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Sustainable pathways to strengthen Morocco’s private sector resilience

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Authors: Jesko Hentschel and Xavier Reille

Over the past few years, Morocco has made significant strides in improving its overall business environment. Private sector development, as a major driver for growth and job creation, topped the government’s priorities. The National Committee for the Business Environment (CNEA) was set up to roll out reforms to improve the business climate, in coordination with private sector players. Important reforms and initiatives to spur private sector growth have subsequently taken place to improve competition, reduce red-tape, and boost manufacturing ecosystems.

But today, Morocco, like many other countries across the globe, sees the momentum of its business environment reform stymied by the Covid-19 outbreak. From large firms to the smallest businesses, Morocco’s enterprise ecosystem is starting to feel the effect of the global and domestic downturn.

At the World Bank Group, the Country Enterprise Survey is an effective tool to monitor and assess private sector productivity. Right before the Covid-19 pandemic, the World Bank Group, in collaboration with CNEA, conducted the survey in Morocco from May 2019 to January 2020, interviewing managers of 1,096 formal sector firms across the Kingdom, based on a representative sample provided by CNEA and Morocco’s Planning agency (HCP). As the pandemic broke out, a follow-up survey was conducted between July and August 2020 to assess the preliminary impact of the crisis. It is important to stress at the outset that the survey does not capture the 4.3 million households who depend on informal sector work – be it through self-employment or wage employment in informal firms.

The findings illustrate the impacts of the unfolding crisis. The combined domestic and global effects of the crisis have severely affected firm’s performances, liquidity, and solvency. Today, at least 6% of firms have exited the market. Businesses surviving the tide of closures are not immune to current market-related challenges, and the climate of rampant uncertainty is especially harmful for investment: 82% of firms reported decreased demand for their products and services. Nearly half (47%) of Moroccan firms’ sales were lost during the pandemic. Small enterprises were the least resilient, showing a loss of 50% of their sales. In comparison, Jordanian and Italian firms lost 51% and 47% respectively.

The decline in firms’ operations led to workforce reductions: 50% of Moroccan firms declared having reduced the total hours worked per week, and 14% of them decreased the total number of permanent workers. The resulting average change in permanent workers is -4%. In comparison, Jordan and Italy recorded -19% and -3%, respectively.

Overall, findings of the Enterprise Survey complemented timely and consistently the latest HCP survey, which estimated that 57% of companies had to totally or partially suspend their activities in April 2020, and that 726 000 jobs were lost (about 20% of total formal jobs), mostly in Micro, Small, and Medium Enterprises (MSMEs). Furthermore, based on a comparison of data from the Enterprise Survey across a sample of both developed and developing countries, Moroccan formal firms could perform better, in terms of survival rates under cash tensions (with an estimated survival time of 9 weeks), than companies from countries such as Greece, Portugal, or Turkey.

Since the outbreak, the government of Morocco has been proactive in deploying an aid package to support continued access to credit for small and medium-sized firms. The government created a US$ 3.3 billion emergency COVID Fund to support firms’ treasury and working capital requirements. For the recovery phase, a Strategic Investment Fund (“Fonds Mohammed VI pour l’Investissement”) is being set up to finance infrastructure projects and complete the financing support tools for companies, which are designed to avoid waves of bankruptcies in the aftermath of the crisis. The Fund is part of a broader recovery package that also includes guarantees for bank lending worth an additional MAD 75bn. The size of the package places Morocco well above the average for emerging markets (chart).

Underlying challenges

But beyond the immediate effects, the crisis has shown structural deficiencies in the country’s private sector composition. The large competitiveness gap between modern sectors (automotive or aeronautics) and low productive or declining sectors (such as handcraft or textiles) is a growing challenge. Moroccan companies remain positioned on low value-added segments of the value chain, such as cabling. In many sectors, firms remain polarized between a few dominant well-established actors in monopolistic or oligopolistic situations and a majority of low-competitive MSMEs, which account for about 93% of all companies (HCP 2019).

