The Moorish Wanderer

Mixed-bag agriculture

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair Baghough on May 24, 2012

I have read it ever since I took interest in Moroccan economics: “advanced models matter very little because, in the final analysis, the Moroccan economy relies heavily on agriculture”;

This sector plays a substantial role in the macroeconomic balance of the country.

The quintessential argument behind any serious rationalization over quantitative predictions on the Moroccan economy has been the importance of agricultural output. While it is clear that particular sector is of vital interest to the Moroccan people and businesses, I would like to submit some pieces of evidence that challenge the conventional wisdom surrounding it. Because only too often do our government officials, elected and otherwise, get away with their failure to create the right conditions for growth and job creation by hiding behind the Agriculture Smoke-screen. My criticism doesn’t apply to a particular government, it is merely an observation.

First off, Agriculture as a percentage of GDP is decreasing at a steady pace since independence. I took the liberty to generate the missing decade from the World Bank Data and then retrofit it back into the PWT dataset; since 1955, while Agricultural GDP grew 4.31% on average (in real terms per capita) its share of total GDP fell a modest – 0.17% on annual average over the period, decreasing from 23.7% in 1955, to 13.84% in 2011.

We are interested in looking into the effect of agricultural output on the aggregate business cycles: if indeed correlation was strong, as strong as, say that of domestic consumption, then the official line holds: agriculture matters, it influences Morocco’s economic performance, and has to be taken care of. However flawed the tax exemption is, it would make sense as a policy in broad principle: a tax-pristine economic sector doesn’t usually experience fiscally induced distortions, and the main thing our agricultural sector would benefit from is a smoothing of an all-too volatile cycle. On the other hand, if the agricultural output doesn’t exhibit strong correlation indicators with GDP and the other significant aggregates, then we can say with a great deal of certainty that agriculture, while retaining its importance for a significant part of Morocco’s labour force, does not hold sway over Morocco’s economic performances, and as such makes it even harder to justify some policies and plans for that particular sector.

Let us consider these moments where the economy departs from its long-term trend; as per definition, an economy is on the expansionary phase if its cycle is above the long-term trend:

. sum HP_y_1 if HP_y_1>0
    Variable |       Obs        Mean    Std. Dev.       Min        Max
      HP_y_1 |        30    .0627514    .0426686    .005383   .1696304

and in recession when below

. sum HP_y_1 if HP_y_1<0
    Variable |       Obs        Mean    Std. Dev.       Min        Max
      HP_y_1 |        27   -.0697238    .0409879  -.1399502  -.0107043

when below potential output, recessions tend to be a little less volatile and a little deeper. “Boom” periods, on the other hand, are prone to be more volatile but with a weaker growth figure in absolute value. but overall there is a great deal of symmetry. Is this however due to agricultural output? We know both cycles exhibit a correlation coefficient of .62 but on the other hand, we get:

. . sum HP_y_1 if   HP_y_g_1>0
    Variable |       Obs        Mean    Std. Dev.       Min        Max
      HP_y_1 |        29    .0419493    .0648962  -.0682606   .1696304
. . sum HP_y_1 if   HP_y_g_1<0
    Variable |       Obs        Mean    Std. Dev.       Min        Max
      HP_y_1 |        28   -.0434474    .0677846  -.1399502   .102021

When the agriculture sector is in trouble, so is total GDP (hence the positive coefficient of correlation) but one can notice the virtual symmetry in their dynamics – as though the effects of agricultural fluctuations are ‘locked’ into a tunnel: however agriculture fares, the projected fluctuations conditioned by its state on GDP are located between – 4.2% and + 4.3% deviation from steady state, which is still less volatile than the total aggregate itself. In fact, the correlation in cycles is weak whenever agricultural GDP is in recession: .29 vs .414 when it is expansionary. the symmetry doesn’t carry beyond cycle statistics, which confirms the initial assumption agriculture is not a drag on the aggregate economy.

