Introduction
Since ascending the throne in 1999, King Mohammed VI of Morocco has pursued an ambitious modernization agenda. As Morocco marks twenty-five years under his rule, this is an opportune time to assess the country’s economic trajectory. In 1999, Morocco ranked low on the human development index. However, the kingdom has made significant progress in the past two and a half decades. UN figures indicate that between 1998 and 2023, average life expectancy increased by nine years, reaching around seventy-five years, income per capita doubled in inflation-adjusted terms, and the expected years of schooling almost doubled, from 8.1 to 14.6. Also, according to the Moroccan government’s High Commission for Planning, the absolute poverty rate declined dramatically, dropping from 15.3 percent in 2001 to 1.7 percent in 2019.
The improvement in living conditions has been particularly impressive for rural households, which accounted for almost half the population in 1999 and still represent one-third today. Every rural Moroccan now has access to electricity and drinking water, up from less than half in 2000. However, the COVID-19 pandemic and a succession of droughts have highlighted persistent social challenges, with a jump in poverty, a spike in unemployment, and a sustained increase in inactivity. On top of that, the 2023 earthquake in the Haouz area of the Atlas Mountains exposed loopholes in the development agenda.
Having transitioned from a low-income to a middle-income economy, the kingdom must now focus on structural transformation. Creating more jobs, especially for women and youth, is imperative, as is narrowing social and spatial disparities. This will require investing in human capital and innovation, fostering a more competitive business environment, carving out additional fiscal space, and navigating a shifting geopolitical landscape. These are formidable challenges. Morocco’s achievements so far are undeniable but the road ahead will be laden with obstacles.
Morocco’s Modernization Drive
Over the past quarter century, Morocco’s successive governments have implemented a modernization agenda rooted in a long-term vision. By leveraging world-class infrastructure such as the Tanger Med port, the kingdom has successfully inserted itself into global value chains and made the best of this insertion by attracting foreign direct investments (FDIs) and building an export-driven industry. Concomitantly, Morocco has initiated a shift toward greater sustainability, setting ambitious targets for renewable energy and water conservation.
Becoming Part and Parcel of Global Value Chains
During the early 2000s, Morocco enjoyed strong economic growth fueled by public investment in infrastructure. The highway network, previously very limited, was expanded to 1,800 kilometers and is projected to grow to 3,000 kilometers by 2030. The development of the deep-water port of Tanger Med in 2007 marked a milestone, and its subsequent expansion in 2019 (which saw the addition of Tanger Med II) further enhanced its capacity, transforming it into the largest container port in the Mediterranean. Additionally, Morocco pioneered the introduction of high-speed rail in Africa. The country’s air transport, roads, and ports now meet Organization for Economic Cooperation and Development (OECD) standards.
Beginning in 2006, the kingdom faced a series of external shocks, including the expiration of a multifiber agreement with the European Union (EU), the global financial crisis of 2008, the euro debt crisis of 2010–2011 (which affected its main trading and investment partners), and elevated energy prices. In response to these challenges, Rabat launched an export-driven industrial strategy that culminated with the Industrial Acceleration Plan 2014–2020. Drawing on ideas from Harvard’s Growth Lab, the new strategy leveraged Morocco’s infrastructure, especially Tanger Med, to facilitate the country’s insertion into technology-intensive global value chains, particularly in the automotive and aerospace industries. In the same vein, the government established Tanger Med Zones, a cluster of industrial and logistics centers near the port of the same name, turning the area into Africa’s leading industrial free zone.
Substantial investments in Tangier by French automotive groups Renault and PSA Group have allowed Morocco to become the continent’s leading producer and exporter of cars, surpassing South Africa. Additionally, the country now hosts major automotive parts manufacturers, including France-based Valeo and Japanese companies Yazaki and Sumitomo. This strategy of incentivizing car and car component makers to move some of their operations to the kingdom has resulted in significant FDIs. Overall, the manufacturing sector’s share of FDIs rose from 15 to 37 percent between 2010 and 2019, driven largely by gains in the automotive industry.
