5th international conference on the Economics and ... - Mafhoum

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The Arab Academy for Sciences and Technology and The Islamic Research & Training Institute (IRTI) of the Islamic Development Bank (IDB)

Workshop on The Prospects of Arab Economic Cooperation To Boost Savings and Investment Alexandria, Egypt (June 22-24, 2004)

IMPACT OF DROUGHT AND FISCAL POLICY ON PRIVATE CONSUMPTION, PRIVATE INVESTMENT AND ECONOMIC GROWTH IN MOROCCO: AN EMPIRICAL ANALYSIS Dr. Brahim MANSOURI(*), Professor, Cadi Ayyad University, Faculty of Law and Economics, Department of Economics, P.O. Box : S- 4, Marrakesh.; email : [email protected]

Abstract: In Morocco, one can easily observe effects of drought on agricultural value added as well as on the economy as a whole. However, no serious empirical work has been done to measure drought and to determine its impact on agricultural production and main macroeconomic variables. An other issue concerns crowding-in or crowding-out effects of fiscal policy on the Moroccan economy, a topic which has received much less attention in the Moroccan case. This paper is dealing with these issues trying to measure drought and fiscal variables and to estimate their effects on main macroeconomic variables. The major selected macroeconomic variables are private investment, private consumption and – Dr Brahim MANSOURI is the Director of the Group of Research on Economics and Finance (GREF) at Cadi Ayyad Universirty of Marrakesh (Morocco). He is also the leader of the Moroccan research teams working on “Understanding Reforms” and “Bridging Research and Policy” (Global Development Network, Washington, D.C.). He is also directing research groups on ‘private investment and economic growth’ (in collaboration with the Agence Universitaire de la Francophonie), ‘sustainability and determinants of fiscal deficits in Morocco, Tunisia and Egypt’ (in collaboration with the CODESRIA), etc. (*)

2 per capita real gross domestic product (GDP). The study is analytical and empirical and uses advanced econometric tools such as unit root tests, cointegration tests as well as error correction models and short run-long run causality tests. Examining and using innovative methodologies to measure drought and budgetary variables, and estimating comprehensive models, our paper shows that: fiscal deficits, public consumption and real devaluation crowds-out private consumption; - drought leads dramatically to decreasing private consumption, private investment and overall real economic growth; - public investment crowds-in private investment but public consumption, corporate taxes and real devaluation crowd-out it; - per capita real economic growth reacts negatively and dramatically to drought cycles, but public investment is seen to boost economic growth in the short as well as long run. What are the main policy implications we can derive from these estimates? On the fiscal policy front, our empirical results suggest that fiscal adjustment in Morocco must not rely heavily on cutting public investment. If fiscal adjustment is necessary, it must be done relying on cutting public consumption and other wasting expenditures and on optimizing public revenues through struggling against corruption and tax evasion and fraud, not on reducing public investment on physical and social infrastructure. Public investment in this field is essential for growth and then, it must not only be maintained but also extended. - On the drought front, our empirical results show how the fact that Morocco is a semi-arid land must be taken into consideration. This is a reality which has been neglected for long time by Moroccan decision-makers. One can observe that there are really two different Morocco : rural and urban. Moroccan policy-makers have neglected rural areas and advantaged some urban ones. Indeed, even life standards in the urban areas are very sensitive to income and expenditures generated in the rural regions. Well, income and expenditures in the rural regions depend heavily on rain falls because few government efforts have been devoted to develop those regions. More public investment should be channeled toward rural arid areas. Unfortunately, most of public (and even private) investment in agriculture has been undertaken in irrigated perimeters during the last decades. Well, up to 76 percent of rural poor are living in arid areas. Public investment in arid regions should work not only for construction of barrages and exploitation of background water but also for facilitating population access to basic physical and social infrastructure such as education, health, fresh water and electricity. This is essential for increasing agriculture productivity in those areas where rudimentary tools are still used in agriculture in an environment that is very sensitive to drought cycles. Government economic and social policies should work for rural development so as to minimize effects of climate changes on standards of life of rural poor. This will contribute not only to eradicate poverty in the rural areas but also to struggle against depression in private spending (that is private investment and consumption) and per capita real GDP depression which is very sensitive to agricultural shocks.

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I-

Introductory Remarks

In Morocco, one can easily observe effects of drought on agricultural value added as well as on the economy as a whole. However, no serious empirical work has been done to measure drought and to determine its impact on agricultural production and main macroeconomic variables. Moreover, existing studies have not empirically examined effects of fiscal policy on main macroeconomic variables in the particular case of Morocco, especially effects on private spending and economic growth (see simplistic works by Boussetta, 1992, 1996). This paper is dealing with this issue trying to measure drought and budgetary variables and to estimate their effects on main macroeconomic variables. The major selected variables are private investment, private consumption and per capita real gross domestic product (GDP). The study is analytical and empirical and uses advanced econometric tools such as unit root tests, cointegration tests as well as error correction models and causality tests. The remainder of this paper is organized as follows. Section II proposes a methodology for measurement of drought in the particular case of Morocco, constructing a more reliable dummy variable. Section III and IV integrate the constructed dummy variable and budgetary variables into macroeconomic models to determine effects of agricultural shocks and fiscal policy on private spending on consumption and investment. Section V tries to estimate impact of drought and fiscal policy on per capita economic growth. Section VI summarizes concluding remarks and formulates some policy implications.

II- Measuring Drought in Morocco : A Methodological Framework Drought as an exogenous variable is not directly observable. Fortunately, it is possible to measure it using a dummy variable (see Mansouri, 2002). 1- Constructing a Dummy Variable to Measure Drought in Morocco Since cereals are concentrated in non-irrigated areas and constitute the main production in the agricultural sector and are very sensitive to rain falls, cereal yield per hectare can be used as a very good proxy for drought. By manipulating the growth rate of the per capita cereal yield, one can construct a dummy variable taking values representing the intensity of drought. Let DUM to be the variable to be constructed. In the variable construction process, DUM takes values from 0 through 8 in relationship with the cereal yield growth which is the main determinant of overall agricultural productivity in the particular case of Morocco. For example, if DUM = 0, the agricultural production is excellent (there is no drought at all). By contrast, if DUM = 8, drought is extreme and agricultural production is dramatically decreasing. Obviously, DUM may take other intermediate values (between zero and 8) in relationship with the rate of growth of cereal yield per hectare, and implicitly in line with the intensity of rain falls (for details on the construction of the dummy variable, see Mansouri, 2002). This methodology is preferable to the widespread simplistic approach according to which drought is measured by a dummy variable taking values from 0 (zero) to 1 (one) (see for example Faini’s simplistic methodology in Faini, 1994).