To sum up:

1/ Agricultural output is more volatile than GDP – respectively .113 and .0785 (in standard deviation).

2/ AGDP and GDP are more correlated in periods of expansionary cycles than they are in times of recession.

3/ GDP is more volatile when AGDP is in recession, but the average recession has a smaller magnitude and volatility compared to the broader aggregate.

The Big Picture – Part 6

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair Baghough on May 19, 2012

This should be the last of “the Big Picture” series. My computations have reached a point where further effort needs to be fed more reliable figures – and get paid handsomely for it.

All previous results assumed no government intervention in the economy; But just as the initial results did not factor in foreign trade, the gradual adjustment of the RBC model shows our laborious business cycles accounting gets better as we introduce new elements.

Now consider government expenditure to be financed by taxes levied on labour and capital. These taxes are levied on ‘net’ income, and are defined as follows:

tax_{labour} = \tau_w (1-\alpha) z_t \left[\frac{k_t}{h_t}\right]^\alpha

tax_{capital} = \tau_k. \alpha .z_t \left[\frac{h_t}{k_t}\right]^{1-\alpha} +1 - \delta

both \tau_w .\ \tau_k are proportional to wages and capital rent. In terms of quantitative fiscal policy, these amount to a total fiscal pressure of about 14% GDP. Government expenditure is then added up to the National Accounting identity: Y = C + G + I

where Consumption, Investment and General government expenditure make up GDP.

Government taxation in this particular case is optimal – and as such might not fit exactly the general framework of fiscal policy-making: these are fluctuating rates within specified steady-state values (\tau_w .\ \tau_k are not fixed) and they levy fiscal income on factors paid at their marginal productivity, a strong assumption very difficult to verify with the data at hand. However, these government wedges, while they do not account for government cycles, do explain a lot of the observed volatility in other Business Cycles components. The new comparison table yields:

HP Data     |s      |sj/sy |Corr(y,j)|
Y_GDP        |0.0803|   1  |    1    |
Consumption |0.07013|0.8734|  0.8215 |
Investment  |0.22035|2.7441|  0.8369 |
Capital     |0.09167|1.1416|  0.4448 |
Government  |0.24127|3.0046|  0.4997 |
Labour      |0.04256|0.5300| -0.8670 |
RBC         |s      |sj/sy |Corr(y,j)|
Y_GDP       |0.0734 |   1  |    1    |
Consumption |0.0592 |0,8065|  0.9842 |
Capital     |0.0826 |1,1253|  0.5972 |
Government  |0.0045 |0,0613| -0.7591 |
Labour      |0.0250 |0,3405| -0.9462 |

Government wedges do a very good work actually: the distortionary effects of labour taxes for instance, account for much of their deviation from steady-state and correlation with output. Same goes for Capital, but not investment: while corporations are taxed on their operational margins -minus a few policy incentives- they do not seem to have a significant impact on their investment decision. the model’s shortcomings are relatively easy to explain: the only exogeneous shock incorporated in the model comes from foreign trade (trade balance) and model specification restraints somewhat capital accumulation; this explains why capital is more correlated to output in the model compared to actual data: other (significant) factors have not been taken into account.

While government wedges do quite well in explaining absolute and relative volatility (to output), they are pretty weak at explaining the intrinsic volatility of government expenditure, nor do they succeed in capturing the pro-cyclical nature of empirical public finances; the RBC model matches the theoretical framework of government expenditure – anti-cyclical and designed to smooth business cycles over- actual data however, seem to indicate a relatively weak positive correlation between government expenditure and Morocco’s business cycles. One way to account for this result is the strong assumption underlying government expenditure and tax receipts: these are set to be balanced over the long run; this means public debt as a budget policy designed to fund some of the government’s expenditure in smoothing cycles – especially in recession phases- is not as efficient as one might think – efficiency, in this case, is not to be measured for the quarters following the immediate expansionary policy, but as a result taken over a long period of time, such as the one the data is based on.

