The Moorish Wanderer

Inflation and Household Consumption Distribution

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco by Zouhair ABH on December 5, 2012

In the fall of 1972 President Nixon announced that the rate of increase of inflation was decreasing. This was the first time a sitting president used the third derivative to advance his case for re-election.

Hugo Rossi

The premise of government fuel subsidies and other goods is to keep inflation low – more specifically, to keep prices low. This policy was sustainable as long as commodity prices were low enough, and they were, up to 2008, at levels manageable enough to avoid large price increases and preserve budgetary balances.

Junior minister Najib Boulif provided a figure of 5% inflation rate if the subsidies provided by the Compensation Fund were lifted overnight – a figure I still grapple with (how did he get 5%?) as it is far above the present level of inflation, as captured by the Consumer Price Index.

Since the new CPI designed by the Moroccan Bureau for Statistics HCP has been used in 2006 (effectively since 2008-2009) inflation has established itself around 1.9% on average – meaning weighted prices for some 387 products have increased each year by almost 2%. And there lies a fact many household might find it hard to understand: their perceived inflation seems higher. “I mean, look at the price of vegetables and bread!” And they are right. Prices of vegetables have increased 7.5% on average, bread and other wheat-based goods increased 3.1% each year – and have been more volatile than other components of the CPI aggregate. However, as mentioned before, the method weights up these goods as an aggregate, and so households will not experience the same CPI. Especially between the top and bottom households.

This is just simple math, the average ICV index is: \mathbb{E}(ICV)_{p,j}=\sum_{p=1}^{385}\mathbb{E}(W_{p,j})Q_{p,j} where \mathbb{E}(W_p) is the average weight for a particular good in all cities.

On the other hand, \mathbb{E}(ICV)_{d_i}=\sum_{p=1}^{385}W_{p,d_i}Q_p provides different weights for each decile (d_i) and these tell a different story. How come the national average weighting is so far off those of perhaps the majority of Moroccan households? It has a lot to do with consumption distribution: the top 10% concentrated a third of household final consumption, so their low marginal propensity of consumption pulls the average weight for food consumption down, further than, say, the median food consumption per household: the weighted average of food-related consumption is 40.6% (close enough to ICV’s allocated 39% to 41% to this consumption category) so it does put those with higher consumption levels relative to their income at a disadvantage. The median consumption on the other hand, is at 47% which would indeed put ICV a full percentage point above the present index.

Poorer households CPI is more sensible to

Poorer households CPI is more sensible to ICV-CPI

Poorer households tend to weight food and related items a lot more than affluent households, and thus the former tend to feel the sting of inflation more acutely: these household tend to spend a larger fraction of their income in food (almost 44% higher than the top decile) and are thus subject to a higher inflation.

The graph opposite shows Morocco’s CPI, ICV tends to underestimate price levels for the poorest household. No news there of course, but a simple analysis shows poorer households have an “ICV effect” 62% higher than the top income earners. So this is not just a matter of weighting averages per class products: the bottom 10% households spend 44% more on food than the top 10%, but they experience a 62% higher inflation factor.

In terms of inflation levels, the “poor inflation” establishes itself around 2.18% – versus a “rich inflation” of 1.4% – a difference of 18%, with a social loss weighting skewed toward the poorer: in essence, 63% of the resulting inflation is shouldered by the bottom 10%. (One could finesse the analysis a bit by including the remaining deciles, but the weight placed on households below the median will be larger still)

So not only the Compensation Fund benefits mainly those who do not need it, it even fails to protect those population from the effects of inflation. I also shows government transfers to businesses – not households directly- only distort needlessly market prices to the tune of 6% GDP worth of compensation cost.

The Worst of Trickle-down, or Zombie Keynesianism?

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on April 19, 2012

There is enough evidence to state that more than ever, big government is alive and kicking in Morocco, and not in a nice way; it has indeed broken with a 30-years trend in 2010; this means that some additional 5.8 Bn have been spent above the 50-years long trend, accruing to the 20Bn-worth exponential break that started 3 years ago. 5Bn might not be a lot relative to the Budget -1.67%- but it does account for 4% of government expenditure in real terms, so the matching resources accounted for in the Budget as a whole.

