The Moorish Wanderer

Middle Class Tax Burden

Posted in Dismal Economics, Flash News, Moroccan Politics & Economics, Morocco by Zouhair ABH on December 6, 2012

Listening to the Head of Government from time to time is entertaining and instructive at once. Whether one likes him and his politics or not, this is representative democracy at work. But overall he started to make use of statistics to get his points across, which is a marked improvement in his argument, and he is better for it. But he is still light on policy-making however.

There is this specific claim about the middle classes, and his failure to address it -or should I say, the failure of opposition caucuses to confront him on the issue- the tax hike on higher income was a sensible move, but it was not matched with an equivalent tax cut for these middle classes. Which leads me to beg the question: was this government policy to achieve some level of fiscal equity, or was it just a move to increase fiscal receipts? These are the questions I would have liked members of parliament to ask the Head of Government.

I argue here the present tax system, with or without the tax hikes on the top income-earners, is structurally unfair to everyone with an annual income below 300.000 dirhams, and specifically to the middle class (middle class as defined mathematically to be the median income per household in a defined income distribution)

First, I use both Exponential and Log-Normal distributions to prove a couple of nice (and useful) properties; I referred earlier on to the exponential distribution as a possible way to model household income distribution. Yet it misses a particular aspect crucial to policy-making: though inter-decile ratios are not constant over time, they can be proven to be centred around the asymptotic value (notably the \ln(2) between the mathematical expectation and median) but there is little in the exponential distribution for the policy-maker to exercise their social preferences.

Log Normal vs Exponential sample distributions. The Log-normal allows for 'more' high income households.

Log Normal vs Exponential sample distributions. The Log-normal allows for ‘more’ high income households.

The Log-normal distribution is not that different, but it has the advantage (and from a computational point of view, an additional difficulty) of fielding two parameters in its probability density function. As indeed one can see in the following densities:

g(x)=\lambda e^{-\lambda x} the exponential, and

f(x)=\frac{1}{x{\sqrt{2\pi \sigma }}}e^{-\frac{(\ln x - \mu)^2}{2\sigma^2}} the log-normal

Both distributions are different in form, but not so much in sample representations. Indeed, the exponential distribution is reputed to be strictly decreasing. But it can be argued households with no income (i.e. with zero or close to zero annual income) need to be taken out of the population, perhaps because they can always rely on transferred income (or because those with no income do not form a household) in any case, the sample population used to generate the exponential distribution of income does not look like it.

second, let us consider a Taylor approximation around the median point of the proposed distribution, that is:

f(x)=f(me)+(x-me)f'(me)+O(me)

It computes the marginal income around the median. Marginal income is the key to understand the present taxation system – as it divides up a household income into brackets, each subjected to increasing tax rates. In essence, the derivative around the median gives a fair idea of any additional income for this population (our median class) and how it would be taxed. A ‘fair’ tax structure would minimize the marginal tax burden around the median -namely, the marginal increase in tax rate for these households. In fact, the optimal tax plan would be a flat tax rate for all the median class, because then additional gains around would not be excessively taxed. A numerical example would be that of a household with an annual taxable income of 78,000 dirhams – a relatively small 4% increase (or 3,000 dirhams) is best left taxed at the same rate (or infinitesimally the same) while the present system takes away 940 dirhams from the 3,000 increase. A marginal tax burden of 32% for a 4% increase in income is not exactly fair.

So, the derivative around the median provides a generalized result that can then be compared to the present tax system, and assuming a strictly positive marginal increase in their income, the median household would observe the following result:

f(x) = \dfrac{\partial(\left | \exp \mu \right |\sigma \sqrt{2\pi})^{-1}}{\partial \exp \mu}=\frac{\dot{\exp \mu}}{(\exp \mu) \sigma\sqrt{2\pi}}

once this is plugged back into the earlier Taylor series, the net benefit for a median household is such:

f(x) = \frac{\dot{\exp \mu}}{\sigma\sqrt{2\pi}}\times\frac{(x - \exp \mu)}{\exp \mu}

