Fiscal Deficits, Public Absorption and External Imbalances: An Empirical Examination of the Moroccan Case

Brahim Mansouri ()
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Brahim Mansouri: Cadi Ayyad University, Faculty of Law and Economics

No 138, Working Papers from Economic Research Forum

Abstract: This paper attempts to empirically analyze links between fiscal deficits, public absorption and external surpluses in the particular case of Morocco. Using advanced econometric tools, alternative measures of external surpluses and a variety of specifications, the paper shows that fiscal and external surpluses are positively linked in line with the Keynesian absorption hypothesis. However, the study reveals that the relationship between the two surpluses is bi-directional, contradicting the Keynesian hypothesis that there is only a causality going from fiscal to external surpluses. Fiscal deficits may affect external surpluses through components of public spending (absorption). In spite of the importance of this proposition, few studies have addressed it in the recent literature. Our empirical analysis shows that external surpluses are affected by the size of public consumption and investment. However, modern time-series analysis reveals that the impact of public consumption is stronger than the impact of public investment. Nevertheless, empirical results suggest that external balance adjustment in the Moroccan case relies more heavily on reducing imports of investment goods destined to the public sector. While external imbalances are mainly caused by an increasing public consumption, the Moroccan government tends to rely on reducing imports of investment goods. This is a real paradox: while our growing empirical studies show that public investment crowds in private investment and economic growth, fiscal and external adjustments rely more heavily on cutting public investment spending. Public consumption is the spending that mainly drives external imbalances and crowds out private investment and economic growth. Surprisingly, fiscal and external adjustments rely less dramatically on cutting that kind of public spending.

Pages: 20 pages
Date: 2001-13-12, Revised 2001
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Published by The Economic Research Forum (ERF)

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