So here we are with a government who has not broken with the fateful decision to increase dramatically government expenditure in 2010; this is, quite simply, Zombie Keynesianism: the government puts on (some) welfare programs, increases recruitment 40%, and comes up with an effective 21Bn package expenditure no government has prepared for but yet finds itself actually spending it. Most importantly however, the Compensation Fund takes a large bite out of government expenditure – the World Bank Open-Data defines it as:

“General government final consumption expenditure (formerly general government consumption) includes all government current expenditures for purchases of goods and services (including compensation of employees). It also includes most expenditures on national defence and security, but excludes government military expenditures that are part of government capital formation. Data are in current local currency.”

HP-detrended aggregates. Government expenditure at its highest level away from 50-years trend since 1976

And considering the available data on that subject, the negative effects of the present course of action are just as equally showing on the short as well as the long run: depending on how the economy fares in 2013, the combined effects of the generous increases in public service payroll and the Compensation Fund will deteriorate an already compromised Budget Balance, and later on, the government will have to increases taxes, or cut spending, or both.

It seems this moment the government is trying for some shadow stimulus package, and it shows: the latest Treasury monthly survey points out the structure of Government Budget has been markedly altered compared to that of 2011: the Budget represents only 14.6% compared to the 23.2% in 2011 (and there goes the government’s boasting about the 188Mds committed to investment) while payroll and subsidies increased their contribution from 36.7%, 12.1% to 41.2%, 18.2%, respectively. And contrary to the government’s claim, the Compensation Fund does not benefit the middle class as much as a few wealthy households.

Les dépenses du budget général ont atteint 68,3 MMDH à fin mars 2012, en légère hausse de 0,8% par rapport à leur niveau à fin mars 2011, qui s’explique par une augmentation de 17,6% des dépenses de fonctionnement conjuguée à une baisse de l’investissement et des charges de la dette budgétisée1 de 34,2% et de 11,1%
respectivement.

So basically the government has put a lot of money to stabilize prices -but at the same time transfers generous sums back to the privileged few- and to recruit many more civil servants – that might not be needed or do not have what it takes- the result is indeed a stimulus package, and it might as well be working by providing the boost for GDP growth, but it will not last long, and the benefits of such an overkill are not that obvious.

          |σ       |σj/σy  |Corr(y,j)|
----------+--------+-------+----------
Y_GDP     |0,08030 |1       |1       |
----------+--------+-------+---------+
Con       |0,07013 |0,87339|0,82150  |
----------+--------+-------+---------+
Investment|0,24127 |3,00463|0,83690  |
----------+--------+-------+---------+
Government|0,22035 |2,74415|0,49970  |
--------------------------------------

\sigma =\left (\sum_{i=1955}^{2011}\left ( \mu -x_{i} \right )^{2} \right )^{1/2}\\  \rho _{x,y}=\frac{\sigma_{xy}}{\sigma_{y}\sigma_{x}}

The table above shows some evidence that government expenditure does not necessarily influence GDP the way other aggregates do, and the effects can be random indeed: government expenditure is just as volatile as the most volatile aggregate in an economy (Investment) yet it is also the least correlated to GDP. The only way that generous increase in government expenditure can pick up growth is through the subsidy to household consumption. In an ideal world, the Finance Ministry would provide us with a technical note to explain and illustrate the model they are using to forecast growth, and more importantly, the contribution to growth per aggregate. One thing is sure though, the present increase in expenditure doesn’t help, and the boomerang effect will be painful.

Business Cycles – A Story of Our Economy

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on February 18, 2012

An interesting discussion with my students (yes, I have recently been assigned TA duties, so kudos to me!) about debt, pensions and demographic growth -more specially a simplified version of the Ramsey-Cass-Koopmans model– prompted me to think about how come none of our economic-oriented institutions, namely Bank Al Maghrib, HCP or MINEFI, engage into some meaningful activities and produce high-quality papers – more often. It seems to me one paper on core inflation, one on business cycles (up to 2007) and a couple of unfortunately very brief reports of macro-econometric surveys are not enough to justify the total Human Resources spending of 2Bn shared by HCP and MINEFI alone. Crack some whips, and lemme read something substantial to bitch about!

