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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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Economy

Afghan crisis: Changing geo-economics of the neighbourhood

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The Taliban takeover of Afghanistan has caused a rapid reshuffle in the geo-economics of South, Central and West Asia. While the impact on the Afghan economy has been profound, triggering inflation and cash shortage, it’s bearing on Afghanistan’s near neighbourhood has wider far-reaching consequences. The US spent almost $24 billion on the economic development of Afghanistan over the course of 20 years. This together with other international aid has helped the country to more than double its per capita GDP from $900 in 2002 to $2,100 in 2020. As a major regional player, India had invested around $3 billion in numerous developmental projects spanning across all the 34 provinces of Afghanistan. Indian presence was respected and valued by the ousted Afghan dispensation. With the US, India and many other countries deciding to close their embassies in Afghanistan and the US deciding to freeze Afghanistan’s foreign reserves amounting to $9.5 billion, the economy of the country has hit a grinding halt. IMF too has declared that Kabul won’t be able to access the $370 million funding which was agreed on earlier. The emerging circumstances are ripe for China and Pakistan to cut inroads into the war-torn country as the rest of the world watches mutely.

Beijing’s major gain would be the availability of Afghanistan as a regional connector in its ambitious Belt and Road Initiative (BRI) linking the economies of Central Asia, Iran and Pakistan. Afghanistan is already a member of the BRI with the first Memorandum of Understanding signed in 2016. Only limited projects were conducted in Afghanistan under the initiative till now due to security concerns, geographic conditions and the government’s affinity towards India. Chinese officials have repeatedly expressed interest in Afghanistan joining the CPEC (China Pakistan Economic Corridor), a signature undertaking of the BRI. CPEC is a $62 billion project which would link Gwadar port in Pakistan’s Baluchistan province to China’s western Xinjiang region. The plan includes power plants, an oil pipeline, roads and railways that improves trade and connectivity in the region.

China also eyes at an estimated $1 trillion mineral deposits in Afghanistan, which includes huge reserves of lithium, a key component for electric vehicles. This mineral wealth is largely untapped due lack of proper networks and unstable security conditions long-prevalent in the country. Chinese State Councillor and Foreign Minister Wang Yi hosted Taliban representatives in late June in Tianjin to discuss reconciliation and reconstruction process in Afghanistan. Taliban reciprocated by inviting China to “play a bigger role in future reconstruction and economic development” of the country. After the fall of Kabul, China has kept its embassy open and declared it was ready for friendly relations with the Taliban. It had also announced that it would send $31 million worth of food and health supplies to Afghanistan to tide over the ongoing humanitarian crisis. Pakistan, a close ally of China, has on its part has sent supplies such as cooking oil and medicines to the Afghan authorities. Pakistan having strong historical ties with the Taliban will possibly play a crucial role in furthering Chinese ambitions..

The immediate economic fallout of the crisis for Iran is its reduced access to hard currency from Afghanistan. After the imposition of US sanctions, Afghanistan had been an important source of dollars for Iran. Reports suggest that hard currency worth $5million was being transferred to Iran daily before the Taliban takeover. Now the US has put a freeze on nearly $9.5 billion in assets belonging to Afghan Central Bank and stopped shipment of cash to the country. The shortage of hard currency is likely to affect the exchange rates in Iran subsequently building up inflationary pressure. Over the years, Afghanistan had emerged as a major destination for Iran’s non-oil exports amounting to $2billion a year. A prolonged crisis would curb demand in Afghanistan including that of Iranian goods with a likely reduction in the trade volume between the two countries. In effect, Iran would find itself increasingly isolated from foreign governments and international financial flows.

India had been the wariest regional spectator watching its $3 billion investment in Afghanistan go up in smoke. Long-standing hostility with Pakistan has prevented land-based Indian trade with Afghanistan and the Central Asian Republic’s (CAR’s). Push by India and other stakeholders for setting a common agenda for alternate connectivity appears susceptible at the moment. India has been working with Iran to develop Chabahar port in the Arabian sea and transport goods shipped from India to Afghanistan and Central Asia through the proposed Chabahar-Zahedan-Mashhad railway line. India is also working with Russia on the International North-South Transport Corridor (INSTC), a 7,200 km long multi-mode network of ship, rail and road routes for freight movement, whereby Indian goods are received at Iranian ports of Bandar Abbas and Chabahar, moves northward via rail and road through Iran and Azerbaijan and meets the Trans-Siberian rail network that will allow access to the European markets. According to the latest reports, the Taliban declined to join talks with India, Iran and Uzbekistan on Chabahar port and North-South Transport Corridor, which has cast shadow on the Indian interests in the region. India’s trade with Afghanistan had steadily increased to reach the US $1.5 billion in 2019–2020. An unfriendly administration and demand constraints may slow down the trade between the two countries.

