The Moorish Wanderer

The Big Picture – Part 1

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on April 28, 2012

Congratulations are in order: two days ago the Finances Ministry has answered a tweet of mine, on their website, no less!

Well, the answer wasn’t interesting beyond the usual, though I would give them credit for taking the trouble; Still and all, we are a long way from making the Open Data government project worthy of what a democracy should and can aspire to. This has little to do with my own political views: unless data is made available to everyone, there is no way one can tell how official figures are computed, or how institutions like HCP, MINEFI or Bank Al Maghrib differ in the assessment they offer on growth perspective. Their methodology differs, and so do their aims; but as long as they do not unveil the working models they make theirs, the only image they project is that of opacity, if not outright incompetence.

Take HCP’s state-of-the-art PRESIMO forecast model: it was developed under joint supervision of HCP and French office for statistics INSEE. A rather comprehensive model delineated in detailed but not unnecessary fashion, yet lacks the one feature that could have made it reliable: the data it uses, it seems, dates back to the 1980s. The amount of data – or rather its sample size baffles me: are we about to use predictions from less than 60 quarters? If so, I guess my own doodling is worthy too!

Le modèle est réestimé sur les données de la comptabilité nationale (base 1998) et diffère substantiellement de sa première version élaborée, en 2005, sur les données (base 1980). Les nouvelles données des comptes nationaux ont remet en cause la spécification empirique de certains comportements. La vie normale de ce modèle macro-économétrique implique, donc, des changements plus ou moins fréquents de ses spécifications.

Consider for instance the shares of capital, labour and random productivity factors in GDP growth Y_t=A_t K_t^\alpha L_t^\beta and when log-linearized, growth is then broken down into capital and labour growth contribution, and a TFP process whose properties will be described later on.
y_t=a_t+ \alpha k_t+ \beta l_t + \epsilon_t

The following computations argue the fact that the Moroccan economy displays remarkable patterns in inputs’ contributions in generating output. I am using to that effect a relatively simple yet powerful tool to explain it; as usual, data from pre-1960 can be found and downloaded on PWT website;

. reg gdp w_h capital
      Source |       SS       df       MS              Number of obs =      57
-------------+------------------------------           F(  2,    54) = 3449.00
       Model |  107.473871     2  53.7369353           Prob > F      =  0.0000
    Residual |  .841343008    54  .015580426           R-squared     =  0.9922
-------------+------------------------------           Adj R-squared =  0.9919
       Total |  108.315214    56  1.93420024           Root MSE      =  .12482
------------------------------------------------------------------------------
         gdp |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]
-------------+----------------------------------------------------------------
         w_h |   .6972258   .0757027     9.21   0.000     .5454511    .8490005
     capital |   .3417366   .0381563     8.96   0.000     .2652378    .4182353
       _cons |  -1.923755   .6722611    -2.86   0.006    -3.271558   -.5759528
------------------------------------------------------------------------------

The model fits perfectly; we can indeed observe that:

– Labour contributes about one-third to output, while Capital has a little over two-thirds (and that can be explained by changes in capital stock that will be accounted for later on)

– The aggregate output function is very close to the standard CRS Cobb-Douglas every undergraduate economics student is familiar with;

Total Factor Productivity is a zero-mean process that will be described later on, and though it seems not to be significant (check the Confidence Interval) it falls in line with the theoretical model; it is also quite interesting to check any correlation between TFP and both factors of production. And so the baseline model for Morocco’s output can be described as follows:

y_t=a_t+ .341 k_t+ .697 l_t + \epsilon_t
\epsilon_t\rightharpoonup N(0;.015)

(Coefficients’ standard deviations can be read on the table above)

Several caveat arise however:

– The absence of inventories: through no fault of my own, there is no way -to my knowledge- to find inventory turnout recorded in Moroccan economic data since 1955 – or perhaps the data isn’t released to the public domain; either way, the absence of data on inventories does allow to consider the present results to be strong;

For \partial s_t inventory annual turnout, a more ‘realistic’ formula would be:  y_t=a_t+ \alpha k_t+ \beta l_t + \partial s_t + \epsilon_t

– The “educated guess” of Capital depreciation, initial value of Capital: recall the following National Accounting equality: k_{t+1}=(1-\delta)k_t+ i_t Investment can be equated to the Gross Capital Formation, and the real depreciation rate is not officially reported it seems. On the other hand, looking at some of the largest non-financial institutions listed on Casablanca Stock Exchange, actual depreciation rate computed from their financial statements do point out to a figure around 3-5% of total assets (including intangibles)

