The Moorish Wanderer

Food and Consumption Subsidy: Below the Median

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco by Zouhair ABH on June 9, 2012

I did not watch our Head of Government’s performance on TV. But I guess by now, the Moroccan public will take a keen interest in the essential mechanism of economic interactions. Mr Benkirane’s favourite catchphrase “God’s Will” might not be as helpful as he makes out.

A strong negative correlation between Consumption and Net Exports, compounded by the strong contribution of the former to GDP growth

First off, the graph opposite just shows the insanity and how unsustainable the subsidies are: Moroccan has a structural deficit in its trade balance, and the compensation fund does not subsidize household consumption, but chiefly subsidizing the trade deficit. As such, the Moroccan government’s hands are tied: if they decide to reform radically the compensation fund, or address the problem of trade balance and balance of payments, this would mean doing away with a reliable source of growth -household consumption- and a lucrative source of fiscal receipts.

Household consumption is a curse no longer in disguise: the weaker foreign demand for Moroccan exports from the Eurozone, the stronger our economy will have to rely on domestic consumption, the heavier the weight of subsidies on public finances, with a paradoxical effect on government receipts, but only up to a point.

The idea is thus to achieve a three-fold objective:

First, reform the compensation fund in an effort to address the structural weaknesses of the Budget.

Second, direct relief to households genuinely in need for it.

Third, balance domestic consumption so as to make Exports a viable substitution in terms of growth contribution.

The Iranian example provided by fellow blogger Omar El Hayani is too inflationary, and I am afraid his computations were a bit far-off base: suffice to say these computations should be done at the household level (400 dirhams per person allowance does not sound to be a viable program at any rate). A household-based direct subsidy in form of cash relief ought to perform better, with a nation-wide benchmark.

The idea is simple enough to avoid the ritual pitfalls of ‘Institutional Shortcomings’ (codeword for government corruption) by applying a small device from Game Theory properties: the subsidy is computed on the basis of a composite basket of goods a median household usually spends money on. The advantage of such a mechanism is that all those households below the Median would automatically benefit from it, regardless of their declared type of consumption. As for the better off households above the median, they have the choice between keeping on with their existing patterns of consumption -and charged more for it- or reduce their consumption absolute levels so as to match the subsidized median basket eligible for the cash relief, which results in a reduction in their consumption in absolute value. This is a win-win outcome: poorer households observe their purchasing power is stable or improving, and the wealthier Moroccans are given the opportunity to pay the true price of their consumption.

This model has the advantage of deflecting inflation away from the vulnerable households: lest we forget, about a third of household consumption in Morocco is concentred in the hands of 10% wealthiest households, these are the ones benefiting from the current system of subsidies, and these are the ones behind any sizeable inflationary shock.

Consider HCP’s households survey in 2000-2001: The average share of income devoted to food consumption established itself around 41%. The figure itself, when compared to the median share of consumption (47%) shows how skewed household consumption is in favour of the wealthiest, even though these consume only a little more than 30% of their disposable income.

Per these findings, the benchmark a household consist of 6 individuals, most likely to be 4 over time, with an annual gross income of 76,940 dirhams (2010 estimates).

Their annual consumption establishes itself around 36,100 dirhams per annum. If these are subsidized at 20%, the total cost for the Compensation Fund would be established around 25.89 Bn dirhams per year, in real terms. The median household is subsidized at 20%, the poorer 10% at around 42% of their consumption, and the real subsidy percentage would be closer to 25%, which only confirms how this particular scheme helps those who really need it.

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