Skills Development, Social Protection, and Employment in Morocco

David A. RobalinoSenior EconomistThe World Bank

Presentation at the HD Learning Week

November 6-10, 2006

Washington, DC

Background / motivation

Morocco: a middle income country, poorly diversified, inward oriented:

Population = 30.5 million.GDPpc = USD 1,300 (PPP 3,850)Agricultural sector = 17% of value added.Exports sector has not developed (trade deficit of 13% of GDP); situation will worsen as Multi-fiber agreement ends.

GDP growth stagnant not enough jobs:GDP growth 2.5% Vs LF growth of 2% (or more)Unemployment rate 12% (22% in urban areas).

GDP would need to be above 6% to curve unemployment

Unemployment higher for educated & young workers:No education =2.5%; primary education=10.5%; secondary education=24%; higher education=30%.

Large share of jobs are in the agricultural sector and the informal sector:

Agriculture = 44% of jobs (50% are non-paid family aids).Manufacture, trade, education & health = 47%Informal sector (excld. agr.) = 26% of jobs.

The informal sector offers low quality jobs:70% have no education; 38% of informal units operate at the subsistence level.

…

Employment creation remains the first priority of the government:

There is a clear understanding that new jobs cannot come from the public sector.Consensus that the economy needs to grow faster:

Diversify and induce private investments and innovation.Understanding of some of the key constraints.But no articulation of policies in the various sectors to make this happen.Latest initiatives for employment creation focus on active labor market programs: intermediation, access to credit, and wage subsidies.

Outline

Process.General framework.Some policy issues (short summary):

Economic policy.Business environment.Education and training.Labor regulations.Social protection.

Next steps.

Process

Creation of Multisector Steering Committee:Labor (chair), PM office, Finance, Industry & Commerce, Planning, Education…

Role:Discussed/approved concept note, analytical framework, and work plan.Review progress in the preparation of the report; feedback on policy recommendations.Local technical teams contribute to the analytical work.

Final report, including multi-year action plan, to be presented to the PM in April-May.At the Bank level ESW pieces integrated under one code.

The general framework for employment creation in Morocco…

Macroeconomic and microeconomic environment that stimulates investments and growth:

Low risks and institutions that allow entrepreneurs to appropriate the returns from these investments.

Policies that promote competitiveness:Reallocate economic resources towards high value-added sectors (productive transformation)…… in particular in the exports sector, in the production of goods that are new in the productive structure of the country (self-discovery).

…Education and training:

Primary-secondary: learning skills.Tertiary: specialized skills for the “new economy.”Training: to facilitate economic transitions.

Social protection (including labor regulations):Income protection/consumption smoothing to facilitate labor mobility.Active programs to support economic restructuring.Assistance programs to build human capital among vulnerable groups; bridge to the formal economy.

Macroeconomic issues

Macroeconomic risks in Morocco are low.Spreads on government debt among the lowest in middle-income economies.

But there are challenges for fiscal policy…Growing SP, health, and education expenditures.Complex tax system reduces incentives to invest –including in education.Large implicit pension debt (100% of GDP).

… and exchange rate policy:Real appreciation since 2001 (20% relative to main competitors) affect self-discovery.

…

Trade regime biased against exports:Highly protected economy.Weak incentives for exports; particularly in non-traditional sectors.Morocco has been competing in low-productivity sectors on the basis of cheap labor.

Services sector is also tightly regulated.

…Graphe 19 : OTRI et PIB par tête, en $US PPA 2000

Tarifs et BNTs

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0 5000 10000 15000 20000 25000 30000 35000 40000

PIB par tête, PPA $US 2000

OTR

I, Ta

rifs

et B

NTs

Morocco

Source: World Bank and Hiau Looi Kee and al.(2005)

Graphe 25: Les Exportations Marocaines Demeurent Faibles Comparativement à Celles des Pays Concurrents

(Indice 1991=100)

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900

1991

1992

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1996

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2004

ChineRoumaniePologneTurquieTunisieMaroc

Source : Office des changes et UNCTAD

Graphe 14: Parts intégrées en ingénierie et produits à haute valeur ajoutéeProduits manufactures dans le total des exportations

0

10

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30

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70

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

AlgérieBulgarie Maroc

Tunisie

Turquie

Roumanie

Pologne

Rep, Slovaquie

Rep. Tchèque

Hongrie

Source: Office des Changes, Gouvernement du Maroc

Investment climate…

Investors will invest and create jobs if operation costs (regulations, corruption, infrastructure,…) are reasonable and predictable – not the case.Mechanisms are also necessary to deal with learning externalities and coordination failures:

Weak framework for intellectual property.Difficult to enter in new sectors (e.g., Aeronautics) that require coordinated investments in infrastructure, new technologies, and skills…… Ministry of Industry and Commerce is leading interventions at this level.