Business Cycles per 3 filtering processes - HP seems to be good compromise for good smoothing

But I digress; back on the original subject – I posted a very raw estimate of business cycles – one that basically has the long-run growth estimated by means of a straight line, a simplistic assumption with no obvious advantages; as I have (finally) managed to unlock and master an interesting little device with Stata, I can now compute cycles per Hodrick-Prescott filter procedure. Dataset was extracted from the UPenn World Table, augmented with 2009-2011 Log GDP from World Bank Open Data website.

the graph plots three possible modus operandi for cycles filtering; the final result tends to favour HP since it does away with much of the high volatility segments that a linearly smoothing tends, in contrast, to exacerbate; from then on, a clear-cut graph depicting our economy’s history during the last half a century can provide informative insight about past events, and more importantly, a prediction of what is yet to come;

Let’s stick with H-P filter; what does it tell us? First off, that the party held since the early 2000s is bound to stop, or at least to slow down somehow; in any case, the next dozen of quarters would tell us exactly what it is all about. It is therefore up to a sound policy design to stabilize output, rather than force an artificial short-term and short-lived expansion.

Why does it seem to differ from earlier computations? First off, the initial data is slightly different; U-Penn PWT Table tends to use normalized data, better suited for international comparisons, and includes some specific PPP-related computations like the Geary-Khamis method. Furthermore, the selected trend dates back to 1955 (instead of 1960) which means the average trend growth rate is around 6.8% – which might also provide an additional explanation on why PJD was so keen to promote a 7% annual growth rate – although the retained growth is real, PPP-adjusted and per capita; further computations still bring the (ideal) potential growth rate around 5% (accounting for an average 2% demographic annual growth, hence vindicating further my claim that: a/ ideal GDP growth rate is 5% and b/ stabilized growth brings a lot more benefits in terms of growth gains as higher rates are usually linked to high volatility.

(one last note perhaps: data is annual, and that means I might have missed some short-term cycles within)

are we heading to a 1980s redux?

Turbulent independence: 1955-1962

for such a short period of time, fluctuations sure have been important; a newly independent nation like Morocco had to deal with hostile conditions, due to a drain in foreign capital – that is why pre-existing legislation has been heavily upgraded with the establishment of Office des Changes in 1958. On the other hand, massive transfers fell on the lap of the successive new governments, who also had the task of building a whole set of legislation from scratch (including labour, currency and budget legislation) as well as engaging in long-haul public expenditure – for lack of any sizeable private sector initiative.

Boom & Bust: 1962-1973

A very short shoot-up has been observed during the considered period, although it seems to be due to a particularly high government expenditure observed in 1962 and 1963, although that shock was rather short-lived, as it failed to prevent a deep recession that extended all the way to the early 1970s.

TelQuel reports on the economic conditions that led to the March 23rd riots:

[…] Comment en est-on arrivé là ? “Vous ne pouvez pas expliquer ces événements en faisant l’économie de l’histoire du Maroc de l’époque”, bougonne Simon Lévy. Très juste. Commençons par le contexte social. Plusieurs grèves ont marqué la fin de l’année 1964. La Promotion nationale, définie par les autorités en 196[0] comme un instrument de développement économique, est un fiasco complet. Les prix de la viande et du sucre grimpent de plus de 40 %. Casablanca compte 600 000 chômeurs et subit un exode aux allures d’avalanche : 36 000 personnes sont jetées dans la ville chaque année. Un tiers des habitants a moins de 40 dirhams par mois pour survivre.

The Big-State approach entailed by programs such as La Promotion Nationale failed ultimately for various reasons, thus leading to the observed trough for most of the mid-1960s.

