Tuesday, April 25, 2017

Negative externality of racist campaign

Illustration: two candidates, A and B, were campaigning for an office. They needed to get votes from 16 percent of population -- the swing voters coming from the first-round election. Candidate A's strategy was to play racism and bigotry card against the B. Candidate B decided to face it one-on-one by playing pluralism card. Both are rational. You can even assume that neither of them are actually racist nor bigot by heart.

Candidate A won the election as apparently voters bought the racism and bigotry card he played. Some commentators also believed that candidate B's strategy for directly confronting the racism card is the reason he lost the election. Nonetheless in a relatively competitive election, this is the equilibrium of the number of voters for each candidate and the quantity of racist and bigot campaign. The voters have spoken. But is this a socially optimal outcome?

If you believe that racism and bigotry are not `bad', then it is optimal. And you can skip the rest of this posting.

If you believe that racism and bigotry are `bad' -- something like pollution--,  then it is not socially optimal. We have a case of negative externality: candidate A, the producer of racist campaign, while maximising his private benefit against cost in a competitive political market, massively failed to take into account the social cost of doing it. As a result, he over-produced racist campaign.

To fix the problem, the social cost of racist campaign needs to be `internalized' to the private cost-benefit calculus of the candidate. One way is by asking government to step in by imposing tax or anti-racism regulation. But here, in this case, it might not be applicable: the candidates ran for the very government position, while at the same time people in the government are part of the game

So we need to take a different approach: when market fails, use more market. We can try to link the current political market to other markets - say, the next presidential election market or even just a market for `(urban cosmopolitan) educated social club membership' -  where our candidate is also aspiring to be. The idea is to make the candidate pay the full price for playing racism card by explicitly internalize the social cost he incurred into his private cost structure in these other linked-markets.

This might work or not work, but what I fail to comprehend is some pundits' post-election suggestion to help (subsidize?) the producer of racist campaign to get away with the allegation of being racist under disguise of repairing the election damage. First, it would even more externalize the social cost from the private cost-benefit structure of the candidate. Second, it would create a moral hazard among other aspiring politicians to play the same dirty tricks. In the end, we will see more of `bad' in the air, not less.

Tuesday, February 16, 2016

How to (mis)use econometrics

Apparently these two pieces of writing (in Indonesian) on LGBT and economic growth hit the nerves of those who have taken at least elementary econometrics course - and/or have been associated with the School. I could not blame them, they have all the reasons to get really annoyed by such sloppy regression analysis.

Take this bit directly from the second article above:
Korelasi menunjukkan arah, sementara regresi menunjukkan hubungan fungsional antar variabel.
Correlation shows the direction [RS: of changes between two variables, perhaps], while regression shows functional relationship between variables.
Wait. Simply running regression would not tell you why the 1 percent increase in defunct economists' access to Facebook leads to 2 percent increase in the ignorance of practical men who believe themselves to be quite exempt from any intellectual influence (HT: J.M. Keynes, circa 1936).

Regression per se will not provide you with a meaningful functional relationship. For that, you need a convincing and logically consistent story line - a theory, on which your empirical model is based. Isn't it just stating the obvious, you say? Yes, of course. First week of Method 101.

But maybe the author thinks that he has a story on how government inclination or support to LGBT leads to slower economic growth [RS: not sure if it's a level or growth effect, but never mind]. Here is what I found in the first writing:
... kecenderungan LGBT yang semakin besar di sebuah negara akan berdampak kepada kondisi kependudukan yang memburuk. Hal ini dapat dijelaskan dari fakta terang benderang bahwa pasangan LGBT tidak dapat menghasilkan keturunan .... Kondisi kependudukan yang memburuk tersebut pada gilirannya akan menghambat ekonomi untuk terus tumbuh.
... growing LGBT population in a country would deteriorate its demographic situation. This can be explained by the crystal-clear fact that LGBT couple can not reproduce... This demographic deterioration, in turn, will prevent the economy to grow.
So I WhatsApp our certified labor economist in the house, barista Ujang, to send me the main literature on the determinants of fertility.

