wages and should contribute to absorbing the growing labor force in thefuture. The careful consideration given to the political economy of policyreform by the Government has marshaled the requisite support of the variousconstituent groups for the objectives of the adjustment program.

25. In conclusion, the results of liberalization have been impressive,particularly in view of the relatively limited ihare of non-traditionalmanufactures in total exports which prevailed at the onset of the program.The considerable debt burden, the relatively high level of defenseexpenditures, and the inherently protracted nature of structural change ingeneral will require sustained adjustment of the economy for some time intothe future. The temptation to reverse the reforms achieved thus far in theinterest of short-term stabilization should be resisted as a facileexpedient. Such a solution will provide only momentary relief from underlying

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macro-economic disequilibria while mortgaging the economic future of thecountry from a structural point of view. Rather, structural reforms should beextended to address existing macro-economic constraints and the momentum ofliberalization should be maintained.

26. Distributing the burden of adjustment in an equitable fashion bothdomestically and vis-a-vis external creditors is a final consideration whichwill condition the sustainability and outcome of Morocco's economic program.Expanding the scope of the liberalization program to include sectors such asagriculture, mining, transportation and banking will alleviate concerns amongindustrialists and ministry officials alike that industry is bearing the bruntof adjustment. The rate of current account adjustment mandated by Morocco'sdebt service obligations in the absence of further relief may be too rapid topermit the orderly reallocation of resources from contracting to expandingactivities which conatitutes the basis of structural change. Financing fornew investment and working capital is necessary, moreover, to further thestructural transformation of the economy, particularly in exporting sectorswhere capacity constraints are increasingly being reached. The politicalacceptability of continued adjustment and the improvement of Morocco'screditworthiness will depend on the future rate of economic growth, andtherefore, on the availability of external funds to help finance productiveinvestment. In view of these considerations and the considerable progressachieved to date, Morocco's adjustment efforts merit the full support of theentire international financial community.

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