## 5. Morocco: Distance to Frontier

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---

### Introduction
- Objective: Assess role of institutional frictions in sectoral labor reallocation, document stylized facts on speed of structural transformation, and use a distance-to-frontier (DtF) analysis for Morocco.
- Headline finding for Morocco: DtF analysis indicates highest payoff to labor reallocation stems from reforms to reduce bureaucracy and regulations, and improve education.

### Empirical strategy and model specification
- Core approach:
  - Estimate a dynamic panel error correction model (P-ECM) of sectoral labor allocation using sector-level data for a panel of 44 countries.
  - P-ECM used because sectoral value added and employment shares are non-stationary and cointegrated.
- Key model components:
  - Long-run allocation: labor shares determined by relative value-added and sector weights; reallocation occurs if sectoral TFP growth rates γ differ and ε ≠ 1.
  - Adjustment: myopic quadratic cost function yields optimal adjustment with speed parameter λ ∈ (0,1).
  - ECM estimates short-term elasticities (β1, β2), long-term elasticities (δ1, δ2, δ3), and adjustment speed λ.
- Role of structural reforms:
  - Baseline ECM augmented with interaction of structural indicators Rj,t and lagged error to estimate contribution of reforms to adjustment speed: λ = λ1 + λ2 Errori,j,t−1 + λ3 Rj,t.
- Estimation approach:
  - Two-stage: (1) pooled OLS to estimate stationary error term and long-run elasticities from cointegration relationship; (2) substitute error term and estimate short-term elasticities and λ using fixed effect System GMM to address endogeneity and dynamic fixed effects.
- Data sources:
  - Employment and value-added shares from GGDC 10-sector database.
  - Reform and institutional measures from IMF structural reform indices and Economic Freedom indicators; reform indices normalized 0–1 (higher = greater liberalization).
  - Institutional variables include business regulations and governance captured by the Fraser index (higher values = less restrictive regulations).

### Key empirical findings — Baseline adjustment and short-term controls
- Average adjustment speed:
  - Estimated coefficient on deviation term (λ, presented as coefficient multiplying the long-run block): -0.137.
  - Interpretation: the average economy in the sample closes 13.7 percent of the distance between current and desired long-run labor allocation within one year.
- Nonlinear gap effect:
  - Second-order effect of the deviation term: 0.074.
  - Interpreted as λ2 = -0.074: if the deviation of relative labor allocation from its long-term target rises by 1 percent, the speed of adjustment declines by 7.4 percent.
- Selected short-term elasticities:
  - Relative Value-Added Growth ∆log(VA_i,j,t): 0.281 (Pr(> |z|) 8.8e-38) without gap size; 0.278 (Pr 1.014e-37) with gap size.
  - Relative Sectoral Prices Growth ∆log(P_i,j,t): 0.0409 (Pr 0.0004) without gap size; 0.039 (Pr 0.0007) with gap size.
- Selected controls:
  - GDP Per Capita Growth Rate: 0.0646 (Pr 4.7E-15) without gap size; 0.0636 (Pr 4.026e-15) with gap size.
  - Population Growth Rate ∆log(Pop.)_j,t: 0.347 (Pr 2.34e-24) without gap size; 0.282 (Pr 4.43e-12) with gap size.

### Heterogeneity: adjustment speed across income groups and sectors
- Income group annual adjustment speeds:
  - High income: 0.2784 (Pr(>|z|) 0.0001) — closes 27.84 percent per year.
  - Upper middle income: 0.2064 (Pr 0.0000) — closes 20.64 percent per year.
  - Lower middle income: 0.1153 (Pr 0.0001) — closes 11.53 percent per year.
  - Low income: 0.0545 (Pr 0.0001) — closes 5.45 percent per year.
- Sectoral annual adjustment speeds:
  - Mining: 0.178 (Pr(>|z|) 0.001)
  - Utilities: 0.148 (Pr 0.000)
  - Construction: 0.117 (Pr 0.000)
  - Government Services: 0.115 (Pr 0.000)
  - Transport, Storage and Communication: 0.108 (Pr 0.000)
  - Manufacturing: 0.103 (Pr 0.000)
  - Trade, Restaurants and Hotels: 0.102 (Pr 0.002)

### The role of structural reforms (selected λ3 estimates and interpretation)
- Interpretation note: Positive λ3 implies higher indicator value is associated with faster labor reallocation speed; negative λ3 implies higher indicator value is associated with slower reallocation speed.
- Financial sector (full sample, Table 4):
  - Interest rate controls: 2.44 (Pr(>|t|) 0.000) — EF
  - Financial privatization: 0.271 (Pr 0.010) — SR
  - Banking supervision: 0.274 (Pr 0.004) — SR
  - Security markets: 0.325 (Pr 0.001) — SR
  - Domestic finance (composite): 0.375 (Pr 0.000) — SR
- Labor market indicators (full sample, Table 4):
  - Employee payroll taxes, lowest level: -0.859 (Pr 0.000) — SR
  - Employer payroll taxes, lowest level: -0.413 (Pr 0.041) — SR
  - OECD score for severance pay after 20 years: -0.563 (Pr 0.000) — SR
- Education (full sample, Table 4):
  - Cumulative drop-out rate, primary: -0.4 (Pr 0.002) — SI
- Governance and regulations (full sample, Table 4):
  - Restrictions on sale of real property: 1.12 (Pr 0.000) — EF
  - Bureaucracy costs: 1.89 (Pr 0.000) — EF
  - Inflation (most recent year): 2.02 (Pr 0.029) — EF
- Trade and openness (full sample, Table 4):
  - Compliance costs: 1.19 (Pr 0.002) — EF
  - Capital flows: 0.228 (Pr 0.025) — SR
  - Financial restrictions on current account transactions: 0.417 (Pr 0.000) — SR
  - Restrictions on capital account transactions: 0.447 (Pr 0.001) — SR

