Statement by executive director's office for Argentina, Bolivia, Chile, Paraguay, Peru and Uruguay at the Board meeting of January 30, 1997

CONFIDENTIAL InternationalBank for Reconstructionand Development InternationalDevelopmentAssociation 86314 InternationalFinance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY EDS97-15 January 29, 1997 Board Meeting of January 30, 1997 Statement by Executive Director's Officefor Argentina, Bolivia, Chile, Paraguay, Perul and Uruguay Morocco - Country Assistance Strategy The Morocco - CAS is a well balanced document supported by significant preparatory work, including a series of recent studies, among others, a CAR and two policy notes. However, as with many CASs, there is a need to define clear priorities and even some possible sequencing of Bank interventions to ensure Bank actions help to place Morocco in the path of sustained growth with equity. These comments argue that progress in structural reform has not advanced at a fast pace and in particular we argue that fundamental reforms in the goods and factor markets need to be deepened for sustained growth to occur. The main lessons of Morocco's past economic evolution are: First, stabilization after more than a decade of deficit reduction remains fragile. Fiscal deficit reduction was attained by cutting expenditure that was "easy" to cut and rising trade taxes thus countering trade liberalization which is fundamental for productivity and export growth. Clearly during the past decade IMF "quick fixes" prevailed over a structural approach to deficit reduction. Second, a gradual approach to structural adjustment in the goods and factor markets has not functioned well. Import tariffs are high and non-uniform, in particular in the agricultural sector where they reach about 100%. Labor markets are rigid generating high urban unemployment. Financial markets are over regulated, in particular the capital account of the balance of payments remains closed, which is a significant deterrent to foreign investment. We think the CAS correctly addresses the first lesson by trying to reduce the wage bill and increasing other sources of tax income to substitute for trade taxes. This documenthas a restricteddistributionand maybe used by recipients only in the performanceof their official duties. It should not be distributed without the consent of the Executive Director concerned. |  2 We think the CAS does not place sufficient emphasis on the second lesson. The CAS seems to assume the long term agreement for preferential trade liberalization with the EU is sufficient to bring the beneficial effects of trade reform. We think Morocco needs a faster and non-discriminatory trade liberalization to transform its economy in a fundamental way. It is well documented in several Bank studies that trade reform to be effective and credible has to be fast and deep, not gradual. A second point not clearly highlighted in the CAS is the negative effects of labor market rigidities on productivity and growth. It is also well documented that to increase productivity, accelerate growth and reinforce the positive effects of trade liberalization, labor markets need to be deregulated. Just a study is promised in the CAS on labor market issues. We think that trade and labor market issues are sufficiently important to be included in one of the planned quick disbursement operations. Their natural place would be to expand the proposed financial sector operation. Morocco is struggling to get to the path of sustained growth, we think it will get there if it addresses in a candid and open way these fundamental structural restrictions with which it has been dealing for more than a decade.