And this is a pretty neat result in many aspects: the term \frac{(x - \exp \mu)}{\exp \mu} refers to the gross benefit for a median household gaining a supplement of x dirhams. But this needs to be replaced into the perspective of the whole distribution, so it is ‘discounted’ with the impact on the median itself – that’s \dot{\exp \mu} and then weighted by the measure of inequality (or income dispersion) \sigma\sqrt{2\pi}

The impact on the general welfare can then be computed by integrating (i.e. generalizing the individual boost around all median household) around the additional x dirhams to the median:

\int_{0}^{x}(\frac{\dot{\exp \mu}}{\sigma\sqrt{2\pi}}\times\frac{(u - \exp \mu)}{\exp \mu})\mathrm{d}u with an expected welfare gain of \frac{\dot{\exp \mu}}{\sigma\sqrt{2\pi}}\left(\frac{u^2}{\exp \mu}-u \right) which can be verified for u>1 is a net gain (any additional dirham contributes to generate additional welfare, that is).

So there is good evidence that suggests the total income distribution is improved when median income increases. The impact on the average household income is not as high as one would expect (up to a \sigma^2 term) but the general welfare of all individuals close enough to the median definitely improves, and those below the median can expect over time to catch up to it. Obviously, a tax rate that does not take this effect into account might indeed stifle the described effect. And this is what we are set out to demonstrate.

My third and last step involves using logged income to emphasise the effect of tax burden on middle class. This means we are back to the useful bell-shaped curve Gauss-Laplace. The log here does not denote of any particular distribution, but indeed could depict the social preferences a policy-maker needs to display in view of the results computed earlier on: since welfare gains are highest for median households, the policy-maker needs to place a larger emphasis upon them – and the Normal distribution serves this purpose pretty well – in mathematical terms, the tangent is almost flat around the median.

Plotting the densities of tax rates and income provides no particular explanation as to the transfer effect, nor the tax burden per income. For instance, there is no particular correlation between income and their theoretical tax brackets, a strange result given the progressive tax structure in place. Additionally, a supposed preference for median income household (captured by a Normal distribution centred around the median income) contradicts the present tax structure: the average tax rate is 27%, whose corresponding income coincides with income between 60,000 and 180,000 annual income. But since there is not such rate, it has to be a convex combination of the 30% and 34% rates, with the 30% rate falling on income between 60,000 and 80,000 – our median class. The convex combination puts the weight on these households at 57%. In fact, those with income between 74,313 and 77,330 dirhams per annum pay 7% more in taxes than the immediate tax bracket (those with income marginally above 80,000 a year) just because of the present tax system. In aggregate terms, this is almost 4 Bn dirhams in deadweight loss due to the present system.

The main problem with the present tax system is its ‘jumping function’ which results in disproportionately larger tax burden for those at the margins. Unfortunately for the middle class, many of them are on the margin, the closer to 80,000 a year, the higher the tax burden. A good example can be provided for the figures mentioned before: incomes of 74,313 and 77,330 dirhams pay respectively 8,293.87 and 9,198.36. And although the difference in income is merely 4%, the richer household will pay 10% more than their immediate neighbour. In fact, this fiscal injustice reaches its peak around the median.

Building a New Progressive Coalition – Looking for New Partners

Koutla, Middle Class civil servant, Unions and radical activists. Give or take, this is the progressive coalition since 1956: contentious, heterogeneous, ready to sell out to seemingly ideological adversaries, and yet much keen to take to the high ground whenever the opportunity arises – USFP’s latest turncoat in opposition is a sight to see. These are just crude generalizations, though I can also provide specific instances of what seems to be an unstable coalition: the first cracks showed with the 1997 Alternance. And quite so, each partner had a divergent agenda, and what is more, there is a constant inner struggle between political organizations to take control of each others; energy initially thought to be devoted to further the ideal of progress was instead diverted into petty politics.

