The Moorish Wanderer

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

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

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

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

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

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

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

In 1955, discrepancies between countries were not as striking; on the other hand, there were only 72 countries whose individual economic data were recorded. Nonetheless, distribution was very close to a theoretical normal distribution, with average Real GDP Per Capita around $ 476.24 (in current prices) and about 95% of all values between $478.3 and $474.2, what is more, countries in the left hand-side tail, the richest countries are quite rare, if any.

Morocco’s Real GDP Per Capita ranked in 1955 around the bottom 12%, close to the lower decile that is. As usual, going from small A to larger B does not necessarily mean we have scored good. It is true Morocco has grown about an average full percentage point above worldwide trend, but is it enough? Or is it even statistically significant?

where high growth is not enough: world GDP is more likely to stick to its average growth figure, while Morocco has a higher likelihood to dip into negative growth figures.

Growth in Morocco is definitely more volatile: even as its mean is significantly higher, the standard deviation is about twice as large as the average global growth. Indeed, if it was not for the large differences in growth levels, Morocco could have improved its standing in the global percentile. in short, the Moroccan economy hasn’t done enough in terms of β-convergence (the maximum growth rate to catch up to more advanced economies) and has definitely failed to generate enough in terms of σ-convergence (the ability to achieve growth rates without too much volatility through redistributive growth).

It is not too harsh a statement: after all, volatility around growth levels for the past decade has been cut by 15% relative to the 50-years long trend, and 20% when compared to pre-1999 levels. What happened was, the economy did not push stronger in achieving more in reducing volatility. At this stage, the argument that maximum growth doctrine, even if it has been achieved at some level by the Moroccan economy, did not generate the anticipated level of wealth and income per capita. This might explain why even as Morocco has improved its ranking by jumping two full deciles, it is not nearly enough to qualify as a true emerging market with upper-middle income potential; simply put, Morocco was lucky enough to improve its ranking because other countries have messed up their development model – check the lower right hand-side tail to verify: it is no good to boast a 30% bottom when the said 30% are much poorer.

The alternative way to go might reside in a little-known and seldom advocated policy, that is, to achieve the lowest possible volatility over an intermediate or long period of time.

Consider a generic Moroccan economy, where everything runs smoothly with no volatility, i.e. a stable economy with the same growth rate of 5.655% every year from 1961 to 2010, which is the exact average growth of real GDP Per Capita over the same period of time. GDP Per  Capita is expected to grow 16.5 times in 50 years, which means GDP per capita (current US$) would reach $3,871.57 instead of the existing $3,053.53 per capita. The generic economy has run on the same growth rate, the same population, but there is one crucial factor that explains the $818 gain per capita (or the aggregate sum of $ 26.7 Bn, or 213 Bn dirhams) and a notch higher toward the $ 4,036 Upper-Middle Income Countries per World Bank nomenclature. In fact, there is a way to quantify the gains from any policies designed to reduced output per capita volatility. A completely ‘sanitized’ growth brings increases GDP Per Capita by $ 800.

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

There is room for the next years to generate an additional $160 per capita if growth volatility is cut in half.

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

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

The Economic Chronicles of the Kingdom, 1955-2011 Part.1

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

It’s been a long time I did not show up on twitter, and I am the better for it. I wouldn’t pretend I’d missed the impassioned twitto-debates I have been involved in, but in matters of economics -as much as in other areas- complex issues cannot be boiled down to 140 characters.

Summertime and with it comes time for self-assessment. A lull to reflect on the past year.and I would like to devote part of my time to a dear project of mine, one that I would like to devote my professional life to: a comprehensive chronicle of Moroccan economics, from the mid-1950s up to date. This I would like to do because the mainstream documentation on that subject and other contiguous ones is not, to my opinion, satisfactory. This is by no mean unfair criticism of their authors, often reputable scholars that however fell victim to trivia and the politically correct. But the fact remains, there are very few papers I can lay my hands on that resemble anything close to, say whatever Lucas, Sargent, Prescott, Kydland, Blanchard, Krugman (to name but a few über-heavyweights) produced in macroeconomics. I am sorry the Cinquantenaire report and the paper commissioned by the Abderrahim Bouabid Foundation did not rise up to the challenge. At least I will not disappoint as a pseudo-amateurish academic blogger, will I?

