The Moorish Wanderer

The Big Picture – Part 2

Consumption smoothing is a reality in view of empirical data, and in this particular occasion, HCP’s own PRESIMO model is at faults in terms of specification and reliability on estimated coefficients, and the model specification themselves can be gainsaid as to their robustness.

Consider their proposed model for household consumption:

\log(c_t)=.73\log(rw_t)+.87\log\left[\frac{rw_{t-1}}{c_{t-1}}\right]-.84\left[\frac{u_t}{l+u_t}\right]-0,82icv_t-.01(r_{t_0}-icv_t)

La variable la plus importante dans la détermination de la consommation est le revenu disponible des ménages. Dans le modèle, cette variable est endogène et résulte d’un ensemble de composantes : la masse salariale, l’excédent brut d’exploitation (EBE), les revenus de la propriété, les impôts sur les revenus, les transferts courants, les prestations sociales et les cotisations sociales.

The reported t-values indicate a pretty large standard deviation attached to each of the computed coefficients in this formula (just divide the estimated coefficients by their corresponding t-values below) Not to mention the fact that inflation and short-term interest rates tend to make the model dependent on contingent data, hence the relatively high R², though it comes at the expenses of a long-term, structural explanation of how households smooth their consumption across time and variations in income.

Consumption smoothing can be traced back to the consumption cycle – whose absolute and relative to GDP’s volatility are both second only to labour work. The proposed alternative does away with inflation and short-term interest rates, as well as unemployment; The idea behind it is can be broken down into two sub-parts:

– long-term trends: inflation and distortionary interest rates do not stay for long, and are eventually factored in by households. The fact that there is little (genuine) concern over subsidies provided by the Compensation Fund, as well as the short-lived effects of Bank Al Maghrib’s decision to cut its policy rate by 25bps are two illustrative examples of the simple intuition behind the idea: households rationalize a lot more than what they let on, and decisions of short-term consequences (including inflation and unexpected shifts in monetary policy) are eventually factored in, and their effect tends to fade away as time goes by. And in this particular issue, we are interested in real consumption behaviour over a very long period of time. Finally, because most of the aggregates are expressed in real terms,

– unemployment is a bit more difficult to gauge from aggregate macroeconomic data; furthermore, because the model is based on household units instead of individuals, there is a mechanism of risk-sharing that alleviates the effects of unemployment and the attached uncertainty to it.

We therefore consider the following model:

U\left(c_t;1-h_t\right)=E\sum\limits_{0}^{\infty}\beta^t\left[\frac{c_t^\gamma(1-h_t)^{(1-\gamma)}}{1-\phi}\right]^{1-\phi}

where: \beta: the discount time factor and \gamma: time fraction allocated to leisure.

While the formula might look baffling, it displays interesting computational properties in terms of inter-temporal behaviour – the trade-offs households face in deciding their present and immediate future consumption; for \phi = 1 we get:

E\sum\limits_{0}^{\infty}\beta^t\left[\gamma\log(c_t)+(1-\gamma)(1-h_t)\right]

(the ‘curvature’ of the proposed utility function denotes of the ‘intensity’ of inter-temporal arbitrage)

PWT provides dataset with consumption per capita, GDP per capita as well as GDP per effective worker; Consumption per capita is then computed back into an aggregate of Consumption per household, so as to preclude uncertainty around unemployment. Worked hours are then computed on the basis of the 40-hours, as the result is based on Moroccan labour laws.

