Mean-Tested Compensation Fund and Regional differences
I have reached a certain level of my graduate life where I need to sort out my writings: less of free-style blog-posts, and more serious, academic papers. I guess from now on I might be less inclined to argue forcefully on economic issues, and the reader can make up their mind as to the need to present such and such argument for such and such claim.
Last post was about a simple and relatively inexpensive scheme designed to induce a mechanism design such that only those households below the median income to genuinely benefit from the subsidy, so as to avoid an excessive compensation whose actual beneficiaries are those at the top. The idea is to look at the median consumption, subsidize it, and provide a commensurate cash relief to any household claiming it. Hopefully, the wealthiest would back away from the scheme, since that would mean a drastic reduction in their consumption habits, and each would pay the true relative price of their consumption bundle.
This post deals with the finer details of such program; the idea is to identify regional means of consumption, hopefully their median consumption, and from then on apply the same method nationwide; the argument behind the region-based discrimination is obviously is its cost-efficiency: a nationwide median understates the discrepancies between regions, just as a mean does – you might understand it as an average median, which brings equal problems in terms of mechanism design strategy-proofness. And based on the figures provided by HCP, we do observe a great deal of discrepancies, which signals to a lower cost for cash-relief.
According to HCP’s “Comptes régionaux PIB régional et dépenses de consommation afinale des ménages“, Grand Casablanca and Rabat regions account for 35% of total GDP, but only 26.4%. The 9% discrepancy captures what might be construed as a typical illustration of Keynes’ consumption function: richer households tend to consume less relative to their output, and they are likely to devote less of their new income when it grows (the so-called marginal propensity of consumption) But still, two regions out of 16 account for the fifth of household consumption in Morocco means a reasonable claim can be made as to the distribution of actual recipient of the Compensation Fund subsidies. As a matter of fact, the subsidies goes to the wealthiest households in metropolitan areas, whose relative consumption to household is significantly lower compared to nationwide figures; in absolute terms though, the average Casawi household consumes twice as much as their opposite number in Taza or Alhuceimas.
The median regional household consumption is in the neighbour of 93,760 dirhams per annum, with extreme values as high as 139,810 in Rabat-Salé-Zemmour and as low as 72,460 dirhams per household in the Gharb.
The scheme would provide cash relief on the basis of the regional median household, with those below the median benefiting up to 2,700 dirhams in excess, precisely because they can claim higher levels than their actual consumption, a significant enhancement for their purchasing power.
On the other hand, those above the median would have to sacrifice more than 25,000 dirhams of consumption to be eligible for that cash-relief scheme, something that represents a net loss of 21% of their current consumption. The arbitrage left to the upper households is pretty straight forward: either accept to lose 21% of their current consumption immediately, or accept to pay a higher price gradually.
On the basis of a 60% population eligible for the cash-relief system, the net cost for the Compensation Fund would be valued at around 25,5Bn dirhams, 400 Million dirhams less than the nationwide-based median consumption bundle. This is the best evidence yet that local standards are best in determining the weighted-average median consumption bundle on the basis of which households are eligible for the cash relief scheme. These figures are based on 2011 estimates, which explains the discrepancies with respect to the figures put up in the latest post, since these are 2010 estimates. This means that the cost of the Subsidy fund can be maintained constant in real terms, i.e. relative to inflation, but also with respect to the nationwide GNI growth.