This has helped Morocco maintain manufacturing’s contribution to GDP at around 15 percent, countering the trend of premature deindustrialization. However, while the country’s manufacturing exports now have a significantly higher share of medium-tech products than that of regional competitors Tunisia and Egypt, the share of high-tech exports remains at levels far below Asian industrial powerhouses China and Vietnam. Additionally, the focus on FDIs has created a strong economic dichotomy, as domestically oriented small and medium-sized enterprises struggle to participate in industrial ecosystems dominated by foreign firms with strict quality standards.
Achieving Greater Sustainability
Traditionally reliant on energy imports, Morocco has since 2009 undertaken a shift toward a more sustainable growth model following the adoption of the National Energy Strategy. The latter rests on three pillars: increasing renewable energy capacity, promoting energy efficiency, and fostering regional integration. Notably, in 2014, the Moroccan government, led by the Islamist Justice and Development Party, lifted all subsidies on transportation-related fossil fuels.
In 2015, Morocco set a new target of a 52 percent share of renewables in its energy mix by 2030, up from an initial 42 percent goal. A landmark accomplishment of this policy is the construction of the world’s largest concentrated solar power (CSP) complex, Noor. Investments in the complex were made by public donors as well as private investors, notably Saudi Arabia’s ACWA Group, and totaled $3 billion. As of 2023, renewable energy sources account for 37 percent of Morocco’s installed electricity generation capacity, with the bulk consisting of wind power and hydropower.
The green transition strategy includes an industrial decarbonization roadmap focusing on the hard-to-abate cement, steel, and fertilizer industries. Decarbonization is critical if the country is to maintain its competitiveness and its access to the European market in the wake of the EU’s upcoming Carbon Border Adjustment Mechanism, which will place a tariff on carbon-intensive products. The state-owned Office Chérifien des Phosphates (OCP Group), which extracts phosphates and transforms them into phosphate-derived products such as fertilizers, is playing a pivotal role in this transition. There is also growing interest on the part of international investors in using Morocco as a platform for producing green hydrogen and embedding it into industrial processes.
However, despite the progress to date, renewable energies still represent less than 20 percent of the country’s total electricity production and only one tenth of total primary energy consumption, which remains dominated by fossil fuels. According to the International Energy Agency, the government should move beyond electricity and set targets for renewables in residential and transport sectors. Lack of financing remains an obstacle, however, especially for small and medium businesses. According to some estimates, Morocco’s green transition will require around $78 billion by 2050.
In addition to energy, water management is a pressing issue. The country has long suffered from acute water scarcity, exacerbated by a succession of droughts in recent years. To tackle the shortage, Morocco launched the National Water Management Plan 2020–2050. This is a $40 billion program, with $13 billion earmarked for 2020–2027, of which up to 60 percent is to be provided by the state and 40 percent by investors through public-private partnerships. The plan is to build nine new desalination plants by 2030, bringing the total to twenty with a combined capacity of 1.4 billion cubic meters. In addition, freshwater storage capacity is to be boosted by accelerating dam and basin construction and increasing the share of reused wastewater following treatment.
Morocco’s Economy in a Multipolar World
Over the past two and a half decades, Morocco has sought to expand and diversify its foreign economic partnerships through a range of free-trade agreements, cooperation accords, and strategic initiatives. Although the EU has long been one of its key economic partners, the kingdom has orchestrated a shift toward sub-Saharan Africa. Additionally, it has positioned itself as a global connector across an increasingly multipolar geopolitical landscape.
The EU as a Long-Term and Reliable Partner
The EU and Morocco established a free-trade area as part of the EU-Morocco Association Agreement, which was signed in 1996 and went into effect in 2000. A quarter of a century later, the EU remains Morocco’s largest economic partner and is expected to maintain this status for the foreseeable future. In 2022, the EU accounted for 49 percent of Morocco’s goods trade, with 56 percent of Moroccan exports destined for the EU and 45 percent of its imports originating there. That year, total trade in goods between the two parties reached $56.1 billion, while two-way trade in services amounted to $12 billion. The EU is also Morocco’s largest foreign direct investor, with a cumulative inward FDI stock of around $24 billion in the country. Additionally, Morocco has been one of the largest recipients of EU funds under the European Neighborhood Policy, receiving $1.6 billion in bilateral assistance between 2014 and 2020.
