The Moorish Wanderer

Deficits and Cycles in Morocco

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on September 12, 2012

No one needs to be hardcore Keynesian to understand why governments – and Morocco is no exception to that- prefer to go deficit-spending when the economy is in recession, especially when it is a serious one. Indeed, Robert Lucas (a big name from the University of Chicago) quipped:

I guess everyone is a Keynesian in a foxhole.

(TIME, Oct. 23, 2008)

And Morocco has been -and continues to be- a Keynesian-style economy. Unfortunately, it indulges a lot more into Zombie Keynesianism, fiscal and expenditure policies are indeed supposedly designed to stimulate domestic demand, but they do not reach the majority of our citizens (just think of household consumption distribution in Morocco: a third of its aggregate total is controlled by 10% richest households) the same can be said of public investment, although the argument is not as clear-cut as one might think it is.

relatively strong negative correlation might lead to think deficits are there to smooth economic fluctuations (captured by GDP growth volatility)

Look at the graph: deficit as a percentage of GDP opposite GDP growth over the period 1960-2011. correlation seems strong enough to sustain the assumption deficits are there to alleviate deficit. However, beware of confusing correlation with causality; we can also produce equally good evidence that deficits are the ones responsible for GDP volatility.

There is also the question of how much historical volatility is linked to deficits. The choice of 3-years deviation of GDP growth was purely arbitrary, and if anything, the strongest correlation between deficit and volatility in GDP is observed for 6-years periods, and immediate correlation between GDP growth (as it is) and deficit in percentage of GDP is equally significant. Finally, there is relatively weak evidence deficits limit somehow fluctuations in the economy (less than two years). This result seem to be in line with usual assumptions in taking 5-years averages to smooth things over.

We therefore have a glimpse to the double effect of deficits: in the shorter run as well as the longer run, deficits are negatively correlated to GDP volatility and growth.

Why do we care about standard deviation in GDP growth? For many reasons, chiefly because of government targets and growth itself; large deviation in GDP from one year to the other reflects badly on average growth – think about the 5.5% average growth projected for 2012-2016 and the impact of large ups-and-downs in GDP growth; as it stands, 2014-2016 needs to deliver consecutive growth figures close to 6.75% each year.

Second, volatility in growth means higher uncertainty. Last year, Morocco created in 2008 some 72.6Bn dirhams worth of goods and services. But the next year, only 43Bn where created, and the next years after, an average of 36Bn. These differences in expected additional GDP – about 30 Bn from one year to the other that could have benefited to many businesses and individuals, but did not, because GDP growth fluctuated a lot (not as much as the  10-year average).

Let us take a leaf from serious academia from the World Bank about the matter:

This paper examines the relation between fiscal deficits and growth for a panel of 45 developing countries. Based on a consistent treatment of the government budget constraint, it finds evidence of a threshold effect at a level of the deficit around 1.5% of GDP.

While there appears to be a growth payoff to reducing deficits to this level, this effect disappears or reverses itself for further fiscal contraction. The magnitude of this payoff, but not its general character, necessarily depends on how changes in the deficit are financed […] and on how the change in the deficit is accommodated elsewhere in the budget.

Now, this paper (from 2005) shows the optimal level for budget deficit is 1.5% for emerging economies, even as Morocco tends to flaunt the 3% target as an article of faith. A 1.5% deficit today means the government needs to cut about 38.7Bn from its deficit, or enact a net cut of 21.8Bn in the 2012 Budget – a 6.3% reduction in the Budget size. But then again, the figure of 1.5% GDP is not absolute: there are other parameters to take into account, which makes the ‘optimal’ deficit for Morocco a bit higher, and more manageable; in fact, 3% deficit GDP falls within the 95% confidence interval for the estimated, optimal 1.5% deficit. With a 3% deficit target, the Government needs to cut the deficit some 24Bn dirhams, or enact net spending cuts of 14Bn (on the basis of a maximum tax increase of 14.6Bn)

All in all, the past 40 years have been a period of relentless deficit spending policies, that ultimately culminated with the 1970s (8% over the period 1970-1981). Even the Structural Adjustment programs did not do that well; while they did indeed reduce the budget deficit considerably with respect to the spendthrift years of the 70s, the deficit between 1983 and 1992 averaged 6%, while the deficit between 1999 and 2010 was cut in half, close to 2.9%, with two surplus consecutive years.