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The Sideshow Consensus

Government to the Right of it, Opposition and Civil Society to the Left of it; into the valley of superficial debates rode the lonely real issues of the economy. Or perhaps it serves both parties well to focus their energy on the debate on executive oversight over the public media network. It suits the conservative government fine because economic news and the (rare) forecasts aren’t predicting rosy years ahead, and the opposition, scattered within and outside the institutions, is left to clinch on purely secondary, or narrowly defined interest-related issues;

Anything to get the public distracted.

Don’t get me wrong, human right abuses and predatory behaviour from high up are not to be disparaged, and even the Football stuff going around is worthy of consideration – although I cannot recall an instance with an interest (even passion) as strong as that displayed whenever the FLP Derby were up. Colonial alienation, moi?

And yes, even the farcical (at this point) trial of #Feb20 figurehead rapper Mouad can be a noble cause to take up and fight for. But why is there so little attention devoted to the economic issues?

To the media’s defence, there were some pieces run in major newspapers about how the government’s coffers were replenished at a higher level compared to 2011. But these were just reports copied straight from official documents released by the Finance Ministry. No particularly insightful comments were made about the worsening state of public finances, the debt or the deficit. And what about the government’s bravado on the Compensation fund reform and their boast on how they’d curb economic special interests. No one to call the conservative PJD on their empty promises, but then again, parliamentary opposition is just as feckless as the ‘civil society’ platform’s vain interest in an agenda that ranks far behind pocketbook issues.

No one is calling Ministers Boulif, Azami, Baraka or even the Head of Government for their handling on their economy, and their bluff on how they can keep up with the Government’s pledge to restore a 5.5% average growth by 2016, or the subsidies allocated by the Compensation Fund. The opposition, notably Ahmed ‘Wonderboy’ Reda Chami writing a full (Facebook) post denouncing the Communications Ministry’s handling of public media, instead of doing a meaningful job at the Budget and Finances committee.

The Worst of Trickle-down, or Zombie Keynesianism?

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on April 19, 2012

There is enough evidence to state that more than ever, big government is alive and kicking in Morocco, and not in a nice way; it has indeed broken with a 30-years trend in 2010; this means that some additional 5.8 Bn have been spent above the 50-years long trend, accruing to the 20Bn-worth exponential break that started 3 years ago. 5Bn might not be a lot relative to the Budget -1.67%- but it does account for 4% of government expenditure in real terms, so the matching resources accounted for in the Budget as a whole.

So here we are with a government who has not broken with the fateful decision to increase dramatically government expenditure in 2010; this is, quite simply, Zombie Keynesianism: the government puts on (some) welfare programs, increases recruitment 40%, and comes up with an effective 21Bn package expenditure no government has prepared for but yet finds itself actually spending it. Most importantly however, the Compensation Fund takes a large bite out of government expenditure – the World Bank Open-Data defines it as:

“General government final consumption expenditure (formerly general government consumption) includes all government current expenditures for purchases of goods and services (including compensation of employees). It also includes most expenditures on national defence and security, but excludes government military expenditures that are part of government capital formation. Data are in current local currency.”

HP-detrended aggregates. Government expenditure at its highest level away from 50-years trend since 1976

And considering the available data on that subject, the negative effects of the present course of action are just as equally showing on the short as well as the long run: depending on how the economy fares in 2013, the combined effects of the generous increases in public service payroll and the Compensation Fund will deteriorate an already compromised Budget Balance, and later on, the government will have to increases taxes, or cut spending, or both.

It seems this moment the government is trying for some shadow stimulus package, and it shows: the latest Treasury monthly survey points out the structure of Government Budget has been markedly altered compared to that of 2011: the Budget represents only 14.6% compared to the 23.2% in 2011 (and there goes the government’s boasting about the 188Mds committed to investment) while payroll and subsidies increased their contribution from 36.7%, 12.1% to 41.2%, 18.2%, respectively. And contrary to the government’s claim, the Compensation Fund does not benefit the middle class as much as a few wealthy households.

