Abstract
Morocco: Selected Issues
Morocco: Unit Labor Costs and External Competitiveness1
This paper evaluates Morocco’s external competitiveness by examining trends in the unit labor cost-based real effective exchange rate (REER) including at the sectoral level. It finds that although low unit labor costs relative to peers provide a competitive advantage supporting a real depreciation, recent movements in nominal exchange rates have limited this trend. The paper also examines the impact of the changes in REER on Morocco’s external position, in particular, merchandise exports. It finds that Morocco’s exports remain sensitive to movements in the REER, but this elasticity has slightly declined recently. Policy considerations from this analysis relate to preserving Morocco’s external competitiveness, including through future productivity growth, integration into global value chains, supportive structural reforms, and greater exchange rate flexibility.
A. Introduction
1. A central pillar of Morocco’s strategy to attain higher, more inclusive growth has been the development of higher value added manufacturing exports. Morocco’s manufacturing exports have grown at an annualized rate of 8 percent between 1990 and 2015, from 24 percent of GDP in 1990 to 34 percent of GDP in end-2015. Since 2012, there has been a marked compositional shift in the export basket toward automobiles and other advanced manufactures, while Morocco’s global market share in more traditional sectors, such as textiles has declined. The effectiveness of this sectoral specialization strategy rests on Morocco maintaining external competitiveness vis-à-vis its peers.
2. A key indicator of cost competitiveness is unit labor costs (ULCs), the ratio of labor compensation to labor productivity. Figure 1 illustrates that Morocco’s labor compensation has remained low relative to its peers. However, Figure 2 reveals that productivity growth for Morocco has remained sluggish relative to other comparators.
Manufacturing Compensation Costs: Morocco vs. Comparator Countries
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: The Conference Board 2016 International Labor Comparisons Program, April 2016; and IMF staff calculations.Manufacturing Compensation Costs: Morocco vs. Comparator Countries
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: The Conference Board 2016 International Labor Comparisons Program, April 2016; and IMF staff calculations.Manufacturing Compensation Costs: Morocco vs. Comparator Countries
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: The Conference Board 2016 International Labor Comparisons Program, April 2016; and IMF staff calculations.
Labor Productivity, 1990–2015
(Output/Worker in 2015, U.S. = 100)
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Source: The Conference Board, 2016. The Conference Board Total Economy Database™ (Adjusted version), November 2016.Labor Productivity, 1990–2015
(Output/Worker in 2015, U.S. = 100)
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Source: The Conference Board, 2016. The Conference Board Total Economy Database™ (Adjusted version), November 2016.Labor Productivity, 1990–2015
(Output/Worker in 2015, U.S. = 100)
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Source: The Conference Board, 2016. The Conference Board Total Economy Database™ (Adjusted version), November 2016.3. This paper assesses Morocco’s external competitiveness by examining trends in the unit labor cost based real effective exchange rate (REER). The REER comprises the country’s nominal effective exchange rate, the weighted average of bilateral exchange rates with the country’s main trading partners, deflated by a price or cost index, to account for relative changes in purchasing power or costs. The most readily available (and thus widely used) deflator is the consumer price index (CPI); other deflators include the producer price index (PPI), wholesale price index, and ULCs.2 Of particular interest here is the ULC-based REER, which can provide fresh insight into the role of productivity-adjusted labor costs relative to peers on the real exchange rate, particularly as Morocco’s exports begin shifting to high productivity sectors. To this end, this paper explores recent trends in Morocco’s ULC-based REERs, presents an empirical analysis of the impact of changes in REER on Morocco’s external position, and discusses relevant policy considerations.
B. Recent Trends in Morocco’s REER
4. The CPI-based REER steadily appreciated until around 2000, followed by depreciation thereafter. As Figure 3 shows, the CPI-based REER, taken from the IMF’s Information Notice System database, depreciated by nearly 5½ percent between 2000–12, due mainly to movements in the euro, which comprises the largest trading partner weight.3 Since then, the CPI-based REER has appreciated nearly 4 percent as of November 2016, with the offsetting strengthening in the US dollar.
