The Moorish Wanderer

Monopolies That do no Good to Morocco

Posted in Tiny bit of Politics by Zouhair ABH on April 23, 2011

Moroccan capitalism is quite strange: the rule of law is (usually) ignored, politics matters more than economics, and the invisible hand Adam Smith has been so keen to promote is, in a Moroccan context, holding a sturdy truncheon beating up 80%  of the Moroccan households. And yet, it fails to improve the lives of these 80% the same way it does to the 10-20%. Something is going terribly wrong.

Does it sound extreme? Well, not so much when one considers the economic structure of our private sector: private businesses that contribute most to the economy are not small businesses, nor do they innovate one way or the other. Instead, they are a curious mix of direct inheritance of colonial influence, i.e. large monopolistic companies in vital sectors, and hastily privatized public companies (many of whom were nationalized French property after 1956) abusing their dominant position (and benefiting from close political connections). Let us consider the following numbers to buttress this claim: following each company’s financial statements, the top 10 businesses (following their respective non-consolidated Net Income and EBITDA) in Morocco contribute to 10% of private Gross National Income in 2009. In contrast, they contribute only 3.65% of total private GDP (that is 3.17% of total GDP in 2009).

ISIN Company Private GNI Private GDP
MA0000011488 ITISSALAT AL-MAGHRIB 3,79% 1,57%
MA0000011926 ATTIJARIWAFA BANK 2,19% 0,76%
MA0000011512 DOUJA PROM ADDOHA 1,27% 0,13%
MA0000012031 LESIEUR CRISTAL 0,67% 0,05%
MA0000010597 LAFARGE CIMENTS 0,64% 0,31%
MA0000011835 BMCE BANK 0,61% 0,11%
MA0000011058 MANAGEM 0,29% 0,00%
MA0000011884 BCP 0,27% 0,19%
MA0000011850 DELTA HOLDING S.A 0,21% 0,04%
MA0000010969 AUTO HALL 0,06% 0,19%
ONA (Unconsolidated) 0,02% 0,30%

© Moorish Wanderer

This marked discrepancy between generated income and actual contribution to wealth creation is typical in monopolistic economies; even though there is no need to dwell on the sub-optimality of monopolies, it is worth noting that theory and evidence do confirm the salient characteristics of such market structure: monopolist agents enjoy high profits (or higher compared to those they would expect in a more competitive economy) but their own position compromises a number of exchanges, thus destroying value in the long run. This rather simple argument should not be disparaged, as it strikes a blow to the myth surrounding large companies in Morocco: their economic model does not serve the common consumer, nor does the economy benefit from in the way it is being advertised.

In fact, the argument goes beyond the criticism of private monopolies: it also claims that they do no good to the economy – either because their destroy value, or when they do create it, it is rather distributed in dividends to an already wealthy elite rather than invested to the greater (and mutually beneficial) good of the whole economy: short-sightedness, greed, rapaciousness and corruption are, unfortunately, the trademark of Moroccan capitalism. But then again, are we really in a monopolistic economy? Indeed, the top ten companies contribute a relatively substantial amount to the national economy, but that might just be due to their intrinsic structure; They might be, in their respective sectors, the only companies large enough to capture large scores of their markets. But such hypothesis also assume that in their respective markets too, these companies are monopolies, or shall we say, in an mitigated version of colluding oligopolies; Fortunately, there are some interesting tools designed to determine precisely whether these companies, and some of their competitors are indeed monopolies. Once the claim is verified, the second argument, that of the discriminating dividend policy should conclude to the need of breaking up these monopolies, and get competition going on, to the economy’s and the consumers’ benefit.

We shall put aside the Lerner Index, mainly because it is such a precise tool that we cannot put it to use; this index assumes a perfect knowledge of consumer elasticity, an assumption challenged by the multiple pricing these companies have on their respective sets of products, and by the difficulty to convene a clear pricing rule. Subsequently, we shall use another tool -that proved reliable as far as The United States Federal anti-trust authorities like the DoJ and the FTC use it to measure market concentration; the Herfindahl Index is going to be the starting point of our investigation.