Access to finance and financial sustainability represent additional challenges. 28% of surveyed firms in 2019 thought that access to finance was a factor of concern. In the follow-up survey, 62% of firms (vs. 50% in Italy) failed to honor their financial engagements and small firms recorded the highest incidences of delayed payments.

Entrepreneurship and innovation, which are the cornerstones of private sector dynamism, are starting to flourish in Morocco. Yet, young firms still struggle to raise early-stage financing and the overall financial and advisory support architecture remains complex. Simplifying it could provide entrepreneurs with a straightforward track from ideation to fundraising and operational phases. Workforce qualification, another key asset for private sector dynamism, remains a concern in Morocco in comparison with peer countries (30% of  Moroccan firms identify an inadequately educated workforce as a major constraint versus 20% in MENA) although 38% of firms offer regular formal training to their staff.

The 2019 Enterprise survey also unveiled a revealing figure about a structural challenge that raises transaction costs for Moroccan firms: corruption. 46% of firms identify corruption as a major constraint and 58% of them declared having been expected to offer a backhander to secure a contract with the government. Inefficient business regulations also constitute impediments for firms’ growth and development in Morocco. The proportion of firms identifying business licensing as a major constraint increased to 30% in 2019, from 14% in 2013. Furthermore, 41% of Moroccan firms view tax rates as a major constraint and 23% of them consider labor regulations as a constraint.

Finally, one cannot ignore that the size of the formal sector in Morocco is far overshadowed by sectors linked to the informal economy: 4.3 million households in the country depend on informal activities for their income and livelihoods. At the same time, the lack of dynamism and opportunities in the formal sector are contributing equally to the persistence of the phenomenon.

A silver lining to step up reforms

The Moroccan private sector has the potential to harness the change momentum to set off and maintain innovation and agility deployed in the early stages of the pandemic, where a number of enterprises positioned themselves in productive sectors related to the pandemic response.

The Covid-19 crisis is a critical challenge; however, it also presents a unique window of opportunity for the Moroccan private sector to transform its productive model and boost its competitiveness. Some critical positioning opportunities for Morocco emerge in the current context:

Global value chains: The limits to the “balkanization” trend of global value chains seen in the past, i.e., an increased fragmentation, will need to be reexamined after the crisis. This will require multinational corporations to rewire and localize their value chains to alleviate the impact of future shocks. This provides a unique opportunity for the Moroccan private sector to progress along global value chains. And to position Morocco as a green and sustainable industrial platform connecting Africa  and Europe.

Market contestability: Improving market contestability and competition by reforming public procurement and reviewing custom tariffs are critical steps to level the playing field for performing domestic firms, namely MSMEs, to grow and create jobs.

Human capital: Investing in a skilled workforce is key to increasing competitiveness, reduce unemployment, and make much-needed productivity gains to drive private sector growth.  

Access to finance: Financing for MSMEs relies mainly on banks. Today, private equity and capital market solutions could be leveraged to enable well-performing companies to raise capital from private and institutional investors, especially in the aftermath of the crisis, when banks have offered large credits to companies to address their pressing need for liquidity.  

Integrating the informal economy: It is imperative to ensure a progressive integration of informal enterprises into the formal sector through adequate fiscal measures and a facilitated and less costly access to financing. Effectively reducing informality, though, will require a multi-faceted approach, including  structural private sector reforms like those mentioned here, but also a broad and prolonged investment in building human capital in the country. For large parts of the informal sector, especially the many dependent on low productivity jobs, often in self-employment in urban and rural areas alike, improving welfare within the informal sector through financial and digital inclusion as well as basic skill building, will be core for improving their welfare.

Generating value: Strengthening the link between Foreign Direct Investments (FDIs) and the growth of domestic SMEs is essential to generate spillovers beyond the fast-growing flagship sectors (such as automotive and aerospace).

As the country engages in a new phase, crafting a future Morocco with promising pathways for development in a post-Covid era, the country can turn a new page to increase its private sector potential and strategically position the country in productive and high-value industrial chains.