I suppose it is extraordinarily pretentious of me to even assume I can write up Morocco’s economic history. And surely it is. But my amibition is otherwise: I wouldn’t like to merely report on economic facts and statistics – for that and many other useful comments, please refer to the never boring Annuaire d’Afrique du Nord. As a matter of fact, it is because I had the pleasure of reading some of their earlier issues on electoral results from the 1963 general election, that I though I can take a look at data circa 1950s-1960s and confort it to mainstream macroeconomic models: what went wrong, what went right. You see, the Moroccan economy as a whole tends to exhibit steady properties. That says a lot about some policies and their effect on the economy, but still. What an orthodox Marxist sees as the inevitable dynamic of History (capital H, as in Hegel) I would suggest measurable economic forces have been at work.

What development means: a simple case study.

The problem at hand as far as the Moroccan economy goes is how it fares relative to the rest of the world, and more precisely, how it does relative to advanced economies. I had the opportunity to present the reader with some blogposts on the matter, but back then I lacked the adequate skills to put a convincing argument to my claim. I don’t implying I fully master these skills, but the analysis is definitely getting better.

Development in its crudest definition means simply the (accelerated) accumulation of physical goods, or capital. One may disagree with it (if anyone is interested, Joe Stiglitz, Amartya Sen and JP Fitoussi produced an interesting report on Gross National Happiness) but as long as no credible alternative analysis to the theory of capital accumulation, we should go with the existing. So the faster an economy cumulates capital (in real terms) the better it is, and the more developed it eventually turns out to be.

Keeping up with pre-1977 levels of growth could have made Morocco 39.87 Billion dirhams in real terms, and double our GDP per capita by the end of the 20th century

But, in order to do so, one needs a yardstick to measure that progress. I would like to consider reusing the comparison to the United States, to which I would like to add South Korea in the mix, and start off with a graph depicting real GDP per Capita in these three countries from 1955 to 2000. Morocco’s GDP is supplemented with a fitted estimation of its annual growth with pre-19777 levels (and variance)

The graph shows compelling evidence as to how Morocco does with respect to that convergence theory: Morocco had, up to 1977, levels of growth fit to carry us to significantly higher levels of income, aggregate and per capita. Indeed, between 1955 and 1977, average real GDP per capita growth was around 7.4%, and decreases to 6.4% from 1977 to 2000, a full percentage point lost in 23 years.

This is so-called Beta-convergence: because Morocco was a poor country in 1955 and 1977 by any measure, it is assumed it will grow at a faster pace, so as to catch up to more advanced economies; by comparison, the US economy (per capita) grew 6.4% between 1955 and 1977, and the South Korean economy, 7.1%. If anything, up to 1977, Morocco was doing pretty well. This begs the question: what did go wrong? Why didn’t Morocco maintain its average growth pre-1977, and does it really matter?

Perhaps it is not all about higher levels of growth. Professor Najib Akesbi, an eminent contributor in both reports mentioned earlier, did confirm his preference for the Beta-convergence theory: He believes -correctly- the economy needs an annual rate around 8% to achieve levels of income observed in big emerging economies; actually, when demographic growth is taken into account (around 1%) the level of growth to which Prof. Akesbi refers is the magic, pre-1977 growth per capita.

Let us test that hypothesis: let us assume that indeed, Morocco has been growing at annual level of 7% between 1955 and 2000 at around 3.8%. We then look at the gap between synthetic and empirical data. Results seem to contradict Professor Akesbi’s claim: for Morocco to achieve an annual 7% since 1955 results in a net real gain of 17.1Bn dirhams, and real GDP per capita would only increase 60%. So the Beta-converge does not explain Morocco’s failure to establish itself as a promising and dynamic emerging market; it is not enough to achieve high levels of growth. Sure, it definitely provides a higher GDP per capita, but not up to levels worth supporting the case for unconditional high growth. Something is definitely wrong with that crude theory of capital accumulation. And I would like to read some paper from mainstream economists here on the virtues of the other way to achieve higher levels of output per capita: the Sigma-convergence, or steady reduction in output volatility.

Strong growth 7% loses 40% of its effect to historical volatility. That number alone does not mean much.