Morocco: ULC and CPI-based REERs
(Index, 2010=100)
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: IMF Information Notice System; WEO; UNIDO; and IMF staff calculations.Note: Exchange rates are expressed as foreign currency units per local currency units; an increase in the REER index implies a loss of competitiveness. Selected competitors include: China, India, Poland, Spain, Thailand, and Turkey.Morocco: ULC and CPI-based REERs
(Index, 2010=100)
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: IMF Information Notice System; WEO; UNIDO; and IMF staff calculations.Note: Exchange rates are expressed as foreign currency units per local currency units; an increase in the REER index implies a loss of competitiveness. Selected competitors include: China, India, Poland, Spain, Thailand, and Turkey.Morocco: ULC and CPI-based REERs
(Index, 2010=100)
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: IMF Information Notice System; WEO; UNIDO; and IMF staff calculations.Note: Exchange rates are expressed as foreign currency units per local currency units; an increase in the REER index implies a loss of competitiveness. Selected competitors include: China, India, Poland, Spain, Thailand, and Turkey.5. On the other hand, the path of ULC-based REER varies with the basket of comparator countries. The ULC-based REER computed against Morocco’s main trading partners shows a divergence with the CPI-based REER between the mid-1990s and 2007/08, with an inflection point in 2000, corresponding to the introduction and subsequent appreciation of the euro. Since the global financial crisis (and around the same time that Morocco’s export basket composition began to shift) this REER shows a real depreciation, reflecting the relative cost advantage with euro area trading partners. However, compared to a basket of emerging economies that includes some of Morocco’s competitors in international markets (China, India, Poland, Spain, Thailand, and Turkey), the ULC-based REER shows a sharp appreciation since the crisis, reflecting bilateral nominal exchange rate movements relative to these countries.
C. Sectoral ULC-based REERs
6. Aggregate, economy-wide REERs can mask movements in sectoral competitiveness.4 Using data from the Ministère de l’Industrie, du Commerce, de l’Investissement et de l’Economie Numérique, ULCs and ULC-based REERs are computed for five manufacturing subsectors, as well as a composite measure of sector-based REERs, as in EuroStat (2012). Sectoral ULCs are computed as labor costs in local currency in the sector divided by labor productivity, which is defined as value added per worker.
7. Indeed, ULC trends vary significantly across sectors (Figure 4). ULCs in textile and leather remain significantly higher than those in other sectors. ULCs have risen steadily in the electronics sector, and more recently in the mechanical and metallurgy and agroindustry sectors. This trend reflects faster growing wage costs than labor productivity. On the other hand, value added per worker has risen steadily in the chemicals sector, keeping unit labor costs steady.
Unit Labor Costs—Manufacturing Sectors
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: Ministère de l’Industrie, du Commerce, de l’Investissement et de l’Economie Numérique; and IMF staff calculations.Unit Labor Costs—Manufacturing Sectors
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: Ministère de l’Industrie, du Commerce, de l’Investissement et de l’Economie Numérique; and IMF staff calculations.Unit Labor Costs—Manufacturing Sectors
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: Ministère de l’Industrie, du Commerce, de l’Investissement et de l’Economie Numérique; and IMF staff calculations.8. Relative to competitors, ULCs present a significant, though narrowing source of competitive advantage (Figure 5). Morocco’s manufacturing ULCs are markedly lower than competitor countries, with the exception of the textiles sector. This pattern is consistent with trends in global export market share, where Morocco has lost ground in the textiles sector. With the exception of the chemicals sector, relative ULCs have been increasing over the last decade, due in part to wage growth exceeding productivity gains relative to competitors.