Euphoric Borrow-and-Spend: 1973-1981

the commodity prices shot-up in 1973 provided Morocco with a lot of resources to spend: prices tripled between 1973 and 1974 from $13/ton to $42/ton and then $68/ton in 1975. Furthermore, large transfers in government expenditure observed during the mid-1970s, in the aftermath of the Madrid Treaty boosted the economy to perform very high growth rates, 7.5% on average between 1974 and 1977. In a particular fashion, these years were boosted mainly with government expenditure (including military spending) and receipts from Phosphate prices;

Boom & Bust, Redux: 1981-1991

Following the 1983 Structural Adjustment Program (SAP), the Moroccan economy was on a bumpy road, and save perhaps for the immediate impact of a drastic reduction in food subsidies:

In the early years of adjustment, Morocco made considerable progress. Between 1983 and 1988, Bank programs focused primarily on sectoral reform, while the IMF took the lead in stabilization efforts. In addition, the Bank addressed long-term structural change through project lending, economic and sector work (ESW), and dialogue with the government. As reducing the deficit was very urgent, it was decided that structural fiscal problems would be addressed at a later stage. Four adjustment loans (in trade, agriculture, education, and public enterprises) were approved during this time. With the exception of education sector reform, which encountered political resistance, and irrigation, which faced shortages of public funds, all were successful.

During this period, overall GDP rose by almost 5 percent a year, manufacturing exports grew rapidly, the deficit was halved, and the balance of payments current account reached a surplus.

Depressing 1990s:

the conjugated effects of SAP aftermath and a series of droughts grounded the economy to a halt, as indeed reports from the World Bank and the OECD pointed out back then; average growth most of the 1990s was null or slightly negative; between 1992 and 1997 average growth was about 1.45%, indeed:

Toward the end of the 1980s, the Bank was excessively bullish it its assessments of Morocco’s economic future. Progress in public enterprise and financial sector reforms was considered excellent. Two adjustment loans approved during this period carried relatively light conditions for disbursement because they were considered a continuation of a smoothly running reform program. The Bank’s ESW, which was of very high quality, was not sufficiently used and disseminated.

The Bank’s overoptimism continued through 1993, despite the fact that there had been hardly any economic growth since 1990. Growth slowed from almost 5 percent a year in the second half of the 1980s to 2 percent in the early 1990s.

Booming 2000s and aftermath: despite what one might think, the last decade was comparatively the best expansion cycle ever observed; government spending and debt were steadily halved, proceeds from privatization were injected back into the economy, and the private sector benefited from a strong foreign demand for exports. By 2007, average growth was about 5% and set on recovering the accrued losses from the 1990s.

The cycle was somewhat broken in 2009 – a halt rather than a breakdown, since the trend has not gone in typical past observations below the potential output line. But based on past occurrences, it seems we are about to witness the end of the longest expansionary cycle in the last half a century, and with it, the end of the only crucial recipe for development the past government have been so keen to promote: growth; insofar as growth was ‘sustainable’, the proceeds were high enough to allow for a certain (albeit very unjust) distribution of wealth. A slow growth would invariably lead to less for the many, hence increasing risks for genuine social resentment – and considering the current set of events, no one in government or else is keen on that scenario to happen.

[Sneak Peek] 2012 Budget Bill

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco, Tiny bit of Politics by Zouhair ABH on November 4, 2011

Early October 2011, The budget bill has (finally) been delivered to the representatives at parliament house to debate, amend and vote on. Not surprisingly, the budget has been so consensual the next government will most certainly not reconvene to introduce a rectification bill next session. As for the first draft that has been hurriedly withdrawn, we will never know its content (perhaps we will, but later. Much later)

Figures out of a 325Bn budget

In general terms, this is not a bad bill. In the sense that it does not depart from the previous more or less successful attempts in reigning in budget deficit in the region of 3% GDP, the bill brings a moderate 20Bn net borrowings requirement package, in line with the previous bills.

But behind seemingly “business as usual” figures hide the harsh truth of financial mismanagement; we can expect the service debt to go up in the next couple of years from the current 42Bn to match the 400Bn stock of debt, courtesy to that courageous decision to avoid social unrest with the most simplistic policies a government can come up with, i.e. increasing subsidies on strategic goods – the compensation fund was indeed the main reason why the 2011 deficit worsened from 13Bn to almost 34Bn.