The index is relatively simple to build; it basically sums the square of each company’s market share, thus giving additional weight to the larger companies; Consider IAM and its competitors as an example; Following the regulatory body ANRT’s figures, on all IT sub-sectors, the three main operators (or shall we say, the only three operators) have it all: they can price the market by discriminating the low and high types, they charge the highest possible fees (and accordingly, capture all consumer surplus) and their profits and income levels defy all senses of economic rationality. Regarding the landlines segment, this ANRT study says that:

Sur la téléphonie Fixe : Malgré des tarifs en moyenne 50% plus élevés que ceux pratiqués en France, la dépense par salarié au Maroc (2 932DHm/an/salarié) reste comparable à un pays comme la France (2 500DHm/an/salarié).” (p. 15)

To put things in perspective, the European Union’s standards consider the French fee levels in landlines (and more generally speaking, in IT) as too high; The Moroccan consumer (whether business or private) is, in effect, paying 50% more than possibly the most expansive market in the EU or the OECD only shows how strong market power is in the telecommunications sector. As a matter of fact, a group of bloggers did put on-line a collective post denouncing the abusive charged fees in mobile lines and internet access, let alone the mediocre quality of provided services. ANRT even recognizes that, over some segments, there is oligopoly (with very high concentration); where our respective analysis diverge, is that Internet Service Providers market is considered ‘open’ perhaps because of the more diverse set of offers (but seems to overlook the supply concentration nonetheless).

We observe the following market structure for all 4 main telecommunications sector: 3G, land-line, mobile line and internet. We retain the number of subscribers so as to measure the impact of concentration on consumers’ welfare:

ITSPs 3G Mobile Land Internet















 HHI Index    0.359            0.388      0.547       0.426  

 © Moorish Wanderer

(March 2011 Figures) We note the unusually high concentration in the HHI index (a 0.25 is usually considered a fairly high concentration index level) and that is not mainly due to the number of providers (indeed, with three competitors, the lowest HHI level would be 0.33, and all sub-sectors are way above that threshold. This also contradicts even the ANRT claim about ISP market to be fairly competitive. Before I conclude on that particular sector, let us consider the kind of concentration each sector embodies: land and internet sectors are even more concentrated than 3G and Mobile; Save for infrastructure issues, the main reason for this peculiarity is the concentration of low-types consumers. I should perhaps delineate this distinction between Low types and High types; it has to do with each consumer’s valuation; A Moroccan consumer subscribing to a mobile service is usually a high-valuation type, while pre-paid users place a lower valuation (due to a lower income effect) on the same service; I suspect marketing departments at IAM or Meditel (or even Wana/Inwi) understood that, and so charge high fees to the low types (thus the weird and discriminating fee structures)

I posted some months ago on the market structure of banking sector too; Again, the claim can be re-verified: though Banking HHI is lower (0.23) compared to the IT sector, it is still too high for a real competitive market (even more so on some banking segments, specifically the real-estate loans and their returns) and enable us to draw similar conclusions on the banking market structure: too concentrated, an oligopoly where each company prices like a monopolist.

The trouble with this oligopolistic structure (and both examples apply with similar outcomes to the retail distribution and consumption sectors) is that is sucks up nearly all consumer surplus to the monopolies’ own benefits (typically, this surplus transfer is simply a high price, high enough to dwarf any consumer feeling that any utility from consuming that good. The official argument -regarding this economic structure- is that these companies need to accumulate profit. They need to save cash, maximize their profit, expand and grow, so as to invest their cash and income in new plants, new infrastructure, expand their productive capacities, and thus, create jobs and expand, in turns, the consumers’ revenues. This tickle-down theory does not apply in our case. Let us consider the level of dividend distributed to the shareholders, and more importantly, the concentration and characteristics of these shareholders. The results are the last bullet argument that monopolies, in Morocco transfer value from the working people to a few, effete elite.

Between 2004 and 2010, Ittisalat Al Maghrib distributed about 91.66% of its net income to its shareholders. Indeed, the Moroccan government owns 30% shares – which allows for a MAD 3.1 Billion revenue in 2010, but also allows Vivendi to take back a dividend of MAD 4.6 Billion, and a needless drain on Morocco’s foreign reserves. The bottom line is that the remaining shareholders owning 17% have little to say over management decision or future investment (The Moroccan government is most likely to be in the same position in their relationship with Vivendi group or indeed the top-management officers).

