The Moorish Wanderer

The Economic Chronicles of the Kingdom, 1955-2011 Part.1

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Read & Heard by Zouhair ABH on July 12, 2012

It’s been a long time I did not show up on twitter, and I am the better for it. I wouldn’t pretend I’d missed the impassioned twitto-debates I have been involved in, but in matters of economics -as much as in other areas- complex issues cannot be boiled down to 140 characters.

Summertime and with it comes time for self-assessment. A lull to reflect on the past year.and I would like to devote part of my time to a dear project of mine, one that I would like to devote my professional life to: a comprehensive chronicle of Moroccan economics, from the mid-1950s up to date. This I would like to do because the mainstream documentation on that subject and other contiguous ones is not, to my opinion, satisfactory. This is by no mean unfair criticism of their authors, often reputable scholars that however fell victim to trivia and the politically correct. But the fact remains, there are very few papers I can lay my hands on that resemble anything close to, say whatever Lucas, Sargent, Prescott, Kydland, Blanchard, Krugman (to name but a few über-heavyweights) produced in macroeconomics. I am sorry the Cinquantenaire report and the paper commissioned by the Abderrahim Bouabid Foundation did not rise up to the challenge. At least I will not disappoint as a pseudo-amateurish academic blogger, will I?

I suppose it is extraordinarily pretentious of me to even assume I can write up Morocco’s economic history. And surely it is. But my amibition is otherwise: I wouldn’t like to merely report on economic facts and statistics – for that and many other useful comments, please refer to the never boring Annuaire d’Afrique du Nord. As a matter of fact, it is because I had the pleasure of reading some of their earlier issues on electoral results from the 1963 general election, that I though I can take a look at data circa 1950s-1960s and confort it to mainstream macroeconomic models: what went wrong, what went right. You see, the Moroccan economy as a whole tends to exhibit steady properties. That says a lot about some policies and their effect on the economy, but still. What an orthodox Marxist sees as the inevitable dynamic of History (capital H, as in Hegel) I would suggest measurable economic forces have been at work.

What development means: a simple case study.

The problem at hand as far as the Moroccan economy goes is how it fares relative to the rest of the world, and more precisely, how it does relative to advanced economies. I had the opportunity to present the reader with some blogposts on the matter, but back then I lacked the adequate skills to put a convincing argument to my claim. I don’t implying I fully master these skills, but the analysis is definitely getting better.

Development in its crudest definition means simply the (accelerated) accumulation of physical goods, or capital. One may disagree with it (if anyone is interested, Joe Stiglitz, Amartya Sen and JP Fitoussi produced an interesting report on Gross National Happiness) but as long as no credible alternative analysis to the theory of capital accumulation, we should go with the existing. So the faster an economy cumulates capital (in real terms) the better it is, and the more developed it eventually turns out to be.

Keeping up with pre-1977 levels of growth could have made Morocco 39.87 Billion dirhams in real terms, and double our GDP per capita by the end of the 20th century

But, in order to do so, one needs a yardstick to measure that progress. I would like to consider reusing the comparison to the United States, to which I would like to add South Korea in the mix, and start off with a graph depicting real GDP per Capita in these three countries from 1955 to 2000. Morocco’s GDP is supplemented with a fitted estimation of its annual growth with pre-19777 levels (and variance)

The graph shows compelling evidence as to how Morocco does with respect to that convergence theory: Morocco had, up to 1977, levels of growth fit to carry us to significantly higher levels of income, aggregate and per capita. Indeed, between 1955 and 1977, average real GDP per capita growth was around 7.4%, and decreases to 6.4% from 1977 to 2000, a full percentage point lost in 23 years.

This is so-called Beta-convergence: because Morocco was a poor country in 1955 and 1977 by any measure, it is assumed it will grow at a faster pace, so as to catch up to more advanced economies; by comparison, the US economy (per capita) grew 6.4% between 1955 and 1977, and the South Korean economy, 7.1%. If anything, up to 1977, Morocco was doing pretty well. This begs the question: what did go wrong? Why didn’t Morocco maintain its average growth pre-1977, and does it really matter?

Perhaps it is not all about higher levels of growth. Professor Najib Akesbi, an eminent contributor in both reports mentioned earlier, did confirm his preference for the Beta-convergence theory: He believes -correctly- the economy needs an annual rate around 8% to achieve levels of income observed in big emerging economies; actually, when demographic growth is taken into account (around 1%) the level of growth to which Prof. Akesbi refers is the magic, pre-1977 growth per capita.

