The Moorish Wanderer

The Big Picture – Part 2

Consumption smoothing is a reality in view of empirical data, and in this particular occasion, HCP’s own PRESIMO model is at faults in terms of specification and reliability on estimated coefficients, and the model specification themselves can be gainsaid as to their robustness.

Consider their proposed model for household consumption:

\log(c_t)=.73\log(rw_t)+.87\log\left[\frac{rw_{t-1}}{c_{t-1}}\right]-.84\left[\frac{u_t}{l+u_t}\right]-0,82icv_t-.01(r_{t_0}-icv_t)

La variable la plus importante dans la détermination de la consommation est le revenu disponible des ménages. Dans le modèle, cette variable est endogène et résulte d’un ensemble de composantes : la masse salariale, l’excédent brut d’exploitation (EBE), les revenus de la propriété, les impôts sur les revenus, les transferts courants, les prestations sociales et les cotisations sociales.

The reported t-values indicate a pretty large standard deviation attached to each of the computed coefficients in this formula (just divide the estimated coefficients by their corresponding t-values below) Not to mention the fact that inflation and short-term interest rates tend to make the model dependent on contingent data, hence the relatively high R², though it comes at the expenses of a long-term, structural explanation of how households smooth their consumption across time and variations in income.

Consumption smoothing can be traced back to the consumption cycle – whose absolute and relative to GDP’s volatility are both second only to labour work. The proposed alternative does away with inflation and short-term interest rates, as well as unemployment; The idea behind it is can be broken down into two sub-parts:

– long-term trends: inflation and distortionary interest rates do not stay for long, and are eventually factored in by households. The fact that there is little (genuine) concern over subsidies provided by the Compensation Fund, as well as the short-lived effects of Bank Al Maghrib’s decision to cut its policy rate by 25bps are two illustrative examples of the simple intuition behind the idea: households rationalize a lot more than what they let on, and decisions of short-term consequences (including inflation and unexpected shifts in monetary policy) are eventually factored in, and their effect tends to fade away as time goes by. And in this particular issue, we are interested in real consumption behaviour over a very long period of time. Finally, because most of the aggregates are expressed in real terms,

– unemployment is a bit more difficult to gauge from aggregate macroeconomic data; furthermore, because the model is based on household units instead of individuals, there is a mechanism of risk-sharing that alleviates the effects of unemployment and the attached uncertainty to it.

We therefore consider the following model:

U\left(c_t;1-h_t\right)=E\sum\limits_{0}^{\infty}\beta^t\left[\frac{c_t^\gamma(1-h_t)^{(1-\gamma)}}{1-\phi}\right]^{1-\phi}

where: \beta: the discount time factor and \gamma: time fraction allocated to leisure.

While the formula might look baffling, it displays interesting computational properties in terms of inter-temporal behaviour – the trade-offs households face in deciding their present and immediate future consumption; for \phi = 1 we get:

E\sum\limits_{0}^{\infty}\beta^t\left[\gamma\log(c_t)+(1-\gamma)(1-h_t)\right]

(the ‘curvature’ of the proposed utility function denotes of the ‘intensity’ of inter-temporal arbitrage)

PWT provides dataset with consumption per capita, GDP per capita as well as GDP per effective worker; Consumption per capita is then computed back into an aggregate of Consumption per household, so as to preclude uncertainty around unemployment. Worked hours are then computed on the basis of the 40-hours, as the result is based on Moroccan labour laws.

When computed, First Order Conditions on that utility function yield the following, which is then regressed to provide estimates for the parameters described above:

. reg C k_h      
      Source |       SS       df       MS              Number of obs =      56
-------------+------------------------------           F(  1,    54) =    1.48
       Model |  .000169425     1  .000169425           Prob > F      =  0.2283
    Residual |  .006162348    54  .000114118           R-squared     =  0.0268
-------------+------------------------------           Adj R-squared =  0.0087
       Total |  .006331773    55  .000115123           Root MSE      =  .01068
------------------------------------------------------------------------------
           C |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]
-------------+----------------------------------------------------------------
         k_h |    .247134   .2028243     1.22   0.228    -.1595042    .6537721
       _cons |   .9015001   .0882337    10.22   0.000     .7246021    1.078398
------------------------------------------------------------------------------

with: C=\frac{c_{t+1}}{c_{t}}
k_h= \frac{\beta}{1-\gamma}\left[\alpha\left(\frac{k}{h}\right)^{\alpha-1}+1-\delta\right]
Households’ own \beta_t is therefore .9015 which does square with estimates from academic (and a lot more serious) papers.