In many respects, Budget deficits in Morocco are not deficit-spending per say. The ‘Rapport du Cinquantenaire‘ correctly pointed out in this graph that investment lags behind current expenditure (pay-wage and stationary, for instant). The deficit has a lot more to do with weak fiscal structure, that prefers to tax easy aggregates (consumption mainly, and it companies are actually the ones collecting the money) instead of taking on special interests (the supplementary report to the Budget bill estimates 33Bn in tax exemptions and breaks are embedded in the 2012 Budget) and broadening the tax base.

6 Responses

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  1. Maria said, on September 12, 2012 at 21:55

    Pourquoi ne pas rédiger en français pour contribuer à la vulgarisation des concepts économiques à travers le cas de l économie marocaine comparée aux économies émergentes.
    Bonne continuation!

  2. Youssef said, on September 28, 2012 at 06:43

    I like very much you attempt to correlate the budget deficit cycle and the business cycle. But the relevant correlation would have been between non-agricultural GDP and the fiscal deficit. When studying business cycle in Morocco, one should ALWAYS correct the gdp fluctuations from exogenous agricultural shocks….ALWAYS !

    In addition, defining an “optimal level of public deficit” doesn’t make any sense from both theoretical and policy perspectives. It all depends on the level of initial debt, gdp growth, interest rates etc. The relevant fiscal variable over the long term is PUBLIC DEBT. In morocco, the debt-stabilizing public deficit is 3% of GDP, meaning that below this threshold, the debt to gdp ratio tends to decline. Maintaining a deficit below 1,5% implies that public debt would disappear over the long term….but i assume you heard about endogenous growth theories and you don’t want to liquidate the public debt for good…There is an interesting paper by Caner and alii (2012, world bank) showing that public debt starts being harmful for growth only above a 60% threshold. Morocco is still below this level with a ratio reaching 55% in 2012, while converging towards the critical level.

    Finally, the theoretical and empirical underpinnings of your criticism to counter-cyclical fiscal policies is not in line with the most recent literature. Check this out : http://www.voxeu.org/article/how-developing-nations-escaped-procyclical-fiscal-policy.

    And guess what ? Morocco is one of those emerging countries who managed to escape from procyclicality ! And this is an major improvement in our policy-making. Now, counter-cyclical fiscal policy should take into account the external constraint, and should not be used when a country is exposed to massive foreign reserves losses. This is the good (and smart) line of argument against the current fiscal policy stance in Morocco…and please forget about the misleading (and stupid) 1,5% thing !

    Wish you all the best for your blog !

    • Zouhair Baghough said, on September 29, 2012 at 12:08

      Hello,

      Many thanks for the insightful comments. More’s the pity these require answers going beyond the blogost, because your observations need serious academia🙂

      I would counter however the argument about agriculture output. While it is true exogeneous shocks affect the sector a lot more than overall GDP, an RBC analysis on non-Agri output is likely to yield biased results, specifically because it would provide an incomplete picture as to how labour behaves in terms of business fluctuations. There is weak correlation in cycles between aggregate and agri GDP, but still, I would consider it more coherent to retain all sectors in RBC analysis. On the other hand, a sector-based RBC analysis could yield interesting results, and provide research opportunities as well.

      Deficit and Debt… I always wondered about the 3% figure; It is more or less the average deficit for 1999-2007, and I can’t lay my hand on a research paper that explains how it stabilizes the debt – after all, we did have two budget surpluses and yet PSBR were over-borrowed. Thanks for the WB reference though, I am trying to get as many papers as I can on emerging economies and their public finances.

      Thanks for stopping by!

      • Youssef said, on September 29, 2012 at 22:57

        Hi,

        When it comes to public finance, the relevant indicator of business cycle is non-agricultural GDP for many reasons, including the fact that agriculture is not part of the tax base (hors champs d’imposition).

        I don’t really get your point about RBC. If you are saying that agricultural output is driven by productivity shocks and not demand shocks. I cannot disagree…but i don’t think it’s relevant for fiscal issues.

        The origin of the 3% figure ? It can be derived from a basic fiscal arithmetic :

        d = public debt (% GDP) 0.54 in morocco
        g= GDP nominal growth 0.06 in morocco

        The public debt stabilizing budget balance (b*) is derived from the following equation :

        b*= – [g/(1+g)]* d

        And applied to Morocco :

        b*=- [0,06/(1+0.06)] * 0.54 = – 0.03

        This confirms that the debt stabilizing deficit is 3% of GDP.

        Hope it helps

        • Zouhair Baghough said, on October 3, 2012 at 11:50

          Thanks for the formula – though I have expected some econometrics behind it, oh well, I suppose simpler things do best🙂

  3. Youssef said, on September 29, 2012 at 23:03

    The formula i used comes from here :

    http://www.imf.org/external/pubs/ft/tnm/2010/tnm1002.pdf


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