The Moorish Wanderer

The Economic Chronicles of the Kingdom, 1955-2011 Part.2

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on July 17, 2012

I should thank Romain Ferrali for his comment/question on some figures I have used on my Capdema presentation (quite a successful gathering, I am told. the Capdema event, obviously) about Morocco’s “1%”.

A challenge indeed, given the scarce information about income distribution from both HCP and the World Bank.

My initial -and strongest- assumption about income distribution is its stability across time: incomes evolve overtime, but the differences between the median and most percentiles relative to their respective incomes are assumed (and tested) to remain constant, or so we shall observe.

A caveat the reader would do well to consider: these incomes are computed on the basis of Gross National Income (from the World Bank Opendata) divided up by the number of households, either provided by HCP census or estimated on the basis of past annual demographic growth. Such a crude method bears several shortcomings in terms of sources of income not accounted for, the heterogeneity of different sources of income, the transfert effects between household to name but three. On the other hand, the primary source of interest remains the dynamics of income distribution, and if indeed additional information arises, I would be glad to carry on and finesse it further. This method might explain why HCP and myself disagree on the definition of “middle classes”: mine is simply the statistical definition of the income halfway between the poor and the rich.

The computations are based essentially on a set of three assumptions:

1/ Income distribution is constant: the same exponential distribution (with different parameter $\lambda$ for each year)

2/ Parameter $\lambda$ i.e. the inverse of GNI per capita, has its own statistical distribution.

3/ the parameter is stationary, possibly with a normal distribution whose mean and variance are estimated on the basis of time series.

An earlier blogpost assumed income distribution was exponential; an educated guess, you might say, given the fact that the decile-based cumulative density function clearly indicates a strong level of inequality – not very scientific indeed, but given the information at hand, it was the best I could come up with. I was lucky enough to find a paper than vindicates partially my assumption.

On income distribution in the United States, Dragulescu & Yakovenko note:

“The exponential Boltzmann-Gibbs distribution naturally applies to the quantities that obey a conservation law, such as energy or money [10]. However, there is no fundamental reason why the sum of incomes (unlike the sum of money) must be conserved. Indeed, income is a term in the time derivative of one’s money balance (the other term is spending). Maybe incomes obey an approximate conservation law, or somehow the distribution of income is simply proportional to the distribution of money, which is exponential [10]. Another explanation involves hierarchy.Groups of people have leaders, which have leaders of a higher order, and so on. The number of people decreases geometrically (exponentially) with the hierarchical level. If individual income increases linearly with the hierarchical level, then the income distribution is exponential.”

The authors provide two possible explanation for that particular distribution: it is either linked to the amount of money at hand, i.e. the higher the income a household earns, the higher its cash-in-hand is going to be, and because money is conserved, income benefits from that effect too. The second explanation is more sociological: income is assumed to have an institutional link to hierarchy, the social and professional status of a particular household confers a certain level of income. Here again, conservation in hierarchical statuses confers on income the same distribution.

The exponential distribution is a very useful statistical device. Its density function needs only one parameter, and is defined such:

$f(x) = \lambda \exp^{-\lambda x}, x>0, \lambda>0$

the restrictions on x is useless in this particular case, since income is obviously a positive amount of money, and lambda is necessarily positive, since:

$\mathbb{E}(x) = \frac{1}{\lambda}$

and there lies the usefulness of the said distribution: all we need is a time series of GNI per Capita or per Household to generate yearly income distribution. The idea is to use these as random vectors to check the effects of inequality over a long period of time. Once this set of distribution is generated, we test the results against empirical data from 1985, 1991, 1999, 2001, 2007 and 2010.  (available on the World Bank data nomenclature) The data at hand is the decile/quantile distribution of concentrated income.

we test whether differences in both values for available years are not statistically significant. Don’t bother with seemingly larger differences for 2007 and 2010, the sample size puts it in perspective.