4 2- Evolution of Drought in Morocco : A Country of Agricultural Shocks The constructed dummy variable (DUM) is represented in graph 1. Its evolution shows sharp fluctuations over the period 1962-1997. Graph 2 represents evolution of per capita cereal yield per hectare over the period 1962-1997. The two graphs show a negative relationship between the constructed dummy variable (DUM) and the per capita cereal yield per hectare, with a correlation of (- 0.92). This means that our dummy variable is well constructed.

Graph 1 : Evolution of the Constructed Dummy Variable (DUM) : 1962-1997 10

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0 60

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80 DUM

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Graph 2 : The Growth Rate of Per Capita Cereal Yield: 1962-1997 (%) 300

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-100 60

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Growth of Cereal Yield (%)

III- Impact of Drought and Fiscal Policy on Private Consumption in Morocco To empirically analyze the behavior of private spending, it is important to take into consideration the specificities of the Moroccan economy. In particular, beside what economic theory tells us about determinants of private spending, it is necessary to introduce drought as a main determinant of private spending. In the estimation process, we propose to model real private consumption as a function of real budgetary variables, drought and other determinants or as a function of fiscal surplus ratio to GDP, drought and other explanatory variables selected in line with economic theory. 1- Drought, Budgetary Variables and Real Private Consumption in Morocco Following theoretical foundations (see details in Mansouri, 2001, 2003a) and focusing on Rodrigùez (1994), real private consumption depends on expected real income measured as one-period-lagged GNP (Yr)1, one-period-lagged real public expenditures (Gr) and real public revenues (Rr). To account for the role of liquidity constraints in determining private consumption, real credit stock (RPC) available to the private sector is integrated among explanatory variables (see Mansouri, 2001, 2003a, 2003b, 2003c). To take into account the

1

- Rodrigùez (1994) considered real GNP, instead of real GDP, as the relevant explanatory variable. Using real GDP or real GNP does not change significantly our empirical results because there is little difference between GDP and GNP in Morocco. Generally, differences between the two measures of real income are significant only in economies where net factor income is large.

6 particularities of the Moroccan economy, we also introduce our constructed dummy variable (DUM) as a main explanatory factor of real private consumption. Therefore, the model may be written as follows2 :

Log ( RPCt ) = c0 + c1.Log (Yrt −1 ) + c2 .Log ( CGrt −1 ) + c3.Log ( Rrt −1 ) (+) + c4 .Log ( RPCt ) + c5 .DUM t + ε t (?) (-)

(?)

(?) (1)

Expected signs for coefficients are indicted under each explanatory variable in equation (1). Obviously, the expected sign of the coefficient associated with one-period-lagged GNP is positive in conformity with the Keynesian proposition. The expected sign of the coefficient associated with real public expenditures is ambiguous. Indeed, according to the wealth effect hypothesis, public expenditures, especially those financed through public borrowing, positively impact private consumption because economic agents holding public debt assets feel richer and consume today more than they did before (on this issue, see Eisner, 1989). By contrast, following the substitution thesis, increasing public expenditures may crowd-out private consumption, particularly through advantages for the public sector to use private sector financial resources. Finally, according to the Ricardian hypothesis (Barro, 1974, 1987, 1989), increasing public expenditures do not affect real private consumption and may even reduce it because of higher inflation3. The expected impact of public revenue is also ambiguous. Decreasing public revenues would increase private consumption in line with the Keynesian proposition according to which consumers are concerned with taxation and react positively to decreasing public savings (or decreasing taxes). By contrast, following the Ricardian thesis, decreasing taxes do not impact private consumption because consumers expect taxes to be higher in the future and save therefore to preserve the wellbeing of their descendants. The result would be that fiscal deficits reduce private consumption. The expected sign of the coefficient associated with real credit stock available to the private sector is also ambiguous. In countries with well-developed credit markets, impact of this 2

- Rodrigùez (1994 : 158-160) estimated a non-logarithmic model for Argentina. We argue that the logarithmic model is the appropriate specification especially because all variables are expressed in real terms and deflators are different. The logarithmic model permits to estimate elasticities of real private consumption with respect to explanatory variables. 3

- This remark is of a great importance. Perhaps, increasing public spending may not impact private consumption in nominal terms but may reduce it in real terms because of inflationary pressures eroding the purchasing power among consumers. Therefore, a hasty empirical reasoning would conclude that the substitution hypothesis holds while the Ricardian equivalence phenomenon would be the appropriate explanatory factor (for more details on this phenomenon, see our survey in Mansouri, 2001, 2003a). Likewise, a negative or null coefficient does not necessarily mean that the Ricardian equivalence phenomenon holds. When conducting empirical analyses like this, one would often forget very severe hypotheses underlying Barro’s equivalence theorem (see Barro, 1974, 1987, 1989). In particular, a perfect credit market must exist and private sector must not be crowded-out by public sector in this market. In countries where these hypotheses are violated, negative or null effects of public spending on real private consumption would have likely to be related to a direct crowdingout of private consumption rather to the phenomenon of Ricardian equivalence. The latter states that private consumers are concerned by the wellbeing of future generations. Expecting increases in future taxes due to current negative public savings, they save today rather than consume (see theoretical and empirical details in Mansouri, 2000, 2001, 2003a, 2003c) .

7 variable on private consumption would be probably positive. By contrast, if private credit concerns alternative economic activities (like investment), its impact on private consumption would be probably negative. Nevertheless, impact of private credit on private consumption is expected to be statistically null in the particular case of Morocco because credit market for consumers is still lacking. To estimate equation (1) for Morocco, we have collected data from Moroccan official statistical documents (Annuaire Statistique du Maroc, Direction de la Statistique, Rapports de Bank Al-Maghrib, etc.). However, since data are sometimes tainted with measurement errors, we rely here on World bank and IMF data bases (International Financial Statistics, World Development Indicators, Governement Finance Statistics Yearbook, etc.). The estimated model may be written as follows : Log ( CPRt ) = 2, 33 + 0,853Log ( Yrt −1 ) − 0,14 Log ( CGrt −1 ) + 0,11L og ( Rrt −1 ) − 0, 009 DUM (6,44) (9, 66) (-2,75) (1,40) (-3,27)

(2)

R 2 = 0.987; adjusted R 2 = 0.984; F-statistic = 442.58 (prob. = 0,000); Durbin-Watson = 1.90; Residual Normality Test : Jarque-Bera = 0.848 (prob. = 0.655); White Heteroskedasticity Test: F - statistic=0.402 (prob. =0.906), number of observations X R 2 = 4.015 (prob.=0.856).