He replied right away and emailed me two major references in the profession: Hotz et.al, 1997,  The Economics of Fertility in Developed Countries (.pdf), and Schultz, 2007, Fertility in Developing Countries (.pdf).

My reading: first, theories, models, and empirical strategies to identify and estimate the determinants of fertility are anything but simple nor easy. Second, there is no discussion on LGBT factor as determinant of fertility rate - if you want to put LGBT into the equation, you have a lot to explain.

OK, fine. With a controversial finding, maybe we can look at the data now?

Unfortunately, it is available either only in a certain office room in Depok and/or if you are willing to co-(re)write the paper -- despite, somehow, the regression results are already widely circulated.

Wednesday, October 08, 2014

HDL Cholesterol in What?

Once in a while, you come across a figure in an article that, if you see it without knowing the context, would baffle you to no end.

Here's one. "HDL Cholesterol in Male Baboons and British Male Civil Servants"

What journal? What discipline? What is it about?

Ungated link to the paper here.

Friday, July 25, 2014

Jokowi's first error? - Aco

Finally. So grateful that we have Jokowi as the president-elect. Selamat, Pak!

Now, he is assembling his new cabinet. Strangely, however, he is crowd-sourcing it, using online polling. (To be fair, it's not really crowd-sourcing, as presumably he will still have the final say). 

And the social media embraces this PR gimmick so happily: "Oh, this is the first president who crowd-source his cabinet assembly. Cool!" - and many other similar comments to that effect.

Is this actually a good thing? I don't think so. Picking ministers is president's prerogative, as the polling says in its intro. Correct. But, the intro continues, "that does not mean the people cannot participate". Wait a minute. Sounds nice, but Pak Jokowi is actually creating an unnecessary problem here. If he has to listen to what people say for every decision he makes, it is not difficult to imagine that this new administration will walk like a tortoise onward. Not only that, he is offering a precedence. The next time he needs to make other decisions, the same people might as well demand a poll. Crowdsource is good. But not always.

An analogy might be useful. One thing that you expect from a CEO is the ability to make strategic decision (of course, decision can be wrong, that's a risk). But does he or she have to consult all the stakeholders for every decision? Does s/he have to ask the opinion of each and every employee when s/he want to appoint in manager in the office?  

Dear Pak Jokowi, just pick your aides. We trust you. And yes, we will keep criticising you - and your cabinet for that matter.

Wednesday, May 07, 2014

RIP: Gary Becker

I don't really recall it, maybe sometime in the late 1990s, that my co-barista here, AP, bragged about showed me a book he just read: The Economics of Life. It took me another few years to get my own copy while visiting another co-barista, Aco, in Urbana-Champaign, and that's my first introduction to the work of Gary Becker.

And, believe it or not, it was not a smooth sailing. Partly because I was still persuaded by some leftists ideals, partly because I was not familiar to the first world problems discussed in the book (such as baseball), and partly, probably the most important reason, because I still did not really get what economics is all about.

Until I read The Economic Approach to Human Behavior (1976).

Eleven pages Introduction of the book is really an eye-opener to me, who had been doing economics for some time without being fully aware of the methodological very basis of the discipline: maximizing behavior, market equilibrium, and stable preference.

Then I took a course on Economics of Non-Market Behavior taught by one of Becker's favorite students, Larry Iannaccone. There, I read lots of Becker's work and learned to develop intuitions to see any human behavior or social patterns using economic approach i.e price theory. For a class assignment, I remember trying to propose topic on why people believed in rainmaker (i.e shamanism) and a classmate pondered why many New Yorkers love dogs.

