Morocco - Basic economic report (Vol. 1 of 2) : The main report

Report No. 3289-MOR FILE COPY Morocco: Basic Economic Report (In Two Volumes) Volume !: The Main Report December 30, 1980 Country Programs Department II Europe, Middle East and North Africa Region FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (As of September 1980) SDR 1.00 = Dirbam (DH) 5.211 Official Excbange Rate 1/ Trade Conversion Factor 2/ US$ 1.00 = Dirbam (DH) 3.970 US$ 1.00 = Dirbam (DH) 3.855 Dirham (DH) 1.00 = US$ 0.252 Dirham (DH) 1.00 = US$ 0.259 FISCAL YEAR January 1 to December 31 ABBREVIATIONS BCP Banque Centrale Populaire BNDE Banque Nationale pour le Dgveloppement Economique BRPM Bureau de Recherches et de Participations Minieres CDG Caisse de Dep6t et de Gestion CIH Credit Immobilier et H8telier CNA Cbarbonnages Nord-Africains CNCA Caisse Nationale de Credit Agricole ERAC Etablissements Regionaux d'Amgnagement et de Construction FEC Fonds d'Equipement des Communes FDCLG Fonds de Developpement des Collectivites Locales et de leurs Groupements FNAET Fonds National d'Achat et d'Equipement de Terrains FSDR Fonds Special de Developpement Regional MARA Ministere de l'Agriculture et de la Rgforme Agraire MHAT Ministere de l'Habitat et de l'Amenagement du Territoire OCE Office de Commercialisation et d'Exploitation OCP Office Cherifien des Phosphates ODI Office de Developpement Industriel ONCF Office National des Chemins de Fer ONE Office National de l'Electricitg ONEP Office National de l'Eau Potable ONP Office National des Pgcbes ONT Office National des Transports ORMVA Office Regional de Mise en Valeur Agricole SAMIR Societe Anonyme Marocaine de l'Industrie du Raffinage Source: IMF, International Financial Statistics, December 1980. 1/ End of period. 2/ Average of the period January-September 1980.  FOR OFFICIAL USE ONLY MOROCCO: A BASIC ECONOMIC REPORT Table of Contents Page No. Volume I: MAIN REPORT Country Data Foreword Summary and Conclusions ................................... i to xxxi CHAPTER I: INTRODUCTION ......................................... 1 Natural Resources. 2 Human Resources. 4 Development Institutions. 5 The International Context. 8 Outline of the Report. 9 CHAPTER II: GROWTH AND STRUCTURAL CHANGES IN THE MOROCCAN ECONOMY DURING THE PERIOD 1968-77 .11 A. Introduction .11 B. Development Goals and Strategy, 1968-77 .... ........... 11 Review of Progress Achieved Since Independence ........ 11 Goals and Overall Strategy of the 1968-72 and 1973-77 Plans ....................................... 12 The Quantitative Goals of the 1968-1972 and 1973-77 Plans ....................................... 14 The Revision of the 1973-77 Plan ..... ................. 14 C. Growth and its Principal Factors .15 Principal Factors .15 Structure of Production .16 Imports and Exports .18 Changes in the Structure of the Economy .21 The Savings Effort .23 Investment .24 D. Growth and Employment .27 E. External Financing .31 Evolution of the Current Account .31 Financing of the Current Account .33 The External Public Debt and its Servicing .35 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contents (cont'd) Page No. F. Domestic Financing .................................... 38 Review of Main Structural Factors ..................... 38 Overall Evolution of Fiscal and Budget Policy .... ..... 40 The Growing Role of Government Expenditure .... ........ 41 The Low Level of Budgetary Savings .................... 44 The Public and Semipublic Enterprises .... ............. 45 Financing of the Overall Treasury Deficit .... ......... 47 The Fiscal Effort ..................................... 47 Local Finances ........................................ 51 G. Monetary and Credit Policy ............................ 52 Importance of Monetary Policy ......................... 52 Direct Control of Credit .............................. 53 Indirect Measures ..................................... 54 Selectivity of Credit ................................. 55 Interest Rate Policy .................................. 57 Evolution of Consumer Prices .......................... 58 CHAPTER III: OVERALL ECONOMIC PROSPECTS AND PROBLEMS .... ........ 59 A. The 1978-80 Plan ...................................... 59 B. General Prospects for 1980-90 and the Problem of External Financing ....................... 67 Overall Prospects in Quantitative Terms for 1980-90 ... 67 External Financing .................................... 77 Evolution of Employment ............................... 80 C. Export Promotion ...................................... 81 Introduction .......................................... 81 Agricultural and Food Products ........................ 84 Phosphates and Phosphate Derivatives .................. 87 Other Mining Products .................................. 88 Manufactured Goods .................................... 89 Tourism ............................................... 92 International Transportation and Miscellaneous Service ............................... 92 Impact of General Policies ............................ 93 D. Mobilization of Domestic Resources: Prospects and Problems .............................. 95 Financial Adjustments, 1978-80 ........................ 95 Quantified Projections, 1980-90 ....................... 98  Table of Contents (cont'd) Page No. Current Expenditure ................................... :LOO Tax Reform ............................................ -02 The Capital Market and Credit Policy .................. i05 Public and Semipublic Enterprises ...................... 07 Local Authorities and Finances ........................ 111. E. Price Policy .......................................... 115 The Role of Prices in the Moroccan Economy .... ........ :.15 The Price System ...................................... .18 Principal Product Market .............................. l20 Factor Markets ........................................ 1l21 Price Subsidies ....................................... :24 Conclusion ............................................ 124 F. Development Planning .................................. .l25 Planning within the Government Structure .... .......... 127 Sectoral Planning ......................................:29 Regional Planning ..................................... :31 Annex (Projections): Note on Methodology ................. 1.;34 CHAPTER IV: DEVELOPMENT OF THE ECONOMIC SECTORS ................. '151 A. Phosphates and Mining Products ........................ :51 Phosphates and Derivatives ............................ 1.51 Other Mining Products ................................. 155 B. Agriculture ........................................... 158 Land use .............................................. :.58 Agricultural Performance and the 1978-80 Economic and Social Development Plan ......................... l58 Supply and Demand for Agricultural Products .... ....... .160 Resource Allocation within Agriculture and the Government's Budgetary Constraint ................... :.61 Savings Mobilization .................................. 164 Constraints on Agricultural Exports ................... I65 Land Tenure ........................................... 169 Livestock Production, Erosion and Desertification ...1.. 70 Problems with Agricultural Extension and Research .....1 Mechanization ............. -72 Agro-Industrial Development Issues .................... 173 Fisheries . ............................................74  Table of Contents (cont'd) Page No. C. The Industrial Sector . , .................. 177 The Role of Industry in the Economy . ................... 177 Structure and Problem of Modern Industry .... .......... 179 Investments and the System of Industrial Incentives ... 186 The Plan 1978-80 ................... . ................... 190 D. Energy and Water ................... ................... 194 Energy .......... ...................................... 195 Water ... 198 E. Transportation and Communications ..................... 203 General Aspects of the Sector ......................... 203 Road Infrastructure and Transport . ..................... 204 Railway Infrastructure and Transport . ................. 207 Ports and Ocean Transport ................... . ........... 208 Airports and Air Transport ............................ 210 Postal and Communication Service ...................... 211 F. Tourism ........................ ....................... 213 CHAPTER V: SOCIAL DEVELOPMENT STRATEGY .......................... 218 A. Evolution of Household Living Standards .. ............. 219 Standard of Living of Rural Households .... ............ 224 Standard of Living of Urban Households .... ............ 225 B. Goals and Thrust of Social Policy ..................... 227 Definition of Social Objectives ....................... 229 The Main Components of a Social Strategy . ............. 230 Increased Social Expenditures and Economic Growth ..... 233 C. Population Policy ...... ........................... 235 Demographic Forecasts ........................... 236 Demographic Policy .................. .. ................ 237 D. Health Policy ......................................... 238 Medical and Paramedical Resources ..... ................ 238  Table of Contents (cont'd) Page No. E. Nutrition ............................................. 240 Extent of malnutrition ................................ 242 Prospects ............................................. 243 Consumer Subsidies .................................... 244 F. Employment ............................................ 246 Operation of the Labor Market ......................... 247 Wage Levels ........................................... 248 Employment Policy ..................................... 249 G. Education ............................................. 251 The Government's Goals ................................ 252 Cost of Education ..................................... 252 Problems of Education and Vocational Training .... ..... 253 H. Infrastructure ........................................ 256 Electricity ........................................... 256 Potable Water ................................. 258 Sanitation ............................................ 259 I. Taxation and Government Spending ...................... 259 Social Equity and Taxation ............................ 259 Government Expenditures and Income Distribution ....... 262 J. Conclusions ........................................... 263 Improvement in Living Standards ....................... 263 Complementarity of Social Policies .................... 265 Reduction in the Cost of Public Services .... .......... 266 CHAPTER VI: REGIONAL AND URBAN DEVELOPMENT ...................... 267 A. Introduction .......................................... 267 B. Local Government and Development ...................... 267 Morocco's Local Government Structure .................. 268 Local Government and Development Management .... ....... 273 Communes in Economic and Social Development .... ....... 277 Strengthening of Local Government for Economic Development ................................ 287  Table of Contents (cont'd) Page No. C. Regional Development .................................. 289 1. Regional Disparities: Basis for a Regional Development Strategy ............................ 289 Level of Geographic Concentration and Extent of Regional Disparities .... ........... 290 Are Regional Disparities Increasing or Diminishing? ................................. 294 2. Evaluation of the Results of the Regional Development Strategy of the 1973-77 Five-Year Plan .................................. 296 A Positive Political Commitment to Regional Development ......................... 297 Absence of Any Real Strategic Plan for Regional Development ..................... 297 Inadequacy of Regionalization Procedures ....... 299 Recourse to Emergency Measures: the Special Regional Development fund (FSDR) .... ......... 299 Failure of Industrial Decentralization Measures ..................................... 301 3. Key Actions and Proposals for the 1978-80 Three-Year Plan ....... .......................... 301 The Need to Make the Regional Development Strategy an Integral Part of a National Regional Development Policy .... .............. 302 Strengthening of Regionalization Procedures in the Plan and the Budget ..... .............. 303 Reinforcement of Industrial Decentralization Measures ..... ............... 303 Conclusion ........ ............................. 306 D. Urban Development ..................................... 306 1. Urban Development Problems in Morocco in a Context of Rapid Urbanization .... ............... 306 Rapid Rate of Urbanization .... .................. 307 High Proportion of Low-Income Households ....... 307 Contrasting Forms of Urbanization .... .......... 307 The Chief Problems ............................. 309 2. Evaluation of the Results of the Urban Development Strategy of the 1973-77 Five-Year Plan .................................. 311 The Slippage in the Housing Program .... ........ 312 Obstacles to Increased Production of Building Sites ............................... 314  Table of Contents (cont'd) Page No. Strengthening the Planning and Control of Urban Development: Advantages and Problems ........ 315 Regulatory and Institutional Framework Strengthened but Sill Not Strong Enough ...... 316 3. Key Actions and Proposals of the 1978-80 Three-Year Plan ........ ......................... 317 Revision of Urban Development Policy; the Strategy Defined by the 1978-80 Three-Year Plan .............................. 318 Redefinition of Roles and Strengthening of the Supervision of the Sector .... ......... 320 Speeding up Production of Building Sites ....... 321 Lowering of Standards and Reducing of Units Costs of Infrastructure and Housing .... ...... 322 Modification of the Financing System for Housing .................................. 323 Conclusion ......... ............................ 324 VOLUME II: STATISTICAL ANNEX   COUNTRY DATA - MOROCCO Population in 1979: 18.9 million 1/ Page 1 of 2 pages Population Characteristics (1978) Education(1978) Crude birth rate (per 1,000) 13.0 Adjusted school enrollment ratio Crude death rate (per 1,000) 45.0 Primary 68.0 Gross reproduction rate (x) Secondary 17.0 Total 1971-78 3.2 Adult literacy rate (%) 28.0 Urban 1971-78 4.6 Urban population (%of total) 39.3 Housing and Consumption (1978) Age structure (%) 0 to 14 years 46.5 Access to electricity 15 to 64 years 50.1 (% of all dwellings, urban areas, 1971) 68.4 65 years and over 3.4 Access to safe water (% of population) 55.0 Energy consumption per capita Health and Nutrition (1978) (kilograms of coal equivalent) 285.0 Radio receivers per thousand population 83.0 Population per physician 10,136 Passengar cars per thousand population 19.6 Population per hospital bed 774 Per capita calories supply as % of requirements 89.0 Per capita protein supply (grams per day) 67.0 Life expectancy at birth 55.0 GNP Per Capita in 1978: $670 1/ National Accounts Million $ Share in 1978 GDP-1978 1970-75 1975-77 1978 1979 3/ Gross domestic product 2/ 12,426 100.0 5.3 3.9 3.1 3.1 Agriculture 2,248 18.1 -0.2 -2.1 18.2 -6.0 Industry 4,010 32.3 7.6 10.6 -0.7 4.8 Services 6,168 49.6 5.7 10.4 2.0 4.7 Consumption 11,138 89.6 5.1 6.7 7.4 3.0 Gross investment 3,102 25.0 14.9 15.5 -23.1 -1.2 Exports of goods and 2,167 17.4 0.4 8.1 3.4 5.5 non-factor services Imports of goods and 3,980 32.0 7.1 18.5 -16.1 -1.1 non-factor services 1,753- 14.1 16.6 7.8 -16.6 11.5 Employment and Productivity (1977) 4/ Employment Value added per worker (In thousands) ( (dollars) (M) Agriculture 2,099 43.5 806 39.6 Industry 896 18.6 3,855 189.4 Services 1,248 25.9 3,747 184.1 Unclassified 190 3.9 - - Unemployed 394 8.1 - - Total 4,827 100.0 2,035 100.0 Government Finance 5/ Millions of Dirhams 1977 1978 1979 3/ Current revenues 11,669 10,954 14,820 24.9 21.2 26.0 Current expenditures 11,925 12,940 14,393 25.4 25.0 25.3 Current surplus (+) or deficit (-) -256 -1,966 427 -0.5 -3.8 0.7 Civilian investment 4/ 7,626 4,109 6,696 16.3 7.9 11.7 External borrowing and grants 5,195 3,364 4,016 11.1 6.5 7.0 1/ 1979 IBRD Atlas. 2/ At market prices. 3/ Preliminary estimate. 4/ Estimate 5/ Revenues include special accounts revenues and annex budgets. Expenditures include subsidies, interest on public debt and military investment.  COUNTRY DATA MOROCCO Page 2 of 2 pages Money, Credit and Prices 1975 1976 1977 1978 (Millions of Dirhams; end of period) Money and quasi-money 14,275 16,902 20,045 24,311 Claims on government (net) 6,558 7,935 10,116 13,561 Claims on the economy 6,331 7,606 8,867 9,761 (Percentage or index numbers) Money and quasi-money as Z of GDP 39.2 40.9 42.8 46.9 GDP deflator 100.0 101.5 108.5 116.3 Consumer price index 100.0 108.5 122.2 134.0 Annual rate of growth: -GDP deflator -0.8 1.5 6.9 7.3 -Consumer price index 7.9 8.6 12.5 9.7 -Net claims on government 23.0 21.0 27.5 34.1 -Claims on the economy 23.9 20.1 16.6 10.1 Balance of Payments (million$) 1975 1976 1977 1978 Exports of goods and non-factor services 2,019 1,717 1,867 2,167 Imports of goods and non-factor services 2,996 3.520 4,124 3,980 Resource gap -977 -1,803 -2,257 -1,813 Workers' remittances (net) 490 499 537 699 Other factor revenues -67 -99 -158 -283 Net transfers 8 47 52 49 Balance on current account -546 -1,356 -1,826 -1,348 Private capital 0 38 53 45 -Direct investment 21 *- 68 77 -Other -21 -15 -32 Official capital 404 1,273 1,699 1,369 -Borrowing 304 838 1,339 1,119 -Grants 100 435 360 250 Other short-term capital 125 29 68 -73 Increase in reserves (- = increase) 17 16 6 7 Net reserves (end of period) 435 549 609 772 Of which: Gold 85 82 104 154 External Debt ( Million $) Outstanding and disbursed public debt (end of period) 1,753 2,341 4,078 5,139 Debt Service (%) Percentage of exports of goods and non-factor services 7.2 9.5 14.2 25.3 Percentage of exports of goods and services 5.6 7.1 10.7 18.5 Merchandise Exports (Million $) Phosphate 147 495 469 488 Phosphate derived products 15 32 74 97 Agricultural products 358 470 429 534 Mining 45 66 91 100 Industrial products 78 183 221 284 Total IBRD Lending, December 31, 1979 (Million $) Outstanding and disbursed 504 Undisbursed 629  FOREWORD This report was prepared by an economic mission that visited in Morocco from November 6 to December 2, 1978 in Morocco. The mission was led by Christian Merat and consisted of Gabriel Sciolli (public finances), Rend Vaurs (economic prospects, balance of payments), Rend Bonnel (poverty-related problems), Michel Cretin (administrative and planning questions), Harald Stier (phosphates sector), Jean Emmanuel Cornu (consultant, urban and regional problems) and Subbiah Kannappan (consultant, employment and job market). The report also incorporates the-findings of a special economic mission that had visited Morocco from February 22 to March 17, 1978. The latter mission was led by Christian Mdrat and consisted of Gabriel Sciolli (taxation and budget), Ian Hume (price policy), Rend Vaurs (economic accounts), Rend Bonnel (social problems), Catherine Pierce (population and health), Phi Anh Plesh (exports), Nicolas Mathieu (macroeconomic projections) and Tugrul Akcura (consultant, urban problems). The report further includes the results of studies made in the World Bank by Gordon Hughes (consultant, shadow prices) and draws on certain sector reports, especially on agriculture (Kevin Cleaver and Ivan Bergeron, consultant) and industry (Francois Ettori and Antoine Delarue, consultant). The basic data used in this report are those gathered by the basic mission in December 1978, updated in December 1979 on the basis of data received from the Moroccan Government. In Two Volumes: Volume I ; The Main Report Volume II: Statistical Annex   SUMMARY AND CONCLUSIONS I. Introduction 1. The Moroccan economy made considerable strides during the Second and Third Plans, which covered the period 1968-77. National income grew significantly faster than the country's population. On an annual average, per capita income rose at a rate close to 3% over the period. Moreover, development both gathered momentum and gained in quality during the Third Plan (1973-77). The GDP target growth rate of 7.5% set by the Plan was virtually achieved (7.3%) in 1973-77, whereas the real annual increase in GDP in 1968-72 was 5.6%. The conservative approach that had tended to predominate in the post-independence years (i.e. after 1956) gave way after 1970-71 to a strong official intention to pursue growth and an active search for the means to improve the distribution of the fruits of that growth. This-desire led to a spectacular increase in investment between 1973 and 1977, and especially to a broadening of development project identification, preparation and execution capabilities in all sectors. The emphasis placed on social development generated a rapid expansion in education and training. In addition, the effectiveness of the social approaches followed till then was reconsidered and efforts were made to devise new formulas for a direct attack on the problems posed by the continuing low productivity and living standards of very sizable segments of the population. In brief, Morocco's development strategy became more dynamic and acquired a broader range of instruments. Although much still remains to be done and the advances made are often precarious, Morocco can be justly proud of its appreciable economic and social achievements over the ten-year period 1968-77. 2. The quickened pace of economic growth and social progress is, however, still not firmly established. The fact is that savings and exports did not expand as vigorously as investment and imports during the 1973-77 Plan. As a result, in 1976 and especially in 1977, pronounced financial disequilibria developed, the structural origin of which lay in the sectoral development policies pursued. The very heavy burden occasioned by the modernizing of the Royal Armed Forces further aggravated these disequilibria after 1975. To meet the resultant financing needs, increasing recourse was made to external borrowing. Since 1978, Morocco has been passing through a period of financial adjustment in which the Government has sought to reduce the financial deficits of the economy. These efforts necessarily entailed a temporary reduction in investment, imports and employment, in view of the constraints bearing on savings and exports. This adjustment was the keynote of the 1978-80 Plan. The chief challenge to be met by the Government during  -ii- this plan was, however, that of preparing and initiating implementation of the structural reforms that alone would make it possible to bring savings and exports up to levels that would allow the economy to attain a high and stable growth rate. These reforms are under study; certain of them which have been analyzed in sufficient detail are already being put into effect. It has to be admitted, however, that the obstacles in the way are immense and may slow progress in this direction. 3. Another no less important challenge to be met by the Government is the fact that there is still a very large number of Moroccan families with very low incomes. The social policies put into effect by the Government so far show by their successes, even though these are very circumscribed in relation to the needs, that the living standards of the poorest households in Morocco can be raised. What is now needed is rapid improvement of the effectiveness of the social policies already in effect, which would entail: (1) Clearly specifying the target social groups, and reserving for them most of the benefits; and (2) Endeavoring to reduce wherever possible the unit costs of the public services furnished to these target groups. 4. The policies of the Government concerning subsidies and social services have been largely non-discriminatory. For instance, the consumer subsidies and the free or heavily subsidized education and health services have been provided to all Moroccans regardless of household income level. This practice obviously cannot be continued indefinitely. The needs of the population, which are growing steadily as the population itself increases, are mounting faster than the budgetary and human resources available to the Government for meeting them. The critical point has in fact been reached, since social expenditures are now weighing too heavily on budgetary savings while numbers entitled to them are increasing so rapidly that the quality of the overloaded services is deteriorating (education is one example). It is essential that the Government makes it clear without delay that the richest social groups should no longer continue to benefit from State subsidies and social services without paying for what they receive. The principle to follow is that the free or highly subsidized services ought to be reserved by priority for those who are most disadvantaged and who are, therefore, unable to meet their basic needs from their own means. Application of this principle will reduce the strain on the budget, while facilitating the organization of the social services and satisfying the equity criterion that should govern the allocation of Government social expenditures. It is important to note that equity in this respect will also serve the interests of efficiency, since it is logical to presume that if Morocco is able to  -iii- augment the productive capacity and improve the living conditions of the low income groups, the capacity for growth of the entire economy will be enhanced. 