1 Global Development Network Bridging Research and Policy
WHY THE MOROCCAN GOVERNMENT DOES NOT USE RELIABLE RESEARCH WHEN IMPLEMENTING FISCAL POLICY REFORMS?: THE DRIVING ROLE OF GOVERNANCE AND INTEREST GROUP PRESSURES Dr. Brahim Mansouri, Professor of Economics, Faculty of Law and Economics, Cadi Ayyad University, Marrakesh, Morocco Email:
[email protected] I-
Introduction
While fiscal deficits are often thought of as exerting negative effects on key macroeconomic performances, less attention has been devoted to the impact of public spending structure (see Gupta et al., 2002). Our previous research in this area has shown that current public consumption has dramatic negative effects on the Moroccan economy as a whole. By contrast, public investment has been seen to crowd-in private investment and to boost economic growth (see Mansouri, 2001). Surprisingly, fiscal adjustment in Morocco continues to heavily rely on cutting capital expenditures and to maintain and even extend current public consumption. Our paper is dealing with the reasons, which are behind such inefficient fiscal policy reforms. In terms of political economy analysis, we focus here on the driving role of governance and interest group pressures (Mansouri, 2000a). The paper is the extension of a research financed by Ford Foundation in the framework of the Middle-East Research Competition (MERC) Program, managed by the Lebanese Center for Policy Studies (LCPS, Beirut, Lebanon). The original research is entitled: “Macroeconomic Implications of Fiscal Deficits in Developing Countries: The Case of Morocco” (see Mansouri, 2001). The remainder of the paper is organized as follows. Section II analyzes effects of fiscal policy on private spending. Section III is dealing with effects of fiscal policy on external sector variables. On the basis of empirical results in sections II and III, Section IV explores the role of governance and interest group pressures in utilization of reliable policy research for efficient fiscal policy reforms. II-
Fiscal Policy and Private Spending in Morocco
If fiscal policy crowds-out private spending on consumption and investment, it would negatively impact opportunities for long-run economic growth. In what follows, we focus on effects of fiscal policy on private consumption and capital accumulation in the private sector. 1- Fiscal policy and private consumption In the particular case of Morocco, no serious empirical study dealt with the macroeconomic implications of fiscal policy, especially the impact of public deficits on private spending (see the simplistic work of Bousstta, 1992, and the incomplete study of Amara, 1993). Our empirical results (see our econometric specifications, estimations and tests in Mansouri, 2001; 2000b; 2003) show that real public consumption crowds-out real private consumption in the particular case of Morocco while the impact of public revenue is positive but not statistically significant. In our sense, contrarily to what would conclude a simplistic explanation, this empirical result does not necessarily indicate that the Moroccan consumers are Ricardian. The most plausible explanation would probably be that public consumption directly crowds-out private consumption through the public sector puncture on available financial resources, forcing the private sector to save rather than to consume. As expected, the impact of drought on real private consumption is negative and statistically
2 very significant, suggesting that agricultural shocks affect the private sector spending on consumption1. Since aggregated public expenditures and current public consumption are statistically significant and public revenues are not, we have decided to combine the two variables in a sole explanatory factor, that is the budget surplus ratio to GDP. Our estimations (Mansouri, 2001, 2003) show that private consumption in Morocco is crowded-out by fiscal deficit accumulation. Replacing overall budget surplus by primary fiscal surplus does not change our main empirical results even if the semi-elasticity of real private consumption in relationship with primary fiscal surplus (in proportion to GDP), though still statistically very significant, decreases somewhat. 2- Fiscal policy, private investment and economic growth in Morocco Following Rodrigùez (1994a) and Aschauer and Lächler (1998) and desegregating total public expenditures into two main components: public investment and current public consumption (expressed in proportions to GDP), we have specified a private investment model for Morocco (see details in Mansouri, 2001, 2003). As expected, our empirical results (see Mansouri, 2001; 2003) show that public investment is seen to positively affect private investment, suggesting that public investment in the Moroccan case is concentrated mainly in activities complementing rather than substituting for capital accumulation in the private sector. By contrast, current public consumption is seen to crowd-in private investment, suggesting that staff plethora, increasing big wages and wasting expenditures in the public sector negatively affect private investment activity in the Moroccan case. This kind of public spending has probably to be linked to the phenomenon of capital flights. As expected, corporate taxes exert negative and statistically significant impact on private investment, suggesting that fiscal policy