When computed, First Order Conditions on that utility function yield the following, which is then regressed to provide estimates for the parameters described above:

. reg C k_h      
      Source |       SS       df       MS              Number of obs =      56
-------------+------------------------------           F(  1,    54) =    1.48
       Model |  .000169425     1  .000169425           Prob > F      =  0.2283
    Residual |  .006162348    54  .000114118           R-squared     =  0.0268
-------------+------------------------------           Adj R-squared =  0.0087
       Total |  .006331773    55  .000115123           Root MSE      =  .01068
------------------------------------------------------------------------------
           C |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]
-------------+----------------------------------------------------------------
         k_h |    .247134   .2028243     1.22   0.228    -.1595042    .6537721
       _cons |   .9015001   .0882337    10.22   0.000     .7246021    1.078398
------------------------------------------------------------------------------

with: C=\frac{c_{t+1}}{c_{t}}
k_h= \frac{\beta}{1-\gamma}\left[\alpha\left(\frac{k}{h}\right)^{\alpha-1}+1-\delta\right]
Households’ own \beta_t is therefore .9015 which does square with estimates from academic (and a lot more serious) papers.

These deep (structural) parameters are now all identified, next step is to build Morocco’s RBC model.

Subsidized Pass the parcel: Compensation Fund

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco by Zouhair ABH on February 12, 2012

As per the latest Treasury survey figures, the Compensation Fund stands at about 41Bn – although the initial 2012 Budget bill provides for 45Bn; that represents 5.7% of GDP, 14% of total budget. It also represents 80% of total public investments for 2012. And finally, it seems all public subsidies equate total expenditure en education. And yet every annual budget statement pushes for a Compensation Fund reform:

L’accent sera mis, notamment, sur des questions liées à la réforme fiscale, à la masse salariale, à la réforme de la compensation… pour s’assurer de la soutenabilité des finances publiques à la lumière des exigences de développement économique et social auquel le Maroc est en droit d’aspirer.

But is the compensation fund worth the money? After all, the total resources allocated to the most important expense – or shall we say the most politically sensitive- remains wheat and sugar; According to the addendum on special funds to the Budget bill (Comptes Spéciaux du Trésor) the designated “Fonds de Soutien des Prix de certains Produits Alimentaires” is allocated with some 880 Million dirhams – and even that amount of money can be halved; either by targeting those subsidies (which hasn’t really been the case ever since subsidies were enforced) or by by setting up a task force within the Exchange Office or the Finance Ministry to trade in those commodities the Moroccan authorities consider to be valuable.

I’m looking at some of the ministry’s own figures regarding the observed average traded prices of sugar on international markets,  and they list traded average prices:

Les cours moyen du sucre brut et du blé tendre au titre du premier semestre 2011 s’élèvent respectivement à près de 652 $/t et 352 $/t contre respectivement 444 $/t et 172 $/t au titre de la même période de l’année 2010.

It is a bit strange the Sugar Index prices do not match MINEFI figures. Or perhaps looking for the cheaper alternative isn't a priority down there. (Bloomberg)

But it seems to me this is not true; not for sugar anyway. I have looked up two indexes for sugar, and the maximal value did not top up $ 360/ton – March 2011, if our government was wise enough to cover imports with futures. As for wheat, it seems the market price did not go beyond $350/ton since 2008; that  $ 20 doesn’t make a difference, and for the specific category of wheat, total cost to import was about MAD 6 Bn for 2010; that means each household had to shoulder 896 dirhams of direct expenses incurred from wheat imports. Total cost for imported sugar (of all kinds) would have been 3.3Bn, that is 511 dirhams per household

896 dirhams of basic cost computed from raw imported wheat; assuming negligible additional costs, and based on the regulated price of one loaf of bread, that means one household would have consumed an annual set of 690 loafs of bread; same computations for sugar based on an average price of 6 dirhams/kg would yield a theoretical consumption of 85kg per household. Gee-whiz statistics perhaps, but it paints a picture; international prices have only limited impact on purchasing power; as far as I can tell, domestic interactions account for a lot more, perhaps because of the strait-jacketing of specific prices and oligopolistic markets for goods such as wheat storage, sugar and distribution.

Now 2010 yielded an average annual income per household of about MAD 106,751, and based on HCP 2006/2007 household consumption survey, consume 41.3%, thus spending MAD 1812 in sugar and MAD 7847 in wheat (bread and otherwise) That’s a lot more than the raw cost for these imported goods.

