Business Cycles – A Story of Our Economy
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!
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)
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.
[…] 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 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.
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.