- Low-income countries (selected λ3, Table 5):
  - Bank deposits to GDP: 0.326 (Pr 0.038) — SI
  - Interest rate controls: 0.158 (Pr 0.001) — SR
  - Product market — Lerner index: -109.395 (Pr 0.000) — SI
  - Labor payroll taxes (various): negative λ3 values ranging from -0.317 to -0.684 (Pr values 0.047 to 0.000) — SR
  - OECD score for severance pay after 20 years: -0.477 (Pr 0.000) — SR
  - Education — Gross enrollment ratio, tertiary: 1.326 (Pr 0.000) — SI
  - Trade and Openness — Financial restrictions on current account transactions: 0.343 (Pr not provided in supplied excerpt)

- High-income countries (selected λ3, Table 6):
  - Bank credit to bank deposits: λ3 = 0.170; Pr(>|t|) = 0.020 (SI)
  - Interest rate controls: λ3 = 0.276; Pr(>|t|) = 0.003 (SR)
  - Banking supervision: λ3 = 0.294; Pr(>|t|) = 0.034 (SR)
  - Security markets: λ3 = 0.309; Pr(>|t|) = 0.030 (SR)
  - Domestic finance (composite): λ3 = 0.424; Pr(>|t|) = 0.006 (SR)
  - Unemployment coverage: λ3 = -1.650; Pr(>|t|) = 0.038 (SR)
  - OECD score for severance pay after 20 years: λ3 = -0.649; Pr(>|t|) = 0.018 (SR)
  - Cumulative drop-out rate, primary: λ3 = -0.512; Pr(>|t|) = 0.035 (SI)
  - Bureaucracy costs: λ3 = 1.187; Pr(>|t|) = 0.000 (EF)
  - Financial restrictions on current account transactions: λ3 = 0.511; Pr(>|t|) = 0.006 (SR)
  - Restrictions on capital account transactions: λ3 = 0.489; Pr(>|t|) = 0.010 (SR)

- Manufacturing subsample (selected λ3, Table 7):
  - Bank concentration: λ3 = -0.431; Pr(>|t|) = 0.043 (SI)
  - Labor market regulations: λ3 = 1.438; Pr(>|t|) = 0.027 (EF)
  - Credit to government and state-owned enterprises to GDP: λ3 = -0.555; Pr(>|t|) = 0.007 (SI)
  - Government enterprises and investment: λ3 = 0.780; Pr(>|t|) = 0.032 (EF)
  - Judicial independence: λ3 = 0.824; Pr(>|t|) = 0.043 (EF)
  - Foreign ownership investment restrictions: λ3 = 1.763; Pr(>|t|) = 0.016 (EF)
  - Financial restrictions on current account transactions: λ3 = 0.391; Pr(>|t|) = 0.003 (SR)
  - Restrictions on capital account transactions: λ3 = 0.399; Pr(>|t|) = 0.003 (SR)

### Synthesis of reform effects
- Financial development:
  - Higher levels of financial development (domestic finance, securities, banking supervision, easing interest rate controls) are associated with less persistent productivity gaps and faster labor reallocation in the full sample.
  - Effects stronger in high-income countries and the manufacturing subsample; results for low-income countries can be insignificant due to binding deeper constraints or limited within-subsample variation.
- Governance and regulatory quality:
  - Improvements in ownership rights and lower bureaucracy costs are strongly associated with lower persistence of productivity gaps.
  - For high-income countries, lower bureaucracy costs and higher central bank independence are associated with faster job creation and less persistent gaps.
  - For manufacturing, limiting size of government/public enterprises, lowering credit to public sector, and judicial independence matter.
- Trade and openness:
  - Reforms facilitating openness to capital flows and reducing transaction restrictions are among the most effective in boosting labor reallocation; positive net effect across income groups and manufacturing subsample.
- Education:
  - Primary education matters: higher cumulative drop-out rates are associated with more persistent productivity gaps; tertiary enrollment positive in low-income subsample.
- Labor and product market regulations:
  - Payroll taxes and severance payments matter: higher payroll taxes and higher severance payment scores are associated with slower reallocation (negative λ3).
  - For low-income countries, lower market concentration (lower Lerner index) is associated with higher job flows to higher productivity sectors.

### Morocco — stylized facts and frictions (country case study)
- Growth and productivity:
  - Morocco registered an average "3.3 percent" per capita GDP growth over the last fifteen years.
  - Total factor productivity (TFP) levels are well below emerging market peers.
  - Structural transformation contributed modestly to overall productivity growth, mostly via movement of labor away from agriculture into services.
- Sectoral employment and productivity (2017 / 2015 data):
  - Agriculture employed around "37 percent" of the workforce in 2017.
  - Movement of labor away from agriculture into low-productivity growth sectors.
- Institutional frictions identified:
  - Labor market regulations: restrictive in fixed-term contracts, firing, working-hours flexibility.
  - High social security contributions raising labor costs, discouraging formal employment (especially youth).
  - Weak private sector and SME growth; large degree of informality (informal sector estimated by National Statistics at around "15 percent" of total economic activity).
  - Over half of public investment channeled through state-owned enterprises (SOEs); "40 percent" of SOE investment stems from only four SOEs (World Bank, 2017).
  - Education and skills gaps: high drop-out rates, low international test scores, low rural literacy (especially among women), majority of university students in social sciences leading to skills mismatches.
- Distance-to-frontier priorities (Figure 5 & Table 8 — selected entries):
  - Potential reform priorities signaled: reduce bureaucracy costs, financial market development, reduce primary education drop-out rate.
  - Table 8 sample entries:
    - Bureaucracy costs: Morocco = 5.3; Best observed = 5.3; Scale 0 to 10
    - Regulatory restrictions on sale of real property: Morocco = 6.9; Best observed = 7.6; Scale 0 to 10
    - Cumulative drop-out rate to the last grade of primary education, both sexes (%): Morocco = 20.4; Best observed = 11.2; Scale 100 to 0

