Background

1. Determinants of productivity in Morocco – the role of trade?Michael GasiorekPatricia AugierGonzalo VarelaPart of a DFID funded study entitled:Analysis of the Effective Economic Impact of Tariff Dismantling (under the Euro-Med Association Agreements)

2. Background • In the long run a key determining factor of GDP, and growth of GDP, is productivity and productivity growth. • Well-established literature on relationship between trade / openness & economic growth (eg.Winters, AER, 2004). • Most tend to accept that openness leads to higher growth rates... but clearly the “environment” in which this occurs matters. • Much smaller literature on what are the mechanisms driving (these) change in aggregate productivity? • These changes in aggregate productivity will be driven by changes in productivity at the level of the firm • More recently, work has started to use firm-level data sets in order to address such questions (Griliches & Regev, Tybout, Barnard, Levinsohn & Petrin….). • Aim of this work is to capture heterogeneity at the firm level and to understand: • the sources of productivity growth across time • the sources of productivity differences across firms

3. Decomposing TFP growth • Possible sources of growth in total factor productivity: • inter-industry reallocation of resources to more productive sectors according to shifts in comparative advantage • Within industry compositional shifts • More productive firms increasing their share of the market • Entry and exit of firms • Existing firm becoming more productive: • efficiency gains from economies of scale (could be internal & external, though the focus is typically on internal) • Technical progress (ie shifts in the production function); • R&D, technological spillovers, improved quality of (imported intermediates)… • Decrease in technical efficiency (ie reductions in the distance each firm is from its production frontier). • Note the policy implications vary substantially depending on the extent to which changes in TFP are driven by each of the above.

4. Data: an overview • based on detailed firm level (FACS) survey of Moroccan industry for 1998 and 1999. • extremely detailed based on seven sectors: clothing, textiles, food processing, chemicals, plastic, leather, electrical machinery. • accounts for 53% of industrial production, 85% of exports, and 70% of manufacturing workers • Advantage of the survey is that it is extremely detailed (eg. including information at the product level, direction of exports, information on imported intermediates etc) • Disadvantage is that the data is only for two years, therefore some of the interesting questions regarding inter-sectoral and intra-sectoral compositional changes cannot really be addressed. • Time series data derived from the Annual Census of Manufacturing • has the advantage of the time series dimension, therefore can perhaps better capture the impact of changes (in explanatory variables) over time. • in principle also has data on more sectors than FACS • has the disadvantage of much less detail with regard to the possible explanatory variables

5. Morocco: policy overview • 1980’s saw beginnings of external trade reform, and this was taken further from the mid-1990’s onwards • Morocco becoming a member of WTO and liberalising MFN tariffs • Barcelona process and Association Agreement with the EU • bilateral FTAs • Other policy initiatives: privatisation, reform of labour law, exchange rate policy

6. Methodology • 2-stage methodology: • Estimate / calculate a measure of productivity at the firm level • Parametric approach ie. econometrically estimate a production function • Non-parametric aproach ie. using index numbers • (Data Envelopment Analysis) • For the time series analysis: • examine the evolution of productivity over time • regress productivity on a shorter list of explanatory variables (age, size, share of exports in output) • For the FACS survery regress that measure of productivity on a list of possible explanatory variables... • Trade barrier, and intermedate input variables • R&D and capital variables • other firm specific variables (age, FDI, ISO certification, industrial action, skill level of work force...)

7. Aggregate productivity over time

8. Productivity by sector

9. Productivity and its determinants - time series **, *, + denote significance at 1%, 5% and 10% levels respectively

10. ...by sector and size

11. Second Stage: • Trade barrier variables: Tariff barriers on exports; Non-tariff barriers on exports; average domestic tariffs • Intermediate trade variables:Share of imported intermediates; Share of imported capital;Share of imported raw materials; Duty paid on imported capital • Other trade variables:Share of production exported (calculated at the firm level);Share of production exported (calculated at the sectoral level); Preparation undertaken for trade liberalisation with the EU. • R&D variables: Does the firm invest in R&D; No of products less than 5 years old; Share of workforce in R&D • Capital variables:Age of capital less then 5 years old; Age of capital between 5 & 10 years old; Age of capital more than 10 years old;Training by suppliers (of new machinery); Training undertaken abroad; Training from manuals • Other:Share of foreign ownership; Has the firm experienced any infrastructure related difficulties in the preceding year; Is the firm multiplant?; Has the firm applied for MEDA funding;Are the firm’s products ISO certified; No. of employees

12. Productivity and its determinants? - trade

13. Productivity and its determinants? - trade

14. Productivity and its determinants? - trade

15. Productivity and its determinants? - trade

16. Productivity and its determinants? - R&D and Capital

17. Productivity and its determinants? - R&D and Capital

18. Productivity and its determinants? - R&D and Capital

19. Productivity and its determinants? - R&D and Capital

20. Productivity and its determinants? - R&D and Capital

21. Productivity and its determinants? - R&D and Capital

22. Summary • Different approaches to productivity yield highly comparable results; little evidence of returns to scale • Time series analysis indicates: • increase in productivity over time, though not in more recent years • some evidence of positive correlation between exporting and (increases in) productivity in aggregate • relationship between trade and productivity different according to the size class of the firm and the industry being considered. • More productive firms tend to: • face lower domestic tariffs, • more obstacles in export markets for their products, use newer capital, • have a larger domestic market share, • may have applied for MEDA funding, and • may have products which are ISO certifies

23. Policy Conclusions Note importance of the heterogeneity of firms: • little evidence that in aggregate firms are becoming more productive • evidence suggests high levels of turnover of firms - why? What are the constraints firms face? • exporting is associated with higher productity levels - issues of causality and underlying mechanisms; potential role of deep integration • why are exiting firms typically more producting than entrants - is this a product of the learning process, or are there structural impediments eg. access to credit • similarly need to consider carefully the negative correlation between domestic openness and productivity - cold shower of competition v structural impediments • role of informal sector