UNLOCKING THE POTENTIAL OF THE MOROCCAN PRIVATE SECTOR An analysis of firm dynamics and productivity EXECUTIVE SUMMARY Context and Objectives dominated by micro and small firms, a small share of large companies, and a large informal sector. Du to A more dynamic private sector with enhanced pro- lack (until recently) of available microdata, the under- ductivity is essential if Morocco is to realize its devel- lying dynamics of firms, as well as their productivity opment ambitions. Before the COVID-19 pandemic, and performance remain poorly understood. A better Morocco had enjoyed two decades of economic understanding of firms’ dynamics is critical to inform growth, resulting in notable socioeconomic advance- the design of public policies to accelerate economic ments. However, growth has been decelerating since growth and job creation in Morocco. the 2000s, driven by a productivity slowdown. As a This note exploits the dataset compiled by result, the labor market has struggled to generate the Observatory of Very Small, Small, and Medium enough jobs for the expanding workforce, causing a Enterprises (OMTPME), an institution created by the drop in labor force participation rates. Central Bank and its partners in 2016. OMTPME col- The 2021 New Development Model (NDM) lects and harmonizes data from key public admin- identified solutions to address these challenges and istrative sources, based on firms’ identifiers and propel Morocco toward more ambitious objectives, periodic declarations: the tax administration (Direction including doubling per capita income and significantly Générale des Impôts (Tax Administration [DGI]), the increasing the proportion of formal employment by social security fund (Caisse Nationale de Sécurité 2035. The NDM recognizes that a more dynamic pri- Sociale [CNSS]), the central bank (Bank Al Maghrib vate sector will have a pivotal role in achieving these [BAM)], the Ministry of Industry and Commerce targets. (Ministère de l'Industrie et du Commerce [MIC]), Morocco has implemented a vast array of pol- the Moroccan Office for Industrial and Commercial icy interventions to support private sector–led growth Property (Office Marocain de la Proprieté Industrielle and job creation. Reforms have sought to improve the et Commericiale [OMPIC]), and the national agency business environment, by making it easier to create for the support of SMEs (Maroc PME). The OMTPME a business, obtain permits, digitalize business pro- dataset covers a panel of roughly 370,000 regis- cedures, and obtain financing. These policies led to tered corporate firms, with data from 2012 to 2022. considerable results, fostering the growth of new busi- This policy note is the output of the first collabora- nesses and encouraging their formalization. However, tion between the world Bank and the OMTPME. The the structure of the Moroccan private sector remains analysis focuses on the period from 2016 to 2019, Executive Summary ix preceding the COVID-19 pandemic and the subse- to be driven primarily by the dynamism of HGFs, some- quent policies introduced to mitigate its impact, which times referred to as gazelles (Goswani, Medvedev, and may have produced effects that are challenging to Olafsen 2019). interpret for the years 2020-2022. The productivity performance of the formal pri- vate sector has been lackluster. The firm-level data used Key Findings in this note suggest that the labor productivity of the Moroccan corporate sector has lagged that of the over- Morocco’s firm density has increased significantly in all economy. This finding may be partly explained by the recent years, thanks to a high entry rate and dynamism authorities´ success in gradually formalizing firms that in business creation combined with an unusually low previously operated in the informal sector. While formal- de jure exit rate. The recent evolution of formal firms’ ization is a positive development, these newly formalized firms may have lower productivity levels than pre-exist- density compares favorably with most of its peers, ing formal firms. As a result, their transition to formal although it is still far from advanced economies. The status could initially reduce the average productivity of survival rate after five years is estimated at 53 percent the formal sector. However, this trend also evidences and the official exit rate by deregistration is only 1.2 per- that more is needed to sustain productivity gains in the cent. However, the de facto exit rate, which captures Moroccan private sector as part of the country’s eco- firms that do not officially close but remain inactive for nomic growth strategy. at least two years, is also unusually high, at 7.3 percent. Between 2016 and 2019, Morocco’s nonagricul- This finding suggests that Moroccan entrepreneurs do tural formal private sector gradually became more ser- not face excessive constraints to administratively start a vices oriented. This trend increased labor productivity. new business but are reluctant to formally close them, Formal employment in the nonagricultural private sec- opting instead for leaving firms dormant. This could be tor gradually reallocated toward retail, education, and partly due to inefficient and costly bankruptcy and liqui- other services. Although fully assessing the contribution dation procedures. of structural transformation within the formal nonagricul- Most formal firms in Morocco are small and grow tural sector would require an analysis with a longer time slowly with age. Firms with 10 or fewer employees con- horizon, results suggest that the sectoral reallocation of tribute to nearly 86 percent of employment in Morocco, employment made a positive contribution to the produc- compared with 35 percent on average in countries tivity growth of the formal nonagricultural sector. in the Organisation for Economic Co-operation and Labor tended to shift toward less productive Development (OECD). Although firms do grow with age, firms in the years leading to the COVID-19 pandemic, the average size of all firms that have been in business a sign of allocative inefficiencies at the firm level.1 for no more than 10 years is below 10 employees, and Between 2016 and 2019, the productivity of the aver- the average size of mature firms (firms that have been age Moroccan formal firms increased. However, the in business more than 10 years) is only 26 employees. positive impact of this upgrading on the productive effi- The average size of firms has tended to decrease, which ciency of the country’s businesses was partially offset could be partly explained by the increased formalization by the fact that less productive firms expanded faster (in of microenterprises, resulting from the implementation terms of employment) than more productive firms, rais- of public policies aimed at easing creation procedures ing questions about allocative efficiency. This suggests and improving the business environment. that Moroccan markets do not allow more productive The density of high-growth firms (HGFs)— is very low