Les dépenses du budget général ont atteint 68,3 MMDH à fin mars 2012, en légère hausse de 0,8% par rapport à leur niveau à fin mars 2011, qui s’explique par une augmentation de 17,6% des dépenses de fonctionnement conjuguée à une baisse de l’investissement et des charges de la dette budgétisée1 de 34,2% et de 11,1%
respectivement.

So basically the government has put a lot of money to stabilize prices -but at the same time transfers generous sums back to the privileged few- and to recruit many more civil servants – that might not be needed or do not have what it takes- the result is indeed a stimulus package, and it might as well be working by providing the boost for GDP growth, but it will not last long, and the benefits of such an overkill are not that obvious.

          |σ       |σj/σy  |Corr(y,j)|
----------+--------+-------+----------
Y_GDP     |0,08030 |1       |1       |
----------+--------+-------+---------+
Con       |0,07013 |0,87339|0,82150  |
----------+--------+-------+---------+
Investment|0,24127 |3,00463|0,83690  |
----------+--------+-------+---------+
Government|0,22035 |2,74415|0,49970  |
--------------------------------------

\sigma =\left (\sum_{i=1955}^{2011}\left ( \mu -x_{i} \right )^{2} \right )^{1/2}\\  \rho _{x,y}=\frac{\sigma_{xy}}{\sigma_{y}\sigma_{x}}

The table above shows some evidence that government expenditure does not necessarily influence GDP the way other aggregates do, and the effects can be random indeed: government expenditure is just as volatile as the most volatile aggregate in an economy (Investment) yet it is also the least correlated to GDP. The only way that generous increase in government expenditure can pick up growth is through the subsidy to household consumption. In an ideal world, the Finance Ministry would provide us with a technical note to explain and illustrate the model they are using to forecast growth, and more importantly, the contribution to growth per aggregate. One thing is sure though, the present increase in expenditure doesn’t help, and the boomerang effect will be painful.

How Will the Budget Look Like in 2016 and Beyond?

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on April 14, 2012

166 Votes in favour, 49 against and 15 abstentions. Is this opposition going to fill the void left by PJD? Very unlikely.

On the news front, Finance Minister is hellbent on keeping his pledge to bring the deficit down to 3% of GDP by 2016, and maintains his sunny forecast for an average growth of 5.5% over the 2012-2016 legislature. Fair enough, these projections are going to be put to the test eventually. There is enough data out there to check whether this figures are likely to compute, or if the minister’s overly-optimistic projections are going to fall flat. Mister Sunny-side got it wrong, and no one calls him on his bluff.

First off, I would like to point out that the Finance Ministry does not seem to be bothered with the lack of year-on-year quantitative targets: a responsible government, one led by an economist no less, should put out a projection of future indicators, such as the deficit and the national debt. Perhaps the minist er and his whipping boy do not want to get caught if their projections do not fit reality, and perhaps these two have spent too much time at the ministry to see the woods from the trees (both Baraka and Idrissi were officials with the MINEFI)

Dreamy Scenario: 5.5% growth rate, 3% Deficit GDP over 2012-2016

First off, an average of 5.5% GDP growth over 2012-2016 means the Moroccan economy has to deliver about 6% over the next three years (2013-2016) a tall order, given its past performance as well as the constraints on the long-term trend. Nonetheless, the counter-argument in favour of a 6% continuous growth all the way to 2016 could be made by predicting a strong recovery in Europe. But then again, the uncertainty surrounding that is so dense that it would be wise to preclude any strong contribution from exports to growth in the near future.

to bring the deficit back to 3% by 2016, the Budget will have to borrow a lot. (fiscal receipts are defined here as primary taxes)

A 5.5% average growth puts GDP to 1.02Tn dirhams (congratulations Mr Benkirane!) means the government can go up to 198Bn in primary fiscal receipts. However, that means Brothers Baraka & Idrissi thought of a comprehensive fiscal reform scheme – a doubtful endeavour, especially on an election year. However, a more realistic assumption is that some modest reform boosts primary (Hauser) fiscal pressure up at around 18% means some 183Bn can be levied by 2016, an average of 170Bn over 2013-2016.

The idea the deficit would be brought under control -i.e. below 3%- by 2016 finds some justification in the light of available data; assuming the deficit takes an AR(1) the following form: d_{t}=\alpha*d_{t-1}+\beta +\varepsilon _{t} the average points out to a sustainable deficit of 2.2% relative to GDP, i.e. 21Bn on average over the next 4 years. This means either a freeze on discretionary spendings (paywage, essentially) which amounts to a spending cut (in real terms, paywage would actually fall) or a commensurate increase in borrowings to match inflationary pressures and make up for the shortfall in fiscal receipts. According to MINEFI figures, almost half the civil service payroll is below the average income, i.e. between 60,000 and 70,000 dirhams per annum.