5. In facing these two challenges -- acceleration of economic growth and raising of the living standards of the poorest households -- Morocco can benefit from several important advantages. Compared with many other developing countries, it is relatively well endowed with natural resources and its geographic location gives it a privileged position in the world economy. Its work force is large, and well disciplined. The authorities manifest a clear-cut desire for equitable development and there is already a solid administrative capacity for translating this desire into fact. An intensified training effort is nevertheless still needed to produce the management and technical staff required. II. Past Growth, 1968-77 6. The growth of the Moroccan economy averaged 5.4% p.a. up till 1974. This rate reflected the prudence that predominated in the formulation of financial policy and held back reforms that had become necessary in order to raise savings and investment levels. The growth achieved up till 1974 was based on a steady, but slow, increase in the share of available resources allocated to investment. The economy's resource gap and its external financing requirements were small, even though the savings effort was lacking in vigor compared with similar countries. Morocco's economy rested on very sound financial bases, but its growth capacity was limited. From the beginning of the 1970s the Government began to look into measures that would impart greater dynamism to the economy. 7. As of 1974, prudence gave place to the deliberately ambitious goals of the 1973-77 Plan, execution of which coincided with an effort toward democratization in the political sphere. Under this influence, the Plan aimed at both a marked acceleration of economic growth and a rapid improvement in income distribution. To accomplish this, it was initially based on a heavily export-oriented investment strategy and a much greater savings effort. However, taking advantage of the sudden rise in phosphate prices that raised phosphate receipts from less than $200 million in 1973 to over $900 million in 1974 and close to $850 million in 1975, the Plan was revised before it had barely been started. In 1975 the Government launched an extremely ambitious supplementary investment program which, led by the public sector and followed by the private sector, was intended to increase  -iv- the amounts invested each year more than fourfold between 1973 and 1977. This acceleration was ambitious and was not accompanied by a reinforcement of the original objectives as regards exports and savings. It therefore carried considerable risks of internal and external disequilibria, which in fact materialized quickly, following a succession of unfavorable developments. First of all, phosphate prices began to fall as of mid-1975. The world economic recession and the restrictions imposed by the EEC caused export markets to shrink. The tensions along Morocco's Saharan borders led to a sharp increase in military expenditures. By the end of 1977, the phase of intensive investment triggered by the revision of the plan had led to a severely unbalanced economic structure, large financial deficits and greatly increased external financing requirements. Accelerated growth had to be sharply slowed down in 1978 to enable the country to address itself to the need for financial stabilization. The Government took advantage of this pause to reconsider the mechanisms for long-term growth and to prepare the structural reforms necessary to ensure its resumption. 8. On the basis of the data available, it is obvious that the rapid expansion of investment as of 1974 was sparked by public sector capital outlays. Gross fixed capital formation (GFCF), which was between 13% and 15% of GDP up till 1974, rose rapidly to nearly 33% in 1977. The proportion of total GFCF accounted for directly by Government rose from 19% in 1970-73 to 27% in 1974-77 and that deriving from public enterprises also increased, whereas the share accounted for by private enterprises declined. Including transfers to enterprises, State investment expenditures made up 46% of total GFCF in 1977, as against less than a third before 1974. 9. The economic sectors that benefitted most from the increase in GFCF between the second and the third development plans -- i.e. between 1968-72 and 1973-77 -- were the public services, followed at some distance by communications and housing. Industry did no more than maintain its position in terms of total GFCF. The shares of agriculture, energy, mining and private services all shrank markedly. It will be noted at the sectoral level that, with the prompting and participation of the State, investment in agriculture and industry in 1975-77 was directed primarily toward import substitution under high tariff protection against international competition. Being an extension of previous similar but much less pronounced trends, this orientation of investment too often led to production structures that were largely uncompetitive and unbalanced vis-a-vis the outside world. The chief exceptions are the phosphate and phosphoric acid sector, certain branches of industry such as textiles and leather, tourism and most agricultural investments.  -v- 10. The orientation of investment combined with the unfavorable external economic situation brought about a marked slowing-down in the growth of exports since 1973. Certain exportable products have also unquestionably been diverted to the home market in response to the heightened domestic demand generated by an expansionist budgetary and monetary policy, coupled with various increases in the protection of the domestic market, particularly the increase of the rate of the special tax on imports. The growth of exports which, at 1969 prices, had exceeded 8% p.a. in 1968-72, was no more than 1% in 1973-77. With the exception of phosphoric acid, production of which was started in 1976, all the major categories of exports posted a distinct slackening in their growth in 1973-77, while for agricultural products there was even a decline of 5% p.a. Growth of manufactured exports slowed down to 11% p.a., but starting from a larger base. Morocco derived an ephemeral advantage from the higher phosphate prices of 1974-75 and from the resulting shift of the terms of trade in its favor, but these prices went down almost as fast in 1976-77 and the advantage gained was practically lost by the end of 1977. The country's production capcity was then insufficiently export-oriented, particularly as regards exporting to markets other than Europe. 11. The expansionist policy followed in the budgetary and monetary fields generated a very pronounced acceleration in the growth of government consumption in the course of the 1973-77 Plan. Expressed in 1969 prices, this rate of growth increased from about 6% p.a. in 1968-72 to over 19% in 1973-77. In terms of GDP at current prices, Government consumption amounted to 22% in 1977 whereas it was between 12% and 13% in 1974. Military and social expenditures were the chief factors behind this growth. At the same time, the growth of household consumption, as recorded by national accounts data, slowed down over the 1973-77 Plan (3.2% p.a.) as compared with the 1968-72 Plan (4.7% p.a.). Household expenditures grew slowly over the 1973-77 period, probably on account of the poor performance of rainfed farming, which had repercussions on rural incomes, and especially on those of the poorest households. It should be noted that the latter received very little benefit from Government public services (education, health and subsidies, for example). The faster growth posted in 1973-77 bypassed them, with the exception of a very small number who benefitted from the first rural development (rainfed farming) projects or certain regional development expenditures. 12. The expansion of the various components of demand (investment, exports and consumption) resulted in marked differences in development in the various sectors. The construction and public works sector was stimulated by the rapid expansion of investment to achieve a very high growth rate (22% p.a.) over the 1973-77 Plan, whereas its growth in 1968-72 had remained slow (5% p.a.). Government consumption also grew very fast -- 19% p.a. in 1973-77 against 6% in 1968-72 -- as a result of budgetary policy. Industry (including handicrafts), on the other hand, posted only  -vi- slight growth over 1973-77, while the expansion in mining and energy slowed down. The value added by agriculture appears to be fluctuating around a stable trend since 1968, depending on the annual variations in rainfall; it was lower in 1977 than in any year of the 1968-77 period. In view of the considerable expansion of irrigation during that period, the reason must presumably be that the trend in rainfed agriculture has been downward. Unfortunately this trend cannot be documented from the official statistics and is moreover obscured by the pronounced yearly variations in the production of rainfed agriculture. Rainfed agriculture has unquestionably suffered from the priority given by the Government to irrigation. Coupled with the inevitable increase in the number of mouths to feed, the poor performance of rainfed agriculture has become a fundamental disequilibrating factor in the growth of the Moroccan economy and the distribution of the fruits of that growth, as we shall see below. 13. The expansion of demand and of domestic production would not have been possible without an increase in imports that assumed spectacular proportions during the 1973-77 Plan. Imports, including nonfactor services, grew by no more than 3.2% p.a. between 1967 and 1972 because the economy's requirements of foodstuffs, consumer goods and capital goods declined in volume (1969 prices). Only imports of energy products and intermediate goods rose rapidly, to support the expansion of industrial production and private consumption. During the 1973-77 Plan, on the other hand, imports of capital goods rose by 37% p.a. in response to the expansion of investment demand, while food imports increased by 16% p.a. in order to supply the population's needs following the shortfalls in domestic production (wheat in particular). Morocco's average annual wheat purchases from foreign sources went up from 420,000 tons in 1968-72 to 1,040,000 tons in 1973-77. Imports of consumer goods grew by 7% p.a. by volume between 1972 and 1977, and the expansion of the demand for energy and intermediate products continued at the previous rates. Altogether, the volume of imports more than doubled between 1972 and 1977. Their current value over the same period more than quadrupled, as import prices rose by 120%. The higher prices for oil had a heavy impact, because purchases of this item, in current dollars, rose from $56 million in 1972 to $371 million in 1977. Morocco's purchases of goods and (nonfactor) services abroad came to less than $1 billion in 1972 but topped $4 billion in 1977. It should be noted that the 1977 figure includes about $540 million as payments for offshore procurement of military equipment, an item that did not appear until 1975. About 60% of these payments were offset in 1977 by grants from abroad. 14. In view of the above movements in exports and imports, the economy's resource gap assumed considerable proportions as of 1975, with the result that sizable volumes of external financing were required. This deficit had dropped to $48 million (less than 1% of GDP) in 1974 and had only exceeded $100 million in two years (1970 and 1971) since 1967. It then  -vii- shot up to $980 million in 1975, $1,800 million in 1976 and $2,260 million (22% of GDP) in 1977. Despite the grants obtained in 1976 and 1977 to (partially)offset the payments for military equipment, and the increase in remittances from Moroccan workers abroad, the economy's external financing requirements rose sharply. Drawing on a borrowing capacity that had till then been little used, Morocco stepped up its foreign borrowing, chiefly from commercial sources. The country's outstanding external debt rose from less than $1 billion at the end of 1974 to $4 billion at the end of 1977. Although the service of this debt represented no more than 14.3% of exports and workers' remittances in 1977, the heightened accumulation of service obligations for the future is becoming a cause of growing concern. During the last eighteen months of the 1973-77 Plan, it was increasingly clear that the indiscriminate maximizing of recourse to external credit practiced during that plan had to give way to a policy of much greater moderation as regards amounts, coupled with efforts to negotiate longer grace and repayment periods for future loans. 15. As noted, the budgetary policy which was followed was a major factor behind the speeding up of investment, but at the expense of the national savings effort. Budgetary savings in fact slumped alarmingly, becoming pronouncedly negative by the end of the 1973-77 Plan. Domestic savings followed suit: after peaking at 21% of GDP at current prices thanks to phosphate receipts, they fell by the end of the 1973-77 Plan to a level (10%) well below that reached as of 1970 (13%). The inadequacy of budgetary savings is explained primarily by the much too rapid increase in Government operating expenditures as a result of the requirements of defense in particular and also of education. Although the fiscal reform envisaged in the 1973-77 Plan was not brought into effect, the effort to mobilize current receipts raised these from 16% to 25% of GDP between 1972 and 1977. The lags that the Government allowed to develop between the rise in costs for the economy and the officially fixed domestic prices for certain major products and services, such as oil products, staple foodstuffs (wheat, sugar, oil and dairy products), power, irrigation water and transportation, were also significant factors in keeping domestic savings down. 16. Credit policy responded to the needs of the Treasury and of the economy, with the result that the increase in the money supply was very rapid during the 1973-77 Plan. The selective control of credit introduced in 1976 brought about a minor slowing-down in this increase in 1976-77. Money creation and the rise in international prices are the two main causes of the quickening pace of domestic price inflation observed since 1974. The annual increase in the cost of living index averaged 10% between 1973 and 1977, whereas it was less than 3% between 1959 and 1973, and notwithstanding the fact that the GDP deflator increased only slightly between 1974 and  -viii- 1977. The raising of interest rates in 1974 had no more than a passing impact on the mobilization of financial savings and the allocation of financial resources, because its effect was soon damped out by price inflation. 17. Employment creation is poorly documented. However, the data available indicate that the growth of employment was 3.4% p.a. between 1971 and 1977 as opposed to 1.9% between 1960 and 1971. These rates were close to those of the labor supply, although there was always a surplus of less skilled job-seekers and an insufficient supply of skilled workers. The poor performance of rainfed agriculture, by far Morocco's largest employer, and the restrictions imposed by the European Economic Community on the supply of foreign labor since 1974, have probably aggravated the divergence between the supply of and demand for unskilled labor in Morocco. Analysis of employment creation at the global and sectoral levels reveals moreover that the allocation of investments remained below optimum from the viewpoint of labor utilization during 1968-77. Between the 1968-72 and 1973-77 Plans this allocation shifted in favor of the highly capital-intensive sectors such as physical infrastructure. Throughout the decade, the system of investment incentives encouraged those activities that were not employment intensive in the various sectors: irrigated agriculture and large-scale modern industry are two examples. The employment creation targets in the 1968-72 and 1973-77 Plans were 80% achieved. III. Future Growth: Prospects and Problems to be solved 18. The preceding section has underscored the fact that at the end of the 1968-77 period the Moroccan economy was faced with two distinct but closely related needs. In the short term, it had to quickly regain control over the excessive upward trends that were affecting investment, Government consumption and imports, because these trends were causing excessive widening of the economy's resource gap and excessive recourse to external borrowing. At the same time, strong measures had become absolutely essential to revive exports, increase savings and raise the living standards of the most disadvantaged households -- in brief, to lay the foundations for a new strategy capable of ensuring that the Moroccan economy would be able to achieve a sufficiently rapid rate of balanced growth over the long term. The 1978-80 Plan 19. To reduce the disequilibria that became apparent toward the end of the 1968-77 period, the Government adopted the 1978-80 Plan combined with annual financial stabilization programs. The Plan sought to reestablish -- if possible by 1980 -- a feasible balance between investment and savings,  -ix- and between exports and imports. In order to maintain as far as possible the growth of production and employment, the Plan envisaged increased orientation of investments toward projects that would be rapidly productive and able to produce for export or the local market at costs that are internationally competitive. Special emphasis was accordingly placed on highly labor-intensive industries and on the promotion of small and medium nonagricultural enterprises. Rainfed agriculture was also to benefit through the expansion of credit to small farmers. The Plan looked to private investment and savings to take over the leading role from the State, since the latter's investment capability is limited by budgetary austerity. The public enterprises were to be governed by new price, wage and management control policies, in order to enable them to step up their savings and reduce their dependence on the Treasury and external financing. The chief reforms that the Plan proposed to study, and in certain cases to start implementing, included those of direct taxation, the system of industrial incentives, the prices of the main public goods and services and economic administration at the central, sectoral and local levels. 20. The implementation of annual financial recovery programs since 1978 has already made it possible to control the chief factors causing disequilibrium in the Moroccan economy. Thus the overall Treasury deficit was brought down from DH 8 billion in 1977 to around DH 6.3 billion in 1979, and the balance of payments current account deficit from DH 8.2 billion in 1977 to around DH 6.3 billion in 1979. Thanks to the restrictive credit policy, inflationary trends have been brought under control and the rate of increase in consumer prices slowed down from 12.5% in 1977 to 9.7% in 1978 and 8.3% in 1979. The measures taken under the financial recovery program have, however, been distinctly selective. Budgetary policy has sought to maintain sufficient growth in capital and operating expenditures for the social services and also for development projects designed to benefit the most disadvantaged segments of the population. Similarly, agriculture and exports have been spared the credit restrictions. The GDP growth rate was thus maintained at 3.1% p.a. in 1978-79. Notwithstanding the results already obtained under the Three-Year Plan, in 1979 the economy's resource gap still amounted to 9.1% of GDP at constant prices, and debt service, expressed as a precentage of exports of goods and services (factor and nonfactor), to 21.2%. In 1980, it could probably reach 22.3%. Prospects for 1980-90 21. Quantified overall projections are presented in Chapter III for the ten-year period 1981-90. Two growth scenarios have been adopted, designated -minimal and voluntarist. The voluntarist scenario is based on economic policies that are more specifically oriented than in the minimal scenario toward promoting exports, savings and import substitution (especially in agriculture), and assumes the possibility of greater success in these  _x areas. In the minimal scenario, the constraint placed on the economy by external financing would dominate throughout the period and the service of the external debt (calculated as a percentage of exports of goods and services) would rise from 22.3% of GDP at constant prices in 1980 to about 29% by 1990, despite the relatively strong growth of exports of goods and nonfactor services (5.9% p.a. at constant prices from 1980 to 1985 and 6.4% from 1985 to 1990). In the voluntarist scenario, the external financing constraint would dominate only at the beginning of the period, with the debt service ratio going down slightly from 22.3% in 1980 to 21.3% in 1985. During a second phase extending to 1990, the economy would move into a faster rate of balanced growth (6.8% p.a. at constant prices) than during 1980-85 (5.8%) as the external financing constraint lessens and as the domestic savings effort rises from 9.5% of GDP at constant prices in 1980 to 18.6% in 1990, and investment from 16.6% in 1980 to 18.9% in 1990. 22. Under the projected growth conditions, the external financing requirements would be considerable. The service of the existing debt (contracted as of the end of 1979) will exceed corresponding disbursements by a quite considerable margin as of 1980, and this gap would continue to widen until 1984. The external financing of the economy ought, therefore, to be governed by strict rules, especially in the early years of the 1980-90 period when the external debt service burden will be sizable and foreign exchange reserves still on the low side. The projection assumes external borrowing to average $2.3 billion a year over 1981-85 in the minimal scenario and $1.9 billion a year in the voluntarist scenario. 23. It is clear, according to the projections, that external financing will remain a severe constraint on the economy for a number of years to come, unless major and rapid changes are made in the chief components of Morocco's economic policy; these include: (a) A more vigorous promotion of exports, since it will be exports that will determine the amount of foreign exchange available for financing imports--and hence the growth of the economy--and as the Moroccan economy will only have a limited capacity for further external borrowing, expecially in the early years of the decade; (b) A heightened savings effort; (c) As a corollary, a policy of strictly limiting the growth of Government consumption, coupled with a vigorous effort to improve the efficiency of the Government social expenditures in terms of the aims sought;  -xi- (d) Appropriate investment strategies at the sector level, especially for agriculture and industry where previous strategies have contributed to the development of disequilibria as regards both fcreign trade and employment. Export Promotion 24. Considered over an extended period, the global performance of Morocco's exports has remained inadequate, especially since 1973. While the import requirements of the economy grew normally between 1953 and 1973, and at a faster rate from 1973 to 1977, its import capacity showed increasingly marked signs of weakness. This capacity (measured by dividing exports at current prices by the import price index) grew annually by nearly 4X in 1954-63, then by less than 3% in 1964-73, and by 1977, when the phosphate boom was over, it bad dropped back to below the 1973 level. 25. However, Morocco has a considerable export advantage based on the low cost of its unskilled labor and the proximity of rich export markets (Europe, North America and Middle East), where its agricultural and industrial products currently have only very modest footholds. This advantage is also significant for services, such as tourism and public works. And, of course, Morocco possesses the world's largest and most readily accessible phosphate reserves. 26. To realize its export potential, Morocco could organize its promotion effort around the following key components: (a) Orientation of Government investment and private investment incentives more toward production for export, and use of local unskilled labor, one of Morocco's assets. This requires a change in public investment criteria and private investment incentives. (b) Encouragement of manufacturers producing for the home market to operate more efficiently and at lower cost througb continuous adjustment of protection. The study the Government has started on the system of industrial incentives ought to make it possible to begin this process in industry during the 1981-90 period. A similar approach would be necessary for agriculture; (c) Implementation of a much more active financial incentive policy in order to increase the profitability of exporting as compared with selling on the home market. The Customs regulations that allow exporters to have access free of import duties and taxes to imported inputs that are used in the manufacture of products for  -xii- export should also be simplified and made generally applicable. The definition of export businesses ought to be expanded and the bank guarantee requirement eliminated. The 0.5% statistical tax of exports should be abolished; (d) Strengthening of the institutional framework for export promotion. This should be done first at the sector level (e.g., OCE and Ministries of Agriculture and Industry for agricultural and food exports; the long-term development planning of OCP and its subsidiaries; and assistance to industrial exporters). However, it also appears necessary to strengthen the central agencies with responsibility for exports and to augment the efforts to train industrialists to be exporters; and (e) Improvement of the reception given to foreign investors able to contribute efficient techonologies and management methods. Mobilization of Domestic Resources 27. The weakness of domestic savings is a major constraint on Morocco's economic and social progress which limits the growth rate attainable over the long term. Increasing of savings depends on a group of measures aiming at: (a) Increasing budgetary savings; (b) Stepping up saving by the public enterprises; (c) Improving the mobilization of savings by the capital market; (d) Achieving greater participation by local savings in the financing of local government investments. 