in teacher‐student ratios, better incentives for teachers, improved access to the internet in schools, and so on) may be critical.

_Promoting innovation_ . To do so requires a range of reforms. First targeted government subsidies to R&D may be needed, to promote specific activities with a potentially high social marginal return. To the extent that they help to prop up wages in the innovation sector and reduce the inherent degree of uncertainty associated with the returns to innovation, temporary public subsidies can also help to mitigate the misallocation of talent alluded to in Box 2.1. However, subsidies to innovation are unlikely to work if the binding constraint on productivity growth in the innovation sector is related to another factor, such as the lack of access to advanced infrastructure. In that case, promoting innovation requires a combination of policies. Second, ensuring contract enforcement and protection of property rights is also important to promote innovation. Poor contract enforcement and lack of protection of property rights (especially intellectual rights) are key weaknesses in developing countries in general, and Morocco in particular (see text).

_Promoting advanced infrastructure_ . As noted in Box 2.1, lack of access to advanced infrastructure may be an important barrier to the development of national and international knowledge networks and the increase of productivity. With a sufficiently large increase in investment in advanced infrastructure, either by the state (through a reallocation of investment spending and improved efficiency of expenditure) or by a combination of the state and the private sector (through public‐private partnerships), productivity in the R&D will increase, thereby fostering the creation of ideas. In addition, by raising wages, higher productivity will increase the number of people who choose to invest in the advanced skills needed to operate in that sector – thereby mitigating the misallocation of talent alluded to earlier (see Box 2.1).

_Improving access to finance_ . Informational asymmetries are a key constraint on the ability of firms in general – and small enterprises that lack collateral, credit histories, and connections, in particular – to secure external funds for the financing of production and innovation projects. Moreover, access (or lack thereof) to finance may constrain growth not only by increasing the cost for lenders of monitoring innovation activities, but also by altering incentives to acquire skills. Indeed, the degree to which firms innovate and the distribution of skills among workers (which conditions the development of innovation activities) are jointly determined; lack of skills and poor access to finance are interrelated. These interactions can lead to a middle‐income trap, characterized by a misallocation of talent and a high cost of financial intermediation.

In this context, public policy aimed at mitigating the impact of these imperfections (or, more specifically, those aimed at reducing the cost of monitoring R&D projects) may allow a country to avoid falling into, or to escape from, that trap. Ensuring access to more funding sources may lead to more intensive innovation, more successful R&D projects which, in turn, may result in lower unit monitoring costs, thereby helping to further promote financial intermediation, innovation, and economic growth. Policies that are aimed directly at mitigating asymmetric information problems and reducing unit monitoring costs include the creation of credit bureaus or registries that help to collect, analyze, and disseminate information about potential borrowers to lenders.

# **3.2 Reforming the Education System and the Labor Market**

As noted earlier, improving the quality and adequacy of human capital is essential to promote productivity and reduce skills mismatch. This is also important to promote innovation. To that effect, it is critical for Morocco to implement a range of reforms of its education system and labor market regulations.

Indeed, sustained effort must be made in the coming years to adapt both the quantity and quality of labor to better match the type of skills produced by the education system and those demanded by the market, facilitate the upward movement along the technological frontier, and the promotion of innovation activities.<sup>1</sup> Empirical studies have shown that the quality of labor also plays an important role in the promotion of foreign direct investment, 38