With the US withdrawal, the CARs would find their strategic and economic autonomy curtailed and more drawn into the regional power struggle between China and Russia. While China has many infrastructure projects in Central Asia to its credit, Russia is trying to woo Central Asian countries into the Russia-led Eurasian Economic Union (EEU), though so far it was able to rope in only Kazakhstan and Kyrgyzstan. CARs would need better connectivity through Afghanistan and Iran to diversify their trade relations with Indo-Pacific nations and to have better leverage to bargain with Russia and China. Uzbekistan, the most fervent of the CARs to demand increased connectivity with South Asia, expressed its interest in joining the Chabahar project in 2020, which was duly welcomed by India. The new developments in Afghanistan would force these countries to remodel their strategies to suit the changed geopolitical realities.

The fact that Iran is getting closer to China by signing a 25-Year Comprehensive Strategic Partnership cooperation agreement in 2020 adds yet another dimension to the whole picture. India’s hesitancy to recognize or engage with the Taliban makes it unpredictable what the future holds for India-Afghan relations.

The hasty US exit has caused rapid reorientation in the geopolitical and geo-economic status-quo of the region. Most countries were unprepared to handle the swiftness of the Taliban takeover and were scrambling for options to deal with the chaos. The lone exception was China which held talks with the Taliban as early as July, 28 weeks before the fall of Kabul, to discuss the reconstruction of the war-torn country. Chinese Foreign Minister Wang Yi also took a high-profile tour to Central Asia in mid-July which extensively discussed the emerging situation in Afghanistan with Central Asian leaders. Since the West has passed the buck, it’s up to the regional players to restore the economic stability in Afghanistan and ensure safe transit routes through the country. Any instability in Afghanistan is likely to have harrowing repercussions in the neighbourhood, as well.

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Turkish Economy as the Reset Button of Turkish Politics

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Democracy has a robust relationship with economic growth.  Barrington Moore can be seen as one of the leading scholars focusing on the relationship between political development and economic structure with his book titled “Social Origins of Dictatorship and Democracy” first published in 1966. According to Moore, there are three routes from agrarianism to the modern industrial world. In the capitalist democratic route, exemplified by England, France, and the United States, the peasantry was politically impotent or had been eradicated all together, and a strong bourgeoisie was present, and the aristocracy allied itself with the bourgeoisie or failed to oppose democratizing steps. In Moore’s book, you can find out why some countries have developed as democracies and others as dictatorships.

It can be argued that economic development facilitates democratization. Following this argument, this article is an attempt to address the Turkish case with the most recent discussions going on in the country. One of the most powerful instruments used by the political opposition today is the rhetoric of “economic crisis” that has also been supported by public opinion polls and data. For instance, the leader of İYİ Party Meral Akşener has organized lots of visits to different regions of Turkey and has been posting videos on her social media account showing the complaints mostly centering around unemployment and high inflation. According to Akşener, “Turkey’s economic woes – with inflation above 15%, high unemployment and a gaping current account deficit – left no alternative to high rates.”

Another political opposition leader, Ahmet Davutoğlu raised voice of criticism via his social media account, saying “As if monthly prices hikes on natural gas were not enough, they have introduced 15% increase on electricity costs. It is as if the government vowed to do what it can to take whatever the citizens have.”

A recent poll reveals that about 65 percent think the economic crisis and unemployment problem are Turkey’s most urgent problems. Literature on the relationship between democracy and economic well-being shows that a democratic regime becomes more fragile in countries where per capita income stagnates or declines. It is known that democracies are more powerful among the economically developed countries.

The International Center for Peace and Development summarizes the social origins of democracy in global scale as the following:

“Over the past two centuries, the rise of constitutional forms of government has been closely associated with peace, social stability and rapid socio-economic development. Democratic countries have been more successful in living peacefully with their neighbors, educating their citizens, liberating human energy and initiative for constructive purposes in society, economic growth and wealth generation.”

Turkey’s economic problems have been on the agenda for a long time. Unlike what has been claimed by the Minister of Interior Affairs Süleyman Soylu a few months ago, Turkish economy has not reached to the level which would make United States and Germany to become jealous of Turkey. Soylu had said, “You will see, as of July, our economy will take such a leap and growth in July that Germany, France, England, Italy and especially the USA, which meddles in everything, will crack and explode.”

To make a long story short, it can be said that the coronavirus pandemic has exerted a major pressure on the already fragile economy of Turkey and this leads to further frustration among the Turkish electorate. The next elections will not only determine who will shape the economic structure but will also show to what level Turkish citizens have become unhappy about the ongoing “democratic politics.” In other words, it can be said that, Turkish economy can be seen as the reset button of Turkish politics for the upcoming elections.

