# The Moorish Wanderer

## The Dirham’s Secret Value

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on July 29, 2012

A short post on Morocco’s most coveted economic secret: what is the currency board breakdown used by Bank Al Maghrib to determine our Dirham currency value?

Over the last 13 years or so, Euro-based commercial partners have accounted for a little less than 70% of physical goods. (Dollar in light blue and other currencies in Red)

Speculations place the Euro well ahead between 60% and 80%. And that has a lot to do with the flow of goods and capital circulating between us and the other side of the Gibraltar detroit. Dollar should follow closely as well, with our main exports (Phosphate) and strategic imports (Oil and derivatives) labelled in Dollar.

And yet we should have a close idea of how the Dirham value is determined; it is after all a matter of transparency as well as credibility: the Dirham value tends to condition -up to a point- a significant part of the overall monetary policy, and many businesses are interacting daily with the decisions of Bank Al Maghrib.

The assumption behind this is simple and a bit restrictive: I assume the only determinant (or indeed the most significant) for the Dirham value is the amount of traded goods in  a year, which is an overly simplistic assumption, but one that makes sense, because discrepancies can be then established on the basis of capital flows, and only then residual differences can be attributed to policy arrangements (the so-called activist policy) furthermore, the initial assumption only establishes itself because the price of a currency is mainly function of the relative price of goods traded between one country and many others. This is all very classical (or neo-classical) but for a small, outward-oriented country that is Morocco, the theory applies, since the trade integration index went up from .38 in 1993, to .58 in 2010: (Exports + Imports)/GDP.

Even without a perfect hindsight of the currency portfolio behind it, the Dirham is firmly pegged against the Euro: the correlation in its exchange rate with the Dollar, and that between the latter and the Euro reaches staggering high levels (.97) either points to a fixed currency board -meaning, with no substantial changes in portfolio weightings, or with a semi-constant weighting for the Euro, and a random process determining the pegging against the Dollar and other major currencies to fill in the remaining slots. If such theory were to be vindicated, then any random generating process for, say the remaining 20% will not change that much the trend observed in the second graph.

Firmly pegged to the Euro. the Dirham mimics very closely the Euro/USD rate at its own level.

Suppose now that the Dirham value is computed as the weighted sum of monthly variation in respective Euro and Dollar exchange rates, and consider these weightings do not change during the year (an unnecessary assumption since monthly breakdown per commercial partner are available, this is a convenient way to spare myself additional computations) if indeed the initial assumption holds, then we should not observe large discrepancies between the policy rate, and the pure currency board-based result.

These computations yield mixed results: overall, a synthetic Dirham based on monthly data from 2000 to 2012, solely based on yearly weightings draws about the same trend, but misses out mainly in terms of historical volatility, about three times as volatile as the empirical Euro/MAD exchange rate, an oddity observed during the first months of 2011.

So the currency board, in the narrow definition provided earlier on, does relatively well in describing the trend; if anything, I would say Euro makes up about 62% to 68%, Dollar 10.8% and 11.2%, and the remaining currencies at most 26%. But there are obviously other elements the simple setting fails to account for, chiefly the capital flows and the level of foreign reserves. Bank Al Maghrib tends to intervene on the Exchange Markets to sustain the currency value of Dirham by buying or selling it so as to remaining within a pre-determined Euro-peg. Since 2000, they have tried to keep these variations within a target of .11% a month. These restrictions are looser when it comes to the Dollar, however.

It may come as a surprise, but the managing policy tends to have a soothing effect on the sudden changes in times of market uncertainty, in that sense, it is safe to say if there ever was an activist policy, its aim was to manage volatility and bring it to an acceptable level. But, as P. Krugman has pointed out, fixed exchange rate cannot be maintained indefinitely. Morocco’s policy has been successfully tested during last year, but that resilience does not mean it can go on indefinitely should a global crisis arise from a possible Euro breakup.

2011 was a rough year on the currency board.

## Fiat justitia Ruat Caelum

Posted in Morocco, The Wanderer, Wandering Thoughts by Zouhair ABH on July 28, 2012

Doom-sayers have one additional thing to crow about: the abysmal – I might say plainly insulting, certainly brazenly shameless – performance of our Head of Government in his Al Jazeera interview. I say that with all the respect I have for that high office, because neither the journalist nor the interviewee did honour to their respective roles, but that’s quite another matter.