28. To achieve the long-term growth rate envisaged in this report, an appreciable change in budgetary policy would be needed over the coming years. The aim would be to bring the ordinary Government budget into surplus and, over the long term, to generate sufficient budgetary savings to allow Government investments to be financed without excessive recourse to domestic and external borrowing. To do this, the growth of current expenditure would have to be kept down so that in 1990 it would not represent more that 22% of GDP at constant prices in the voluntarist scenario and 25% in the minimal scenario, whereas it amounted to 26% of GDP in 1977.  -xiii- 29. Reduction of Government current expenditure in relation to GDP presupposes an unflagging austerity effort, which ought to be backed up by priority actions designed: (a) to maintain the efficiency of Government administration and take better account of the inevitable relationship between investments and the resulting operating expenditures; (b) to raise the efficiency of social expenditures in terms of the aims sought, while accepting the principle that subsidies and free social services ought to be reserved by priority to those (the poor) whose incomes are still too low to allow them to meet their basic needs (food, housing, education, health care, etc.). 30. To maintain Government revenues at approximately 25% of GDP would require, fundamental reforms to be progressively introduced in the tax system, whose weaknesses have been shown up increasingly by the need to increase indirect taxation. A fiscal reform is to be adopted shortly. 31. The increased role assigned to the public and semipublic enterprises warrants that careful thought be given to the broad lines of Government policy regarding those enterprises. First priority ought to be given to revision of the system of price setting, in order to step up the savings effort of public enterprises. The main public services (power, water, land transportation and telecommunications) should be authorized to apply a cost based price policy, possibly incorporating an element of progressivity in relation to the income of users, for power and water tariffs. The control to be exercised by the Government over the public enterprises forms a second subject for immediate reflection. Improvement of the administrative and financial controls would not be a sufficient reform in this respect. What is needed primarily are universally respected procedures to ensure that all new investments show an acceptable economic return; this would entail strengtbening of the project appraisal capacities in the financial institutions and supervisory ministries. A third area for reflection is the allocation of budget resources to the public enterprises. Whatever the overall ceiling imposed on transfers from the Treasury to those enterprises, their allocation to individual enterprises should be in accordance with an economic priority ranking to ensure that they are used to the fullest advantage; here, too, computation of an economic return should be the rule that governs this allocation. 32. The capital market in Morocco has a diversified array of institutions, but its functioning (the matching of the supply and of the demand for capital) is encumbered by detailed regulations as involved as those governing foreign exchange control and foreign trade. The attempts  -xiv- begun in 1974 to improve the capital market should be pursued, an effort that is all the more necessary now that Morocco can no longer count, as it could in 1974-77, on a sizable net inflow of external capital to finance its development. As first steps, the taxing of real estate investments could be increased to lessen their attractiveness as compared with financial investments; the channels for mobilizing savings could be improved (Caisse Nationale d'Espargne, Caisse Nationale de Credit Agricole, etc.), and the structure of incentives for saving could be amended (interest rates and taxation of securities). Price Policy 33. Price policy plays a significant, but not yet clearly understood, role in Morocco. The empirical data needed for a quantified analysis of its social costs and benefits are largely lacking. In practice, the price system is mixed, as is the management of the economy. Government intervention, at times far-reaching and decisive, is found side by side with the free interplay of market forces. The Government intervenes in the markets for various products and services through price controls and subsidies. However, taken overall and with the lags deriving from slow-moving administrative procedures, prices adjust to the costs in these markets. The State also intervenes in the markets for production factors. The cost of capital is reduced by investment incentives and by the numerous direct State investments; this cost is also adjusted, generally downward, by the strict regulation of interest rates. The exchange rate is tied to the average value of a basket of currencies. To maintain external payments within bounds during times of inflationary stresses, the Government has recourse to exchange and import controls, in conjunction with budgetary and credit restrictions. Only the labor market is virtually free, although there is social legislation regarding wages and worker representation. 34. The chief conclusions to be derived from an analysis of price policy in Morocco are as follows: (a) The essential components for a global approach to price policy are there, but it would be desirable to strengthen the means of the Prices Directorate and to integrate it better into the macro-economic planning process; (b) The regulation of the prices of goods and services is quite flexible, but the adjustment of prices to costs sometimes takes rather long and this tends to temporarily reduce the savings of enterprises. It would seem that price control ought, in practice, to be limited to those goods and services markets for which it is essential from either the economic (imperfect market) or social (progressiveness of certain tariffs) viewpoints;  -xv- (c) The study of the distortions affecting industrial prices has been started. A similar study regarding agricultural prices seems called for. It would appear that raising of the cost of capital and introduction of more competition in this market would be desirable in order to increase the mobilizing and allocatory role of these prices and to better serve the national goal of employment creation; (d) As regards price subsidies, their effectiveness in terms of the objectives sought seems in general low, and instruments better suited to the purposes of the growth and income distribution policy need to be urgently sought. This suggestion applies more particularly to consumer price subsidies, subsidies for agricultural inputs and subsidized interest rates; the financial incentives for exports, on the other hand, are still too small to offset the bias in production costs resulting from protection of the home market. Development Planning 35. Economic development takes place in Morocco in a liberal framework, but the responsibility of the Government and of the public authorities in determining this framework and in the rate of overall investment is decisive. Today, planning could be made the instrument for better management of economic development. This is essential because a restructuring of the economy with a view to increasing exports and savings and to meeting the basic needs of the population can only be undertaken in the framework of a long-term program. To allow planning to play its role, the highest priority would need to be given to three sets of actions aimed at: (a) Better integration of the planning system within the governmental decision structure; (b) Strengthening of sectoral planning capabilities, and (c) Greater rigor in regional planning. These measures also presuppose improvements in the relationship in relating the budget to the plan, and in the monitoring of execution of the plan. 36. Integration of the planning system within the governmental decision making structure is a problem that arises at several levels. At the highest level, the overall direction of planning, presently handled on an informal basis by a group set up in the Conseil de Gouvernement, could be entrusted to a permanent committee and strengthened by the participation of the Bank of Morocco in that committee. This committee would be responsible for  -xvi- preparing the directives for formulation of the development strategy and the main sectoral policies. The creation of this committee could provide a central directing unit without upsetting the distribution of functions among the different ministries. 37. At the sectoral level, the central planning body must be able to rely in the ministries and public enterprises upon a network of units responsible for sector policy formulation and programming of medium and long-term actions and investments. These units should report directly to the permanent secretaries of the ministries concerned for purposes of coordination and evaluation of the work of the technical directorates. 38. As regards regional planning, the most pressing need is to set up an apparatus able to ensure that the goals adopted are consistently pursued and able to draw extensively on local savings and initiative. At the central level, the national policies on regional development, formulated by the Conseil de Gouvernment should be translated into directives for the sectoral and regional levels by the central planning body. These policies and directives should take strict account of the available financial and human resources. At a second level, it is necessary to determine precisely how and at what stage the decentralized authorities (regions, provinces, communes and municipalities) should be brought into the formulation of national policies and decisions on the allocation of resources and infrastructure among the regions. The province and the commune would appear to offer the most potential in this respect. IV. Development of the Economic Sectors Phosphates and Mining Products 39. About 60% of the world's proven phosphate reserves are in Morocco, where production costs are among the lowest anywhere. This advantage gives Morocco an important source of foreign exchange (mining products made up 43% of exports in 1977) and budget receipts in the form of tax payments by the Office Chdrifien des Phosphates (OCP), a public enterprise that directly or indirectly controls 80% of the mining sector. 40. Although the proportion of world phosphate exports accounted for by Morocco has declined slightly since 1960 (from 38% in 1960 to 34% in 1978), it is still large enough to allow Morocco to exercise a certain influence over the world price without actually giving the country a dominant monopoly position, as is evidenced by Morocco's fruitless efforts to keep phosphate prices up after 1975. Over the long term, however, Moroccan phosphate exports are projected to grow by about 6% p.a. at constant prices and form the economy's chief source of foreign exchange.  -xvii- 41. The new momentum in the conversion of phosphates into intermediate (phosphoric acid) or finished (phosphate fertilizer) products derives from the growing significance of these products in world trade and will enable Morocco to benefit from the expected rise in their prices. Morocco's long term goal is to process 30% of its production locally. Despite the high cost of such a program, this goal is justified by the economic benefit to be gained from processing phosphates where they are produced rather than close to the consumer markets. Moreover, the growth prospects for phosphoric acid exports are extremely favorable (nearly 14% p.a. at constant prices over the next ten years), and could in fact be higher if quick solutions are found to the technical constraints currently bearing on the production, transportation and exporting of these products. 42. The other mining activities are also controlled by the public sector, but with a larger degree of foreign participation. However, for ten years now production and exports have not increased despite the investment program carried out under the 1973-77 Plan. This situation suggests that a critical study of the economic justification for the financial incentives granted to the mining sector, and of the activities of the Bureau de Recherches Petrolieres et Minieres (BRPM), would be worthwhile. Agriculture 43. Agricultural activities accounted for about 14% of GDP in 1978, i.e. distinctly less than the average of 22% achieved during 1967-70. After 1970, agricultural production fluctuated extensively owing to climatic variations, but without achieving any significant growth, although the domestic demand for agricultural products rose as a result of higher incomes and population growth. As a result, food imports rose by about 10% p.a. in constant prices from 1970 to 1977, while agricultural exports did not increase, being no higher in 1977 than they were in 1970. 44. Notwithstanding these less-than-satisfactory overall results, Moroccan agriculture has an appreciable growth potential. Where it has been possible to modernize the farming techniques employed, and when producer prices have been sufficiently remunerative, production has in fact risen rapidly. This has been the case with sugar beet, sugar cane, milk and vegetables, production of which expanded rapidly thanks to the development of the irrigated areas by the Government and the assistance provided by extension staff. Projections to the year 2000 of the supply of and demand for foodstuffs indicate a shortage of cereals, vegetable oils, dairy products and meat. As regards sugar, fruit and vegetables, demand can be met if past growth is maintained.  -xviii- 45. Up to the present, the Government has concentrated its efforts primarily in developing the irrigated zones (56% of the 1973-77 Plan's agricultural investments went into these areas), which made it possible to increase production of certain foodstuffs that are imported, such as sugar and milk. However, in order to eliminate the shortage of cereals, vegetable oils and meat, the amount of agricultural investment allocated to the rainfed farming areas would have to be increased. Calculations of the expected economic return on several rainfed farming projects in fact show that these investments could offer a greater return than certain large irrigation projects. This observation prompts the suggestion that emphasis ought to be placed on rainfed farming projects, when economically warranted, though without neglecting development of the irrigated sector. Reorientation of Government investment toward the rainfed areas would also make it possible to directly increase incomes among the 80% of the rural population who depend on rainfed agriculture. The resulting increase in income would create additional purchasing power and provide new openings for Moroccan industry and crafts. 46. During the 1973-77 Plan meat production rose by 3.7% and that of milk by 5.6%. In order to reduce the projected milk and meat deficits, the Government has drawn up a policy for developing cattle and goat production. While this does represent a step forward, rangeland improvement and erosion control projects need also to be carried out to improve the incomes of the small-scale stockfarmers who practice transhumance and are unable to benefit from agricultural credit or the Government's agricultural services. 47. Strengthening agricultural research is another priority area for action. Although research in Morocco has produced some positive results, the application of these results and their adaptation to the prevailing socio-economic conditions are still insufficient. Nevertheless, some progress has been made, and the 1978-80 Plan envisaged a reform of the extension services in order to concentrate their work on the establishment of service cooperatives, which they would then advise on all agricultural matters. 48. The policy on agricultural prices and subsidies has sought to guarantee producers a sufficiently remunerative income and to maintain retail prices to consumers at levels affordable by the least well-off social classes. While the repercussions on the agricutural sector of the Government's interventions in price formation have not yet been measured, the data available give the impression that the effect of the overall price policy has been to penalize agriculture as compared with industry. In order to boost the incentive effect of the price and subsidy policy, the following measures would be required:  -xix- (a) Progressively reduce agricultural input subsidies and concentrate them on small farmers grouped in cooperatives. Priority in the allocation of subsidies would go to the rainfed sector, and inputs would only be subsidized for a limited period for each farm; (b) Parallel with the reduction in input subsidies, producer prices would be adjusted; (c) Promote production contracts between farmers and processing or marketing enterprises; (d) Increase the activities of the Caisse Nationale de Credit Agricole, because of their high economic efficiency. 49. The rapid growth of the rural active population means that additional sources of employment will also have to be created in rural areas. Development of agro-industries seems desirable in this respect, although the existence of excess capacity in certain subsectors indicates that careful attention needs to be paid to the proper unit size. Until now expansion of small-scale agro-industry has encountered a number of obstacles (lack of financing, technical competence and skilled labor), and a special effort is needed to remove the constraints on its development. 50. Promotion of agricultural exports was one of the objectives of the 1973-77 Plan, but notwithstanding the considerable comparative advantage enjoyed by Morocco these exports did not increase in volume. This stagnation is explained in part by the insufficient diversification of crops, the aging of orchards, the obsolescence of the varieties raised, the heightened competition from the Mediterranean countries in the EEC market and the restrictions imposed since 1976 by the EEC. In order to reverse this decline, the Government has undertaken a program to improve the production of citrus fruit and early vegetables, which should induce the farmers to align their production more closely to demand. 51. Fisheries. The fishery sector is an important source of foreign exchange for Morocco (about 6% of exports), and its potential was recognized in the 1968-72 and 1973-77 Plans. The first steps taken consisted of the establishment of public enterprises to be responsible for production and marketing. The introduction of extremely generous financial incentives in 1973 spurred a spectacular expansion of the fishing fleet, but production and exports did not rise above 1967 levels. A large part of the fleet's catches, the extent of which is not known, was in fact being diverted to foreign ports. Stepping up control and inspection procedures will not be enough by itself, since the port infrastructure would also not be able to cope with any sizable increase in landings (due to lack of cold storage facilities).  -xx- 52. To solve the difficulties affecting the fishery sector, long-term programming seems needed in order to coordinate the different aspects of fishery activity and determine precisely what should be the role and contribution of the public sector. An analysis of the impact of financial incentives ought also to be made. Finally, appropriate measures need to be formulated for the processing industry and, in particular, vocational and technical training is needed for the skippers. 53. Industry. During the 1973-77 period industrial production grew at a faster rate (7%) than it had up till then (5.4% in 1968-72). The higher phosphate prices of 1974 led to a very considerable upsurge in investment by modern industry, especially on the part of the Government, in highly capital-intensive projects which had only a limited impact on employment. However, employment creation in industry has increased considerably over recent years (about 7% in 1971-77 against 4.4% in l196-7O) thanks to the pronounced growth of the construction sector. 54. There were no noteworthy changes in the share of GDP accounted for by industry (16%) or in the breakdown of the valued added by the different branches between 1969 and 1975. Moroccan industry, tnerefore, remained heavily oriented toward production of consumer goods for the home market, exporting only 10% of its production. Notwithstanding the priority initially assigned to exports by the 1973-77 Plan, industrial development was aimed primarily toward import substitution. However, this substitution entailed a sharp increase in imports of intermediate and capital goods needed for local production. The technologically simple substitution of imports of finished goods as pursued up to the present appears to have reached its limits, because local demand is growing slowly. For the future development of industry, the alternatives are therefore either to get existing (or new) industies to export, or else to extend the substitution process to intermediate and capital goods. These two alternatives presume a modification of the incentive policy designed to raise the profitability of exporting, a selective substitution policy, and integration of the different projects in a sector program designed to strengthen the entire fabric of industry. 55. Within such a framework, reform of the systenm of :ifdustrial incentives -- which comprises not just the 1973 Invesc,icent Code and price policy, but also tariff protection and export subsidies --- vill play a central role. Such reform should aim at reducing the discriminatory impact of protection on exports, the arbitrary inequality of protection levels, and the incentives for using highly capital-intensive techniques and skilled labor. In order to set up a program of action, the Governfment has started a study of industrial incentives that is to be completed in 1'981,  -xxi- 56. The general orientations of the 1978-80 Plan seem well chosen. They delineate a new industrial policy, appropriate to the circumstances of the economy, and composed of attaching priority to investments that utilize local resources (phosphates, sugar and cement), selective development of the production of intermediate and capital goods, strengthening of the industrial export policy, and promotion of small and medium industries. 57. About 70% of the investments included in the 1978-80 Plan are for the utilization of local resources. Investment possibilities in this sphere appear very favorable, not only as regards phosphoric acid but also for paper, pulp or chemical products derived from the sugar industry. The implementation of major projects by the public sector ought also to provide opportunities for engineering and industrial equipment companies. The substitution of imports of intermediate and capital goods envisaged by the Plan must be based on a prior study of these sectors in order to identify which production lines would be economically justified in Morocco. The priority assigned to small and medium industry is a new feature, the policy having up till now been weighted in favor of heavy industry and of handicrafts; this priority is justified by the importance of small and medium industry in terms of employment, exports and the integration of the country's industrial fabric. Finally, exports which have received a major boost from the building of phosphoric acid plants, should also be made the subject of reforms designed to broaden their industrial base and facilitate the use of the existing export-promotion incentives. 58. Energy. To meet its future energy requirements, Morocco will have to rely mainly on imported oil, which already furnishes 78% of the energy consumed, as the country does not bave any new energy sources of significance that could be quickly developed. Oil imports, at a time when international oil prices are on the rise, will form an increasingly heavy burden on the balance of payments and make the search for alternative energy sources at internationaily competitive prices a matter of priority. The implementation of this strategy is complicated, however, by the large number of agencies or ministries involved in the energy sector , and by the pricing policy for energy. In this field, a firm policy of price increases for energy products and eliminating the related subsidies would appear particularly desirable as a means for containing the increase in demand and in oil imports. 59. Water. Over the period 1955-75, the utilization of rainwater increased by 5% p.a. and if this trend were to be maintained the country's total rainwater resources would be exploited by 1990 (i.e. 16 billion mn3). Allocation of water to the different uses (power generation, irrigation, drinking water) will therefore involve increasingly complex trade-offs and will need to be geared to its efficient utilization. This would be facilitated by a tariff policy (for irrigation water in particular)  -xxii- designed to recover a larger part of the operating and capital cost. Drinking water requirements are going to rise rapidly over the years ahead as a result of population growth, higher incomes, and the expansion of the water distribution network required to improve access to drinking water. In view of the likelihood of conflict among the various users, a national water plan needs to be quickly drawn up in order to integrate the different development plans for individual catchment areas and to facilitate the planning of the water sector, responsibility for which is currently shared by a large number of ministries. 