Concluding Remarks and Policy Implications.

This paper reviewed the Moroccan experience with financial reforms and showed that despite noticeable financial development since the early 1990s, little subsequent growth has been achieved, essentially as a result of stagnant private sector investment. Aggregate data and results from a questionnaire addressed to Moroccan bankers suggest that one of the main beneficiaries from financial liberalisation has been the public sector, which is now able to finance its deficit from domestic sources at lower cost. In addition, borrowing-financed public spending appears directly to have stimulated informal private activities that have little need for bank loans, suggesting that budget deficits have both stimulated the demand for and the supply of bank lending to the public sector. In

summary, in the absence of a fast and efficient legal system and flexible labour regulations, financial liberalisation does not promote higher growth. Instead, restrictions resulting from these governance failures tend to stimulate informal economic activity.

LISREL estimates suggest that the ratio of the black economy to GDP remained constant since the 1970s, averaging 37 percent of recorded GDP. This implies that market distortions that typically encourage individuals to join the informal economy have not worsened, hence the stagnant ratio to GDP. Still, one would have hoped that reforms conducted for more than a decade would have corrected some of these distortions, therefore resulting in a decline in the size of informal economic activity.

However, until recently, the Moroccan authorities have placed better governance at the far end of their priority list, putting very little effort to control the resulting increase in the size of the shadow economy, as the later have proved to be quite helpful in absorbing a significant portion of the unemployed population. But the poor working conditions and the low salaries that typically characterise the underground economy, along with stagnant private investment, call for drastic improvements in governance. These include more flexible labour regulations and a more efficient legal system, that would in turn promote more private investment and lead to the creation of more regulated and decently paid jobs in the formal sector.

Major efforts are being made to improve the overall investment climate-new commercial courts are created, trade and labour laws have been or are being revised, regional investment centres are implanted in the major cities to cut down on the number of administrative procedures to set up a business- but strong enforcement is required if these are to improve people’s confidence in the Moroccan authorities and encourage

sufficient private investment to promote growth. In addition, the LISREL estimates described above suggest that the most damaging market distortion is currently the size of the budget deficit and its financing through borrowing instead of tax collection. Unless the government improves tax collection and reduces its reliance on borrowing, informal economic activity will persist. Nonetheless, tax enforcement should be accompanied by an improvement in the quality of public goods and services. Otherwise, it will probably encourage more people to operate in the black market. This will reduce further revenues from taxation and increase the government’s reliance on borrowing to finance budget deficits, stimulating further the underground economy and trapping the economy in a vicious circle.

Table 3: Estimates of the Hidden Economy of Morocco, 1975-2000 (% of GDP) Year Size 1975 _37.21372 1976 _37.336 1977 _37.36837 1978 _37.35214 1979 _37.41665 1980 _37.51808 1981 _37.39907 1982 _37.75188 1983 _37.64348 1984 _37.79445 1985 _37.94418 1986 _37.99574 1987 _37.86013 1988 _37.92099 1989 _37.85392 1990 _37.51344 1991 _37.57809 1992 _37.48042 1993 _37.46263 1994 _37.61656 1995 _37.44378 1996 _37.70274 1997 _37.42676 1998 _37.52226 1999 _37.36353 2000 _37.28295

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