If the three assumptions turn out to be correct, we should observe generated results close enough to empirical percentages from these years, and thus conclude to the robustness of the estimated income distribution. The policy implications of these results are infinite: fiscal policy, among others, would gain a lot from addressing issues of truth-telling and other institutional dysfunctions. But for now, I am focused on trying to describe as explicitly as possible statistical properties of income households in Morocco since its independence.

A first test to check whether income distribution is exponential, is to compare synthetic and empirical median income per household. The exponential distribution has the following property:

$\int_{0}^{x}\left(\lambda \exp^{-\lambda t}\right)dt= 0.5 = median$

which means the difference (or ratio) between average and median income per household is a constant commensurate to $ln(2)$ the null hypothesis in this case is to check whether observed discrepancies between both datasets are statistically insignificant. At 95% confidence interval, we get most empirical values lay between the 45-52% percentiles, which, given the size of the selected samples, is a pretty robust evidence these differences amount to very little. We therefore retain at high levels of confidence the assumption of the exponential distribution.

For instance, median income in synthetic data for 1985 was 23,293 dirhams, vs empirical median income of 24,210 dirhams, which falls within the 51%-52% percentile (which is more than enough to test at 95% confidence). It is worth pointing out however that these discrepancies, for all their statistical irrelevance, are systematically in favour of empirical data, which points out to an income distribution marginally more unequal than the exponential distribution suggests. However, because the fit is robust enough, we shall settle for the synthetic model. A final caveat perhaps: the test was carried on 6 particular dates, which still does not preclude significantly different results for the 51 remaining years. The likelihood of such event nonetheless is very low in view of the levels of confidence used earlier.

The fact the distribution has been the same (with its parameter $\lambda$ evolving with GNI per household) since 1955 might lead to think that income inequality has remained constant since 1955 (recall the ratio Median/Mean is $\log(2)$) and for some inter-quartile ratios,  results are stationary, which means inter-quartile income inequality has not change significantly over the past half a century.

large discrepancies between the top 1% and the median incomes starting from the 1970s

The picture is not all that clear, though: first off, the upper bound evolves frequently, a properties that has to do with the elusive nature of high income households (the 1% more affluent) the synthetic income distribution. If anything, there seem to be no particular link that growth since 1955 has contributed to influence income inequality one way or the other. What looks to be painfully clear however, is that the richest 1% have enjoyed a distribution of income growth whose trend is undoubtedly in their favour: between 1955 and 2010, the richest 1% have improved their income relative to all percentiles below the median by 6%, even as GNI per Household grew an average 6.91% over the same period of time. It might look like jumping to conclusions, but unequal distribution of income growth seem to contribute a lot, if indeed 86% of it goes to the top 1%.

I would say the graph and these computations understate the discrepancies between top and ‘regular’ earners: the sample size goes only as far as list maximum values of an annual income of 1,077,000 dirhams per annum, even as rarefied incomes are larger by far. If anything, these computations would instead minimize the reality of income inequality, because extreme values on the right hand-side tail are bounded.

So there it is: a quick look at the relationship between growth and inequality indices point to the lack of correlation: growth in Morocco does not necessarily bring about better quality of life to households below the median line. If anything (but the statistics gets blurry there) income inequality abated during the 1990s (a period of recession as well as structural reforms) and increased with the early 2000s (an economic expansion by many measures)

Inflation, Households and Wages

Posted in Dismal Economics, Moroccan Politics & Economics by Zouhair ABH on October 26, 2010

Some of us need to be the wicker man, I guess. In my case, mine is to rise above the banal and bring about -or at least, give the impression to do so- some rigorous pieces on subjects I can be of contribution. Does it sound bombastic a bit? yes I does.

Inflation. A friend joked about me being a left-wing monetarist, it might have to do with the cheer contradiction this description embodies. and I could as well be so; Save for income inequality and unemployment, inflation is one essential variable I believe to be harmful and of no great use -under certain set of conditions- to an economy. I cannot emphasise enough the need to keep at low level.

