The Moorish Wanderer

Stabilizing Growth and Expanding Income Per Capita

Posted in Tiny bit of Politics by Zouhair ABH on September 3, 2011

The job of opposition can be very tricky: criticism is supposed to come up with some alternative proposals to incumbent policies. It is easy, in the sense that opposition does not carry the burden of office, but then again, building a true democracy implies a complete preparation to meet the adversary with the full force of a logical and articulate argument.

Changes comes with a comprehensive, exhaustive package of alternative policies, and not just broad principles, and it is right it should be so. While these broad principles might be commendable, the critical policies are those who have a real impact on the lives of Moroccan households, whether on the economy, society or institutions. The question of hierarchy between these needs is irrelevant: everything comes in a package, no half-backed measures.

There is this question of stable growth and its impact on the income of Moroccans: the claim here is that macroeconomic policies seeking the smoothing of growth volatility, as well as sticking as closely as possible to the potential growth rate, would, on themselves, manage to increase in significant proportions income per capita, indiscriminate of wealth classes, though some fine-tuning could make sure most of the growth benefits to those actually contributing to it as well as those left behind who need community support through redistributive policies.

Over the last two decades, GDP growth averaged 3.8% (with a standard deviation of 4.7bps) an average considered to be lower than the potential growth the domestic economy is supposed to deliver. Unfortunately, it seems our policy-makers do not consider the measure a proper policy tool (the last document the Finance Ministry produced on the matter was published on September 1998, and no word of it ever since) the thing is, the computation of potential growth ties the hands of a lot of people: it puts pressure on the government, who needs to do whatever it takes not only to keep as close as possible to the frontier while justifying why they did not, the highest authorities, the flunkies at the Royal cabinet and their pals at McKinsey need to come up with policies and “Grand Designs” that would either push the potential up or put a spin on why they failed to do so, political parties are still learning how to talk and design policies. All in all, because the indicator is bluntly efficient in fingering responsibilities, no one has the political courage to use it as a compass for their policies; The result is dramatically linear: because no one within the decision-making process uses the potential growth rate as a performance indicator, volatility matters very little, and the only viable policy is to score the highest growth possible. I understand the claim that no one in ministries (or elsewhere) uses the potential GDP is extraordinary, but I have, as yet, failed to find any public, consistent and available document stating otherwise.

Coming back to GDP growth: the starting assumption that Cobb-Douglas function is a good proxy of labour and capital contribution to output, in the absence of a more rigorously defined function. We also assume that the return to scale are constant -although that assumption does not seem to carry much significance, since results remain consistent with or without it, just to get a close picture of growth contribution (the β and α parameters for respectively labour and capital) then, using the property of logarithmic transformation – the function Log(.) – we consider the following formula as the starting point for measuring potential GDP:

log(GDP)=α.log(Labour) +β.log(Capital) +log(TFP*) +ε

Where TFP stands for Total Factor Productivity (or the Solow residual), and ε a random term (or white noise). as the allusive feature of growth compels us to consider a pre-specified scale point for GDP growth, we therefore retain the real GDP growth in constant terms, with the early 1980 as the anchor value of actual growth: the 1980s in Morocco have recorded the worst recession the national economy has ever witnessed, and so, any growth points the economy picks up from then on is valued for what it is, and not relative to year-to-year performance. The model is then processed with a standard linear regression (again, thanks to the logarithmic properties) and provides us with the following results:  R² is 0.98, a very good indicator especially for a linear model.

Model shows constant returns to scale, as well as robust indicators

Furthermore, the assumption of constant returns to scale holds, with β = .53 and α = .43 – that means that for every unit of output, 54% is produced by labour, 43% capital, and the residual being the output of TFP.

These numbers also allow us to compute the potential GDP growth, which brings output gap to zero (or at least gets very close to it) a figure that goes around 4.8% for the same period. This vindicates the claim that on average, growth in Morocco was way below its potential, one point GDP behind, to be precise. This output gap, when conjugated with the negative effects of volatile growth, can explain why Morocco has been lagging behind in terms of income per capita.

When considering the cumulative effect of growth, the data shows that a straight 4.8% would have delivered a 47.9% bonus on income, and increase GNI Per Capita from $ 2,850 to $ 4,082.04 we would move away from the Lower-middle income worldwide bracket, and thus catch up with the Upper-middle income group. Overall, a stable growth would grant Moroccan households on average some additional MAD 11088,36 per annum by the end of 2009, for the same average growth observed over the period.

Stabilizing growth actually increases wealth and standards of living across the population.

The evidence also shows that even with a theoretical standard deviation half of the observed one (i.e 2.4bps), the accrued effect still beats down the current GNI per capita, this time by around 41%.

A 2:1 ratio bonus is insured when growth is absolutely stable

We do know for a fact that successive government -as well as the government in residence- failed either to implement policies designed to insure total stability in the broad macroeconomic indicators. While it is true growth volatility decreased significantly in the early 2000s, it has been so because the average growth rate abated both in volatility and levels.What is needed here is absolute stability, a similar commitment to keep inflation under control that actually benefits to the economy.

A government who is committed to raise steadily growth rates above 4.8% (around 7%) for the next two to three years, then insures that volatility does not stray away plus or minus one basis point over the next five years could not only guarantee stable the macroeconomic environment, but also expand income per capita to higher levels. These are, in my opinion, some of the macroeconomic balances a government should be very orthodox in trying to stabilize: the impact on growth distribution and income per capita per decile cannot but reduce wealth and standards of living disparities.

One Response

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  1. […] interactive reader pointed out to me a few days ago that the proposed regression in an earlier post about potential growth. The remark focused precisely on the estimated TPF: .16. No way productivity […]

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