In statistics, standard deviation provides a measure of how far apart individual observations are from the mean. If standard deviation is high, that mean… means nothing. In our particular case, a high level of output tends to lose some of the accumulated effects of high growth rate: doing 6% on a row for two years yields 6%. doing 0% and then 12% yields a real growth of 5.8%, since:

y_t = \sqrt[t]{\prod_{i=1}^{t}(1+y_i)}

The standard definition of a geometric mean suits growth levels better because it is just another application of compounding interest rates. Besides, it also captures precisely the cost of an unconditional Beta-convergence, in our particular case, the 7% with historical volatility (standard deviation) advocated earlier turns out to be 6.6%, and .4% is not a marginal quantity, it amounts to about 2.4Bn dirhams, in real terms. These are lost because the economy cannot sustain itself at 7% over a long period of time.

This, in my opinion, is Morocco’s conundrum: it needs higher levels of growth than those observed during the last decade (and that explains why I restrained my comparisons to 1955-2000) so as to boost its GDP per capita. On the other hand, it cannot achieve it without high levels of volatility that would ultimately take away substantial amounts of that high growth. The balanced growth path needs to be found elsewhere: in each aggregate contribution to growth, among others.

“Gouverner, C’est Pleuvoir”… Or Not

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco by Zouhair ABH on July 9, 2012

An excerpt from the 1967 issue of ‘Annuaire d’Afrique du Nord’ on the Moroccan economy:

L’augmentation de la production agricole en 1967 par rapport à 1966 a donc été due à peu près intégralement à des conditions climatiques plus favorables, c’est-à-dire à un facteur exogène; nous savons par ailleurs qu’en valeur absolue l’augmentation de la P.I.B. de l’agriculture n’a représenté que la moitié de l’augmentation de la P.I.B. du Maroc par rapport à 1966(8). Analysons donc maintenant les facteurs endogènes qui ont permis aux autres branches d’activité de contribuer pour moitié au supplément de production obtenu.

[…]

Tel est le secteur agricole, sur lequel les autorités comptent pour réaliser le décallage de l’économie : très instable du point de vue conjoncturel et ne montrant aucune tendance marquée à l’amélioration des rendements, en tous cas à peu près insensible d’une année sur l’autre aux incitations qui lui sont prodiguées sous formes d’encouragements, de mesures administratives ou d’investissements.

(Chronique Economique Maroc, p.466)

My (belated) interest in Moroccan agriculture finds its origin in the topic of Moroccan business cycles: as far as I can tell, fluctuations in agricultural output do not seem to have that big an impact on aggregate output. This means poor economic performances are not necessarily always due to drought or weak agricultural production. In that sense at least, “Gouverner, C’est Pleuvoir” maxim dear to Maréchal Lyautey bears little significance other than the political strategy it sustains: rural labour market in Morocco is very homogeneous and volatile, which only means a large fraction of the population -in fact, a majority- depends on random meteorological wonders. Since the early 1990s however, the urban workforce has come to encompass a majority the current demographic trend predict to be irreversible. Nonetheless, “Grands Barrages” and “Plan Maroc Vert” are both similar in their imposed, top-down implementation, as well as their disregard for institutional constraints, likely to jeopardise their initial objectives; A report from 1975 mentioned:

Le modèle d’aménagement qui a toujours la faveur des services responsables est celui là même qui avait été établi par l’ONI. Or, pour l’ONI, le choix de cette formule correspondait à un pari sur changement de structures que semblait autoriser dans l’esprit des responsables le contexte politique de l’époque. Le pari a été perdu mais, assez curieusement, le schéma d’aménagement servi par une logique technicienne extrêmement séduisante s’est maintenu comme un dogme de la mise en valeur.

(La Politique Marocaine des Barrages, p.282)

the scheme anticipated by the Office National d’Irrigation (ONI) pre-dated the policy itself, and finds its roots in the early rural policies of 1958-1960, and these had in mind a deep structural reform of real estate regimen. These reforms, for (obvious) political reasons, were quickly shoved in favour of a status-quo that still prevails. In that respect, there are very few farmers eligible to benefit from these decision, and those who might have qualified did not really need the subsidies. the Grand Dams did not come alone: a series of state-sponsored programs were put together to help farmers by subsidising particular goods (especially sugar) and providing support on the basis of expected returns. Unfortunately, the report points out that only very few endeavours managed to reach the theoretical threshold of 1,500 to 2,000 dirhams/ha.