Relative ULCs—Manufacturing Sectors
(100=China)
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: Ministère de l’Industrie, du Commerce, de l’Investissement et de l’Economie Numérique; UNIDO ; and IMF staff calculations.Relative ULCs—Manufacturing Sectors
(100=China)
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: Ministère de l’Industrie, du Commerce, de l’Investissement et de l’Economie Numérique; UNIDO ; and IMF staff calculations.Relative ULCs—Manufacturing Sectors
(100=China)
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: Ministère de l’Industrie, du Commerce, de l’Investissement et de l’Economie Numérique; UNIDO ; and IMF staff calculations.9. Low relative ULCs should contribute to a depreciation in ULC-based REER, though recent nominal appreciation has checked this trend (Figure 6). The ULC-based REER for most sectors has been on an appreciating trend since 2000 despite low relative ULCs due to changes in the nominal exchange rate.
Sectoral ULC-based REER Sectoral ULC-based REER
(2005=100)
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: Ministère de l’Industrie, du Commerce, de l’Investissement et de l’Economie Numérique; IMF WEO; UNIDO; and IMF staff calculations. Note: Competitors include: China, India, Poland, Spain, Thailand, and Turkey.Sectoral ULC-based REER Sectoral ULC-based REER
(2005=100)
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: Ministère de l’Industrie, du Commerce, de l’Investissement et de l’Economie Numérique; IMF WEO; UNIDO; and IMF staff calculations. Note: Competitors include: China, India, Poland, Spain, Thailand, and Turkey.Sectoral ULC-based REER Sectoral ULC-based REER
(2005=100)
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: Ministère de l’Industrie, du Commerce, de l’Investissement et de l’Economie Numérique; IMF WEO; UNIDO; and IMF staff calculations. Note: Competitors include: China, India, Poland, Spain, Thailand, and Turkey.10. Overall, like for the CPI-based REER, nominal exchange rate movements have driven a real appreciation of the ULC-based REER. A composite measure of external competitiveness can be computed as the weighted average of the sectoral REERs, with each sector weighted by its relative value added in the economy (Figure 7).5 Because the sectors with the highest relative value added are still a small share of total value added in the economy, this translates to a sharper real appreciation. Using an alternative weighting based on employment shares reveals an even larger appreciation.
Composite ULC-based REER— Manufacturing
(2005=100)
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: Ministére de l’Industrie, du Commerce, de l’Investissement et de l’Economie Numérique; and IMF staff calculations.Composite ULC-based REER— Manufacturing
(2005=100)
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: Ministére de l’Industrie, du Commerce, de l’Investissement et de l’Economie Numérique; and IMF staff calculations.Composite ULC-based REER— Manufacturing
(2005=100)
Citation: IMF Staff Country Reports 2017, 065; 10.5089/9781475583519.002.A003
Sources: Ministére de l’Industrie, du Commerce, de l’Investissement et de l’Economie Numérique; and IMF staff calculations.D. The REER and Morocco’s External Position
11. This section assesses the impact of changes in the real effective exchange rate (REER) on Morocco’s external position. The literature suggests that a depreciation in the real exchange rate should lead to an increase in exports for both advanced and emerging economies (Amiti et al. 2014; Veeramani 2008). However, this elasticity can weaken as exports move up the global value chain and are increasingly integrated into global production processes, making them less price sensitive (IMF 2015). It is instructive to estimate the REER elasticity of exports for Morocco, given the prevailing sectoral strategy toward higher value added exports and the importance of exports in generating growth.
Model
12. To quantify the impact of exchange rate changes, the following regression is estimated using quarterly data for 1990-2015:
where Y is a measure of Morocco’s external position, namely merchandise and manufacturing exports, REERt is the ULC-based real effective exchange rate, Xt is a vector of control variables and εt is the error term. It is expected that β < 0, i.e., an appreciation of the REER (a loss in competitiveness) would worsen export performance. On the other hand, compositional shifts in the export basket up the value chain could make the trade balance less sensitive to the REER.
13. The control variables Xt comprise own real GDP growth yt (all else equal, higher growth would result in greater production capacity, increasing exports); world GDP growth gt, a proxy for external demand (higher global demand would increase demand for all exports, including Morocco’s); as well a time trend T. REERt, yt and gt are lagged to control for endogeneity.