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Finding Fulcrum to Move the World Economics

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Domenico Fetti / Wikimedia Commons

Where hidden is the fulcrum to bring about new global-age thinking and escape current mysterious economic models that primarily support super elitism, super-richness, super tax-free heavens and super crypto nirvanas; global populace only drifts today as disconnected wanderers at the bottom carrying flags of ‘hate-media’ only creating tribal herds slowly pushed towards populism. Suppose, if we accept the current indices already labeled as success as the best of show of hands, the game is already lost where winners already left the table. Finding a new fulcrum to move the world economies on a better trajectory where human productivity measured for grassroots prosperity is a critically important but a deeply silent global challenge. Here are some bold suggestions

ONE- Global Measurement: World connectivity is invisible, grossly misunderstood, miscalculated and underestimated of its hidden powers; spreading silently like an invisible net, a “new math” becomes the possible fulcrum for the new business world economy; behold the ocean of emerging global talents from new economies, mobilizing new levels of productivity, performance and forcing global shifts of economic powers. Observe the future of borderless skills, boundary less commerce and trans-global public opinion, triangulation of such will simply crush old thinking.

Archimedes yelled, “…give me a lever long enough and a fulcrum on which to place it, and I shall move the world…”

After all, half of the world during the last decade, missed the entrepreneurial mindset, understoodonly as underdog players of the economy, the founders, job-creators and risk-taker entrepreneurs of small medium businesses of the world, pushed aside while kneeling to big business staged as institutionalized ritual. Although big businesses are always very big, nevertheless, small businesses and now globally accepted, as many times larger. Study deeply, why suddenly now the small medium business economy, during the last budgetary cycles across the world, has now become the lone solution to save dwindling economies. Big business as usual will take care of itself, but national economies already on brink left alone now need small business bases and hard-core raw entrepreneurialism as post-pandemic recovery agendas.

TWO – Ground Realities:  National leadership is now economic leadership, understanding, creating and managing, super-hyper-digital-platform-economies a new political art and mobilization of small midsize business a new science: The prerequisites to understand the “new math” is the study of “population-rich-nations and knowledge rich nations” on Google and figure out how and why can a national economy apply such new math. 

Today a USD $1000 investment in technology buys digital solutions, which were million dollars, a decade ago.Today,a $1000 investment buys on global-age upskilling on export expansion that were million dollars a decade ago.  Today, a $1000 investment on virtual-events buys what took a year and cost a million dollars a decade ago. Today, any micro-small-medium-enterprise capable of remote working models can save 80% of office and bureaucratic costs and suddenly operate like a mini-multi-national with little or no additional costs.

Apply this math to population rich nations and their current creation of some 500 million new entrepreneurial businesses across Asia will bring chills across the world to the thousands of government departments, chambers of commerce and trade associations as they compare their own progress. Now relate this to the economic positioning of ‘knowledge rich nations’ and explore how they not only crushed their own SME bases, destroyed the middle class but also their expensive business education system only produced armies of resumes promoting job-seekers but not the mighty job-creators. Study why entrepreneurialism is neither academic-born nor academic centric, it is after all most successful legendary founders that created earth shattering organizations were only dropouts.  Now shaking all these ingredients well in the economic test tube wait and let all this ferment to see what really happens.

Now picking up any nation, selecting any region and any high potential vertical market; searching any meaningful economic development agenda and status of special skills required to serve such challenges, paint new challenges. Interconnect the dots on skills, limits on national/global exposure and required expertise on vertical sectors, digitization and global-age market reach. Measuring the time and cost to bring them at par, measuring the opportunity loss over decades for any neglect. Combining all to squeeze out a positive transformative dialogue and assemble all vested parties under one umbrella.

Not to be confused with academic courses on fixing Paper-Mache economies and broken paper work trails, chambers primarily focused on conflict resolutions, compliance regulations, and trade groups on policy matters.  Mobilization of small medium business economy is a tactical battlefield of advancements of an enterprise, as meritocracy is the nightmarish challenges for over 100 plus nations where majority high potential sectors are at standstill on such affairs. Surprisingly, such advancements are mostly not new funding hungry but mobilization starved. Economic leadership teams of today, unless skilled on intertwining super-hyper-digital-platform-economic agendas with local midsize businesses and creating innovative excellence to stand up to global competitiveness becomes only a burden to growth.

The magnifying glass of mind will find the fulcrum: High potential vertical sectors and special regions are primarily wide-open lands full of resources and full of talented peoples; mobilization of such combinations offering extraordinary power play, now catapulted due to technologies. However, to enter such arenas calls for regimented exploring of the limits of digitization, as Digital-Divides are Mental Divides, only deeper understanding and skills on how to boost entrepreneurialism and attract hidden talents of local citizenry will add power. Of course, knowing in advance, what has already failed so many times before will only avoid using a rubber hose as a lever, again.  

The new world economic order: There is no such thing as big and small as it is only strong and weak, there is no such thing as rich and poor it is only smart and stupid. There is no such thing as past and future is only what is in front now and what is there to act but if and or when. How do you translate this in a post pandemic recovery mode? Observe how strong, smart moving now are advancing and leaving weak, stupid dreaming of if and when in the dust behind.

The conclusion: At the risk of never getting a Nobel Prize on Economics, here is this stark claim; any economy not driven solely based on measuring “real value creation” but primarily based on “real value manipulation” is nothing but a public fraud. This mathematically proven, possibly a new Fulcrum to move the world economy, in need of truth

The rest is easy  

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