The Moorish Wanderer

Some Metrics on Income Distribution – More Details and Methodology

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco by Zouhair ABH on December 11, 2011

The argument about the nefarious effect of too concentrated an income in a particular country can always be made to gainsay any potential benefits to the trickle-down -or supply side- economics: while it is almost impossible -and probably counterproductive to enforce or allow for perfect, egalitarian distribution of income and wealth, evidence can buttress the case for a wide median/middle class, empowered with a large income share, and comforted in a steady and balanced growth in its wealth.

From a policy point of view, I believe the wages and income issues are perhaps the only thing that can bring together large scores of Moroccan populations whose cultural and political loyalties are too polarized, but eventually find solace in pledges to improve their standards of living, and would even go as far as support that political organization credible enough to reduce inequalities and guarantee steady income growth for all.

So, let us consider other metrics to income instead of GNI – a raw measure indeed, but one that does not provide precise information on generated income; fortunately, national accounting can provide us with a bit of help to devise some custom-made aggregate for National Domestic Income. World Bank data defines the Gross National Income aggregate (code NY.GNY.TOTL.KN [xls]) it provides as:

Gross national income is derived as the sum of GNP and the terms of trade adjustment. Data are in constant local currency.

Though Gross Domestic Income grew at a higher pace starting from early 2000s, FDIs and MRE remittances made significant differences between GNI and GDI

Clearly there are some components one isn’t very interested in; the figure of interest should be purely domestic – we are, after all, interested in domestic income. Because GNI is basically the sum of domestic income and primary income from abroad, we can therefore compute it with net foreign income from FDIs, Workers’ remittances and portfolio inflows.

There is always the delicate question of remittances: for only too many households, remittances from relatives working abroad are the only source of income, and in a sense, it distorts somehow the big picture one is keen on painting; but there goes the limitations of data availability – the local Morccan office for national statistics (Haut Commissariat au Plan – HCP) does not provide adequate format for data processing, if it ever does; I am grateful for many of their documents, but there is no comprehensive plan to upload relevant data, say in xls or csv format; as for the World Bank, they can only put online what the Moroccan authorities are giving them – any additional information needs to be paid for, and I don’t think I have the money for it 🙂

But still, even with these rule-of-thumb, back-of-the-envelope computations, final results are not as bad as one may make out; quite the opposite, they seem to be quite close to whatever comes up in official reports. Still and all, it is always good exercise to investigate whatever figures of interest.

Now, rearranged figures show that domestic income distribution per deciles and quantiles are on the low side when compared to GNI breakdown – which is only logical, given the computed differences in FDI and remittances – nonetheless, one finds out that upper 20% and 10% within still benefit from a high annual income: for the wealthiest 10%, it was MAD 222,000 per annum in 1999, it neared 400,000 in 2010 – while average domestic income was MAD 71,000 in 1999, it increased to MAD 106,000 in 2010.

It is clear that the average annual increase was higher for the richest 10% (+5.47%) than the observed average (3.7%) and that applies only to domestic income. As for median income, an annual increase of 2.5% was recorded over the considered 12-years time period, growing from 53,000 to 70,000 per annum, and in constant terms; the conjugated effects of a base 1999 inflation (CPI) and the downgrade in income distribution to the expenses of median households vindicates the claim made in an earlier post that median households have lost purchasing power to monetary illusion.

during the considered 12 years, CPI inflation (base year 1999 instead of HCP’s ICV base year 2006) was at annual average of 3.4%, in addition to the annual 1.14% dent in median income share, this means a real discount of 4.54% on any nominal income increase; it stems from the number computed earlier on (2.5%) that there was significant loss to real purchasing power to this class of households – relatively higher, when compared to a GNI-based computations, and this only makes sense: foreign currency inflows are not subject to the same inflationary distortions, and so, tend to make up partially for the purchasing power downgrade, across the board.

+80% of top 10% and +50% for the average - over 12 years.

But the bottom line of the argument made earlier is vindicated by these findings: middle class are hurt in their income, and this comes to a blow, because a balanced society with low risks for social unrest needs a strong and wide middle class base – if this is observable in a host of country, there is good reason to believe that it would apply equally to Morocco as well.

But let is now consider something different, less dynamic – the present distribution of income as it were. In statistics, probability distribution are quite useful to assess, in this case, wealth distribution across households – we start from the purest egalitarian distribution of all, the uniform distribution.

Uniform/Egalitarian: very easy a computation, just take every household, number them from 1 to 6.5156.000 (approximately) and then allocate them with the same income, namely GNI per household. Median, Average and Variance are clearly defined and everything is fine. This how an egalitarian society would look like: all households deciles would have the same income, i.e. 106,000 per annum with uniform growth per household from 1999 and 2010. The only snag is that it is utopian and almost impossible to enforce. Plus there are no immediate economic benefits to such a distribution: can we expect growth if everyone is insured to have the same income as the others regardless of their contribution to society?