Morocco has got over inflationist policies -through painful and yet to be proven necessary- process and the annual inflation target of the BAM is getting more and more steady. I referred to the problem in controlling core inflation and losing focus on the volatile one in a previous post, now I shall devote this piece to the broad parameters that influence it in Morocco; My primary findings support the fact that the level of wages in Morocco, especially the minimum wage, bears little influence on the present inflation –contrary to what people from the employers’ union CGEM claim. The main course remains our -shall we say structural, inflation.

Over all, monthly average inflation is characterised with low volatility and low YtD average

Over the last quarter, the Central Bank pointed out the downward trend inflation is following during Q1 2010: “Les données du mois d’août 2010 relatives à l’indice des prix à la consommation (IPC) confirment la faiblesse des tensions inflationnistes […]. En glissement mensuel, l’IPC a enregistré une hausse de 0,9% après les baisses consécutives de -1% et -0,6% observées durant les deux derniers mois.” It is good news, although it can get confusing when one gets into details: “En glissement annuel, l’inflation a connu un ralentissement, revenant de 1,1% en juillet à 0,6% en août, en raison du niveau relativement élevé des prix à la consommation en août 2009, lui même imputable à l’envolée des prix des produits alimentaires volatils. Abstraction faite des produits alimentaires exclus et réglementés, l’inflation sous-jacente s’est établie à 0,4%, niveau quasi-inchangé depuis mai dernier.” Things are not as straightforward as they seem to be. To be frank, this deflationist trend, while it can be of unarguable benefits to the consumer welfare as well as to the whole economy, shades great concerns about Morocco’s future economic stability. I’ll elaborate on that later on.

First, a formal definition of inflation. Olivier Blanchard in his much interesting textbook ‘Macroeconomics‘ (not to be confused with the much challenging Lecture Notes in Macroeconomics co-written with Stanley Fisher) described inflation as: “the sustained rise in the general level of prices in the economy- called the price level. The inflation rate is [therefore] the rate at which the price level increases”. the standard index used for inflation computation is the Consumer Price Index. the Haut Commissariat au Plan (HCP) produces a very comprehensive documentation on how and why this index is used. It is essential to understand how the CPI is computed, because it is the important step to understand how inflation behaves, especially in Morocco, and why core vs volatile inflation differences are so important. Also, I wanted to discuss some interesting paper I read on unconventional monetarist policies in times of recession or contraction. The St-Louis Federal reserve produced an interesting research on the matter. On second thoughts, let’s leave it till next post.

Inflation Breakdown per group of goods: consumption goods like food are experiencing a higher than average inflation compared to the rest of index components

According to the HCP, the Consumer Price Index: “L’indice des prix à la consommation (Base 100 : 2006) mesure le niveau et l’évolution des prix de détail […] Le panier de l’indice contient 478 articles et 1067 variétés de produits représentant la majorité des articles consommés par la population urbaine. Ces articles sont classés en 12 divisions et 41 groupes.
Les pondérations de l’année de base ont été calculées à partir des données provenant de l’enquête de consommation de 2000–2001 et actualisées sur la base des résultats de l’enquête sur le niveau de vie réalisée en 2006–2007. Elles représentent la structure des dépenses de consommation des ménages urbains. Les prix sont relevés à l’aide d’une enquête permanente dans 17 des principales villes représentant les 16 régions du Royaume […] La formule de calcul de l’indice est celle de « Laspeyres en chaîne ». Cette formule offre la possibilité d’actualiser en continu le panier et les coefficients de pondération. Elle permet aussi de résoudre les problèmes induits par les produits saisonniers. Signalons que les indices publiés sont des indices bruts, c’est–à–dire non corrigés des variations saisonnières.”

There is nothing to be added- in facts I tried to get the a shorter definition, but that one looks perfect and just fine. It is tedious indeed, but I cannot stress enough how important it is to understand how the index is computed in order to grasp the full implications of any changes in inflation rate over the last quarter as well as the last years; The HCP uploaded an interesting presentation some while ago about how the new index is computed. I went a bit ahead of myself: the HCP produced a new index in 2006 as base year. the index under-weights some specific goods because the 2000-2001 survey proved Moroccan household spend less, compared to the previous census’ results on these same goods. Moroccan households spend less in food and tobacco, clothing, small equipment household goods and miscellaneous services.They do however spend more on housing, transport, communications, education and to a smaller extent, health expenditure. We will notice that this relatively sizeable shift in consumption pattern can explain, up to a point, part of the low inflation the Moroccan economy generates. Because patterns of consumption changed, there is less strain on specifically volatile price goods and as such, less pressure on the core inflation and the global inflation, though in different respective magnitudes.

