My Coconuts are Better than Your Big Macs

No they are not. While we're on the subject (fast food, not coconuts), let me belatedly say "Happy 20th Birthday!" to the Big Mac index. For those unfamiliar with this index:

"...The Economist's Big Mac index is based on one of the oldest concepts in international economics: the theory of purchasing-power parity (PPP), which argues that in the long run, exchange rates should move towards levels that would equalise the prices of an identical basket of goods and services in any two countries. Our “basket” is a McDonald's Big Mac, produced in around 120 countries. The Big Mac PPP is the exchange rate that would leave burgers costing the same in America as elsewhere. Thus a Big Mac in China costs 10.5 yuan, against an average price in four American cities of $3.10 (see the first column of the table). To make the two prices equal would require an exchange rate of 3.39 yuan to the dollar, compared with a market rate of 8.03. In other words, the yuan is 58% “undervalued” against the dollar. To put it another way, converted into dollars at market rates the Chinese burger is the cheapest in the table...."

With a Big Mac costing Rp 14,400 in Jakarta, rupiah is 49% "undervalued" against the dollar. Of course, no one is arguing that Big Mac is representative of what Indonesians are gobbling up. In fact, any Indonesian worth his paket hemat would know that we go to McDonald to get them chicken.

It turns out that several years ago, the financial giant UBS created an alternative Big Mac index, based on how long (in minutes) a typical worker would need to work before he earn enough money to buy a Big Mac. The 2005 numbers say that a typical worker in Karachi would have to work for 132 minutes to be able to buy a Big Mac. It would have taken 64 minutes of work for a typical Jakarta worker to be able to afford one (alternatively, he only needs to work for 19 minutes to get 1 kg of rice). Bangkok: 46 minutes, Singapore: 20 minutes (New York: 12 minutes). Like most cross-country indices, the numbers are more fun to look at than they are useful (what is a typical worker anyway?).

Dissapointed with these indices, Ms. Thu-Tam Doan, a travel writer, once proposed the use of her coconut index to compare purchasing power parity and cost of living in Southeast Asia,

"...I assumed that like all men, all coconuts too are created equal.....I took the given variables, the per capita income of each country in US$ and throughout my travels have noted the average cost of their coconuts. I divided per capita income by 365 to find their daily wages, then compared the cost of a coconut as a ratio to their wages (X:Y), where X = cost of 1 coconut as a fraction of their daily wages, Y....

..and so it went on. According to her calculation, in Indonesia, a daily wage would buy you around 12 coconuts. A daily wage in Thailand would buy you 24, and in Singapore 81. I don't know how useful those numbers are. But that's a lot of coconuts.

To her credit, Ms. Thu-Tam Doan recognizes the flaw of this index ,

....In conclusion, coconut quality inherently attributes to coconut cost, thereby influencing purchasing power parity (eg. the standard of living). This Coconut Index was a lot more work than I thought it would be - too much work for someone who is aimlessly traveling.

I give up.

Sound decision. Coconuts are not created equal after all. So I guess we're stuck with the Big Mac index, maybe for another 20 years. In the meantime, tall latte index is now a toddler.

The Economist | Big Mac | latte | coconut | ppp

Chicken Capital

Tired of social capital? Here's a completely different capital. It's called chicken.

Animal-rights activist, Pamela Anderson (hmm, I think I've heard this name somewhere) complained that Indonesia's KFC is cruel and abusive to chickens. Quoted:

Investigations by my friends at PETA [People for the Ethical Treatments of Animals] that chickens who are raised for KFC are bred and drugged to grow so large quickly that many become crippled under their own weight.

Maybe they are implanted, Pam?

Update: Since I'm in the mood for chicken, I find this story amusing. It says egg causes chicken. Well, not really surprising. I can prove it.

Chicken | Pamela

Putnam confirmed

In "Making Democracy Works" (1994), Robert Putnam shows how civic community matters in governance and democracy. He made Northern vs. Southern Italy has his case. Then, in "Bowling Alone" (2001) he wrote that civic participation has been declining in the U.S. TV and radio were to blame for that.