60. Transport and Communications. During the 1973-77 Plan, Morocco made a significant effort to modernize its communications sytem which, overall, meets the needs of the economy. Nevertheless, certain problems still remain, especially as regards telecommunications, which have been relatively neglected till now, and the highway network, which still does not serve certain rural areas with promising production potential. The problems of rate-setting for transport and communications services further aggravate the problems of autonomy and management which the public enterprises have to face. Thanks to the financial incentives provided by the Government, Morocco's merchant fleet has been greatly expanded, but it appears that the operation and equipment of port facilities are still inadequate. 61. Tourism. Over recent years, receipts from tourism have made up about 15% of total exports, and with a sound sector policy designed to make the most of Morocco's considerable tourism potential they could well show an increase of around 6% to 8% a year. A program of studies of the tourism sector is presently under way; this should serve to improve understanding of the sector and coordination of the different measures to promote tourism. V. Income Trends and Social Policies 62. Over the period 1960-71, there was a net improvement in the average standard of living, which rose by 2.5% p.a. in the rural areas and by 4.7% in the urban areas, at constant prices. The distribution of expenditures did not, however, improve and it appears that the living standard of some social groups deteriorated. In this, Morocco followed a pattern very similar to that of many other developing countries whose economic growth was accompanied by increasing concentration in income distribution up to a certain level of development, after which income distribution improved. 63. During 1971-78 the development of the irrigated zones made it possible to raise the living standards of a large number of farmers, while the increase in producer prices for the main agricultural products brought about a distinct improvement in the terms of trade between agriculture and industry. The expansion of agricultural investment in the rainfed areas as currently envisaged by the Government ought to make it possible to raise incomes among the 80% of the rural population who gain their livelihood from  -xxiii- those areas and who make up the great majority of the most disadvantaged households. In urban Morocco, the general improvement in average living standards and incomes for the least well-off households appears to have been satisfacto.-y. The high growth of employment in the urban areas (12% p.a. from 1971 to 1976) has made it possible for the most disadvantaged social groups to share the benefits of economic growth, while also helping to reduce the extent of rural poverty through migration to the cities. 64. The socio-economic characteristics of the most disadvantaged households are difficult to determine, because they have not been covered by the surveys made so far. In the countryside, the most disadvantaged households consist primarily of young persons without formal education, small farmers or farm workers in the non-irrigated areas, and craft workers. The small size of the farms and the low productivity of agricultural labor are the chief reasons for their low living standards. These two factors have, however, been compounded by the fact that small farmers have only limited access to modern production factors. In the urban areas, the characteristics of very low-income households are different. These are mostly older, illiterate families deriving their incomes from a wide variety of activities. As a result of the Government's schooling policy, the younger households have been able to earn higher-than-average incomes in the urban areas. Contrary to a widely held belief the main cause of very low living standards of the most disadvantaged group is not the low daily income earned from the pursuit of "informal" occupations, but the fact that the households concerned are only able to earn this income a few days a month. 65. Government expenditure in the social sectors (especially education) has been greatly increased over recent years, and a clear improvement is already apparent in life expectancy, which rose from 47 years in 1960 to 55 in 1977, and in school enrollment, up from 47% in 1960 to 65% in 1978 for primary education. However, certain social indicators such as infant mortality are still not favorable, and the disadvantaged social groups have not always been able to benefit from the social services provided by the Government. The contrast between a financial outlay that is often quite sizable compared with other countries, and the slow progress actually achieved in certain areas, is an indication that the policy followed in the social sphere has not always had the expected results. 66. The reasons for this situation are multiple, but it is perhaps important to emphasize that it would be incorrect to attribute the slow social progress to insufficient budgetary outlays. Increased budgetary appropriations would not in effect meet the central problem of social policy, which is its lack of precise objectives and appropriate means of action. The fact is that the goals of social policy are rarely explicit and the relative effectiveness of various policies is rarely evaluated. It is  -xxiv- not, therefore, altogether surprising to find that very often the beneficiaries of Government social policies belong to the better-off classes. Viewed as a whole, social policy does not appear to have been sufficiently selective. Very often the standards selected for the supply of public services have been out of the reach of the poorer households. Rather than thinking in terms of the provision of uniform "high-guality" services throughout the country, it would be more realistic to consider Government action differentiated according to household income levels and the existing social infrastructure. 67. Elements of an Integrated Social Strategy. In devising a social development strategy, it is important to take into account the links between the different aspects of social policy, because this serves to point up their interdependence and the existence of alternative means for achieving a given goal. The success of any social strategy depends on the successful implementation of three components, which are considered separately here for the sake of clarity but which in fact are and should be closely integrated. These three components are: (a) raising the productive capacity of the disadvantaged social groups; (b) expansion of highly labor intensive activities; and (c) strengthening the measures to redistribute income. 68. The drop in the rate of urban unemployment (from 18% in 1960 to 15% in 1971 and 10% in 1976) indicates that the employment market and wage levels are sufficiently flexible to provide jobs for a rapidly growing active population. The significant variations in wages observed throughout the economy underscore, however, that access to credit, capital and vocational training, and also to industrial and commercial techniques, is still unequal. Inasmuch as one of the main causes of poverty is the low productivity of labor, the first aim of the social strategy must be to step up investments that would directly raise the productive capacity of the disadvantaged social groups. 69. The effort already undertaken in formal education needs therefore to be completed by an increased effort in vocational training, including for those without any education at all. In the rural areas, by far the majority of the poor households are in the rainfed farming regions and consist of small farmers, farm workers and landless farmers. Raising their living standards depends therefore on increased Government efforts in favor of rainfed agriculture and the mountainous areas tbrough integrated rural  -xxv- development projects, expansion of agricultural credit and improvement of rangelands and animal husbandry. Special mention should be made of the "Promotion Nationale" program in this respect, because it bas provided those employed in the poorest regions under the program with an additional income amounting to as much as 40% of their total incomes. 70. In the urban areas, the occupations of the poor households are very varied. In contrast with the rural areas, the benefits of the growth of industry and services have reached down to the most disadvantaged social groups. This indicates that general economic policy measures designed to facilitate the expansion of highly labor-intensive activities, increasing the job supply and efficient functioning of the employment market, would make it possible to raise the incomes of poorer households. In this connection, the attention recently given to small and medium industry is a new feature of industrial policy and one worth pursuing, in view of its significance for employment. Improving services and information provided by the employment exchanges would help bring the supply of and demand for labor into'balance. Existing measures that artificially reduce the cost of capital and credit in relation to that of labor should be terminated, since they encourage employers to reduce their demand for labor. 71. Although the economic and social return on social expenditures proper is difficult to estimate, it seems unlikely in the case of Morocco that strengthening social policy would prove detrimental to economic growth in the long-term. In this context, improving the living standards of the least advantaged social groups is clearly a priority element. This would call for greater selectivity in Government intervention by identifying the group of poor households and their basic needs, and for raising the efficiency of the social services (education, health and family planning), the utilization of which should be extended. A special effort should be made to provide basic and inexpensive services. 72. Concerning education, the low efficiency of the education system, coupled with the extremely rapid rise in enrolments and the fact that education is provided free, constitutes a substantial financial cost that could prove beyond Morocco's means. A switching of public funds from higher education (by requiring that those able to pay should do so) to primary education in rural areas would appear desirable. A better balance between vocational training and formal schooling, plus assessment of the economy's skilled labor requirements, would make it possible to reduce unemployment among the young (in 1976, 73% of the urban male unemployed were under 24), while also lessening the shortages of skilled labor.  -xxvi- 73. Up till now, inadequate garbage collection and sanitation services and the limited number of homes with drinking water, especially in the rural areas, have been factors holding back progress as far as health is concerned. The limited access to the public health services of certain groups--children, nursing infants, the rural population and the urban poor--is also responsible for the unfavorable levels of certain social indicators. Past policies concentrated on development of an infrastructure and medical personnel of high quality. The Government is, however, aware of the need to reform the present system of medical care by stressing the need to meet basic health needs and facilitating the use of family planning services in order to bring down the population growth rate and improve living conditions for Moroccan families. 74. Finally, as regards housing and urban services, it would be necessary to place the emphasis on the provision of social services for the poorest segments, while continuing the effort already begun to improve living conditions in the bidonvilles, and progressively extend infrastructure services to the rural areas. 75. The third component of social policy relates to the general measures to redistribute income, i.e. direct and indirect taxes, subsidies, and rate setting for public services. As things are at present, these measures have no more than a very minor impact on the living standards of the poorest households. For instance, these households only receive a small part (about 20%) of the subsidies on the staple food items, whereas the budgetary cost to the Government is substantial. The weak role of the direct income tax also greatly lessens the progressivity of the tax system. Reduction of the subsidies paid on production factors or received by the users of public services through the rate scales applied should be considered, since this would be a means of increasing social equity. 76. In any case, the progress achieved by the investment programs needs to be evaluated at regular intervals. The relative number of poor households benefiting from them should be calculated, together with the increase in these households' incomes. Also, the gathering of statistical data (as for public health purposes) should be improved in order to be able to evaluate movements in the social indicators. VI. Regional and Urban Development 77. The differences in the level of development among Morocco's various regions are reflected in extensive regional disparities in living standards and administrative organization. The desire to achieve more balanced regional development through the inclusion of local initiatives has led to  -xxvii- strengthening of the administration at local level and an expanded role for the elected local authorities. The strengthening of the local offices and units of the ministries was thus accompanied by a degree of decentralization, the main stages in which were the establishment of provinces, then regions and, finally, the promulgation of a "Communal Charter" (Charte Communale) in 1976. 78. Local Government. Decision-making powers in the ministries are still extremely concentrated at the highest level. The requirements for medium-term planning and the lack of qualified staff at the local level have so far constrained decentralization efforts, except by the Ministry of Agriculture and the Ministry of Equipment. The Ministry of the Interior is the only ministry with a complete network of representatives covering the entire country down to the city wards and rural douars. Besides their traditional functions of maintaining law and order, these officials act as intermediaries between the local authorities and the Government. 79. In order to ensure harmonious development of the different regions of the country, it has been found necessary both to extend administrative decentralization and to increase the human, financial and technical resources of the local authorities. Generally speaking, it does not appear technically possible to augment the staff of the local offices of the ministries and other central agencies at all echelons of local government. The most reasonable solution would be to decide on a particular level of administrative decentralization, and one only, that would be given priority. The province is presently the best staffed echelon of Government at the local level, and it would seem logical to concentrate on strengthening it, even though the framework of the province is possibly somewhat narrow for the needs of regional development. Such a decision presumes, however, that the creation of new provinces would be subject to strict criteria in view of the pressure it would put on the already limited staff of the ministries, and that the decentralization of central administration to the provincial level would be continued. This decentralization should cover personnel management, procurement, the regionalization of budget appropriations, and the strengthening of the means and coordinating powers of the governor. 80. Although some significant elements of autonomy have been introduced at the local level, the central authorities still exercise very considerable supervision and control over local decisions as far as the regions, the provinces and the communes--the three major local government units--are concerned. The creation of seven regions in 1971 was intended primarily to establish the region as a framework for economic administration, but it has remained no more than a level of regional and physical planning. The provinces (36 in 1978) form the most important echelon of local government, but the provincial assemblies have only a very limited degree of autonomy. Decentralization is in fact greatest at the  -xxviii-- commune level. The legal authority of the municipal council and of its chairman is quite extensive. In practice, however, their autonomy has, until recently, been limited by the supervision exercised by the Ministry of the Interior, by the unavailability in the municipal administration of the technical staff needed for the preparation of investment projects, and by the inadequacy of the municipalities' financial resources. To build or run major facilities, local governments can, however, combine into associations; these play an important role in certain public services (water, power, urban transport). 81. To enable the local governments to play a larger role in economic development, the Moroccan Government has undertaken a far-reaching reform of the local government system, comprising: (a) A quantitative and qualitative improvement of local administrative structures through the establishment of a commune civil service, increasing the number of commune personnel and setting up a large training program; (b) Increasing the financial resources of the communes. In the context of the 1978-80 Three-Year Plan, an appropriation of DH I billion has been made available to the local authorities; a reform of local taxation is under study; and the volume of lending by the Fonds d'Eguipement Communal (FEC) to the local authorities has been raised from DH 89 million in 1977 to DH 200 million in 1980, and is to reach DH 800 million in 1985; (c) Development of local public services, especially water, power, sewerage and urban transport; (d) Increased technical assistance to the least privileged local authorities through the FEC and the local offices of the ministries. 82. The differences in the level of development among the various local authorities are still considerable and require that Government assistance be differentiated to take account of their various characteristics (size of population, existing infrastructure and financial resources available). Classification of local authorities on this basis would make it possible to modulate the division of responsibilities between the communes and the Government while ensuring that their sphere of competence, their financial means (local or from central institutions) and the staff available to them (local or provided through a technical assistance program) are all consistent. The proportion of grant-type funding (as compared with loans) and of technical assistance from the ministries (as compared with the establishment of municipal services) should, of course, be greater the poorer the commune. Establishment of a classification of this type appears to be an essential prerequisite for the preparation of differentiated assistance programs and of directives to be addressed to officials concerned  -xxix- with local matters in order to guide them in their tasks of motivating and supporting development efforts. These directives, whose degree of complexity ought to be adapted to each type of authority, would relate to: the priorities adopted in the national plan for the area in question; project identification and preparation methods; financial management (simplified accounting and budgeting framework); financial and manpower assistance programs managed by the central institutions and available to the local authorities; and the relations to be established with the local offices of the ministries and agencies. 83. Regional Development. Geographically, economic growth has been concentrated mainly in a zone located in the center and northwest of the country, as a result of which economic activities and social infrastructure are also unequally distributed. Comparison of various economic and social indicators confirms that it is the center and northwest which are best supplied, while the south and the Tensift regions are the most deprived. The midwest and eastern regions are in an intermediate position, but often below the national average. 84. The lack of consistent regional statistics makes it difficult to judge whether the disparities between regions have been reduced. However, partial data appear to indicate that as regards household incomes and economic activity, disparities tended to widen over the period 1960-71. Unlike some other developing countries, however, Morocco has a dynamic network of secondary cities, which enables it to spread the sources of economic growth over the entire country, thus providing a counterweight to the privileged development of the Casablanca region. In a more recent period, 1969-75, the balance of industrial growth thus tended to shift somewhat, with a greater distribution of industrial enterprises and jobs outside the central region (Casablanca). 85. Already in the early 1960s Morocco was aware of the need for a regional development policy, but it was not until the 1973-77 Plan that a more systematic policy was applied, characterized particularly by the strengthening of local governments and the establishment of special institutions such as the Special Regional Development Fund (FSDR) for the disadvantaged provinces. 86. However, although regional development was a clearly stated political aim, the goals of the Plan remained too general, both as regards reducing regional disparities and the promotion of poles of development and were not translated to a consistent strategy expressed in the form of a regional development plan. Nevertheless, a certain number of project identification studies were made in the poorer provinces. The drawing up of a nation-wide regional development plan that could incorporate a medium-term regional development strategy would now appear to be essential, as noted in  -xxx- the 1978-80 Plan. In an initial stage, and bearing in mind the scantiness of available statistics, the studies already made should be combined with an analysis of the regions' potentials, to determine the main options open at the national level. The data from the upcoming census would then make it possible to refine this plan by region. 87. During the 1973-77 Plan, the regionalization of investments was effected through a new institutional framework characterized by the formation of sectoral commissions at the provincial and regional levels and by the activities of the regional consultative assemblies. Progress was limited, however; in many instances the sector programs of the ministries were not broken down by region, which made it difficult to assess whether or not they were consistent. To strengthen the methods for regionalizing investments would require in particular the adoption of a regionalized budget system. 88. However, regional disparities will not be lessened or income raised in the disadvantaged provinces without a balanced development of regional economic activities; to achieve this goal, the Government would have to reorient its agricultural policy in favor of the rainfed areas, and to provide the disadvantaged regions with basic infrastructure. Urban Development 89. Morocco is already a highly urbanized country which is having to cope with a very rapid urban growth rate that has resulted in the emergence of shantytowns (bidonvilles) and overcrowding in the traditional quarters (medinas). In spite of wbat the Government has done and is doing, the demand for housing is continuing to grow faster than the supply, although the latter doubled between 1973 and 1977. 90. The 1968-72 Plan placed the emphasis on rural development and housing in the hope of damping down migration into the cities. However, in view of the scale of urbanization, the 1973-77 Plan adopted a more realistic strategy, devoting appreciably more funds and resources to the development of urban centers. The adopted strategy formed a consistent whole, and included the following main policies: (1) Increased Government intervention in urban areas, especially in the provision of sites and services; (2) Phased provision of sites and services; (3) As regards housing, priority for the population groups able to pay, with the aim of meeting the needs of those categories within five years;  -xxxi- (4) Limitation of the grant and subsidy element in State assistance. rlowever, this strategy had two major shortcomings: apart from the "zones a equipement progressif" (ZEP 15) program, it was not oriented toward meeting the needs of the poorest categories on a priority basis even though it included the construction of 72,000 dwellings for the poor, and it did not include any program for improving the medinas and bidonvilles. Elimination of these was considered only implicitly. A positive reorientation in this respect has since occurred, however, with the bidonville rehabilitation component included in the Rabat urban rehabilitation project. 91. Questions related to land ownership proved an obstacle to carrying the Plan's strategy into effect. The pace at which serviced lots were placed on the market was very slow. The control of urban development proved ineffective and clandestine urban housing sprung up in parallel with the planned developments. To solve these difficulties, the 1978-80 Plan proposed to complete the programs under way, to assign a certain priority to rehabilitation of the medinas and bidonvilles, to continue the preparation of master plans and to encourage the development of private real estate promotion through coordination of the activities of private and semipublic corporations with those of the Government. 