The Moorish Wanderer

Quarterly Data for the Moroccan Economy: A Shortcut

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on May 30, 2012

This is some heavy stuff: the post proposes to use statistical results from computations on cycles to develop, in turns, the broad aggregates and expand the level of details; we move from 56 years to 224 quarters (1 years = 4 quarters). Obviously, this gainsaid much of the computations performed in other posts: the HP filter does usually a lot better with quarterly data, and these do not come in hand – not so much a gainsay as it is a complete reformulation of any past doodling. On the other hand, the closer any official study got to it was the Finance Ministry’s 2009 study on Cycles, considered too short a time sequence – 1980 to 2008. This will explain some discrepancies in their results – it also explains why the Hodrick-Prescott filter works better, although I suspect any non-parametric filter would do equally fine.

If you torture the data long enough, it will confess.

(Ronald Coase)

Annual GDP is usually computed as follows: y_t = \sum_{q=1}^{4} y_q (adjusted for seasonal fluctuations). On the other hand, we might substitute this expression with a more probabilistic setting, with y_t the cumulative density for quarterly GDP (with a normalized annual GDP to 1) this statistical device is needed to generate the moments needed for further computations: mean, standard deviation and perhaps skewness. Obviously, this denies the modelthe possibility of capturing outstanding fluctuations, but there is an arbitrage to be made: scarce data, persistent fluctuations and the easy in computations.

Scarce data: it is a pity HCP or any other public institution does not publish long time series pertaining to the Moroccan economy – reliable data goes as far as the early 1980s, and annual data is usually not available on domestic sources (I have yet to find some lonely pdf file on the Finance Ministry’s website with dates from the 1960s…)

Persistent fluctuations: to capture these means eliminating outliers; no doubt the process will underestimate negative shocks because of the constraints put on the model.

Handiness in computations: there are some models available, for which assumptions -sometimes strong ones- have to be made in order to make sense of it all. In that respect, the results are not supposed to be iron-cast; in uncharted territories, it is hardly the case, and Moroccan business cycles certainly are.

The idea is to find a distribution across quarters so as to minimize differences in relative GDP over the considered period (graph depicts annual output)

From the beginning of the year till its end, growth is somehow randomly distributed across quarters. Perhaps ‘random’ is not the right word: what matters here are the moments of interest; it matters little to ‘guess’ the appropriate form quarterly growth displays over the very long run, and these errors will cancel out over almost 230 quarters. the initial step is to adopt the overly simplistic assumption that growth is uniform across quarter, that is, growth adopts the cumulative density of a uniform distribution, from Q1 to Q4, while the assumption is indeed very strong, it has the convenience to present us with smoothness: uniformity means inter-quarter growth will be very close to the yearly trend growth. In that sense, those recorded disturbances around the trend will be considered as the historical volatility we need to compute for more advanced distributions.

How do we check the results make sense? There is a benchmark out there for us to see: Quarterly data for US GDP per Capita is available, as well as the annual data for the percentage of GDP the Moroccan economy represents with respect to that of the US. A successful estimation for quarterly growth in Morocco means the relative GDP to the US should be very similar to that in yearly setting. The idea is simply to compute both countries’ trends, and from then on the ration across the available 196 quarters (usable US Data runs from 1955:I to 2004:IV)

We proceed to generate a normal distribution at each year, with N \left(\bar{y_{t,t+1}},\sigma_{229}\right) where \sigma_229 is a measure of volatility derived for the time being from levels of annual growth, and centred around an average measure computed on annual growth values. We thus obtain the following results compared to annual data:

