The Moorish Wanderer

Morocco’s Growth Potential

First (real) post in 2011. I wish I could get more people read me, but apparently the posts are too long and too tedious to read. On a totally non-related subject,  I also discovered I am a bad writer, in the sense that I cannot convey my ideas in the way I want them to be. To my regular readers (and the bots that occasionally drop by) I say, thank you again -in your dozens- for taking the time to read some bits. As for Ibn Kafka’s challenge, I had the thought of writing more compact pieces (with other lengthy ones when I have free time). I’ll do my best in keeping up with a weekly posting.

Growth rate and Real GDp experience different rates: cumulative real GDP is exponential and convex, Real growth is logarithmic and concave

I wish economic debate in Morocco rose to higher standards. I mean, I’m reading columns on l’Economiste, or La Vie Eco, or even Economia, they don’t get to the bottom of things. I want to contribute.

Never wondered why the Moroccan economy never took off above a certain level of GDP growth?

Historically, the average real GDP growth per capita over the last 60 years was 5.51%, which is the nominal growth rate Morocco is experimenting for the last 5 years. A good figure, when compared to the average growth countries like the US was experiencing over a longer time series. Then again, it has been proven that poorer countries ten d to have a faster growth -at least in terms of capital productivity- due to their lower initial capital stock. This however, does not give much information about how the economy is doing compared to its potential. And the figures I display below show that our  economic potential has been systematically underused, and even the current trend shows that we are weakly catching up with the potential growth.

First, why focus on growth rate? Because, among others, growth is wealth creation, it means additional income for Moroccan agents , albeit in unequal fashion, it also means lower unemployment -although with unsubstantial results. Since we are not set on immediate institutional reforms getting better wealth redistribution, it is better to start on getting growth, and not only so: growth that gets the best out of potential GDP, so as to trigger these much needed structural reforms. Let me clear up this statement: the idea is that for the time being, our growth is erratic, because of the volatility of its origin, either due to seasonality issues, or because of their inherent weaknesses, like our exports. On the other hand, if growth was based on healthy economic dealing, i.e. on an economy that does not rely on rent, or speculation, or private monopolies to that matter, then not only structural and institutional reforms would have good basis to be implemented, but also, the urge for reform would be such that the incumbent policy makers would feel compelled to get them on tracks.

The idea of measuring our GDP potential growth gives a fair assessment of how good the economy is doing with respect to its level of inputs. Why so? Because, following the results, Morocco needs to be either on that level of output, or indeed any possibility that would not lead to a negative gap, deemed to destroy part of the capital stock. Potential GDP is the possible result that could have been obtained if workforce was at full employment, as well as capital stock used at maximum capacity with respect to the frontier of output production function (that is, in microeconomic setting, a production function). For purposes of simplifications -without loosing much sense of proportion- the Cobb-Douglas function does just fine (in facts, it is quite reasonable to use it, as indeed the HCP papers did consider the function as a realist proxy for output production.

It has also been assumed that for this Cobb Douglas, labour contribution is 2/3 and capital 1/3 (these are the parameters β and α). The levels of Capital and Labour are computed as the optimized GDP per labour, and the return of investment per GDP (meaning that FDIs were included as well). Numbers of such long time series are extracted from the U-Penn table, and have the benefit of being expressed in real terms.

Output gap (red line) and raw cumulated output gap (white line) over the last half a century. the Moroccan economy is barely touching the potential output these last years, a handicap due to that fact that output gap has been substantial for the last two decades.

Now that the potential GDP has been computed (and roughly estimated) it is quite puzzling to note that for all these many years, our GDP has been lagging behind its potential. En in the instances when the gap was positive, it was purely artificial, or short-lived. And on the other hand, it is worth pointing out that the cumulative gap had indeed deepened, especially right from the 1990’s, at a time when the under-used assets (among which, the dams the late King Hassan II was so proud of) needed to be replaced, or their high depreciation rate to be financed. This is nothing compared to the important investments that need to be undertaken for Morocco’s capital stock, as global trade and racing technological innovation compel us to do so. The fact that the Moroccan economy sustained a volatile, mostly negative output gap shows that the short term blunders the successive governments and policy-makers are guilty of, became gradually structural weaknesses. It is not only high time to address these handicaps, but it is going to be painful, long and unpopular with large scores of the Moroccan societies, not only vested interests.

