Cablegate: Morocco's Competitivity Gap

DE RUEHRB #1076/01 1791617
R 281617Z JUN 07





E.O. 12958: N/A


This cable is sensitive but unclassified. Not for internet

1. (SBU) Summary: Morocco's weak showing in the
newly-published competitivity index of the World Economic
Forum has again highlighted an issue that has sparked
extensive public comment and debate in recent months,
particularly in the context of the failure of Moroccan
exports to become a locomotive for economic growth. The
Finance Ministry's respected Division of Studies and Planning
published a detailed assessment of Morocco's competitive
shortcomings in February, and spirited exchanges surrounded
the topic at the June 12 annual meeting of the Moroccan
exporters' association. Key factors identified by both
public sector experts and businesses themselves include the
overvalued Moroccan dirham, a shortage of skilled labor,
overconcentration by business on a limited number of
primarily low value-added sectors, expensive logistics, and a
fiscal regime that falls far short of regional rivals. The
impact is clear: Morocco ranked 72d in the WEF index, far
behind regional leader Tunisia (in 29th place), and export
growth from 1995-2006 averaged only five percent annually, so
that the export coverage rate fell from 65 percent to 54
percent over the period. End Summary.

2. (U) While in this pre-electoral period, the GOM typically
focuses its public comments on the reforms it has undertaken
over the last five years, senior GOM officials are forthright
in admitting that Morocco's export sector is not one where
they have had much success. In his remarks opening the June
12 National Exporters' Meeting in Skhirat, Prime Minister
Jettou highlighted a number of positive developments in the
export sector, including growth in electronics exports (up to
15 percent of Morocco's total exports in 2006) and the
recovery of the textile-apparel sector in 2006 from its 2005
downturn. He conceded, however, that "Morocco's export
performance had "fallen short" of the government's ambitions.
He argued that much more must be done and pressed for
businesses themselves to take action to diversify Morocco's
exports, particularly into high value-added sectors, a trend
he argued the government's industrial policy (the "Plan
Emergence") will foster. He also urged business to update
its management structures, increase its expenditure on
research and development, and engage in more dynamic
commercial promotion.

3. (SBU) For their part, our business interlocutors, like
business participants at the assembly, prefer to focus on the
range of constraints they perceive in government policy.
Skhirat participants cited Morocco's fiscal regime, with a
company tax rate 75 percent higher than regional leader
Tunisia; a lack of trained workers as a result of
shortcomings in the education system; continuing weaknesses
in Morocco's logistical base (despite recent improvements);
and Morocco's overvalued exchange rate. In a recent meeting
in Casablanca, a senior executive with the General
Confederation of Enterprises of Morocco (CGEM) echoed these
themes, while also highlighting shortcomings in Morocco's
judiciary and the continued inflexibility of Morocco's labor
market, despite implementation of a new labor code in 2004.
He and others, however, also concede the shortcomings
identified by Jettou, attributing the failure to aggressively
exploit market opportunities in part to language and cultural

4. (U) Not surprisingly, all these topics also figured in the
2007 WEF index. Surveyed executives cited access to
financing, tax rates and regulations, corruption,
infrastructure and workforce issues as their major concern.
Morocco's relatively restrictive foreign currency regulations
were also cited by some respondents, as was inefficiency of
the government bureaucracy and restrictive labor regulations.
In a sign of the stability of Morocco's political and
economic framework, however, only a handful of respondents
cited inflation, policy/government instability, and crime and
theft as concerns. Overall, Morocco was ranked in 72nd place
in the survey, well behind regional leader Tunisia (in 29th
place), behind Egypt (65th) and barely ahead of Algeria

5. (SBU) The most comprehensive recent analytical examination

RABAT 00001076 002 OF 003

of these competitive issues comes from the respected Studies
and Planning Division of the Finance Ministry, which
published a stark report in February detailing Morocco's
competitive shortcomings. It highlighted the continuing
challenge through a range of negative statistics-- a steadily
increasing trade deficit from 1994-2005, a decline in the
import coverage ratio to just above 50 percent, the failure
of exports to contribute more than 1.2 percent on average to
annual economic growth (half the rate in Turkey and Tunisia
and a third that of Romania), and a decline in Morocco's
share in the world market, despite conclusion of free trade
agreements with Turkey, the United States and others. The
only bright spot in an otherwise somber picture was Morocco's
success in increasing its competitivity in exporting
electronic components and information technology.

6. (U) The analysis of Ministry experts confirms the issues
cited by businessmen at Skhirat and in our own meetings
regarding the key internal constraints facing Moroccan
companies. Morocco, it shows, is more expensive than its
rivals in areas ranging from labor costs to the cost of
logistics. Labor costs, the Ministry argues, are increased
not just by inflexibilities resulting from the labor code,
but by the lack of education of most workers, which limits
their productivity. It points out that fewer workers have
completed secondary school in Morocco than in any of its
emerging market rivals, while only 20 percent of Moroccan
companies provide training to their workers. As a result,
Moroccan productivity has slipped in recent years. This,
coupled with appreciation of the dirham against the dollar
over the 1994-2005 study period, greatly worsened Morocco's
position, particularly in comparison to Asian rivals which
link their currency to the dollar. The competitive impact
was only cushioned by the dirham's slight depreciation
against the Euro, given the fact that Europe absorbs
two-thirds of Morocco's exports. Even there, however,
Morocco's market position has stagnated, with exports to
France falling short of those of Tunisia.

7. (U) Logistics is another key impediment highlighted by the
Finance Ministry. It estimates that transport costs
constitute 20 percent of gross domestic product in Morocco,
versus 10-16 percent in the EU and 15-17 percent in other
emerging economies. The cost of shipping a container from
Agadir to France equals that of shipping a container from
Istanbul to France, while the cost of crossing the Straits of
Gibraltar is two to three time the cost of other similar
crossings. These issues were the focus of a recent meeting
between Transport Minister Ghellab and the British Chamber of
Commerce in Casablanca, at which textile exporters complained
that transport times to Europe are twice what they need to
be, with concomitant costs. Participants pressed for the
government to "reconsider" its international transportation
policy and work to reduce these costs.

8. (U) The Finance report also documents the shortcomings of
Moroccan companies. Few invest in research and development
(total R and D spending is negligible, as only 5 percent of
companies invest in this area, far less than their
competitors in other emerging markets), and companies are
dependent on a limited number of products and markets. Thus
phosphates and textiles account for 50 percent of Moroccan
exports, while France and Spain alone represent 50 percent of
Morocco's international market. While some successes have
been registered with high tech products, these still only
account for 10 percent of Moroccan exports, while low-tech
and agricultural exports still account for over two-thirds.
Another telling statistic cited in the report is that the
world's most dynamic 10, 50 and 100 products only constitute
1.3, 1.4 and 1.7 percent (respectively) of Moroccan exports,
whereas they form 25, 52, and 70 percent of trade worldwide.

9. (SBU) Comment: Morocco is working on many of these issues,
through both its ambitious effort to improve the country's
logistical base and encourage investment in key industrial
sectors. These measures have clearly not been as successful
as the government would have wished in improving Morocco's
overall competitiveness, while equally critical issues
regarding the country's tax regime and legal system remain to
be addressed. End Comment.

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RABAT 00001076 003 OF 003


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