A Gini Index of 3.76, a relatively high number for inequality in distribution, which vindicates the claim agriculture is concentrated in the hands of the wealthy few

Assuming figures from the 1996 Agricultural Census did not change dramatically – though there is every chance these have indeed- any top-down policy will benefit about 12.3% of all farmers: there should be around 1.4 million farms (down from 1.5 million in 1996) whose distribution shows a great deal of discrepancies: there are about 12.3% of all farmers (around 185,000) that concentrate more than half (54.4%) of arable lands, these usually cover large surfaces, typically no less than 10ha. These lands are undoubtedly the best equipped and the most productive: the 12.3% lucky few concentrate 86% of all available tractors and 87% of harvester machineries.

These large farms tends also to be more capital-intensive than the others as well as the national means: they use about twice as much machinery, and three times as much new technology, including new types of fertilizers and selected crops.

These are 1996 figures; and yet it is on the basis of these figures the Grand Design is carried out. In fairness, the explicit working assumption behind the PMV strategy is to concentrate 80% of allocated resources around less than 40% (wealthy) farmers. Trickle-down at its worse:

And Plan Maroc Vert (PMV) suggests these wealthy farmers ‘share’ their capital with their poor neighbours:

6. Autour de quoi peut-on s’agréger ?

L’agrégation peut s’effectuer autour de différentes opérations ou services liés au processus de production et de valorisation d’un produit tel que :

– L’acquisition ou l’utilisation groupée d’un matériel agricole ;

– L’équipement en commun en systèmes d’irrigation, en système collectif d’avertissement et de lutte contre les aléas climatiques ;

– La réalisation d’une prestation commune (labour, traitement phytosanitaire, irrigation, récolte…) ;

– Le stockage en commun ;

– La valorisation de la production ;

L’idéale, serait l’agrégation autour de l’ensemble du processus de production de l’amont à l’aval pour bénéficier de la marge de l’ensemble des chaînes de valeur.

The plan does have a sub-strategy for smaller, poorer farmers, the so-called “Pilier II”:

* La stratégie du Pilier I se traduit par la réalisation de 961 projets d’agrégation et vise 562 000 exploitants moyennant un investissement global de 75 milliards de MAD

* Aussi, le Pilier II envisage la réalisation de 545 projets sociaux en faveur de 855 000 exploitants pour un investissement de 20 milliards de MAD.

(please note the second part of the program is a set of welfare projects, contrary to the other, supposedly more “serious” investment projects)

In many respects, the Grand Dams and the attached policies have failed to boost productivity per agricultural worker, precisely because these have been concentrated on a few farms; if anything, agricultural productivity per capita increased in volatility with the early 1970s. Per previous experiences, and on the basis of similar assumptions and data, concentrating (aggregating, as it were) resources in the hands of the rural establishment does not do good for the remaining many. I hope the chaps over at McKinsey though about it carefully.

A quick word perhaps on the correlation between agricultural, non-agricultural and aggregate output: by my account, all robust correlations point out to a strong relationship between aggregate and non-agricultural output (.953) much stronger and more significant than that with agricultural output (.619) and there is an even weaker correlation between non-agricultural and agricultural outputs (.369) and these correlations change significantly when considering only the period 1955-1975.

Morocco was a ‘pure’ agricultural country up to the mid-1970s: a majority of the labour force was employed in  rural activities, and there was a much tighter correlation between rural and urban economic activities. Nowadays, the only remaining feature is the disproportionate percentage of labour force employed in the rural sector. Agriculture, in that sense, modernized, but the trickle-down effects of past (and future) policies are yet to show their benefits to the many farmers.

Austerity and the New Engines of Growth

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Tiny bit of Politics by Zouhair ABH on June 3, 2012

Paul Krugman on Chris Matthews‘ Hardball argued forcefully in favour of a larger fiscal stimulus package

How come the Moroccan mainstream media doesn’t provide comparable levels of debate? Surely Ministers Nizar Baraka and Driss Azami El Idrissi, or even the parliamentary leadership (Said Khairoun, Chairman of the Permanent Parliamentary Committee on Public Finances) can afford to go on TV or the radio and be scrutinized on more than just platitude (I doubt Milouda Hazib, senior ranking PAM member in the same committee fully grasps the implications of the marginal income tax rate. Mr Technocrat himself, Ahmed Reda Chami seems to be more interested in pandering in view of the next USFP convention than actually doing his job as a member of the said parliamentary committee)  The Finances ministry uploaded not long ago a useful compendium of new fiscal measures, but as far as I can tell, no mainstream journalist has had the interest of writing a paper on how effective the revenue enhancement in car stamps and duties have on reducing car use and, indirectly on oil consumption. Government officials go on with the business of making the Budget bill, the elected representatives supposed to scrutinize them do not seem to be interested in the policy implication of these decisions, and the fourth estate is far behind on this particular piece of news.