These deep (structural) parameters are now all identified, next step is to build Morocco’s RBC model.

Business Cycles – A Story of Our Economy

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on February 18, 2012

An interesting discussion with my students (yes, I have recently been assigned TA duties, so kudos to me!) about debt, pensions and demographic growth -more specially a simplified version of the Ramsey-Cass-Koopmans model– prompted me to think about how come none of our economic-oriented institutions, namely Bank Al Maghrib, HCP or MINEFI, engage into some meaningful activities and produce high-quality papers – more often. It seems to me one paper on core inflation, one on business cycles (up to 2007) and a couple of unfortunately very brief reports of macro-econometric surveys are not enough to justify the total Human Resources spending of 2Bn shared by HCP and MINEFI alone. Crack some whips, and lemme read something substantial to bitch about!

Business Cycles per 3 filtering processes - HP seems to be good compromise for good smoothing

But I digress; back on the original subject – I posted a very raw estimate of business cycles – one that basically has the long-run growth estimated by means of a straight line, a simplistic assumption with no obvious advantages; as I have (finally) managed to unlock and master an interesting little device with Stata, I can now compute cycles per Hodrick-Prescott filter procedure. Dataset was extracted from the UPenn World Table, augmented with 2009-2011 Log GDP from World Bank Open Data website.

the graph plots three possible modus operandi for cycles filtering; the final result tends to favour HP since it does away with much of the high volatility segments that a linearly smoothing tends, in contrast, to exacerbate; from then on, a clear-cut graph depicting our economy’s history during the last half a century can provide informative insight about past events, and more importantly, a prediction of what is yet to come;

Let’s stick with H-P filter; what does it tell us? First off, that the party held since the early 2000s is bound to stop, or at least to slow down somehow; in any case, the next dozen of quarters would tell us exactly what it is all about. It is therefore up to a sound policy design to stabilize output, rather than force an artificial short-term and short-lived expansion.

Why does it seem to differ from earlier computations? First off, the initial data is slightly different; U-Penn PWT Table tends to use normalized data, better suited for international comparisons, and includes some specific PPP-related computations like the Geary-Khamis method. Furthermore, the selected trend dates back to 1955 (instead of 1960) which means the average trend growth rate is around 6.8% – which might also provide an additional explanation on why PJD was so keen to promote a 7% annual growth rate – although the retained growth is real, PPP-adjusted and per capita; further computations still bring the (ideal) potential growth rate around 5% (accounting for an average 2% demographic annual growth, hence vindicating further my claim that: a/ ideal GDP growth rate is 5% and b/ stabilized growth brings a lot more benefits in terms of growth gains as higher rates are usually linked to high volatility.

(one last note perhaps: data is annual, and that means I might have missed some short-term cycles within)

are we heading to a 1980s redux?

Turbulent independence: 1955-1962

for such a short period of time, fluctuations sure have been important; a newly independent nation like Morocco had to deal with hostile conditions, due to a drain in foreign capital – that is why pre-existing legislation has been heavily upgraded with the establishment of Office des Changes in 1958. On the other hand, massive transfers fell on the lap of the successive new governments, who also had the task of building a whole set of legislation from scratch (including labour, currency and budget legislation) as well as engaging in long-haul public expenditure – for lack of any sizeable private sector initiative.

Boom & Bust: 1962-1973

A very short shoot-up has been observed during the considered period, although it seems to be due to a particularly high government expenditure observed in 1962 and 1963, although that shock was rather short-lived, as it failed to prevent a deep recession that extended all the way to the early 1970s.

TelQuel reports on the economic conditions that led to the March 23rd riots:

[…] Comment en est-on arrivé là ? “Vous ne pouvez pas expliquer ces événements en faisant l’économie de l’histoire du Maroc de l’époque”, bougonne Simon Lévy. Très juste. Commençons par le contexte social. Plusieurs grèves ont marqué la fin de l’année 1964. La Promotion nationale, définie par les autorités en 196[0] comme un instrument de développement économique, est un fiasco complet. Les prix de la viande et du sucre grimpent de plus de 40 %. Casablanca compte 600 000 chômeurs et subit un exode aux allures d’avalanche : 36 000 personnes sont jetées dans la ville chaque année. Un tiers des habitants a moins de 40 dirhams par mois pour survivre.