                            GDPY
-------------------------------------------------------------
      Percentiles      Smallest
10%     6.252841       6.162857       Obs                  57
25%      7.11526       6.189924       Sum of Wgt.          57
50%     8.232385                      Mean           7.942243
                        Largest       Std. Dev.      .9970512
90%     9.121388       9.263059       Variance       .9941111
95%     9.263059       9.275018       Skewness      -.4843868
                      Quarterly_GDP
-------------------------------------------------------------
      Percentiles      Smallest
10%     6.259518       6.089419       Obs                 228
25%     7.096377       6.104532       Sum of Wgt.         228
50%      8.24034                      Mean           7.941979
                        Largest       Std. Dev.      .9909281
90%     9.101249       9.296097       Variance       .9819385
95%     9.253781       9.301066       Skewness      -.4863844
99%     9.296097       9.343733       Kurtosis         1.9077

As one can see, the quarterly data does not distort the original series too much, the trade-off being at the cost of a marginally smaller volatility and average GDP.

Brand new Morocco’s Quarterly RBC, and HP-filtered.

The newly generated doesn’t look much like the earlier results I posted on. Simply put, the data was not fit for cycle-generation. Some short-term fluctuations were not taken into account precisely because the data was annual, and subsequently, some outstanding quarters (in both ways) were skipped or instead exacerbated because of their effects on annual growth.

Overall, the essential features of ‘yearly’ cycles can be found in the graph too: boom-and-bust in the second half of the 1960s, the boom of the 1970s, and then the quagmires in short cycles in the 1980s and 1990s.

Interestingly enough, volatility is much smaller compared to initial projections; in fact, 38% smaller, as we can observe on the descriptive statistics:

    Variable |Obs      Mean     Std. Dev.       Min        Max
-------------+--------------------------------------------------
HP_Quarter_1 |228    2.28e-19    .048117   -.1296305   .1497003
HP_AnnualY_1 | 57   -7.30e-19    .078588   -.1399502   .1696304

(the difference in mean is not very significant, as both are very close to zero)

How does this cycle perform with respect to that computed by the Finances Ministry in their 2009 paper?

Les huit cycles d’affaires enregistrés durant les décennies 80 et 90 ont été marqués par la comptabilisation de 13 années de sécheresse entrainant de fortes oscillations de la production agricole et des secteurs de l’activité économique qui lui sont associés à l’amont et à l’aval. […] La phase expansionniste que connait aujourd’hui l’économie marocaine se démarque clairement de l’expérience des décennies précédentes […] Ce contexte d’évolution démontre distinctement dans quelle mesure l’économie nationale a réussi à amorcer un changement positif de structures économiques et à développer une grande capacité d’adaptation et d’amortissement des chocs. Les gains de stabilité et de durabilité enregistrés au cours de ces dernières années tiennent dans une grande partie à l’amélioration de la conduite de la politique économique et de la qualité des dispositifs institutionnels.

The findings about the expansionary cycle beginning from late 2000 are somewhat mitigated when one considers a longer time series: true, the average cycle has been less volatile (25% less than the 229 quarters-long time series) but these fluctuations are under-estimated in the MINEFI study because of the historical volatility they embed: the 1980s have been very volatile indeed, and the great moderation that followed makes cycles in the 2000s very moderate, hence the optimistic view held in the ministry’s findings. On the other hand, it seems the last 40 quarters have exhibited historically low volatility, which, when combined with those in the period 1980-2000, can be under-stated.

Prophet Of Doom No More (If Only)

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard, Tiny bit of Politics by Zouhair ABH on November 23, 2011

This post will consider a finer estimating of Moroccan business cycles – with some statistical device economists do not usually use (so I’ve been told) to get a smoother estimation of business cycles.