Addoha, the behemoth real estate developer has an even more concentrated shareholding: tycoon Anas Sefrioui owns 56% of the firm, while the company itself distributes 40% of its net income. The real estate sector is quite special when compared to IT or banking, especially with respect to the booming industry in Morocco (a boom that might, if not already so, develop into a bubble) that explains how Addoha manages to create and 25.41% operational return on sales (20.43% including inventory turnover)

Revenue distribution in Morocco rather confirms the earlier theory about wealth concentration: in 1985, 10% wealthiest households owned 31.77% of GNI. In 2007, 33% of the corresponding GNI, even though GNI grew 4 times, 5 times when adjusted for inflation between 1985 and 2007; The top 10% outranges the lowest 10% revenues by a factor of 1 to 25. This concentration goes even higher when percentiles are computed; Even with the conservative estimate of a uniform distribution over the 10% wealthiest, the revenue gap is too high, and clearly does not explain how the total wealth creation contributed to more concentration in revenues (and not, as the story goes, bridge the income gap).

In these circumstances, any serious policy claiming to deal with poverty or income dispersion has to proceed by double tap: first by putting together a direct intervention in revenue distribution by means of progressive fiscal policy, and second by taking on the monopoly powers, thus insuring a fairer distribution of, and an increased size of the pie.

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The Case Against Monopolies

Posted in Dismal Economics, Moroccan Politics & Economics by Zouhair ABH on April 26, 2010
I speculated earlier on the need for a hypothetical government to nationalize private monopolies in order to crush any ‘financial coup d’état’, under the condition that theses trusts should be re-privatized in smaller bits, in order to get the competition going (I thought something of 4-5 years is a good reference) However, I failed to prove my point (rigorously I mean) And indeed, how do we assess the previous hypothesis? How do we prove that 

a). these companies enjoy private monopoly over some, not if all, vital consumption goods

b). these goods are quite important to Moroccan households, who are very price-sensitive to any changes.

Before that, I will just develop some basic microeconomics theory on Monopoly. The starting point is about how a company charges the ‘market price’, if it has any grip on it. We do assume that prices are exogenous to any market player; it seems that price-taking process, the core structure of market economics, is ignored by the companies, though they cling to the very idea of open markets. That’s a contradiction in terms, since a true market economy is not rent-providing, or even profit-providing in market equilibrium.
Coming back to pricing process: in an ideal world, the firm adapts itself to the market price by adjusting to its marginal cost (i.e; with reasonable extrapolation, the marginal productivity of its inputs). Second year economic students do know about that graph I believe:

As long as market price is above the marginal cost, the firm will produce till it reaches the optimal* quantity (which, in comparison to other market situation, is the highest) for a social equilibrium.

You know what? This has never existed, though many economic and financial models base their assumptions on a near-perfect market structure (after all, Hedge funds were once described as ‘market clearing mechanism’, enabling security pricing to be more efficient). Nonetheless, in a true market-competitive structure, a single company has a very small margin on prices and quantities, so they do take price market as a given or rather, in their majority, follow a ‘signal’ (another subject to be discussed in another post perhaps)
The Moroccan economic structure for the described goods is closer to what A. Marshall described as a rent economics. He had some interesting thoughts on the matter: “It has never been supposed that the monopolist in seeking his own advantage is naturally guided in that course which is most conducive to the well-being of society regarded as a whole, he himself being reckoned as of no more importance than any other member of it. The doctrine of Maximum Satisfaction has never been applied to the demand for and supply of monopolized commodities.” He then goes on: “The prime facie interest of the owner of a monopoly is clearly to adjust the supply to the demand, not in such a way that the price at which he can sell his commodity shall just cover its expenses of production, but in such a way as to afford him the greatest possible total net revenue.”

Clearly, the academic definition of a monopoly is quite revealing: there’s nothing beneficial for a society from a monopoly –save perhaps for the monopolist themselves-, in that sense that they capture the consumers’ surplus (the premium between the market price and their maximum reserve price), the captured surplus is therefore a rent, which is in turn spent as dividend –rather than investments as we are ld to believe in our ‘national’ economic model- to the wealthy.