The Core Progressive coalition: Unions, Radicals, former Resistants and new Socialists

The first progressive coalition to emerge in post-1956 Moroccan election was the UNFP-UMT-ALM triumvirate: one political party, one party and one liberation armed organization. But it quickly turned out into a UNFP-UMT Doppleadler with little success to take over power by peaceful -nut not necessarily democratic- means: elections were rigged, and chances of a successful general strikes were stifled by regime oppression or union officials equivocations about their role as defenders of the “Masses”. What follows delivered serious blows to that coalition: student activists split from left-leaning parties, moderate elements from the same parties distanced themselves:  23 Mars and Ilal Amam in the early 1970s, USFP in 1972-1975 and CDT Union in 1978 are all striking evidences of that inherently fragile coalition for progressive values.

History still leaves its fingerprints over the sorry state of progressive thinking in Morocco: sorry because two large, governmental left-leaning parties have long lost been discredited, and the host of smaller left-leaning parties have been blinded by -or made themselves blind with- Feb20 glitter of rejuvenation. Although I should mitigate this by stating the pre-2011 balance of power: the 2007 Elections have seen all left-leaning political parties garner 67 seats -on par with the RNI-UC alliance, and 21 more seats compared to the PJD caucus. In fact, the Moroccan left could have carried a lot more seats (about 120) has it decided to run unique candidates to stand for parliament, and carried some 1,232,024 votes back then – some 23.66% of all electoral votes.

How about the middle class civil servants? they made up until recently (say 2002) a sizeable chunk of the progressive coalition electorate; not out of love for progressive ideals, but perhaps because the liberal discourse in Morocco emphasised for a long time the need for fairness, the left has been advertising itself as a defender of the underdog; needless to say the underdog/populist discourse was echoed by union bosses as well: Noubir Amaoui CDT (former?) boss, a former schoolteacher, managed through populist and strong-worded speeches to make many Moroccan civil servants to identify with him. Paradoxically, that progressive coalition went even more fragile with the mid-late 1970s when the more moderate elements (USFP and later on OADP with the early 1980s) ditched their hard-liners, and accepted to go alone with the conservative elements; the Koutla from 1970 to the early 1990, formed on the premise of a ‘reasoned’ alliance to prepare for a peaceful alternative, traded ideological coherence for murky common historic struggles. The progressive coalition nowadays relies heavily on the new breed of activists, very much into Human Rights and specific causes; it tends to hurt more than anything else the coalition itself, because it inevitably falls into parochial interests: for sure, a small-coalition interest can do with specific issues, but this is a coalition with a self-allocated task of bringing people together, or indeed to be as inclusive as possible; needless to say, narrow -sometimes obtuse- dadas tend to alienate a lot of potential supporters of the progressive coalition.

The first example to come to mind is this strange union fetishism: every left-wing party, from USFP to Annahj, tends to try very hard to take over a specific union to make it its own . This may be so because of an inherited -but no longer true- perception of unions’ political strength. This might also explain why USFP for instance never bothered to put forward a much needed Strikes and Industrial Relations bill in parliament when in office for the last 14 years to fill in a void ongoing since 1962.

Human Rights issues were a good bet in 1979, when AMDH was founded, perhaps well into the early 2000s, too. But an HR obsession could -if it has not already- damage political activism in 2012. There is nothing wrong to stand for Human Rights, in fact, it is a noble pursuit that honours those who care for it. But there is a danger of depriving the mainstream discourse, more specifically the liberal and progressive discourse from any other topic worthy of public debate, thus permanently labelling every left-winger in Morocco as a potential “Looney HR”. It also induces the coalition to go into all-out opposition to the regime, because Human Rights violations occur inevitably (and more often that possible bearable). These abuses must be publicized and their perpetrators held accountable, no doubt about it, but by doing so systematically, the most committed members of that coalition fall into some kind of miserabilisme and tend to get blind-sided too: who cares about private monopolies cashing-in juicy profits when one (second-rate) pro Feb20 rapper is imprisoned?