We can also expect pay-wage to rise at a higher trend, thanks to the additional 25,000 new civil servants positions provisioned for in this draft bill. Ironically though, a third of it goes to the Interior Ministry – in fairness, about the same number of positions have been created for the Education department as well. Whatever the expected benefits of having extra local civil servants -or more importantly, more teachers in the classrooms- the drain of civil service pay-wage will keep on increasing, and there is a simple explanation to that: whenever a group of productive civil servants (teachers, police force members, local functionaries, doctors, etc.) are recruited, another batch of bureaucratic staff is recruited as well.

Humphrey Appleby's shopping list - Budget Bill 2012

For every collected dirham in government receipts, 38 cents goes to pay civil servants alone. Even more concerning is how one can easily equate government receipts from income taxes (28.5 Bn) to the interest on paid debt (20.2 Bn) and these numbers have been going for some time now. The trouble is, it is not like the government’s hands are tied and cannot raise more revenues out of the taxpayers (corporations or otherwise).

The fiscal exonerations report points out a maintained yearly increase of 7.63%, and thus broke through the symbolic ceiling of 30Bn tax deductions, exonerations, loopholes and credit that would more than make up for the deficit. Real-Estate developers still make up the bulk of tax deductions recipients, to the tune of almost 5.5Bn (a 22% increase from the 4.4Bn offered last year) while other sectors that would benefit from these deductions and generate some income, like Tourism, Automotive and Chemical industries do not enjoy a third of what RE tycoons get in terms of VAT and Corporate tax breaks.

It seems the spirit embodied in these deductions is to slow down the growth rate of fiscal receipts (currently at 9.8% for a projected 5% real GDP growth) and that’s where a dangerous contradiction lies: the 2012 exonerations reverse VAT deduction from 13.7Bn in 2011 to 13.2Bn 2012 even though domestic consumption still contributes around 1 percentage point to GDP growth. If indeed the tax deductions were geared toward sustaining growth, then investment and exports are the ones needing the deductions, and real-estate development doesn’t account for its 5.5Bn compared to 3Bn for exports for instance.

On a lighter note: the Moroccan taxpayers are the proud recipients of 10,000 receipts from trials and experimental farms managed by the Agriculture ministry; and PJD caucus will have a field day with the Alcohol taxes receipts to increase them from the 1.1Bn, i.e. 0.3% of total Budget to whatever level they set to both satisfy their Moral Crusade (sorry, Jihad) against that devilish beverage, and at the same time destroy a domestic industry and compel consumers to chose contrebande or imported products.

600,000 Beamte Und Ein Befehl

Let us consider one particular aspect of the now stated policy of the Finance Ministry, i.e. its commitment to “all budget entities have been requested to economize 10 percent of their budget allocations for some non-essential current expenditure items”. Now, either ministerial departments will cut 10% of their non essential expenses – in which case total savings will amount, at best, to a few hundred millions- or, all departmental bodies will have to cut 10% of their total current expenditure, with cuts justified as such. This scenario means a package of MAD 22 Bn cuts uniformly distributed across ministries, a bad policy, government-wise, since the largest (and most important) departments will be hit harder: Education, Health and Law & Order. 600,000 public servants are therefore held at gunpoint by that one order: “cut 10%”.

The caring government

The cuts are scheduled to target current expenditure, which means civil service pay-wage, purchases of hardware (non-investment hardware) and other current expenses like electricity bills and rent for instance. But let us not be deluded on that point: current expenses are mainly made up of pay-wage, and depending on ministries, these can make up to 94% of total current expenses (Education) but each department has its own ratio, and a non-commensurable cut across departments will inevitably cause great harm to those employing large staff. Whether on believes in small government in Morocco or not, there will be few dissenting voices regarding the reduction of teachers and police force members, just to achieve MAD 4,1Bn savings.

