# **1 Introduction**

To accelerate its pace of economic convergence, Morocco needs to achieve and sustain faster economic growth. Dabla-Norris et al. (2013) shows that episodes of growth take-off in emerging markets have been mostly associated with a strong pick-up in total factor productivity (TFP) growth. Yet, in the last two decades, average TFP growth in Morocco has been much lower than in other emerging market economies, especially in East and South Asia. Policies to lift-up TFP would appear therefore to be critical to accelerate the Moroccan economic convergence process (World Bank, 2017a).

Productivity increases with the adoption and development of new technologies (Howitt, 2000; Klenow and Rodriguez-Clare, 2005; and Coe and Helpman, 1995) and with better institutions and higher social and human capital (World Bank, 2017a and 2017b). In addition, the structural change process of allocating resources from less productive to more productive sectors has also been found to be one of the main sources of TFP growth (McMillan, Rodrick, and Verduzco-Gallo, 2014). In this paper we focus on another significant determinant of aggregate productivity explored in the literature: resource misallocation across firms.

Seminal papers in this literature include Restuccia and Rogerson (2008), Hsieh and Klenow (2009), Bartelsman, Haltiwanger, and Scarpetta (2013), and Asker, Collards-Wexler, and De Loecker (2014) and suggest that large heterogeneity in firm-level productivity within a sector may indicate misallocation of resources across firms, with a consequent negative and sizable effect on the aggregate TFP (see Restuccia and Rogerson, 2017 for a recent survey on this topic). In this paper we apply the Hsieh and Klenow’s (2009) framework (henceforth HK) to Morocco, which allows to first quantify the level of distortions in the Moroccan manufacturing sector, and second to compute the productivity gains from eliminating these distortions. In the HK framework, distortions to firm size (output distortions) and capital/labor ratio (factor distortions) lead to different marginal products of capital and labor across firms within industries. Productivity gains then can be quantified by equalizing marginal products across firms.<sup>1</sup> Examples of output distortions include regulations restricting market access and/or firm size, bribes that have to be paid by firms in order to operate, public output subsidies, trade policies in the form of import protection and export subsidies (taxes), and distortions generated from exchange rate policies and price controls. Factor distortions are credit constraints, financial policies, tax policies, and labor regulations that differ across firms (for instance because of political connections) and affect the relative prices of capital and labor. Note that output and factor distortions can simultaneously affect both the size of a firm and the relative prices of capital and labor.

The present paper proposes to investigate the effects of market distortions in the manufacturing sector in Morocco. It calculates the level of resource misallocation and the potential TFP gains associated to liberalization. It uses microdata

> 1Note that this is an indirect approach to analyzing misallocation. This approach contrast with direct approaches, which analyze the impact of specific frictions (for instance see Buera, Kaboski, and Shin, 2011; and Moll, 2014, for the case of financial frictions).

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