Scholars have been disagreeing over his work. I will leave the disagreement for another discussion. One interesting question to ask would be "how true is the claim that TV and radio contributed to declining civic participation?"

An interesting paper by Ben Olken tried to answer that using survey data from more than 600 villages in Centarl and East Java. The methodology is very interesting. He looked at the number of TV channels can be reveived in each village. Based on Putnam's work, he hypothesized that the more channels can be received, the lower the level of civic participation. Since Putnam also argued that level of civic participation correlate with governance, more channels should also negatively correlated with quality of governance.

But a simple linear regression suffers from reverse causality and omitted variable bias. There may be other factors correlated with channels reception and participation as well as governance. To deal with this problem, Olken exploited the exogenous factor that affects channel reception: geography of each village. Villages surrounded or near the mountain will receive less channels (perhaps only TVRI and RCTI). So he uses the information on several determinants of channel reception in each village (geography, topography, relative position from nearest transmitter etc.) as the instrument.

The IV regression results were fascinating. Number of channels is negatively correlated with participation in social groups (community meeting, gotong-royong, arisan or religious groups), trust (other measure of social capital), and "missing expenditure" (as proxy for corruption and governance).

So, Putnam's theory is confirmed then?

Methodology | Social capital

From the Manager

Our deepest condolence to all the victims of Yogyakarta earthquake...

Is Social Capital Really Capital?

The demanding Manager asked me to serve this drink in the cafe. She doesn't like the idea of moonlighting --including, even, serving my own drink at home. So here it is (cross-posted at here, with minor modification)

This is, of course, a fiction, in response to previous fellow host's posting:

Once upon a time an economist had been confused. He found two countries, Banana Republic and Togog Republic, have similar resources, endowment, size, economic structure, political system, etc --in short, they're almost identical, like twin. Yet he also learned that Togog Rep. grew so well, Banana didn't.

Having frustated to find the secret of Togog Rep., he went to entertain himself playing bowling. His bowling mate is an anthropologist who incidentally was reading Bourdieau (1986) for his ethnography work on the Mighty Maridjan case in Mt. Merapi Central Java.

The economist, while waiting his turn, read that book and encountered the term social capital. A light-bulb flashed in his head. He said to himself: "Voila, this is the answer. Togog Rep. had higher social capital".

He started writing, and to make it catchy and relevant to his readers --they don't have Maridjan's fortuneteller game-- he put a title with something related to bowling. It turns out everyone seems love the idea.

Except this crazy guy from Salemba, I, who ask how to have reliable social capital measurement, and more importantly, whether this social capital is similar to old definition of capital, that is, subject to diminishing return, reproduce-able (through investment), and has various rates of return (and what determine this return).

Social capital

Does internet connect or separate people?

This is a spin-off from my earlier posting on the Police's "Message in the Bottle." Actually, I wanted to comment on Roby's comment. But since this may be a different subject, I guess it's worth being posted as a new entry.

Roby argued that internet (blog, friendster etc.) might connect people. But at the same time it could also create alienation. This reminds me of a similar but different discussion on whether internet makes people from different groups (professions, political ideology, hometown etc.), or even segregate them more?

In the social capital discussion, Robert Putnam raised the concept of 'bonding' and 'bridging' social capital. Another thing he rasied in "Bowling Alone" (2001) was the declining trend in the of civic and community engagement in the U.S., partly because of TV. But other people challenged his argument by pointing that people may still engage in civic activties by other means. Town meeting, rally, petition may still exists but people now can do it through online petition, email communcation, blogging etc. So internet can be a source for 'bridging' social capital.

But internet can also be a source for 'bonding' social capital that segregate different groups of people. This paper shows how it can happen in science. Suppose A and B is are economists, but live in two geographically separate places. A has two colleagues, C and D, who are non-economists but live in the same area with A. Consider the world when communication was still difficult. A will interact more with C and D, which imply the possibility of a cross-disciplinary collaboration.

But because of the revolution in communication technology, A can now easily interact with his or her fellow economist, B. So economists will be more likely to talk only with economist, reducing the possibility of cross-disciplinary interactions. In the authors' language, internet will "Balkanize science."

