The Moorish Wanderer

From Hero to Zero: 7% – 5.5% – 5% … 4%?

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on May 27, 2012

Who cares really… Forecast in growth is usually a very tricky business, but it is interesting in assessing the government’s own projections of how the Moroccan economy will fare in the next couple of years.

For instance, by my account, the government’s claim to create enough growth for 2016, an average of 5.5% as a matter of fact. 2012 is off to a bad start, since the best estimates are 3-4%, which leaves them with a higher target – about 5.8% to 6.1% to meet by the end of their legislation. By Bank Al Maghrib‘s own projections, that means the economy has to perform 5.5% for the next couple of years. But then again, these are basic results: growth figures are computed as geometric means, with 1+\hat{y_t}=\sqrt[5]{\prod 1+y_t}

the lower the initial value, the higher the next growth figures will have to make up for it – that’s how averages work. But then again, I do not expect the government to delve into explaining the method by which they get their figures. So if the Moroccan economy does not perform very close to 5 or 5.5% every year, then they would lose their bet, and with it some of their spending commitment will be halved or shelved.

Potential Real GDP (computed with respect to demographic growth)

A quick word perhaps on projected growth: there is more to it than just delivering a 5.5% five years straight. for the last 20 years, the potential output growth for the economy has turned around 5% (4.98% to be precise) in real terms. To promise 5.5% on average over the next 5 years means they are expecting an expansionary cycles, which does not seem to be doable at this moment: ever since 1992, the potential GDP growth has been very steady, and the volatility of cycles have decreased by a third when compared to the 50-years trend, and has been hovering around 5.02% and 4.95%, regardless of economic performances (and these were not top notch during the 1990s with the benefit of hindsight)

An IMF report points out:
Growth has been lackluster and volatile, especially since the 1990s. The most recent years show some encouraging signs […] However, the performance of the economy still needs to improve to catch up with the recent trends of GDP […]

Let us look back to the RBC computations described in the Big Picture Series: I have recomputed the parameters in question, and introduced the changes below. It is worth pointing out that these changes, while not very significant, are solely based on how one deals with the labour aggregate; the standard modus operandi is to compute total hours worked by the potential working population; since I have based most of my computations on DeJong & Dave, this is the most proper way to proceed:

Title:              	Nonfarm Business Sector: Hours of All Persons
Series ID:          	HOANBS
Source:             	U.S. Department of Labor: Bureau of Labor Statistics
Release:            	Productivity and Costs
Seasonal Adjustment:	Seasonally Adjusted
Frequency:          	Quarterly
Units:              	Index 1992=100
Date Range:         	1947-01-01 to 2004-10-01
Last Updated:       	2005-03-03 8:36 AM CT

But since no such data exist for Morocco, I had to make do with the available material, and settle for the standard 2080 hours per productive worker.

1/ we first list the parameters of interest as follows:

\alpha Capital Share: 0.335966

\beta Households’ discount rate: 0.934257

\delta Capital annual depreciation rate: 2.909%

\epsilon_{z_t} White noise of structural shocks N(0,0.01019)

\upsilon_{bp_t} White noise of balance of payments N(0, 0.08656)

\tau cross-persistence between the balance of payments and structural shocks: 0.599035

\rho persistence of AR(1) process: 0.371501

\phi time share allocated to work, 8 hours per day: 1/3

2/ model specification

* Household utility function, defined such: U(c_t,h_t)=\sum_{t=0}^{\infty}\beta^t\left[\theta \log c_t +(1-\theta) \log (1-h_t)\right]

* Output production: y_t=\exp(z_t)k_t^\alpha h_t^{1- \alpha}

* Structural shock process: z_t = \rho z_{t-1} + \tau bp_{t-1} + \epsilon_{z}

* Balance of payments process: bp_t = \rho bp_{t-1} + \tau z_{t-1} + \upsilon_{bp}

* Capital accumulation: k_{t+1} = (1 - \delta) k_{t-1} + i_t

* Investment dynamics: i_t = \exp (bp_t) \frac{y_t}{c_t} the definition combines a measure of domestic savings (\frac{y_t}{c_t}) and inflows of Capital.