Accordingly, and keeping in mind the projection for inflation in 2012 is likely to go up to 2.5%, there will be an automatic increase in almost half of the total public payroll to match it up, not to mention the fact that there are some 100,000 civil servants that are likely to retire by 2012, and many -if not all- of them will be replaced, which means the frantic pace of recruitment will most likely be maintained all the way to 2016, i.e. an incremental increase of 2% per annum.

This ties the hands of the government over another hot potato: this scenario assumes the Compensation Fund does not distribute more than 56Bn in subsidies on average over the next 5 years, an overly optimistic assumption, one that contradict the very initial claim made by the Minister: a 5.5% growth on average means that more and more wealthy households will consume goods, prompting a disproportionate increase in subsidies and resources allocated to the Fund.

This sunny projection by the minister’s own figures for 2016 shows the inherent contradiction of the government’s policies, as well as the hidden cost for the lack of reforms:

Likely Scenario: 5% growth over 2013 – the lowest possible deficit (but not 3%)

And I would say the smart money is on that one: there is no way the economy can recover straight from the present sluggish prospect and deliver a steady 6% a year all the way to 2016. The closest 3-years performance in recent economic history is 5.7%, observed in 2001-2003, and that was during an expansionary cycle.

In truth, the government will miss the 3% cut-off. and more likely than not, by a relatively large number, possibly as high as 7%. Indeed, the combined effect of high borrowings, high payroll and the increasing cost of compensation. Lest we forget, compensation grows at a higher rate than GDP growth – and the price of oil is a key component.

One thing is sure though: this government cannot deliver a 5.5% average growth rate, much less a 3% deficit by 2016.

PJD, Morocco’s GOP

Posted in Flash News, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on April 7, 2012

the latest issue of TIME Magazine published an interesting article on Morocco’s conservative, Islamist-led government; quite an insight on how PJD spinners want to project their image overseas. (cc @PJDofficiel)

The Elephant in the room; the Grand Old Parti de Justice et Développement

Mustapha El Khalfi, Communications Minister and Government spokesman has spent some time in Washington DC as a legislative aide on Capitol Hill. In that respect, he does have a good knowledge of DC politics; TIME correspondent was a bit surprised when El Khalfi compared his party to the Grand Old Party, the Republican Party; Perhaps Mr El Khalfi meant PJD was attached to family values and inclined to support socially conservative policies.

Converted, indeed.

I am indeed amazed to that analogy, especially when TIME correspondent Bobby Ghosh also interviewed Karim Tazi, who was dismissive of any particular danger as to PJD’s conservative stance, making a very apropos analogy that we in Morocco have no Rick Santorum:

“The PJD may not move us forward on social issues, but at least none of the leaders wants to take us backward. There’s no Santorum here”

The irony of it, PJD is gradually nailing its colours to the mast; every time their economic team encounters economic hardships, the farther they tank to the right, in the hope they can make up their moderate electorate dissatisfaction by shoring up some hardcore social conservatives; a bit like the Republican Party indeed. Attajdid -whose former editor-in-chief was Mr Al Khalfi- did not refrain from carrying vicious attacks against the perceived alienation of an already effete, secular and Western-minded elite. Now he is burnishing his party’s image abroad, he is willing to engage in drawing parallels between PJD and the Republicans in the United States; if anyone thought PJD are not two-faced, mendacious hypocritical Islamists, now is the time to reconsider. If any other politician was to compare its party to, say the UK Labour Party, or the French Front de Gauche, they would have been mauled by the PJD press. El Khalfi gets away with this, both at home and abroad.

Lest we forget, Mr El Khalfi has been a legislative aide to the Representative Jim McDermott from Washington, and there is no way someone who has spent some time at the heart of the United States’ legislative branch, not to be fully aware of the finer details of the GOP identity. El Khalfi says:

We must learn how to defend our values and faith values while embracing globalization from the Republican Party. […] The GOP knows how to reflect its ideas in a legislative framework”

Are we to expect some legislation akin to DOMA (Defence Of Marriage Act) the Bush tax cuts to the wealthy and the like?