The Big-State approach entailed by programs such as La Promotion Nationale failed ultimately for various reasons, thus leading to the observed trough for most of the mid-1960s.

Euphoric Borrow-and-Spend: 1973-1981

the commodity prices shot-up in 1973 provided Morocco with a lot of resources to spend: prices tripled between 1973 and 1974 from $13/ton to $42/ton and then $68/ton in 1975. Furthermore, large transfers in government expenditure observed during the mid-1970s, in the aftermath of the Madrid Treaty boosted the economy to perform very high growth rates, 7.5% on average between 1974 and 1977. In a particular fashion, these years were boosted mainly with government expenditure (including military spending) and receipts from Phosphate prices;

Boom & Bust, Redux: 1981-1991

Following the 1983 Structural Adjustment Program (SAP), the Moroccan economy was on a bumpy road, and save perhaps for the immediate impact of a drastic reduction in food subsidies:

In the early years of adjustment, Morocco made considerable progress. Between 1983 and 1988, Bank programs focused primarily on sectoral reform, while the IMF took the lead in stabilization efforts. In addition, the Bank addressed long-term structural change through project lending, economic and sector work (ESW), and dialogue with the government. As reducing the deficit was very urgent, it was decided that structural fiscal problems would be addressed at a later stage. Four adjustment loans (in trade, agriculture, education, and public enterprises) were approved during this time. With the exception of education sector reform, which encountered political resistance, and irrigation, which faced shortages of public funds, all were successful.

During this period, overall GDP rose by almost 5 percent a year, manufacturing exports grew rapidly, the deficit was halved, and the balance of payments current account reached a surplus.

Depressing 1990s:

the conjugated effects of SAP aftermath and a series of droughts grounded the economy to a halt, as indeed reports from the World Bank and the OECD pointed out back then; average growth most of the 1990s was null or slightly negative; between 1992 and 1997 average growth was about 1.45%, indeed:

Toward the end of the 1980s, the Bank was excessively bullish it its assessments of Morocco’s economic future. Progress in public enterprise and financial sector reforms was considered excellent. Two adjustment loans approved during this period carried relatively light conditions for disbursement because they were considered a continuation of a smoothly running reform program. The Bank’s ESW, which was of very high quality, was not sufficiently used and disseminated.

The Bank’s overoptimism continued through 1993, despite the fact that there had been hardly any economic growth since 1990. Growth slowed from almost 5 percent a year in the second half of the 1980s to 2 percent in the early 1990s.

Booming 2000s and aftermath: despite what one might think, the last decade was comparatively the best expansion cycle ever observed; government spending and debt were steadily halved, proceeds from privatization were injected back into the economy, and the private sector benefited from a strong foreign demand for exports. By 2007, average growth was about 5% and set on recovering the accrued losses from the 1990s.

The cycle was somewhat broken in 2009 – a halt rather than a breakdown, since the trend has not gone in typical past observations below the potential output line. But based on past occurrences, it seems we are about to witness the end of the longest expansionary cycle in the last half a century, and with it, the end of the only crucial recipe for development the past government have been so keen to promote: growth; insofar as growth was ‘sustainable’, the proceeds were high enough to allow for a certain (albeit very unjust) distribution of wealth. A slow growth would invariably lead to less for the many, hence increasing risks for genuine social resentment – and considering the current set of events, no one in government or else is keen on that scenario to happen.

The Independant Deterrent

Posted in Moroccan Politics & Economics, Tiny bit of Politics by Zouhair ABH on April 15, 2010

Now, I know that’s a bit unorthodox from a radical.

Save for “nationalistic” stuff, the largest weakness the Left post-1989 was Economics and economic policy. Perhaps that’s why social-democracy, which is more centrist policy-wise-, was pursued in Europe and under Clinton. I still retain some reservation on how those governments were pushed into devising policies that were not at the best public interest, just for the sake of deficit reduction and inflation-embattling. Not that I am against those, but the Center-left parties didn’t actually explore the whole range of policies (did they lack the guts, or is it because of their electorate primary target? Or was it far beyond their I can’t tell…)

Anyway, what I wanted to talk about is the role the Central Bank should play in the Moroccan economic structure, as well as on the Financial Markets. It is not, so to speak, a ‘bread and butter’ issue (although, when you think about it, it is, in a sense) but I think, it should take place in the great Constitutional Change Morocco is in a dire need for.