What is quite strange is that institutions like Bank Al Maghrib do not take that into account in their reports. The output gap does not seem to be of prime interest (as far as the monetary policy is concerned) and it does not appear on the official reports. This casts great doubts on how relevant the policy is carried out. Next piece will deal with how relevant output gap is to the monetary policy.

11 Responses

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  1. Anas Alaoui said, on January 5, 2011 at 10:57

    I do nont see your point in the second grpah. Could you give more clarifications plz ?

  2. Anas Alaoui said, on January 5, 2011 at 10:57

    Don’t see your point in the second graph. Could you give more clarifications plz ?

    • The Moorish Wanderer said, on January 5, 2011 at 12:06

      Sure

      – red line is the output gap. Good news is, the gap is stabilizing but only just (when it crosses or gets close to 0) good economic performances would have led us to be close or above the 0 line for a substantial amount of time.
      – white line is even more interesting: it’s the cumulative gap. I have to point out two shortcomings though:
      1) the cumulative computation does not take into account technological innovation
      2) I did not (could not) scale back the cumulative gap

      I know notice I should have put a legend for this graph. thanks for the heads up, I am updating the caption.

  3. Mohamed Attahri said, on January 5, 2011 at 11:24

    Your writing skills are just fine. Keep up the good work.

  4. fawzi said, on January 5, 2011 at 20:51

    I have always been baffled by the lack of rigor of economists. Did you pull the parameters β and α out of your hat? Why do you assume they should be constant over time. In fact, what rational reason do you provide to back-up your use of the Cobb-Douglas model? None! It’s a de-facto standard that Cobb and Douglas…pulled out of their hat.

    I like simple elegant models as much as the next guy, but this is ridiculous. Growth potential is intimately linked to a litany of factors.

    That Morocco has a misguided policy is a truism. The decision making process is hogged by people who are there by chance (and thus, lack intrinsic motivation), or because they kiss ass and are therefore untrustworthy. You don’t need shady models to arrive to that conclusion.

    That’s the tough love. On the more mushy side, I agree with Simo. Your writing is just fine, and I’m looking forward to reading more informative and insightful pieces from you.

    • The Moorish Wanderer said, on January 5, 2011 at 21:24

      Grr😉
      The parameters are not fixed across time; However, we can assume they are constant across time. I still need to get back to you on that. And no, I am not an economist; I can pretend to be so when I get my PhD, or when I start working for Bank Al Maghrib. In the mean time, it’s less a matter of rigour than it is of insufficient information: the Upenn table gives K and L, but not β and α, and estimating them takes time (for me I mean)

      The model is simple indeed. Too simple, I share the criticism that it is so. But then again, It’s a good start. May be the next piece will be using more sophisticated arithmetic (I’ve been taking crash course in the statistical software R, I promise wonders !)
      As for Morocco’s past policies, It is true, it is redundant. But it’s always fun to stick another one.

      Thanks for your last remark (and for Simo too). I took a sort of an exam on analytical writing, and my grade was quite bad. I mean really bad, so It’s nice of you to put on encouragements.

  5. Vago said, on January 7, 2011 at 16:50

    Congratulations on your nomination as one of the Best of Morocco Blogs. We just want to remind you that the voting will begin at midnight on the 7th of January at http://www.moroccoblogs.com. Please make sure that our listing for your site is correct and encourage all of your fans to vote for you! You can get the Nominated badge by downloading it from MoroccoBlogs. Also, be sure to follow us on twitter and facebook at http://www.facebook.com/moroccoblogs and http://www.twitter.com/moroccoblogs

  6. Fergani said, on January 8, 2011 at 00:24

    You can start working with BAM without a Phd, and usualy it’s the case for the majority of them…that may explain the faintness of BAM’s performences….

    I think you can do better, the moroccan economy is very elaborated😉 and try not to analyse just the GDP (Very academic), but more practical things !

    Chuss

    • The Moorish Wanderer said, on January 8, 2011 at 09:12

      Hello

      I know I can. Holding a PhD does not make one smarter, but then there’s more time to learn other things besides what is taught at Master’s degree level.
      Of course GDP is not everything, and I try to post on other econ stuff as well🙂

      Thanks for stopping by !

  7. […] mentioned in a previous article something about output gap and potential output. There were some interesting comments about how the […]

  8. […] sur cette stratégie de Grands Chantiers, il semble que les résultats obtenus sont au deçà du potentiel de croissance du Maroc (par Moorish Wanderer en […]


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