Price elasticity of foods and related goods is still very sensitive in Morocco. the negative sign on the B column shows it to be a vital good. Yet inflation breakdown points out to food goods as the most volatile component

There’s also a price effect that is difficult to capture here: although Moroccan household devote a little above 41% of their income to food and related goods in 2007 (compared to about 45% in 1998), there is little said on the extent of substitution effects, on prices or on quantities. In facts, an HCP study shows than prices are at an actual higher level when base year is set to 1989 (Prices have double since -September 2009). Was 1989 a particularly inflationist year? not much, about 3% -much less compared to the average of the past 5 years-. Did GDP increase by that much on the 1989-2009 period? certainly not (its grew an average of 3% in real terms, that is a total increase of 84%, comparatively lower to the overall inflation of 102% on the same period of time), effectively meaning that the real wages of households -relative to food and food-related goods- have been worse-off over the period. I am a bit drifting from the subject here, though not entirely, as we do now understand why and how inflation is so low in Morocco: the base year has been recomputed to 2006 with a lower weight base for the highly volatile and highly inflation-sensitive food category. But then again the central bank focuses on core inflation, which is not as volatile as overall inflation, but still is over-priced compared to the previous index computation. Why would the HCP go through these changes? partly because household behaviour changed. consumption shifts gradually from foods and peripherals to other.  The results of it were shown in a study that proved price elasticity changed overtime in Moroccan households, but certainly not enough to aver that Moroccan standards of livings have improved. Or rather, that the improvement is following a steady way. It is not, as it is notoriously known that vital consumption goods’ prices are the most volatile components of the general consumption price index, and even though the index has been rebalanced in 2006-2007, the effective inflation since the late 80’s is still high. This state of high if not volatile inflation does not do great good for the Moroccan consumer -which happens to be the average Moroccan household-. And one should credit the central banks efforts to muscle out the inflation. But this is not enough. Inflation in financial and monetary spheres is one thing, inflation in the grocery market is another. All in all, Morocco is not a bit facing deflation, nor is it getting near zero inflation; quite simply, it experiences a stabilization in its price level. stabilization means inflation grows at a lower rate compared to the 80’s and 90’s, but still is quite high and, more disturbing, quite volatile.

What about wage-driven inflation? CGEM bosses argued some while ago about the need for a different way for computing the minimal wage. The idea is sound indeed, as the setting is entirely discretionary -compared to how an economy is doing -, the proposed policy is poisonous: in 2005, the textile sector pushed for a regional SMIG (minimum wage) in order to bolster their competitiveness, and some employers would like that to be extended to a sector minimum wage. The latter is economically sound -labour marginal productivity differs from one business to the other- but it does not take into account the overall welfare, which is worth some distortions in wage settings. That is of course another subject I hope I will deal with some other time. The idea behind the quiet clamour as it were of employers for minimum wage reform is that it hurts competitiveness -and, quite indirectly, that it boosts inflation a bit. Something we know not to be true. Indeed, the 2010 BAM report displayed a nice chart that does contradict the previous statement:

Real Minimum Wage increases by Lump intervals, but gradually decreases to its original level if not below

Under the initial predictions set, real minimum wage should be increasing (as indeed it is expected to pay workers a wage above the marginal productivity of labour), while the graph shows a remarkable quasi-linearity compared to the lump-like nominal wage. If anything, the real wage is not a cause of inflation, and its downward trend is definitely an effect of inflation. One has to point out the increasing gap between real and nominal wage, due to the inflation effect. The immediate effect of inflation on real wage is even more important when one takes into account the fact it kept a quasi-linear profile over the years.