World Bank

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How Bangladesh became Standout Star in South Asia Amidst Covid-19

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Bangladesh, the shining model of development in South Asia, becomes everyone’s economic darling amidst Covid-19. The per capita income of Bangladesh in the fiscal year 2020-21 is higher than that of many neighbouring countries including India and Pakistan. Recently, Bangladesh has agreed to lend $200 million to debt-ridden Sri Lanka to bail out through currency swap. Bangladesh, once one of the most vulnerable economies, has now substantiated itself as the most successful economy of South Asia. How Bangladesh successfully managed Covid-19 and became top performing economy of South Asia?

In March 1971, Sheikh Mujibur Rahman declared their independence from richer and more powerful Pakistan. The country was born through war and famine. Shortly after the independence of Bangladesh, Henry Kissinger, then the U.S. national security advisor, derisively referred to the country as a “Basket Case of Misery.” But after fifty years, recently, Bangladesh’s Cabinet Secretary reported that per capita income has risen to $2,227. Pakistan’s per capita income, meanwhile, is $1,543. In 1971, Pakistan was 70% richer than Bangladesh; today, Bangladesh is 45% richer than Pakistan. Pakistani economist Abid Hasan, former World Bank Adviser, stated that “If Pakistan continues its dismal performance, it is in the realm of possibility that we could be seeking aid from Bangladesh in 2030,”. On the other hand, India, the economic superpower of South Asia, is also lagging behind Bangladesh in terms of per capita income worth of $1,947. This also elucidates that the economic decisions of Bangladesh are better than that of any other South Asian countries.

Bangladesh’s economic growth leans-on three pillars: exports competitiveness, social progress and fiscal prudence. Between 2011 and 2019, Bangladesh’s exports grew at 8.6% every year, compared to the world average of 0.4%. This godsend is substantially due to the country’s hard-hearted focus on products, such as apparel, in which it possesses a comparative advantage.

The variegated investment plans pursued by the Bangladesh government contributes to the escalation of the country’s per capita income. The government has attracted investments in education, health, connectivity and infrastructure both from home and abroad. As a long-term implication, investing in these sectors helped Bangladesh to facilitate space for businesses and created skilled manpower to run them swiftly. Meanwhile, the share of Bangladeshi women in the labor force has consistently grown, unlike in India and Pakistan, where it has decreased. And Bangladesh has maintained a public debt-to-GDP ratio between 30% and 40%. India and Pakistan will both emerge from the pandemic with public debt close to 90% of GDP.

Bangladesh’s economy and industry management strategy during Covid-19 is also worth mentioning here since the country till now has successfully protected its economy from impact of pandemic. At the outset of pandemic, lockdowns and restrictions hampered the country’s overall productivity for a while. To tackle the pandemic effect, Bangladesh introduced improvised monetary policy and fiscal stimuli to bring them under the safety net which lifted the situation from worsening. Government introduced stimulus package which is equivalent to 4.3 percent of total GDP and covers all necessary sectors such as industry, SMEs and agriculture. These packages are not only a one-time deal, new packages are also being announced in course of time. For instance, in January 2021, government announced two new packages for small and medium entrepreneurs and grass roots populations. Apart from economic interventions, the government also chose the path of targeted interventions. The government, after first wave, abandoned widespread lockdown and adopted the policy of targeted intervention which is found to be effective as it allows socio-economic activities to carry on under certain protocols and helps the industries to fight back against the pandemic effect.

Another pivotal key to success was the management of migrant labor force and keeping the domestic production active amidst the pandemic. According to KNOMAD report, amidst the Covid-19, Bangladesh’s remittance grew by 18.4 percent crossing 21 billion per annum inflow where many remittance dependent countries experienced negative growth rate. Because of the massive inflow of remittance, the Forex reserve of Bangladesh reached at 45.1 billion US dollar.