In addition to the introduction of public finances dynamics, the standard output function has been specified with two incorporated shocks: the trade balance has been added as a distinct component – and this explains a lot the increased output volatility – not only does foreign capital account for much of Morocco’s own capital accumulation, but it seems other factors embedded in it – say foreign imported technical expertise – give a powerful explanation as to how output fluctuates over time, and these foreign (exogeneous) factors can be expected to be downplayed due to the stationary specification of the balance of trade process. Furthermore, the optimal tax sequences \left\{ \tau_w .\ \tau_k \right\} are computed on the steady-state assumption that primary fiscal pressure does not go beyond 17.4% of GDP, in real terms; this means the longer a budget deviates upwards from that threshold, the longer agents (households and businesses alike) will adjust their own behaviour accordingly; in essence, any major fiscal policy cannot count on permanent effects – computations show only 72% of an initial policy decision carries its effect over one period -assumed in this case to be a year. This means that for a government to set a policy for the legislature, the measure in effect carries only 25.16% of its initial intensity by end of the 5th year. On the other hand, any cut to the corporate tax is likely to maintain its effect on capital accumulation at 93% on average over two years; these results are based on the auto-correlation results listed below:

Order       1       2       3       4       5       
Y        0.7227  0.5081  0.3686  0.2668  0.1944
C        0.8179  0.6436  0.5124  0.4110  0.3323
K        0.9667  0.8984  0.8194  0.7363  0.6544
H        0.7328  0.5944  0.4930  0.4095  0.3417
z        0.7676  0.5310  0.3758  0.2646  0.1865
tb       0.6361  0.4593  0.3219  0.2272  0.1601
tax_l    0.6362  0.4593  0.3220  0.2272  0.1601
tax_k    0.6362  0.4593  0.3220  0.2272  0.1601
G        0.6361  0.4593  0.3220  0.2272  0.1601

There was one major difficulty I kept stumbling upon: no matter how careful my coding was, I failed to produce satisfactory results as to the differentiated impulse responses triggered by exogeneous shocks, those “white noises” from the structural shocks z_t .\ \epsilon_t and tb_t .\ \upsilon_t functions. Other than that, the final results are pretty straightforward in view of the described methodology.

The source code I have compiled to get the results can be found below. MATLAB “Dynare” add-in is a very powerful language that needs to be downloaded (for free) and installed on the MATLAB directory and run via the simple command line dynare YourFile.mod (alternatively, GNU Octave can do as well)

\\declaration of variables mainly Output, Consumption, Capital, Labour and Government,
var y, c, k, h, g, z, tb, tax_l,tax_k;
varexo e, u;
\\structural parameters computed by means of calibration
parameters theta, alpha, gamma, delta, beta, tau, rho, sigmae, sigmau;
theta = 0.037;
alpha = 0.3414;
gamma = 0.3351763958;
delta = 0.029;
beta = 0.9198;
rho = 0.27234;
tau = 0.43244;
sigmae = 0.0678233;
sigmau = 0.0959883;
\\the model is computed by building a matrix of First Order Conditions that capture agent's decision rules
c = gamma*(1-tax_l)*(1-alpha)*exp(z)*(k(-1)/h)^alpha;
z = rho*z(-1) + tau*tb(-1) + e(-1);
tb = rho*tb(-1) + tau*z(-1) + u(-1);
y = exp(z)*exp(tb)*k(-1)^alpha*h^(1-alpha);
k = exp(tb(-1))*(y-c)+(1-delta)*k(-1);
g = (tax_l*(1-alpha)*exp(z)*(k(-1)/h)^alpha)+(tax_k*(alpha*exp(z)*
y = exp(tb)*g + c + k - (1-delta)*k(-1);
tax_l/tax_k = (1-alpha)/alpha;
\\steady-state values computed by the same methodology proposed for calibration
g = 0.0726936349;
tax_l = 0.0324716235289365;
tax_k = 0.0324716235306143;
h = 0.2663385236;
y = 0.465686322;
k = 1.3684021321;
c = 0.4259362416;
tb = 0;
z = 0;
e = 0;
u = 0;
\\simulated shocks from exogeneous "white noises"
var e; stderr sigmae;
var u; stderr sigmau;
var e, u = sigmae*sigmau;

What Debt and Deficit mean for All of Us?