All-out opposition is also a killer, within as well as outside institutions: USFP -and to some extent, CDT and UMT- are represented in parliament, and recent news indicate the opposition caucus will be bitching a lot. As for extra-parliamentary opposition, and for all the talk about democracy and power to the people, their activism tends to side with the more obvious victims/dissidents: a rapper, a world champion boxer, the unemployed graduates, all of which drives the left-leaning pro-democracy platform into supporting narrow interest at the expenses of a wider, more comprehensive reform agenda.

82 seats - for old times' sake.

I would argue the progressive coalition has a huge potential in claiming back popular mandate: while it is true voters can be very shifty in their voting patterns, it is always possible to assume they would go back and vote for a particular candidate given some prerequisite indicators of good faith.

Rabat, Casablanca, Tangiers and Agadir urban rings, long held by left-leaning candidates, concentrate now about 5 Mln urban voters and carry some 47 seats. In addition, Benimellal, Khouribga, Kenitra, Taounate, Alhuceimas, Taza, Tetuan, Fez and even Guelmim, at one point or the other in history, have been either carried by a left-leaning party or the aggregate left-leaning votes have captured a sizeable majority. In terms of current electoral votes, that’s 82 seats, almost PJD’s strength by the 2011 elections. Demographics changed meanwhile, to be sure, but the progressive coalition ought to outperform PJD’s victory – especially since both share similar constituencies.

My point is, the coalition needs to be radically rebuilt and distance itself from the old “National Movement”: in with the fresh up-and-coming, out with the decrepit, and old. And that means specifically the Koutla has outlived its supposed term limit.

Most importantly, agree on a wider platform that transcends parochial interest, which makes it more urgent to widen the coalition to a new constituency.

20 Measures to Spur Growth and Strenghten Middle Classes

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on January 23, 2012

Reading about the -finally!- upcoming government statement about their plans for the next 5 years prompted me into thinking about the 20 economic/fiscal policies I would endorse, or to that matter would like PSU leadership to consider and advocate for 2016 and beyond. My contribution on how growth can be boosted and benefit at the same time to the Middle Classes.

How to get to a higher growth trend? First by focusing on stability rather than levels of growth; 7% average is of no interest if it means high volatility; growth gains are accrued best when volatility is low, and the proposed policies are targeted at stabilizing growth, basically setting a target growth -just like for M3 for instance. The immediate benefits are obvious; while it is true growth can be sort of stochastic process, nothing prevents us from compounding growth, i.e. computing the increase in wealth over half a decade for instance.

5% growth with a very close (small) variance provides modest but strictly increasing growth gains; in fact, growth gains due to growth stabilization are pretty much the next thing to a geometric sequence, and it can be proven there is no explosive -infinite- solution to it (come to think of it, it might be the subject of a boring post)

1/ An Agrarian Reform: more often than not, agricultural output, by sheer structural volatility, tends to slow down total growth.

average growth for agricultural output was 6.9%; total growth averaged 7.8% and non-agricultural growth, 8%

Dams didn’t change much; estate distribution still slows down agricultural output to the benefit of a small, tiny  group of wealthy farmers. Average deviation of agricultural output over the last 40 years is about 2.3 times higher compared to that of non-agricultural output, and 2 times higher than the overall output growth. The mere fact that agricultural output volatility is at such high levels means all past policies -including the massive investment in dams during the late 1960s-early 1970s have been quite ineffective, since output productivity per worker is low compared to other sectors, specifically so when one considers that about 40% of workforce is enrolled in Agricultural production.

2/ Re-establish the agricultural tax ahead of the December 2013 moratorium deadline: Budget bills up to 2011 have been reasserting the moratorium on agricultural taxes will expire on December 2013. But so far no structural reforms have been carried out to justify such moratorium. And so, an immediate interruption would put pressure on government policy-makers to come up with a workable legislative framework not only to levy some fiscal receipts per exploited acre, but to establish precisely productivity differentials in terms of utilized surface, and thus direct more efficiently policies designed to help small farmers to face up their larger, wealthier opposite numbers.

The Agri-tax will obviously target only about 60,000 farmers, making up for 15% of total SAU surface – those who actually benefit from the tax moratorium, basically.