negatively and substantially impacts through taxation. As expected, the coefficient associated with the credit available to the private sector is positive and statistically very significant, suggesting that liquidity constraints significantly affect private investment through the amount of credit available for the private sector. As shown by the statistical significance of the coefficient associated with the variable DUM, agricultural shocks are seen to negatively and dramatically affect capital accumulation in the private sector (see Mansouri, 2001, 2003). Our empirical results reveal how climate changes heavily affect investment activity in the private sector. Finally, investment-based-real exchange rate exerts negative impact on private investment, suggesting that real devaluation depresses capital accumulation in the private sector. As shown in our estimated model using advanced econometric tools (see Mansouri, 2001; 2003), the rate of growth of real public investment exerts a positive and statistically significant effect on real GDP. As expected, drought has negative, dramatic and statistically significant effects on real economic growth. Our empirical results reveal how drought plays a major role in economic growth. III-
Fiscal Deficits, Public Absorption Components and external sector variables in Morocco: The Paradoxes of the Moroccan Government
Concerning effects of fiscal deficits on external sector variables, our paper is dealing with impact on external deficits and real exchange rates. 1- Fiscal deficits and external imbalances in Morocco Theoretically speaking, two approaches are known to explore links between external and fiscal deficits: the Ricardian explanation and the Keynesian proposition (see details on the theoretical literature in Mansouri, 2001, 2002a, 2003).
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For details on the construction of a dummy variable for drought, see Mansouri (2001, 2002b, 2003).
3 In the particular case of Morocco, no serious empirical analysis has been devoted to estimate effects of fiscal policy on external deficits (see for example, the very simplistic graphical observations of Boussetta, 1992, 1995). As shown in our cointegrating equations (see Mansouri, 2001; 2002a; 2003), the fiscal surplus as a ratio to GDP has a positive and statistically significant effect on the external surplus. The current account surplus also has a positive and statistically significant impact on the fiscal surplus. Our estimates and tests on the basis of error correction models show that there is a bi-directional short and long run causality between external and fiscal surpluses (see Mansouri, 2001; 2002a; 2003). Our empirical results contradict those found by other studies, especially those using conventional and simplistic statistical analyses, mainly Boussetta's statistical exercise (see Boussetta, 1992; 1995), whereby simplistic graphs show only an ambiguous unidirectional causality going from fiscal to external surpluses. Since our empirical results reveal that bidirectional positive causality exists between external and fiscal deficits in the particular case of Morocco, it is important to know what kind of public absorption determines external surpluses and how external surpluses affect public absorption components themselves. In spite of the interest of this decomposition, many previous studies have neglected it. As shown in the cointegrating equations (see Mansouri, 2001; 2002a; 2003), increasing current public consumption deteriorates external surpluses more heavily than does public investment. The paradox is that while public consumption is seen to deteriorate more heavily the current account surplus, an improvement of the latter affects negatively and more substantially public investment than public consumption. This empirical result reveals that import restrictions fall more heavily on the public sector imports of investment goods than on the public sector imports of consumption goods. Estimated cointegrating equations show that public consumption affects external surpluses more powerfully than does public investment, suggesting that external imbalances in the case of Morocco are more substantially affected by current government consumption. Our estimates also show that there is a real paradox in the process of external and fiscal adjustment in the case of Morocco. Effectively, while public consumption is seen to drive more significantly the external deficit, fiscal adjustment seems to fall more heavily on public investment as shown by the estimated effect of the external surplus improvement on public investment. Since public investment is seen to have a crowding-in effect on private investment and growth (see Mansouri, 2000b; 2001; 2003), we think that the strategy of fiscal and external adjustment in Morocco would be bad for long run economic growth. 