### Diagnostics, robustness and decomposition notes
- Econometric tests (Appendix A):
  - Panel unit-root / stationarity: CIPS test statistic = "-1.6496"; p-value = "0.02618" (using two lags). Null of non-stationarity rejected.
  - GMM diagnostics (baseline regression):
    - Sargan-Hansen test statistic = "267.75"; p-value ≈ "1".
    - Arellano-Bond First Autocorrelation test statistic = "-7.738"; p-value ≈ "0".
    - Arellano-Bond Second Autocorrelation test statistic = "0.7082"; p-value = "0.478".
    - Wald test for joint significance: chi-squared = "763.98"; p-value ≈ "0".
- Robustness (level-equation results, Table A.1 — selected entries):
  - Bank deposits to GDP (%) : λ3 = 0.233; Pr(>|t|) = 0.037 (SI)
  - Interest rate controls: λ3 = 0.172; Pr(>|t|) = 0.005 (SR)
  - Banking Supervision: λ3 = 0.277; Pr(>|t|) = 0.048 (SR)
  - Domestic Finance (composite): λ3 = -0.289; Pr(>|t|) = 0.025 (SR)
  - Employee Payroll taxes, highest level: λ3 = -0.760; Pr(>|t|) = 0.000 (SR)
  - OECD Score for Severance Pay after 20 years: λ3 = -0.518; Pr(>|t|) = 0.003 (SR)
  - Regulatory quality: λ3 = 38.592; Pr(>|t|) = 0.003 (SI)
  - Bureaucracy costs: λ3 = 1.064; Pr(>|t|) = 0.013 (EF)
  - Financial restrictions on current account transactions: λ3 = 0.397; Pr(>|t|) = 0.000 (SR)
  - Restrictions on capital account transactions: λ3 = 0.453; Pr(>|t|) = 0.001 (SR)
- Productivity decomposition:
  - Variant of Fabricant (1942) decomposition used to split aggregate productivity change into within-effect, labor reallocation across sectors (structural change), and cross/interaction term.

### Policy implications and priorities
- Governance and regulation:
  - Reduce bureaucracy costs and improve regulatory quality to facilitate labor reallocation to higher productivity sectors.
  - Strengthen judicial independence and government effectiveness to speed structural adjustment.
- Financial sector development:
  - Ease interest rate controls, deepen security markets, improve banking supervision, and expand lending to the private sector to allow more efficient allocation of labor.
- Labor and education reforms:
  - Make labor markets more flexible (hiring/firing, contract flexibility, working hours) and lower distortionary payroll taxes to encourage formal employment, especially among youth.
  - Address primary education drop-out rates and improve technical and STEM-oriented tertiary education to reduce skills mismatches.
- Trade and openness:
  - Prioritize reforms reducing compliance costs and restrictions on capital flows and current account transactions to boost reallocation.
- Use DtF diagnostics:
  - Combine indicator gaps with estimated elasticities of labor reallocation to prioritize high-impact reforms and inform sequencing.

*Content derived from IMF Working Paper — “5. Morocco: Distance to Frontier” (wp1864).*

### 1. Labor Reallocation Baseline Results .................................................................................

### 1. Labor Reallocation Baseline Results ...................................................................................10

### Major sections
- 1. Labor Reallocation Baseline Results ...................................................................................10
- 2. Labor Reallocation Speed Across Income Groups ..............................................................11
- 3. Labor Reallocation Speed Across Economic Sectors ..........................................................12
- 4. The Role of Structural Indicators in Labor Reallocation Speed (Full Sample) ...................15
- 5. The Role of Structural Indicators in Labor Reallocation Speed (Low Income Countries) .16
- 6. The Role of Structural Indicators in Labor Reallocation Speed (High Income Countries) .17
- 7. The Role of Structural Indicators in Labor Reallocation Speed (Manufacturing) .....................18

### Figures listed
- 1. Morocco Growth Accounting ..............................................................................................19
- 2. Productivity Levels and Employment Shares by Sector in Morocco, 2015 ........................20
- 3. Productivity Growth and Employment in Morocco, 1999–2015.........................................20
- 4. Decomposing Aggregate Productivity Growth in Morocco ................................................21

*Source: wp1864 - 1. Labor Reallocation Baseline Results (wp1864.pdf)*

### 5. Morocco: Distance to Frontier .......................................................................................

### 5. Morocco: Distance to Frontier

### Introduction
- Objective: Assess role of institutional frictions in sectoral labor reallocation, document stylized facts on speed of structural transformation, and use a distance-to-frontier (DtF) analysis for Morocco.
- Methodological overview:
  - Estimate a dynamic panel error correction model (P-ECM) of sectoral labor allocation using sector-level data for a panel of 44 countries.
  - P-ECM chosen because sectoral value added and employment shares are non-stationary and cointegrated.
  - Model captures adjustment speed of labor across sectors and quantifies policy/institutional distortions (adjustment costs) that slow reallocation.
- Morocco-specific headline: DtF analysis for Morocco indicates highest payoff to labor reallocation stems from reforms to reduce bureaucracy and regulations, and improve education.