There’s of course a fine line between a ‘Marshallian’ pure economics and the actual and factual economics we are dealing with. In facts, absolute/pure monopolies do not exist. However, in a more refined economic theory, duopoly and strong-form oligopolies do replicate the same pricing methods, but in a two-times model. I am of course referring to the Cournot/Stackelberg models, for which we need to understand the academics underlying before we can go further: indeed, aggressive moves on prices at a particular market does not necessarily mean competition (and therefore, outcomes to the benefit of consumers) since the tides could change to a much less price-friendly market structure. Basically, the Cournot model starts with the ‘best response’ strategy each company draws up against their competitors, they end up producing with monopoly quantities (because of their respective strategies) each firm enjoys a captured portion of total demand, but cannot charge it with the full marginal revenue, so they end up charging the pure competition market price, namely their marginal cost.

The general assumption is that all competitors enjoy similar cost structures, and subsequently, the same marginal cost (save for the fixed cost) otherwise; the one with the lowest cost takes it all. Despite its simplistic assumptions, the model could, for the available data, provide interesting insights on how particular markets are doing, and how some companies are taking advantage of it.

The Stackelberg model is even more accurate; the dynamic dimension is more important, and in our case, suits perfectly the edible-oil market: there’s a leader that has a first-move advantage, and can subsequently use an advantage it has –in it’s cost structure that would be discussed later on- to fix a certain amount of production that would, in the long run, simply oust any serious competitor, and leave little of market shares to the smaller followers.
Let us just have a look at two sets of the main consumption goods for a Moroccan household, Edible oil and Milk derivatives.

* Oil derivatives:

I’ve always wondered: how many firms are there in the Oil derivatives market in Morocco? Yes, we know Lesieur-Cristal, a notable subsidiary of the well-known SNI-ONA Holding, and according to their website (you’ve got to give them credit for that) they own the following products;

– in edible oil sub-sector : Huilor Graine d’Or Lesieur Plus Oméga 3 Lesieur FritureSafia Cristal Oméga 3 Cristal Friture Cristal Maïs Oléor

– in olive oil sub-sector : Jawhara Cristal Olive MabroukaSalamZitouna

That’s a lot of products, and anyhow, no competitor in the market is strong enough to field the same product portfolio, so it’s a lost cause for any challenger… (And, If I may, you sell oil if you want to, Lesieur’s not for leaving.. I know, my puns are terrible…) The Oil market is notorious for the fierce rows that sprung between the incumbent monopoly (i.e. Lesieur-Cristal) and any strong-hearted competitor trying to get in, most notoriously Savola; Unfortunately, our good friends the medias (the newspapers of course) consider it to be the very image of a healthy competition, or, in simple terms, a competition. Of course, I can understand that a journalist has a weak grasp of proper academic definitions (I mean, the Journalists’ school doesn’t graduate specialists) though I feel they are mixing market competition and Cournot-like competition. Let us for a moment assume their primary market is the consumers’ basket of goods (namely, 8.6% of the national average consumption as defined by the HCP) the Median told us that overall edible-oil market is roughly divided up between three main firms. It evolves around something like 80% of the Market for Lesieur, Savola & Huiles du Souss… I know, I couldn’t hold of proper data so I had to make some very extensible extrapolations). These companies have none but the price to attract the consumers. And seemingly the price range is wide enough (8 to 12 MAD/Lt) to create specific niches for each competitor;