Well, we could still argue otherwise. Because of communcation, economists who tend to group together can have more access to their non-economists colleagues. At the end, the conclusion can happen in both ways.

Social network

Marxian in the bottle

Time for retro music:

Just a cast away, and island lost at sea-o
One lonely day, no one here but me-o
More loneliness, any man could bear
Rescue me before I fall into despair

You should be cool enough to know which song it is. But do you know what philosophical idea this song is closely related to?

Well, this is the answer: Marx' alienation. Remember the idea of surplus, division of labor, division of class etc. that in the end made labor alienated from theirselves, their work, and their society?

I woke up this morning, don't believe what I saw
Hundred billion bottles washed upon the shore
Seems that I'm not alone in being alone
Hundred billion castoways looking for a home

Thank God that we now have internet, emails, blogs, friendster and everything that make us not really alienated...

P.S. Other Marxian philosophy of The Police can also be heard in Synchronicity.

Marxian philosophy

I'd rather teach a pig

I don’t think other hosts in this café ever took his class on money and banking or monetary economics. But I did. [Addendum: I forgot, Ujang also took his class]


Few of us who were in his class would deny that he is quite a character. From his cigarette puffing behavior inside class (inside? yes ! inside class) to bashing students for our questions or ineptitude, this man, Anwar Nasution, has absolutely no match.

Ujang and I had an idea to collect Mr. Nasution’s famous, often notorious, quotes. We urge all alumni to document his quotes which perhaps can be published in the future.

As a start, here are some in our memories:

On criticizing state-owned enterprises:
“Jangan naik Garuda kecuali urusan kau tamasya” (circa 1991)
“Don’t fly Garuda (state owned airline) unless you are in a vacation”

On ideology:
“Jangan cuma bisa Bismillah.. Assalamuaiakum, kelakuan kaya setan” (recently in an interview)
“Don’t be proud of saying Bismillah.. Assalamuaiakum yet behaving like a jerk”

On economics (reply to student answer in his Q&A):
“ Money supply mamak kau!” (right in front of me, circa 1991)
“Your grand ma’s money supply!”

“ Mamak kau tingkat bunga! “ (circa 1990 or 1991)
“Your grand ma is that interest rate!”

“Babi masih bisa diajar!” (happened in our seniors class)
“I’d rather teach a pig!”

On students late coming to class behavior:
“Kambing aja nggak telat masuk kandang!” (happened in our seniors class)
“Even goats are never late to return to barn!”

Self-Promotion #393: "...Because That's What Gets the Chicks... "

(See Self-Promotion #392 right here)

It's time for another installment of our infamous Self-Promotion^TM postings. Let me shamelessly quote two full paragraphs from a blog entry by Steven Levitt at Freakonomics:

You may remember Joey Cheek as a gold medal speed skater from the Winter Olympics. It turns out he is also quite smart. He was admitted to Yale, Princeton, and Stanford. (Harvard, however, turned him down.)

Parade magazine quotes Cheek as saying that he plans to study economics. And then he goes on to blow the secret we economists have so carefully guarded for all these years. He plans to study economics because “that’s what gets the chicks.”

Joey, Joey. You just can't keep a secret, can you? Here's the website of Mr. Chick Magnet himself for you ladies.

That, ladies and gentlemen, is Self-Promotion #393. (Or is it self-vilification?)

self-promotion economists

...The point, however, is to change it...*

Unfortunately I read Greg Mankiw's of Harvard paper (Title: The Macroeconomist as Scientist and Engineer --in pdf) right after giving last lecture of intermediate macroeconomics, with topic on the stabilization policy (the birth of, Keynesian, macroeconomics) and the subsequent New Macroeconomics. If not, I would like to add it as reading list. For non economists, don't worry, it's a non-technical paper (read: no math). You can take it as the biography of the macroeconomics.