92. The strategy of the three-year Plan contains some highly positive elements, but it is, nevertheless, no more than an interim one. The three-year period has given time for reflection and transition towards preparing a more comprehensive strategy, that could usefully include: (1) A new definition of role of the Ministry of Housing and Regional Planning (MHAT), with a view to relieving it of the responsibility for the purchasing and development of sites, which would be entrusted to local governments, public agencies or private corporations, with a view to strengthening MHAT's control and land-policy formulation function; (2) Speeding up of the production of sites for housing construction, which presumes, as the Plan in fact envisages, that the drawing up of master plans will also be speeded up with a view to defining a policy governing land aquisition by the central and local Governments. The system for expropriating and registering land ought also to be revised; (3) Continuation of the present efforts to bring down the unit costs of infrastructure and housing; (4) Amendment of the housing finance system or order to mobilize household savings.   CHAPTER I: INTRODUCTION 1.01 The Moroccan economy made considerable progress during the Second and Third Development Plans, which covered the period 1968-77. National income grew distinctly faster than the country's population over that period, with per capita income rising at an annual rate close to 3%. During the Third Plan (1973-77), moreover, economic growth gathered momentum. Whereas in 1968-72 the real annual increase in GDP remained below 6%, the target rate of 7.5% for the growth of gross domestic production set for the Third Plan was virtually achieved in 1973-77. The conservative approach which had tended to predominate in the post-independence (1956) years gave way after 1970-71 to a strong intention to pursue growth and a better distribution of the fruits of that growth. This desire led to a spectacular increase in investment between 1973 and 1977 coupled with a considerable broadening of development project identification, preparation and execution capabilities in all sectors. The emphasis placed on social development generated a rapid expansion in education, training and health-related services. It also prompted reconsideration of the effectiveness of the approaches followed till then, and the devising of new formulas for a direct attack on the problems posed by the low productivity and living standards of many Moroccans. In brief, Morocco's development strategy became more dynamic and acquired a broader range of instruments. Morocco can be justly proud of its appreciable economic and social achievements over the ten-year period 1968-77. 1.02 However, this acceleration of the economy's growth created problems of its own. Pronounced financial disequilibria developed in 1976 and especially in 1977 because the growth in savings and exports had not kept pace with that of investments and imports. After 1975, the very heavy burden of modernization of the Royal Armed Forces was added to these disequilibria of structural origin, which were further aggravated by the fluctuations in the prices of Morocco's principal exports and imports. To meet the resulting financing needs, the country resorted increasingly to external borrowing. Since 1978, Morocco has been passing through a period of financial adjustment during which it made determined efforts to re-establish the major equilibria in the economy. These efforts included a temporary cutback in investments, imports and employment, and were incorporated in the Plan for 1978-80. The challenge to be met by the Government during this Plan was that of preparing and initiating the implementation of long-term development policies that will make it possible for the economy to again attain a high growth rate based on a sound structural foundation. These policies are under study; certain of them have been analyzed in quite considerable detail and are already being put into effect. 1.03 Another and equally important challenge is that posed by the low income levels that are still the norm for a very large number of Moroccan households. Since these households derive their incomes from activities that offer little return, they are unable to meet their basic needs in terms  of nutrition, housing, education and health, while access to public services is difficult for them. The social policies put into effect by Morocco so far show that effective methods exist for overcoming this problem. What is now needed is to expand and improve the effectiveness of the social development strategy that is already to a large degree being followed, by better specifying the social groups to be the targets of this strategy and, wherever possible, reducing the unit cost of the services rendered to these target groups. This improvement is all the more essential because Morocco will only be able to count on limited budget resources in the years ahead, and the growth of its population is bound to bring heightened needs in this area. This financial constraint would mean in particular the reduction, or even elimination, of "social" subsidies and free public services for the wealthier social groups, on the principle that these subsidies ought to be limited, as far as possible, to those whose incomes are insufficient to allow them to cover their basic needs. 1.04- A number of factors contributed to the successes already achieved by Morocco, and will also help overcome the difficult problems remaining to be solved. Certain of these factors have a direct impact and can be modified relatively quickly, namely the economic, financial and social policies that enable the country to mobilize and allocate its resources more effectively in pursuit of the goals set. These policies are analyzed in the chapters that follow. Other factors, on the other hand, are of a less malleable nature and govern to some degree the choice of goals and policies; these are the natural resources available and the qualitative characteristics of Moroccan manpower. These are examined below. This examination is not an exhaustive one, but is intended only to underscore certain strengths and weaknesses that can be expected to continue to play an important role in the strategic choices that Morocco would have to make to overcome the obstacles in the way of its development. Natural Resources 1.05 Compared with many developing countries, Morocco has quite abundant natural resources. It has tne world's largest and most easily accessible phosphate reserves, which makes the phosphate sector a key one in the economy as a source of both foreign exchange and savings. Other exported minerals are iron ore, manganese and lead, together with zinc, cobalt and copper, although the value of these last three products is much smaller. Construction materials are abundant and conveniently located. Anthracite and hydropower plants help to meet part of the country's energy requirements. Oil and natural gas have been produced commercially for several years now, but in very small quantities; there are, however, promising indications of additional reserves that warrant continued exploration work. Morocco has uranium and tar shales in very sizeable quantities, but the techniques required and returns obtainable have not yet been fully determined. 1.06 Its geographic location and natural factors give Morocco a considerable agricultural potential. The country is under two dominant influences: that of the Atlantic Ocean, whose coast opens up for the greater part onto the plains, and that of a chain of mountains running from the  - 3 - central Rif to the western Anti-Atlas. Rainfed agriculture can become intensive on the plains, hills and foothills west of these mountains, where a humid and temperate Atlantic climate combines with sufficiently fertile soils. Mo.eover, several large rivers flow from the Atlas and Rif to the coastal plains of the west and north, where they provide water for the irrigation of extensive farmlands while also supplying the cities' needs. However, this moist Atlantic air rarely reaches the other side of the mountains, while the air masses moving in from the Mediterranean do not carry enough moisture at that point to compensate. In southern and eastern Morocco water is a major constraint; apart from the oases and some irrigated areas, agriculture can only be extensive or else altogether nonexistent, as in the Saharan regions. In all the regions suited for farming, Moroccan agriculture is still far from achieving the optimum yields possible with existing agricultural techniques; the long-term program for bringing a million hectares under irrigation is only about 70% complete. Morocco's extensive coastline on both the Mediterranean and especially the Atlantic offers it considerable fishery resources that are only partly exploited to date. Moroccan agriculture and fisheries still have very considerable potential for further growth. 1.07 Morocco's geographical location gives it other advantages. It is very close to Europe, with which it is linked by the important freight route via the Straits of Gibraltar. It is also relatively near, by sea and air, to North America, the Middle East and South America. The proximity of the economies of these regions is a factor favorable to the development of international trade. Morocco's international trade has been primarily with Europe, especially France, for historical reasons; this trade can be developed further and diversified. In 1978, imports of goods and services represented 32% of Morocco's GDP and exports 17%. In that year there were about 250,000 Moroccans working in Europe, while over 1.5 million tourists visited Morocco. 1.08 The diversity of natural conditions has greatly influenced human settlement patterns and economic activities in Morocco. Population growth and development have been concentrated in the plains of northwest Morocco; and, to a lesser extent, in the irrigable valleys of the Souss in the southwest and the Moulouya in the northeast, these being the most favorable zones from the viewpoints of climate, relief and access to international transportation. The regions behind the central mountain chain, in the south and east toward the Sahara, on the other hand, have remained thinly populated and characterized by a way of life based on extensive pastoral farming. These natural disparities between the regions have prompted nigrations from the less favored to the better endowed regions. The latter thus acquired an institutional advantage in addition to their natural assets in the form of much more developed physical infrastructure and modern services. A better balance between the regions in the provision of infrastrcuture and services is one of Morocco's key goals that it sees as a means for preventing the formation or persistence of pockets of poverty in the disadvantaged zones.  -4- Human Resources 1.09 Morocco's population is growing and becoming urbanized very rapidly: in 1979 the country had over 19 million inhabitants, and this figure is expected to increase to 27-30 million by 1992. The cities will have to absorb at least an additional 4 million people between 1977 and 1992. These ineluctable demographic prospects make it necessary for Morocco to achieve a minimum rate of growth, if it wishes to increase the supply of goods and services per capita and for all Moroccans. This necessity is particularly pressing in agriculture which, in view of its as yet unexploited potential, must be organized to provide sufficient food for every household. It is even more pressing with regard to large segments of the population whose basic needs are not fully met. Raising the productivity of these urban and rural dwellers so that they will be able to earn enough to feed and house themselves to minimum but adequate standards, and providing them with minimum education and health services, are the difficult tasks that demographic growth imposes on the country. Of these tasks, one is becoming more pressing every day, namely the need to make modern means of family planning available to more Moroccan families, especially the poorest ones, both to avert the disastrous consequences that a runaway population explosion would have, and also to give each family greater control over its future and its well-being. 1.10 The high birth rate that Morocco has known for many years means that the population is now very young and that the population of working age is growing distinctly faster than the population as a whole. These demographic characteristics ensure that Morocco will have an abundant labor supply; at the same time they require the economy to create large numbers of jobs and to train workers for those jobs. An estimated 190,000 additional workers have come onto the labor market in 1977. According to this report's forecasts, which take into consideration both the growing participation of women in the labor force and the unencouraging prospects for emigration to Europe, about 300,000 new jobs would be needed each year by 1990. Moroever, for several years now, the supply of unskilled labor has exceeded the economy's requirements, while the reverse has been the case as regards skilled labor, especially since the start of the 1973-77 Plan. To counter this tendency toward imbalance between labor supply and demand according to levels of skill, Morocco would have to make an even greater effort than in the past to train its work force and to raise the effectiveness of that effort. At the same time, it will have to put into effect an investment strategy that places greater emphasis on projects wbose cost per job created is low while requiring large numbers of unskilled workers for their operation. 1.11 The Moroccan labor market is essentially a relatively free and well integrated one. The regulations in force and the existence of trade unions have no more than a minor influence on its functioning. Thanks to the well developed infrastructure and low costs of transportation, movement within the country is easy and relatively cheap for workers. Subject to the imbalance between supply and demand at various levels of skill, the range of  5- occupations offered is very wide, from the least paid to the most prestigious; in fact the supply pressure of unskilled labor tends to result in a subdivision of jobs at this level into short-time employment paying very little, rather than into full unemployment. The very low productivity and remuneration of many urban and rural jobs constitute the fundamental problem that has to be overcome if there is to be a reduction in the number of households that cannot meet their basic needs. Structural unemployment does not seem to be as serious a problem as that of low productivity and income levels; it mainly affects the youngest workers looking for their first jobs, and the oldest who are likely to be prematurely superannuated from the labor force. 1.12 The abundant supply of unskilled labor tends to keep wage levels down for this category, while also encouraging migration flows out of country. This situation places Morocco at a considerable advantage on international markets; its unskilled labor costs are among the world's lowest. The fact that this labor is often obliged to accept wage rates that do not keep pace with inflation contributes to the stability of Morocco's production costs. However, this advantage is offset, to an extent that is hard to quantify owing to lack of sufficient data, by several concomitant adverse factors: the low productivity of barely or badly trained labor; the fact that the workers who emigrate, even the unskilled ones, are often the best and most highly motivated; the very strong pressures for higher pay for skilled labor; and the shortage of technical and managerial staff. Development Institutions 1.13 The monarchy is the linchpin of Morocco s institutions. Established at the end of the 8th century by Idris ibn Abdullah, who fled from Arabia to seek refuge in Morocco, the Alawite dynasty today rules in the person of King Hassan II. The authority of the monarchy emerged considerably strengthened from the post-independence period following the French Protectorate imposed from 1912 to 1956. Exiled by the French from 1953 to 1955, King Mohammed V returned to Morocco as the extremely popular symbol of the national will. The sovereign governs within the framework of the 1972 Constitution. Under this constitution, Morocco is a democratic and social constitutional monarchy, in which personal political freedoms are guaranteed and the citizens are represented by elected assemblies. The local assemblies were set up after the 1976 elections and the National Assembly (one-third of which consists of representatives of various socio-economic groups elected by indirect suffrage) in 1977. The monarchy seeks to maintain a balance between the different political and social groups acting as an arbitrator above factional interests. 1.14 This policy of seeking equilibrium is reflected in the permanent search for national unity under the direction of the king. After the regime's serious crisis in 1970-71, this unity was achieved to defend Morocco's cause in the dispute dating from 1975 over the western Sahara.  - 6 - All parties agreed to support the Government on this point. It is for the future to show how far the political equilibrium achieved today will permit an effective response to the economic and social pressures building in Moroccan society: inflation, income disparities, concentration of economic growth and modern employment, erosion of the living standards of many rural dwellers, hypertrophy of minor urban services and the growth of shantytowns. It is true that several reforms have already served to meet certain demands, such as recovery of land owned by foreigners, effected in 1973, or the Moroccanization of a large number of sectors, also starting in 1973. However, it should be noted that these reforms have affected only foreigners established in Morocco; in other words, they could be carried out without affecting the interests of the beneficiaries of the present equilibrium. 1.15 Morocco's economic development takes place in a free market setting but the State exercises a determining influence over its orientation and pace., Since 1957, pluriannual plans have served as a guide to investments and reforms. From 1962 onward, these plans have been discussed by the Gonseil Superieur de la Promotion Nationale et du Plan, which is chaired by the king, and they have force of law. They do not set quantitative targets for private enterprises, being concerned primarily with proper programming of State investment expenditures. The 1972 Constitution guarantees the right of ownership, subject to the exigencies of economic and social development, and expropriation is only permitted on a case-by-case basis and in accordance with procedures specified by law. The State encourages private enterprise through a number of instruments and a class of Moroccan entrepreneurs has grown up in the commercial, agricultural and real estate spheres. However, notwithstanding this frequently reiterated commitment to private enterprise, public and semipublic enterprises predominate, especially in the industrial and banking sectors, and have been gaining further in significance since 1973. The direction of this trend is still unclear. By all appearances, Moroccan entrepreneurs, except those engaged in certain traditional light industries, are somewhat hesitant to take the risks involved in industrial investments and prefer to see the State carry such risks. Moroever, expanding the public and semipublic sectors provides an additional source of influence for the central authorities, and a means of developing and refining the State's interventions in the economy. These interventions, while justified to begin with, are sometimes characterized by a rigidity that is ill-suited to the changing needs of businesses and the economy. This places constraints on the private sector that is supposed to be encouraged and brings about economic rent situations to the advantage of certain categories of enterprises. The flexibility and dynamism that are the essential advantages of the private system, disciplined as it is by the law of the market place are thus impaired. It appears that the emergence of the most efficient small and medium enterprises is held back by the very regulations designed to encourage them, and the same applies to transfers of technology through foreign participations and their adaptation to the Moroccan setting. An important goal of the 1978-80 Plan is a study of the reforms needed in the instruments of economic regulation, so that they will better serve the development of the private, semipublic and public enterprises sector.  1.16 In his memoirs, H. M. Hassan II stresses that "our constitutional and democratic monarchy is also a social monarchy", i.e. "that one of its essential aims is to improve the lot of the lower-income classes". This point is brought out in various chapters of the memoirs, particularly those dealing with agriculture, education and housing. The theme has been reiterated in numerous recent official declarations and decisions and has been translated into a complex strategy of social development, the results of which, though substantial, remain nevertheless limited in relation to the immense needs to be satisfied. The needs in question are those of the country's increasing numbers of young people for whom opportunities for productive employment are presently limited, those of the peasants in the non-irrigated areas who have a hard life struggling for subsistence on tiny holdings, and those of the underemployed urban and rural workers with very low productivity and inadequate earnings. The limitation of the domestic market as a result of this situation in return discourages the expansion of small and medium industries which do not at present find outlets commensurate with their capacities. 1.17 The constraints on action in the social sphere by Morocco are heavy. Income and savings, especially public sector savings, are low, and the financial resources available for social policy are limited. Administrative capability is relatively good in quality terms but still insufficient in quantity, partly because of the limited financial resources. The monarchy is constantly concerned with the preservation of social equilibrium. Intervention by the State to foster redistribution is therefore very cautious, planned in minute detail and designed not to upset the status guo. It touches only the fringe, so to speak, and impinges only on certain additions to assets or incomes. As regards weath, certain strategic sectors that generate considerable savings - such as phosphates - have been nationalized for some time. The Agrarian Reform - a complex long-term exercise in restructuring landholdings - has as its primary concern the formation of economically viable individual holdings. As to the recovery or Moroccanization by the public and private sectors of foreign-owned farms and enterprises, this was encouraged through compensation and did not affect the situation of those who benefit from the present distribution of wealth. 1.18 Concerning incomes, more has been done to further redistribution but here, too, prudence has been the watchword and disparities have probably continued to widen. Redistribution is effected by general measures, such as taxation and price subsidies, or by specific interventions. In view of the difficulties of planning and implementation of general measures, Morocco is shifting more and more to specific interventions. Without abandoning the general measures which it is in fact seeking to render more efficient, Morocco is increasingly using, as instruments for redistribution, development projects or social programs targetted to the lowest-income segments of the population. Although still inadequate, the capabilities for preparing and executing projects of this nature are being actively  developed. A feature these projects all have in common, and one that is deliberately sought by Morocco, is that they are designed to improve both the distribution and the growth of income by raising the benficiaries' productivity. 1.19 Morocco has a capable corps of administrators for implementing its social and economic development policy. The administration, traditionally prestigious, accustomed to command and competent, has been able to attract high-caliber staff capable of formulating and executing its development programs and policies. However, the most able have up to the present gravitated mostly to the financial and industrial sectors, while the other sectors have insufficient staff to undertake the planning and execution of increasingly complex projects. There is also a shortage of middle-level staff to give proper support to the decision- making echelons. Finally, whereas the central Government is, subject to the above reservations, relatively well-provided with competent staff, the human resources available to the local authorities are very inadequate for their economic and social development responsibilities, except perhaps in Casablanca and Rabat. Morocco has instituted compulsory civil service and is making a major training effort to overcome these weaknesses; this policy needs to be pursued more forcefully. The International Context 1.20 Morocco wants to expand its economic relations with other countries to the degree that it can profitably do so without compromising its political independence. These economic relations are closest with the European Economic Community (EEC). The bulk of its international trade is with the Community and it is to the countries of the Community that most of its emigrant workers go. In 1976 Morocco signed an association agreement of unlimited duration with the EEC. Basically, this agreement provides for: (1) free access to the EEC market for raw materials and industrial products originating from Morocco; (2) the provision by the Community of financial aid to Morocco totaling 130 million units of account over the five years following the signing of the agreement; and (3) a guarantee for Moroccan workers in EEC countries of equal treatment with workers of the member states as regards working conditions and remuneration, and also social security. Although the EEC has reserved the right to limit imports of agricultural products and "sensitive" products (for instance, certain textile products in 1977), Moroccan exporters and workers benefit from a system of favorable access to the Community. The association agreement also contains special provisions regarding transfers of private capital and technology. If one also takes into consideration the bilateral agreements in effect between Morocco and the EEC member states (particularly France), the Moroccan economy is seen to be clearly oriented toward close interdependence with Europe. However, it should be noted that when Greece, Portugal and Spain become members of the EEC in the relatively near future, the attraction of the Community for Moroccan exporters and workers might diminish, since the economies of those three coutries would derive an enhanced competitive advantage from their membership.  