However, these prices come to a cost, not really the marginal cost, but on the total –or sunk- costs: Lesieur-Cristal has a tremendous advantage, for their incumbent status allow them to keep fixed costs quite low; their balance sheet does show up a relatively low (their intangible fixed-asset ratio is around 71% for 2009 figures) and therefore, can afford to go further down their theoretical marginal cost. The Cournot model does assume the equilibrium price eventually settles at the lowest marginal cost. However, the main competitors are going in for a dumping, making the fixed cost –or, in Savola’s case, the entry cost- the ultimate efficiency criterion. Savola could cope with dumping, but certainly not for long, and I wouldn’t be surprised Savola would quit (which it did, eventually) All in all, Lesieur-Cristal is now in a near-monopoly situation, with a huge rent-situation, that is not invested –as we might hope- but rather spent in dividend-distribution policy. Because no substantial investment was made, they managed to increase the total distributed dividends to 187Million MAD, something like 44.68% over the year. Actually, they could have distributed twice the amount as they settled for an overall self-working capital of 300M MAD which can be virtually wholly distributed (save for the legal compulsory reserve), that’s a nice rent the Moroccan people are paying for… to give you an idea of what we might do with it, the 2009 Budget devoted a similar amount to the Wildlife & Forests departments (145 Million MAD investment allowance) or to the Families & Social affaires department (195 Million MAD) or even the jails and prisons office (264 Million MAD)

– Milk derivatives/eggs

Let us just focus on the Milk derivatives (it so happens egg-production is relatively out of line here) I can still remember the cooperative Jaouda struggling successfully against the other SNI/ONA-subsidy (come to thing of that, SNI/ONA are everywhere, quite disturbing !) How do we make up for this one? Is the market really ‘competitive’? First off, Jaouda (or shall we say, the Copag) is a cooperative, it works with a different economic paradigm (they do try to maximize their profit, but their cost structure has an additional term that changes that changes somewhat the classic optimization scheme, anyway, I think this article is quite interesting to read) the fact is, Copag is treating the local farmers with a win-win co-partnership, which allows for a steadier rate of profits, though at any rate Copag is posing a serious threat to Centrale Laitière.

Of course, they are taking away market share bits, but it does certainly not affect Centrale Laitière profits as we can draw up from their financial statements (2009): They managed to get 1Billion MAD in terms of cash result, which enabled them to distribute dividends for a total amount 461 Million MAD (2009). [Again, that could provide money for 5 regional departments for the Education ministry investment’ allowance] The idea of dismantling Central Laitière and selling it by bits to local cooperatives is, I believe the right move for a government to ensure a lower market price and a fairer distribution of wealth, instead of spending it all on dividends to the wealthy.I shall devote another piece on the oligopolistic structure of the Moroccan economy –or at least, for some of the essential goods- and the need for a genuine democratic government to crack down radically this intolerable rent-seeking economics. I would be quite interested to write something on the ‘grima’ system; it looks as though the whole economic structure moves in a bizarre and rather unhealthy paradigm, namely the permanent quest of comfortable and effortless rents, just like ‘grima’ seekers.

Basically, these firms that supposedly proud themselves to be leading the Moroccan growth are just following the same old scheme of rent-seeking, of course with much modern management techniques, but the fact of the matter remains what it is: Moroccan capitalism follows ‘grima’ scheme. It became so much of a norm that even the Cour des Comptes acknowledges the fact in many parts of their 2008 Report:

Il a été relevé que l’octroi de l’agrément ne repose pas sur des règles précises” or “En terme d’agréments octroyés, l’évolution du nombre des agréments octroyés permet de constater que […]1749 agréments ont été accordés en cinq ans, soit en moyenne 350 agréments par an. En dépit de l’amélioration constatée dans l’évolution annuelle du nombre des agréments d’une année à l’autre, il convient de souligner que les 4445 déclarations d’intention de création exprimées entre 2003 et 2007 se répartissent comme suit:

• 1829 déclarations seulement ont été suivies par des demandes d’autorisation, soit un taux de désistement inquiétant de près de 60% de la part des déclarants;

• 1749 agréments seulement ont été accordés, soit un taux d’agrément de 39%. Ce taux modeste trouve son explication, en partie, dans la lourdeur remarquable de la procédure […]

All in all, temporary nationalization is not the pristine and flawless strategy we might think of. It is only the governmental move to deal with private monopolies and oligopolies. The ‘grima-seeking’ mentality, on the other hand, cannot and will not be done away only by abolishing these rents: to abolish oligopolies means also to abolish the licenses-approval system as well.

Thou shall not bow thee economic plans

Posted in Dismal Economics, Moroccan Politics & Economics by Zouhair ABH on April 19, 2010

In essence, the left-leaning chum would be anti-monopoly (private monopoly of course). Why ? Because it makes people pay more for fewer goods, and it uses its dominant position to lock the market away and setup some kind of rent economy.