3/ Drop Fiscal penalties on Cooperatives: it was the case for a long time; but because a modest cooperative from the outskirts of Agadir created a great deal of trouble to the very lucrative private monopoly of Central Laitière, a sneaky regulation taxed them up just to get the spoiled competitor on par with a very dynamic and original form of business, to the expenses of the final consumer and a very original business structure.

4/ Create small, regional applied research centres to improve productivity per acre: from the available agricultural survey data, small farms tend to have low productivity, which is due to either small surface or to labour-intensive exploitation. Small units of applied research, with a roster of technicians and experts for all farmers to provide counsel and support to expand their production. A system of tax credits can be engineered to price the service these regional agricultural centres provide to farmers.

5/ Eliminate ‘Special Funds’ from the budget and attach performance objectives for ministries to meet before they get additional funding: so far, there are about 52Bn appropriated for ‘Special Funds’ that do not submit to regular scrutiny procedure, and yet these do define in a way government policy outside their ministerial departments. In fact, the establishment of a debt ceiling can curtail the amount of discretionary spending through these special funds.

6/ Fix a Debt-ceiling on the public Budget: The standard reason for such a policy is to keep government deficit and debt in check; it also means fewer liquidities will be diverted for public expenditure, which means that government officials as well as members of parliament will have to be more efficient in their trade-offs. It is a question of fiscal discipline: discretionary spendings can be tempting for ministers to go crazy with their budget submission.

7/ Impose a short-term freeze on pay-wage and get mean payroll closer to the median salary: it sounds phony, but the discrepancies in civil service payroll are actually such that freezing or cutting salaries, not all of them obviously, are the only way to bridge the gap between the highest and lowest pay-grade, a ratio of about 1:37 according to a UNPAN report. The closer the mean gets to the median pay wage of 170,000 per annum, the better.

So far, international indicators do point out the fact the current ratio of Moroccan adult citizens per civil servants (1:35) is sustainable and there is no need to expand, but rather reorganize the civil service: 600.000 civil servants, 2/3 of which work with central services; the idea is to reverse the ratio, so as to get a small and dedicated central civil service, while the bulk of officials would be working on the local or regional level.

8/ Re-instate the marginal income 42% tax rate, create a wealth tax on millionaires: its scrapping came to the cost of at least 7Bn every year, even though only a tiny minority of rich households benefit from it. Furthermore, and because the marginal 38% tax rate provides a break starting from about 180,000 per annum, there is a need to establish a wealth tax on millionaires, a specific rate of 60% can provide as much as 40Bn.

9/ Stop subsidizing real estate developers and use the money to help households for home ownership directly instead: 5.5 Billion tax breaks to developers vs 800 Million to household are perhaps the best available proxy for surplus transfer from consumer to suppliers; unfortunately, the transfer does not benefit the society as a whole; this is why some of the overall fiscal expenditure on real estate needs to be diverted to households; real estate business has such a large operating margin that they can do with not a tax increase, but an end to tax exemption, which can be dealt with in accounting just like a subsidy for investment.

10/ Provide cash relief of 700-1000 dirhams to the bottom 10% to boots their consumption: food stamps, tax credits, tax cuts, and other incentives to provide poorer and lower-middle classes with enough resources to lift themselves up to the average consumption and bridge the gap of wealth inequality; and that comes to the tenth of the tax break the top 10% benefit from when the 42% marginal rate was scrapped in 2008.

Thanks to their structural consumption, no immediate impact will be observed on the trade balance deficit, and that will most certainly boost agricultural business to meet the new demand, thus filling the considerable capacity production created with the agrarian reform; no trade deficit, no increase in core inflation, and standards of living increase markedly.

11/ Phase out the Compensation Fund: 45 Billion is too much, and is basically subsidies the top tier of Moroccan households, as well as a small group of business that do not always report the same surplus transfer on consumer prices. This is why cash incentives, easier to target and less expensive; as for international commodity prices, Morocco’s imports represent a tiny percentage in global volumes, and that is why the Finance Ministry ought to consider hiring a team of brokers so as to trade the best terms in futures and options on strategic commodities. The total cost surely can be brought below the 45 Bn the taxpayer is paying for.