2- Fiscal policy and price-competitiveness of the Moroccan economy To estimate effects of fiscal deficits on price-competitiveness, we use a simultaneous equation model where current account surplus is determined conjointly with real exchange rate. Extension of Salter-Swan-Corden-Dornbush paradigm (see Rodrigùez, 1994b) to three-sector distinction between exportables, importables and nontradables permits to derive a structural equation for the real exchange rate (see Mansouri, 1999; 2000b; 2001; 2003). In conformity with our initial hypotheses, the coefficient associated with the terms of trade in our initial model (see Mansouri, 1999; 2000b; 2001; 2003), is negative and statistically very significant, suggesting that an improvement of terms of trade would appreciate import real exchange rate. As expected, the current account surplus, even if its coefficient is statistically significant only at 10 percent level, positively affects import real exchange rate, suggesting that an improvement of external surplus generates real devaluation. Economically speaking, this positive effect may be explained by the fact that an improvement in external surpluses implies a fall in aggregate absorption, reducing domestic prices and then inducing a real depreciation. Well, an improvement in external surpluses is driven mainly by an improvement in fiscal surpluses, in conformity with the budgetary approach to the balance of payments. Therefore, real exchange rate depreciation seems to be explained in definitive by an improvement in budget surpluses.
4 The main policy implication is that if Moroccan decision-makers want to improve the pricecompetitiveness of the economy, fiscal adjustment is necessary. However, the solution is not “to adjust in order to adjust” but to design an efficient fiscal policy reform, reducing wasting public expenditures and maintaining, even extending, productive public spending. In addition, tax revenue should be optimized, especially through the struggling against corruption as well as tax fraud and evasion. In conformity with our initial hypotheses, the coefficient associated with the terms of trade in our reformulated model (see Mansouri, 1999; 2000b; 2001; 2003 for details), is still negative and statistically very significant, suggesting that an improvement of terms of trade would appreciate import real exchange rate or, all things being equal, a deterioration in terms of trade would depreciate import real exchange rate. According to our estimates on the basis of our reformulated model (see Mansouri, 1999; 2000b; 2001; 2003), public absorption is seen to appreciate import real exchange rate. Economically speaking, this means that public spending in consumption and investment increases domestic prices and induces increasing import real exchange rate as measured, that is a real appreciation. Our empirical results also show that the Moroccan public sector has higher propensity to consume nontradables than the private sector. Therefore, our decomposition methodology as well as our estimates reveal that deterioration of external surplus appreciates real exchange rate because such a deterioration is mainly due to increasing public spending (see details in Mansouri, 1999; 2000b; 2001; 2003). Since public expenditures deteriorate budget surpluses, accumulation of budget deficits would probably result in a real exchange rate appreciation, consequently degrading price competitiveness of the Moroccan economy. IV-
The Reasons of Inefficient Fiscal Policy Reforms: The Place of Governance and Interest Group Pressures
Our empirical results show that: -
even if fiscal deficits crowd-out private consumption, the impact is due to current public consumption rather than to other public spending components; public capital expenditures are seen to crowd-in private investment and to boost economic growth while current public consumption exerts adverse effects; Regarding effects of fiscal policy on external sector variables, our empirical results show that:
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there is a short and long-run positive bi-directional causality between fiscal and external surpluses; in comparison with public investment, current public consumption is seen to substantially deteriorate external surpluses; decision-makers tend to adjust external accounts, relying heavily on cutting public investment. Paradoxically, current public consumption, which exerts the most substantial impact on external surpluses, has been reduced only slightly. Fiscal deficits have to endanger the current account deficit, and the latter has to appreciate real exchange rate.
Despite these interesting findings, the Moroccan policy-makers continue to conduct an inefficient fiscal policy reform. Fiscal and external adjustments have been often driven by dramatic reductions in public investment (in proportion to GDP), undermining opportunities for long-run economic growth. In this sense, policy-makers seem to consider fiscal adjustment as a pure accounting exercise. Less attention is reserved to the structure of public spending and to its effects on the economy as a whole. We think that such inefficient fiscal policy reforms have to undermine opportunities for long-run economic growth of the country What are the reasons, which are behind this inefficient macroeconomic policy reform? Why decision-makers do not use reliable and more comprehensive research when they design and implement fiscal policy reforms? Recent interviews with collaborators of decision-makers reveal that among factors explaining inefficiency of fiscal policy reforms, one can mention the following: - inadequate knowledge and training of decision-makers; - the widespread idea that policy research is extremely theoretical and vague;
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bad dissemination of reliable research in fiscal policy research area.