Normal (or Laplace-Gauss) distribution: a little more complicated a distribution, but one that remains within the realm of acceptable inequality: the bell curve distribution concentrates quite a lot around the mean (which coincides with the median too) as a matter of fact about 66% of all relevant information lies very close to the mean. Now, considering the distribution at hand with a GDI per household capita of 106,000, and say 36,000 as a variance, we get a pretty decent income equability, as the graph below would show:

the wealthiest 10% households would represent no more than 131,000 - less than two variances away from the mean

But then again, that would be too good to be true – though it is realistically more achievable, and the case for a strong and wide middle class can then be made more forcefully.

Generated Pareto distribution vs Empiricial distribution per deciles

Pareto Distribution:and this is the last distribution one should have a look at, because as far as available empirical data goes, this is the closest we can get to the real income distribution in Morocco. And it all adds up: as we observe average income per households is 106,000, there are 30% households above that line capturing 60% of total Domestic Income.

We compare and confirm that incomes in Morocco follow very closely a Pareto-like distribution, which denotes of its unequal distribution indeed.

Finally, it is enough to look at the Gini index to understand why the Pareto-shaped distribution in Morocco is so unequal: HCP’s own computations put the Gini Index at 0.46, certainly one of the highest in the world. According to the United States 2008 Census, their 2009 income Gini Index was around 0.469 – very close to Morocco’s. What does this tell about our own economy?

I would suggest that we have achieved the same level of income concentration as the United States’, but ultimately failed to raise standards of living for the middle and median classes, not even commensurate to the selected benchmark’s own growth over 1999-2010.

Generated Data (computed on R open-source software) shows:

#data computed for a normal distribution, 
#with average 106 and standard deviation of 20
Distribution_Income <- rnorm(6516, mean=106, sd=20)
Income_Norm<-dnorm(6000, mean=106,sd=36)
plot(density(Distribution_Income, bw=4),col="Black", lwd=4)
hist(Distribution_Income, col="tomato4",
main="Generated Normal Income Distribution",
xlab= "Income Per Household (thousands dirhams)",
ylab= "Number Of Households in Thousands")
#Monte Carlo-like simulation to test mean and median convergence
Distribution_Income_MC<-rep(Distribution_Income, each=1000)
vector_generated<-c(summary(Distribution_Income_MC))
summary(vector_generated)
# Min. 1st Qu.  Median    Mean 3rd Qu.    Max.
#34.48   95.76  106.10  105.80  116.10  176.10
#compute the income share held by the 10% wealthiest (quintile above 90%)
qnorm(0.90, mean = 106, sd = 20, lower.tail = TRUE, log.p = FALSE)
#[1] 131.631
#-----------------------------------------------------------------------
#Pareto Distribution
#need to setup "VGAM" Package
library(VGAM)
Distribution_Income_Pareto<-rpareto(6516, 106, 100)
summary(Distribution_Income_Pareto)
hist(Distribution_Income_Pareto, probability=TRUE, col="wheat4",
main="Income Distribution Per Pareto",
xlab="Income per Household in Thousands")
#minimum value 100 selected gets the closest to empirical distribution

The Middle Class Rip Off

Posted in Moroccan Politics & Economics, Moroccanology, Morocco, Read & Heard, The Wanderer by Zouhair ABH on October 17, 2011

Much has been made of the Feb20 demonstrations, mainly as a sign of middle class unrest and discontent with perceived unfair distribution of wealth and political power. While it is understood only too many citizens have been excluded from, or ruled themselves out of,political representation – because of the generally corrupt and inadequate partisan political apparatus, the same argument cannot be made as easily about economic retribution;

The middle class in Morocco is both a political and economic maze to the observer, remain a tricky and elusive set of individuals, and any proposed criterion to determine the broad characteristics of such population is bound to trigger gainsay and recriminations for its arbitrary, almost deterministic approach. And yet, these are the people that may well hold the key to appease social and economic resentment, drive forward both the political process and the economic transition away from its current quagmire and into genuine prosperity.

The middle income as we define it.

My proposed definition of “Middle Class” does not stray from HCP established nomenclature; first because my own back-of-the-envelope computations tend to be vindicated by HCP findings, and second because the less controversial course is to settle for the Median Income as an indicator of the economic characteristics. The modus operandi is pretty straightforward: households are ranked per income, and then broken down into uniform quintile group (that is, per 20% sub-groups). The median quintile is therefore the third 20% -as it leaves as many households on its left as it does on its right. Then, we consider each quintile’s respective share in gross national income (GNI). Unfortunately, consistency isn’t HCP forte, and the IMF world data fields only 5 dates for the income distribution, further completed with some punctual HCP late figures on the matter: 1985, 1991, 1999, 2001 and 2007.

As we set in to track the median national income between 1999 and 2007, the findings point out a marked decrease in median share, down from 14.97% in 1999, to 14.54% in 2007, and the trend is to be confirmed by subsequent surveys. This dent in median wealth (-2.87%) almost mirrors the average GNI per capita growth over the same period (+2.83%) In simple words, the median income share has gone down at almost the same rate GNI per capita has gone up. And it seems all other quintiles but one have experienced similar trends. The only quintile households with a healthy 3.41% improvement were the top 20%, that is, those earning more than MAD 207,000 per annum (2007 figures).