12/ Focus on terms of trades rather than trade deficit as a performance index for export industries policy: the trade deficit is sustainable as long as the terms of trades are in favour of Morocco. But the trouble is, the heavy trend indicates it is not, or that it is too volatile to consider structurally safe.

13/ Shift export subsidies to exports with highest value per physical unit: though there are less than 2Bn provided as fiscal incentives for exports, textile and related businesses benefit most from it, courtesy of the very powerful Textile lobby; and yet indicators show textile actually destroys value; while it is true this particular business provides jobs for many workers, a gradual shift to more value-added businesses can not only make up for the job destruction due to the subsidies shift from textile to other businesses, but they can actually create jobs, and at the same time redistribute the surplus captured by textile.

14/ Free up Universities by allowing them to get as much private funds as they can.

15/ Transfer universities into hyper-campus outside metropolitan cities – create one self-sufficient campus city in each region.

16/ Stop the ‘Grima’ system altogether, offer a deal for incumbent grima-holders: unless figures are released on that touchy subject, but so far indicators point out to a very unfair system where insiders benefit more from closed businesses. And whenever a particular sector is protected, consumers are harmed: transports, fishery, sand careers, alcohol, import/export licenses… all of these sectors once regulated in the late 1950s should now be liberalized because they harm more than anything consumer welfare.

17/ Start working week with Sunday: a simple computation leads to a modest boost in productivity, and thus in GDP growth: there are 48 working weeks per year, and for every Friday half a day is squarely lost; moving forward the week-end to Thursday evening would save as much as 0.2 basis points of output growth, or approximately 25 Billion dirhams, perhaps 5 to 6 Billion in additional tax receipts.

18/ Differentiate retirement age, from 55 to 67: the Unions need to be taken on board, but a uniform retirement age across the board tends to harm a specific population more than the other. Furthermore, and starting from 2010, the number of minors has started to decline, which means that in 10 years’ time, considering no change in demographic indicators, there will be a need to retire workers later, and the sooner contingency and transition plans are implemented, the better conditions will be for a whole new generation for business and at the same time provide safeguards for health and insurance costs.

19/ Relax paperwork needed to create businesses: this is the most straightforward measure needed to bring undeclared business out of the shadow and into the legal limelight: all that is needed is to justify a capital of, say 5,000 dirhams, no past criminal records and no past history of bankruptcies.

20/ Spend 30 Bn per annum in Research and Development: so as to get productivity contribution to growth from 0.16 basis point to 1-2 full points and over a decade or so, push the boundary of potential growth beyond 5% and up to 7% with the same level of stability.

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, The Median Class: Growth Did Not Benefit Everyone

And we are back with the Median/Middle class tantrum. I sketched in a hasty post describing the “Middle Class Rip-off” perhaps It would be nicer -and more transparent- to describe the process by which I reached the conclusion our Median Class has lagged behind growth and has actually lost purchasing power over the last decade or so.

The Top 10% skimmed a large chunk off National Income growth in the past 12 years

The data is public and easily accessible on the World Bank’s Open Data website, more precisely on Morocco’s matrix of indicators with the following references :

SI.DST.02ND.20

SI.DST.03RD.20

SI.DST.04TH.20

SI.DST.05TH.20

SI.DST.10TH.10

SI.DST.FRST.10

SI.DST.FRST.20

NY.GNP.MKTP.CN

(All of which are related to Income Share per Decile and GNI in Current Local Currency).

For more up-to-date data (2007 and onwards) HCP Annual Social Indicators for 2009 was processed so as to get a complete picture of how incomes evolved over time. Since the data is computed in terms of decile/quintile households, I use the HCP table data 1960-2030 and make up for the missing years by computing an average proxy for demographic growth. When all these numbers are crunched together, we get that the average GNI growth between 1999 and 2010 was 6% in current terms. This means the Gross National Income doubled in 12years; Good news for the wealthiest 10%, their income quadrupled to peak at an average of MAD 430,000.

