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.
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.
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.