in Morocco, contributing to insufficient job cre- ation and the weak emergence of new large compa- Firms’ dynamics following the pandemic have been 1 heavily influenced by the extraordinary exogenous nies. As a result, incumbents are rarely challenged by forces at play since 2020, calling for caution in the inter- new entrants. High density of HGFs is generally indica- pretation of some of the changing trends observed from tive of private sector dynamism and innovation. Recent then onward. For this reason, much of the analysis pre- literature shows that economies’ net job creation tends sented in this note focuses on the 2016–19 period. x MOROCCO — UNLOCKING THE POTENTIAL OF THE MOROCCAN PRIVATE SECTOR firms to access production factors efficiently, which trend constitutes a disincentive to investment in could be due to shortcomings in the country’s compet- innovation and competitiveness enhancement, itive environment. which could hinder growth at the macro level. The allocation of factors appears to be more inef- Policies could help ensure that more productive ficient in industry than in the services sector. The firm- firms, including smaller and younger business level dataset suggests that labor productivity declined have access to the resources they need to scale in the industrial sector, driven by a decline in allocative up their production. They could also ensure that efficiency, coupled by an insufficient level of upgrad- firm’s productivity is rewarded, through an effi- ing, which could be partly explained by a decline in the cient competitive environment. average quality of installed physical capital or by insuf- • Evaluate indirect incentives to firms to remain ficient innovation and adoption of new technologies. By small. International experiences show that size- contrast, in the services sector, the reallocation of labor based measures can incentivize businesses toward more productive firms made a modest but posi- to remain small or keep part of their activities tive contribution to labor productivity growth. informal. A review of size-based incentives and The life-cycle dynamics of Moroccan firms point their impacts could shed light on such effects to the presence of significant market distortions. Older in Morocco, especially related to tax regimes Moroccan firms are on average larger even if their pro- or active labor policies and business support. ductivity is lower than that of younger firms. Pointing • Encourage the exit of inactive firms. Too many in the same direction, larger firms are less productive firms stop operating without formally closing. than their smaller counterparts. Similarly, some indica- Public policies should therefore ensure that the tors suggest that more productive firms are too small high rate of inactivity does not create inefficien- relative to their optimal size. This is another sign of cies in the economic environment by ensuring allocative inefficiencies, which are likely to constrain that bankruptcy procedures are efficient and the development potential of the Moroccan formal busi- that the legal and administrative procedures to ness sector and the growth prospects of the economy. close businesses do not impose an excessive Despite the comparatively large size of the burden on entrepreneurs. Moroccan credit market, lack of access to credit by • Morocco has focused on manufacturing-led many firms may be contributing to the misallocation development since the 2000s, with the emer- problem. Credit is concentrated among larger and gence of sectors such as automobiles and older firms, penalizing new entrants and potential mar- aeronautics. Data show that aggregate produc- ket challengers. tivity growth is primarily driven by the services sector and that more productive services firms Policy implications and Next steps grow more rapidly than less productive ones, possibly suggesting that this sector in Morocco Over the long term, productivity is the key determinant is marked with less market distortions and of countries´ income level. Implementation of policies greater allocative efficiency. Alongside indus- and regulations should therefore be a priority to foster trial policies, Morocco could further leverage the economic growth and job creation : development the services sector to deliver pro- The note highlights several important areas ductivity growth and jobs by leveraging technol- for potential interventions to help reach the country’s ogy and connectivity. growth objectives: Additional analysis will need to be conducted • Provide conditions for all firms to grow and for the to inform public policies. The OMTPME database pro- most productive to thrive. Productive Moroccan vides an invaluable tool to address key policy-relevant firms, most of which are small or medium-size questions on how to overcome identified constraints. enterprises (SMEs), struggle to grow at their During the second phase of their joint analytical full potential and to challenge incumbents. This engagement, the World Bank and the OMTPME Executive Summary xi team intend to tackle the following research ques- whether incentives geared toward larger firms tions, leveraging the ongoing expansion of variables favor incumbents at the expense of the renewal made accessible to OMTPME by partner administra- of the economic fabric with new, more produc- tion departments: tive entrants. • Sharpening the understanding of the charac- • Analyzing the market distortions that are likely teristics of firms that manage to grow, includ- to have reduced allocative efficiency, benefiting ing size, industry sector, market dynamics, and older and larger firms at the expense of newer others. By identifying common patterns and more productive ones. They may include unique attributes that contribute to firms’ sus- shortcomings in the competition framework, tained growth, this analysis will provide insights obstacles to the entry and exit of firms, and that can help policy makers revitalize a critical constrained access to key inputs. A more segment of the corporate sector. granular sectoral analysis combined with a • Collecting more detailed information on the type systematic review of product market regulations and quality of physical capital used by Moroccan could help shed light on these distortions. businesses, to understand why the increase in • Evaluating whether the structure of the corporate physical capital per employed worker has not income tax, tax incentives, and other programs translated into more robust productivity growth. of public support for firms have contributed to This analysis could include a comparative anal- the productivity performance and dynamics of ysis of productivity of firms with domestic or for- Moroccan businesses. This analysis will try to eign capital. determine whether measures are in place that • Reviewing the factors that explain the asymmet- incentivize businesses to remain small and ric access to finance for Moroccan firms. xii MOROCCO — UNLOCKING THE POTENTIAL OF THE MOROCCAN PRIVATE SECTOR