Democracy Lab

The Moroccan Model?

Morocco has a chance to become a regional leader on economic reform. But it still has a way to go.

If the premise that all happy families are alike, whereas unhappy ones are each unhappy in their own way explains the world of Anna Karenina, then the reverse is certainly true for the Arab Spring countries. Throughout the region, economies are struggling with the same problems: the politically explosive issue of bloated subsidy programs, red tape, corruption, and policy uncertainty in the private sector and foreign sector development -- with little consensus on the right way forward.

In such circumstances, finding examples worthy of emulation is of paramount importance. Cue Morocco, which former Secretary of State Hilary Clinton has singled out as a "leader and model" for King Mohammed VI's handling of the state's political transition. In the words of Mohamed Tamaldou, president of the Network of Arab Liberals, "Morocco was one of the first Arab countries where opposition acceded to power through normal political procedures." There are hopes that the country will be the first Arab nation to transition towards a European-style constitutional monarchy, with the King playing only a very limited role, yet providing a sense of political continuity in a region rife with instability.

More so than other (relatively) positive examples like Tunisia, Morocco has received attention for being "traditionally oriented to the West and [having] a long experience with a market economy, albeit often of the cronyist variety," explains Nouh el-Harmouzi, a lecturer in economics at Ibn Tofail University and Morocco's first "free market activist."

In the 1990s, when Mohammed VI took the throne, the country saw various political and economic reforms. Many political prisoners were freed, state-owned companies were privatized, and the economy opened to foreign trade and investment. In 2012, the Economist Intelligence Unit ranked Morocco 66th worldwide, above both Jordan and Russia, in its "where-to-be-born" index, aggregating measures that are related to life satisfaction around the world. A 2013 ranking by the World Economic Forum, assessing of the competitiveness of economies around the world, classified Morocco as the best performer in North Africa and better than Slovakia, Montenegro, and Romania. 

The country's economy has been growing steadily even in the aftermath of the Arab Spring with a growth rate of 4.9 percent in 2011 and 2.9 percent in 2012. Poverty rates in the country are fairly low and falling -- from around 16 percent in 1999 to less than 9 percent in 2009.

Yet, on a closer inspection, excessive optimism seems unwarranted. In the same speech where Clinton praised Morocco's governance, she warned against the dangers of its high unemployment amongst young people.

Education makes the problem worse, not better. Those with the highest level of educational achievement face an unemployment rate of 19.4 percent compared to only 4 percent for individuals with no degrees -- hence the large number of diplômés chômeurs, as they are know in the country. Because of low rates of labor participation, particularly among women, the official unemployment figures underestimate how many people are out of work. As elsewhere, bad institutions and policies are to blame. The country has seen 80 self-immolations since February 2011, as acts of protest by unemployed graduates or vendors harassed by local authorities.

Just as in Egypt, Tunisia, etc., the fiscal problem is driven primarily by subsidies to consumer goods (fuels and food) which represent 15 percent of total public spending and have almost doubled in absolute terms since 2010, as the government tries to contain the civil unrest through more generous spending on subsidies and public-sector salaries. The governing party, the Justice and Development Party (PJD), has realized the unsustainability of continued subsidies, and following the advice of the IMF, it proposed a reform that would reduce subsidies while cushioning the blow to the 2 million poorest households with cash transfers. 

The reform won't eliminate subsidies completely. It will limit them by stabilizing consumer prices within a certain range but allowing for price increases or decreases whenever the international prices rise or fall above the set boundaries. The reform, which is now officially scheduled after Ramadan, would be less radical than the proposals by economists and organizations like the IMF to phase out of subsidies, while introducing direct transfers to poor households. Still, with 20 percent savings to the subsidy bill in 2013, it would be certainly preferable to the status quo.

But since late May, even this modest reform is in jeopardy after the junior coalition partner, the nationalist Istiqlal party, announced that it would not support the effort and that its ministers would leave the Cabinet in protest. In a grand display of political posturing, an Istiqlal spokesperson, Adil Benhamza used the opportunity to proclaim that the "PJD wants to raise prices and hit the poorest, while we prefer to pick up some billions which are at the hands of speculators by controlling imports."

As compassionately as their declaration was surely meant, one would be hard pressed to find a subsidy system that does not lead to leakages to the black market and waste. "A possible interpretation of Istiqlal's resistance to subsidy reform is that the compensatory payments would make the reform popular, further increasing PJD's electoral advantage," offered Harmouzi.