The concept of doom-sayer encompasses both sides of the argument in our national conversation: pro-reform argue the lack of genuine change will spell doom on the enchanted kingdom, while the others put forward the idea of the present omniscient monarchy as the last barrier standing between our civilized society, and chaos, inaptly captioned ‘Siba‘. Strangely enough, I find the danger not in the doomsday scenario, but rather in this perpetual sense of decline, and a feeling that no matter what one wants to and can do, things will always be the same.

I am referring to a je-ne-sais-quoi atmosphere of wait-and-see, which has nothing peculiar about the Moroccan society, but I felt it strongly in my interactions with fellow citizens. I usually build my opinions on statistics and facts -admittedly rigged or biased, but this is stronger than anything else. Perhaps the sight of piles of garbage has helped a bit, too.

The notion of decline is always hard to grasp, and it is harder to gauge in a society where opinion polls are rare, and so uncommon that their findings have to be treated with the utmost caution. But from my little urban neighbourhood and immediate circle of friends and acquaintances, I can sense a certain disappointment, even a resignation before the inevitable decline of… nothing really. Perhaps it was the false hope of a rising movement, and the second political re-alignment that failed to deliver, or even live up to expectations.

This has little to do with the economics really; for sure, the economic stagnation -I don’t know how to describe it otherwise – is only the expression of a malaise, though no one dares enough to take the lead, and lance the boil. I would like, if I may, list some of the aspects of it.

The economic decline: in fairness, there is no particular ‘golden age’ I can relate to personally, or anyone from a previous generation. The past two decades are, for the better, and perhaps especially for the worse, the product of ten years of a painful structural adjustment program, whose dividends, in the final analysis, did not fully pay off, if not at all, according to the World Bank itself. Growth is weak, and its gains consolidate the wealth and power on the top. Growth factors are idle, non-productive, and as they say, “the world does not owe as a living”; unfortunately, we are enjoying while we can. The few sunspots are only there to remind us of their exact role as such in an otherwise stagnant economy.

Society: there is a crisis of morals. Perhaps crisis and morals are too strong words to be used in the context of the consensus-seeking society that is Morocco, but the ongoing debate, regardless of how many people are involved in it, shows the deep divides in the society, and how unlikely these are to be healed, paradoxically in a consensus-seeking society. The crisis of morals is that perpetual back-and-forth movement between beloved but obsolete traditional mechanisms, and the enticing but unpredictable new ways of life. I am afraid this is caricature of reality, but the most recent serious survey -from the 50-year anniversary report- shows a tidal wave of a de facto individualism, but one that coexists (not always peacefully) with more traditional structures and solidarities. The crisis of morals, in this sense, means the transitory models takes too much time, and fails to produce new social interactions, and only succeeds in piling on things in a very heterogeneous environment that refuses to accepts that heterogeneity.

The political arena has hopefully been the most patent example of that decline: a vile mixture of shop-floor populism, kleptocracy and gerontocracy, our political personnel has long lost any sense of realities. That quote from Kypling: “Power without responsibility, the prerogative of harlots throughout the ages” can be applied aptly to Moroccan politicians (activists are a different breed however) unfortunately, the same politicians also participate in undermining themselves by belittling their own role in the political process. No one should be surprised at the low turnout during elections, or how despised the once-noble elected office is now.

And there comes the latin maxim I used as a title: “Fiat justitia Ruat Caelum“, “Let Justice be Done though the Heavens Fall”. What we need is a consensus-breaking, cavalier attitude to customs. That argument put forward by our Head of Government and (Elected) Chief Executive is precisely what I am talking about: the deal he was offered is simple, “leave special interests alone or they will bring this country to a halt”. When a politician with only 107 seats and untrustworthy allies leads a heterogeneous government coalition, that seems like the end of the road. And even if he did have the pre-requisite of a 198-strong super-caucus, there is still that major roadblock that is the SGG, our Cabinet Office. And yet we need an elected executive, backed by an equally fearless legislative body ready to go big and adopt grim-trigger strategy, thuggish, abrasive, whatever, just Let Justice and Reforms be Done though the whole of Morocco Fall.