This comparison suffers from major flaws however: it does not take into account other costs factored in the final product, and second, computing expenditure in average term tends to produce bias; indeed, compensation subsidies are not mean-tested; furthermore, figures are not that reassuring when one looks into the median expenditure, let alone the fact that average household does not take into account its intrinsic size. Median annual income has been MAD 77,000 and thus consume MAD 5288 in wheat and MAD 1244 in sugar per annum.

But the argument is basically sound: raw cost per household is too low to justify what might come to be a MAD 7,800 subsidy per household. Actually, that argument is strengthened by the disparities in consumption distribution; in fact, because the top 10% households (that’s 2 Million individuals, give or take) capture a third of total household consumption, they get more than their theoretical 10% share in subsidies -since those are indiscriminate- in fact they get three times more than average, and they get to benefit from 3/4 of total subsidies – this is derived from the fact that subsidies are distributed uniformly across population deciles.

I would argue it is too high a price to pay for an arcane system that may have been working when income dispersion was not that high: with a widening income, wealth and consumption gaps within the economy, an indiscriminate subsidy on food and other essential goods tends to favour those who capture the largest proportion of household consumption, i.e. the top 10%, or as one would like to label them, those who do not need the subsidy.

Furthermore, the compensation also encompasses the following:

à la compensation des produits de base, en l’occurrence le sucre et la farine. Le montant réglé dans ce cadre par prélèvement sur le compte intitulé “Fonds de soutien des prix de certains produits alimentaires” se monte à 880 MDH, auquel s’ajoutent des dépenses de 14.987 MDH prises en charge par le budget général (Chapitre des Charges Communes), dont 2.357 MDH au titre de la compensation des denrées alimentaires de base et 12.630 MDH destinés à couvrir la charge de compensation des produits pétroliers.

So as far as identified compensation-related items go, the industrial subsidy is 4 times larger than the more important matter of subsidizing food and edible goods. A call has been made by government officials to maintain an industrial status-quo that might not, after all, benefit the domestic economy; what if the cost of subsidizing oil-intensive industries was actually much higher than any transitional loss to alternative industries? And how come oil-related imports benefit from a 12.6Bn subsidy when the immediate household consumption of Butane is only 15%? Unless Butane is sold for a symbolic price (which is not the case as long as I can recall the commercial price of one butane cylinders) that subsidy goes primarily into business oil consumption;

So total expenses for subsidizing food is at most 3.2Bn, that’s less than 1% of total budget and 13% of projected deficit – which is so far quite a sustainable subsidy and an expenses ceiling for future mean-tested programs for targeted subsidies. As for oil-related subsidies, the same observations can be made regarding income/consumption gaps: on households’ sides, who owns/drives cars? on business’ side, which industries are hungry for oil? A valid counter-argument can be made for the poorer household deciles; how will they cook and keep their family warm? Well, given the fact that these account for 10%, and since HCP reports the following:

En 2007, 54,6% des ménages marocains disposaient d’une cuisinière à gaz. Selon le milieu de résidence, ce taux passe de 42,9% dans les campagnes à 61,6% dans les villes. Selon la classe de dépense, ce taux passe de 67,4% pour les ménages les plus favorisés à 37,1% pour les moins nantis.

[…] Au niveau national, 20% des ménages disposent d’un chauffe-eau à gaz. Ce taux varie de 1,2% pour les 20% les moins aisés à 45,9% pour les 20% les plus riches. En milieu urbain, le taux d’équipement est 10 fois supérieur à celui enregistré en milieu rural (30,3% contre 3,0%).

Furthermore, the bottom 20% households are twice less likely than the top 20% to own a gaz-based stove, and only 1.2% of those households own a gaz-based heaters.