Reading Beckerian economics feels like that you're given a lightsaber to deal with various social issues. Not everybody on the other side will be happy with that, but it's a powerful tool nonetheless. It also helps you a lot to be a well-reasoned social commentator. Although not necessarily makes you the most popular person in a cocktail party, it helps you to actually take side on things (read: policy issues) consistently. Personally, it really provides me with a solid framework to discern seemingly messy and complex social issue and human behavior.

Now, to bring it closer to home, too often our economists and/or economic commentators in the country too easily depart from economic approach in their analysis -- if they ever held it once. It might just show a sign of intellectual laziness or simply ignorance for basic tenets of economics, namely basic price theory derived from three axioms above. But either way, it's a pity. What else we can expect most from a person trained in economics if not an economic analysis?

Instead, oftentimes what we see is an economic analysis that never was. Following Beckerian revolution (some say imperialism), it is inevitable that economist discusses social issues. But it is of little use if she/he does it without applying his/her economic approach and, god forbid, resorts to normative analysis. Becker himself, after laid down his economic approach, carried on to demonstrate how to do it on issues such as crime, addiction, fertility, discrimination, etc.

I often get impressions that these "economists", after presumably going through those curves and math in the classrooms, do not seem to get that "...economics is not a field of inquiry, but rather a method of analysis..". Their comments on various social issues reflect very little, if any, their educational background.

Even worse many of them trade their hard-earned economic tools and skills for populism.

This may indicate a deeper problem: our economics education failed to equip students with the lingua franca of the profession. No, it is not the math (although that is, too), but the language of basic price theory and the economics of incentives (Heckman, 2011). As a result, first, we can not communicate clearly with economists at the frontier of the field and/or follow large bodies of latest development in the profession. Second, in communicating with non-economist, we do not sound like an economist.

But anyway, RIP Prof. Becker. And thanks for the lightsaber.

Sunday, March 09, 2014

Apakah depresiasi nilai tukar riil (real exchange rate) Rupiah dapat membantu mengurangi defisit transaksi perdagangan (trade balance)?

Apa relevansinya? Teorinya adalah nilai tukar riil mencerminkan harga relatif produk Indonesia terhadap produk negara-negara lainnya. Mudahnya, nilai tukar riil adalah nilai tukar nominal dikalikan harga produk negara-negara lain relatif terhadap harga produk Indonesia. Maka nilai tukar riil akan melemah (depresiasi) jika nilai tukar nominal melemah (seperti belakangan ini) atau harga produk Indonesia bersaing dibandingkan harga produk negara lainnya. Sebaliknya nilai tukar riil akan mengalami penguatan (apresiasi) jika nilai tukar nominal menguat (seperti Rp lari ke 8,000/USD) atau harga produk Indonesia mahal dibandingkan harga produk negara lainnya (seperti apel China yang lebih murah dari apel Malang bahkan di kota Malang sendiri).

Dalam literatur, penurunan nilai tukar riiil dianggap bisa membantu mengurangi defisit transaksi perdagangan (atau bahkan transaksi berjalan/current account) jika apa yang disebut "Marshal-Lerner condition" terpenuhi. Yakni jika kenaikan permintaan ekspor dan penurunan permintaan impor terjadi lebih besar dari depresiasi nilai tukar riil.

Memang, keluhannya adalah dalam periode awal penurunan nilai tukar riil, transaksi perdagangan bisa saja tetap defisit karena impor tidak bisa gampang digantikan oleh produk lokal sementara ekspor perlu waktu. Fenomena ini yang disebut dengan J-Curve

Apaka J-Curve berlaku untuk Indonesia? Karena tidak ada akses terhadap computable general equilibrium model (buatnya mahal dan rumit dengan resiko salah yang tinggi), saya gunakan vector autoreggresive (VAR) dengan error correction terhadap data bulanan dari 1999 - 2013. Dependent variables dari VAR ada dua, nilai tukar riil yang saya unduh dari situs web Bank of International Settlement (BIS) dan transaksi perdagangan dari BPS. Saya juga sertakan harga minyak mentah dunia untuk mengendalikan pengaruhnya terhadap tekanan defisit transaksi migas.