From a purely economic and political point of view, it has a lot to do with political courage, which everybody in Morocco lacks, including the most radical fringes of the Left. Each and every one of the pro-reform partners have their own taboos and dogma to worship, and these are not necessarily in the long-term interest of the community. The example of tuition-free university system is symptomatic of the Left’s failure to address coherently the problem of public service goods.

To lance the boil of perpetual decline means taking on tough decisions: reforming the compensation fund as well as the penal code. Introducing agrarian reform as well as legislation on heritage and gender equality. I sometimes buy into the argument that economic problems rank first in order to sort out our consensus-made mess, but I am wrong. In fact, we (the Left) should take on all of these problems at once. And this is the beauty of it: reforms will take place even if it splits this country in half – because it won’t. The apparent fragility of the ‘Moroccan Experience’ has proved to be much more resilient than any one has anticipated, perhaps it is time single-minded politicians (I would prefer them to come from the Left, but Thatcherites/Reaganauts are welcomed as well) go the whole hog and test it to its limit.

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## إقتراح بسيط لتفعيل إنهاء مجانية التعليم

### أود أن أشير إلى مفهوم مهم في نظرية الألعاب (والله حتى هذه هي الترجمة الصحيحة) يمكن من “المشرع واضع قوانين اللعبة” أن تقترح قواعد لا يمكن لأحد أن يتلاعب بها دون أن يضر بمصلحته، و هكذا يتمكن المشرع واضع قوانين اللعبة من فرض قواعد اللعبة و إرساء أهدافها. في حالتنا هاته الهدف هو توزيع منح/إعفاء من رسوم التسجيل واحد المجموعة ديال الطلبة، وذلك لتشجيعه للولوج للدراسات العليا. هذا القرار، إن تم تطبيقه بصفة ساذجة، أي بطلب شهادة أو حجة إدارية تثبت إنتماء الطالب للعينة المطلوبة، فستكون هناك إختلالات مؤسساتية، أي أن عدد من الأفراد في العينة لهم القدرة على إنتحال صفة العينة المعفاة من الرسوم، الشيء الذي يبطل اللعبة، ويشكك في مصداقيتها. لذى وجب إقتراح إجراء يبطل ميزة البعض، بفرض عقوبة نقدية أو مضرة بالفائدة لمن يمكن له أن ينتحل صفة العينة المراد مساعدتها. في هذا المثال، الهدف هو معاقبة طالب ميسر الحال ينتحل صفة طالب ذو دخل محدود لكي يستفيد من رسوم مخفظ أو مجانية، أو منحة. و كل هذا يمكن تلخيصه في ما يلي

$U(\hat{\sigma_i}(\alpha_{K}),\sigma_{-i}(\alpha_{K}))> U(\sigma_i(\alpha_{K}),\sigma_{-i}(\alpha_{K})) \forall \sigma_i$

### أما الرسوم الأخرى فتتراوح بين 2،000 و 3،500 درهم حسب إقتراب الدخل من الدخل المتوسط (في حدود المئويتين 45 و 55 حول المتوسط). الضريبة الإحتياطية يمكن حصرها في 500 درهم لأنها تتجانس و الفائدة الإضافية التي يمكن أن يستفيد منها الطالب الميسور بإنتحال صفة طالب من الطبقة المتوسطة و تظهر في دراسة المفوضية التفاوت الصارخ في نفقات التعليم

Les ménages ayant des membres scolarisés supportent une dépense moyenne d’éducation par élève de 1021 DH par an pour les enfants ayant un niveau fondamental, 1987 DH par an pour les enfants au secondaire et 3217 DH par an pour les personnes ayant un niveau d’études supérieur. Par ailleurs, la dépense moyenne d’éducation par personne scolarisée croît avec le niveau de vie des ménages. La dépense annuelle moyenne par personne scolarisée pour les élèves issus de la classe des 20% les plus aisés est de 3491 DH alors que celle des élèves du premier quintile est de 366 DH.