But let us dig deeper in the “Middle Class malaise”; while it is understood their share in income has fell over time (a tale-telling sign of income concentration in this country) their real income has also gone down. The stated implication is not necessarily true: the share pie per person has grown some 3% a year, so even though it has grown smaller with respect to the whole pie, it may have grown in absolute terms nonetheless. But sadly for the Middle Class, that did not happen; quite the opposite.

But what about real income?

Between 1999 and 2007, median income per household has grown 1.48% in nominal terms. However, when adjusted for average (CPI) inflation,the real income has been steadily decreasing at 0.18%. This means the median households have accumulated a real loss in purchasing power of MAD 13,000 over the considered period. What does this tell us about all these economic policies carried ever since 1999?

And it is not like the median households are the only ones who bore the brunt of economic inequity; again, the top 20% are the only ones who actually improved their real income by MAD 11,000 overtime.The bottom 20% have increased their real income though: an accumulated MAD 51 over the considered 8 years – the top 20% improved their real income 215 times more than the bottom 20%. This is worse than a zero-sum game, it is, quite simply, a game heavily skewed towards the affluent, and public redistributive policies (i.e. fiscal policies) have done nothing to allay the inequity; it has only made it worse.

What holds in 2007 holds equally true for 2011 (even by the most optimistic projections of a stabilized income share with respect to the 2008 survey) as the median 20% saw their income share fall further to 13.2%.

... The Middle Class have been screwed up. In real terms.

A country with a weak middle class who cannot enjoy the proper benefits of growth, cannot sustain itself without serious risks of social unrest and discontent. What is worse, these subsidies the government has been so generously putting on the table only beat the inequity further in, as they benefit those with the highest absolute consumption levels.

Now that these numbers have put in perspective the ailing of our Middle Class, the guileless observer would now understand why a deep, structural change within our institutions and the economics of wealth redistribution need to be thoroughly reviewed.

And yes, Middle Class IS radical.

Wandering Thoughts Vol.2

Posted in Dismal Economics, Flash News, Read & Heard by Zouhair ABH on October 7, 2010

I was going through some old documents on the computer, and I found a piece I wrote in relation to the 2009 OECD annual conference in Paris. Quite light on theoretical background, but the main ideas are there.

“Could taxes stimulate an open economy ? The question on itself is a bit provocative : how could a drain –or let us say a puncture- on a theoretically optimal production market bring benefits to an economy ? A government takes money for two basic things : pay its regular expenses (as in paying its expenses and its civil servants) and its investments. There is a way in turning theses taxes into powerful means in boosting an economy : how so ?

– A common wisdom among tax experts is that an optimal taxation (in the sense of Laffer’s maximum level tax) is such that the government takes a little something from everyone creating value. The little something is a mathematical solution such that the captured part of the social surplus is so low that the expected projects of the taxed agents would not be altered.

 

Laffer Curve. Surprisingly the US, home of "Free-capitalist" market is on the wrong side of the curve

 

This might even go to a social consensus, where agents voluntarily give away a part of their present surplus for a bigger future one. This is not wholly irrational, it is just an example of the cooperative Nash paradigm. The main question is how agents behave so ? when they have positive expectations on the government project : a highway project, nuclear plants for cheap electricity, universities for a larger knowledge capital, etc… How does one calculate the ‘optimal’ taxation rate for the government’s projects ? For businesses, the problem is more or less easily solved: many firms have to spend a lot of money in some projects they have to undertake due to lack of say, infrastructure, skilled labour force, an so on. Theses firms would be relieved to give a lot less to the government for it to provide these collective goods. To sum up, taxes are just an aggregate of opportunity costs for investments a firm cannot undertake but is in dire need of it in order to do business.

– How does the government spend the taxes right ? Apart from rigorous spending checks, it is the social consensus that the agents are putting their faith in what is now the very visible hand of ‘benevolent government’. It goes back to the very structure of market economy : there is no such thing as ‘natural markets’. It is how roles are distributed among agents : the firms, the public authorities, the labour force representatives, the households, and so on and so forth. Taxes are just the equilibrium price for what the government is providing as services: education, legislative framework, infrastructures, security. Finally, there is only little to be feared from the impact of taxation within an open economy. One might even dream of international taxes form common international services: sea and airports might be free to use in exchange of a ‘package’ tax that would pay for their expenses thus rendering them autonomous and effectively international.”

Ok, that does not sound very classic left-wing-ism on tax-and-spend policy, but when you think about it, neither does the conservative wing’s policy make sense. A heavy tax toll is no productive and could hinder an economy, but too much tax cuts -especially to the top tier income households-  is no good policy either because when the going gets tough, governments are left twisting in the wind and compelled to borrow money they could have already gotten, or because it just adulterates government policy to provide basic services for the many and skews the policy towards the better-off.

What about government then? Contrary to the media myth, it is not a core policy for the left to advocate for “big state”. It is not. I’ll try to elaborate on that on some future post

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