### Empirical strategy and model specification
- Core equilibrium relations (as specified):
  - Long-run allocation: labor shares determined by relative value-added and sector weights.
  - Reallocation occurs if sectoral TFP growth rates γ differ and ε (price elasticity of substitution) ≠ 1.
- Adjustment representation:
  - Myopic quadratic cost function leads to an optimal adjustment rule with speed parameter λ lying between 0 and 1.
  - ECM of labor reallocation dynamics (aggregate form shown in equation (7)) estimates short-term elasticities (β1, β2), long-term elasticities (δ1, δ2, δ3), and adjustment speed λ.
- Role of structural reforms:
  - Augment baseline ECM with interaction of structural indicators Rj,t and lagged error to estimate contribution of reforms to adjustment speed: λ = λ1 + λ2 Errori,j,t−1 + λ3 Rj,t.
- Estimation approach:
  - Two-stage: (1) pooled OLS to estimate stationary error term and long-run elasticities from cointegration relationship; (2) substitute error term and estimate short-term elasticities and λ using fixed effect System GMM to address endogeneity and dynamic fixed effects.
- Data:
  - Employment and value-added shares from GGDC 10-sector database.
  - Reform and institutional measures from IMF structural reform indices and Economic Freedom indicators; reform indices normalized 0–1 (higher = greater liberalization).
  - Institutional variables include business regulations and governance captured by the Fraser index (higher values = less restrictive regulations).

### Key empirical findings — Baseline adjustment and heterogeneity
- Average adjustment speed:
  - Estimated coefficient on deviation term (λ, presented as coefficient multiplying the long-run block): -0.137.
  - Interpretation: the average economy in the sample closes 13.7 percent of the distance between current and desired long-run labor allocation within one year.
- Nonlinear gap effect:
  - Second-order effect of the deviation term: 0.074.
  - Interpreted as λ2 = -0.074: if the deviation of relative labor allocation from its long-term target rises by 1 percent, the speed of adjustment declines by 7.4 percent.
- Short-term elasticities (selected):
  - Relative Value-Added Growth ∆log(VA_i,j,t): 0.281 (Pr(> |z|) 8.8e-38) without gap size; 0.278 (Pr 1.014e-37) with gap size.
  - Relative Sectoral Prices Growth ∆log(P_i,j,t): 0.0409 (Pr 0.0004) without gap size; 0.039 (Pr 0.0007) with gap size.
- Controls (selected):
  - GDP Per Capita Growth Rate: 0.0646 (Pr 4.7E-15) without gap size; 0.0636 (Pr 4.026e-15) with gap size.
  - Population Growth Rate ∆log(Pop.)_j,t: 0.347 (Pr 2.34e-24) without gap size; 0.282 (Pr 4.43e-12) with gap size.

### Heterogeneity: Adjustment speed across income groups and sectors
- Income group adjustment speeds (Table 2):
  - High income: 0.2784 (Pr(>|z|) 0.0001) — closes 27.84 percent per year.
  - Upper middle income: 0.2064 (Pr 0.0000) — closes 20.64 percent per year.
  - Lower middle income: 0.1153 (Pr 0.0001) — closes 11.53 percent per year.
  - Low income: 0.0545 (Pr 0.0001) — closes 5.45 percent per year.
- Sectoral adjustment speeds (Table 3):
  - Mining: 0.178 (Pr(>|z|) 0.001)
  - Utilities: 0.148 (Pr 0.000)
  - Construction: 0.117 (Pr 0.000)
  - Government Services: 0.115 (Pr 0.000)
  - Transport, Storage and Communication: 0.108 (Pr 0.000)
  - Manufacturing: 0.103 (Pr 0.000)
  - Trade, Restaurants and Hotels: 0.102 (Pr 0.002)

### The role of structural reforms (λ3 estimates and interpretation)
- Interpretation: Positive λ3 implies higher indicator value is associated with faster labor reallocation speed; negative λ3 implies higher indicator value is associated with slower reallocation speed.
- Financial sector reforms (Table 4, full sample):
  - Interest rate controls: 2.44 (Pr(>|t|) 0.000) — EF
  - Financial privatization: 0.271 (Pr 0.010) — SR
  - Banking supervision: 0.274 (Pr 0.004) — SR
  - Security markets: 0.325 (Pr 0.001) — SR
  - Domestic finance (composite): 0.375 (Pr 0.000) — SR
- Labor market indicators (Table 4, full sample):
  - Employee payroll taxes, lowest level: -0.859 (Pr 0.000) — SR
  - Employer payroll taxes, lowest level: -0.413 (Pr 0.041) — SR
  - OECD score for severance pay after 20 years: -0.563 (Pr 0.000) — SR
- Education (Table 4, full sample):
  - Cumulative drop-out rate, primary: -0.4 (Pr 0.002) — SI
- Governance and regulations (Table 4, full sample):
  - Restrictions on sale of real property: 1.12 (Pr 0.000) — EF
  - Bureaucracy costs: 1.89 (Pr 0.000) — EF
  - Inflation (most recent year): 2.02 (Pr 0.029) — EF
- Trade and openness (Table 4, full sample):
  - Compliance costs: 1.19 (Pr 0.002) — EF
  - Capital flows: 0.228 (Pr 0.025) — SR
  - Financial restrictions on current account transactions: 0.417 (Pr 0.000) — SR
  - Restrictions on capital account transactions: 0.447 (Pr 0.001) — SR

- Low-income countries (selected λ3 from Table 5):
  - Bank deposits to GDP: 0.326 (Pr 0.038) — SI
  - Interest rate controls: 0.158 (Pr 0.001) — SR
  - Product market — Lerner index: -109.395 (Pr 0.000) — SI
  - Labor payroll taxes (various): negative λ3 values ranging from -0.317 to -0.684 (Pr values 0.047 to 0.000) — SR
  - OECD score for severance pay after 20 years: -0.477 (Pr 0.000) — SR
  - Education — Gross enrollment ratio, tertiary: 1.326 (Pr 0.000) — SI
  - Trade and Openness — Financial restrictions on current account transactions: 0.343 (Pr not provided in supplied excerpt)