Equation (2) indicates that real public consumption crowds-out real private consumption while impact of public revenue, even positive, turns to be statistically non significant4. According to our estimates, 1 percent increase in real public consumption would result in 0.14 percent decrease in real private. We argue that this empirical result is not an indication that Moroccan consumers are Ricardian. The most plausible explanation is that public consumption crowds-out private consumption because the public sector exerts a puncture on available financial resources forcing private consumers to save rather than to consume (in a different simple model, Faini, 1994, estimated the same effect for the Moroccan case). Since impact of private credit is positive but statistically non significant, we have eliminated it from the final equation. As expected, impact of drought on real private consumption is negative and statistically very significant, suggesting that climatic conditions reduce private spending on consumption. Beginning in an excellent agricultural year (DUM = 0), an extreme drought during the subsequent year (DUM = 8) would result in about 7 percent decrease in real private consumption. Beginning in a medium agricultural year (DUM = 4), an extreme drought during the subsequent year would result in about 4 percent decrease in real private 4

- Estimation of the original model where public expenditures are aggregated shows that the coefficient associated with public expenditures is negative and statistically very significant. By contrast, impact of public revenue is positive but statistically non significant. Therefore, a simplistic reasoning would conclude that Moroccan consumers are Ricardian. In fact, stringent hypotheses of Barro’s equivalence theorem are widely violated in Morocco, especially because credit markets are imperfect, the public sector is advantaged in financial markets and liquidity constraints on consumers still exist. Therefore, the most plausible explanation in the Moroccan case is that real private consumption is directly crowded-out because of an institutional environment whereby the public sector exerts a puncture on available financial resources forcing consumers to save rather than to consume. Replacing total public revenue by tax revenues does not change much our empirical results. In the original model with aggregate public expenditures, the long-run elasticity of real private consumption with respect to public expenditures is estimated to be about –0.20, suggesting that 1 percent increase of real public expenditures would result in 0.20 percent decreasing in real private consumption.

8 consumption. These empirical results reveal robustness of the drought impact on private consumption. 2- Estimating Impact of Drought and Fiscal Surpluses on Real Private Consumption

Since impact of public expenditures is seen to be statistically significant and impact of public revenue is positive but statistically non significant, we have decided to combine the two variables into one explanatory factor. Since fiscal surplus approximately equals public revenue minus public expenditures, this surplus is chosen to be the alternative explanatory variable. Formally, if fiscal surplus (in proportion to GDP) is noted as fs, we will have the following relationship to be estimated for Morocco over the period 1967-1997 : Log ( RPCt ) = a0 + a1 .Log (Yrt −1 ) + a2 . fst + a3 .DUM t

(3)

where variables are as already defined above. Obviously, the expected sign of the coefficient associated with lagged-one-period real GNP is positive while the sign of the coefficient associated with our constructed dummy variable (DUM), capturing effects of drought, is expected to be negative and statistically very significant. The sign of the coefficient associated with fiscal surplus (in proportion to GDP) is theoretically ambiguous. Nevertheless, because of the puncture that the public sector exerts on available financial resources, we expect the sign of the coefficient associated with fs to be positive, suggesting that fiscal deficits crowd-out private consumption in the Moroccan case. Since variables in equation (3), except DUM, are not stationary in levels5, we propose to use econometrics of nonstationary variables to estimate impact of drought and fiscal deficits on real private consumption. Johansen cointegration tests (see Johansen, 1988, 1991; Johansen and Juselius, 1990; Gonzalo, 1994) show that the three nonstationary variables are cointegrated and that the cointegrating vector is unique (for an Eigen value of 0.52, the likelihood ratio enters with a value of 34.67, higher than the critical value of 29.68 at 5 percent of significance; the cointegrating equation does not contain a linear trend and the number of lags in the VAR equals 1). Therefore, the error correction model may be written as follows6 : ∆Log ( RPCt ) = 1.646 + 0.65∆Log (Yrt −1 ) + 0.508 Log (Yrt − 2 ) + 0.42 fst −1 − 0.006 DUM t

(2,195) (2,45)

(2,15)

−1.162 Log ( RPCt −1 ) + 0.535Log ( RPCt − 2 ) (1,96) (−3, 257) 5

(2,043)

(-2,18)

(4)

- In conformity with our ADF tests (see details on ADF test methodology in Dickey and Fuller, 1981), Log(RPC) and Log(Yr) are not stationary in levels and stationary in first differences (see Mansouri, 2001, 2003a). Our ADF tests also show that the variable fs is not integrated of order 0 (the t-statistic of the coefficient associated with the lagged variable in our ADF equation has a value of –2.13, higher than the Mackinnon critical value at 5 percent level of significance, that is a value of –2.97). Our ADF tests show that our constructed dummy variable (DUM) is stationary in level (t-statistic = -5.705; Mackinnon critical value at 5 percent = -3.59). this test result does not surprise us : DUM reflects sharp fluctuations in real agricultural production due to irregular rain falls, indicating that tha variable is necessarily stationary. 6 - Estimates show that the coefficient associated with ∆fst is not statistically significant (t-statistic = 1.013; probability = 0.323). Therefore, this variable has been eliminated and the model has been re-estimated.

9 R 2 = 0.597; adjusted R 2 = 0.483; F-statistic = 5.195 (prob. = 0.002); Durbin-Watson = 2.14; Residual Normality Test : Jarque-Bera = 0.023 (prob. = 0.988); White Heteroskedasticity Test : F - statistic = 0.85 (prob. = 0.60), number of observations X R 2 = 10.324 (prob. = 0.50).

Equation (4) shows that the short-term elasticity of real private consumption with respect to lagged real GNP is about 0.65. In the long run, income elasticity is about 0.80, suggesting that 1 percent increase in real income would result in 0.80 percent increase in real private consumption. The short term semi-elasticity of real private consumption with respect to fiscal surplus (in proportion to GDP) is estimated to be around 0.42. In the long run, the semielasticity is about 0.67, suggesting that 1 percentage point of GDP increase in fiscal surplus would induce 0.67 percent increase in real private consumption. Therefore, our error correction model indicates that real private consumption in Morocco is crowded-out by increasing fiscal deficits7. Replacing overall fiscal surplus by primary fiscal surplus does not change much our empirical results even if the semi-elasticity of real private (with a value of 0.59, statistically very significant). As expected, drought, as estimated by our constructed dummy variable (DUM), is seen to significantly depress real private consumption. Beginning in an excellent agricultural year (DUM = 0), an extreme drought during the subsequent year (DUM = 8) would result in about 5 percentage points decrease in the rate of growth of real private consumption. Beginning in a medium agricultural year (DUM = 4), an extreme drought during the subsequent year would result in about 2.5 percentage points decrease in the rate of growth of real private consumption. IV- Impact of Drought and Fiscal Policy on Private Investment in Morocco

