Determinants of productivity in Morocco and Egypt - the role of trade?

The aim of this paper is to explore the determinants of productivity and productivity change in the Moroccan and Egyptian economies, with a particular emphasis on the role of international trade in impacting upon productivity levels. Methodologically this is achieved through a two-stage methodology. First we focus on productivity, and productivity change and its determinants at the micro (firm) level. The underlying data we have comprises both detailed cross section data, as well as slightly less detailed time series data. In the first stage then we derive estimates of firm and sectoral level productivity, and examine their evolution over time. For this first stage we derive the firm level productivity measures using both econometric and index number approaches. The second stage of the work is concerned with understanding and explaining the differences in productivity across the firms/sectors, and in particular of the role of trade liberalisation in this. This involves regressing the differences in productivity on a range of key explanatory variables. This analysisis carried out at both the sectoral and the firm level, and for different time periods. Our results suggest that changes in firm level productivity are relatively modest (in particular in the latter half of the period), and that there are quite considerable changes in aggregate productivity arising from a relatively high degree of entry and exit of firms, and from changes in the shares of incumbent firms. This suggests clearly that it is changing market shares, and the entry and exit from the industry that are key to understanding the aggregate productivity changes. It also suggests that is important to consider carefully the institutitional, financial and regulatory framework within which firms operate, and thus the constraints they face. Central to the methodology and the results in this report is the need to recognise the importance of firm level heterogeneity. The results indicate that the relationship between key variables such as import or export openness can vary importantly according to the size (class) of the firm. It is thus important to understand the sources of these differences in these relationships better, and secondly to tailor policy accordingly. Hence, while overall we find a positive relationship between exports and productivity we also find that the relationship between exporting and productivity is weakest for large firms.