Bangladesh’s success in managing COVID19 and its economy has been reflected in a recent report “Bangladesh Development Update- Moving Forward: Connectivity and Logistics to strengthen Competitiveness,” published by World Bank. Bangladesh’s economy is showing nascent signs of recovery backed by a rebound in exports, strong remittance inflows, and the ongoing vaccination program. Through financial assistance to Sri Lanka and Covid relief aid to India, Bangladesh is showcasing its rise as an emerging superpower in South Asia. That is why Mihir Sharma, Director of Centre for Economy and Growth Programme at the Observer Research Foundation, wrote in an article at Bloomberg that, “Today, the country’s 160 million-plus people, packed into a fertile delta that’s more densely populated than the Vatican City, seem destined to be South Asia’s standout success”. Back in 2017, PwC (PricewaterhouseCoopers) report also predicted the same that Bangladesh will become the largest economy by 2030 and an economic powerhouse in South Asia. And this is how Bangladesh, a development paragon, offers lessons for the other struggling countries of world after 50 years of its independence.

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Build Back Better World: An Alternative to the Belt and Road Initiative?

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The G7 Summit is all the hype on the global diplomatic canvas. While the Biden-Putin talk is another awaited juncture of the Summit, the announcement of an initiative has wowed just as many whilst irked a few. The Group of Seven (G7) partners: the US, France, the UK, Canada, Italy, Japan, and Germany, launched a global infrastructure initiative to meet the colossal infrastructural needs of the low and middle-income countries. The Project – Build Back Better World (B3W) – is aimed to be a partnership between the most developed economies, namely the G7 members, to help narrow the estimated $40 trillion worth of infrastructure needed in the developing world. However, the project seems to be directed as a rival to China’s Belt and Road Initiative (BRI). Amidst sharp criticism posed against the People’s Republic during the Summit, the B3W initiative appears to be an alternative multi-lateral funding program to the BRI. Yet, the developing world is the least of the concerns for the optimistic model challenging the Asian giant.

While the B3W claims to be a highly cohesive initiative, the BRI has expanded beyond comprehension and would be extremely difficult to dethrone, even when some of the most lucrative economies of the world are joining heads to compete over the largely untapped potential of the region. Now let’s be fair and contest that neither the G7 nor China intends the welfare of the region over profiteering. However, China enjoys a headstart. The BRI was unveiled back in 2013 by president Xi Jinping. The initiative was projected as a transcontinental long-term policy and investment program aimed to consolidate infrastructural development and gear economic integration of the developing countries falling along the route of the historic Silk Road. 

The highly sophisticated project is a long-envisioned dream of China’s Communist Party; operating on the premise of dominating the networks between the continents to establish unarguable sovereignty over the regional economic and policy decision-making. Referring to the official outline of the BRI issued by China’s National Development and Reform Commission (NDRC), the BRI drives to: “Promote the connectivity of Asian, European, and African continents and their adjacent seas, establish and strengthen partnerships among the countries along the Belt and Road [Silk Road], set up all-dimensional, multi-tiered and composite connectivity networks and realize diversified, independent, balanced, and sustainable development in these countries”. The excerpt clearly amplifies the thought process and the main agenda of the BRI. On the other hand, the B3W simply stands as a superfluous rival to an already outgrowing program.

Initially known as One Belt One Road (OBOR), the BRI has since expanded in the infrastructural niche of the region, primarily including emerging markets like Pakistan, Bangladesh, and Sri Lanka. The standout feature of the BRI has been the mutually inclusive nature of the projects, that is, the BRI has been commandeering projects in many of the rival countries in the region yet the initiative manages to keep the projects running in parallel without any interference or impediment. With a loose hold on the governance whilst giving a free hand to the political and social realities of each specific country, the BRI program presents a perfect opportunity to jump the bandwagon and obtain funding for development projects without undergoing scrutiny and complications. With such attractive nature of the BRI, the program has significantly grown over the past decade, now hosting 71 countries as partners in the initiative. The BRI currently represents a third of the world’s GDP and approximately two-thirds of the world’s entire population.