As in the case of effects of certain variables on private consumption, exploration of determinants of private investment is a controversial topic on the theoretical as well as on empirical levels (for survey and discussion of previous theoretical and empirical works on determinants of private investment in developing and developed countries, see Mansouri, 2000, 2001, 2003a, 2003b). 1- Estimating Impact of Drought and Fiscal Policy on Private Investment in Morocco : A Capital Flow Approach

Following Rodrigùez (1994) and Aschauer and Lächler (1998), a simple approach consists of regressing the ratio to GNP of private investment on lagged ratios to GNP of public spending and revenue. We argue however that this simple approach has the shortcoming to exaggerate aggregation of budgetary variables and to not take into consideration certain important determinants of private investment in the particular case of Morocco. Our approach here consists of : i) considering drought, as estimated by our constructed dummy variable, as a 7

- A simplistic analysis would conclude that because fiscal deficits do not affect private consumption in nominal terms and reduces it in real terms, Moroccan private consumers are Ricardian. Indeed, according to our estimates, fiscal deficits have no impact on nominal private consumption while they affect it in real terms. Regressing nominal private consumption on lagged nominal income, fiscal surplus and the constructed dummy variable (DUM), we have found a statistically non significant coefficient for fiscal surplus expressed in proportion to GDP. In fact, the most appropriate explanation of this empirical result would be that real private consumption is directly crowded-out by fiscal deficits because of puncture the public sector exerts on available financial resources (see Mansouri, 2000, 2001, 2003a, 2003c).

10 main explanatory variable of private consumption in the particular case of Morocco; ii) desegregating total public absorption into public “investment” and “consumption” components (with ratios to GDP noted as pubi and pubc respectively); iii) considering among public revenues only the components concerning taxation on private firms (with the ratio to GDP noted here as tpf) ; iv) taking into account the role that investment-based real exchange rate ( λI ) may play in determining private investment through impact of real devaluation (or overvaluation) on private investment8 ; v) taking into account the role that liquidity constraints may play in determining private investment, especially through impact of private credit stock available to the private sector (measured in proportion to GDP and noted pc) ; v) introducing the rent cost of capital among explanatory variables of private investment. Following Haque and Montiel (1994), we have constructed the rent cost of capital multiplying real interest rate by the natural logarithm of ( PI P ) , where PI and P are the deflator of gross domestic fixed investment and the GDP deflator respectively9. Preliminary estimates reveal that impact of the rent cost of capital is negative but turns to be statistically non significant (coefficient = -0.07; t - statistic = -0.80; probability = 0.42)10. In the particular case of Morocco, there is no time-series on private investment. The difference between gross domestic fixed investment and public investment gives an estimation of private and semi-public investment. In the estimation process, we regress this difference on its main determinants. Since public investment affects private investment only after a certain time, we have taken into consideration this lagged impact in our estimations. Eliminating the rent cost of capital, which is statistically non significant, and re-estimating the model over the period 1967-1997, we can write :

prinvt = 0,11 + 0,54 pubit −1 − 0,96 pubct −1 − 1, 49tft −1 (4,60) (1,95)

(-2,40)

(-3,75)

+0,34 pct − 0, 005 DUM t − 0, 05 Log ( λI t ) (6,08)

(-3,72)

(5)

(-2,20)

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- Real exchange rate is commonly defined as prices of tradables divided by prices of nontradables. However, it is important to compute real exchange rate for each category of goods. We compute investment-based real exchange rate in three stages. First, we compute a price index for imported equipment goods using Moroccan foreign trade time-series providing information on average value indices for imported goods. Since time-series for average value indices of imported equipment goods are heterogeneous, we have reduced them to a common base year. Second, we compute the deflator of gross domestic fixed investment (GDFI) dividing GDFI in current prices by GDFI in constant prices (obviously, the latter msut be reduced to the same base year as in the case of indices of average value for imported equipment goods). Third, approximating prices of nontradable investment goods by the deflator of GDFI, we obtain investment-based real exchange rate dividing the average value index of imported equipment goods by the deflator of GDFI (for details on this measurement methodology, see Mansouri, 2001, 2003a). Note that fiscal deficits themselves may affect real exchange rates (for details on this impact, see Mansouri, 2003d). Among external sector variables, external deficits may also be linked to fiscal deficits (on this issue, see Mansouri, 2003e). 9 - It is important to note however that Haque and Montiel (1994 : 441) constructed this variable multiplying real interest rate not by the natural logarithm of ( PI P ) but by the ratio ( PI P ) itself. For details on our measurement approach and its advantages, see Mansouri (2003). 10 - As in some studies for developing countries, private investment is seen to be insensitive to real interest rates (see for example, Rama, 1993; Servén and Solimano, 1993; Easterly and Schmidt-Hebbel, 1994).

11 R 2 = 0.82; adjusted R 2 = 0.77; F-statistic = 16.395 (prob. = 0.000); Durbin-Watson = 1.97; Residual Normality Test : Jarque-Bera = 0.116 (prob. = 0.944); White Heteroskedasticity Test : F - statistic=1.007 (prob. =0.49), number of observations X R 2 = 12.48 (prob.=0.41); Chow Forecast test (for 1996) : F-statistic = 0.41 (prob. = 0.53); Log Likelihood Ratio = 0.56 (prob. = 0.454).

As expected, as indicated by the positive and statistically significant of the coefficient associated with pubit-1 in equation (5), public investment is seen to positively affect private investment. This suggests that public investment in Morocco is concentrated in activities complementing rather that substituting for private investment. 2 percentage points of GDP increase in public investment in period t-1 would result in 1.08 percentage point of GDP increase in private investment. By contrast, as indicated by the negative and statistically significant of the coefficient associated with pubct-1 current public consumption is seen to crowd-out private investment. This suggests that higher big salaries and wasting expenditures in the public sector have dramatically affecting private investment activity in the private sector during the period. 1 percentage point of GDP increase in current public consumption in period t-1 would result in 0.96 percentage point of GDP decrease in private investment. Following a standard Wald test, such a proportion is not statistically different from 1 (F statistic = 0.008, probability = 0.93; χ 2 = 0.008 ; probability = 0.93), suggesting that every increase in current public consumption would result in decreasing private investment in the same proportion. This kind of public spending would be probably linked to the phenomenon of capital flights: increasing current public consumption would increase enrich holders of big salaries in the public sector who would invest their “wealth” abroad. Adding dilapidated money through corruption and bad governance, the wasting size would be more dramatical and its impact on capital accumulation in the private sector would endanger more substantially. According to the World Bank, general government consumption is estimated to be about 6 billion dollars in 1997, that is 18 percent of GDP, with a share of 65 percent for public salaries, that is about 12 percent of GDP. In annual average over 38 years (period 1960 – 1997), general government consumption is about 2.6 billion dollars, with 1.8 billion dollars for public salaries. As expected, corporate tax (tf) exerts negative and statistically significant impact on private investment. 1 percentage point of GDP increase in corporate tax would induce 1.48 percentage point of GDP depression in private investment, suggesting that fiscal policy substantially affects private investment through taxation. The coefficient associated with the variable pc is positive and statistically very significant, suggesting that liquidity constraints significantly affect private investment through the amount of credit awarded to the private sector by bank and non-bank institutions. 3 percentage points of GDP increase in private credit would induce about 1 percentage point of GDP improvement in private investment. As expected, impact of climatic conditions on capital accumulation in the private sector is negative and statistically very significant. Beginning in an excellent agricultural year (DUM = 0), an extreme drought during the subsequent year would result in 4 percentage points of GDP decrease in private investment. Beginning in a medium agricultural year (DUM = 4), a