That decision to lift moderately oil subsidy on industrial and car fuel is not a sign of the government coming to their senses regarding the compensation fund, it is merely a half-measure designed to curtail the runaway cost of the said fund. At best, the deficit will remain within the 5% projected for 2012, otherwise that decision will hurt significantly growth, paradoxically even more so if a more radical scheme was introduced with the idea of replacing fuel-inefficient vehicles.

Suffice to say there are about 2.001.458 cars and other vehicles in Morocco (2009 figures) and 74.4% of these are more than 6 years-old (2008 figures) more than half have more than 10 years of service. Older car models tend to consume more, and these are usually (mainly) driven by less well-off Moroccan households and businesses. In effect, the decision to increase diesel and fuel by about 14% overnight will hurt a majority while the better off minority will not adjust their behaviour and continue to take full advantage of an indiscriminate and ultimately unfair subsidy system.

I am drifting here… Paul Krugman makes a very good case for the stimulus package, and warns austerity measures would plunge the US economy into a recession similar to that experienced by Spain, Portugal and many other countries in Europe. And yet Morocco is experiencing increasingly dangerous economic hardships, a piling public debt, a sluggish growth in M3 aggregate, and finally, that problem no one in Morocco can actually address, the abysmal trade deficit. a research paper by the IMF points out to the effects of European economic fluctuations on Morocco’s growth, and their conclusions are daunting: the recover in the Eurozone will be slow, and almost certainly not pulled by domestic consumption:

Our analysis confirms the important role played by the European Union for the Moroccan and Tunisian economies. We note, however, that this close tie might also represent a challenge for the future.

For the two countries, enhancing competitiveness and diversifying trade flows is essential for sustaining future growth.

This means Morocco’s foreign demand is unlikely to improve over the next couple of years, and with it, any possibility of growth around the government’s objective of 5.5% average by 2016. The best of best scenario (net) exports can do is to give a modes 1.5 percentage point to growth, which is way below what the economy needs to reach the vicinity of 5% to 5.5%.

Morocco’s growth is therefore left to domestic consumption and government expenditure. This is a particular recipe for disaster: on the one hand, any consumption-led growth means about 30% of household consumption will be insured by a wealthy few less than 600,000 households, and these people are  very hungry for transportation, luxury and imported goods. To these top-tier consumers, one needs to take into accounts the demand pressure implied by the aspiring middle-class, the various increases in public sector payroll. As for government expenditure, assuming our elected officials are taking their pledge to bring the deficit back under 3% GDP seriously, an expansionary budget cannot go one forever, as the pressure on rates, barely alleviated by Bank Al Maghrib’s decision to cut rates 25bps, is going to eventually penalize the private sector, if it is not already the case.

GDP Growth and two components’ contribution to growth: Household Consumption and Government Expenditure.

So Morocco and its public finances are between a rock and a hard place: on the one hand, any Keynesian-like stimulus program is unlikely to restore Morocco’s economic stability, and might well turn out to be a bad temporary fix, whose price are high borrowings now and higher taxes next; on the other hand, growth cannot be fuelled by domestic demand indefinitely because it will result in deteriorating Morocco’s terms of exchange and trigger a run on the currency. That is where cutting the budget comes in: to rebalance the engines of growth.

Government expenditure and Household consumption have contributed an average of .72 and 1.52 percentage points respectively of the 3.58% average growth over the 1992-2010 period. Their contribution goes higher in the last decade with respectively .79 and 2.31 percentage points for an average growth of 4.64% since 2000. An austerity program, that is, discretionary cuts in government expenditure mean a reduction of the budget’s contribution in growth, and in the short term results in a small contraction of GDP, with an undetermined time lag for agents in the economy to adjust themselves, and then growth goes on.