Though Rabat has a trade deficit with the EU, the EU-Morocco economic partnership has yielded significant advantages for both parties. Despite occasional tensions, this partnership has facilitated an expansion of EU manufacturing exports and FDIs to Morocco, while allowing better access to the EU consumer market for Moroccan producers. Separately, the EU’s emphasis on strategic autonomy and resilience to shocks has encouraged the development of near-shoring, which could benefit Morocco. Conversely, however, the EU economy has exhibited a lack of dynamism over the past decade, coinciding with an inward-looking bias on immigration and energy security. These factors have prompted Morocco to reduce its overreliance on the EU market.
Pivoting Toward Sub-Saharan Africa
In 2017, after a thirty-two-year absence, Morocco rejoined the African Union. Motivated in part by its rivalry with Algeria and the desire to better defend its position on the Western Sahara conflict, the kingdom has increased its engagement with Sub-Saharan Africa. This has translated into significant investments by the OCP Group as well as Moroccan banks, insurance companies, telecom operators, and construction firms in African countries along the Atlantic coast, in the landlocked Sahel region, and across the Congo River basin. As a result, Morocco is now second only to South Africa when it comes to investments on the continent. With the king also challenging the historical “look north” bias of Moroccan elites, this has fostered more positive perceptions of Sub-Saharan students and immigrants.
Morocco’s turn toward Sub-Saharan Africa was also partly a reaction to the disappointing project of Maghreb integration, which could have generated considerable benefits had it not petered out. However, the new approach is more ambitious in scope. Although Morocco’s bid to join the Economic Community of West African States has stalled, this setback has spurred the development of new forms of cooperation, such as the recently announced Atlantic Initiative, which aims to create durable economic relations among twenty-three countries located along Africa’s Atlantic coast. It also comes at a time when pan-African integration has moved beyond rhetoric and into the realm of action, as illustrated by the launch of the African Continental Free Trade Area in 2019. Nevertheless, the potential for Africa to become a major driver of Morocco’s growth will take time to materialize. In 2022, Morocco’s exports to the continent were on par with its exports to the United States and South Asia but represented only 15 percent of the kingdom’s exports to Europe.
Morocco as a Connector Country
In an era of heightened tension between Western and non-Western countries, Morocco has refrained from aligning itself with any geopolitical bloc and has positioned itself on the sidelines of the rivalry between the United States and China. While it maintains strong historical ties with the United States, exemplified by its status as a major non-NATO ally of Washington, the kingdom’s stance on global diplomatic issues, from the U.S. invasion of Iraq to the Russia-Ukraine war and the Israeli-Palestinian conflict, has consistently been in keeping with that of the Global South. This strategic opportunism has bolstered the country’s ability to pursue economic opportunities. In a way, the 2020 normalization deal with Israel fits into this strategy, although its primary goal was to secure U.S. support for Morocco’s stance on the Western Sahara conflict.
While strengthening its partnership with Washington through a free-trade agreement that went into effect in 2006, Rabat has simultaneously developed stronger commercial and business ties with Beijing. One outcome of this Sino-Moroccan cooperation is the Tangier Tech City Project launched in 2017, which is expected to host 200 Chinese technology companies upon its completion by 2027. Potentially more important, as it unlocks Chinese funding for infrastructure projects and corporate joint ventures, is Morocco’s signing of a Belt and Road Initiative agreement with China in 2022.
Morocco is also trying to turn itself into a bridge between Chinese companies and Western markets. Drawn to the country for its privileged access to Europe and the United States, major Chinese electric vehicle makers—such as BYD—have invested billions of dollars in the kingdom’s fast-expanding automotive sector. This strategy, already followed by Chinese companies in Mexico, Vietnam, and Indonesia, allows them to overcome the obstacles they face in Western countries, even as they preserve access to the latter’s consumer markets. Morocco’s increasing ability to serve as a bridge between China and the West has earned it the nickname of “global connector” by Bloomberg Businessweek.