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair Baghough on March 4, 2012

As much as I care about Debt and Deficit, I fear these subjects do not catch on with the mainstream media in Morocco.

There is some kind of fatality attached to it: “Deficit? Can’t be helped.” “Taxes? Debt? Can’t be helped either, as long as taxes are not high, who cares?” But the fact of the matter is, to care about deficits is essential. First off because abstract issues related to public finances have, sooner or later, a direct impact on our lives: the mortgage, the basic public services, even the level of prices are affected by government finances.

I wish there was some official report to vindicate my prediction the expansionary cycle reported by a 2009 paper from MINEFI on Moroccan business cycles, has, in fact, been put to an end:

Phase d’expansion entamée en 2000T4 et non encore achevée Les huit cycles d’affaires enregistrés durant les décennies 80 et 90 ont été marqués par la comptabilisation de 13 années de sécheresse entrainant de fortes oscillations de la production agricole et des secteurs de l’activité économique qui lui sont associés à l’amont et à l’aval. Toutefois, à partir du 4ème trimestre de l’année 2001, deux caractéristiques qualitatives ont particularisé l’économie marocaine et portent essentiellement sur :

* La baisse notable de la volatilité, mesurée par l’écart type de la variation du PIB trimestriel, pour atteindre 1,38 contre 4,2 dans les années 90 et 2,9 dans les années 80.

* La rupture avec les cycles d’affaires courts par l’amorcement d’une longue phase expansionniste record de 31 trimestres.

La phase expansionniste que connait aujourd’hui l’économie marocaine se démarque clairement de l’expérience des décennies précédentes puisqu’elle est réalisée dans une conjoncture difficile et instable, marquée essentiellement par des aléas climatiques défavorables (2001, 2005 et 2007), par l’instabilité des marchés financiers internationaux, par la flambée des cours du pétrole et par l’essoufflement de l’activité économique chez les principaux partenaires du Maroc. Ce contexte d’évolution démontre distinctement dans quelle mesure l’économie nationale a réussi à amorcer un changement positif de structures économiques et à développer une grande capacité d’adaptation et d’amortissement des chocs.

what follows might be either a mild depression or a long, painful recession, it is up to the appropriate public policy to smooth business cycles over the troubled path ahead. And increasing debt when available liquidity dries up and upward pressure is exerted on the level of interest rates.

Better operate modest and harmless cuts today than deep and unpopular cuts tomorrow

1/ High Deficit means an increase in taxes/decrease in spendings are coming fast: a deficit doesn’t usually go on for ever, especially a 6% deficit to GDP. Simple: high deficits need to be paid for, and at a premium, usually paid for by the taxpayer, one way or the other.

The operating logic is quite simple: government spending keeps on rising -save for two fateful years, 1965 and 1983- and is usually matched with taxation, debt and… the deficit. The deficit is a convenient way to finance government policy, but it is so when the deficit is created because of a precise set of government agenda, not because a government wants to spend itself into social stability or just to sustain its administrative lifestyle. in fact, the very existence of CST treasury funds contradicts the idea that ministerial departments conduct a policy of their own.

And so an unjustified high deficit cannot sustain itself for a long time -and 5 years is a short time in politics; sooner or later, deficits have to be halved, and from past experience, Moroccan officials tend to favour lower government spendings instead of increasing taxation: In fact, during the 1980s, during which the Structural Adjustment Program was implemented, the total increase in fiscal receipts was scaled back, and was kept well below 16% of total GDP. The rest is pure budget accounting: the government has to freeze or cut spending (which it did 30 years ago), including pay-wage, basic services like Health, Public order, Education and, most worrying to the government, Compensation and Subsidies.