Hasilnya? J-Curve diperkirakan juga berlaku di Indonesia seperti yang ditunjukkan oleh gambar di bawah.

{Secara teknis saya run impulse response function yang praktis adalah impact multiplier dari sistem persamaan VAR}

Depresiasi nilai tukar riil Rupiah awalnya memperburuk transaksi perdagangan karena impor tidak serta-merta turun dan permintaan ekspor tidak langsung meningkat. Tetapi sejalan dengan waktu, permintaan ekspor meningkat. Coba saja cek toko-toko mebel di Kemang, mereka panen pesanan. Juga permintaan sepatu, produk otomotif, makanan dsb dari Indonesia meningkat. Sementara, permintaan impor melemah karena makin mahal, sehingga dampak positif terhadap transaksi perdagangan mulai terlihat (gambar di bawah). J-Curve sepertinya menyentuh limit threshold (batas). Sepertinya memang tidak semua impor bisa diganti dengan produk lokal sementara ekspor yang berdaya saing juga tetap memerlukan komponen impor (contoh gampangnya membuat IPhone China harus impor komponen dari berbagai negara).
Implikasinya? Biarkan depresiasi nominal Rupiah sendirinya membantu mengoreksi transaksi perdagangan melalui depresiasi riil nilai tukar. Intervensi untuk mengatur ekspor dan impor hanya akan menimbulkan inefisiensi. Kedua, jika ingin Rupiah tidak terlalu lemah tetapi transaksi berjalan tidak defisit, mau tidak mau kita harus perbaiki daya saing produk Indonesia - sayangnya ini gampang dibicarakan tapi sulit dilakukan. 

Sunday, February 09, 2014

RIP: Thee Kian Wie, True Scholar

Pak Thee Kian Wie was my role model for a good economist.

First of all, he published articles in international journals. A lot of articles. His primary expertise is in economic history and his PhD dissertation is on plantation in East Sumatra in the 1863-1942. He also wrote books on the making of Indonesian economy - from the colonial period to independence. A rare breed of economic historian in the economic profession, even rarer in Indonesia.

I read a lot of his works on industrialization and industrial policy in Indonesia. Pak Thee's personal access to the technocrats and at the same time his distance to power circle and bureaucracy makes his works not only instructive but also credible. Pak Thee, from his writings, was very aware of all political economy constraints and contestation at the time. He witnessed and reported the making of Indonesia miracle between 1970-1998 -- in increasing alarm in later years.

I actually wish that Pak Thee wrote more on how then up-to-date "(economic) ideas" were introduced and translated into Indonesian economic policymaking. Nevertheless, anyone wants to know how industrialization was planned and worked/did not work as intended in Indonesia shall read his papers and books.

Yet, one of his important work after the 1998 crisis is his essays on development, freedom, and New Order miracle (Pembangunan, Kebebasan, dan Mukjizat Orde Baru).

Apparently influenced by Amartya Sen, Pak Thee re-evaluated Indonesian economic "miracle" and reflected that, if I don't misread his writing, while the economic progress was real, there should have been more attention and work (read: government policies) to deal with freedom, inequality, and injustice. Probably not a strong statement for those who want a clear-cut verdict on the regime, but Pak Thee clearly went through a deep thinking and contemplation, with a tingle of regrets, before coming to this conclusion.

But above all, Pak Thee was a wonderful person. Anyone who ever came across him can attest how humble he was, considering his high scholarly credential.

Pak Thee once told me that while he was visiting Sussex University, he often commuted to London to see art performances. "I bought kelas kambing (cheapest) ticket for the shows", he added. It turns out that living in a "relative poverty" -- late Professor Sadli's term to describe his choice for living as a researcher under government payroll -- did not prevent him to become a true cosmopolitan.