1.21 Morocco has also strengthened its economic relations with the USSR and several Middle Eastern and African coutries. The agreement signed with the USSR in March 1978 is, potentially, the most significant. This agreement provides for exports of phosphates and phoshate derivatives to the USSR for thirty years following its signing; the quantities involved could reach 10 million tons a year over the coming decade. In return, the USSR will grant Morocco financing on very favorable conditions (annual interest of 3% and repayment over 18 years, including three grace years) for development of the new mine at Meskala and for transportation equipment; the financing in question would total $2 billion. Since 1975, the confrontation in the western Sahara has compromised the Maghrebian cooperation sought by Morocco, although its links with Tunisia remain close. Outline of the Report 1.22 The rest of the report is organized into five chapters. Chapters II, III and IV are devoted to economic growth and Chapters V and VI to the distribution of the fruits of this growth. More specifically, the different chapters are arranged as follows: (1) Chapter II examines the growth and structural changes the economy has experienced at the overall level in the course of the ten-year period 1968-77. In doing so, it brings out the chief strengths and weaknesses of the economic growth achieved by the end of the 1968-72 and 1973-77 Development Plans, pointing up the immediate and structural problems that economic and financial policy would have to solve to attain viable growth in the short and long term. These problems relate to external financing, exports, mobilization of domestic resources, price policy, and planning. (2) Chapter III seeks to determine the results that can be expected from the annual plans of financial adjustment that dominate the period covered by the 1978-80 Plan, and looks ahead to the overall prospects for the economy in the period 1981-90. This leads to a closer analysis of the main problems identified in Chapter II. This chapter therefore leads to the identification of a certain number of pressing and important needs for reform. (3) The overall growth problems are considered at sector level in Chapter IV. This chapter is based on studies made previously for the Moroccan Government and by the World Bank. (4) Chapter V is devoted to the employment situation and the social development strategy pursued by Morocco. It approaches these two questions from the angle of satisfying the basic needs of the population, rather than from that of the inequality of wealth and income distribution. This approach seeks to define the size of the social groups that lack sufficient income, or sufficient access to public services, to meet their basic needs, and endeavors to  - 10 - explain this situation. To the extent that these reasons are clear, Chapter V leads to proposing modifications to or strengthening of policies related to employment creation and social development. (5) In Morocco as in many other countries, income distribution has a regional or spatial dimension, in that regional differences in development are pronounced and have an acute impact in the social and political spheres. Chapter VI examines regional development and urbanization policies, and also considers how the regional and local government structures can best be reshaped to implement these policies more effectively.  - 11 - CHAPTER II: GROWTH AND STRUCTURAL CHANGES IN THE MOROCCAN ECONOMY DURING THE PERIOD 1968-77 A. INTRODUCTION 2.01 Between 1968 and 1977 the Moroccan economy passed through two quite distinct phases. Up till 1974, economic growth remained steady at around 5.4% per annum. This prudent rate mirrored the financial and monetary policy then followed, being based on a regular, but very gradual, increase in the share of domestic resources allocated to investment and thus making it possible for the economy's resource deficit to be kept at a low level. From 1974 onward, however, this prudence gave place to the voluntarist goals of the 1973-77 Plan which aimed at accelerated economic growth and improved income distribution. Taking advantage of the sudden rise in phosphate earnings, which increased fivefold between 1973 and 1974, the Government embarked on an ambitious investment program which, involving first the public sector and then the private sector, resulted in annual investment increasing 2.6 times between 1973 and 1975. Being ambitious, this acceleration carried with it numerous risks of domestic and external disequilibria, and these disequilibria in fact developed more quickly than expected, following a buildup of adverse and in part unforeseeable external factors. The sudden increase in military spending as a result of the tensions along the Saharan borders was one of the important factors, to which was added the world economic recession that constricted overseas markets plus the fall in phosphate prices as of mid-1975. This phase of intensive capital expenditure under the 1973-77 Plan produced substantial financial disequilibria, which led the Government to take corrective measures and to formulate a three-year austerity Plan for 1978-80. The purpose of this Plan is to re-establish the economy's major equilibria and thus to ensure renewed growth on a sound economic basis. B. DEVELOPMENT GOALS AND STRATEGY, 1968-77 Review of Progress Achieved Since Independence 2.02 Following the achievement of political independence in 1956, three development plans were carried out between 1958 and 1967, the overall results of which were as follows: I/ 1/ The statistics for this period cannot easily be compared for lack of homogeneous series based on constant prices.  - 12 - 1958-59 1960-64 1965-67 Plan Plan Plan Capital outlays: - Total in millions of current DH 1,580 5,920 4,860 - Annual amount in millions of 1969 DH 900 1,300 1,800 - Average % of GNP 9.6 11.2 12.2 - Annual GNP growth (X) 5.5 4.0 2.4 Source: Estimates based on data in Yusuf Sayigh, The Determinants of Arab Economic Development, Croom Helm, London 1978. During this ten-year period, the economy's rate of growth was a modest one reflecting the increasing, but small, share of domestic resources allocated to investment. The planning process, based on the methods followed in France, was slowly adapted to the special requirements of the Moroccan context, enabling the administration to gradually expand its control over the country's development. Not until the 1968-72 and 1973-77 Plans, however, would the planning process become more elaborate, though still limited to the public sector. Goals and Overall Strategy of the 1968-72 and 1973-77 Plans 2.03 The 1968-72 Plan was already concerned with the economy's growth as a means of offsetting mounting demographic pressure. It centered on the following tbree priorities: - Achieving a high growth rate in agriculture; - Promoting the tourism sector; - Accelerating vocational training to meet the country's need for skilled labor. It attached special importance to improving standards of living through measures relating to family planning, slum improvement and employment creation, particularly through the "Promotion Nationale" program and the development of irrigated areas. The Plan also provided for a special effort to promote industrial development, while seeking to improve the mobilization of private, national and foreign savings, primarily through amendment of the Tax Code and incentives for investment. 2.04 As it was felt that the results of the 1968-72 Plan were modest in relation to the economy's growth potential and the population's needs, the 1973-77 Plan adopted much more ambitious goals. This Plan aimed at a much higher growth rate (7.5% p.a.), based on a major increase in investment  - 13 - and a heavy emphasis on exports. It also sought a more equitable distribution of the benefits of economic growth. To achieve these goals, the development strategy adopted included the following elements: (1) A coordinated array of measures and institutions aiming at attaining a high growth rate of exports; (2) Stimulation of domestic demand so as to improve the utilization rate of installed industrial capacities oriented toward the domestic market; (3) A pronounced increase in agricultural production, by seeking especially to reduce the intervals between the construction of irrigation facilities and the bringing into production of the land served, together with encouragement of traditional crops and stockraising; (4) A restructuring of the industrial sector through the Office de Developpement Industriel (ODI), established for this purpose in 1973; (5) Amendment of taxation to enhance the State's saving capacity and favor a better distribution of income; (6) A reform of the education system to adjust it simultaneously to the needs of the people and those of the economy, but with an emphasis on management training; (7) Adaptation of Government services with a view to bringing them closer to the people, through, inter alia, a greater degree of regionalization, more equitable income distribution, and increased social expenditures and housing assistance for low-income families; (8) An improvement in nutrition levels, notably through family education; and (9) A policy favoring access by Moroccans to the management and control of the means of production; this policy included recovery of land held by foreigners and its distribution to small farmers and the Moroccanization of businesses with a view to placing Moroccans and foreign partners on an equal footing in most subsectors in industry and services. 2.05 The 1973-77 Plan recognized explicitly the need to reduce the disparities between the different social strata, whether at the level of basic needs (especially nutrition), income, regions or access to public services. Parallel with this, it advocated a more dynamic budgetary and monetary policy than in the past, taking the view that priority had to be given to growth, even at the risk of creating inflationary pressures.  - 14 - The Quantitative Goals of the 1968-72 and 1973-77 Plans 2.06 The 1973-77 Plan was considerably more ambitious than the 1962-72 Plan and this was reflected in their main quantitative targets. As mentioned earlier, the growth target for the Gross Domestic Output 11 (GDO) of 4.3% p.a. for the 1968-72 Plan was raised to 7.5% for the 1973-77 Plan. Similarly, the investment target set at about 2.5 billion 1969 dirhams per year for 1968-72, i.e. 15.5% of GDO, was raised to around 5 billion 1969 dirhams per year for the 1973-77 Plan, or 17% of GDO. In overall terms, the macroeconomic goals can be summarized as follows: Annual Growth (%) Percentage of GDO 68-72 Plan 73-77 Plan 1973 1977 Gross Domestic Output!/ 4.3 7.5 100.0 100.0 Imports 5.4 8.0 21.3 21.7 Exports 4.9 10.0 16.1 17.5 Investment (and stocks) 4.4 18.02/ 16.5 22.92/ Government consumption!/ 4.6 3.5 2.9 2.5 Household consumption2/ 3.3 4.8 81.3 73.5 1/ Does not include civil servants' salaries. 2/ Does not include consumption by tourists. 3/ Before revision of the Plan (see para. 2.08). Source: State Secretariat for Planning, 1968-72 and 1973-77 Plan documents. 2.07 These goals were placed in an official long-term perspective that looked toward an average GDO growth rate of about 7% p.a. by the year 2000, the rates assigned to agriculture and industry being 3.8% and 7.6% respectively. These goals required a marked acceleration of investment over the entire period (10% growth p.a.). Their achievement was to make it possible for household consumption to rise at about 6% p.a. and thus to improve the living standards of the population (with slower population growth also an aim). The 1975 Revision of the 1973-77 Plan 2.08 The 1968-72 and 1973-77 Plans were both revised during the plan periods, but the revision of the second was by far the most extensive. The 1975 revision of the 1973-77 Plan, itself ambitious, was decided on following the increase in foreign exchange earnings (and in savings) resulting from the spectacular rise in phosphate prices in that year. The budget allocations included in the Plan for public and semipublic capital expenditures were revised very sharply upward, whereas those for the purely 1/ Defined as GDP less civil servants' salaries.  - 15 - private sector remained indicative. The allocations for the public and semipublic sectors were raised from DH 10.9 billion in the original version of the Plan to DH 29.3 billion in the revised version. The revision assigned particular priority to State participation in industrial development through the establishment of highly capital-intensive plants (steel mill, sugar refineries, cement factories and chemical plants), and to the Special Regional Development Fund, in support of the aim to reduce regional disparities. C. GROWTH AND ITS PRINCIPAL FACTORS Principal Factors 2.09 The real growth of the economy (GDP at 1969 prices) is estimated at an average of 6.5% p.a. over 1968-77. However, this average covers two periods that were distinctly different as regards both the rate and origin of growth. Up to 1972, GDP growth rate was an estimated 5.6% p.a., with the economy deriving its dynamism primarily from exports, which outstripped the cautious targets set in. the 1968-72 Plan. Exports grew over this period at close to 8% p.a., whereas the Plan's target was only 5%. Gross fixed capital formation rose at an annual average of 4.2%, slightly below the Plan's target. This growth pattern made it possible both to reduce the economy's resource deficitl/ and to speed up somewhat the growth of consumption (especially public consumption) from its low pre 1968 level. 2.10 The period following 1972, on the other hand, was one of markedly faster economic growth and a considerable widening of the economy's resource deficit. Real GDP growth, at 7.3% p.a., was close to the goal set by the 1973-77 Plan. Investment increased at a record 28% p.a., thus becoming the main impetus for growth. This increase reflected essentially the direct and indirect impact of public investment expenditures, which were stepped up very considerably in 1973-77, while the incentives introduced in 1973 also had a positive impact on private investment. To the stimulating effects of investment on demand was added the rapid increase in military expenditures as of 1975 and the very pronounced rise in Government current social expenditures. The rise in domestic demand brought about a considerable increase in demand for imported goods and services. At the same time, exports of phosphates and agricultural products lost their dynamism, and their international purchasing power dropped back in 1977 to below the 1972 level, following the substantial but shortlived rise in 1974-75. These various factors produced an extremely skewed growth pattern in which the weakness of exports and savings contrasted increasingly with the dynamism of investment and Government consumption. In 1977 the economy's resource gap exceeded 20% of GDP (at current prices), whereas it had never exceeded 5% up to 1974. To cover this gap, Morocco resorted to extensive external borrowing on commercial terms, as will be noted later. 1/ The economy's resource deficit is defined and measured by the difference between exports and imports (including nonfactor services), which is equal to the difference between investment and savings.  - 16 - 2.11 The changes in the economy's resource availability and uses can be summarized as follows (percentages): Annual Growth Percentage of GDP (1969 prices) (current prices) 1968-72 1973-77 1967 1972 1977 Gross Domestic Product 5.6 7.3 100.0 100.0 100.0 Imports 3.2 17.2 20.4 19.8 39.7 Exports 8.3 0.9 18.2 19.1 18.0 - in purchasing powerl/ 4.9 0.7 - - - Consumption 4.9 6.2 89.0 87.4 89.8 - government 6.2 19.3 12.2 13.0 21.9 - household 4.7 3.2 76.8 74.4 67.9 Investment2/ 3.5 28.6 13.3 13.2 31.9 1/ Obtained by dividing exports at current prices by the import price index. 2/ Gross fixed investment and changes in stocks. Source; Table 2.3, Statistical Annex. 2.12 These figures reveal a slow-down in the growth of household consumption during the 1973-77 Plan (3.2% p.a.) compared with the 1968-72 Plan period (4.7% p.a.). The growth in household consumption probably remained relatively slow in 1973-77 owing to the poor performances of the agriculture sector (and in particular the poor harvest in 1977), which affected the income of the rural population and especially that of its poorest segments. It should be noted, however, that the estimates of household consumption on which the above figures are based were obtained as a residual when preparing the national accounts, without verification by a direct survey. They are therefore subject to a margin of uncertainty that could be significant. Structure of Production 2.13 The pronounced differences in sectoral growth rates between 1972 and 1977 led to a change in the structure of GDP. During the 1973-77 Plan, the construction and public works sector was by far the most dynamic, in response to a very marked increase in investment demand. Despite the considerable increase in investment in 1973-77, the industrial sector experienced a growth rate that may appear deceptive (less than 7% p.a. for the period); however, it must be borne in mind that a certain time is needed before capacities installed can be actually brought into production, and that the impact of the investment during 1973-77 was still only partial in 1977. There was a marked acceleration in the real growth of Government services in 1973-77 and their share in GDP increased. By contrast, agricultural growth remained extremely disappointing during the period 1973-77 owing to bad weather conditions, whereas over the years 1960-71 agricultural production bad increased at an annual rate of 3.7% (at 1960 prices). The figures for the individual sectors' contributions to GDP can be summarized as follows (percentages):  - 1.7 - Annual Growth Share of GDP (1969 prices) (current prices) 1968-72 1973-77 1967 1972 1977 Agriculture 6.8 -2.4 21.7 21.6 16.3 Mining 3.9 2.5 4.1 3.4 5.3 Energy 7.5 4.8 3.9 3.7 2.5 Industry 5.4 6.9 16.1 16.5 16.5 Construction and public works 4.9 21.9 4.4 4.2 8.9 Nonpublic services 4.1 7.6 39.3 37.3 33.1 Public services 4.4 11.9 10.5 10.4 11.9 Duties and indirect taxes - 21.0 -- 2.9 5.5 Gross Domestic Product 5.6 7.3 100.0 100.0 100.0 Source: Table 2.1, Statistical Annex. 2.14 The phosphate sector warrants special mention, because of its importance for the country's foreign exchange earnings and Government revenues. The value added by phosphate mining represents no more than a very small percentage of GDP (2 to 2.5X); the actual mining activities do not create much employment, althougb their impact in the regions concerned is not negligible. The linkage role of the phosphate sector has increased with the growth of the fertilizers industry and, since 1975, that of phosphoric acid, and also in transportation where it accounts for the greater part of railway and port activity. Recent developments show the growing importance of phosphate derivatives, as well as the significant impact of changes in phosphate export prices on the State's revenues and hence its ability to finance investments. The chief indicators of the role of the phosphate sector and their evolution are as follows (percentages): 1969 1974 1975 1977 Share of phosphate sector in: - GDP 2.2 3.5 2.2 2.4 - rail freight traffic .... 66.6 65.0 75.2 - port freigbt traffic .... 66.7 57.7 59.3 Share in exports of goods: - phosphate (current prices) 22.4 55.0 55.3 36.5 - phosphate (1969 prices) 22.4 33.0 29.6 28.9 - derivatives (current prices) 2.1 1.8 1.7 5.7 Share in State revenues: - mining taxes 7.7 2.8 1.9 0.8 - Treasury receipts from OCP 5.9 30.0 23.0 8.5  - 18 - 2.15 Significant price changes also affected the various other sectors of the economy. Between 1969 and 1977, the growth in value added at current prices was distributed as follows (DH millions): Increase in Value Added, 1969-77 Due to Increase in: Total Price Quantities Agriculture 4,074 4,074 - Secondary sector 10,549 6,379 4,170 (of which: mining) (1,828) (1,575) (253) Tertiary sector 14,207 7,325 6,882 GDP 28,830 17,778 11,052 Souice: Tables 2.1 and 2.2, Statistical Annex. The agriculture and mining sectors, which together accounted for 21.6% of GDP in 1977, only contributed 2% of the increase in GDP in real terms between 1969 and 1977, but 32% of the increase in prices. It should be noted, nowever, that the value-added data on which these figures are based are estimated at market prices and include the effect of indirect taxes (net of subsidies). Without estimates at factor costs, it is difficult to draw firm conclusions as to the changes in relative sector prices. Imports and Exports 2.16 Economic growth would not have been possible without a marked increase in imports, especially after 1973. The increase in volume of imports was 17% p.a. over the 1973-77 Plan, and this, coupled with the considerable rise in prices, raised imports to over US$4 billion at current values in 1977, whereas prior to 1972 the figure was less than US$1 billion. The real growth in import requirements, if payments for offshore military procurement are excluded, arose essentially from the sharp increase in investment and the resulting purchases of capital goods and related services. The large and increasing quantities of food that had to be brought in to compensate for poor agricultural production in 1973-77 also played a significant part. The growth in intermediate products became relatively low (less than 6% p.a.) after 1973, as imports of raw materials stagnated (except for sulfur, which is used in producing phosphoric acid); imports of semifinished products posted a growth of about 7% p.a. in 1973-77, with chemical products and cement growing fastest. As of 1974, the c.i.f. prices of all categories of imports rose abruptly, particularly those of petroleum products. Taking 1969 as 100, the import price index reached 220 in 1977, compared with 161 for the cost of living. The growth and composition of imports were as follows (percentages):  - 19 - Annual Growth Composition (1969 prices) (current prices) 1968-72 1973-77 1967 1972 1977 Food -7.8 15.6 23.1 13.9 10.5 Consumer goods -0.9 10.7 12.7 12.8 7.5 Energy products 10.0 10.5 4.0 5.7 9.0 Intermediate goods 11.8 7.8 26.8 31.5 24.0 Capital goods -2.7 37.1 16.9 15.8 26.8 Total Goods 2.6 15.9 83.5 79.7 77.8 Nonfactor services 6.1 -3.9 11.1 13.4 4.8 Government transactions 7.6 41.0 5.4 6.9 17.4 Total Imports of goods and nonfactor services 3.2 17.2 100.0 100.0 100.0 Source: Table 2.6, Statistical Annex. 2.17 Export receipts grew as rapidly as imports up to 1974, but fell off noticeably thereafter. These fluctuations were largely due to variations in phosphate export earnings, which evolved as follows: Phosphate exports 1967 1972 1974 1975 1976 1977 Quantity (millions of tons) 9.3 13.6 18.7 13.1 14.7 15.8 Average price (US$/ton) 11.5 10.7 49.5 63.8 33.9 29.7 Value (US$ millions) 107.0 145.5 925.6 835.8 498.3 469.3 Percentage of total exports (at current prices) 25.2 22.7 54.7 54.7 39.9 36.5 Source: Tables 3.2 and 3.3, Statistical Annex. In addition, the rise in external demand and higher prices operated in favor of Morocco's other exports up to 1974, but these trends were reversed after that year owing to the world economic recession and particularly its effects in Europe. All export categories suffered from this combination of circumstances. The export sector was the one that posted the worst performances in terms of the 1973-77 Plan goals, despite being the priority sector for that Plan. Some domestic factors were also involved in this poor performance since 1974, but their impact is hard to quantify. The recommendations made and the priority assigned to exports in the 1973-77 Plan were not translated to significant practical measures, either in terms of choice of policies or investments undertaken in that period (see Chapter III). The growth and composition of exports were as follows (percentages):  - 20 - Annual Growth Composition (constant prices) (current prices) 1968-72 1973-77 1967 1972 1977 Agricultural and food products 5.4 -4.9 44.4 37.9 23.0 Phosphates 7.7 5.1 21.4 17.1 29.1 Other mining products 1.0 0.0 7.5 4.7 4.8 Manufactured goods 16.3 11.1 3.4 8.3 11.9 Total Goods 6.5 0.8 76.7 68.0 68.8 Tourism 14.5 0.9 14.3 20.6 17.8 Other nonfactor services 10.3 8.0 9.0 11.4 13.4 Total Exports of goods and nonfactor services 8.3 0.9 100.0 100.0 100.0 Source: Table 2.5, Statistical Annex. 2.18 As already noted, the purchasing power of Morocco's exports on external markets rose substantially -- but temporarily -- in 1974-75 owing to the rapid rise in phosphate prices. The difference between this purchasing power and the value of exports at constant prices provides an approximate measure of the gain (or reduction) in real resources to the economy as a result of the relative variations in export and import prices. In terms of 1969 prices, this difference was as follows in the period 1968-77: Percentage of GDP DH millions at constant 1969 prices 1968 -28 0.2 1969 0.0 0.0 1970 -85 -0.5 1971 -49 -0.2 1972 -373 -1.8 1973 -459 -2.2 1974 384 1.7 1975 399 1.6 1976 -251 -0.9 1977 -436 -1.5 Source: Table 2.4, Statistical Annex.  - 21 - 2.19 The above figures show that Morocco derived no more than a minor and very transitory benefit from the interplay of international prices. While phosphate prices were higher in 1974-75, the cost of imports, especially oil products, food and capital goods also rose sharply. Moreover, the latter increases continued unabated through 1976-77 whereas phosphate prices dropped back to around US$30/ton. The additional resources obtained in 1974-75 were followed by growing and substantial losses in 1976-77. Over the period covered by the 1973-77 Plan, Morocco posted a net loss of DH 363 million at 1969 prices. It must be stressed that these figures are sensitive not only to price variations but also to shifts in the composition of imports and exports. It is also pertinent to note that in the case of some commodities, the composition of exports in 1976-77 failed to adjust to changes in relative export prices, as bad been the case in 1970-73. Viewed in this light, the 1974-75 gains are seen as the result of a combination of fortunate circumstances, and not as the outcome of a deliberate adaptation of the economy to render it more competitive as regards both exports and the substitution of imports. Changes in the Structure of the Economy 2.20 There were quite considerable variations in relative prices in the Moroccan economy between 1968 and 1977, but they are not well documented. It is accordingly difficult to draw firm conclusions regarding the relative evolution of imports and exports in relation to the domestic demand for and supply of goods and services. Comparison of the two input-output tables available for 1969 and 1975 does, however, reveal that significant structural changes occurred during that period although the comparison can only be based on current prices. 2.21 The importance of external trade for the functioning of the economy has been high, as can be seen from the following percentages that provide an indication of the significance of imports and exports in the chief sectoral production accounts in relation to the total supply of (demand for) goods and services of the individual sectors: Imports Exports 1969 1975 1969 1975 Agriculture 7.4 17.1 14.2 8.5 Mining and energy 10.5 15.1 31.0 47.0 Industry 27.4 30.1 8.2 4.6 Production-related services 4.1 2.6 2.9 5.3 Source: Input-Output Tables 1969 and 1975. Price movements were unquestionably the chief cause of the increase in the relative significance of external trade as regards the mining and energy sector. As for agriculture, the relative significance of imports has risen and that of exports has diminished most markedly, underscoring the sector's  - 22 - poor performance as regards both expanding exports and substituting imports. In other words, the development of local agricultural production was not in line with the potential export markets, while the expansion of food production was insufficient to keep pace with the growing domestic demand. Regarding industry, the pattern of imports and exports is the same as for agriculture but much less marked. It can, nevertheless, be surmised that the development of export-oriented industry could have been more vigorous, while the substitution of local for imported industrial products was insufficient to reduce industry's dependence on imports. Only in the service sector is a favorable evolution apparent, thanks primarily to tourism as regards exports and to the expansion of the Moroccan air and sea fleets and communications as regards imports. These trends that took shape between 1969 and 1975 led to an aggravation of the economy's resource deficit that became starkly evident in 1976 and 1977. 2.22 To make up for the low rate of growth of external demand during the 1973-77 Plan -- except as regards phosphate-related products and certain other manufactures and nonfactor services -- local production turned to domestic demand. Based on the same sources as for external trade, the evolution of the structure of domestic demand can be derived for 1969 and 1975, and is summarized in the following table: Total Value Percentage of Total of Supply of which: (millions of Domestic Inter- Final 1969 DH) Demand mediate GFCF!/ Cons. 1969 Agriculture 5,960 85.9 32.3 - 53.6 Mining and energy 2,450 70.0 43.2 - 26.8 Industry 13,000 91.8 31.6 9.0 51.2 Construction and public works 1,470 100.0 10.0 85.0 5.0 Production-related services 5,340 97.1 29.7 - 67.4 1975 Agriculture 12,100 91.5 45.0 - 46.5 Mining and energy 7,930 53.0 37.4 - 15.6 Industry 30,580 91.4 37.7 11.0 42.7 Construction and public works 5,520 100.0 6.6 87.3 6.1 Production-related services 10,470 94.7 49.2 - 45.5 1/ Gross Fixed Capital Formation. Source: Input-Output Tables for 1969 and 1975.  - 23 - 2.23 The growth of local final consumption averaged 3.6% p.a. between 1968 and 1977, whereas the figure for GDP was 6.5%, both in 1969 prices. For all sectors except for construction and public works, this relative weakness in final consumption led to a quite clear fall in 1975, as compared with 1969, in the share of household consumption as a percentage of the supply of goods and services (and to a lesser extent in those for consumption by public bodies). These reductions were a repercussion of the leading role played by investment demand in accelerating the growth of the economy. As there were few capital goods industries operating in Morocco during that period, a demand of that type had an impact primarily on imports; in addition, many new projects were highly capital intensive. The Savings Effort 2.24 National savings increased rapidly up to 1974, outstripping gross fixed capital formation in certain years, but fell back in both absolute and relative terms after 1975. The table below shows national savings over the period. 1968 1970 1972 1975 1977 1. Millions of current DH Domestic savings 1,800 2,470 2,850 5,690 4,760 Net current transfers and net receipts from factor services -150 60 360 1,750 1,940 of which: workers' remittances (200) (320) (640) (2,160) (2,650) National savings 1,650 2,530 3,210 7,440 6,700 2. As percentage of GNP Domestic savings 11.0 12.7 12.4 14.9 9.8 Net current transfers and net -0.9 0.3 1.6 4.6 4.0 receipts from factor services of which: workers' remit- tances (1.2) (1.6) (2.8) (5.7) (5.5) National savings 10.1 13.0 14.0 19.5 13.8 Source: Tables 2.3, 3.1 and 5.1, Statistical Annex. In the absence of accounts by economic agent, it is hard to pinpoint the origin of the turnaround in the trend in savings after 1974. However, the budget data do show that savings by the Government shrank steadily from 1970 onward, and very markedly after 1974 with the stepped-up military spending (see Section E) and subsidies for consumer prices. As regards business and households, there are no data available for ascertaining their respective savings.  - 24 - Investment 2.25 Actual investment expenditures are difficult to estimate precisely. Several sources provide indications as to trends but no consistent consolidation has been made. The national accounts give an estimate of gross fixed capital formation (GFCF) at current and constant prices and its breakdown by sector at current prices, but as regards Government investment, no distinction is made between investment carried out directly by the Government and transfers for capital expenditures made by the public enterprises (Table 2.10, Statistical Annex). Using data furnished by the State Secretariat for Planning, it was possible to draw up an estimate of the public sector's capital outlays; taking this estimate and the data on disbursements of medium and long-term credits by the development banks, one can arrive at an estimate of the investments effected by the modern private sector, as a residual. This method results in a slight under-estimation of private sector investments, since the data on the other economic agents include relatively small but unknown expenditures for purposes other than investment as defined by the national accounts (land purchases for example). Using the same sources, a sectoral breakdown of investments was made at 1969 prices for the 1968-72 and 1973-77 Plan periods (Table 2.11, Statistical Annex).l/ 2.26 Notwithstanding the low level of disaggregation due to the sparseness of the data used, the figures for GFCF confirm that its spectacular growth after 1975 was triggered by the capital expenditures of the Government and the rest of the public sector which directly or indirectly carried the private sector along. Investment in housing has grown steadily since 1968. The data may be summarized as follows: 1/ Reconciliation of the various sources of information regarding investment is impossible without making a specific and full item-by-item analysis. The sector breakdown analyzed in the following paragraphs is the result of aggregation of some of these sources: this breakdown is purely indicative of the order of magnitude of the sectoral investments that could have been made in the period 1968-77.  - 25 - Gross Fixed Capital Formation 1968 1970 1972 1975 1977 1. In millions of current DH Government L/ 500 580 710 2,150 4,650 Public enterprises 950 1,050 950 3,400 4,530 of which: budget transfers (390) (500) (400) (1,190) (1,940) Other sectors 740 1,360 1,520 3,310 6,170 of which: Housing (250) (440) (580) (1,130) (2,180) Total 2,190 2,990 3,180 8,860 15,350 2. In percentage of GDP Government _ 3.1 3.0 3.1 5.6 9.6 Public enterprises 5.8 5.4 4.2 8.9 9.4 of which: budget transfers (2.4) (2.6) (1.7) (3.1) (4.0) Other sectors 4.5 7.0 6.6 8.7 12.8 of which: housing (1.5) (2.3) (2.5) (3.0) (4.5) Total 13.4 15.4 13.9 23.2 31.8 1/ Includes civilian investments only. Source: Tables 2.11 and 2.3, Statistical Annex. 2.27 During the 1973-77 Plan the Government followed a policy of overprogramming its direct and indirect investments in order to remove all financial constraints on governmental and public enterprise investment. As a result, investment appropriations increased very rapidly and the Treasury assumed a growing role in the financing of the nation's total capital outlays. This financing included increasingly large participations in industrial investment projects undertaken by the public and semipublic corporations. At the same time, private investment benefitted from the incentives adopted in 1973 and the assistance provided by the State to facilitate the mobilization of technical services and external financing required. As a result of this State encouragement, public and private investment moved into a period of unprecedented expansion during the 1973-77 Plan. The figures for investment projects approved under the investment code (Tables 2.8 and 2.9, Statistical Annex) and for BNDE operations confirm the quantitative success of these policies. 2.28 Expressed in 1969 prices, investment volumes in 1973-77 were double those of 1968-72 (Table 2.10, Statistical Annex). Direct Government investments increased the most (174%), comprising primarily: (1) Agricultural infrastructure and dams, for which about 300 million 1969 dirhams was allocated each year throughout the period; (2) Transportation and telecommunications infrastructure, with a more than threefold increase in budgetary appropriations between the two plans;  - 26 - (3) Socio-educational, administrative and regional infrastructure, where the real amounts invested increased six times between the two plans, raising this type of investment from 5% of total GFCF in 1967-72 to 14% in 1973-77. This increase reflected the goal, adopted for the 1973-77 Plan, of raising the living standards of the population. Capital expenditures by public enterprises accounted for about 34% of total GFCF. These were mainly in the mining and energy sectors where public corporations control virtually all production. In the industrial and communications sectors, outlays by public and semipublic corporations increased substantially during the 1973-77 Plan, to a level roughly equal to that of the private sector. 2.29 The relative importance of private sector investments, which accounted for more than 40% of GFCF before 1976, declined over 1973-77. This decline was particularly apparent in the industrial sector, despite the strong recovery posted by the private sector after 1976. Housing has experienced steady growth, but still accounts for no more than 14% of total GFCF. 2.30 Thus, over the ten-year period 1968-77 the volume of the investments of two sectors showed sizable increases in both absolute and relative terms, these being the socio-administrative sector, which includes education, health, recreation, plus the regional and commune development programs, and the communications sector, especially for the development of air and sea fleets. At the same time, investments rose in absolute terms in all sectors, as the following figures show: Gross Fixed Capital Formation 1/ DH Billions Increase Distribution (%) 1968-72 1973-77 (%) 1968-72 1973-77 Government 2.7 7.4 174 21 28 Public enterprises 4.7 8.9 89 37 34 Other 5.2 9.9 90 42 38 Total 12.6 26.2 108 100 100 Agriculture and dams 2.8 4.5 61 22 17 Mining and energy 2.5 3.8 52 20 14 Industry 1.6 3.3 106 13 13 Communications 1.6 4.6 188 13 18 -Production services 1.5 2.0 33 12 8 Public services 0.6 3.7 517 5 14 Housing 2.0 4.3 115 15 16 Total 12.6 26.2 108 100 100 1/ At constant 1969 prices. Source: Table 2.10, Statistical Annex.  - 27 - The above data show that there has been a significant drop in the proportion of GFCF invested in the sectors that can be qualified as directly productive (agriculture, mining, energy and industry). This would indicate that the recent surge in investment served more to improve economic and social infrastructure than to directly expand the economy's productive capacity. 2.31 Overall, the incremental capital-output ratio (ICOR) worked out at about 3.0 for the 1968-72 and 1973-77 Plans. However, this ratio is calculated by dividing the total invested in 1968-72 and in 1973-77 by the increase in GDP between 1968 and 1972 and between 1973 and 1978, respectively. There is, therefore, a lag of one year between the investment and the increase in GDP, which is too short for the ratio to be considered as a valid indicator of the effectiveness of the investment. In fact, an analysis of changes in value added by sector brings out the important role played by agriculture, owing to the exceptional harvest in 1978, and by Government, in the maintaining of the ratio at the 3.0 level after 1974. D. GROWTH AND EMPLOYMENT 2.32 The demand for labor grew at 3.4% p.a. between 1971 and 1977, whereas the rate was 1.8% between 1960 and 1971. The acceleration in the rate of economic expansion therefore had the effect of speeding up employment creation. The evolution by sector shows a decline in the share of agricultural employment, which since 1976 has accounted for less than half of the total, although still continuing to grow slowly in number. A change in sectoral composition is seen in all the other sectors, as can be seen from the following figures: Percentage Share (%) Growth (% p.a.) 1960 1971 1977 1960-71 1971-77 Agriculture 62.2 54.8 47.3 0.7 0.9 Mining and energy 1.6 1.5 2.0 1.2 8.1 Manufacturing industry 9.0 10.6 11.0 3.4 4.0 Construction and pub. works 1.9 4.2 7.2 9.8 13.0 Transportation, trade, etc. 14.9 17.3 19.7 3.3 7.0 Government 6.9 7.3 8.5 2.5 5.6 Not classified 3.6 4.3 4.3 3.5 3.5 100.0 100.0 100.0 1.9 3.4 (In thousands) Employment demand 2,949 3,631 4,433 1.9 3.4 Unemployment 305 350 394 1.3 2.0 Employment Supplyl/ 3,254 3,981 4,827 1.8 3.3 Total population 11,626 15,379 18,247 2.6 2.9 1/ Not including Moroccan workers abroad. Source: 1960 and 1971 Population census and Mission estimates for 1977. (See Table 10 in annex to Chapter III).  - 28 - 2.33 On the basis of available data, it is not possible to assess to what extent the demand and supply of labor have been matched during the 1971-77 period. The uncertainty surrounding employment estimates quoted in the previous paragraph is such that it would be hazardous to draw any firm conclusions from them as to the volume and past trends of unsatisfied employment demand (unemployment). In any event, available statistics show that the annual growth rate of 3.4% in employment demand between 1971 and 1977 was slightly above the increase in supply (labor force), estimated at about 3.3%. On this basis, the number of workers unable to find employment would have been 400,000 in 1977 as compared with 350,000 in 1971. Emigration to the European market played a significant role in easing unemployment pressures in the early 1970s; the number of migrant workers abroad in 1977 is estimated at between 250,000 and 300,000. However, openings in Europe have become less numerous since 1974 with the slowing-down of economic growth there. 2.34 According to the available statistics, employment creation during the 1968-72 and 1973-77 Plans fell by some 20% below target. Planned and actual job creation were as follows (thousands): 1968-72 Plan 1973-77 Plan Planned Actual Planned Actual Agriculture 270 80 100 80 Secondary 30 140 390 220 Government 40 40 70 80 Other 140 140 250 300 Total 480 400 810 680 Source: Mission estimates. However, an analysis of overall and sectoral employment creation leaves the impression that growth was not oriented toward the most highly labor-intensive sectors and that, within individual sectors, the investment strategy did not always seek to minimize the capital cost per job created. 2.35 Overall, during the ten year period 1968-77, a comparison can be made between the periods before and after 1974, the year of the phosphate boom. The period before 1968 can also be given for reference. This comparison reveals the following trends for the main indicators of economic growth and employment:  - 29 - Before 1968 1968-74 1974-77 GDP growth (% p.a.) 4.0 5.4 7.5 Share of GDP allocated to GFCF (%) 10.0 13.0 25.0 Incremental capital-output ratio (ICOR) 2.5 2.4 3.3 Employment growth (% p.a.) 0.5 1.4 3.0 Increase in value added per worker employed (% p.a.) 3.5 3.9 4.4 Source: Yusuf Sayigh, op. cit. and Tables 1.4 and 2.4, Statistical Annex. The above figure indicate that economic growth accelerated, as the proportion of GDP invested increased. They also indicate a marked upward trend in ICOR since 1974. The growth of the value added per worker employed increased noticeably after that year, too. In other words, utilization of capital increased as compared with that of labor, especially after 1974. 2.36 The changes by sector in value added per worker can be summarized as follows: Value added per worker (thousands of 1969 DH) Annual Growth (%) 1960 1971 1977 1960-71 1971-77 Agriculture 1.6 2.1 1.7 2.5 -3.5 Mining and energy 21.3 25.7 21.0 1.7 -3.3 Industry 7.8 8.5 9.9 0.8 2.6 Construction 7.1 6.1 7.5 -1.4 3.5 Transportation and services 11.8 10.5 10.3 -1.1 -0.3 Trade 12.0 14.1 17.6 1.5 3.8 Government 5.9 7.6 9.6 2.3 4.0 GDP 4.5 5.5 6.5 1.8 2.8 Source: Mission estimates. The absence of more detailed studies means that interpretation of changes in the sectoral value added per worker can only be superficial. Thus for agriculture, the contrasting figures for 1960-71 and 1971-77 partly reflect the more capital-intensive production methods associated with the growing importance of irrigated agriculture, but also the effect of climatic conditions which have in general been unfavorable since 1971. As regards mining and energy, the policy of employment maintenance followed by the public enterprises has led to a decline in value added per worker between 1971 and 1977 as phosphate production also declined. The steady drop in  - 30 - value added per worker in the transportation and services sector since 1960 is probably due to the fact that workers obtain temporary or occasional jobs in the informal service sector while looking for permanent jobs. 2.37 More detailed studies are also needed in order to be able to distinguish the different types of enterprises within each sector, mainly by reference to their size and form of management. This is particularly true for construction, where the value added per worker is relatively less than in the other sectors, thus offering the best employment-creation potential. The industrial sector is the only one that has been studied in depth (see Chapter IV); the studies point up the importance of small and medium enterprises, as such enterprises provided 62% of all industrial jobs in 1975 as against 53% of value added. If the periods 1960-71 and 1969-75 (for both of which data are available) are compared, it can be estimated that investments in modern industry grew by about 14% p.a. between 1969 and 1975 against 5% between 1960 and 1971. Employment in this sector rose by only 5.7%'p.a. between 1969 and 1975 as compared with 4.3% between 1960 and 1971, leading one to presume that resource allocation was not to the benefit of the highly labor-intensive subsectors. It should be noted, finally, that the employment provided by small and medium enterprises grew at 3.4% p.a., although the growth of their value added was less than that of modern industry (4.1% and 7.9%, respectively, between 1969 and 1975). 2.38 The distribution of investments by industrial subsectors resulting from the official investment incentives does not appear to have favored employment. The available statistics show that the four subsectors (food, agricultural products, textiles and clothing) that accounted for 62% of the jobs created between 1969 and 1975 received no more than 25% of the investments that were the subject of official financial incentives. 2.39 In conclusion, it appears that investment allocation remained below the optimum as regards employment creation during 1968-77. Between the 1968-72 Plan and the 1973-1977 Plan, this allocation shifted in favor of capital-intensive sectors such as physical infrastructure (communications and government buildings). Throughout the period, the system of investment incentives in the broader sense of the term, i.e. including direct and indirect State financing, seems to have favored capital intensive activities in the various sectors, whether irrigated agriculture or large-scale modern industry, to cite two instances. It is not, therefore, suprising that the employment targets in the two Plans were not reached. This failure, however, preoccupied the Government. It will be seen in the following chapters that the 1978-80 Plan period would be used to formulate and to begin implementing an investment strategy that comes closer to the optimum from the employment-creation angle, both on global and sectoral levels.  - 31 - E. EXTERNAL FINANCING Evolution of the Current Account 2.40 The economy's resource deficit has widened rapidly since 1975, following an extended period with only minor deficits and even small surpluses in some years. At current prices, this deficit rose from DH 200 million in 1974 to over DH 10 billion in 1977, as a result of a worsening deficit on the merchandise account and a negative balance on (nonfactor) services as of 1976. The balances developed as follows (in millions of current dirhams): 1967 1972 1974 1977 Goods Exports, f.o.b. 2,150 2,950 7,400 5,780 Imports, c.i.f. 2,620 3,580 8,330 14,440 Balance -470 -630 -930 -8,660 Nonfactor services Exports 650 1,390 1,850 2,630 Imports 520 910 1,120 4,130 Balance 130 480 730 -1,500 Resource deficit -340 -150 -200 -10,160 Source: Table 3.1, Statistical Annex. 2.41 The worsening of the deficit on merchandise account was caused by the very pronounced increase in imports in a time of poor export performance. At 1969 prices, imports of goods more than doubled between 1972 and 1977, whereas exports of goods remained largely static around an average of DH 2.8 billion reached in 1972. On the import side, the main increases were in capital goods, up almost fivefold between 1972 and 1977, and food imports which more than doubled. As regards exports, there were ups and downs in all products over the period. The fluctuations in the terms of trade, due mainly to the shortlived rise in phosphate prices in 1974-75, also played a significant part. After reaching 128 in 1975, the terms of trade index for goods dropped back to 89 in 1977, as can be seen from the following indexes (taking 1969 as base at 100): 1974 1975 1976 1977 Export price index 245 262 207 198 Import price index 199 205 212 223 Terms of trade 123 128 98 89 Source: Tables 2.5 and 2.6, Statistical Annex.  - 32 - 2.42 The appearance of a deficit on (nonfactor) services as of 1976 resulted from the increase in imports of services connected with the importation of goods (freight and insurance) and especially from the rise in payments for offshore purchases of military equipment, which are included with services. Nongovernmental services have traditionally shown a surplus since 1969, even when the cost of freight and insurance relating to imports is included; nevertheless, in view of the sharp increase in the latter, the surplus has been tending to shrink and disappeared by 1977, as can be seen from the figures below (million of current DH): 1967 1972 1977 Exp. Imp. Exp. Imp. Exp. Imp. Transportation costs 1/ 76 249 221 432 639 2,901 Tourism 400 189 893 388 1,500 420 Other services 51 100 80 105 266 319 Subtotal 527 538 1,194 925 2,405 2,640 Governmental transactions 126 170 195 310 221 3,227 Nonfactor services 653 708 1,389 1,235 2,626 5,867 1/ Including the c.i.f. - f.o.b. differential on imports. Source; Table 3.1, Statistical Annex. As regards governmental transactions, the payments for offshore purchases of military equipment were responsible for their rapid growth during the last few years. 