Market distortions and the informal economy: the case of Morocco

F Z Alaoui Moustain

No 542774, Working Papers from Lancaster University Management School, Economics Department

Abstract: This paper reviews the Moroccan experience with financial reforms, suggesting that, while financial liberalisation may be an important factor in the growth process, it is not sufficient in itself to promote productive investment. Increased financial deepening in Morocco mostly benefited government budget deficits and household consumption, essentially because of the absence of appropriate labour regulation and an efficient legal system. This paper therefore investigates the hypothesis that the absence of proper governance experienced by Morocco have stimulated informal, rather than formal activity. The MIMIC methodology used to estimate the size of the shadow economy in Morocco reveals that governance failure resulted in a black economy of a magnitude averaging 37 percent of GDP over the period 1975-2000. Furthermore, budget deficit financing through borrowing rather than tax collection appears to lead to more informal activity. This paper therefore concludes by arguing that reviving private sector investment in Morocco requires reducing government dependence on borrowing to finance its budget deficit as well as the adoption of less stringent labour regulations and a more efficient legal system.

Date: 2004
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