2/ Expansionary spending at the end of an expansionary cycle are hazardous: the figures disclosed ahead of the new 2012 Budget clearly point out to a moderate expansion in government spending in the hope to allay the backlash induced by pessimistic projections in growth figures: the government was gunning for an average of 5.5% GDP growth all the way to 2016, they start off on a low 4.2%, which puts the pressure to come up with a higher growth figures for 2013-2016, an average of 6%, actually. One has to agree that in these trying times, with huger economic uncertainty from the EU, there is very little chance the economy can pull off a straight 6% growth all the way to 2016, whatever tax cuts, generous subsidies and mani pulite this government can indulge in.

In fact, the government has got itself caught in what is usually a weakness in left-leaning styles of government: generous social programs with no immediate focus on growth, pro-business agenda of sorts. (By pro-business, I mean businesses that generate growth, innovation and jobs, not the rent-seeking, oligopolistic type of businesses that rule Morocco) and I suspect they get a free ride from the press for a host of reasons: a gutless Finance Minister who is more interested in wrestling control of key Finance departments from his sidekick generates more news headlines than anything else, in addition to a convenient, almost opportunistic government timetable to deflect public scrutiny to more superficial matters (Grima-Gate, Choubani‘s and Hakkaoui’s controversial statements respectively on culture and abortion)

3/ An unbalanced fiscal base means no harm done to the Economy if taxes are raised: just look at the average fiscal pressure on GDP: we are far from the net average of 19.4%. Now this is always a touchy subject: increasing taxes isn’t really a popular subject, unless the discourse is directed to the various fiscal exemptions and breaks a privileged few benefit from; the 2012 Budget makes room for about 33 Billion, 2/3 of which benefits to big, profitable business and wealthy individuals; the scrapped 42% marginal rate on Income Tax, and, last but not least, the discretionary, unjustified, uncalled for moratorium on the agricultural tax, an actual tax cut that benefits a tiny, urban and wealthy group of farmers whose profit margins are high enough and aren’t usually invested back into the agricultural economy. This is a 120Bn business with untapped fiscal receipts and large tax subsidies. The least one can do is to tax agriculture, then allocate the money back to smaller farmers to help them expand and improve their output, and thus extract themselves from poverty into middle-class affluence.

And there goes the argument on taxes: it is better to operate now a fiscal consolidation with moderate and fair tax increases, so as to sustain growth and redistribute wealth, instead of dodging the issue until it is no longer possible, and then carry on with a fiscal consolidation that taxes the middle class, with proceeds used to pay off the debt instead of spurring growth, and that what might very well happen if the next couple of budget bills do not get their fiscal house in order.

4/ the Political choice has not resolved anything, and the price for it is Debt: the government self-proclaimed ‘virtue’ doesn’t provide an adequate plan to bring spending under control. In fact, I suspect total public borrowings will grow to some 500Bn by the end of 2012. The public debt has a direct impact on everyone’s livelihoods: high debt, especially when one consider shrinking available liquidities, put pressure on interest rates across the board; high interest rates mean fewer households can manage to buy their house, and those with a mortgage will be faced with higher rates. Businesses with tight financing capabilities will have to close down. In expansionary times, a relatively important deficit doesn’t matter a lot: liquidities are available for everyone, banks, individuals and businesses alike to dispose of, even government finances.

But when one considers the latest monetary figures, liquidities have dried up from 962Bn to 900Bn, and there lingers an uncomfortable question: aren’t additional borrowings going to dry up liquidities further? High government debt means fewer liquidities will be available for private markets, a textbook application for the crowding out effect. Furthermore, the money paid back on past public debt bears little value, even with interest rates. The government is set on borrowing 66Bn, it projects a 42Bn payback -including interest- but each payback is valued less than the money taken away from existing liquidities; quite simply, and because of the conjugated effect of opaque government finances and ineffective spending, the net public extraction of liquidities is higher than the mere arithmetic difference of 24Bn. It looks as though government officials observe how ineffective their fiscal policy to boost growth and investment, and try to make up for it by borrowing to finance spending, only to worsen the liquidity and investment problem.