### Synthesis of reform effects (findings reported)
- Financial development:
  - Higher levels of financial development (domestic finance, securities, banking supervision, easing interest rate controls) are associated with less persistent productivity gaps and faster labor reallocation in the full sample.
  - Effects stronger in high-income countries and the manufacturing subsample; results for low-income countries can be insignificant due to binding deeper constraints or limited within-subsample variation.
- Governance and regulatory quality:
  - Improvements in ownership rights and lower bureaucracy costs are strongly associated with lower persistence of productivity gaps.
  - For high-income countries, lower bureaucracy costs and higher central bank independence are associated with faster job creation and less persistent gaps.
  - For manufacturing, limiting size of government/public enterprises, lowering credit to public sector, and judicial independence matter.
- Trade and openness:
  - Reforms facilitating openness to capital flows and reducing transaction restrictions are among the most effective in boosting labor reallocation; positive net effect across income groups and manufacturing subsample.
- Education:
  - Primary education matters: higher cumulative drop-out rates are associated with more persistent productivity gaps; tertiary enrollment positive in low-income subsample.
- Labor and product market regulations:
  - Payroll taxes and severance payments matter: higher payroll taxes and higher severance payment scores are associated with slower reallocation (negative λ3).
  - For low-income countries, lower market concentration (lower Lerner index) is associated with higher job flows to higher productivity sectors.

### Policy implications and priorities (as indicated by results and the Morocco DtF case)
- Prioritize reforms with highest payoffs for labor reallocation (based on DtF for Morocco and cross-country evidence):
  - Reduce bureaucracy and regulatory restrictions (strong positive λ3 in governance indicators).
  - Improve education outcomes, especially reducing primary dropouts and raising tertiary enrollment where relevant.
  - Advance trade and capital openness reforms (compliance costs, capital flows, current account restrictions).
  - Strengthen financial sector development: ease interest rate controls, deepen security markets, improve banking supervision and domestic finance.
  - Revisit labor taxation and severance frameworks to balance worker protection with incentives for job creation (reduce payroll tax distortions where they impede reallocation).
  - For low-income contexts, address product market concentration and barriers to entry to facilitate flows into higher productivity sectors.

*Source: IMF Working Paper — “5. Morocco: Distance to Frontier” (chapter content provided).*

### 0.000                        SR

### wp1864 - 0.000                        SR

### Key empirical findings on labor reallocation speeds
- Aggregate annual adjustment: employment shares converge towards equilibrium allocations, closing "13.7 percent" of existing labor productivity gaps each year.
- Heterogeneity: the speed of employment share adjustment varies across sectors and country income groups (full sample, high income, low income, manufacturing subsamples).

### Structural indicators associated with faster/slower labor reallocation (High Income Countries — Table 6)
- Financial (positive λ3 implies faster reallocation):
  - Bank credit to bank deposits: λ3 = 0.170; Pr(>|t|) = 0.020 (Data source: SI)
  - Interest rate controls: λ3 = 0.276; Pr(>|t|) = 0.003 (SR)
  - Banking supervision: λ3 = 0.294; Pr(>|t|) = 0.034 (SR)
  - Security markets: λ3 = 0.309; Pr(>|t|) = 0.030 (SR)
  - Financial privatization: λ3 = 0.350; Pr(>|t|) = 0.030 (SR)
  - Domestic finance (composite): λ3 = 0.424; Pr(>|t|) = 0.006 (SR)
- Labor:
  - Unemployment coverage: λ3 = -1.650; Pr(>|t|) = 0.038 (SR)
  - OECD score for severance pay after 20 years: λ3 = -0.649; Pr(>|t|) = 0.018 (SR)
- Education:
  - Cumulative drop-out rate, primary: λ3 = -0.512; Pr(>|t|) = 0.035 (SI)
- Governance and Regulations:
  - Bureaucracy costs: λ3 = 1.187; Pr(>|t|) = 0.000 (EF)
- Trade and Openness:
  - Financial restrictions on current account transactions: λ3 = 0.511; Pr(>|t|) = 0.006 (SR)
  - Restrictions on capital account transactions: λ3 = 0.489; Pr(>|t|) = 0.010 (SR)

### Structural indicators for Manufacturing sector (Table 7)
- Financial:
  - Bank concentration: λ3 = -0.431; Pr(>|t|) = 0.043 (SI)
- Labor:
  - Labor market regulations: λ3 = 1.438; Pr(>|t|) = 0.027 (EF)
- Governance and Regulations:
  - Credit to government and state-owned enterprises to GDP: λ3 = -0.555; Pr(>|t|) = 0.007 (SI)
  - Government enterprises and investment: λ3 = 0.780; Pr(>|t|) = 0.032 (EF)
  - Judicial independence: λ3 = 0.824; Pr(>|t|) = 0.043 (EF)
- Trade and Openness:
  - Foreign ownership investment restrictions: λ3 = 1.763; Pr(>|t|) = 0.016 (EF)
  - Financial restrictions on current account transactions: λ3 = 0.391; Pr(>|t|) = 0.003 (SR)
  - Restrictions on capital account transactions: λ3 = 0.399; Pr(>|t|) = 0.003 (SR)