Morocco ranks low in terms of its business environment

Singapore 1United States 3Malaysia 25Chile 28France 35Jordan 78Colombia 79Tunisia 80Yemen 98Morocco 115Algeria 116Iran 120Venezuela 164Congo, Dem. Rep. 175

Constraints to enterprise grow th by size of entrerprise

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Inform alSector/UnfairCom petition

Labor CodeRegulations

W orker's Skills Access toFinancing

Perc

enta

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Sm all

M edium

Large

Constraints to enterprise grow th by activity of entrerprise

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10

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30

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Access to Land W orker's Skills Inform alSector/UnfairCom petition

Labor CodeRegulations

Perc

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Non-Exporting

Exporting

Constraints to enterprise grow th by age of entrerprise

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Inform alSector/UnfairCom petition

Cost ofFinancing

Access toFinancing

Access toLand

W orker'sSkills

Perc

enta

ge

O ld

Young

New

Education and training

Level of education of the labor force is very low (average 2.5 years of schooling):

No education or less than primary = 40%.Primary = 26%Secondary = 10%Tertiary = 9%

Still high dropout and repetition rates:Only 12% of student enrolling in 1st year of primary obtain the Baccalaureate.40% drop before 9th grade.Analysis for the study suggests both demand (income poverty) and supply factors play a role.

…

Serious concerns about quality:Results TIMSS among the lowest in the region.60% of students do not reach the lowest benchmark.The study will include an analysis of individual results to identify causes.

Serious concerns about the relevance of skills supplied by higher education and VT systems:

High unemployment rates could be explained in part by high reservation wages…… but skills-mismatches are likely to be important as well.

Poor performance in TIMSS

0 100 200 300 400 500

Saudi Arabia

M orocco

W BG

Bahrain

Egypt

Tunisia

Islam ic Republic of Iran

Jordan

Lebanon

AVERAGE W ORLD

Score m athem atics

…Important reforms of the VT system but still not designed to support innovation & competitiveness particularly among SMEs.

> 70% of resources still go to initial training (drop-outs).Large share of resources finance operational costs of the central administration.Weak incentives to align the supply of skills with the demand. No linkages with government innovation policies implemented through the Ministry of Industry.

Higher education system supplies more skills that have a low probability of employment?

0% 5% 10% 15% 20% 25%

ArchitecteLicence Beaux ArtsIng.Tech. Ingénierie

Ing. Agriculture & Agro-alimentairesIng.Informat. & Télécom & Electro

MaitreMédecin

Maitrisar InformatiqueTech. Sup. Santé & Serv. Sociaux

Tech. Sup. Autres SpécialitésMaitrisar Tech. Ingenierie

Maitrisar Autre SpécialitésMaitrisar Sciences Humaines

Maitrisar DroitMaitrisar Sciences Fondamentales

Maitrisar LanguesTech. Sup. Gestion & Com. & Adm.

Tech. Sup. Ingénierie & TechMaitrisar Gestion & Eco. & Fin

% Population Totale

HOMMES (43%) FEMMES (57%)

Tunisia

…

0 10 20 30 40 50 60 70

MaitreArchitecte

Ing. Informat. & Télécom & ElectIng. Tech. Ingénierie

MédecinMaitrisar Informatique

Licence Beaux ArtsIng. Agriculture & Agro-alimentaires

Maitrisar Tech. IngenierieTech. Sup. Santé & Serv. Sociaux

Maitrisar Sciences FondamentalesTech. Sup. Ingénierie et Tech

Maitrisar LanguesMaitrisar Gestion & Econ. & Fin

Maitrisar Autres SpécialitésMaitrisar Sciences Humaines

Tech. Sup. Gestion & Com. & AdmTech. Sup. Autres Spécialités

Maitrisar Droit

Taux de Chômage (%)

Average = 46%

Tunisia

… and which are more likely to be underutilized?