* National Accounting Identity: y_t = \exp (bp_t) g_t + c_t + i_t government expenditure factors in foreign shocks as well, so as to capture other constraints a government in a closed economy doesn’t usually face.

* Government dynamics: it is assumed the government funds itself by levying taxes on capital and labour, with no room for deficit. this assumption is dictated to by the reality of given data and not pure ideology: the time series on public debt are incomplete and do not go as far as the late 1950s. The government announces a sequence of taxes \left\{tax_k , tax_h \right\}

Taxes: g_t = tax_k.\alpha.\exp z_{t-1} \left[\frac{k_t}{h_t}\right]^{\alpha-1} + tax_h.(1-\alpha).\exp z_{t-1} \left[\frac{k_t}{h_t}\right]^{\alpha}

Substitution rates of taxes: \frac{tax_h}{tax_k}=\frac{h_t}{k_t} \left(\frac{1-\alpha}{\alpha}\right)

3/ Results:

the assumption behind a utilitarian rate of substitution precludes any activist policy; the idea is to figure out first how an optimal funding for government expenditure in an RBC setting, then consider other settings where taxes are selected according to a specific decision rule.

  V   | St.Dev | sj/sy|Cor(j,y)|
  Y   |0.060230|   1  |    1   |
  C   |0.042792|0.7105| 0.9636 |
  K   |0.380672|6.3203| 0.8090 |
  I   |0.020965|0.3481| 0.8727 |
  H   |0.004720|0.0784|-0.5595 |
 tax_h|0.003165|0.0525| 0.4948 |
 tax_k|0.076674|1.2730| 0.3870 |
  G   |0.009470|0.1572| 0.2632 |

the model is significantly less volatile than the data, but ultimately fields good prediction when the cycle is close to the trend.

(we can already say the tax sequence is not based on utilitarian principles, since volatility on tax_k is higher than total government expenditure, and a lot closer to that of empirical government aggregates – this means taxes on capital are either too distortionary, or that government decision rules are based on unknown parameters.

in terms of cycle projection, while issues of equity premium puzzle arise – the comparison between RBC-generated data and empirical cycles for investment and capital, broader results are in line with model predictions, in particular when the cycle is close to the trend; aside from the expected low volatility, deviations are mainly due to exogeneous shocks, which allows for some predictions without too much tampering with the broad aggregates’ identities.

At this point, the model predicts very narrow results for the next quarters in 2011, but it remains very ellusive: the graph below points out to the variations with respect to the potential GDP growth per capita – about 3,94%, or 4,98% in aggregates terms.

Growth will not go beyond 5% for the next half a decade; there are no particular exogeneous shocks to expect that might lift productivity up and thus push the boundary of potential growth. There are however many shocks to expect that might slow down growth: foreign demand for Moroccan exports is likely to weaken, and the need for imported goods – whose relative price is quite high- will grow and handicap the economy. This means growth projects are wider on the lower side than they are on the upper one; a growth target for 5%, the baseline scenario might very well look overly optimistic, let alone an average of 5.5% over the 2012-2016 period.

On the other hand, the model by itself predicts a higher boundary of 4.98% – the potential trend that is – and provides ample room for lower projections, in the region of 4%. For Q2-2012, the model forecasts between 3.951% and 3.936% per capita growth; this means, in real terms, the economy will grow between 4.05% and 4.03%; but based on historical volatility, it is likely to be closer to 4%. From then on, the model predicts only one quarter above the 4.98% trend and from 2012 to 2016, average real GDP growth per capita does not rise beyond an average of 4.02%, and could go down as low as 3.8% (within a 95% confidence interval, that is)

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