To put it simply, the Central Bank (Bank Al Maghrib) should enjoy a total independence from the government body –namely, the Finance Office and the Treasury as well-. In ideal facts, the Governor is answerable only to the Parliament, which sets up a public committee, just like the Fed and the US Congress.

It might look simple, but it is not. Why do we need the Central Bank to be free from any interference from the Government’s departments? Well basically, the idea is that, even though the majority coalition/party has a mandate from the people, they are bound to go for the ‘eye-candy’ policies (tax breaks, expanding investment) that are all targeted to some sub-populations, which does not always square with other important variables, such as interest rates, inflation, and ultimately, unemployment and economic growth. I am not saying governments are usually irresponsible (I am not referring to the Moroccan case only) but when unconstrained, they tend to make a mess out of the economy when they have a full mandate (I don’t mean necessarily an absolute majority, but the institutional tools to achieve their objectives). In essence, an independent Central Bank eliminates the cheapest way for a government to finance its programs, i.e. by artificially creating money, monetary inflation as it were. Of course, it also eliminates a precious tool (interest rates or Dirham devaluation) when difficult conjecture allows for or even obliges the governments to do so, though the central bankers are usually aware of such fluctuations, and quit frankly, it is part of their job to forecast, anticipate and jugulate these cycles.

Another detail that could perhaps be of interest to the financial markets: a Central Bank free of any interference from the Ministry led by an independent-minded governor is a strong positive signal that once a policy stated, the Bank will not derive from it, and subsequently, they would act upon it as a token. Before I start explaining why, amid the constitutional reform so badly needed, a credible Central Bank is a plus; According to Blinder (2000), “the concept of credibility has become a central concern of the scholarly literature on monetary policy […]credibility matters in theory, and it is certainly believed to matter in practice— although empirical evidence on this point is hard to come by because credibility is not easy to measure. The survey (Blinder gathered data from 84 Bankers members of the Bank Of International Settlements) started with a deliberate blurred definition of credibility, as it begun with the dictionary definition, i.e. the ability to have one’s statements accepted as factual or one’s professed motives accepted as the true ones. It seems the definitions Central Bankers fielded were heterogeneous, though not wholly contradictory; it evolved mainly around Long-term interest rates, as well as how anti-inflation policy is doing. In a more theoretical tone, Kyland & Prescott (1977), there’s a way in measuring credibility; it could be summed up in the following equations –that are assumed to hold true

1).

This is a modified version of the Phillips curve equation with inter-temporal expectations, π being the inflation rate, πe the expected inflation rate, u unemployment rate and z is a bundle of goods (supply commodities) [the rest are parameters relatively easy to compute with econometric techniques, plus a ‘noise’ error term ε]

Without going too much on detail, a credible bank is able to deliver a minimal difference between the expected and actual inflation rate. No Central Bank uses such target, but it is useful to see how good it does in dealing with inflation.

2). the second equation links unemployment rate deviation to interest rates r.

3. is a ‘trade-off’ function. L is the liquidity loss variable the Bank has to compensate (and under optimization rules, minimize); α measures the inflation aversion. The function is a tradeoff in the sense that the k parameter is the probability for the Banker to cheat and deliver an unexpected inflation -and therefore minimize the Liquidity loss artificially. The equations are all linked, with the bottom line being the Liquidity loss compensation. It underlines the important effects interest rates have on unemployment and inflation. The effects are intertemporal and involve a great deal of expectations and projections, all of which are function –to an extent- of the Central Bank’s credibility and commitment to keep inflation low, and so the long-term interest rates.

This could of course provide a starting point of measuring how credible a Central Bank could be; In other terms: “a central bank’s pronouncements are credible only if it attains a higher level of expected utility by following through on its promises rather than reneging. In other words, duplicity is to be expected unless truthfulness is in the central bank’s self-interest. One way to induce the central bank to carry out its pledge to fight inflation is for the government to write an incentive-compatible contract for its central bank. The author proposed an additional term to the equation 4 (as a penalty in case they cheated for ‘cheap’ compensation) but there’s another way to get it right; Furthermore, a credible Banker is such that his determination to stabilize long-term interest rates –and therefore inflation- is beyond reproach. The other important parameter (as it appears in the paper) was about ‘independence, indeed, according to the finding, most Central Banks agreed strongly on this particular point, it ranked much better with respect to the next reason in line.