Similar to BRI, the B3W aims to congregate cross-national and regional cooperation between the countries involved whilst facilitating the implementation of large-scale projects in the developing world. However, unlike China, the G7 has an array of problems that seem to override the overly optimistic assumption of B3W being the alternate stream to the BRI. 

One major contention in the B3W model is the facile assumption that all 7 democracies have an identical policy with respect to China and would therefore react similarly to China’s policies and actions. While the perspective matches the objective of BRI to promote intergovernmental cooperation, the G7 economies are much more polar than the democracies partnered with China. It is rather simplistic to assume that the US and Japan would have a similar stance towards China’s policies, especially when the US has been in a tense trade war with China recently while Japan enjoyed a healthy economic relation with Xi’s regime. It would be a bold statement to conclude that the US and the UK would be more cohesively adjoined towards the B3W relative to the China-Pakistan cooperation towards the BRI. Even when we disregard the years-long partnership between the Asian duo, the newfound initiative would demand more out of the US than the rest of the countries since each country is aware of the tense relations and the underlying desperation that resulted in the B3W program to shape its way in the Summit.

Moreover, the B3W is timed in an era when Europe has seen its history being botched over the past year. Post-Brexit, Europe is exactly the polar opposite of the unified policy-making glorified in the B3W initiate. The European Union (EU), despite US reservations, recently signed an investment deal with China. A symbolic gesture against the role played by former US President Donald J. Trump to bolster the UK’s exit from the Union. As London tumbles into peril, it would rather join hands with China as opposed to the democrat-regime of the US to prevent isolation in the region. Despite US opposition, Germany – Europe’s largest economy – continues to place China as a key market for its Automobile industry. Such a divided partnership holds no threat to the BRI, especially when the partners are highly dependent on China’s market and couldn’t afford an affront to China’s long envisaged initiative.

Even if we assume a unified plan of action shared between the G7 countries, the B3W would fall short in attracting the key developing countries of the region. The main targets of the initiative would naturally be the most promising economies of Asia, namely India, Pakistan, or Bangladesh. However, the BRI has already encapsulated these countries: China-Pakistan Economic Corridor (CPEC) and Bangladesh-China-India-Myanmar Economic Corridor (BCIMEC) being two of the core 6 developmental corridors of BRI. 

While both the participatory as well as the targeted democracies would be highly cautious in supporting the B3W over BRI, the newfound initiate lacks the basic tenets of a lasting project let alone standing rival to the likes of BRI. The B3W is aimed to be domestically funded through USAID, EXIM, and other similar programs. However, a project of such complex nature involves investments from diverse funding channels. The BRI, for example, tallies a total volume of roughly USD 4 to 8 trillion. However, the BRI is state-funded and therefore enjoys a variety of funding routes including BRI bond flotation. The B3W, however, simply falls short as up until recently, the large domestic firms and banks in the US have been pushed against by the Biden regime. An accurate example is the recent adjustment of the global corporate tax rate to a minimum of 15% to undercut the power of giants like Google and Amazon. Such strategies would make it impossible for the United States and its G7 counterparts to gain multiple channels of funding compared to the highly leveraged state-backed companies in China.

Furthermore, the B3W’s competitiveness dampens when conditionalities are brought into the picture. On paper, the B3W presents humane conditions including Human Rights preservation, Climate Change, Rule of Law, and Corruption prevention. In reality, however, the targeted countries are riddled with problems in all 4 categories. A straightforward question would be that why would the developing countries, already hard-pressed on funds, invest to improve on the 4 conditions posed by the B3W when they could easily continue to seek benefits from a no-strings-attached funding through BRI?

The B3W, despite being a highly lucrative and prosperous model, is idealistic if presented as a competition to the BRI. Simply because the G7, majorly the United States, elides the ground realities and averts its gaze from the labyrinth of complex relations shared with China. The only good that could be achieved is if the B3W manages to find its own unique identity in the region, separate from BRI in nature and not rivaling the scale of operation. While Biden has remained vocal to assuage the concerns regarding the B3W’s aim to target the trajectory of the BRI, the leaders have remained silent over the detailed operations of the model in the near future. For now, the B3W would await bipartisan approval in the United States as the remaining partners would develop their plan of action. Safe to say, for now, that the B3W won’t hold a candle to the BRI in the long-run but could create problems for the G7 members if it manages to irk China in the Short-run.