The picture is quite clear as to why government expenditure has to be halved: the Moroccan economy cannot sustain itself with high levels of of consumption and government spending; there are arbitrages to be made, and these come to the expenses of two other equally important national accounting aggregates, Investment (Gross Capital Formation) and Exports (Trade Balance): Y = C + G + I + NX

Cutting the budget by means of restraining public service payroll with growth rate well below inflation rate (since 1992, payroll increased 6.6% on annual average, while CPI inflation rate established itself around 2.6% over the same period of time) is necessary because the available resources have to be used somewhere else. It is a bit of a vicious circle: high public payroll means high household consumption and higher imports, which in turns means high receipts from VAT – these make out 21% of total fiscal receipts, and the trend is upward since 2004. Obviously, the government cannot just agree to kill a lucrative source of income for the sake of economic stability, but the fact of the matter is, the economy badly needs it.

We will have to agree to the unbearable fact that we cannot secure anything near 5% by 2016. Growth has been the magic wand to solve, or at least hide Morocco’s deep structural and social problems: trickle-down effects from income inequality were relied upon to improve (marginally) the condition of poorer households, and government jobs were there to appease unions and the unemployed graduates. On the other hand, other engines of growth have been neglected: Investment makes up for 1.5 percentage point of GDP growth since 1960,  2.38 points since 2000. Same goes for Gross Exports, with 2.19 percentage points as well. High consumption and higher government expenditure means higher imports, with the immediate effect of penalizing promising prospect for the Moroccan economy.

Investment and Exports: the first is just a matter of corporate interest in buying assets, the second needs to adjust to the end of an era: the Europeans are no longer a good trading partner.

The Big Picture – Part 4

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on May 14, 2012

The standard RBC model has several major limitations that fail to account for proper results – in this case, a close match-up with summary statistics obtained after significant aggregates have been HP-filtered. The graph below for instance, shows a long-term comparison between actual GDP data, and RBC-generated output, the widening gap can be explained by the fact that savings in the standard RBC setup are exclusively domestic; recall capital accumulation dynamics:
k_{t+1}=(1-\delta)k_t + i_t
and National Accounting identities:
c_t + i_t = y_t
and
y_t = z_t k_t^\alpha h_t^{1-\alpha}
Obviously, if the Moroccan economy were to rely solely on domestic savings, capital accumulation would have grown at a lower rate, hence leading to smaller levels of output; furthermore, because Morocco is not an immigration country – meaning, demographic growth is endogenous- Capital dynamics account for a lot in terms of output growth, which vindicates the initial claim domestic savings are not high enough to explain the levels of investment observed over the past half a century.

This in my opinion is the strongest piece of evidence I would consider for pro-free trade policies: capital flows boost the economy, to the tune of 130Bn Dirhams every year since 1965, in real terms.

In addition to Balance of Payments issues, the RBC model needs to embed Government policies in the model’s intrinsic functions; Overall, RBC model described by an inter-temporal CRRA utility function and the resources constraints mentioned above yield the following:

HP Data     |σ      |σj/σy |Corr(y,j)|
------------+-------+------+----------
Y_GDP       |0,08030|   1  |    1    |
------------+-------+------+----------
Consumption |0,07013|0,8734|  0,8215 |
------------+-------+------+----------
Investment  |0,22035|2,7441|  0,8369 |
------------+-------+------+----------
Government  |0,24127|3,0046|  0,4997 |
------------+-------+------+----------
Labour      |0,04256|0,5300| -0,8670 |
--------------------------------------
RBC         |σ      |σj/σy |Corr(y,j)|
------------+-------+------+----------
Y_GDP       |0,06596|   1  |    1    |
------------+-------+------+----------
Consumption |0,04715|0,7148|  0,5092 |
------------+-------+------+----------
Investment  |0,20460|3,1018|  0,8766 |
------------+-------+------+----------
Government  |         No Data        |
------------+-------+------+----------
Labour      |0,00002|0,0003|  0,0238 |
--------------------------------------

Starting from the mid-1960s, Real GDP departed significantly from RBC-generated GDP. Incidentally, Morocco’s Balance of Payment picked up steam around the same time. (log-levels)

As you can see, the standard RBC model does pretty well in explaining cyclical fluctuations on GDP, household consumption and Investment dynamics – it exhibits lower levels of volatility for GDP, Consumption and Investment.

So even though synthetic data shows discrepancies like that of GDP’s, it retains similar features – in this case volatility, correlation and relative variance with respect to other aggregates.

The basic model provides powerful results, but not powerful enough to start building on forecasts and statistics-based predictions; there is a need for newly specified functions where foreign trade, government expenditure, and perhaps cross-correlated structural shocks are embedded.