Let us test that hypothesis: let us assume that indeed, Morocco has been growing at annual level of 7% between 1955 and 2000 at around 3.8%. We then look at the gap between synthetic and empirical data. Results seem to contradict Professor Akesbi’s claim: for Morocco to achieve an annual 7% since 1955 results in a net real gain of 17.1Bn dirhams, and real GDP per capita would only increase 60%. So the Beta-converge does not explain Morocco’s failure to establish itself as a promising and dynamic emerging market; it is not enough to achieve high levels of growth. Sure, it definitely provides a higher GDP per capita, but not up to levels worth supporting the case for unconditional high growth. Something is definitely wrong with that crude theory of capital accumulation. And I would like to read some paper from mainstream economists here on the virtues of the other way to achieve higher levels of output per capita: the Sigma-convergence, or steady reduction in output volatility.

Strong growth 7% loses 40% of its effect to historical volatility. That number alone does not mean much.

In statistics, standard deviation provides a measure of how far apart individual observations are from the mean. If standard deviation is high, that mean… means nothing. In our particular case, a high level of output tends to lose some of the accumulated effects of high growth rate: doing 6% on a row for two years yields 6%. doing 0% and then 12% yields a real growth of 5.8%, since:

y_t = \sqrt[t]{\prod_{i=1}^{t}(1+y_i)}

The standard definition of a geometric mean suits growth levels better because it is just another application of compounding interest rates. Besides, it also captures precisely the cost of an unconditional Beta-convergence, in our particular case, the 7% with historical volatility (standard deviation) advocated earlier turns out to be 6.6%, and .4% is not a marginal quantity, it amounts to about 2.4Bn dirhams, in real terms. These are lost because the economy cannot sustain itself at 7% over a long period of time.

This, in my opinion, is Morocco’s conundrum: it needs higher levels of growth than those observed during the last decade (and that explains why I restrained my comparisons to 1955-2000) so as to boost its GDP per capita. On the other hand, it cannot achieve it without high levels of volatility that would ultimately take away substantial amounts of that high growth. The balanced growth path needs to be found elsewhere: in each aggregate contribution to growth, among others.

Austerity and the New Engines of Growth

Posted in Dismal Economics, Moroccan Politics & Economics, Morocco, Tiny bit of Politics by Zouhair ABH on June 3, 2012

Paul Krugman on Chris Matthews‘ Hardball argued forcefully in favour of a larger fiscal stimulus package

How come the Moroccan mainstream media doesn’t provide comparable levels of debate? Surely Ministers Nizar Baraka and Driss Azami El Idrissi, or even the parliamentary leadership (Said Khairoun, Chairman of the Permanent Parliamentary Committee on Public Finances) can afford to go on TV or the radio and be scrutinized on more than just platitude (I doubt Milouda Hazib, senior ranking PAM member in the same committee fully grasps the implications of the marginal income tax rate. Mr Technocrat himself, Ahmed Reda Chami seems to be more interested in pandering in view of the next USFP convention than actually doing his job as a member of the said parliamentary committee)  The Finances ministry uploaded not long ago a useful compendium of new fiscal measures, but as far as I can tell, no mainstream journalist has had the interest of writing a paper on how effective the revenue enhancement in car stamps and duties have on reducing car use and, indirectly on oil consumption. Government officials go on with the business of making the Budget bill, the elected representatives supposed to scrutinize them do not seem to be interested in the policy implication of these decisions, and the fourth estate is far behind on this particular piece of news.

That decision to lift moderately oil subsidy on industrial and car fuel is not a sign of the government coming to their senses regarding the compensation fund, it is merely a half-measure designed to curtail the runaway cost of the said fund. At best, the deficit will remain within the 5% projected for 2012, otherwise that decision will hurt significantly growth, paradoxically even more so if a more radical scheme was introduced with the idea of replacing fuel-inefficient vehicles.

Suffice to say there are about 2.001.458 cars and other vehicles in Morocco (2009 figures) and 74.4% of these are more than 6 years-old (2008 figures) more than half have more than 10 years of service. Older car models tend to consume more, and these are usually (mainly) driven by less well-off Moroccan households and businesses. In effect, the decision to increase diesel and fuel by about 14% overnight will hurt a majority while the better off minority will not adjust their behaviour and continue to take full advantage of an indiscriminate and ultimately unfair subsidy system.