5/ Fiscal Consolidation has just been postponed, a can kicked down the road: we now move to a different time-line, whereby future generations of taxpayers will shoulder the cost of fiscally irresponsible choices. A deficit is justified as long as a tangible assets are put up as collateral; TGV, F16 fighter airplanes and the (future) purchase of M1A1 Abrams Tanks [pdf] are no use for the future generations. And so, any future fiscal consolidation plan will be tougher and more painful, simply because there will be higher spendings to cut, and higher interests to pay back. Available money for education, health, law and order will inevitably be squeezed. When the government commits for a net increase in government balance sheet by 30Bn for a 5% budget deficit, it seems the government has indeed opted in for kicking the can down the next fiscal year. We will therefore have to wait for the 2013 Budget, and there is little we can do about it.

Business Cycles – A Story of Our Economy

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair Baghough on February 18, 2012

An interesting discussion with my students (yes, I have recently been assigned TA duties, so kudos to me!) about debt, pensions and demographic growth -more specially a simplified version of the Ramsey-Cass-Koopmans model- prompted me to think about how come none of our economic-oriented institutions, namely Bank Al Maghrib, HCP or MINEFI, engage into some meaningful activities and produce high-quality papers – more often. It seems to me one paper on core inflation, one on business cycles (up to 2007) and a couple of unfortunately very brief reports of macro-econometric surveys are not enough to justify the total Human Resources spending of 2Bn shared by HCP and MINEFI alone. Crack some whips, and lemme read something substantial to bitch about!

Business Cycles per 3 filtering processes - HP seems to be good compromise for good smoothing

But I digress; back on the original subject – I posted a very raw estimate of business cycles – one that basically has the long-run growth estimated by means of a straight line, a simplistic assumption with no obvious advantages; as I have (finally) managed to unlock and master an interesting little device with Stata, I can now compute cycles per Hodrick-Prescott filter procedure. Dataset was extracted from the UPenn World Table, augmented with 2009-2011 Log GDP from World Bank Open Data website.

the graph plots three possible modus operandi for cycles filtering; the final result tends to favour HP since it does away with much of the high volatility segments that a linearly smoothing tends, in contrast, to exacerbate; from then on, a clear-cut graph depicting our economy’s history during the last half a century can provide informative insight about past events, and more importantly, a prediction of what is yet to come;

Let’s stick with H-P filter; what does it tell us? First off, that the party held since the early 2000s is bound to stop, or at least to slow down somehow; in any case, the next dozen of quarters would tell us exactly what it is all about. It is therefore up to a sound policy design to stabilize output, rather than force an artificial short-term and short-lived expansion.

Why does it seem to differ from earlier computations? First off, the initial data is slightly different; U-Penn PWT Table tends to use normalized data, better suited for international comparisons, and includes some specific PPP-related computations like the Geary-Khamis method. Furthermore, the selected trend dates back to 1955 (instead of 1960) which means the average trend growth rate is around 6.8% – which might also provide an additional explanation on why PJD was so keen to promote a 7% annual growth rate – although the retained growth is real, PPP-adjusted and per capita; further computations still bring the (ideal) potential growth rate around 5% (accounting for an average 2% demographic annual growth, hence vindicating further my claim that: a/ ideal GDP growth rate is 5% and b/ stabilized growth brings a lot more benefits in terms of growth gains as higher rates are usually linked to high volatility.

(one last note perhaps: data is annual, and that means I might have missed some short-term cycles within)

are we heading to a 1980s redux?