### Morocco — country case study: stylized facts and frictions
- Growth and productivity:
  - Morocco registered an average "3.3 percent" per capita GDP growth over the last fifteen years.
  - Total factor productivity (TFP) levels are well below emerging market peers.
  - Structural transformation contributed modestly to overall productivity growth, mostly via movement of labor away from agriculture into services.
- Sectoral employment and productivity (2017 / 2015 data):
  - Agriculture employed around "37 percent" of the workforce in 2017.
  - Movement of labor away from agriculture into low-productivity growth sectors.
- Institutional frictions identified:
  - Labor market regulations: restrictive in fixed-term contracts, firing, working-hours flexibility.
  - High social security contributions raising labor costs, discouraging formal employment (especially youth).
  - Weak private sector and SME growth; large degree of informality (informal sector estimated by National Statistics at around "15 percent" of total economic activity).
  - Over half of public investment channeled through state-owned enterprises (SOEs); "40 percent" of SOE investment stems from only four SOEs (World Bank, 2017).
  - Education and skills gaps: high drop-out rates, low international test scores, low rural literacy (especially among women), majority of university students in social sciences leading to skills mismatches.
- Distance-to-frontier priorities (Figure 5 & Table 8):
  - Potential reform priorities signaled: reduce bureaucracy costs, financial market development, reduce primary education drop-out rate.
  - Table 8 sample entries:
    - Bureaucracy costs: Morocco = 5.3; Best observed = 5.3; Scale 0 to 10
    - Regulatory restrictions on sale of real property: Morocco = 6.9; Best observed = 7.6; Scale 0 to 10
    - Cumulative drop-out rate to the last grade of primary education, both sexes (%): Morocco = 20.4; Best observed = 11.2; Scale 100 to 0

### Decomposition and methodology notes
- Productivity decomposition: variant of canonical Fabricant (1942) decomposition (also Timmer and De Vries 2015) used to decompose change in aggregate productivity into:
  - within-effect, labor reallocation across sectors (structural change), and cross/interaction term.
- Estimation approach: panel Error Correction Model (ECM) and GMM for second-step estimations to estimate speed of job flows and the role of structural indicators.
- Robustness: analysis repeated with level data (employment level per sector, value added level, price level) with a level-equation analogue (equation (12)).

### Econometric tests and diagnostics (Appendix A)
- Panel unit-root / stationarity:
  - CIPS test statistic = "-1.6496"; p-value = "0.02618" (using two lags). Null of non-stationarity rejected.
- GMM diagnostic tests (baseline regression):
  - Sargan-Hansen test statistic = "267.75"; p-value ≈ "1" (cannot reject null of exogenous instruments).
  - Arellano-Bond First Autocorrelation test statistic = "-7.738"; p-value ≈ "0" (reject null of no autocorrelation in first-differenced residuals).
  - Arellano-Bond Second Autocorrelation test statistic = "0.7082"; p-value = "0.478" (cannot reject null of no second-order autocorrelation).
  - Wald test for joint significance: chi-squared = "763.98"; p-value ≈ "0" (reject null that all coefficients are zero).

### Robustness: Level-equation results (Table A.1 — selected entries)
- Financial:
  - Bank deposits to GDP (%) : λ3 = 0.233; Pr(>|t|) = 0.037 (SI)
  - Interest rate controls: λ3 = 0.172; Pr(>|t|) = 0.005 (SR)
  - Banking Supervision: λ3 = 0.277; Pr(>|t|) = 0.048 (SR)
  - Domestic Finance (composite): λ3 = -0.289; Pr(>|t|) = 0.025 (SR)
- Labor:
  - Employee Payroll taxes, highest level: λ3 = -0.760; Pr(>|t|) = 0.000 (SR)
  - Employee Payroll taxes, lowest level: λ3 = -0.709; Pr(>|t|) = 0.001 (SR)
  - OECD Score for Severance Pay after 20 years: λ3 = -0.518; Pr(>|t|) = 0.003 (SR)
- Governance and Regulations:
  - Regulatory quality: λ3 = 38.592; Pr(>|t|) = 0.003 (SI)
  - Bureaucracy costs: λ3 = 1.064; Pr(>|t|) = 0.013 (EF)
  - Inflation (most recent year): λ3 = 2.177; Pr(>|t|) = 0.019 (EF)
  - Government effectiveness: λ3 = 32.247; Pr(>|t|) = 0.016 (SI)
  - Voice and accountability: λ3 = 34.773; Pr(>|t|) = 0.015 (SI)
- Trade and Openness:
  - Foreign banks among total banks (%): λ3 = 0.955; Pr(>|t|) = 0.001 (SI)
  - Freedom of foreigners to visit: λ3 = 0.775; Pr(>|t|) = 0.048 (EF)
  - Compliance costs of importing and exporting: λ3 = 0.834; Pr(>|t|) = 0.037 (EF)
  - Financial restrictions on current account transactions: λ3 = 0.397; Pr(>|t|) = 0.000 (SR)
  - Restrictions on capital account transactions: λ3 = 0.453; Pr(>|t|) = 0.001 (SR)

### Policy implications and recommendations (from conclusions and Morocco case study)
- Governance and regulation improvements matter:
  - Reduce bureaucracy costs and improve regulatory quality to facilitate labor reallocation to higher productivity sectors.
  - Strengthen judicial independence and government effectiveness to speed structural adjustment.
- Financial sector development:
  - Expand lending to the private sector, deepen domestic finance and capital markets to allow more efficient allocation of labor.
- Labor and education reforms:
  - Make labor markets more flexible (hiring/firing, contract flexibility, working hours) and lower distortionary payroll taxes to encourage formal employment, especially among youth.
  - Address primary education drop-out rates, improve technical and STEM-oriented tertiary education to reduce skills mismatches.
- Use distance-to-frontier diagnostics:
  - Prioritize reforms by combining indicator gaps with estimated elasticities of labor reallocation to identify high-impact reforms.
- Further research direction:
  - Examine interaction and timing across various structural reforms to design comprehensive reform sequencing that supports structural transformation.