He also once let me know, without a slightest hint of irony, that his son (I did not know Marcel Thee and Sajama Cut at that time) is a musician and makes a lot more money than him.

We will sorely miss you, Pak Thee.

Saturday, February 08, 2014

Thing I don't really comprehend #675

What do you think of this statement:

"To prepare for a healthier lifestyle, we will start eating junk food"

Crazy, you may think.

Read this. And think again.

HT: @acopatunru

Wednesday, February 05, 2014

Maybe there's no such thing as a maximum winning coalition

Recently, political scientists and commentators on Indonesian politics seem to like to think that SBY administration, in his second period, is a something called "maximum winning coalition". Certainly not a compliment, his fat coalition is widely seen as a reason on why his government has been so ineffective in many ways.

I agree that the administration does not do their homework very well -- in some cases, such as defending freedom of religion or free trade, they failed miserably. But I am afraid that I can not really comprehend what a "maximum winning coalition" substantially means, as opposed to a more plausible, at least to me, and more established theory of "minimum winning coalition" (see Riker, 1962, for example). 

A "maximum winning coalition" assumes that the winner is somewhat irrational by not picking a low-hanging fruit of smaller coalition for better delivery -- and bigger rent to redistribute within the coalition.

In economic jargon, it is like that he left a 100 dollar bill he saw on the street when actually nobody can prevent him to pick it.

Now, when you see someone did it, you can think that either he's irrational (or maybe foolish); or, he is just rational but it costs him a lot, albeit not directly observable, to grab the money.

The proponent of "maximum winning coalition" argument seems to believe in the first possibility. I am, however, for the argument that the current administration, a large coalition, is still a "minimum winning coalition", given big transaction cost faced by the winner should he exclude the current elements of the administration.

Such cost is stemmed from the effective ability of the (election) losers to hijack the administration policy and rents redistribution -- especially in our existing murky business of political campaign finance transactions, where, it seems to me from series of KPK saga, everybody get the money from everybody. 

Thursday, October 31, 2013

Animal cruelty - or trade war?

So it is happening again. In the middle East this time.

But let's first rewind the tape. Sometime in 2011 an amateur video was broadcast widely in Australia. It was about an "inhumane" practice of slaughtering cows in Indonesian abattoirs. Animal rights activists and Green Party jumped in, condemning Indonesian farmers and called for an action from Aussie government. And action they got. The government of Australia imposed a ban on live cattle exports to Indonesia.

Indonesia, on the other hand, took offence. The government said, fine, let's just then go ahead with our long time fetishism for self sufficiency in beef (I made up the sentence, but it was something to that effect, really). So, Indonesia cut import quota for live cattle from Australia by 30% in 2012 and another 30% in 2013. Not only battle, Indonesia also cut the import of beef, 60% in 2012 and 6% in 2013.

What's the consequence? Australian cattle growers were hurt badly, especially those in Darwin. They produce brahmin cows mostly for export to Indonesia. According to a friend who is expert in this thing, Australians don't really like brahmin beef. So export ban gave a big punch to the business. I heard they even had to kill many cows for nothing.

As for Indonesian side, we heard the self sufficiency rhetorics all over again. Rice, maize, soybean, sugar. And now beef. But then we also saw how the government panicked during the fasting month of 2013. Beef was in short supply, and the Eid day (the day when people eat a lot of beef, and I mean really a lot) was coming. The president was reportedly furious of the whole thing. Prices were going up very quickly. What happened next? Minister of Trade and Minister of Agriculture called imports from Australia. "Urgently wants to buy 25,000 extra cattle and 3,000 tons of frozen beef from Australia", so the news read.

Bottomline? Animal cruelty issue and trade war can be very mingled. Often time it ends up in a lose-lose situation for both trade parties involved.

So, this morning I heard this new news. This time it involves Australian sheep in Jordan.

Please read it yourself. I gotta go get my burger.