While these factors may be essential in determining why decision-makers do not use reliable research in this area and why reforms are inefficient, aspects relating to governance and interest pressures matters more. In what follows, we focus on an analysis of the driving role of governance and interest group pressures. In stressing the importance of these factors, we aspire to conduct an analysis in terms of political economy. 1- The role of governance in fiscal reform process and utilization of reliable policy research Interviews with collaborators of decision-makers show that bad governance, reflected in public sector irrationality and increasing wasting expenditures as well as in corruption and incredibility of rules, may explain why decision-makers neglect reliable research and why they tend to inefficiently adjust public budgets. Interviews show that the government often relies on generalizing policy researches that are politically feasible and easily practicable. More comprehensive and reliable researches are often rejected, partially because of the lack of governance. In this sense, the strengthening of linkages between research and policy, especially on the fiscal front, may be possible, especially if the policy-makers have the confidence on policy research as well as the willingness and the capacity to set up good governance. Interviews show clearly how decision-makers often do not believe to academic policy research. According to one of interviewed collaborators, “generally, there is no confidence on academic research, practice matters more. While bureaucrats have short-term visions, researchers have long-term horizons. The staff in the Ministry of Finance has forgotten economic and political theories. In the administration, we seek to manage the “day-to-day” issues not to read academic research”. It is important to underline that a pure economic study of fiscal policy reforms is not sufficient to better understand the reform process because it neglects political and institutional factors. In other words, it does not account for political economy analyses. Well, it is known today that political and institutional factors play a major role in economic policy reforms as well as in economic performances in general (Haggard and Webb, 1993 ; Alesina, 1998a, 1998b ; Brunetti, 1995 ; Easterly and Levine, 1996 ; Helliwell, 1994 ; Mauro, 1996 ; Tavares and Vacziary, 1996 ; Alesina and Perotti, 1996). When implementing fiscal policy reforms, decisions are decomposed and implemented by public servants at a lower level of the government hierarchy (see Mansouri, forthcoming). Interviews with certain collaborators of decision-makers show how the quality of feedback in the bosom of the hierarchy matters for efficient fiscal policy reforms. In this framework, governance issues systematically arise. Interviews also show that decision-makers tend to use non-reliable policy research because of the lack of efficiency of fiscal policy reforms at lower levels of the government hierarchy. Such efficiency may occur only if: -
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Signals which decision-makers transmit to their collaborators are clear. When signals are confuse, contradictory or timid, they will not be able to mobilize public servants who are in charge of rendering reforms effective. Decision-makers have the willingness and the power to convince and to arouse efforts of those who are in charge of implementing fiscal policy reforms. Often, the minister of Finance has the good intention to attenuate fiscal imbalances through rising some public revenues and reducing some public expenditures, but he is sometimes inapt to get the support and the cooperation from some central directors. An effective structure of incentives for bureaucrats is set up so as they will have no interest in hindering fiscal reforms initiated by decision-makers.
The quality of governance and bureaucracy may partially explain inter-country differences in fiscal reform outcomes. The success of tax and fiscal policies depends crucially on the characteristics of the state (Rodrik, 1997). In particular, the discipline and the competence of bureaucracy matter in fiscal policy reforms. As underlined by some interviewed public servants, the Moroccan public sector is characterized by visible irrationality. It is now known that the ratio to GDP of current public consumption in Morocco is higher in international standards.