*Source: IMF Working Paper (content from provided PDF: wp1864 - 0.000                        SR).*

### 8. When there were, again, few SOEs other than those involved in energy and

### wp1864 - 8. When there were, again, few SOEs other than those involved in energy and

### State-owned enterprises (SOEs) and investment share — rating rules
- Rating assignments based on SOE sectoral presence and government investment share:
  - Rating = 7: few SOEs other than those involved in energy and other such industries and government investment was between 20% and 25% of the total.
  - Rating = 6: SOEs present in the energy, transportation, and communication sectors and government investment was between 25% and 30% of the total.
  - Rating = 4: a substantial number of SOEs operated in many sectors, including manufacturing, and government investment was generally between 30% and 40% of the total.
  - Rating = 2: numerous SOEs operated in many sectors, including retail sales, and government investment was between 40% and 50% of the total.
  - Rating = 0: the economy was dominated by SOEs and government investment exceeded 50% of total investment.

### Undocumented extra payments / bribery — Global Competitiveness Report question
- Survey question framing (response scale):
  - “In your industry, how commonly would you estimate that firms make undocumented extra payments or bribes connected with the following: A— Import and export permits; B— Connection to public utilities (e.g., telephone or electricity); C— Annual tax payments; D— Awarding of public contracts (investment projects); E— Getting favorable judicial decisions. Common (= 1) Never occur (= 7).”
- Note: The question’s wording has varied slightly over the years.

### Size of government — component construction and sub-factors
- Four quantitative sub-factors are equally weighted (each counted as one-fourth of the component):
  - General government consumption spending as a percentage of total consumption (International Monetary Fund).
  - Transfers and subsidies as a percentage of GDP (International Monetary Fund).
  - Government enterprises and investment (International Monetary Fund).
  - Top marginal tax rate (PricewaterhouseCoopers, Worldwide Tax Summaries Online).

### Foreign ownership / investment restrictions — Global Competitiveness Report questions
- Two question framings used for the sub-component:
  - “Foreign ownership of companies in your country is rare, limited to minority stakes and often prohibited in key sectors (= 1) or prevalent and encouraged (= 7)”.
  - “In your country, rules governing foreign direct investment are damaging and discourage foreign direct investment (= 1) or beneficial and encourage foreign direct investment (= 7).”

### Education indicators (definitions)
- Cumulative drop-out rate, primary (UNESCO Institute for Statistics):
  - Proportion of pupils from a cohort enrolled in a given grade at a given school year who are no longer enrolled in the following school year.
  - Dropout rate by grade = 100 − (promotion rate + repetition rate).
  - Cumulative dropout rate in primary education = 100 − survival rate at a given grade.
  - Derived by analyzing enrolment and repeaters by grade for two consecutive years.
- Gross enrollment ratio, tertiary (UNESCO Institute for Statistics):
  - Gross enrollment ratio for tertiary = (number of students enrolled in tertiary education regardless of age / population of the age group which officially corresponds to tertiary education) × 100.
  - Data mapped to the International Standard Classification of Education (ISCED).

### Banking market structure and indicators
- Lerner index (Bankscope):
  - Measure of market power in the banking market: difference between output prices and marginal costs (relative to prices).
  - Prices = total bank revenue over assets.
  - Marginal costs obtained from an estimated translog cost function with respect to output.
  - Higher values indicate less bank competition.
  - Methodology follows Demirgüç-Kunt and Martínez Pería (2010).
- Bank concentration (Bankscope):
  - Calculated as sum of assets for three largest banks divided by sum of assets for all banks in Bankscope for a given country.
  - Only reported if number of banks is 3 or more.
  - Total assets include total earning assets, cash and due from banks, foreclosed real estate, fixed assets, goodwill, other intangibles, current tax assets, deferred tax assets, discontinued operations and other assets.
  - Calculated from underlying bank-by-bank unconsolidated data.
- Bank credit to bank deposits (International Monetary Fund, International Financial Statistics):
  - The financial resources provided to the private sector by domestic money banks as a share of total deposits.
  - Domestic money banks comprise commercial banks and other financial institutions that accept transferable deposits.
  - Total deposits include demand, time and saving deposits in deposit money banks.
- Credit to government and state-owned enterprises to GDP (%) (International Monetary Fund, International Financial Statistics):
  - Ratio between credit by domestic money banks to the government and state-owned enterprises and GDP.
- Bank deposits to GDP (%) (International Monetary Fund, International Financial Statistics):
  - Total value of demand, time and saving deposits at domestic deposit money banks as a share of GDP.
  - Calculated using deflation method: {(0.5)*[F_t/P_e_t + F_{t-1}/P_e_{t-1}]}/[GDP_t/P_a_t] where F is demand and time and saving deposits, P_e is end-of-period CPI, and P_a is average annual CPI.

### Capital flows and financial privatization (IMF Structural Reforms Database)
- Capital flows coding:
  - Fully open = [2], Partially Restricted = [1], Fully Restricted = [0].
  - Two binary items:
    - Does a country set restrictions on capital inflow? (0/1) — coded 0 when significant restrictions exist on capital inflows; coded 1 when banks are allowed to borrow from abroad freely without restrictions and there are no tight restrictions on other capital inflows.
    - Does a country set restrictions on capital outflow? (0/1) — coded 0 when restrictions exist on capital outflows; coded 1 when capital outflows are allowed to flow freely or with minimal approval restrictions.
- Financial privatization — privatization of banks is coded:
  - Fully Liberalized = [3]: no state banks exist or state-owned banks do not consist of any significant portion of banks and/or percentage of public bank assets is less than 10 percent.
  - Largely Liberalized = [2]: most banks are privately owned and/or percentage of public bank assets is from 10 percent to 25 percent.
  - Partially Repressed = [1]: many banks are privately owned but major banks are still state-owned and/or percentage of public bank assets is 25–50 percent.
  - Fully Repressed = [0]: major banks are all-state owned banks and/or percentage of public bank assets is from 50 percent to 100 percent.