12 catastrophic drought during the subsequent year would induce 2 percentage points of GDP decrease in private investment. As shown by the negative sign and the high t–statistic for the coefficient associated with the negatively affects capital variable Log ( λI t ) , investment-based real exchange rate accumulation in the private sector. This empirical result does not surprise us since increasing prices for imported equipment goods discourage imports of investment goods (the negative effect of devaluation). 5 percent real devaluation would result in 0.25 percentage point of GDP in private investment (see Mansouri, 2001, 2003a). 2- Impact of Drought and Fiscal Policy on Private Investment in Morocco : A Capital Stock Approach

In what follows, we propose to improve our empirical analysis focusing on studies curried out by Easterly, Rodrigùez and Schmidt-Hebbel (1989, 1994), Solimano (1992) and SchmidtHebbel and Müller (1992). According to them, private investment depends, among other variables, on permanent stock of private capital, lagged stock of public capital, tax variables and real exchange rate. As we have argued in previous developments (see above), the tax variable is estimated by corporate tax and investment-based real exchange rate is measured by the average value index of imported equipment goods divided by the deflator of Gross domestic fixed investment. Problems remain especially on the level of capital stock measurement. Three measurement methodologies are available in the recent literature : i) the permanent inventory methodology (see Nehru and Dareshwar, 1994; Dessus and Herrera, 1996); ii) the a-priori methodology assuming an initial ratio to GDP for capital stock (see Haque and Montiel, 1994); iii) Easterly’s formula (see Easterly, 1994). We argue that the permanent inventory methodology cannot be applied to Morocco because data on total capital stock is not available (see Mansouri, 2003a, 2003b). As for the a-priori methodology, we reject it because of it is based on a simplistic assumption for initial private and public capital stocks. We rely here on Easterly’s formula according to which initial year capital stock in the private and public sectors can be “determined as a ratio to GDP in that year, with the ratio given by the average over the period of the ratio of investment to GDP divided by the sum of the average rate and the depreciation rate” (see Easterly, 1994 : 264). Assuming an annual depreciation rate of 3 percent, capital stocks for the subsequent years are determined as previous year’s capital stocks multiplied by (1 minus the depreciation rate). Following partially Easterly, Rodrigùez and Schmidt-Hebbel (1989, 1994), Solimano (1992) and Schmidt-Hebbel and Müller (1992), private investment (in proportion to GDP) depends on ratios to GDP of permanent private capital stock (Kpp)11, lagged public capital stock (Kpubt-1) and lagged corporate tax (CTt-1) as well as on investment-based real exchange rate (λI), as measured above. Because of the role that climatic conditions may play in driving private investment, we introduce our constructed dummy variable (DUM) as a main explanatory variable. Therefore, we obtain the following regression over the period 1967-1997 ::

11

- Expected permanent private capital stock is estimated using the approach of partially perfect foreseeing. Following this approach, Kpp can be written as follows : Kpp = ( Kpt + Kpt +1 + Kpt + 2 ) 3 , where Kp is the capital stock.

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Ipt Kpubt −1 KPPt CT = 0, 07 + 0, 07 + 0, 08 − 1, 42 t −1 − 0, 04 Log ( λI t ) − 0, 005DUM t Yt Yt −1 Yt Yt −1 (3,20) (1,72) (3,97) (-3,12) (-1,76) (-2,03)

(6)

R 2 = 0.78; adjusted R 2 = 0.73; F-statistic = 14.65 (prob. = 0.000); Durbin-Watson = 1.78; Residual Normality Test : Jarque-Bera = 0.59 (prob. = 0.745); White Heteroskedasticity Test : F - statistic = 0.66 (prob. = 0.74), Number of Observations X R 2 = 7.90 (prob. = 0.64); Chow Forecast test (for 1994) : F-statistic = 0.62 (prob. = 0.44); Log Likelihood Ratio = 0.824 (prob. = 0.364).

Equation (6) shows that impact of public capital in period t-1 on private investment in period t is positive and statistically different from zero (at 10 percent of significance), suggesting that public capital crowds-in capital accumulation in the private sector. 2 percentage points of GDP increase in public capital stock would result in 0.14 percentage point of GDP increase in private investment. This empirical result indicates that public capital in Morocco is concentrated in activities complementing private investment activity. The coefficient associated with permanent private capital stock is positive and statistically very significant and enters with a similar magnitude. 2 percentage points of GDP increase in permanent private capital stock would induce 0.16 percentage points of GDP increase in private investment. To estimate short and long run impact of public capital on private investment, we propose to use recent innovations in time-series analysis. Unit root test indicate that Ip/Y, Kpub/Y, Kpp/Y and CT/Y are integrated of order 1, the other variables are stationary in levels. Therefore, the four variables may be cointegrated. Indeed, Johansen cointegration tests reveal that Ip/Y, Kpub/Y, Kpp/Y and CT/Y arecointegrated and that the cointegrating vector is unique (Eigen value = 0.74, likelihood ratio = 53.77, critical value at 5 percent level = 47.21). The error correction model can be written as follows : ⎛ CT ⎞ ⎛ Ipt ⎞ ⎛ Kpubt − 2 ⎞ ⎛ KPPt −1 ⎞ = 0.078 + 0.07 ⎜ + 0.06 ⎜ − 1.16∆ ⎜ t −1 ⎟ ⎟ ⎟ ⎟ ⎝ Yt ⎠ ⎝ Yt − 2 ⎠ ⎝ Yt −1 ⎠ ⎝ Yt −1 ⎠

∆⎜

(3.12) (1.80)

(2.51)

(-2.62)

⎛ Ip ⎞ ⎛ CT ⎞ −1.72 ⎜ t − 2 ⎟ − 0.05 Log ( λI t ) − 0.0025 DUM t − 0.87 ⎜ t −1 ⎟ ⎝ Yt −1 ⎠ ⎝ Yt − 2 ⎠ (-2.49)

(-2.32)

(-1.84)

(7)

(-4.62)

R 2 = 0.675; adjusted R 2 = 0.562; F-statistic = 5.93 (prob. = 0.0008); Durbin-Watson = 2.01; Residual Normality Test : Jarque-Bera = 1.88 (prob. = 0.39); White Heteroskedasticity Test : F - statistic = 0.752 (prob. = 0.70), Number of Observations X R 2 = 12.53 (prob. = 0.564); Chow Forecast Test (for 1995) : F-statistic = 0.03 (prob. = 0.864); Log Likelihood Ratio = 0.044 (prob. = 0.833).