As for how it could be effectively measured, one could offer an estimation –thanks to econometrical techniques of the α and k parameters (though data is quite incomplete in this area, I promise I will venture some sketches about it)

Before I move on, I sense the question is looming: ‘surely the Central Bank’s main concern should be about jobs, while it focuses in a rather obsessive way, on inflation’. That’s true. But then again, its up to the Finance and Employment offices to carry on effective policies –not involving inflation of course-. Actually, high or ‘concentrated’ inflation damages the common people more than any other class of society. It is amazing how a leftist government –or a left-leaning politician- feels more inclined to squash unemployment than fight-off inflation, while both are equally dangerous (well not so much, but both are harmful) There is indeed a tradeoff between both variables, but it all boils down to the long-term thinking most politicians (in Morocco anyway) lack. On a related topic, an independent Central Bank tends to go ‘technocratic’ and sometimes, biaised towards business and supply-side lobbies (thanks to their monetarist stance I should say…) Anyway I will come back on the various safeguards that could prevent it to do so, and instead, serve the common good (and not only the financial markets). This whole introduction on theory is to prove a point: a credible Bank has to be independent –in order to achieve its commitment to embattle inflation


How are things in the real world, or shall we say, the Moroccan context?

The Central Bank (Bank Al Maghrib) has a long history, though with little if no power right from the start. A little bit of history perhaps: Bank Al Maghrib, formerly Bank Of Morocco, was instituted in June 1959 (A. Ibrahim Premiership and A. Bouabid as finance minister) by virtue of Dahir n° 1-59-233. In essence, the bank acts a great deal like a super-paymaster-enforcer for the finance minister, plus there’s the business of blurred relation between the Civil service (theoretically answerable to the government), the Bank and the Monarchy (that got hold of virtually everything). Of course, that’s 1959, many things changed since then.

The 2005 Dahir brought some new things (I can’t find it in the Government Secretary’s gazette, if anyone has got the link, thanks a lot), for instance, no Civil servant or private Bank representative could be member of the committee board and indeed, the Bank is from now on the guarantee of monetary stability as well as monitoring the markets. That’s a good start, but it fails to address the relationship with the government. The latter still appoints 2/3 of the board.

Another thing: the Governor is virtually answerable to anybody –only perhaps to the only empowering authority, i.e. the King-. The present state of BAM is quite interesting, as it’s a pure bureaucratic institution, theoretically close to the government but actually very autonomous. However, because only a Dahir gives or takes away its prerogatives, its independence is hindered by this opaque tie.

I’ve got this example to show that BAM is quite submissive, or rather, cannot prevent government actions, even when they are perceived to be harmful to the economy; In 2003, the Jettou government was in between two minds about devaluating the Dirham. The Bank, on the other hand, was adamant in its refusal (at the time, there was no real immediate benefit to do so, and in the long run, it makes the Balance of Payment deficit even worse.) Funnily enough, there was a time the Bank wasn’t even aware there was devaluation. The government caved in for a lobby, period.

There was another row late 2009, when the Governor A. Jouahri refused to consider another devaluation.

That’s why the Bank has to keep its independence and all its prerogatives (among which to contribute or not to devaluation) off the government, because it is not credible in its commitments (as they change their minds fairly easily) Of course, in a real answerable and democratic government, such amateurism wouldn’t take place, and the Finance minister would be well advised to stick to their plans (if they have any, but then again, it’s always a pleasure to see a left-leaning finance minister advocating for privatization, a joke, really)

How do we solve this then? I don’t mind the Governor being appointed by royal Dahir (after all, it’s all the same in the UK, or any modern democratic monarchy) but there should be clarification on what it is meant by ‘with the advise of the Prime Minister or the Finance Minister (because, hey, an advise is not binding nor compulsory to follow, especially from an ectoplasm like A. Fassi, while a decision to sanction actually is, especially when it is someone lie A. Ibrahim)

Of course, there must be first a constitutional reform, so that the Bank would be of constitutional, rather than administrative legitimacy. The same bank, on the other hand, has to be answerable to Parliament, as the governor should give evidence to a public select committee (MPs, academics and members of government) and defend their decisions.

Again, I know this is a quite far-fetched policy for a left-wing radical, but I believe the economy has to be initially stabilized –through interest rates, unemployment and inflation- and then we can get on with our objective of cooperatives, public ownership and free information/innovation policies. Well, someone had to do the blue-sky thinking, shall we?