2.43 The resource deficit has only partially been offset by the surpluses on the other (factor) services and current transfers, despite the considerable growth in remittances by Moroccan workers abroad. The increase in these remittances has been greatly stimulated by the offer of a premium and by the efforts of certain Moroccan banks among the emigrant workers. However, in constant prices, these remittances have tended to level out since 1975. Besides this increase in remittances, the rise in interest payments on the external public debt between 1972 and 1977 should be noted. This latter increase derives from the much larger volume of external borrowing since 1975. The evolution of (factor) services and current transfers are as follows (millions of current DH);  - 33 - 1967 1972 1977 Expend- Expend- Expend- Receipts itures Receipts itures Receipts itures Income from investments - private 15 128 19 148 13 186 - public 14 84 41 176 126 665 Workers' remittances 208 213 640 202 2,652 234 Factor services 237 425 700 526 2,791 1,085 Private transfers 196 65 261 66 230 59 Public transfers - 68 79 82 340 277 Total 433 588 1,040 674 3,361 1,421 Source: Table 3.1, Statistical Annex. Financing of the Current Account 2.44 The chief items of the balance of payments are summarized on the next page. The current account balance showed surpluses up to 1974 but posted sizable deficits in 1975-77, reflecting the shifts noted in the preceding paragraphs regarding the economy's resource deficit and the balance of services and current transfers. The current deficits have been financed mainly by external borrowing, but this has not prevented a decline in net external assets in absolute terms and also in relation to imports since 1975. 2.45 Net inflows of private capital from abroad have remained small, despite the high volume of investment that might have prompted recourse to foreign private investment. This was because a considerable proportion of the investments were in the Moroccan public sector; it would also seem that foreign investors showed little interest. The reason may have been the perception such investors had of government policy, since Morocco's economic potential could lead one to expect an opposite development. This policy is analyzed in Chapter III. It should further be noted that the Treasury only rarely authorizes private long-term borrowings abroad without State guarantee.  - 34 - SUMMARY OF THE BALANCE OF PAYMENTS (Millions of $; current prices) 1967 1972 1973 1974 1975 1976 1977 Exports 1/ 554 946 1,298 2,107 2,019 1,717 1,867 Imports -622 -979 -1,377 -2,155 -2,996 -3,520 -4,124 Resource balance -68 -33 -79 -48 -977 -1,803 -2,257 Workers' remittances 41 139 249 355 532 547 589 Other factor income, net -78 -102 -111 -90 -109 -147 -210 Net current transfers 13 43 46 19 8 45 52 Current account balance -92 47 105 237 -546 -1,356 -1,826 Net private M+LT loans 9 14 3 -22 - 38 53 Net public M+LT loans 2/ 59 32 3 66 404 1,2732/ 1,699 Net short-term borrowings -18 -32 -75 -158 -125 29 68 Errors and omissions and fluctuations in exchange reserves (- = increase) 42 -61 -36 -123 17 16 6 Exchange reserves at year end3/ - Foreign assets, not in- cluding gold reserves 55 214 241 391 352 467 505 - Gold reserves at market prices 21 39 67 113 85 82 104 Total foreign assets 76 253 308 504 437 549 609 1/ Including nonfactor services. 2/ Including net use of IMF resources and special grants for defense. 3/ According to international financial statistics published by the IMF. Gold reserves are evaluated at the price of gold on the London market. Source: Tables 3.1, 3.1A, Statistical Annex. 2.46 The greater part of the current account deficit was therefore financed by public loans issued directly or guaranteed by the Government, the Government's policy being to centralize virtually all external borrowing through the Treasury. Moreover, the country has received appreciable grants since 1975 which have enabled it to finance a part of the special expenditures on defense. The actual amounts of these grants have not been made public, but can be estimated from the difference between the capital inflows observed in the balance of payments, on the one hand, and estimates based on data regarding the external debt, drawings on official non-military grants and public borrowings, on the other. These estimates are as follows ($ millions):  - 35- 1973 1974 1975 1976 1977 1978 Gross public capital inflows 82 148 538 1,349 1,824 1,623 Drawings on public loans -94 -258 -664 -736 -1,785 1,191 Recorded official grants -30 -31 -29 -29 -38 -30 Difference -42 -141 -155 -584 -1 -402 Source: Mission estimates. This difference includes, in addition to transactions with the IMF and unrecorded transfers, inevitable but minor discrepancies arising from the differences between the flows obtained from the external debt statistics and those recorded in the balance of payments. In 1976 Morocco utilized IMF resources, making purchases under the compensatory financing and oil facilities amounting to about $132 million (SDR 115 million), with repurchase due in 1979. Special grants for defense, therefore, probably totalled about $1 billion for the years 1976-78. 2.47 Short-term capital movements assumed considerable proportions in 1974 and 1975 because under its phosphate sales policy Morocco greatly increased its short-term credit to phosphate buyers in those two years. This policy brought about a temporary slowdown in the rise in external assets. Since 1975, net external assets have increased in absolute value but declined in relative value. As of the end of 1977 they represented no more than 1.8 months' imports for that year. The External Public Debt and its Servicing 2.48 From 1975, Morocco greatly expanded its medium and long-term external borrowing to cover its mounting balance of payments current account deficits, as can be seen from the table following. The disbursed portion of the outstanding external debt, which had remained moderate in relation to GDP (less than 20%), grew very rapidly thereafter to reach 41% of GDP by 1978. As of the end of 1978, the total amount, disbursed and undisbursed, of commitments entered into or guaranteed by the State was more than US$7 billion, or 60% of GDP. These were primarily State borrowings, but the proportion represented by borrowings by other institutions with the State's guarantee rose steadily, moving up from 25% of total debt in 1972 to 30% in 1977.  - 36 - EXTERNAL DEBT: AMOUNTS OUTSTANDING AND SERVICE PAYMENTS, 1972-1978 ($ millions; current prices) 1972 1973 1974 1975 1976 1977 1978 Amount outstanding at year end Total commitments!/ 1,216 1,308 1,831 2,405 3,143 5,104 7,421 Total disbursed 919 998 1,218 1,753 2,341 4,078 5,139 - amount disbursed as % of GDP 18.3 16.1 15.8 19.5 25.0 39.3 41.4 Drawings on commitments Annual disbursements 123 98 270 664 736 1,785 1,191 - as percentage of GFCF 17.8 11.6 23.9 27.9 26.2 53.9 40.0 - as percentage of GDP 2.4 1.2 3.5 7.4 7.9 17.2 9.6 Service payments during year L Interest only 35 42 43 50 66 148 252 Total debt service 103 129 138 145 162 265 548 - as percentage of exports of goods and services 9.1 8.1 5.5 5.6 7.1 10.7 18.5 Average terms Interest (% p.a.) 5.3 5.5 5.2 7.3 7.5 6.8 6.9 Period (years) 22.3 16.6 16.6 14.7 12.2 13.1 13.3 1/ The annual change in total commitments include loans cancellations and exchange rate variations. 2/ IBRD estimates based on data from Ministry of Finance. These figures are not altogether identical with those derived from the balance of payments, which are as follows: 1972 1973 1974 1975 1976 1977 Interest only 38 40 44 55 85 148 Total debt service 117 120 126 129 162 273 Source: Tables 3.1 and 4.1, Statistical Annex. 2.49 To finance the 1973-77 Plan, Morocco relied on its enhanced ability to borrow, brought about by the temporary increase in phosphate receipts in 1974-75. This policy resulted in a sizable increase in borrowings from the Arab countries and funds and especially from private commercial and  - 37 - financial sources. The volume obtained from traditional official sources, both multilateral and bilateral, also increased, but to a more moderate degree. State or State-guaranteed borrowings (commitments) over 1972-78 were as follows ($ millions): 1972 1973 1974 1975 1976 1977 1978 Source International institutions 97 53 151 67 153 222 212 Bilateral sources (governments) 63 48 227 138 156 640 1,164 Commercial 15 76 20 134 7 158 16 Financial 3 12 126 368 597 970 1,008 Total medium and long term borrowings 178 189 524 707 914 1,990 2,400 Source: IBRD. 2.50 The increase in loans obtained at market rates has resulted in a hardening of the average conditions applying to Morocco's total external debt outstanding, as is apparent from the following figures: Interest Maturity Grace Period Grant Element (% p.a.) (years) (years) (%) Average conditions for total borrowings End 1972 5.3 22 4 31 End 1974 5.2 18 5 30 End 1979 7.1 13.9 4.9 17.1 Source: IBRD. 2.51 Morocco's external borrowings in 1973-77 produced an estimated net resource transfer of $2.2 billion over the space of five years. Taking 1978 commitments also into account, the total net transfer should still be positive for the 1978-80 Plan period. After that date, however, the net resource transfer relating to existing debt will become negative as growing repayments of principal are added to the interest payments. The negative net transfer for the period 1981-85 is estimated at about $4.2 billion. 2.52 In conclusion, the economy's external resource deficit, which had remained modest up to 1974, became sizable by 1977 and occasioned considerable deficits in terms of current external payments as of 1975.  - 38 - These deficits were financed almost entirely by the Treasury, which arranged directly or guaranteed practically all the country's external borrowings. The part played by foreign private capital, whether through direct investment or lending (the latter only being authorized in exceptional cases), remained small. The policy of external borrowing followed during the 1973-77 Plan relied in part on access to Arab sources, but primarily on borrowing on market conditions, which surged between 1975 and 1978. This led to a rapid increase in the amount of the external debt outstanding, plus a hardening of the average conditions and a sharp rise in repayment and interest obligations. At the end of the 1973-77 Plan, external debt service represented 18.5% of export receipts (goods and services), and the growth of external borrowing and of the debt service had become clearly excessive in relation to the growth of exports. A financial adjustment program to reverse those trends became a matter of urgency. Being aware of this situation, the new Government that took office in September 1977 addressed itself to the task; this change in the economic and financial policies is discussed in the first part of Chapter III, dealing with the 1978-80 Plan. F. DOMESTIC FINANCING Review of Main Structural Factors 2.53 During the ten-year period 1968-77, domestic financing had to adapt itself to the structural and institutional changes occurring in the economy. Some of the more significant changes were the increase in population, the expansion of the State's role as investor, the emergence of the local authorities, the concern for regional development and the mounting inflationary pressures and defense requirements. 2.54 The high rate of population growth had major repercussions in several areas where the Government has extensive responsibilities, such as social services, supply of basic foodstuffs at prices affordable by all, housing construction and employment creation. Between 1967 and 1977, Morocco's population rose from 14 to 18 million, growing at a rate of 2.7% p.a. whereas income (GDP) increased at close to 6.5% p.a. and the share of Government in GDP rose from 15% to 25%. 2.55 The State's role in the investment sphere was greatly increased in the course of the 1973-77 Plan, reversing the previous trend. The financial prudence that dominated through the 1968-72 Plan was reflected in fact that the proportion of GDP allocated to investment remained at around 14% between 1967 and 1972, and by a drop in the share of Government investment in total investment. By the time of the 1973-77 Plan, this prudence was viewed as excessive and was abandoned in favor of a deliberately more active role for the State as of 1973, which gathered further momentum following the increased phosphate receipts of 1974-75. Between 1972 and 1977 total investment was raised from 14% to 32% of GDP, with the State's share going up from 31% to 52% of the total. A large part of this participation took the form of Treasury transfers to public and semipublic corporations to finance their capital expenditure and sometimes also to cover operating deficits. Available data are inadequate for drawing up consolidated  - 39 - accounts for the Moroccan public sector, but it is evident that its relative significance has increased substantially. The 1978-80 Plan comments on this point as follows: "although we are accustomed to thinking of our economic system as libe-al, we should be aware of the growing role of the State in our economy". 2.56 The local authorities still play no more than a minor role, but one that appears destined to expand as a result of the 1976 reform envisaging the granting of an increasing degree of political and financial autonomy to local authorities over the long term. For the time being, no more than a start has been made toward this goal owing to the severe constraints bearing on most local authorities, with the exception of the main urban municipa- lities. The fact is that the human resources for preparing, executing and managing development programs are still very thin at local level and can only gradually be reinforced. Moreover, most local authorities have too limited a tax base to become financially independent and will have to rely for a long time on revenues cbanneled to them by the State for covering their expenses. This should not, however, lead to relaxing current efforts to improve local revenues, especially those from local public services and the new taxes on real property. 2.57 Regional development received considerable allocations under the 1973-77 Plan, which had set itself the goals of reducing regional dispa- rities in development and improving the economic and social lot of the people living in the less well endowed regions of the country. The finan- cial ease by the 1974-75 phosphate earnings made it possible for State action in this sphere to be expanded. According to data given in the 1978-80 Plan, investment allocations available for regional development totaled DH 3.3 billion for 1973-77, of which DH 1.8 billion had been spent as of December 31, 1977 while DH 1.6 billion was carried forward to the 1978-80 Plan. About two-thirds of allocations went to the Special Regional Development Fund and the other third was allocated to direct subsidies to local authorities, "Promotion Nationale" and the Saharan Provinces Fund. An evaluation of the achievements of this effort in terms of the goals pursued remains to be made. The 1978-80 Plan does not include any new allocation to the Special Regional Development Fund because of the volume of funds carried forward. The Plan proposes instead that the current period be used to fully define the aims of regional development and to consolidate its institutional framework. This subject is considered in greater detail in Chapter VI. 2.58 Inflation and defense needs became increasingly significant factors for domestic financing during the 1973-77 Plan. Up until 1974 Morocco earmarked only a small part of its resources for defense, the State's savings were adequate for its investment effort and price inflation was very moderate. However, these trends have been reversed since then. The much higher military spending has placed a severe constraint on the State's savings whereas its capital outlays have increased severalfold. This disequilibrium was a major factor in the acceleration of price inflation in Morocco between 1974 and 1977, although higher export and import prices also played no small role.  - 40 - Overall Evolution of Fiscal and Budgetary Policy 2.59 Analysis of the country's fiscal and budgetary policy brings out some very marked contrasts between 1968-73 and 1974-77. Between 1968 and 1973 prudence was the watchword. As a ratio of GDP, current and capital expenditures fell while current receipts increased (especially in 1973), with the result that budgetary savings improved and the overall Treasury deficit was reduced. This policy led to a remarkably low rate of inflation during the period, but also had a generally deflationary impact. The 1973-77 Plan noted that economic growth and employment creation could have been higher in 1968-72 if budgetary policy had been more expansion- oriented. With the benefit of hindsight, it is in fact clear that the reduction of the share of GDP spent on improving economic and social services was hardly warranted, considering the low level of debt service in that period. Considering that the proportion of GDP invested was only about 14%, it is also clear that fiscal and budgetary policy did not contribute sufficiently to raising of level of economic activity. 2.60 These trends were abruptly reversed when phosphate prices soared in 1974-75. Increased phosphate earnings brought in larger amounts of foreign exchange and higher budgetary receipts which made it possible to revise the 1973-77 Plan and to raise investment levels sharply for the years 1975-77. Between 1973 and 1975, Government investment expenditure rose from DH 1.2 billion to DH 4.5 billion and the same trend was apparent in private and semipublic investment. In 1977, Government investment was stepped up to DH 10 billion, the rise this time accounting for almost the entire increase in gross fixed investment in Morocco and bringing the Government's share of total investment up from 37% in 1973 to 67% in 1977. The following salient features of the period should also be noted: defense spending increased very fast in response to tensions along the Saharan borders; consumer price subsidies were raised for staples because of the higher cost of importing the products concerned; phosphate receipts began to shrink rapidly as of 1976; and tax revenues -- apart from those from phosphates -- could only be increased gradually owing to the socio-political obstacles to a full-scale reform of the tax system. These various factors bore increasingly on the public finances and aggravated the overall Treasury deficit (17% of GDP in 1977). To cover this deficit the Treasury was obliged to resort increa- singly to monetary financing, which fueled inflationary pressures, and especially to borrowing from external commercial sources, which led to a very rapid rise in external debt service obligations. During the course of 1977 the need for financial adjustment became increasingly pressing, although it would imply a slowdown of economic growth and employment creation. 2.61 Analysis of the fiscal and budgetary policy followed from 1974 to 1977 shows the dominant factors to have been defense requirements, price subsidies and the fluctuations in phosphate earnings. These factors quickly reduced freedom of decision in this field. Again with the benefit of hindsight, it would appear that the expansion of investment spending should  - 41 - have been slowed down in 1976, as soon as it became apparent that the Government was unable to increase its savings. A slowing-down of expansion then would have made it possible to moderate inflationary pressures of budgetary origin, which would bave eased the stresses on domestic investment costs observed in 1975-77. The Growing Role of Government Expenditure 2.62 As already noted, Government expenditure rose very rapidly after 1973. This is apparent from the figures below (expenditures in relation to GDP at current prices, in percentages): 1968 1972 1973 1975 1977 Government expenditure 20.4 20.0 19.4 32.4 41.8 of which: Investment 1/ 5.4 4.9 4.3 10.2 16.3 Defense 2/ 2.5 2.6 2.8 4.3 9.2 Subsidies 0.1 0.1 0.1 5.6 2.6 Misc. current expenditures 12.4 12.4 12.2 12.3 13.7 Budgetary investment in % of total GFCF 42.0 37.4 34.8 50.3 67.1 Total GFCF as % of GDP 13.2 14.0 13.9 24.3 32.8 1/ Excluding defense, but including capital transfers to the public and semipublic corporations. 2/ Mission estimates. Source: Ministry of Finance. The above figures clearly show the growth of the chief components of Government expenditure, confirming the qualitative observations made in the preceding paragraphs. As regards defense, it should be explained that in the published budget data a considerable part of expenditure is included among transfers made by the Ministry of Finance; this part, when added to the amounts shown under the Defense Ministry, makes a total of 9% of GDP in 1977. As for subsidies, they appear to have peaked in 1975. 2.63 The following table provides a breakdown of Government expenditures by nature of service rendered (functional classification) and combines, for each service, operating and capital expenditures:  - 42 - 1968 1972 1973 1975 1977 Expenditure In DH million: Economic services 1,057 1,139 1,169 3,426 6,342 1/ of which ; Agriculture (588) (418) (521) (849) (1,360) Social services 872 1,311 1,397 2,475 3,446 of which: Education (601) (1,007) (1,041) (1,867) (2,628) Health (271) (304) (356) (608) (818) Defense 2/ 408 586 699 1,561 4,304 Administrative services 368 618 588 1,186 2,117 Subsidies 169 142 206 2,046 1,109 Debt 3/ 298 423 450 566 1,004 Unclassified 238 320 323 539 768 Total 3,410 4,539 4,832 11,799 19,090 As percentage of total; Economic services 31 25 24 29 33 of which: Agriculture (17) (9) (11) (7) (7) Social services 26 29 29 21 18 of which: Education (18) (22) (22) (16) (14) Health (8) (7) (7) (5) (4) Defense 12 13 14 13 23 Administrative services 11 14 12 10 11 Subsidies 5 3 3 17 6 Debt 9 9 9 5 5 Unclassified 6 7 8 5 4 Total 100 100 100 100 100 1/ Including the Special Regional Development Fund (DH 354 million). 2/ Mission estimates. 3/ Interest plus repayment of certain domestic loans. Source; Ministry of Finance. 2.64 The changes in the pattern of Government expenditures in this period occurred in the framework of the overall drop in the ratio of total Government expenditures to GDP between 1968 and 1973, followed by a sharp upsurge in the following four years. The most notable changes were those in the spending on social services and defense, on the one hand, and on the economic services, on the other. The relative share of the latter became smaller between 1968 and 1973, whereas that of social services increased. There was then a pronounced turnaround between 1973 and 1977, when the social services lost ground in some measure to the economic services, and also because of the lower spending on subsidies and debt service between 1975 and 1977. Taken together, the shares earmarked for defense and  - 43 - administrative services, which include sizable allocations for internal security, increased substantially after 1975. The marked expansion of the economic services, in absolute and relative values, between 1973 and 1977, reflects the growing role the State has assumed in the economy, particularly through transfers to the public and semipublic enterprises. 2.65 Expenditure on social services has, nevertheless, greatly increased in real terms, while in relation to GDP it rose from 5% to 7% between 1968 an 1977. In real terms, the per capita increase of this expenditure in the period was almost 70%, as is shown by the following figures: Expenditure on social services (in 1969 prices) 1968 1972 1973 1975 1977 Total expenditures (DH million) 1/ 893 1,161 1,183 1,648 1,944 Population (million) 14.2 15.8 16.3 17.3 18.3 Per capita expenditure (DH) 63 73 73 95 106 1/ The deflator used is that of government consumption. Despite the considerable effort in favor of the social services reflected in the above figures, the question arises whether Morocco may not have well spent even larger volumes of resources on the social sectors in view of the extent of the needs not yet satisfied and the country's relatively low ranking on the world scale of social development indicators. This question is considered in Chapter V. Here it can be noted provisionally that the expenditures on health could well have been both higher and better programmed, and that in education and training the effort was probably as great as resources permitted but perhaps not sufficiently well adapted to the economy's needs. 2.66 To conclude, a question of budgetary procedure should be noted. In 1973 the Government introduced the concept of zero-base budgeting, which meant that at the close of each development plan all budget appropriations for investment have to be formally justified before they are carried forward to the following period. This procedure was applied at the end of the 1968-72 and 1973-77 Plans. It amounts to a compromise between annual zero-base budgeting in respect of all appropriations and their automatic continuation, two procedures that often cause delays and complications in the execution of development programs and projects. The compromise adopted in Morocco reduces these adverse affects, since the appropriations are carried forward automatically within the planned periods, but are reviewed at the end of each such period.  - 44 - The Low Level of Budgetary Savings 2.67 The Treasury accounts are summarized below (DH millions): 1968 1972 1973 1975 1977 Current revenue 1/ 2,586 3,604 4,316 8,337 11,669 of which: From public monopolies (120) (34) (89) (1,080) (582) Current expenditure 2/ 3/ 2,475 3,424 3,748 8,076 11,925 of which: Defense 3/ (408) (586) (699) (1,561) (4,304) Budgetary saving 111 180 568 261 -256 Investment expenditures 892 1,115 1,084 3,723 7,626 of which: Transfers (--) (66) (80) (954) (1,725) Total deficit 781 935 516 3,462 7,882 1/ Including the special Treasury accounts and the supplementary funds of the "annexed" budgets. 2/ Including military procurement.