This is to say that an inflated compensation fund, in all its individual components, is not due to the international hike in prices – only 4Bn out of the 45 have a direct impact on the livelihoods of Moroccan households;A willing (and strong-willed) finance minister can gradually start reforming the fund by first setting up a team to supervise pricing on international markets -by using commodity futures, since Morocco’s own demand is unlikely to tip futures’ valuation one way or the other- and get prices down by as much as 6% per annum for wheat for instance. Second, there must be a way to mobilize the services of the Inland Revenues (Direction des Impôts) HCP and the whole Finances ministry to design mean-tested tax deductions and breaks, as well as cash relief schemes to support as many as 661,000 households, about 5.3Mln individuals who do not have the means to sustain themselves; so far, a 7,000 annual relief (that’s a 23% boost on average income of the bottom decile) would cost about 4.7Bn and still be a relatively low burden on the budget, plus subsidy would go to those it can actually help. Third, subsidies to businesses cannot go on indefinitely; first because it skews Morocco’s industrial structure, and would give an unfair advantage to what might be obsolete and rent-seeking industries; subsidized fuel only boost the value of a taxi license, when the money can be used to improve public transportation.

The thing is, there is a way to halve subsidies gradually, though it means taking on many powerful lobbies. The only essential condition for such a scheme to succeed is political courage. I doubt Mr Baraka or his sidekick Mr Azami Idrissi, or even Mr Benkirane have what it takes to take the fight where it is necessary: suppressing rent, promoting innovation to boost growth.

Grim 2012 Economic Outlook

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco by Zouhair ABH on February 8, 2012

Bank Al Maghrib monthly survey for January 2012 states:

Sur le plan national, les conditions économiques et financières chez les principaux pays partenaires du Maroc se transmettent graduellement aux indicateurs de la balance des paiements, bien que ces derniers continuent d’afficher, dans l’ensemble, une certaine résilience.

[…] Dans ce contexte, la croissance économique, sur la base des données provisoires, s’est établie à 4,8% au troisième trimestre 2011, reflétant la poursuite de la progression de la valeur ajoutée agricole et l’ajustement à la hausse de la croissance non agricole de 4,1% à 4,9%, après le ralentissement observé au deuxième trimestre. L’analyse plus détaillée montre, toutefois, que cette orientation favorable du PIB global et de celui non agricole tient essentiellement à la dynamique des activités orientées vers la demande intérieure, avec notamment une bonne performance du secteur des bâtiments et travaux publics.

On the other hand, HCP’s latest labour survey reports:

Le secteur du BTP a créé 30.000 postes d’emplois restant, cependant, en deçà des 48.000 postes qu’il a créés annuellement entre 2000 et 2010 ou encore les 63.000 de la période 2008-2010.

And so there goes the government’s 7%-turned-5% growth plan: real estate and exports. Both are likely to weaken over the next quarters, thus the negative impact on projected growth: it is no longer 5%, but more like 4.3% And not only that, but it seems the state of public finances is degrading so fast that yet another PJD promise will be broken; as it stands, the projected deficit computed by the Treasury stands at around MAD 42Bn, 47 Bn if proceeds from the BCP partial privatization are not taken into account:

SOLDE ORDINAIRE

Le solde ordinaire positif constaté à fin décembre 2011 est de 5,9 MMDH contre un solde positif de 22,5 MMDH un an auparavant. Il permet de couvrir 12% des dépenses d’investissement.

Hors recettes de privatisation, le solde ordinaire n’est plus que de 609 MDH.

This means deficit to GDP goes to 5.4% (or 6% with no privatization receipts) PJD manifesto promised the deficit would not exceed the 3% threshold – meaning that there are some 20 Bn of expenses on excess this government has no choice but to pay for.