Turbulent independence: 1955-1962

for such a short period of time, fluctuations sure have been important; a newly independent nation like Morocco had to deal with hostile conditions, due to a drain in foreign capital – that is why pre-existing legislation has been heavily upgraded with the establishment of Office des Changes in 1958. On the other hand, massive transfers fell on the lap of the successive new governments, who also had the task of building a whole set of legislation from scratch (including labour, currency and budget legislation) as well as engaging in long-haul public expenditure – for lack of any sizeable private sector initiative.

Boom & Bust: 1962-1973

A very short shoot-up has been observed during the considered period, although it seems to be due to a particularly high government expenditure observed in 1962 and 1963, although that shock was rather short-lived, as it failed to prevent a deep recession that extended all the way to the early 1970s.

TelQuel reports on the economic conditions that led to the March 23rd riots:

[...] Comment en est-on arrivé là ? “Vous ne pouvez pas expliquer ces événements en faisant l’économie de l’histoire du Maroc de l’époque”, bougonne Simon Lévy. Très juste. Commençons par le contexte social. Plusieurs grèves ont marqué la fin de l’année 1964. La Promotion nationale, définie par les autorités en 196[0] comme un instrument de développement économique, est un fiasco complet. Les prix de la viande et du sucre grimpent de plus de 40 %. Casablanca compte 600 000 chômeurs et subit un exode aux allures d’avalanche : 36 000 personnes sont jetées dans la ville chaque année. Un tiers des habitants a moins de 40 dirhams par mois pour survivre.

The Big-State approach entailed by programs such as La Promotion Nationale failed ultimately for various reasons, thus leading to the observed trough for most of the mid-1960s.

Euphoric Borrow-and-Spend: 1973-1981

the commodity prices shot-up in 1973 provided Morocco with a lot of resources to spend: prices tripled between 1973 and 1974 from $13/ton to $42/ton and then $68/ton in 1975. Furthermore, large transfers in government expenditure observed during the mid-1970s, in the aftermath of the Madrid Treaty boosted the economy to perform very high growth rates, 7.5% on average between 1974 and 1977. In a particular fashion, these years were boosted mainly with government expenditure (including military spending) and receipts from Phosphate prices;

Boom & Bust, Redux: 1981-1991

Following the 1983 Structural Adjustment Program (SAP), the Moroccan economy was on a bumpy road, and save perhaps for the immediate impact of a drastic reduction in food subsidies:

In the early years of adjustment, Morocco made considerable progress. Between 1983 and 1988, Bank programs focused primarily on sectoral reform, while the IMF took the lead in stabilization efforts. In addition, the Bank addressed long-term structural change through project lending, economic and sector work (ESW), and dialogue with the government. As reducing the deficit was very urgent, it was decided that structural fiscal problems would be addressed at a later stage. Four adjustment loans (in trade, agriculture, education, and public enterprises) were approved during this time. With the exception of education sector reform, which encountered political resistance, and irrigation, which faced shortages of public funds, all were successful.

During this period, overall GDP rose by almost 5 percent a year, manufacturing exports grew rapidly, the deficit was halved, and the balance of payments current account reached a surplus.

Depressing 1990s:

the conjugated effects of SAP aftermath and a series of droughts grounded the economy to a halt, as indeed reports from the World Bank and the OECD pointed out back then; average growth most of the 1990s was null or slightly negative; between 1992 and 1997 average growth was about 1.45%, indeed:

Toward the end of the 1980s, the Bank was excessively bullish it its assessments of Morocco’s economic future. Progress in public enterprise and financial sector reforms was considered excellent. Two adjustment loans approved during this period carried relatively light conditions for disbursement because they were considered a continuation of a smoothly running reform program. The Bank’s ESW, which was of very high quality, was not sufficiently used and disseminated.

The Bank’s overoptimism continued through 1993, despite the fact that there had been hardly any economic growth since 1990. Growth slowed from almost 5 percent a year in the second half of the 1980s to 2 percent in the early 1990s.