### لنعتبر أن دالة فائدة كل فرد من مجموعة الساكنة التي تطمح في ولوج التعليم العالي تعريفها كالآتي

$U_i(\sigma_i, \alpha_K) = \mathbb{E}\left[\sigma_i(\alpha_K)\right]+P(\alpha_K)-C_i - \epsilon_i$

## The Economic Chronicles of the Kingdom, 1955-2011 Part.4

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on July 23, 2012

The Hauser Rule exists and it is verified in Morocco. Over a long period of time, almost 60 years in our case, the percentage of main tax receipts to GDP has remained constant, or at least did not rise above an upper bound, in our case, it is a little below 19.4% of GDP, except four years (and in good reason, as we shall see later on)

[…] En réponse à Horani, Akesbi précise que la pression fiscale ne représente que 22 à 25% au Maroc (il n’a pas décliné sa méthode de calcul) et que à ce titre, il est hors propos de demander des baisses d’impôt.

My Hauser boundary would at first glance contradict official figures from say, Bank Al Maghrib or the MINEFI. It would also contradict a statement from Prof. Akesbi, who puts his figure for fiscal pressure around 22-25% of GDP, which is probably true for the last three or four years, if all receipts except new borrowings are taken into account. It seems Bank Al Maghrib in the predictions laid in their 2010 annual report have made a similar assumption that public finances have been at their best in 2008 (a historical surplus in the Budget is indeed a plus) and the 24.2% should, if I am not mistaken, point to the total receipts (barring borrowings) relative to GDP. Unfortunately, both Prof. Akesbi and the BKAM team have missed the point of genuine fiscal pressure; the percentage is supposed to measure the treasury’s extraction of resources relative to wealth creation.

I do not buy into their argument for two reasons: first, the percentage itself provides little explanation as to its individual component, chief of which the contribution of taxes on Capital and Labour, and second, it gives disproportionate importance to various sources of treasury income with no immediate link to government and budget policy. The economic argument, the fiscal pressure should be computed so as to discuss the effects of distortionary taxes, and only then look at other lump-sum type of taxes, but certainly not pay too much attention to the miscellaneous receipts the treasury cashes in from the government’s portfolio, privatization or other minor sources of income.

Hauser said back in 1993:

The historical record is quite simple, if surprising. Not matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP. This is a lesson Congress should remember as it considers President Clinton’s proposed tax hikes. If history is any guide, higher taxes will not increase the government’s take as a percentage of the economy.

In relative size, the last decade has seen Morocco’s effective, “Hauser” fiscal pressure hover around 18.2%, the lowest effective rate since the days of fiscal conservatism and austerity of the Structural Adjustment Plan of 1983-1992.

Distortionary vs Lump-Sump: VAT is a distortionary tax, and so is Income tax. stamp duties and local government taxes, more likely to be lump sum taxes. The difference is two-fold: first, lump-sump taxes do not affect economic decision-making. Because economic agents are assumed to behave in a rational fashion, their optimized decision equate marginal effects, which means constants such as the lump-sum tax do not enter into account. This is perhaps why economists prefer them. On the other hand, these taxes are very unfair to the poorest and less-endowed economic agents. Proportional or quasi-proportional taxes are said to be ‘fairer’, but at the same time, they alter, or distort, economic calculations. In size as well as in importance, distortionary taxes are worth the study, while lump-sum taxes are a secondary element that need not be involved in the way described above.

the Hauser boundary evolves around 19.2% and 19.4% of GDP. This means fiscal policy has little impact on government’s fiscal pressure over the economy.

Some of the computations I present the reader with are built on a very strong assumption, almost a dishonest one: the only available data time series I could put together involved government expenditure, and not taxation. What you see really is government expenditure relative to GDP. My assumption postulates the primary balance is stationary around zero, i.e. government expenditure is almost fully funded by tax receipts. It is a strong assumption indeed, but some results from empirical data tend to vindicate yet again that assumption.

The years 1976-1979 stand out as a bit odd, because there was a primary deficit back then for obvious, historic reasons: huge transfers to the newly recovered Southern provinces, and a rapid expansion of Morocco’s military capacities have put a strain on its public finances. Besides, even though Morocco’s GDP grew at very high rates, it was not economic activity that pulled it off, and that might explain why it did not translate into additional tax receipts. Barring these 3-4 years, government expenditure and main tax receipts are not statistically significant, when one takes into account for instance the GDP deflator. For reference, I compare my expenditure-turned-tax receipts against the World Bank’s nomenclature GC.TAX.GSRV.CN and GC.TAX.YPKG.CN.