Does it sound odd? I mean, for a radical to advocate market competition instead of an old-fashion planned, centralized, state-owned economy. Of course, if you keep cluttering your mind about it, one can never get to the bottom of it anyway.

I think even the radicals are not sure about it. The fact is, they entirely focused their struggles on the political issues (including personal choices, free speech, religion, sexual orientation and other individual choices) that they lost more or less sight of the economy.

Save for those with some economics-reading background economics, as I underlined before, is a weakness.

Morocco had got only two opportunities when left-leaning governments were in power. A. Ibrahim in 1959 had to supervise building up the economy from little, pre-colonial shamble (and it does count, though it provided the land with some invaluable assets) and in 1998, when A. Youssoufi started the so-called ‘Alternance Consensuelle’, with a finance minister with so narrow a margin, that he had to get on with it and basically to implement right-wing policies. In facts, save for some nationalization and planned economy, radical left-wing economics has little to provide. I came across some cooperative theories that can be of use, but they are not widely considered suitable for manifestos, but I believe it to be something the new left should promote.

Not that I reject completely economic plans, but it seems to me the economy, like the society, is part of the collective and individual rights and liberties. Besides, centralized, soviet-like economic structures are contingent plans, and more likely to be (relatively) efficient when a country is either in autarky –with enough resources to stand its needs- at war or emerging from one (very much like former USSR in 1921-1928 and after 1945)

I fear I’m losing your attention. Let me just sum up real quick my own stand –with a simplistic description for the moment-: market economy is not fundamentally evil, and when properly monitored (meaning that the government has a neutral role of umpire), could deliver a good deal of wealth to society, and thus preventing income gaps, poverty and the social problems that ensue.

Of course, that’s just a utopia that might never be achieved. I should perhaps add that I still favor collective ownership, in the sense that employees should take over and be their respective own companies’ shareholders; the idea that communism or socialism means all productive units (businesses and firms as it were) should be state-owned is a distorted opinion –based on a historical experience that didn’t do justice to itself- of what ‘collective ownership’ means; Of course, I am not an expert in Marxist theory, but I seem to remember, that first, Marx didn’t advocate for state-owned economy (and in facts, his views on government are quite interesting to study) and second, he started, late in his life, to take interest in the mathematical background he needed to make the dialectic more ‘scientific-like’.

However, before such principles could be applied to the Moroccan context, there are so many roadblocks one has to do away with; the present system (what is considered to be the Makhzen) has its economic bastions too, and in the event of a constitutional reform, a democratic government, whatever its political stance, will face considerable resistance from occult economic lobbies.

The idea is that an ‘honest’ government (in the sense that they genuinely care about the public welfare) would be broken within weeks if they do not comply with what some powerful lobbies dictate as terms of appeasement. In that case, a hypothetical radical left-leaning government will have to deal with it in the most direct way, i.e. to nationalize –or any similar decision these institutions. If I may add something else, the nationalizations or such as they would be described, are not definitive, nor part of a move to control a monopoly and turn it to the state benefit, for these institutions will be privatized afterwards into small pieces, none of which could recover –at least for a certain time- the monopoly position they had, with all the perks and the rents that ensue.

It’s not a clever solution, I know, though it’s the intricate question of how democracy and economic power can cope with each other: the ruling majority has a popular mandate, but economic lobbies will block the government of the day because it may harm their interest (and believe me, the same applies to the unions, for they do not always act on behalf of the workers’ interest, let alone their own members’) Temporary nationalization is two-fold: first, to ensure a little cash security for the government –nationalizing is quite expensive, unless one is set not to compensate the previous owners and a bit extra to finance some project or whatever the government wants but cannot achieve (black ops or electoral bribing are not included)

How do we proceed? I am not a trained lawyer, though I think it might go like this: at an unspecified moment, the government seizes the targeted companies, and delivers the opening price for the shareholders on the stock exchange market. There is no need to stress on how crucial this move has to be in terms of secrecy and swiftness: an expectable government move will lead to a dramatic rise in the stock price, making the whole operation very difficult to carry on. That’s not the difficult part: actually, the hardships to follow are to ensure the staff loyalty, a sustainable profit margin and possible retaliation from other companies (especially foreign interest, because, let’s be honest, a couple of multinationals will be infuriated when the decision comes into effect)