Of course, clerical and non-essential staff could be laid off, though this means a renewed struggle with “Ghost civil servants“, a fight long lost even before it has begun. So this not a cost-killing operation, but a genuine austerity plan: the blind plan, the size of cuts and the timing, all these elements point out to a difficult 2012 Budget bill and years of near-stagnation ahead. But let us first consider the impact of that 10% cut on human resources, indeed, 600,000 civil servants (from local and central services) will no doubt see their pay frozen, or cut. And contrary to the Intilaka program enacted in 2006, 39,000 departures are not going to be enough to balance the books (as a matter of fact, it makes up only 3/4 of expected savings on wages).

Now, a 10% cut on the 6 largest departments -Education, Interior, Health, Justice, Finances and Equipment departments account for 89,6% of total workforce, means that some 51,800 positions will have to be economized one way or the other. Unless each department manages to strike a deal with unions to cut wages some MAD 7,000 per annum per civil servant -that saves some MAD 4.2 Bn in salaries, i.e. two-thirds of targeted costs. But then again, this modus operandi assumes Unions and government will be reasonable in their negotiations to freeze pay over the next couple of years, but that is very unlikely, given the sad history of horse-trading between both parties. The other alternative is to exhort civil servants to retire well ahead before the 65 years-old limit, thus minimizing payroll. The remaining third alternative, and unless things get very desperate, might not be considered: in short, make people redundant with limited or no pay.

Early retirement is a good policy: regulations specify that any civil servant willing to retire early will receive a reduced part of their wage, until they reach 65. Now, considering that a large chunk of workforce is 50-ish years old, the 15 years gap can be used to reach the average 7,000 annual pay cut target. But the point is, these retired schoolteachers, policemen and attorneys will not be working for the public sector any more, thus inflicting great damage upon public service, a damage it could do without. What is worse, these cuts/early retirement cannot, yet again, be uniformly distributed. The trouble is, large-staffed department will bear the brunt of cuts not because they are the ones with the largest bureaucracies, but because it is the nature of their operations: you need to take on more teachers to keep teacher/pupils ratio low, healthcare officers and workers to reach similar ratios, more policemen to insure neighbourhoods are quiet… the error of an indiscriminate budget cut is that it overlooks such details, and end up hurting essential, front-line services.

Quadruple whammy (sectors make up for 3/4 of job losses)

Could things be  done some other way? it seems not. cutting wages accounts for a third of overall planned cuts. Other than that, departments will need to cancel orders on hardware. There is no way only secondary expenses will be cut; eventually essential services will be on the ministry’s sights. Under the assumption of uniform distribution of total pay wage per department, teachers and Education staff, for instance, receive MAD 11,000 a month -not an unreasonable mean, considering the ageing structure of the teachers’ corps. Healthcare workers are slightly better off, with an average monthly wage of MAD 12,000. Staff from the interior, finally, receive 6,000 monthly on average. Hardly high-income earners indeed.

Now, in his briefing before the Cabinet, minister Mezouar:

a mis l’accent sur la nécessité de préserver les acquis relatifs aux équilibres macroéconomiques et de garantir les conditions de poursuite de l’élan de développement que connaît le pays.

and that means, the stated policy of his budget cut is not to harm public service. That also means, he needs to be more specific about the 10% cut, and exempt departments from what is a sure blow to the standards of their services to Moroccan users. If the ministry is serious about putting together a stimulus package – especially in these trying economic times- then it should consider carefully the budget cuts it is planning, for fear it might take the country to recession, rather than stabilizing macroeconomic balances.

Budget cuts are not pure evil: it is a given that government debt is too large, and its foreign-held, short-term maturity weighs a great deal on the dwindling foreign reserves. Cutting expenses -as well as raising receipts- is the way to go. But instead of targeting blindly departments, the government needs to put into practise its pledge to engage in “structural reforms”, i.e. to end up exemption and fiscal niches that benefit only to the wealthiest.

the VAT and Income Tax reforms need, in effect, to be seriously considered in that spirit. As for expenses,  the Audit Court has pointed out numerous dysfunctional items within the public sector and that saves up capital and expenses over the years. Then, dysfunctional payroll regulations can be addressed as well.

But I digress. The minister obviously knows his job better than I do.