14. The regression is estimated using ordinary least-squares. Data on sectoral exports (FOB, by main product groups) is taken from Office des Changes, real GDP growth rates from the IMF’s World Economic Outlook, and cubic spline interpolation is used to estimate a quarterly series for the ULC-based REER (relative to trading partners, for data availability).
Results
15. Table 1 presents the results of the regression model estimated for three sets of the independent variable Yt: (i) all merchandise exports, and (ii) manufacturing exports. The regression is also estimated for two sample periods, 1990-2006 and 2007-2015 for any structural shifts (e.g. the GFC, export strategy).
Estimation Results: Morocco’s REER and External Position
Estimation Results: Morocco’s REER and External Position
| (1) | (2) | (3) | (4) | (5) | |
|---|---|---|---|---|---|
| (i) Yt = Merchandise exports | |||||
| log(REERt) | −0.384** | −0.239* | −0.122* | −0.391** | −0.192** |
| log(yt) | --- | 0.008 | 0.015* | 0.013 | 0.017* |
| log(gt) | --- | --- | 0.032* | 0.029* | −0.019* |
| T | −0.012 | −0.000* | −0.001 | 0.011* | 0.021 |
| Constant | −6.312** | −5.311* | −5.530** | −2.483* | −2.342 |
| R2 | 0.769 | 0.788 | 0.892 | 0.813 | 0.861 |
| (ii) Yt = Manufacturing exports | |||||
| log(REERt) | −0.399** | −0.305* | −0.268* | −0.400** | −0.212* |
| log(yt) | --- | 0.006* | 0.016 | 0.014 | 0.018* |
| log(gt) | --- | --- | 0.022** | 0.024* | −0.003** |
| T | −0.002* | −0.010* | −0.003* | 0.015* | 0.014* |
| Constant | −4.543** | −3.675** | −3.231** | −2.388* | −2.117* |
| R2 | 0.811 | 0.834 | 0.881 | 0.833 | 0.827 |
| Period | 1990-2015 | 1990-2015 | 1990-2015 | 1990-2006 | 2007-2015 |
Estimation Results: Morocco’s REER and External Position
| (1) | (2) | (3) | (4) | (5) | |
|---|---|---|---|---|---|
| (i) Yt = Merchandise exports | |||||
| log(REERt) | −0.384** | −0.239* | −0.122* | −0.391** | −0.192** |
| log(yt) | --- | 0.008 | 0.015* | 0.013 | 0.017* |
| log(gt) | --- | --- | 0.032* | 0.029* | −0.019* |
| T | −0.012 | −0.000* | −0.001 | 0.011* | 0.021 |
| Constant | −6.312** | −5.311* | −5.530** | −2.483* | −2.342 |
| R2 | 0.769 | 0.788 | 0.892 | 0.813 | 0.861 |
| (ii) Yt = Manufacturing exports | |||||
| log(REERt) | −0.399** | −0.305* | −0.268* | −0.400** | −0.212* |
| log(yt) | --- | 0.006* | 0.016 | 0.014 | 0.018* |
| log(gt) | --- | --- | 0.022** | 0.024* | −0.003** |
| T | −0.002* | −0.010* | −0.003* | 0.015* | 0.014* |
| Constant | −4.543** | −3.675** | −3.231** | −2.388* | −2.117* |
| R2 | 0.811 | 0.834 | 0.881 | 0.833 | 0.827 |
| Period | 1990-2015 | 1990-2015 | 1990-2015 | 1990-2006 | 2007-2015 |
Models (i) and (ii) suggest that in general, a 1 pp depreciation of the exchange rate leads to an increase in exports by 0.38-0.4 pp, a significant estimate that is broadly consistent with the literature; the relationship appears stronger for the subset of manufacturing exports.
Specifications (4) and (5) suggest the REER elasticity of exports has weakened since 2007–08.