Growth Projection:

growth contribution are volatile, but it seems exports and domestic consumption are likely to pull growth for 2012

Household consumption and exports pulled growth in 2010, and most probably will do so for 2011 as well. Investment is not likely to contribute much for too many reasons: public finances cannot sustain an expansion in public investment, and large companies listed on the Casablanca exchange do not seem to be set on increasing their investment either – though precisely because of its volatility, it can actually sustain growth to the projected level:

L’analyse des éléments de la demande indique que l’accélération de la croissance au troisième trimestre tient à une progression plus rapide de l’investissement, de 4,6% au lieu de 3,2% un trimestre auparavant et de la consommation, soit 7,3% pour celle des ménages et 5,2% au niveau des administrations publiques. La demande extérieure a en revanche de nouveau contribué négativement à la croissance, à hauteur de 3,8 points de pourcentage, le rythme d’accroissement des importations de biens et services s’étant établi à 14,8%, contre 5,3% pour les exportations.

So exports are likely to contribute negatively to GDP growth; public finances consumption are not likely to contribute more – not with a 5.4% GDP deficit; as for household consumption, including the building sector, it is a bit of a mixed bag, HCP’s latest households’ survey reports some pessimism on durable purchases:

Achat de biens durables : moment peu opportun: Au quatrième trimestre de 2011, 56,5% des ménages considèrent que le moment n’est pas opportun pour faire des achats de biens durables et 18% pensent le contraire. Le solde relatif à cet indicateur s’établit ainsi à -38,5. Il s’inscrit en baisse de 2,1 points par rapport au trimestre précédent mais reste en hausse de 5,8 points par rapport à la même période de l’année précédente.

Situation financière des ménages : légère détérioration Par rapport au trimestre précédent, les ménages affichent, au quatrième trimestre de 2011, une appréciation négative de leur situation financière actuelle et de ses évolutions passée et future. Les soldes relatifs à ces trois indicateurs se sont détériorés de 1,4 point, de 3,4 points et de 1,1 point respectivement.

This could indeed reflect on real estate and perhaps on non-durables consumption as well.

Some Elements On Consumption Smoothing – A Prima Facie On Household Prediction Of Their Future

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Tiny bit of Politics by Zouhair ABH on December 24, 2011

I was set on writing a post on social mobility, on the basis of consumption smoothing across time. It was unfortunately a bust, more of a stillborn. But I have the perfect excuse to make for some laziness on my part: data has not been released yet by HCP (for they have promised something early 2011)

Fortunately however, the preliminary computations have not been useless, and provided a certain set of assumptions about household consumption in Morocco, crunched numbers can be of valuable teachings.
The analogy with business cycles is quite important to understand the rest; broadly speaking, the initial, and perhaps the most important, assumption is that households, individuals and businesses, in their rational (or semi-rational) behaviour, tend to favour stability over random and extreme fluctuations. Stability means that everyone appreciates an increase in their consumption of goods, their wealth and their income. In that respect, a head of household would be more content with a steady job and steady prospects too. The same goes for a company in a mature sector, where market shares are very stable, and there is no point in going into a risky endeavour.

Still, an economy like this will die away, because its growth will eventually stop at a certain point. This is why we need to introduce an additional element into the ‘black box’ of the national output: technological progress, a wonderful gift from heaven that translates into better consumption: the best example is that of a housewife with a washing machine (and I can assure the lady readers I am all for shared house-shores) with a completely changed pattern of consumption, with  more abundant and better quality goods.

0.833% annual growth of household consumption per capita to get a 41% increase over half a century

And there lies the first caveat: consumption as depicted in the graph does not account for the increased quality in edible and durable food, the efficiency in electricity consumption, and the rise of the internet, among others. The expressed value merges all of these things into one big aggregate indicator. However, as we are more interested in how consumption as a whole evolves across time, this does not matter a lot. and evolve it did: the average annual increase in consumption per capita has been 0.8%, a 50% increase since 1960 – by comparison, GDP per capita doubled over the same period of time. Even though wealth has considerably increased in Morocco, consumption remained relatively stable: it increased 40% over the last 50 years, but GDP increased almost three times more.