The assumption about the primary budget balance is one of long-term consequences: no country can afford a deficit in its primary balance, i.e. not fund its daily expenditure with taxation over a long period of time. This is particularly true for the past decade, where a primary surplus of 0.1% relative to GDP, on average, has been observed – this figure is merely the difference between distortionary taxes and government expenditure relative to GDP, and shows the long-term behaviour of public finances: primary taxation funds entirely government expenditure.

How should distortionary taxes have been levied? First off, we need to take a look at the long-term breakdown of production per input: if we restrict ourselves to capital and labour, total receipts from primary taxes should encompass the same proportions -captured by $\alpha$ and $\beta$ in $Y = A K^{\alpha} H^{\beta}$ in order to neutralize the effect of exogenous technological process (captured by A) we assume $\beta = 1 - \alpha$. In this respect, growth gains and the respective contributions of inputs are distributed such: $\ln(Y) = \alpha \ln(K) + \beta \ln(H)$

In the realm of public finances, and with no loss of detail, labour taxes are levied on income, consumption-oriented goods and services (typically, VAT) while taxes on Capital are usually centred around corporate tax (a tax on profit or in accounting terms, operating margin). When one considers fiscal receipts from the last 20 years however, this does not seem to be the case: Capital is over-taxed, and Labour under-taxed.

the spendthrift late 1970s have ransacked the fiscal house, and impaired its stability for the next decade, and deflect it away from a 50-years mean of 15.6%

There are many ways to explain these discrepancies, both at the aggregate and input levels: first, fiscal policy in Morocco does not seem to take into account the repercussions of its implementation, meaning that the various tax breaks, deductions and even the new fiscal measures fail to anticipate the behaviour of agents subject to these fiscal regulations.

This is not a new phenomena, really: if indeed the Hauser boundary is verified, fiscal policy, translated into fiscal receipts, appears to exhibit higher levels of volatility -almost twice as much as GDP’s, though the trend observed since the mid-1990 points to a stabilization close to GDP fluctuations. The second point about these discrepancies is policy-making: the figures in this post fail to account for the differences in fiscal regulations, especially those pertaining to agricultural output, whose tax system has been frozen in effect since the mid-1980s. The same fiscal regulations miss out on the upper income bound due to the standard income tax, whose marginal rate actually falls when it comes to the top decile income earners.

In policy terms, income rates have been too low, or inadequate. The same can be said of consumption-based taxes, such as VAT. As for corporate taxes, though the effective tax rate is comparatively low, the receipts are not up to scratch, in terms of Laffer Curve, corporate taxes are not efficient, and need to be cut accordingly. To make up for the shortfall and to balance the fiscal ratio up, wealth tax and the agricultural tax need to be levied at some point.

## The Economic Chronicles of the Kingdom, 1955-2011 Part.3

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on July 21, 2012

This post could have been titled ‘Morocco v The Rest Of The World’. and can be summarized in two sentences:

Morocco’s RGDP Per Capita grew 6.18% yearly in current terms. Average Global RGDP Per Capita, 5.35% between 1955 to 2009

in 1955, Morocco’s GDP ranked in the bottom 12% out of 72 countries.

in 2009, Morocco’s GDP ranked in the bottom 32% out of 190 countries.

This is good news: it can be argued that Morocco’s catching up to the global mean is real and tangible, and that is has done well over half a century by lifting itself up from poverty to average, the performance has to be put in perspective: the distribution of global GDP has changed dramatically: it has grown more unequal, and the seemingly bimodal shape of the density estimate in the graph belies the large number of countries left behind the curve, literally. The “bimodal shape” refers to the two humps observed in the light-grayish curve of Real GDP Per Capita for 2009, one close to 6 – 8, which refers to a Real GDP Per Capita of $1,200 and$1,500, and a wealthier hump of $13,000 to$17,000. Morocco’s performance puts it in the vicinity of the upper bound of the first hump, with about half as much, in current terms.