I am drifting here… Paul Krugman makes a very good case for the stimulus package, and warns austerity measures would plunge the US economy into a recession similar to that experienced by Spain, Portugal and many other countries in Europe. And yet Morocco is experiencing increasingly dangerous economic hardships, a piling public debt, a sluggish growth in M3 aggregate, and finally, that problem no one in Morocco can actually address, the abysmal trade deficit. a research paper by the IMF points out to the effects of European economic fluctuations on Morocco’s growth, and their conclusions are daunting: the recover in the Eurozone will be slow, and almost certainly not pulled by domestic consumption:

Our analysis confirms the important role played by the European Union for the Moroccan and Tunisian economies. We note, however, that this close tie might also represent a challenge for the future.

For the two countries, enhancing competitiveness and diversifying trade flows is essential for sustaining future growth.

This means Morocco’s foreign demand is unlikely to improve over the next couple of years, and with it, any possibility of growth around the government’s objective of 5.5% average by 2016. The best of best scenario (net) exports can do is to give a modes 1.5 percentage point to growth, which is way below what the economy needs to reach the vicinity of 5% to 5.5%.

Morocco’s growth is therefore left to domestic consumption and government expenditure. This is a particular recipe for disaster: on the one hand, any consumption-led growth means about 30% of household consumption will be insured by a wealthy few less than 600,000 households, and these people are  very hungry for transportation, luxury and imported goods. To these top-tier consumers, one needs to take into accounts the demand pressure implied by the aspiring middle-class, the various increases in public sector payroll. As for government expenditure, assuming our elected officials are taking their pledge to bring the deficit back under 3% GDP seriously, an expansionary budget cannot go one forever, as the pressure on rates, barely alleviated by Bank Al Maghrib’s decision to cut rates 25bps, is going to eventually penalize the private sector, if it is not already the case.

GDP Growth and two components’ contribution to growth: Household Consumption and Government Expenditure.

So Morocco and its public finances are between a rock and a hard place: on the one hand, any Keynesian-like stimulus program is unlikely to restore Morocco’s economic stability, and might well turn out to be a bad temporary fix, whose price are high borrowings now and higher taxes next; on the other hand, growth cannot be fuelled by domestic demand indefinitely because it will result in deteriorating Morocco’s terms of exchange and trigger a run on the currency. That is where cutting the budget comes in: to rebalance the engines of growth.

Government expenditure and Household consumption have contributed an average of .72 and 1.52 percentage points respectively of the 3.58% average growth over the 1992-2010 period. Their contribution goes higher in the last decade with respectively .79 and 2.31 percentage points for an average growth of 4.64% since 2000. An austerity program, that is, discretionary cuts in government expenditure mean a reduction of the budget’s contribution in growth, and in the short term results in a small contraction of GDP, with an undetermined time lag for agents in the economy to adjust themselves, and then growth goes on.

The picture is quite clear as to why government expenditure has to be halved: the Moroccan economy cannot sustain itself with high levels of of consumption and government spending; there are arbitrages to be made, and these come to the expenses of two other equally important national accounting aggregates, Investment (Gross Capital Formation) and Exports (Trade Balance): Y = C + G + I + NX

Cutting the budget by means of restraining public service payroll with growth rate well below inflation rate (since 1992, payroll increased 6.6% on annual average, while CPI inflation rate established itself around 2.6% over the same period of time) is necessary because the available resources have to be used somewhere else. It is a bit of a vicious circle: high public payroll means high household consumption and higher imports, which in turns means high receipts from VAT – these make out 21% of total fiscal receipts, and the trend is upward since 2004. Obviously, the government cannot just agree to kill a lucrative source of income for the sake of economic stability, but the fact of the matter is, the economy badly needs it.

We will have to agree to the unbearable fact that we cannot secure anything near 5% by 2016. Growth has been the magic wand to solve, or at least hide Morocco’s deep structural and social problems: trickle-down effects from income inequality were relied upon to improve (marginally) the condition of poorer households, and government jobs were there to appease unions and the unemployed graduates. On the other hand, other engines of growth have been neglected: Investment makes up for 1.5 percentage point of GDP growth since 1960,  2.38 points since 2000. Same goes for Gross Exports, with 2.19 percentage points as well. High consumption and higher government expenditure means higher imports, with the immediate effect of penalizing promising prospect for the Moroccan economy.

Investment and Exports: the first is just a matter of corporate interest in buying assets, the second needs to adjust to the end of an era: the Europeans are no longer a good trading partner.