from two World Bank’s Enterprise Surveys (2007 and 2013) for Morocco. Recently, Ragbi and Nihou (2016) undertake a similar study. However, even if they also apply the HK framework, their results can not be compared directly with ours.<sup>2</sup> The paper finds that market distortions in the manufacturing sector in Morocco are higher compared to developed countries and somewhat higher compared to other developing countries such as China and India. Empirical results provide evidence in the reduction of market distortions between 2007 and 2013. In addition, we estimate about 84 percent TFP gains from a full liberalization and 56 percent from removing distortions to the level of selected developed countries with better resource allocation. Thus, the removal of economic distorsions has the potential to considerably accelerate the convergence process. The paper also finds that industries more opened to international and domestic competition (e.g. machinery and textiles) present lower levels of output and factor distortions compared to industries where competition is more limited (e.g. food industry). Finally, the results show that a higher level of TFP can be obtained if more resources are allocated to younger and smaller firms. The paper’s main results are robust to an alternative estimation that uses a different methodological framework with a less extensive theoretical framework (Bartelsman, Haltiwanger, and Scarpetta, 2013).

The remainder of the paper is organized as follows. Section 2 presents an overview of market distortions in Morocco. Section 3 gives a brief presentation of the HK methodology. Section 4 presents the data and describes the construction of the required variables for the study. The empirical analysis is contained in Section 5, where we quantify the level of distortions and compute the TFP gains from resource reallocation. Section 6 discusses policies to further limit the extent of product and factor market distortions in Morocco. Section 7 provides the final remarks.

# **2 Market Distortions in Morocco**

The free movement of capital and labor to the most productive manufacturing firms is restrained by market distortions, including distortions in Morocco’s international exchange system. In this section we present an overview of the main market imperfections that currently affect the optimal allocation of resources in both the tradable and nontradable sectors of the Moroccan economy. To be consistent with the grouping of market distortions in the paper’s theoretical framework section (Section 3), we describe here separately output and factor distortions. Output distortions affect the quantity of production leaving the input mix unaffected. These distortions are more related to limited competition, deteriorated business environment, and reduced international trade. Factor distortions affect the use of capital relative to labor and are mostly associated to high credit constraints and

> 2In contrast to Ragbi and Nihou (2016), our empirical exercise takes into account a recent revision of the HK framework (see Hsieh and Klenow, 2013). Although most of their analysis is not affected by this change, the level of distortions and the TFP gains associated to a full liberalization cannot be compared with ours or with recent papers in this literature.

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