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For the government to use reliable policy research for efficient fiscal policy reforms, public institutions must function well. Such a good functioning depends on administrative and institutional factors such as: efficiency in collecting data; efficacy in organizing decision-makings; efficiency in distributing tasks among agencies in charge of the implementation of policy reforms; transparency of financial decisions of the government, including audit. Administrative reforms in these fields are essential to enhance capacities of the state in the long run and to consolidate competencies for efficient fiscal policy reforms. An other problem concerns the control of decision-makings. For an appropriate rationalization of public expenditures, the minister of Finance and the Governor of the Central Bank should have in mind the public interest, must be well trained n economics, honest and not interested in short term political issues (see Tanzi, 1994). The training profile of the minister of Finance and his collaborators may largely determine the scope for technical errors in fiscal policy reforms. One can believe that decision-makers have the required training to understand the finest issues in economics. In some cases, certain decision-makers have little theoretical and/or empirical knowledge in this field. 2- The role of interest group pressures in fiscal policy reforms and usage of more comprehensive policy research One can believe that because of the emergence of democratic institutions in Morocco, rent-seeking groups would become more influent. Rent-seekers may resist tax and fiscal policy reforms. Furthermore, autocratic governments have longer political horizons because of their capacity to dominate interest groups. A fiscal policy reform using reliable and more comprehensive policy research to efficiently reduce public expenditures may induce positive results only in the medium and long run. Economic and social costs of efficient fiscal reforms are often higher in the short term. Well, democratic regimes cannot survive for longer time to get reform results. Under the influence of lobbies, democratic governments risk to abandon efficient reforms in favor of unsustainable tax and fiscal policies. Even if the Minister of Finance and his collaborators have the required technical competencies to design appropriate fiscal policy reform programs, other ministers and central directors may constitute a real interest group, resisting efficient reforms. Interviews with certain collaborators of decisionmakers show that policy-makers are more interested in “day-to-day” issues not in reliable research to conduct efficient fiscal policy. For certain ministers, fiscal adjustment is a “null-sum-game”. Even if they tolerate the reduction of wasting expenditures in the public sector, they would hope that other components of the public sector bear the brunt of fiscal policy. Moroccan citizens still hope that the new government tax and fiscal measures to improve elasticity of the tax system, struggling vigorously against tax fraud and evasion. They also hope that the government will do the necessary to rationalize the public sector, eradicating corruption, clientelism and wasting. In doing so, the government will show the willingness, the power and the suppleness to resist “hostile-to-change” mentalities. A good functioning of public institutions is not only a question of administrative competencies. Using reliable research for efficient fiscal policy reforms requires a resisting of bureaucratic interest groups. In Morocco, corruption may render the bureaucracy a powerful interest group, well positioned and aligned against efficient fiscal reforms. Even with the absence of corruption, bureaucrats may also suffer from political inference. In Morocco, short-term efforts cannot permit to build up a bureaucratic system immunized against corruption and political inference. Institutional reforms require long term processes and actions.
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Concluding Remarks
Despite our interesting findings regarding macroeconomic implications, policy-makers continue to conduct an inefficient fiscal policy reform. Fiscal and external adjustments have been often driven by dramatic reductions in public investment (in proportion to GDP), undermining opportunities for longrun economic growth. In this sense, policy-makers seem to consider fiscal adjustment as a pure accounting exercise. Less attention is reserved to the structure of public spending and to its effects on the economy as a whole Interviews with certain collaborators decision-makers show that in addition to inadequate knowledge and training of decision-makers, the widespread belief that policy research is extremely theoretical and vague and bad dissemination of reliable research in this area, implementation of a reliable researchbased fiscal policy reform seems to be hindered by the following main factors: - bad governance, reflected in public sector irrationality and increasing wasting expenditures as well as in corruption and incredibility of rules; - effects of bureaucratic interest groups who agree fiscal adjustments but resist efficient fiscal reforms; The paper reveals that the government often relies on generalizing policy researches that are politically feasible and easily practicable. More comprehensive and reliable researches are often rejected because of the lack of governance and the impact of rent-seeking groups. Our research results show that the strengthening of linkages between research and policy, especially on the fiscal front, may be possible only if the policy-makers have the confidence on policy research as well as the willingness and the capacity to set up good governance and to resist rent-seeking groups. •
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