### Banking supervision — coding framework
- Overall regime categories by summed score: Highly Regulated = [6], Largely Regulated = [4-5], Less Regulated = [2-3], Not Regulated = [0-1].
- Four dimensions (each coded with specified values):
  - Adoption of a Basle capital adequacy ratio (0/1):
    - Coded 0 if Basle risk-weighted capital adequacy ratio is not implemented.
    - Coded 1 when Basle CAR is in force (Basle requirement of 8 percent CAR emphasized; date of implementation important).
    - Prior to 1993 this measure takes the value of 0.
  - Independence of banking supervisory agency (0/1/2):
    - Coded 0: inadequate legal framework to intervene; lack of legal independence; ultimate jurisdiction under MOF; frequent turnover of head.
    - Coded 1: objectives and legal framework defined but potential independence or resolution-framework issues remain.
    - Coded 2: legal framework for objectives and resolution set up; agency legally independent and not interfered with by executive.
  - Effectiveness of on-site and off-site examinations (0/1/2):
    - Coded 0: no legal framework or examinations not conducted.
    - Coded 1: legal framework set up and examinations conducted but ineffective or insufficient.
    - Coded 2: effective and sophisticated examinations are conducted.
  - Coverage of banking supervisory agency (0/1):
    - Coded 1 when all banks are under supervision without exception.
    - Coded 0 if some kinds of financial institutions are excluded from oversight.

### Security markets — index construction and sub-dimensions
- Overall regime labels: Fully Liberalized = [4 or 5], Largely Liberalized = [3], Partially Repressed = [1, 2], Fully Repressed = [0].
- Two sub-dimensions summed:
  - Measures to develop securities markets (0/1/2/3):
    - 0: securities market does not exist.
    - 1: market starting to form (e.g., auctioning of T-bills or establishment of a security commission).
    - 2: further measures to develop markets (tax exemptions, introduction of medium and long-term government bonds, development of corporate bond and equity markets, primary dealer system).
    - 3: further policy measures (derivative markets, broaden institutional investor base by deregulating portfolio investments and pension funds, or completing full deregulation of stock exchanges).
  - Openness of equity market to foreign investors (0/1/2):
    - 0: no foreign equity ownership allowed.
    - 1: foreign equity ownership allowed but less than 50 percent foreign ownership.
    - 2: majority equity share of foreign ownership allowed.

### Domestic finance (composite)
- Synthetic aggregate combining indicators for:
  - banking supervision,
  - directed credit/reserve requirements,
  - entry-barriers/pro-competition measures,
  - privatization,
  - security markets,
  - interest rate controls.

### Restrictions on capital account transactions — composite and sub-components
- Composite classification: Fully Liberalized = [3], Largely Liberalized = [2], Partially Repressed = [1], Fully Repressed = [0].
- Three binary sub-components added:
  - Is the exchange rate system unified? (0/1)
    - Coded 0 when a special exchange rate regime for either capital or current account transactions exists.
    - Coded 1 when the exchange rate system is unified.
  - Does a country set restrictions on capital inflow? (0/1) — coding rule as above.
  - Does a country set restrictions on capital outflow? (0/1) — coding rule as above.

### Interest rate controls — coding and regime labels
- Deposit rates and lending rates coded separately: government set or subject to binding ceiling (code=0), fluctuating within a band (code=1), or freely floating (code=2).
- Composite regime labels and definitions:
  - FL = 4 Fully Liberalized: both deposit and lending rates determined at market rates.
  - LL = 3 Largely Liberalized: either deposit rates or lending rates freed but the other rates subject to band or only a part of interest rates determined at market rates.
  - PR = 2/1 Partially Repressed: either deposit or lending rates freed but the other set is set by government or subject to ceiling/floor; or both subject to band or partially liberalized; or one subject to band or partially liberalized.
  - FR = 0 Fully Repressed: both deposit and lending rates set by the government or subject to ceiling/floor.

### Labor taxes, severance, and unemployment coverage
- Employee payroll taxes (OECD):
  - Payroll taxes consist of taxes and social security contributions payable by workers assessed either as a proportion of wages and salaries paid or as a fixed amount per person employed.
- Employer payroll taxes (OECD):
  - Payroll taxes consist of taxes and social security contributions payable by enterprises assessed either as a proportion of wages and salaries paid or as a fixed amount per person employed.
- OECD score for severance pay after 20 years (Labor Market Regulations database):
  - Severance pay at 20 years tenure in months of pay:
    - Score 0: Months of pay 0
    - Score 1: Months of pay ≤ 3
    - Score 2: Months of pay ≤ 6
    - Score 3: Months of pay ≤ 10
    - Score 4: Months of pay ≤ 12
    - Score 5: Months of pay ≤ 18
    - Score 6: Months of pay > 18
- Unemployment coverage (Labor Market Regulations database):
  - Number of UI benefit recipients = number of individuals who, at a given point in time, receive UI benefits.
  - Sources for UI recipient counts: national statistics offices and national statistical yearbooks, ministries of labor, social protection, and employment, social security administrations, labor funds, other program administrators, ministries of finance and economy, national central banks, local research institutes, and national libraries wherever available.

*Italic: Content derived from the provided IMF unit.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2018/wp1864.pdf_