Booming 2000s and aftermath: despite what one might think, the last decade was comparatively the best expansion cycle ever observed; government spending and debt were steadily halved, proceeds from privatization were injected back into the economy, and the private sector benefited from a strong foreign demand for exports. By 2007, average growth was about 5% and set on recovering the accrued losses from the 1990s.

The cycle was somewhat broken in 2009 – a halt rather than a breakdown, since the trend has not gone in typical past observations below the potential output line. But based on past occurrences, it seems we are about to witness the end of the longest expansionary cycle in the last half a century, and with it, the end of the only crucial recipe for development the past government have been so keen to promote: growth; insofar as growth was ‘sustainable’, the proceeds were high enough to allow for a certain (albeit very unjust) distribution of wealth. A slow growth would invariably lead to less for the many, hence increasing risks for genuine social resentment – and considering the current set of events, no one in government or else is keen on that scenario to happen.

“You’ve Never Had it So Good” – And It Is About to End

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair Baghough on November 15, 2011

Here is another proof of why parties cannot deliver on the prosperity front: there are some interesting computations I would like to share with you, regarding business cycles in the domestic economy.

An expansion that could well stop short in the next couple of years

In a nutshell, the economy has been experiencing since the early 2000s quite a robust expansion (one that has little to do with growth as we shall see later on) in a clear fashion (as the graph shows) and this is something to recognize as a sign of good economic health.

The macroeconomic aggregate of GDP growth is somewhat disconnected from these cycles, and that is so for a simple reason: these are short-term fluctuations, while growth is more of a deep, long-run variable. That’s where the “You’ve Never Had it So Good” line would not fully apply. Now that we know the present trend is on the upswing, it would perhaps prove to be a clearer evidence the next government, whatever their proposed manifesto, cannot do better. At best, they would smooth the expansion cycle, or more realistically, softly land the economy and engage in structural reforms whose benefits they are not likely to reap during their time in office; but nonetheless, these reforms are needed now.

A couple of procedural points to explain how the results are obtained: it is pretty standard procedure to take Real GDP to its logarithm -it makes computations easier- and then compute the long-term trend. the differences in observed GDP and long-term growth are mainly business cycle fluctuations. Data is as usual downloadable on the World Bank’s Open Data website (Variable Code: NY.GDP.PCAP.KN)

The expansion cycle is both a curse and a blessing: ever since the early 1970s, Moroccan economy experienced short booms and long busts. In fact, ever since 2000, the cycle has been remarkably stable, with relatively harmless standstills, and stability tends to yield virtuous results in wealth and output accumulation. The economy praised by the IMF in their reports resides in business cycles expansion stability, not in the level of growth. This is another argument political parties would do well to consider: growth does not matter much if it is not stable, does not yield business activity, and finally, does not bridge inequalities. And just so to be clear: this relatively robust business cycle cannot be solely attributed to any government or political player; if anything, it is merely the economy re-adjusting after a decade-long of recession after the Structural Adjustment Program was lifted in 1992.

The expansion cycle is a curse because the trend is losing speed, and at this moment any ill-thought decision might turn the temporary slacking into a recession. It might be temporary, but the effects on business activity would be a lot less painful would economic policy try to stick to the long-term path, or in more operational terms, to the real output.

Close-up on 2000-2010 business cycle fluctuations

Promising anything more than 6% GDP growth for more than three quarters could get the economy overheated, and bring us back to the late 1970s economic difficulties. The best a government can do is to try and maintain the same expansion rate, but certainly not engage in expansionary budget policy because it would kick off inflation, public debt and the virtuous cycle could well be reversed, and in times of global uncertainty, it is best to keep the domestic economy in shape by sticking to the 5% potential output target.

The business cycle argument is yet another piece of evidence Moroccan private sector and corporations that a smooth but lower than expected 5% growth is better than sky-high 6 to 8% GDP growth; high growth means higher deviation from both long-trend and potential output, and more volatility on the business cycles.

For more information on Moroccan business cycles, Finance Ministry produced a briefing note, March 2009 with some interesting figures to look at.