I already hear some reservations: why take on large companies, aren’t the ‘national champions’ the key players of our global strategy? I refer to what seems to be the economic model adopted by the high spheres to ensure our economic development. It imitates, in a very amateurish way, the South Korean and Japanese models of large conglomerate of private monopolies on the national markets, and aggressive, rent-seeking entities in similar markets (Maroc Telecom in Mauretania for instance), the ultimate goal being a progressive accumulation of a rent that would be later on invested, and subsequently provide Morocco with the boost it need to develop itself. The strategy, however, has a major flaw: the rent is almost systematically paid as dividends to the shareholders. Ok, Châabi does invest in ‘social responsibility’ sectors –and those moves should be encouraged indeed but there’s a huge amount of profits that lies there, and it’s just divided up between a tiny yet powerful mob of upper-class people. I think the following figures could give you indeed an idea of how it goes down.

Millions MAD





Total Sales

18 277.9

30 339.0

6 011.96

11 927.7

Operating Profit

1 148.3

14 008.0

1 552.45


Operating Margin %





Net Profit

1 863.6

9 779.0

1 023.79

3 940.84

(CDVM regular financial statements, 2009)

These figures show a high operating margin, too high for a good company. Its quite difficult to state that they sustain that high a level of profits, but if so, we can then reasonably assume that their profits are not the result of competition in their own sector, but rather the benefit of a rent or quasi-rent they get out their monopoly –or close to it- situation. Furthermore, these companies happen to be loaded with cash (I didn’t have a close look to their cash statements, but it seemed quite high) and distribute much of their profits as dividends. I won’t bring out of the wood some fancy econ theory, but I would like to discuss in length what the seemingly narrow margin ONA holding displays hides in terms of rent: the company has an indecent rent situation on consumer goods such as Sugar, Oil, Milk & Derivatives, Waters and so on… (Incidentally, ONA is to merge with SNI soon, so precious information will disappear, as the new entity will no longer be listed on Casablanca Stock Exchange, and therefore, will have no statutory obligation to display its financial statements… I hope they will list under the new entity, after all, it’s in their interest to display some financial transparency, foreign investors-wise)

Let us first enquire about what does the Moroccan household consumes, or rather, how do they affect their income.

The national statistics office produced a survey in 2001 in which 46% of the total average income (253.186 MAD yearly) is devoted to consumption goods.

In a nutshell, the consumption structure is as follows:

Why do we have to bore ourselves with these figures? Well, the idea is to prove that, because of the important percentage devoted to consumption, the average household is very sensitive to price changes, and therefore, any monopoly on these products is indeed a rent provider, and therefore, should be disbanded.

And apparently, it appears to be the case. The average Moroccan household are quite sensitive to any price changes (which were quite in an upward trend, it should be pointed out). Without dipping into fancy theories, the sole fact that nearly half the annual income is devoted to consumption (just to maintain bodily functions going on, roughly speaking) gives a pretty good idea about how consumption might change function of price changes.

In essence, the profit margin these companies are making –for the consumption goods at least- are more part of a rent profit –sucked up from the consumers’ surplus.

In these conditions, a penalizing move against those companies is and has to be in the interest of the public. The good news is, cracking down on private monopolies can be a popular policy among small and middle-size businesses (as well as the final consumer). I will devoted another post to this issue, in more rigorous terms, that is.

Markets, Innovation and Competition

Posted in Dismal Economics, Read & Heard, The Wanderer, Wandering Thoughts by Zouhair ABH on July 4, 2009

To quote Immanuel Wallerstein ‘Only a monopoly could pursue innovation (as a way to secure and expand its rent)’.