0 10 20 30 40 50 60 70 80

ArchitecteMaitre

MédecinIng. Informat. & Télécom. & Elect

Ing. Tech. IngénierieTech. Sup. Santé et Serv. Sociaux

Tech. Sup. Autres SpécialitésMaitrisar Sciences Fondamentales

Ing. Agriculture & Agro-alimentairesMaitrisar. Tech. Ingenierie

Tech. Sup. Ingénierie et TechMaitrisar Autres Spécialités

Maitrisar LanguesMaitrisar Informatique

Licence Beaux ArtsMaitrisar Gestion & Econ. & Fin

Tech. Sup. Gestion & Com. & AdmMaitrisar Sciences Humaines

Maitrisar Droit

Déclassement (%)

Average = 34%

Tunisia

Labor market policies

Standard problems with regulations:Focus on job protection, not income protection.Rigid dismissal procedures and expensive severance pay preclude economic restructuring.Temporary contracts are proliferating but these do not provide any type of protection to workers.

High cost of severance pay

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0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30Years of Service

Ben

efit

(pro

port

ion

of y

early

sal

ary)

.

Morocco

Tunisia

Qatar

Iran

Djibouti

Egypt (eco./technical reasons)

…

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

AlgeriaEgyptWBG

TunisiaDjiboutiQuatar

BahrainIran

JordanLebanon

OmanYemen

MoroccoOCDE

Sub-Saharan AfricaEastern Europe

South AsiaEast Asia andLatin America

MENA

Cost index (1 = max)

…Concerns about effectiveness of recent active labor market programs:

Development of jobs for new entrants to the labor market:Tax breaks for firms which hire first-time job seekers.Wage subsidies for internships with the guarantee of regularization.

Development of SMEs:Credit facilities at the regional level.

Re-enforcing ANAPEC (employment services agency).Focus of the study is on how to improve the design and how to prepare impact evaluations.Analysis will also show limits of these programs relative to the demands.

Social insurance

Focus on pensions, [with some links to health insurance and discussion of viability of UI]:

Effects of financing mechanisms and systems to distribute risks (DB-DC) on the LM:

Level of the equilibrium contribution rate.Links between contributions and benefits and the resulting labortax implicit in the contribution rate.Effects on SMEs and the informal sector.

Economic cost of early retirement.Portability of benefits and labor force mobility.Incentives to cue for jobs in the public sector.Distortions on rates of return on investments in education.

Pension system provides incentives to cue for jobs in the public sector

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20 25 30 35 40 45 50 55

Age

Ben

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aitin

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publ

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ropo

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erag

e w

age)

Current pension law s

Sam e benefits of civil servants apply to CNSS

… and to enter the informal sector

Figure 33: Value-added Per Worker and Average Wages in Manufacturing (ICA 2004).

0

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20000

30000

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50000

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1 19 37 55 73 91 109 127 145 163 181 199 217 235 253 271 289 307 325 343 361 379 397 415 433 451 469 487

Firms Ranked by Value Added per Worker

dirh

ams

Legislated Minimum Wage

Value added per worker

Wages of production workers

Legislated Minimum Wage plus CNSS contributions

Predicted threshold of informality

A

B

C

Figure 33: Value-added Per Worker and Average Wages in Manufacturing (ICA 2004).

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10000

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30000

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1 19 37 55 73 91 109 127 145 163 181 199 217 235 253 271 289 307 325 343 361 379 397 415 433 451 469 487

Firms Ranked by Value Added per Worker

dirh

ams

Legislated Minimum Wage

Value added per worker

Wages of production workers

Legislated Minimum Wage plus CNSS contributions

Predicted threshold of informality

A

B

C

Social assistanceFragmented portfolio of programs with no clear mandates:

Weak targeting and monitoring systems.No evaluation.

Study will take stock of these programs and provide general recommendations for future reforms…… but focus will be on identifying interventions that can be piloted and eventually expanded to deal with the issue of drop-out rates.

What comes next?Continue/finalize the assessment of constraints and necessary policy interventions by sector and their linkages.Assess macro impact of policy packages:

Analysis is based on a CGE model with a well disaggregated labor market.Capable of assessing the impact of alternative policy packages (including pension reform) on labor markets and macroeconomic outcomes:

Employment / unemployment by type of skills level; wages; fiscal space…

Define policy matrix for discussion with Government (prioritize).

…

Operationalize the strategy:Classical instruments:

Currently demand for projects in VT, Basic and Secondary Education (SWAP), and higher education.Also demands for TA to support social insurance reform (pensions and health) and the implementation of active labor market programs (including evaluation mechanisms).

Or opportunity for a DPL…