It is also worth noting that GDP and Consumption display a strong correlation in terms of growth rate. indeed, one can even think of some sort of dynamic interaction between value creation and household consumption, a pull/lag of sorts, even more so obvious given the consumption-based GDP aggregate; in this sense, household consumption contributes to growth basis points.

We are however interested in a different topic, namely how well households try to smooth over their consumption across time – regardless of changes in their standards of living. The purpose does have some policy implications: an income tax cut is bound to generate some additional domestic consumption, but by how much and how long is unknown, unless elements such as smoothing consumption across time, with the clear implication that an increase in income not only is conditioned with the immediate marginal propensity of consumption and the smoothing effect for future use of income. Also, there is evidence (later on discussed in detail) on lagging effects -autocorrelation- that go has far as 10 years-time on, perhaps the best evidence that past decisions are factored in over a longer than expected period of time.

high volatility in consumption cycles

The assumption of a perfectly smooth consumption pattern goes right out of the window with the distribution observed, although there is very little to be said about it starting from the 1990s: the trend is steadily decreasing, though it has modestly picked up pace in the late 2000s.

Now, results show that household consumption is a lot less deterministic than I or anyone else would think it to be so. Does it make sense? In a sense, it does. First because households do not necessarily control their outside environment, and exogenous shocks -from productivity and other factors- are more of a random nature than anything else. It is thus understood that past decisions affect present and future ones, and the unaccounted for elements are also lagging over the years.

Truth is, the most persistent pattern starting from “modern” Moroccan economics – modern in the sense of the Adjustment Structural Program aftermath- is a steady decrease in consumption relative to the very long term consumption trend. It is both concerning and interesting: first, it seems as though there is no “trend” to speak of: the trend does exist, but it is only a statistical happening, that there is no collective understanding of the concept. This looks even more alluring that the deviation from the trend is very large, and is very sensitive to brusque historical events: the early 1990s reach a peak because PAS was about to stop, but from then on, there is a steady decrease from the theoretical trend (that coincided with a stiff recession at the time) a very fast deviation from the trend that seems to mimic that of the late 1960s and early 1970s.

There is however a very persistent regularity in these cycles that allow for other means to pursue: there are methods to verify and even predict the next changes in consumption patterns, and these will by the same means produce results on how households will adapt their consumption relative to the trend.

This post is a broad introduction to a more ambitious project seeking a more formal approach to consumption patterns in Morocco – because these are going to be the cornerstone to a host of policies related to taxation, foreign trade, food and edible goods domestic productions, to name but a few.

Stay tuned!

The Open Society Project: Bridging Income and Wealth Gap

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on August 12, 2011

Large numbers to illustrate policy ways and means do not, usually, speak to the average voter. And up to a point, they are right not to care whether the Compensation Fund increased to some MAD 32 Bn, first off because even the most civic-spirited citizens of us cannot put together a detailed account of how much it would benefit them, and second because for all governmental policy and its supposed benefits on all of us, it takes a while, and a certain approach to convince people that these taxes are well spent, and these actually benefit them.

I used to convince myself that a successful political party in Morocco can win favours with some “populist” lines on income inequality and wealth. I wish we had some serious polling companies (and a more relaxed set of regulations) to gauge the mood of the nation regarding the introduction of progressive taxation on dividends, large agricultural businesses, real estate tycoons, grima-holders. In a curious, almost virtuous ring, populism, high-brow policies and sound economic decisions have been united in one single fiscal policy: wealth taxation. I mentioned in an earlier post the possible levy of at least MAD 45Bn by introducing a 60% tax rate on millionaires. As a matter of fact, that measure is net of a tax break which would benefit directly to the 20% less affluent, and 60% of total households. The following is an effort to breakdown those measures into real, individual impacts.