Equation (7) shows that the coefficient associated with the variable ( Kpubt − 2 Yt − 2 ) is positive and statistically significant at 8 percent level. In the long run, 2 percentage points of

14 GDP increase in public capital stock would result in 0.16 percentage point of GDP increase in private investment, suggesting that public capital exerts significant crowding-in effects on private investment. As expected, private capital stock also positively affects private investment. In the long run, 2 percentage points of GDP increase in permanent private capital stock would result in 0.14 percentage point of GDP increase in private investment. By contrast, as shown by the negative signs and the high t-statistics for the coefficients associated with the variables ∆ ( CTt −1 Yt −1 ) and ( CTt −1 Yt −1 ) in equation (7), corporate tax is seen to crowd-out private investment in the short as well as long run. In the short run, 1 percentage point of GDP increase in corporate tax would depress private investment by a proportion around 1.16 percentage point of GDP. In the long run, the portion is about 1.98 percentage point of GDP, suggesting that corporate tax crowds-out private investment, supporting perhaps the point of view of supply-side economists predicting that increasing taxes discourage economic activity. This is a channel through which fiscal policy may negatively affect capital accumulation in the private sector. Effects of real devaluation and drought remain negative and statistically significant. 1 percent devaluation of the real exchange rate would result in 5 percentage points decrease in the rate of growth of the ratio to GDP of private investment. Beginning in an excellent agricultural year (DUM = 0), an extreme drought during the subsequent year (DUM = 8) would depress the rate of growth of the ratio to GDP of private investment by a proportion around 2 percentage points. Beginning in a medium agricultural year (DUM = 4), an extreme drought during the subsequent year (DUM = 8) would result in 1 percentage points decrease in the rate of growth of the ratio to GDP of private investment. V- Impact of Drought and Fiscal Policy on Economic Growth in Morocco

Controversies related to the impact of public capital and investment on economic growth have particularly growing during recent years. One can observe the growing number of theoretical and empirical studies dealing with this issue in industrialized countries as well as in developing and transitional economies. If the origin of this debate is relatively ancient (Meade, 1952; Arrow and Kurz, 1970; Nurkse, 1952; Hirschman, 1958; Rosenstein-Rodan, 1964), recent theories of endogenous growth have contributed to its revival. For example, Barro (1990) has attributed to productive public expenditures, such as public spending on capital infrastructure, a driving role in long run economic growth. Barro and Sala-i-Martin (1995), Berthelemy, Herrera and Sen (1995) and Dessus and Herrera (1996) argued that public capital boosts economic growth through its positive impact on capital profitability in the private sector. If there are few problems in formalizing theoretical links between capital accumulation in the public sector and economic growth, it may be very difficult, in this field, to conduct empirical investigations (see Aschauer, 1989a,1989b; Munnel, 1992). Generally, the idea that public investment is positively related to real economic growth is often accepted on an apriori basis (see Aschauer and Lächler, 1998). There are some reasons for which the relationship may be unstable or may hold only under some conditions. Identifying such conditions is very important for economic policy design and implementation, ensuring that public spending will have the expected effect and that it will not induce a misallocation of resources.

15 In a first analysis, the hypothesis that public investment positively affects economic growth requires that public and private capital are perfect substitutes. If this condition holds, an increasing public investment will have the same effect on economic growth than an increasing private investment. In other words, the two components of aggregate capital will contribute to physical capital accumulation and will improve the capability to sustain a high level of real income. Nevertheless, spending an additional unity of money in public investment does not necessarily increase the spending on aggregate physical capital by the same amount. The reason is that public investment possibly crowd out private investment. In a second analysis, public spending on capital has to conform to conditions of efficiency and profitability existing in the private sector. Measuring the value of public capital stock by the nominal spending has probably to overestimate the true value which can be measured by expected returns on investment. For instance, when public investment is conducted in some sectors or regions on a political basis, it’s financial return will be obviously weak in comparison with private investment. In a third analysis, the undertaken public investment must foresee effects on private investment in respect with financing modalities. In fact, impact of public investment on real economic growth also depends on financing means. When public investment is financed by an increasing taxation, the net return on that investment has probably to be weak because of the impact of distortionary taxes on the whole economy. When public investment is financed by an increasing borrowing, the present taxation will be postponed in the future. If future taxation is expected by private investors, it would probably discourage capital accumulation in the private sector. In an environment of high present taxation, private investors, in order to prevent tax payments, would even shift to investment activities where social profitability is weak. In a fourth analysis, the positive impact of public investment depends on how it affects the growth rate of productivity and then, the economic growth rate itself. If public capital on infrastructure is a complement of private capital, an increasing public investment will not only attract additional private capital, increasing capital accumulation, but it will be able to improve the profitability of private capital as well. Obviously, Such a positive impact does not hold if the relationship between public and private investment is antinomic rather than complementary12. In fact, public investment would probably reduce overall productivity if public spending on capital are undertaken without conforming to rationality norms prevailing in the private sector. More precisely, an additional unity of money spent by the public sector would probably permit to buy less investment goods in comparison with an additional unity on money invested in the private sector13. 12

- As Easterly (1994 : 270) argued, "the share of private capital in output would fall with an increase in public capital if the elasticity of substitution between the two were greater than 1 in absolute value. A fall in the share of private capital would lower the share of private investment in output for a given rate of return on investment. The rate of return to private capital would fall with increases in the types of public capital that were close to being perfect substitutes for private capital… Note that public capital can have a negative effect on private investment as a result of crowding-out through the financial market if the loan rate is not a true measure of the cost of funds (because of financial repression and credit rationing, for example).

13

- According to Pritchett (1996), in a sample of developing countries, less than 50 percent of capital is created for each dollar invested by the public sector.