In any event, things have taken a somewhat bizarre turn when, after a phone call from the king, the Istiqlal ministers decided to stay in the government until Mohammed VI returns from his somewhat mysterious extended vacation in Paris. On July 9, 2013, several weeks after the monarch's return, and after the government proceeded with the reform initiative, Istiqlal ministers went ahead to announce that they will tender their resignation. If accepted by the king, the prime minister will either have to find a new political partner or call an early election.

The country's political liberalization seems a bit sketchy if one takes into account the enormous influence the king and his entourage have on the day-to-day conduct of public affairs -- a far cry from the touted constitutional monarchy --  or the treatment of the Sahrawi people in the Western Sahara. On the Fraser Institute's index of Economic Freedom of the World, Morocco is faulted for its red tape burden, its capital controls, and regulations on hiring and firing practices. Morocco also performs poorly in several areas of World Bank's Doing Business index. That's hardly a way to attract investors or spur domestic entrepreneurship.

The country is among the worst in the world on the measure of ease of registering property -- partly because of its arcane tax system. Completing a transfer of property in the country takes 75 days and costs 5.9 percent of the property's value. This year, the property registration fees have increased, making property registration in Morocco more difficult than in India, Angola, and even the Central African Republic.

It should be encouraging that the reforms needed to make Morocco a good place to do business are relatively painless to implement. The country has traditionally been welcoming of foreign investors and has several free trade zones -- notably in Tangier, which is also an offshore banking center. To help foreign investors navigate the country's opaque bureaucracy, the government runs Regional Investment Centers, which serve as one-stop shops for foreign investors.

But with rising public debt (currently around 71 percent of GDP), a substantial budget deficit (8.2 percent of GDP), high youth unemployment (17.9 percent), 30 percent of Moroccans illiterate, and very low economic participation by women, Morocco has a long way to go towards being an economic success story.

The government has therefore a lot to build on to further improve the business environment with the potential of turning the Moroccan economy into the region's premier destination for foreign investors. The economic effects of liberalization of capital flows, a reform of the financial system, and other "structural reforms" would be substantial. According toIMF estimates, such reforms could easily add up to 2.5 percentage points to the economy's annual growth rates.

This would be beneficial not just to the Moroccans but also serve as a model to reformers elsewhere in the region that suffer from the inability to push through liberalizing reforms in an effort to maintain their constituents' support. The battle for sound economic and political institutions in the Arab world can only be won through the power of ideas. One success story in the region would go a long way.

Harmouzi remains an optimist: "I think the country can potentially serve as a model. There is some political will to do the needed reforms. And although we need to speed up, we're moving in the right direction."



Aiding and Abetting

Why are the United States and Japan still giving tens of millions of dollars in aid to China?

In 2010, China surpassed Japan as the world's second largest economy. In the years since, its economy has grown roughly four times as fast as Japan and the United States; a March report by the Organization for Economic Cooperation and Development (OECD) forecast that China will overtake the United States as the world's biggest economy by 2016, when assessed in purchasing power parity terms. China has the largest foreign exchange reserves in the world -- $3.4 trillion, as of the first quarter of 2013. When President Barack Obama sat down with President Xi Jinping in an early June summit, it was a meeting of equals. And in the Strategic and Economic Dialogue, the annual meeting between high-ranking U.S. and Chinese officials that this year took place on July 10-11 in Washington D.C., the balance might even have been in China's favor: the country sent two lower-ranking officials to meet with U.S. Secretary of State John Kerry and Secretary of the Treasury Jack Lew.

The stories, facts, and figures that show how global wealth and influence is shifting from the Western world and Japan to China and other developing nations are widely known. What most people overlook, however, is that the United States and Japan -- China's two largest trading partners, and its most significant geopolitical rivals -- still provide China with tens of millions of dollars annually in aid and assistance.

The United States provided $28.3 million in foreign assistance and funding programs to China via USAID and the State Department in 2012, according to a May report from the Congressional Research Service. It projects that number to decrease slightly in 2013, to $25.5 million. Roughly half of the U.S. funding is administered by the U.S. Agency for International Development (USAID), which focuses on four main areas in China: environmental protection, rule of law, HIV/AIDS, and sustainable development for Tibetans. "I believe that our foreign aid to China furthers U.S. interests," said Sen. Ben Cardin (D-MD), who chairs the East Asian and Pacific Affairs Subcommitttee of the Foreign Relations Committee, in a phone interview. But a USAID official, who asked to speak on background, took issue with calling the assistance to China "aid." "We are using some assistance to do technical cooperation in a few key areas, which are narrow and defined in scope," the official said. It's "directed" assistance, the official added, noting that these programs were not controversial.