Though this statement is purely abstract, many examples come to mind when it is about innovation : apart from Edison-like geniuses, market innoation comes from large, oligopolistic or monopolistic structures : Apple with its Ipods and Iphones, Microsoft with Window and Internet browser (Albeit threatened by newcomers)…

The sum of examples is too large to be presented in length. One the other hand, economists from the dominant stream advocate strongly the idea that only free markets could bring about wealth, well-being and subsequently innovation (as part of the positivist ‘progressivism’ competition makes shared among agents)The main issue, therefore, is an attempt to find out about the various relations markets, innovation and competition have with each other : Could market competition encourage innovation ? How can innovation be measured in an economy ? what changes does innovation make within market structures ? The present article will present (or at least will try to) a proper definition of innovation, as a first step to understand mechanisms behind market changes. Secondly the readers will get acquainted with various theories contradicting the previous thesis, essentially on the point of competition. historical evidence shows the large role monopolies assumed in the global innovation, throughout human history. Finally, One will show that, though competition is for innovation to emerge, monopolies store undeniable advantages in controlling and improving it.

When an economist presents the free market as beneficial for innovation, they have in mind the following reasoning : an individual firm makes profits when its marginal cost is below the market price (one assumes the firm operating in a pure and perfect competitive market). Innovation intervenes when a firm makes a ‘discovery’, namely, a new combination of factors of production that produces more output for the same amount of input. In that sense, innovation is nothing more than a new combination of Labour and Capital, that increases significantly their marginal productivity.

So, a firm in a competitive market has a strong incentive to innovate, in order ot outsmart their competitors, and to increase its share of profits. In the short term, consumers benefit from competition, as the quality of goods improves (thanks to a better combination of means of production) at the same price, or even lower. In that sense, a free and competitive market presents all the incentives for companies to innovate, at least for the short run, since their innovation combinations -as a knowledge/information- are bound to be known to the market (fluid and transparency assumptions hold) and therefore neutralising their initial advantage. The theory seems perfect. Perhaps too perfect, as the real world differs significantly from the one pure microeconomics builds.

Game theory, as well as actual corporate behaviour tend to be more accurate in dealing with the innovation issue : a famous economist, H. Varian, wrote an article about network and high-tech economics, an article one should look at very closely : in an innovative market, two variables tend to contradict some of the important assumptions of free markets theories : transparency and fluid information.

A firm has the choice (or not) to undertake R&D studies, a decision that could cost a certain amount of money. As a rational agent, the firm has to guarantee sizeable returns over this investment : returns of investment have to outbalance their initial cost. Firms could for instance, develop some kind of restriction to the use of their innovative goods : Microsoft protects its software and forbids their uses to get to the original code-source (namely, the very heart of the software, which could be altered). Patents could also guarantee a rent to the innovative firm, by protecting its innovation. Those two pattenrs of behaviour contradict indeed the very heart of free and competitive markets : free information.

Another way of looking at the matter would be the ‘free rider’ theory : in a relatively open market, a firm could just wait for innnovation to ‘pop’ and grab it. The free rider firm would be actually happy to get a small but stable rent on the market, by adopting a ‘follower strategy’. In that case, and if all firms were to follow the same reasoning, no innovation would be expected.  In a monopoly though, things are different : as many economists put the stress on it, a competitive monopolistic market could be innovative, but to make sure that no potential newcommer would get into the market. In that sense, innovation works as a barrier to entry. Because monopolies do not bring maximum social utility, they are actively denounced by economists. The plain fact of the matter is, Innovation IS more effective under monopoly situation thant in competitive markets pattern.

The stumbling block in this issue is without doubt the treatment of information. Should the benevolent government -i.e. the public authorities- abandon te patent system ? Should it introduce some change in it ? As H. Varian, pointed it out, there could be various alternative economic models : the most novel and original one being the ‘cooperative’ innovation (with a paradigme far from the dominant one in economic theory) : Linux, an alternative operating system, improves and expands because a community of engineers and IT technicians want to contribute to the Linux project.

This authentic public behaviour might give ideas to the public authorities : why shouldn’t the innovation be a public good ? instead of being ‘produced’ in a competitive market, main innovations could be the fruits of public R&D, and at the reach of everyone. Firms, as well as other agents could expand it -to a minor or marginal scales-.

This proposal, of course, has to be discussed and expanded, but the idea of a public and free innovation monopoly could be a suitable answer to the problem.