16

Among rare empirical studies concerning determinants of private investment in developing countries, especially effects of public policies, one can mention those undertaken by the pioneers, Blejer and Khan (1984), Borenzstein (1990) and Greene and Wellanueva (1991). The articles of Blejer and Khan (1984) and Borenzstein (1990) present independent points of vue. While the purpose of Borenzstein’s article (1984) is to test the influence pf overborrowing on private investment, Blejer and Khan (1984) aim to test the degree of substitutability or complementarity between public and private investment. By contrast, Greene and Wellanueva (1991) take into consideration effects of over-borrowing and public investment as well. According to Blejer and Khan (1984) and Greeene and Wellanueva (1991), public investment is founded to positively affect private investment and their empirical results are interpreted as an evidence in favor of the proposition that public investment is good for growth. Other empirical studies for developing countries argued that the relationship between public investment and economic growth depends on the degree of complementarity or substitutability between public and private capital (see for example, Khan and Reinhart, 1990; Aschauer and Lächler, 1998). Among certain case studies, public investment is found to stimulate both private investment and economic growth in Pakistan (Haque and Montiel, 1991, 1994) and Zimbabwe (Morandé and Schmidt-Hebbel, 1991,1994). By contrast, private investment and economic growth are found to be negatively affected by public investment in Chile (Marshall and Schmidt-Hebbel, 1991,1994), Ghana (Islam and Wetzel, 1991) and in Mexico (Alberro-Semerena, 1991; Aschauer and Lächler, 1998). Given that public investment is concentrated mainly in infrastructure, we expect public investment and economic growth to be positively related in the Moroccan case. However, agricultural shocks would be the main determinant of economic growth. Persistent episodes of drought negatively affect not only real agricultural value added but also the overall domestic production as measured by the GDP in constant prices. This is explained by the fact that agricultural value added is an important part of GDP and that it affects the remaining two sectors, namely industry and services. Contrarily to what the theory of growth accounting would predict, we expect that drought explains the essential of real economic growth in Morocco. Among the community of researchers, no one has emphasized the need to measure the phenomenon of drought and its impact on real income. Many scholars in Morocco often declare that the Moroccan economy is sensitive to agricultural shocks but they have never devoted efforts to measure them and to determine their measurable effects on economic growth. The main initial hypothesis of the present essay is that the growth reality of the Moroccan economy is different and then, it cannot be explained by theoretical models constructed for developed economies. In 1967, Denison (1967), in his well-know book “Why Growth Rates Differ?”, developed the so-called growth traditional theory. On the basis of Denison’s work, the Nobel Price Robert Solow (1970) constructed his famous growth model. He argued that economic growth is determined by technological progress. To inflect the potential growth curve, technical progress must be accelerated to increase productivity and then, to improve population standards of life. If these theoretical developments have motivated several researchers to empirically understand the sources of economic growth in the developed World, this accounting approach of growth has been applied in the developing World as well. However, in spite of its

17 importance, it would be probably less helpful in some developing countries where structural particularities are somewhat different. Especially, in some low-diversified economies, like the Moroccan one, agriculture is the more dominant activity. Moreover, the agricultural sector relies heavily on rain falls so that agricultural value added and overall economic growth are sensitive to agricultural shocks. Besides depressing public investment following structural adjustment programs, cycles of agricultural shocks have likely to lower per capita income and then, to endanger poverty, particularly in rural areas. Two different specifications are considered in this paper. The first specification considers the per capita real GDP as a function of public investment and agricultural shocks while the second supposes that the production function follows a Cobb-Douglas technology with three inputs : public and private capital stocks and labor. 1- Drought, Public Investment and Economic Growth : Two Different Specifications

According to theoretical literature highlighted above, we have expressed per capita real GDP (Yr) in Morocco as a function of public investment (Ipub) an our constructed dummy variable (DUM) capturing the impact of agricultural shocks on per capita real income. Formally, we can write : Yrt = a0 . ( Ipub ) 1 .ea2 .DUM t a

(8)

To linearize the model, one introduce the natural logarithm in both sides of equation (8), to yield: Log (Yrt ) = a + a1Log ( Ipubt ) + a2 .DUM t (?)

(-)

(9)

where a = Log(a0). The sign of the parameter a1 is ambiguous and depends on the degree of complementarity or substitutability between private and public capital. Given that real GDP is sensitive to the drought phenomenon , the parameter a1 is expected to be negative and statistically significant. An other approach destined to study the impact of public investment and agricultural shocks on economic growth is to suppose that the production function follows a Cobb-Douglas technology with three inputs : public capital stock, private capital stock and labor. Following Haque and Montiel (1994 : 442-443), we suppose that returns to scale are constant. We also suppose, contrarily to Haque and Montiel (1994) who estimated labor by the volume of population, that the level of labor force (LF) is a good proxy for labor. To take into consideration the particularities of the Moroccan economy, we introduce the constructed variable (DUM) as an additional main determinant of real income. Formally, the model can be expressed as follows : Log (Yrt ) = α 0 + α1Log ( Kpub LFt ) + α 2 .Log ( Kprt LFt ) + α 3.DUM t + ηt

(10)

18 where Yr is per capita GDP in constant prices, Kpub and Kpr are, as measured before, public and private capital stocks respectively, DUM is the dummy variable as constructed, and ηt is a random variable. Following our specified relationships, one may be interested in empirically exploring impact of public capital and agricultural shocks on real economic growth in the particular case of Morocco. Traditional estimation techniques may be used to estimate these effects. But, unfortunately, since variables may not be integrated of the same order, those estimation techniques may be particularly misleading (see Dickey and Fuller, 1981; Johansen, 1988, 1991; Johansen and Juselius, 1990; Engle and Granger, 1991; Gonzalo, 1994). 2- An Economic Growth Dramatically Affected By Agricultural Shocks and Crowded-in by Public Investment

Using data from the World Bank (World Development Indicators, CD-ROM), our ADF tests indicate, as expected, that the constructed dummy variable (DUM) is strongly stationary in level and that natural logarithms of per capita real GDP and public investment are integrated of order 1 (for details on ADF test methodology, see, Dickey and Fuller, 1981). However, Engle-Granger and Johansen cointegration tests show that the two nonstationary variables are not cointegrated (for details on Johansen test methodology, see Johansen, 1988, 1991; Johansen and Juselius, 1990; Gonzalo, 1994). So, the correct relationship is to regress the first difference of natural logarithm of per capita real GDP on the first difference of natural logarithm of public investment and the constructed dummy variable (DUM) in level. Therefore, the estimated model may be written as follows : dLog (Yrt ) = 0.08 + 0.06.dLog ( Ipubt −1 ) − 0.015.DUM t (7.50) (2.60)

(-7.10)

(11)


Our estimates in equation (11) reveal that public investment positively affects per capita real economic growth. 3 percentage points increase in the rate of growth of public investment in period t-1 would result in 0.18 percentage point increase in per capita real economic growth rate. As expected, agricultural shocks, as estimated by the dummy variable (DUM), negatively and dramatically affect per capita economic growth. According to our estimates, beginning in an excellent agricultural year (DUM = 0), an extreme drought during the subsequent year would depress the rate of growth of per capita real GDP by about 12 percentage points!. Even if the impact of public investment is statistically very significant, its size is relatively small in comparison with the effect of agricultural shocks.