In that paper, before coming into a rather disheartening verdict on the disconnection of macroeconomics as science and as engineering (or problem solving) Mankiw draws a very clear and readable history of macroeconomics as a discipline. Soon you would be engaged in a gripping tale on the battle of ideas between Keynesian and New Keynesian in one hand, and New Classical in the other.

Indeed some knowledge on intermediate macroeconomics would help to understand and follow what is being fought. You know: Philips curve and wage stickiness, rational expectation, systematic monetary policy, etc. But even for you who doesn’t have a chance, and privilege (kidding!), for being trained into the subject, it is still fascinating to enjoy the exchange, sometimes nasty, arguments amongst the proponent of each camp. Particularly between Bob Lucas (Chicago) of Neo Classical school and Bob Solow (MIT) Keynesian.

In page 12 Lucas was quoted saying:

"People don't take Keynesian theorizing seriously anymore"

While Solow called that it

"foolishly restrictive" for the new classical economists to rule out by assumption the existence of wage and price rigidity and the possibility that markets do not clear.

Mankiw thinks that Lucas represents the analytical rigour of the new classical --in other word, a sophisticated science--; and Solow concerns on the lack of reality of market clearing assumption -- bad engineering --.

Meanwhile the science itself develops in both camp of neoclassical and neo Keynesian (modern macroeconomics, you would like to say). The interesting research projects of the two schools have been discussed briefly, but excellently, in the paper. Both leads to a conclusion that now we know better about the subject.

But

If God put macroeconomics on earth to solve the problems, then the Saint Peter will ultimately judge us by our contributions to economic engineering. So let’s ask: Have the developments in business cycle theories over the past several decades improved the making of economic policy? p.15

Alas, no.

Mankiw shows that the macro-model used by US administration is basically the old Keynesian type --yes, that IS-LM and Philips curve stuffs-- with minimal contributions from New Macroeconomics researches. And come to think of it, I guess the IMF model --Polak model--, applied to countries in crisis in need for stabilization and IMF money, is also very much old Keynesian one. And I believe all macroeconomic models for Indonesian economy are no different.

This is indeed a disheartening that since Keynes (and to some extent Hicks) --well OK, call it Neoclassical-Keynesian synthesis-- macroeconomic framework in the 30s, no one come up with significantly different and better model of an economy.

I was expecting, and still hopes, that 1998 Asian crisis, a resemblance of 1929 Great Depression, would give a birth to a new Keynes –-perhaps from the East-- to revolutionize the way we see the economy and business cycle as well as devising better way for stabilization policies.

Apparently we still have to wait.

footnotes:
* yeah, it's Karl Marx's word, not on macroeconomists, but philosophers who are too busy interpret the world in various ways.

Macroeconomics

From the Manager

Hi,

Yes, I was absent last week. But that was for a good reason: Ujang and Sjamsu were back -- and smashing. I didn't feel like spoiling their great postings with my ranting on music.

One week is enough, tho. Now I'm going to torture you again... No I'll go light and sweet.

It's Michael Franks. Popsicle Toes (and have the brilliant interpretation by Diana Krall). When The Cookie Jar Is Empty. Hourglass.

when the cookie jar is empty
baby gets so glum
when the cookie jar is empty
baby sucks her thumb
baby breaks her dishes
and she won't eat her peas
baby never misses
when she throws her spoon at me
leo is high as i'm leaving
love is the web that she is weaving

p.s. and unrelated: If you're still using Internet Explorer, you should see that Ujang's and a.p.'s postings with footnotes are weird. Use Firefox, IE is lame.

Corrupt at home, corrupt abroad?

"...even when stationed thousands of miles away, diplomats behave in a manner highly reminiscent of officials in home country..."

Do diplomats bring the corruption "culture" of their home countries when they move to New York City? There seems to be evidence that the answer is "yes", at least according to Ray Fisman and Edward Miguel in their their paper on corruption (via PSD) using data on parking violations committed by thousands of diplomats in New York City. The study finds that diplomats from countries highly perceived as corrupt (using the Corruption Perception Index created by Transparency International) also have significantly higher number of unpaid parking tickets.