Now let us put things into context: the Median families -to my recollection the best available proxy for Middle Class households- have increased their income over the last 12 years. This is good news and should be noted. But on the other hand, they have lagged behind the artificially constructed average household; One explanation might be that averages are inherently biased toward individual occurrences scoring high values; there is a weight favouring those way more wealthy than the others that increases the average, as well as the measure of dispersion around it.

But increasing the average, or for the Median household to increase their own income is not a goal on its own. Indeed, every household has increased their income since 1999, but what about inequality? The ratio between the top 20% and bottom 20% went up from 1:7 in 1999, to 1:9 in 2010. In other terms, for every additional dirham the bottom 20% made between 1999 and 2010, the wealthiest 20% made 20. And the median household made 3 during the same period. If anything, the observed growth for the whole decade has benefited more to a tiny 20% minority (if not less) than it did to the rest of the population. Eliminating poverty is good; squeezing inequality is even better.

A Household from the top 20% has a annual income higher than that of the 80% households combined - in 2010

On the other hand, the Median-income households have lost pace with GNI growth both per capita and aggregate levels: it their income grown at an average of 2.63% in current terms between 1999 and 2010, while GNI per capita increased 2.9% on average over the same period. By contrast, the top 20% scored an annual increase of 4.8% -and since the top 10% increased their own income a 5.3% a year, the Super-Über-rich must have made a lot more.

But this is beside the point. We focus on the Median Class, who increased their wealth but did so at a level below the nationwide mean, and certainly lagged way behind the wealthiest. In relative terms, they have lost some of their purchasing power because of this; their social standing, for one.There is a social cost to the marginalization of the middle class: they increased their wealth, to be sure, but they are stuck and could not increase their income and wealth. It is as if a glass ceiling has been put above the Middle Class, an unbreakable and unseen obstacle that prevents hard-working Moroccan households from achieving a higher status. And there goes the argument: if the middle class cannot feel empowered, and their status envied or at least considered to be the norm, then the very seeds of class warfare are sown: a small, effete nucleus has reached upon and confiscated an increasing share of GNI: the 10% wealthiest concentrated National Income from 31% to 38%, while the Median Class saw their own share decrease from 15% to 13.2% of GNI between 1999 and 2010.

In terms of real purchasing power, the effect of inflation has been crippling: considering Consumer Price Index with base year set at 1999, prices have increased 40%, or an overall annual inflation 3.1% rate -CPI inflation is preferred to GDP deflator because it focuses on items that affect consumption and real incomes. Also, since comparison takes place on the 1999-2010 period, the 2005 CPI is re-computed so as to fit the base year.

So unless some household have increased their nominal income by a higher percentage in the meantime, they would have lost some of their purchasing power. And unfortunately, not everyone have increased their income by more than 40%: Over the last 12 years, the Median class have lost an average of 0.5% of their nominal income to inflation. In monetary terms, this means since 1999 the Middle Class have lost, on average, inflation-discounted value of MAD 1,201, that is MAD 14,400. This number is higher than what I posted earlier on because between 2007 and 2010, the income share decreased 1.3 basis points. The accrued effect of inflation takes up the loss in real income to the level mentioned above; so it goes from 11,000 in 2007 to 14,400 in 2010.

The only people pulling it off are the top 20%; net of inflation, their income increased 31% since 1999, and at annual rate of 2.3%. The top 10% did even better: 42% increase since 1999 net of inflation. That’s a MAD 140,000, almost double the gross returns for the remaining 90%.

The Median class, who saw their income go down while GDP and GNI went up during the last decade are only a prelude, a preview of what other classes are ailing from; they are both representatives of the increasing inequalities we live in our society and the key to bring together all classes around a granite-solid middle class that brings affluence to the economy. And for political parties to gain support (and votes) their policies should be designed toward the median, not the mean. Otherwise, their manifestos become meaningless.