19 Using data from the World Bank (World Development Indicators, CD-ROM), over the period 1966-199714, our ADF tests indicate that the natural logarithm of Kpub/LF and Kpr/LF in equation (10) are integrated of order 1. Our Johansen cointegration tests indicate that Log(Yr), Log(Kpub/LF) and log(Kpr/LF) are cointegrated and the cointegration vector is unique. Our error correction model may be written as follows : dLog (Yrt ) = 0.87 − 0.02.t + 0.19dL og ( kpubt LFt ) + 0.05 Log ( Kpubt −1 LFt −1 ) (1.54) (-2.58) (2.72) (1.57) +0.26 Log ( Kprt − 2 LFt − 2 ) − 0.009 DUM t − 0.75 Log (Yrt )

(3.00)

(-3.35)

(12)

(-3.47)


Our estimates, based on an error correction model, reveal that public and private capital stocks in equation (3) positively affect per capita real GDP in the particular case of Morocco. Our causality tests indicate that there is causality going from capital stocks and agricultural shocks towards per capita real GDP and that the causality holds in the short as well as long run (see details on the short and long run causality in Engle and Grander, 1991, Gonzalo, 1994). As expected, the impact of drought, as captured by the constructed dummy variable (DUM) is negative and statistically very significant, suggesting that agricultural shocks play a major role in per capita real GDP fluctuations in Morocco during the period. Following our primary estimates, beginning in an excellent agricultural year (DUM = 0), an extreme drought during the subsequent year, would depress the growth rate of per capita real GDP by about 10 percentage points!. VI- Policy implications and Concluding Remarks

What are the main policy implications we can derive from our primary estimates? Our empirical results indicate that fiscal deficits crowd-out private consumption through effects of public consumption on this kind of private spending. Given that private consumption is necessary for growth, the main policy implication is that fiscal adjustment in Morocco must rely mainly on cutting public consumption. Moreover, our estimates show that public investment crowds-in private investment but public consumption is seen to crowd out capital accumulation in the private sector. In this case, the main policy implication is that fiscal adjustment must not rely heavily on cutting public investment (see Mansouri, 1999, 2001, 14

- In fact, all data are from the World Bank (World Development Indicators, CD-ROM, 1999) except for public and private investment series that are necessary for us to estimate private and public capital stocks. The series for public and private investment are estimated from the World Bank over the period 1970-1997 and from the “Annuaire Statistique du Maroc” (various issues) for the remaining of the period. Private investment is computed as the difference between aggregate investment (World Developement Indicators, CD-ROM, 1999) and public investment (World Developement Indicators, CD-ROM, 1999, and “Annuaire Statistique du Maroc", variuos issues ) and public investment.

20 2003). Given that Moroccan policy-makers tend to cut public capital expenditures to reduce fiscal deficits, they tend in fact to negatively affect opportunities for long run economic growth. Our empirical results show that public capital and agricultural shocks are main determinants of economic growth in the particular case of Morocco. On the public capital front, our empirical results suggest that fiscal adjustment in Morocco must not rely heavily on cutting public investment. If fiscal adjustment is necessary, it must be done relying on cutting public consumption and other wasting expenditures and on optimizing public revenues through struggling against corruption and tax evasion and fraud , not on reducing public investment on physical and social infrastructure (Mansouri et al., 2003). Public investment in this field is essential for growth and then, it must not only be maintained but also extended. On the drought front, our empirical results show how the fact that Morocco is a semi-arid land must be taken into consideration. This is a reality which has been neglected for long time by Moroccan decision-makers. One can observe that there are really two different Morocco : rural and urban. Moroccan policy-makers have neglected rural areas and advantaged some urban ones. Indeed, even life standards in the urban areas are very sensitive to income and expenditures generated in the rural regions. Well, income and expenditures in the rural regions depend heavily on rain falls because few government efforts have been devoted to develop those regions. More public investment should be channeled toward rural arid areas. Unfortunately, most of public (and even private) investment in agriculture has been undertaken in irrigated perimeters during the last decades. Well, up to 76 percent of rural poor are living in arid areas. Public investment in arid regions should work not only for construction of barrages and exploitation of background water but also for facilitating population access to basic physical and social infrastructure such as education, health, fresh water and electricity. This is essential for increasing agriculture productivity in those areas where rudimentary tools are still used in agriculture in an environment that is very sensitive to cycles of drought. Government economic and social policies should work for rural development so as to minimize effects of climate changes on standards of life of rural poor. This will contribute not only to eradicate poverty in the rural areas but also to struggle against per capita real GDP depression which is very sensitive to agricultural shocks. Per capita real GDP fluctuations not only endanger aggregate income poverty but also complicate government economic and social actions and perturb plans of economic and social operators in the public and private sectors in rural and urban areas as well. References : • Alberro-Semerena, José Alberto. 1991. « The Macroeconomics of the Public Sector Deficit in Mexico during the 1980s », World Bank, Policy Research Department, Washington, D.C. • Annuaire Statistique du Maroc (statistical document), various issues, Direction de la Statistique, Rabat, Morocco. • Arrow, K.J. and M. Kurz. 1970. Public Investment, the Rate of Return, and Optimal Fiscal Policy. Baltimore, The Johns Hopkins Press. • Aschauer, David. 1989a. « Is Public Expenditure Productive? », Journal of Monetary Economics, N° 23, Mars.

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• Mansouri, Brahim. 2003b. “Impact of Drought on Main Macroeconomic Variables : An Empirical

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• Mansouri, Brahim. 2003c. “Why the Moroccan Government Does not Use Reliable Research when Implementing Fiscal Policy Reforms?: The Driving Role of Governance and Interest Group Pressures”, Program of the Global Development Network (GDN) and World Bank on Bridging Research and Policy, RAPNET, www.gdn.org. • Mansouri, Brahim. 2003d. “Politique Budgétaire et Taux de Change Réel au Maroc”, in Lahcen Achy (ed.), Management du Taux de Change au Maroc: Quelle option par Rapport à l’Euro?, publications de l’Institut National de Statistique et d’Economie Appliquée (INSEA), Rabat, Morocco. • Mansouri, Brahim. 2003e. “Fiscal Deficits, Public Absorption and External Imbalances: An Empirical Examination of the Moroccan Case”, ERF Working Paper Series, N°138, Economic Research Forum (ERF), Cairo, Egypt (this paper was also accepted in the framework of the 8th ERF conference, 15-17 January, 2002, Cairo, Egypt).

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Marrakesh, April, 15th, 2004. Dr. Brahim MANSOURI.