Primary results (expatiated in an earlier post) still hold, though because they remain a raw estimate of business cycles in Morocco, fluctuations are influenced by seasonality, extemporaneous events, and other ‘white noise’ effects we seek to minimize with such computations. Now, it does not really matter to express these numbers of terms of GDP size, or Business revenues – this is in fact a computation on relative terms of change – in facts, there is little use of these computations in monetary or volume terms, because they have been originally computed on log-based real GDP per capita.

distribution of business cycles is almost normal, centred around zero with 0.05 standard deviation - a statistician's dream

We consider to that effect non-parametric regular smoothing, not because it is best -compared to regular filters- but simply because it allows for more visual understanding (even serious academic debates on the best way to smooth over the business cycle curve) but it also minimizes the deterministic features of traditional filters like Hodrick-Prescott; non-parametric smoothing refers back to random variables. For sure, referring to Moroccan business cycles as a random variable is not reassuring, but the randomness remains contained within a very well-defined, almost natural centred distribution;

This however, does not say business cycles are normalized, and when smoothed, the graph shows the next couple of years cannot do better than the best years of Moroccan economics, and these turned out to be the prelude to two decades of painful adjustment and recovery: the mid and late 1970s saw the widest variance from the long-term growth, and no period of Moroccan history managed to reach that level, and there is a reason for that.

The 1975-1983 period was the high water-mark of an indebted economy, fuelled with generous subsidies and Phosphates revenues: Guaranteed debt relative to GNI was 1.93% in 1974 (around the same number, 1.95% in 2010) Morocco was pouring money into the new Saharan provinces, investing in non-productive assets (like military equipment) and relying more and more on foreign borrowings to make up for the shortfall when the Phosphate manna dried up. Are we experiencing these conditions again in 2011? Debt is increasing to around 54% of GDP, and there are a lot of investments going around, enough to doubt their direct impact on productivity, at least on a 3 to 5 years basis.

Assuming Morocco keeps up with its current growth, there will be a time one macro-variable will falter, or exhaust itself. I would go for public finances or real estate development, but the thing is, the current business cycle starting from 2000 will come to an end in a couple of years; unless some positive externalities kick in.

Smoothed business cycles (model predicts an 81.7% robustness) shows the expansionary cycle is likely to end in two years-time

By that, I mean the trend growth shifts up, thus re-adjusting computations, and allowing for the expansionary cycle to continue well into as many years as these externalities can influence. Otherwise, and that seems to me to be the most realistic scenario, given an expected slumping global demand for Moroccan exports, the economy will fall into a contraction cycle. While the systemic effect explains a lot in the next progressive halt in business activities, domestic indicators could well signal the end of expansion.

Playing the prophets of doom is not a pleasant task, much less a ‘patriotic’ one. But voters trying to make sense out of electoral manifestos, economic and political elites trying to foresee their way and business out of uncertainty and economic fogginess should keep in mind these facts:

Moroccan officials have agreed to IMF to carry out fiscal consolidation measures; that means budget cuts and austerity measures. Slimming down government is not always bad for households and businesses, but we in Morocco do have a reputation for botched reforms that quickly turn into economic recessions.

Bank Al Maghrib is planning for a reduction in Government Debt: whether banks and businesses like it, the Central Bank class the shots when it comes to market liquidity. And I believe BAM staff clings to their reputation as inflation-adverse institution strongly enough not to yield to government pressure and raise main interest rates, a policy that would kill any chances for continued expansion (especially real estate, the main beneficiary of low 3.25% interest rates)

This, of course, is not as bleak as I make out; there is always a chance to focus on structural policies, redistributive fiscal policies (and that includes targeted tax cuts to small businesses) any policy, in effect, that would produce good results even in times of low growth; the salient point of such policies is however, a permanent transfer of wealth from super-wealthy households to the remaining population. So unless the authorities do not want to run the risk of a 1981-1984 re-run, they should consider more than a laughable 2Bn ‘solidarity fund’.

Technical Note: I have used the standard Kernel estimator, and computations yielded the following results:

Regression Data: 51 training points, in 1 variable(s)
                 Years
Bandwidth(s): 1.500668
Kernel Regression Estimator: Local-Constant
Bandwidth Type: Fixed
Residual standard error: 0.000536727
R-squared: 0.8179711
Continuous Kernel Type: Second-Order Gaussian
No. Continuous Explanatory Vars.: 1