But first off, some macro-figures are needed to illustrate why wealth taxation is necessary, and could actually help stem inequalities and boots domestic economy. The cornerstone of governmental policy is twofold: first, the introduction of wealth tax regime, and the implementation of discriminatory (in the pure economic definition) VAT and Income Taxes. Based on the assumption revenue distribution evolves within the observed trend of the last decade, and following available figures on GDP growth and the 2011 Budget, we can establish the following windfall receipts from the new changes in income and VAT taxes: out of some 5,210,000 urban households, distribution between income structure and paid income tax shows a marked discrepancy, an injustice that should be dealt with swiftly by re-arranging the income brackets.

20% Wealthiest own 60% of GNI, but pay only 40% of Income Tax

It can be observed that even with a uniform distribution of individuals across households deciles, the 20% richest do not pay taxes commensurate to their incomes, while the less affluent households do pay comparatively more. This is mainly due to the virtual tax break for all households earning more than MAD 180,000 (though actually, the tax break starts at MAD 165,000) which means individuals earning on average MAD 500,000 and up (the top 10% bracket) earn a tax-free Dirham when they turn millionaires. The tax subsidy goes even worse, and conservative estimates, the tax receipts from the introduction of progressive  tax policy will be quite large.

a family of 5, with one breadwinner and a stay-at-home mum is likely to earn, on average MAD 59,642 per annum. They are likely to pay MAD 3,900 i.e. about 7% actual tax contribution -These, by the way, are households HCP officials refer to as “the middle class”. A smaller household (say of 4 members), with two working co-heads of household earning MAD 560,000 per annum pay in taxes MAD 44,000. Both households pay comparatively the same percentage of their income in taxes. The income ratio however, is 1 to 9. The super-rich are on average paying less than the middle class in terms of income taxes, and we are considering only their non-agricultural incomes. Any fiscal reform that shifts the burden from 40% of households to a minority within the 10% more affluent is not only a progressive policy, but would also most certainly bridge income gap. The other implication of such fiscal reform would necessarily increase all 60 to 80% of households’ standards of living.

Am I too greedy with the super-rich? Am I? Following their 2010 financial statement, listed companies on Casablanca Stock Exchange (and thus required to publish their financial statements with the CDVM regulatory body) have distributed in 2010 about MAD 27 Billion of dividends. Considering how concentrated the shareholding structure is in Morocco, these dividends simply do not benefit to the many, but only to the (already rich) few. Besides, tax code regulations to that day do not seem to tax these dividends. Indeed, under Art.6 subsection C regulations, company shareholders registered in Morocco (that is, virtually all of BVC listed companies) do not pay income tax on at least 95% of their earnings. A financial tax of of 65% over these earnings (as well as the rising of the legal reserves ceilings) can provide the budget with an additional MAD 17 Billion receipts.

The untaxable happy few (Brahim Zniber) Picture: Flickr

Agricultural income is not taxable in Morocco. It is argued that since the strategic sector has been agriculture, and since this economic sector has suffered severe setbacks due to a series of droughts, farmers should not be burdened with taxes; Up to a point, the argument is valid and seems economically sound; nonetheless, the legislative process that exonerates farms from taxes is a pure royal fiat decision, one that comes back every couple of years. Lately, His Majesty decided to postpone the end of farm tax exemption till 2014. The second argument is economic: are all farmers benefiting from the tax exemption? Evidence from estate conservation and ownership concentration most certainly suggest that the answer is no, only a super-privileged few are benefiting from the moratorium.

Following the latest agricultural survey (1996) there is a huge concentration around large farms. As a matter of fact, 12.3% of farmers own about 67.1% of total area (Surface Agricole Utile) and every one of them owns more than 12,000 ha. It is even more interesting to note that those owning the largest farms are 5 times more likely to be urban dwellers, rather than established farmers (respectively 66.4% and 13.9%). Under assumptions of stabilized total agricultural surface, uniform returns over areas, and bearing in mind the That agricultural GDP was in 2010 about MAD 95.30 Billion, and assuming commensurable distribution in GNI distribution, total income generated was MAD 121.53 Bn. Assuming only those farmers with 10,000 ha and above are subjected to a low, indiscriminate tax rate of 12%, gross generated income would amount to MAD 12 Bn, all of which could be used in favour of smaller farmers, or at least to fund the necessary agrarian reform (a proposal to consider instead of Plan Maroc Vert shambles) because, quite frankly, it is high time we have dealt with the intricacies of estate status that do not benefit to communities. Just ask the Soulalyates:

What would happen if indeed the lower bracket was to benefit from a tax cut that basically eliminates the 10% lower tax threshold? Obviously income to some 40% households -the worse off- would increase significantly from MAD 600 to MAD 4000 per annum. This does not mean their consumption would increase accordingly. Let us consider some households to make the point.

Let us consider a family of 7 members household with a total annual income of some 33,000 dirhams. They are likely to spend some 18,000 in food, 97% of which mainly devoted to the following items: crops and derivatives (MAD 3,000) Meat (MAD 1,900) Fruits and Vegetables (MAD 1,800). Not enough of course to get a healthy meal, since consumption of milk and derivatives, for instance, is too low (MAD 400) even Meat consumption does not rise to expectations. Fortunately, in the event of tax breaks in favour of this household and many others, there are ways to anticipate how much is going to be spent on food and other items. But for the time being, let us concentrate on domestic food consumption;

Most likely, milk and meat consumption are going up, then less so edible oil, fruits, vegetables and sugar. Now, since we are considering a tax break of 300 dirhams, crop, bread and other derivatives consumption does not increase much (no more than 20 dirhams as a matter of fact) So sceptics can put to rest any criticism that a tax break to the poor would increase our crop imports, or put a further strain on the Compensation Fund’s finances. The good news is that the benefits of tax relief would lead to an increase in consumption of what many Moroccans view as “luxury goods”: meat, milk and fruits. Indeed, even though national capacity might not satisfy meat demand, fishery resources can more than make up for the shortfall (fish-made flour can be a valuable auxiliary to improve standards of living too); in any case, this household would, in all likelihood, increase its consumption of meat to MAD 1,940 per annum. Of course, these numbers do not show marked improvement, but suppose that universal benefits scheme was introduced, and that household was to benefit from a MAD 700 boost: meat consumption goes up to MAD 2,000, and same story goes with other items: sugar consumption goes up to MAD 680, fruits and vegetables to MAD 1,900. The conjugated effect of tax breaks and a MAD 700 cash contribution increase, overall consumption of the 10% worse off some increases from MAD 9,600 to 9,800 in the most conservative estimates (indeed, these numbers have been computed with nation0wide wealth elasticity, even though poorer households tend to consider almost all food classes to be luxury goods)

Nota: ratios are 10% top to 20% bottom. all computations are based on income earned by urban households

Indeed, tax breaks and cash relief work pretty good to the extent that they not only increase food consumption to better standards, but also bridge the gap between poor and rich households’ consumption, and that is particularly true for all food classes, and not only the Giffen goods; Families of 7 and less that belong to low median income, i.e. who earn less than 7,200 a month can witness substantial increase in their consumption (from an average of 27,000 per annum to 31,000) as well as a narrowing gap with the upper, families of 3 and less from the top 10% income bracket.

The great news for business is that this increased demand is more than likely to fulfil its needs in domestic markets: lower and middle classes tend to consume locally, and because production capacity is so underused, there is little danger of inflationary pressure, contrary top what might be expected. Inflationary demand is usually triggered by more powerful consumers, in a mass consumption society, two features that do not show in national consumption pattern.

What seems to hold for food consumption equally applies to other classes. Indeed, tax reforms, for all the fairness it achieves, also allows ordinary Moroccans to reach a better class, higher standards of living, and by narrowing income and wealth gaps, a major risk of social resentment is taken away. I do not believe these policies to be socially divisive if they do benefit to 60-80% of Moroccan households, are they?