In 1955, discrepancies between countries were not as striking; on the other hand, there were only 72 countries whose individual economic data were recorded. Nonetheless, distribution was very close to a theoretical normal distribution, with average Real GDP Per Capita around $476.24 (in current prices) and about 95% of all values between$478.3 and $474.2, what is more, countries in the left hand-side tail, the richest countries are quite rare, if any. Morocco’s Real GDP Per Capita ranked in 1955 around the bottom 12%, close to the lower decile that is. As usual, going from small A to larger B does not necessarily mean we have scored good. It is true Morocco has grown about an average full percentage point above worldwide trend, but is it enough? Or is it even statistically significant? where high growth is not enough: world GDP is more likely to stick to its average growth figure, while Morocco has a higher likelihood to dip into negative growth figures. Growth in Morocco is definitely more volatile: even as its mean is significantly higher, the standard deviation is about twice as large as the average global growth. Indeed, if it was not for the large differences in growth levels, Morocco could have improved its standing in the global percentile. in short, the Moroccan economy hasn’t done enough in terms of β-convergence (the maximum growth rate to catch up to more advanced economies) and has definitely failed to generate enough in terms of σ-convergence (the ability to achieve growth rates without too much volatility through redistributive growth). It is not too harsh a statement: after all, volatility around growth levels for the past decade has been cut by 15% relative to the 50-years long trend, and 20% when compared to pre-1999 levels. What happened was, the economy did not push stronger in achieving more in reducing volatility. At this stage, the argument that maximum growth doctrine, even if it has been achieved at some level by the Moroccan economy, did not generate the anticipated level of wealth and income per capita. This might explain why even as Morocco has improved its ranking by jumping two full deciles, it is not nearly enough to qualify as a true emerging market with upper-middle income potential; simply put, Morocco was lucky enough to improve its ranking because other countries have messed up their development model – check the lower right hand-side tail to verify: it is no good to boast a 30% bottom when the said 30% are much poorer. The alternative way to go might reside in a little-known and seldom advocated policy, that is, to achieve the lowest possible volatility over an intermediate or long period of time. Consider a generic Moroccan economy, where everything runs smoothly with no volatility, i.e. a stable economy with the same growth rate of 5.655% every year from 1961 to 2010, which is the exact average growth of real GDP Per Capita over the same period of time. GDP Per Capita is expected to grow 16.5 times in 50 years, which means GDP per capita (current US$) would reach $3,871.57 instead of the existing$3,053.53 per capita. The generic economy has run on the same growth rate, the same population, but there is one crucial factor that explains the $818 gain per capita (or the aggregate sum of$ 26.7 Bn, or 213 Bn dirhams) and a notch higher toward the $4,036 Upper-Middle Income Countries per World Bank nomenclature. In fact, there is a way to quantify the gains from any policies designed to reduced output per capita volatility. A completely ‘sanitized’ growth brings increases GDP Per Capita by$ 800.

Halving output per capita volatility by 50% means growth gains would amount to $160. This shows growth stability is not an easy target to achieve, and the potential benefits have long-term effects, but it is clear the σ-convergence path has more benefits to the Moroccan economy. Unfortunately, growth volatility in Morocco has been followed by a proportionally larger drop in average output per capita – even as demographic growth dropped too, so this is, up to less than a percentage point, the economy’s entire responsibility. There is room for the next years to generate an additional$160 per capita if growth volatility is cut in half.

The political argument for a more stable growth is more difficult to make: no political party or organization would advocate moderate growth rate for higher stability. Elected representatives cannot produce electoral manifestos without ambitious growth rates: recall PJD’s pledge to increase GDP Per Capita 40% by 2016, which means they need to achieve an annual growth of 6%, or 7% when demographic growth is taken into account. The unelected officials need to promote a narrative whereby Morocco is a dynamic, Mediterranean Dragon, and potential growth rates of steady 5% do not look terrific when sold to foreign investors.

Come to think of it, this is the actual cost of development policies in Morocco: these should have at least alleviated the effects of volatility. Instead, some have only exacerbated them, to the tune of 213 Bn dirhams of lost development.