The Moorish Wanderer

The Big Picture – Part 4

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on May 14, 2012

The standard RBC model has several major limitations that fail to account for proper results – in this case, a close match-up with summary statistics obtained after significant aggregates have been HP-filtered. The graph below for instance, shows a long-term comparison between actual GDP data, and RBC-generated output, the widening gap can be explained by the fact that savings in the standard RBC setup are exclusively domestic; recall capital accumulation dynamics:
k_{t+1}=(1-\delta)k_t + i_t
and National Accounting identities:
c_t + i_t = y_t
y_t = z_t k_t^\alpha h_t^{1-\alpha}
Obviously, if the Moroccan economy were to rely solely on domestic savings, capital accumulation would have grown at a lower rate, hence leading to smaller levels of output; furthermore, because Morocco is not an immigration country – meaning, demographic growth is endogenous- Capital dynamics account for a lot in terms of output growth, which vindicates the initial claim domestic savings are not high enough to explain the levels of investment observed over the past half a century.

This in my opinion is the strongest piece of evidence I would consider for pro-free trade policies: capital flows boost the economy, to the tune of 130Bn Dirhams every year since 1965, in real terms.

In addition to Balance of Payments issues, the RBC model needs to embed Government policies in the model’s intrinsic functions; Overall, RBC model described by an inter-temporal CRRA utility function and the resources constraints mentioned above yield the following:

HP Data     |σ      |σj/σy |Corr(y,j)|
Y_GDP       |0,08030|   1  |    1    |
Consumption |0,07013|0,8734|  0,8215 |
Investment  |0,22035|2,7441|  0,8369 |
Government  |0,24127|3,0046|  0,4997 |
Labour      |0,04256|0,5300| -0,8670 |
RBC         |σ      |σj/σy |Corr(y,j)|
Y_GDP       |0,06596|   1  |    1    |
Consumption |0,04715|0,7148|  0,5092 |
Investment  |0,20460|3,1018|  0,8766 |
Government  |         No Data        |
Labour      |0,00002|0,0003|  0,0238 |

Starting from the mid-1960s, Real GDP departed significantly from RBC-generated GDP. Incidentally, Morocco’s Balance of Payment picked up steam around the same time. (log-levels)

As you can see, the standard RBC model does pretty well in explaining cyclical fluctuations on GDP, household consumption and Investment dynamics – it exhibits lower levels of volatility for GDP, Consumption and Investment.

So even though synthetic data shows discrepancies like that of GDP’s, it retains similar features – in this case volatility, correlation and relative variance with respect to other aggregates.

The basic model provides powerful results, but not powerful enough to start building on forecasts and statistics-based predictions; there is a need for newly specified functions where foreign trade, government expenditure, and perhaps cross-correlated structural shocks are embedded.

The Big Picture – Part 1

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on April 28, 2012

Congratulations are in order: two days ago the Finances Ministry has answered a tweet of mine, on their website, no less!

Well, the answer wasn’t interesting beyond the usual, though I would give them credit for taking the trouble; Still and all, we are a long way from making the Open Data government project worthy of what a democracy should and can aspire to. This has little to do with my own political views: unless data is made available to everyone, there is no way one can tell how official figures are computed, or how institutions like HCP, MINEFI or Bank Al Maghrib differ in the assessment they offer on growth perspective. Their methodology differs, and so do their aims; but as long as they do not unveil the working models they make theirs, the only image they project is that of opacity, if not outright incompetence.

Take HCP’s state-of-the-art PRESIMO forecast model: it was developed under joint supervision of HCP and French office for statistics INSEE. A rather comprehensive model delineated in detailed but not unnecessary fashion, yet lacks the one feature that could have made it reliable: the data it uses, it seems, dates back to the 1980s. The amount of data – or rather its sample size baffles me: are we about to use predictions from less than 60 quarters? If so, I guess my own doodling is worthy too!

Le modèle est réestimé sur les données de la comptabilité nationale (base 1998) et diffère substantiellement de sa première version élaborée, en 2005, sur les données (base 1980). Les nouvelles données des comptes nationaux ont remet en cause la spécification empirique de certains comportements. La vie normale de ce modèle macro-économétrique implique, donc, des changements plus ou moins fréquents de ses spécifications.

Consider for instance the shares of capital, labour and random productivity factors in GDP growth Y_t=A_t K_t^\alpha L_t^\beta and when log-linearized, growth is then broken down into capital and labour growth contribution, and a TFP process whose properties will be described later on.
y_t=a_t+ \alpha k_t+ \beta l_t + \epsilon_t

The following computations argue the fact that the Moroccan economy displays remarkable patterns in inputs’ contributions in generating output. I am using to that effect a relatively simple yet powerful tool to explain it; as usual, data from pre-1960 can be found and downloaded on PWT website;

. reg gdp w_h capital
      Source |       SS       df       MS              Number of obs =      57
-------------+------------------------------           F(  2,    54) = 3449.00
       Model |  107.473871     2  53.7369353           Prob > F      =  0.0000
    Residual |  .841343008    54  .015580426           R-squared     =  0.9922
-------------+------------------------------           Adj R-squared =  0.9919
       Total |  108.315214    56  1.93420024           Root MSE      =  .12482
         gdp |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]
         w_h |   .6972258   .0757027     9.21   0.000     .5454511    .8490005
     capital |   .3417366   .0381563     8.96   0.000     .2652378    .4182353
       _cons |  -1.923755   .6722611    -2.86   0.006    -3.271558   -.5759528

The model fits perfectly; we can indeed observe that:

– Labour contributes about one-third to output, while Capital has a little over two-thirds (and that can be explained by changes in capital stock that will be accounted for later on)

– The aggregate output function is very close to the standard CRS Cobb-Douglas every undergraduate economics student is familiar with;

Total Factor Productivity is a zero-mean process that will be described later on, and though it seems not to be significant (check the Confidence Interval) it falls in line with the theoretical model; it is also quite interesting to check any correlation between TFP and both factors of production. And so the baseline model for Morocco’s output can be described as follows:

y_t=a_t+ .341 k_t+ .697 l_t + \epsilon_t
\epsilon_t\rightharpoonup N(0;.015)

(Coefficients’ standard deviations can be read on the table above)

Several caveat arise however:

– The absence of inventories: through no fault of my own, there is no way -to my knowledge- to find inventory turnout recorded in Moroccan economic data since 1955 – or perhaps the data isn’t released to the public domain; either way, the absence of data on inventories does allow to consider the present results to be strong;

For \partial s_t inventory annual turnout, a more ‘realistic’ formula would be:  y_t=a_t+ \alpha k_t+ \beta l_t + \partial s_t + \epsilon_t

– The “educated guess” of Capital depreciation, initial value of Capital: recall the following National Accounting equality: k_{t+1}=(1-\delta)k_t+ i_t Investment can be equated to the Gross Capital Formation, and the real depreciation rate is not officially reported it seems. On the other hand, looking at some of the largest non-financial institutions listed on Casablanca Stock Exchange, actual depreciation rate computed from their financial statements do point out to a figure around 3-5% of total assets (including intangibles)