It is certainly controversial for Japan, whose relationship with China is extremely fraught. On July 9, Japan released its annual defense white paper, which warned that China was engaging in "dangerous actions" around the Senkaku islands, which China claims but Japan administers. Despite the tensions, Tokyo still provides China with "a huge amount of money," said Kae Yanagisawa, the director general of the East and Central Asia and the Caucasus Department of the Japan International Cooperation Agency. The OECD estimated that in 2011, the latest year for which data is available, Japan gave nearly $800 million in development assistance to China. In 2000, Japanese economic aid to China peaked at $1.98 billion, according to an article on People's Daily Online, a Chinese Communist Party website.

Japan has been a major donor to China, in part out of feelings of guilt arising from the invasion during World War II. But some Japanese worry that now their country is donating money that abets their enemy. "It's controversial. Many countries stopped providing aid a long time ago," but Japan "cannot move totally away from China," Kae said, adding that the government tries to target the "aid to China to the sphere that directly benefits Japan," like air pollution. (A February article in the Japanese newspaper Asahi Shimbum, reported that traces of Chinese pollutants reached southwest Japan.) 

Foreign aid is sensitive in China as well. In the wake of an earthquake this April, Beijing declined Tokyo's offer of assistance. Yet Japan gratefully accepted a 15-member team sent to help search for survivors after Japan's March 2011 tsunami. What makes the relationship odder is that Beijing is now a major international donor itself, providing billions of dollars of aid and favorable loans to African and Asian countries. I asked Kae if China provides any aid to Japan. "No, of course not," she said. (USAID said it wasn't appropriate for them to comment on whether the United States would welcome aid from Beijing, or whether China currently gives any aid to the United States. A State Department spokesperson referred the request to the Federal Emergency Management Agency; a spokesperson there did not respond to an interview request.)

U.S. aid to China became an issue in Washington in 2011. In 2010, the year that China overtook Japan to become the world's second largest economy, U.S. aid to China reached its highest point over the last 15 years, at nearly $47 million. In August 2011, a bipartisan group of U.S. Senators wrote a letter calling for the end of development aid to China, stating that "China certainly has the financial resources to ... care for its citizens without relying on U.S. assistance." A November 2011 hearing before the House Subcommittee on Asian and Pacific affairs entitled "Feeding the Dragon: Reevaluating U.S. Development Assistance to China," focused on the $3.95 million USAID used to ‘‘engage China as a partner in addressing climate change," and on why the United States borrows "money from China to give back to China to help it fix its own domestic problems." In that hearing, Congressman Steve Chabot (R-OH) peppered Nisha Desai Biswal, USAID's assistant administrator for Asia, during testimony, noting that it's a "hard sell explaining to the American people" why "China can't use their own money" to fund assistance to China. Since then, Congress has reduced or withdrew aid in some areas, such as environmental programs. "The need for U.S. involvement is not as strong as it was in the past," says Cardin. 

The USAID official, like many of the people interviewed for this article, stressed that the money goes not to the government in Beijing, but to the Chinese people. The United States spends $7.5 million, or roughly 25 percent of the annual Chinese aid budget, to help Tibetans with business development and cultural preservation. Aid to Tibetans "was set up to fill some of the cracks in Tibetan society," said Todd Stein, director of government relations at the International Campaign for Tibet, a D.C.-based advocacy group. The aid programs to assist Tibetans, a beleaguered Chinese minority persecuted by the Chinese state, steer far away from anything the Chinese might deem as sensitive. The Tibet programs are "not politically oriented," said the USAID official, adding that the Chinese government acknowledges the aid and has "allowed [it] to continue." That is because the programs don't involve sensitive areas like democracy and rule of law, said a policy analyst who works on China and Tibet issues, and who asked to speak anonymously because of the sensitivity of the issue. That said, USAID's page on the U.S. Embassy in Beijing's website does not mention Tibet. A USAID spokesperson responded by email and said that they will contact the State Department "and make certain [that] USAID programs centered around Tibet are included and posted."

Of the remaining $14 million not administered by USAID, $3 million goes to fund the Peace Corps, which currently has 146 volunteers in China, although none are allowed to operate in Tibet. The remaining $11 million, administered by the State Department, is spent on programs that advance "human rights, democracy, rule of law," and is mostly given to U.S.-based NGOs and universities that operate programs in China, "although Chinese NGOs, universities, and some government entities have participated in, benefitted from, or collaborated with U.S. programs and grantees," according to the May Congressional Research Service report. This shows that "U.S. promotion of democracy and rule of law [in China] has not totally disappeared as a policy matter," says Dan Blumenthal, director of Asian Studies at the American Enterprise Institute.  

At what level of Chinese economic and political development will U.S. aid to China disappear as well?  

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