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COVID-19: New Dynamics to the World’s Politico-Economic Structure

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How ironic it is that a virus invisible from a naked human eye can manage to topple down the world and its dynamics. Breaking out of CoronaVirus, its spread across the globe and the diversity of consequences faced by the individual states all make it evident how the dynamics of the world could be reversed in months. Starting from the blame games regarding coronavirus to its geostrategic implications and the entire enigma between COVID-19 and politics, COVID-19 and economies have shaken the world. Whether it is the acclaimed super power, struggling powers or third world states or even individuals, the pandemic has unveiled the capability and credibility of all, especially in political and economic domains. Wearing masks in public, avoiding hand shake and maintaining distance from one another have emerged as ‘new normal’ in the social world of interaction.

Since the pandemic has locked its eyes upon the globe, world politics has taken an unfortunate drift. From the opportunities for leaders to abuse power during state of emergency (which is imposed in different states to limit the spread of novel Coronavirus) to the likelihood of rise of far-right nationalists to the emergence of ‘travel bubbles’ between states (such as New Zealand and Australia) and the increased chances of regionalism in post-pandemic world to the new terrorist strategies to gain support and many others, all are result of the pandemic’s impact on the political world, one way or the other. Since the end of WWII, the United States has taken the role of global leadership and after the Cold War, it became more prominent as it was the sole superpower of the world. Talking ideally, pandemics are perceived to bring up global cooperation but in the COVID-19 scenario it has started a whole new set of debates, sparkled nativism versus globalization and the sharp divide in global politics has drifted the focus from overcoming the global pandemic through global response to inward looking policies of leaders.

Covid-19 has impacted every sphere of life, be it social, political, health or economic. The pandemic itself being the result of a globalized world has affected globalization badly. It is the best illustration of the interrelation of politics and economics and how the steps in one sector impact the other in this interdependent, globalized world. Political actions such as restricting travel had drastic economic impacts especially to the countries whose economy is largely dependent on tourism, foreign investment etc. Similarly, economic actions such as limiting foreign products’ access had political implications in the form of sudden unemployment and downturn in living standards of people.

For the first time in history, oil prices became negative when its demand suddenly dropped when industries were shut down almost everywhere. Russia and Saudi Arabia’s oil clash which led to increased oil production by Saudi Arabia further complicated the situation. This unprecedented drop in oil demand and consequently its price would only help in the economic recovery of countries. Covid-19 has impacted three sectors badly. First of all, it affected production as global manufacturing has declined due to decrease in demand. Secondly, it has created supply chain and market disruption. Finally, lockdowns affected local businesses everywhere. Bad impact aside, pandemic has led to the change in demand of products. Instead of investment and foreign trade, states having strong medical and textiles industries have got the opportunity of increasing exports. This is because there are requirements of face masks everywhere to avoid contagion. Need for medical instruments have also increased such as ventilators in developing countries specially. 

The only positive impact of Coronavirus is that it fostered environmental cleanliness. It is said that it can avert a climate emergency but the fact is that, as soon as the lockdown will be eased and businesses will begin returning into functioning, economic growth and prosperity will be prioritized over sustainability and we might even witness, more than ever, carbon emissions into the atmosphere.

Novel coronavirus has brought new dynamics to the world’s politico-economic structure. While the world has the opportunity to come close for cooperation and consensus to fight it, we might witness increased regionalism in the post-pandemic world as a cautious measure and alternative where crisis management would be more cooperative and quick. There is a likelihood of the emergence of an international treaty or regime to ban bio-weapons. While the prevalence of political optimism is not assured in the post-pandemic world, we are likely to see the interdependent economic world, as before, to overcome the economic slump and revive the global economy. 

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