Creating a More Inclusive Development Model
Despite the success of Morocco’s export-driven strategy, the growth slowdown of the 2010s brought renewed attention to persistent socioeconomic challenges. Additionally, Morocco is exposed to the middle-income trap, a precarious position between low and high-income status. Rabat has begun to tackle these issues through a new development model, but much work remains to be done.
Socioeconomic Hurdles
Morocco suffers from enduring regional disparities, a persistent urban-rural income gap highlighted by the earthquake in Haouz Province, high informal employment, high youth unemployment, and low female labor participation. These issues reflect the dampening effect of the informal economy, which accounts for two-thirds of jobs, on labor productivity and growth. They also stem from the formal economy’s slow pace of structural transformation and its continued reliance on agriculture, which still employs a third of the country’s labor force. With the exception of commercial crops, agriculture remains highly dependent on weather conditions, making yields inconsistent and incapable of raising the sector’s productivity.
In view of these challenges, a special commission was established in 2019 to draft a new development model, with the objective of doubling women’s participation in the labor force by 2035 and reducing the share of informal jobs from 60 to 20 percent. And in October 2020, amid the COVID-19 emergency, the king announced a comprehensive social protection reform package. First, a social protection floor was drawn up. It extended compulsory health insurance coverage and cash transfers to the 60 percent poorest and most vulnerable households. Second, by 2025, pension benefits and unemployment insurance are to be extended to all non-salaried workers.
Thus far, the reforms are financed by reallocations from existing social programs, drawdowns from a national solidarity fund, and a gradual removal of subsidies on fuel gas. However, structural gaps remain in terms of governance and financing. The most pressing question is to carve out additional fiscal space to ensure the sustainability and future expansion of the social protection system over the long term.
The Middle-Income Trap
Like other countries, Morocco is now facing the middle-income trap, as its export-driven growth model must address competition from lower-income countries in labor-intensive industries as well as from high-income economies in technology-driven sectors. To escape this trap and sustain the transition to high-income status, the country needs to increase investment in human capital and explore new engines for growth beyond manufacturing, such as knowledge-intensive services. In 2023, Morocco’s ranking on the Global Innovation Index was 70 out of 132 countries; the country would have placed higher were it not for its ranking 111 in the world when it comes to knowledge-intensive employment.
On the supply side, progress on this issue is impeded by the low quality of education: only 18 percent of Moroccan students attained at least Level 2 proficiency on the Programme for International Student Assessment tests in mathematics, against an OECD average of 69 percent. On the demand side, low knowledge-intensive employment reflects the prevalence of rent-seeking over innovation. To change that, the kingdom must more forcefully tackle crony capitalism, which stifles economic efficiency, as well as favoritism, nepotism, and bribery, which hinder social cohesion. A recent decision by the Competition Council sanctioning the “oil products cartel” is a step in the right direction, but the effort must be stepped up.
Conclusion
Morocco has made significant economic and social progress over the past quarter century. The adept combination of supply-side and demand-side reforms has helped the country overcome numerous crises and shocks. To accelerate economic growth and achieve anything approaching high-income status, however, Morocco will have to undertake further institutional reforms and make better use of its human capital. The reforms in question should create a level playing field in critical areas such as access to quality training and education, finance, and public procurement.
Morocco’s public debt, including guaranteed debt, at above 80 percent of GDP, and external debt above 50 percent of GDP, have both sharply increased because of the COVID-19 pandemic. Against this background, the International Monetary Fund recommends fiscal consolidation to bring the debt-to-GDP ratio back to pre-2020 levels. However, absent fiscal reforms that would create more fiscal space, the consolidation could jeopardize the financing of structural reforms and delay the investments needed to support the transformation of the economy.
Geopolitical risk is another wild card that needs to be carefully managed. Tensions with Algeria and the protracted conflict with the Polisario Front rebel group over the Western Sahara have dramatically escalated since 2020, when a long-standing ceasefire fell apart. Though Morocco garnered support for its Western Sahara autonomy plan from the United States, Spain, and France, diplomatic relations with Algeria, which supports the Polisario Front, are at a historic low. A deescalation strategy, coupled with a resumption of negotiations, could avoid a costly arms race that would otherwise drain fiscal resources at a time when they are much-needed.
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