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.

Makassib: The Government’s Record?

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Moroccanology, Morocco, Read & Heard by Zouhair ABH on September 12, 2011

A couple of days ago, was activated on-line to publicize the government’s achievements over the last 4 years. A PR campaign supposedly designed to give a flattering record of what the government did for the Moroccan people during their tenure. It’s new, it’s colourful, and… sometimes economical with the truth, to say the least. Larbi opened the charge with a gambit on the half-truths over unemployment. I’d follow with something that has attracted my attention over inflation, real wages and minimum wage.

According to the website:

الرفع من الحد الأدنى للأجر في القطاع الخاص ب 25% (من 1936,74 درهم إلى 2337,84 درهم)؛

The minimum wage actually increased a little above 20% by the website’s own figures, so the remaining 5% are funny money, a 2012 projection in fact, for which the incumbent government cannot claim credit, since it is on its way out shortly. This increase translates the government’s effort in sustaining dialogue with unions and their willingness to improve minimum wage even though it supposedly put a strain on public finances or on the domestic economy. This caring government wants to show that their policy aimed at reducing wage and income inequality was successful by acting in favour of the bottom 10% households.

3.27% real increase between 2008-2011 compared to 5.2% between 2005-2007

But then again, the real data shows these very same households did not improve their standards of living in the proportions this PR campaign tries to put forward as the precise improvement of income. As a matter of fact, the government’s claim a 20% increase in minimum wage actually redistributed further growth gains is contradicted by official statistics: minimum wage recipients have improved their real income but its evolution has fallen short of overall GNI growth, which means in dynamic terms that their real income and real relative income decreased over time. So much for social-liberalism on behalf of Istiqlal and RNI economic team…

First off, the above-quoted simplistic statement fails to take into account inflation-adjusted minimum wage and even more so, a specific computed inflation for the lower income-earner households: indeed, nationwide inflation fails to take into account the more sensitive price-elasticity these consumers display when it comes to basic goods. Indeed, a higher average propensity to consume edible goods can lead to at least one-point additional inflation on the annual synthetic index. In these conditions, trumpeting that nominal minimum wage increased 20% (or 25%) is meaningless until it has been re-computed on real basis.

According to HCP figures, nationwide inflation increased some 6% between early 2008 and mid-2011.  This means that the 3-years real (and effective) increase in minimum wage was closer to 13%, or 3.27% annual real increase.

When the composite index is computed on the basis of a larger coefficient put on edibles (48.3% instead of 41.5%) the actual inflation poorer households need to take into account is 6% instead, and that means  actual improvement in real wages is closer to 12%, i.e. a 2.87% annual improvement, hardly a makssab to speak of, especially when these are compared to the higher rates of compensation minimum-wage recipients enjoyed during the late 1990s, some 5.23% annual increase, in real terms. As such, the ‘effort’ the government supposedly put to secure higher minimum wage level did not make up for the 2005-2007 freeze.

Real minimum wage decreased compared to GNI per Capita, even though nominal terms marginally improved in 2010

When compared with recorded GDP and GNI growth rates over the period, minimum wage has fallen behind. In economic terms, the argument goes any indexation mechanism might trigger inflationary pressures, something this government, Bank Al Maghrib and the IMF cannot contemplate.

But then again, that bombastic figure, the 25% announcement, tries to slip in the idea that minimum wage actually increased at a higher pace, which it did not all the way over the considered 3 years. True, nominal minimum wage caught up with GNI growth in 2010, a commendable figure- the government should have highlighted it instead of indulging in shabby deceptions. But then again, we are reasoning in nominal terms: when we look closely at real variables, it is obvious that yet again, standards of living have definitely not improved: 2010 was a bad year for real GNI per capita, but was even worse of minimum wage, with respectively 4.11% and 0.99% year-to-year.

Let us now indulge in some gleeful partisan comparison: the MASI Dividend index (computed as the daily difference between MASI gross and net return indices) shows some 35.27% increase in 2010, compared to 2.47% in nominal terms. Well, these are good news for hard-working poor households, to know that stock exchange tycoons have increased their profits 1.3 over one year when they have benefited from a marginal 2.47%.

Caring government.