The impact of own real growth on exports is weak, though with expected signs; this reflects the resilience of Morocco’s exports despite recent volatility in growth (due mainly to agriculture).
An increase in world economic growth, reflecting global demand, appears to have a positive effect on Moroccan exports. However, the sample split reveals that Morocco’s exports have performed strongly despite weak global growth.
E. Policy Considerations
16. This analysis holds several policy considerations for preserving Morocco’s external competitiveness and the strength of its external position:
Productivity growth should match or exceed nominal wage growth to maintain low relative ULCs. Whereas low ULCs have thus far provided Morocco an advantage in external competitiveness relative to its peers, this gap is narrowing, and slow productivity growth would pose a constraint as nominal wages rise (for example, for textiles). To maintain relative external competitiveness, productivity growth should match or exceed growth in nominal wages. Also, non-wage labor compensation, an important component of the latter, such as social security contributions, can contribute to high and sticky nominal wages.
Efforts to integrate exports into global value chains should continue. The empirical analysis of export performance suggests that manufacturing industries remain sensitive to the REER despite recent shifts up global value chains. It is the degree of integration within these chains, rather than the additional value add per se, which would work to weaken the elasticity of exports to the real exchange rate, a shift which is likely to take place in the future as these sectors develop further.
Supportive structural reforms will be important. To the extent that external competitiveness allows returns to accrue to sectors with low relative unit labor costs, structural reforms (such as improving education and training, or labor market reforms) can facilitate the reallocation of productive resources towards more productive, more competitive sectors, increasing welfare gains for the economy.
Greater exchange rate flexibility may also contribute. More broadly, the findings highlight the potential benefits for Morocco from greater exchange rate flexibility, including in order to preserve competitiveness and support the emerging manufacturing sectors (especially where productivity gains have been slow, such as for textiles), and particularly in case of nominal shocks.
References
Ahmed, S, M. Appendino, and M. Ruta, 2015, “Global Value Chains and the Exchange Rate Elasticity of Exports,” IMF Working Paper 15/252 (Washington: International Monetary Fund). https://www.imf.org/external/pubs/ft/wp/2015/wp15252.pdf
Amiti, M., O. Itskhoki, and J. Konings, 2014, “Why Hasn’t the Yen Depreciation Spurred Japanese Exports?” Liberty Street Economics. http://libertystreeteconomics.newyorkfed.org/2014/07/why-hasnt-the-yen-depreciation-spurredjapanese-exports.html#.Vh8JELRVikp
Ministry of Economy and Finance, Department of Financial Studies and Economic Forecasts (DEPF), 2016, Décomposition de la compétitivité structurelle du Maroc: Marges intensives et extensives de nos exportations (Morocco).
European Central Bank, 2012, “Revisiting the Effective Exchange Rates of the Euro,” Occasional Paper Series No. 134.
International Monetary Fund, 1997, “A Primer on the IMF’s Information Notice System,” IMF Working Paper WP/97/71 (Washington). https://www.imf.org/external/pubs/ft/wp/wp9771.pdf
International Monetary Fund, 2012. “Assessing Competitiveness Using Industry Unit Labor Costs: An Application to Slovakia,” IMF Working Paper WP12/107 (Washington). https://www.imf.org/external/pubs/ft/wp/2012/wp12107.pdf
Veeramani, C., 2008, “Impact of Exchange Rate Appreciation on India’s Exports,” Economic and Political Weekly, Vol. 43, No. 22 (May 31-June 6, 2008), pp. 10–14.
Prepared by Sanaa Nadeem.
The REER of country i with K trading partners is computed as
The Moroccan dirham is currently pegged to a currency basket comprising 60 percent Euro, 40 percent dollar (80 percent Euro, 20 percent dollar prior to April 2015).
Further, the use of a manufacturing REER as a proxy for an economy-wide REERs may not be adequately representative of ULCs in other sectors (e.g. tradable services, such as tourism). However, lack of data restricts analysis to the manufacturing sector.
The composite measure is computed as