Why parking tickets? Scarcity of parking spots in NYC is legendary and each diplomatic mission to the UN is only given two spots for their cars, regardless of the size of the mission. Cars with diplomatic license plates can be ticketed for parking violations but the diplomats who are the registrants of the cars are immune from any legal punishment if they choose not to pay the tickets. Economic prediction then would tell us that no one will make any payment since everyone can get away with it. One can then argue, as did the authors, that the number of unpaid parking violations represents the revealed preference on "corruption" of the diplomats (or the mission). And guess what, apparently diplomats who come from countries perceived as least corrupt tend to have the least number or even zero unpaid parking tickets. On the other hand, diplomats from countries high in the CPI ranking revealed their preference to, er.. not paying the tickets.

[Quiz: How many of you are actually familiar with our own traffic infraction procedures? Do you know about the blue and red forms? Here's an amusing "how-to" guide to do it the right way - and by that I mean the least corrupt way, not necessarily the cheapest way.]

So what country has the highest number of parking violations per diplomat between November '97 to November '02? It's Kuwait, with 246 unpaid parking tickets per year per diplomat (they have 9 diplomats in 1998). You would think after what the US did for them in Desert Storm....

At the other end of the list is Turkey, with zero unpaid parking tickets for their 25 diplomats (remember zero means either they committed no violations or they paid for all the violations they made). There are around 20 other countries also with zeroes but Japan deserves a mention because they have 47 diplomats stationed in New York.

Okay, what about Indonesia? We're number 24 (pop the champagne!), with an annual average of 36 unpaid parking tickets per diplomat. Considering there were 25 Indonesian diplomats in New York City in 1998, the number suggests that our diplomats racked up around 900 unpaid parking tickets per year (Three cars get ticketed every single day? One car three times a day? Any helpful readers from NYC? Just curious).

In the paper the authors control for various things including the size of the mission, the country's per capita income, as well as the number of cars registered per mission, but the strong correlations between corruption in home country and the number of unpaid tickets are still there. They went as far as to conclude:

"This strongly suggests that one's background and experiences, what we might call culture, does indeed contribute to bad behavior"

Earlier, we were having a discussion on corruption, provoked by a.p.'s post about whether corruption is necessarily a bad thing. I and others thought that a lot of things a.p. were alluding to in that post were probably only relevant in a second-best world. Norm and culture didn't really enter our discussion, although Treespotter did suggest that disregard for law and order in one area may spill to other areas. Now this paper is saying that diplomats seem to bring their home countries' norms along with them when they come to New York City.

Another interesting result of the paper is that diplomats from countries whose population have unfavorable attitudes toward the US (based on the Pew Index) also tend to have significantly higher number of parking violations; a result interpreted by the authors as evidence that sentiments play a role in the decision to pay the tickets. Proportion of Muslim population does not appear to be significantly related to unpaid parking violations, just in case you are curious about that. I was.

Back on the domestic front, there's a number of important empirical papers on corruption written by Ari Kuncoro of LPEM/FEUI. One of those, a paper on the relationship between bribes and regulation at the local level has been published in the BIES. He has several other papers, some of them you can find at the NBER working paper website. And of course the paper by Ben Olken on corruption in road building also worth a mention.

empirical corruption

Globalize your teeth

Hey, don't laugh. I went to a otrhodentist to have custom transparent braces made.
The braces are based on a relatively new technology: http://www.invisalign.com/generalapp/us/en/index.jsp.
I believe it is a California based company.

What amazes me is the manufacturing process. First, I got my dentist measuring and checking all the problems. Then, he developed a special mouldings to map my teeth. Based on those prints, a team of expert will "simulate" the development of my teeth during the course of treatment using computarized mathematical programming.

Guess where are those guys who run the computer program ? Costa Rica.
Team of engineers in Costa Rica will use videostream to consult with my dentist on their design and the trajectory of my teeth. Once the design is complete, set of braces are made and shipped to my dentist before they delivered to me.

Why Costa Rica? They have pool of talented engineers, speak English, perfect weather I suppose. Another reason might be because leaders in Cuba are still too busy : )

Globalization

Industrial Policy: Kicking and Screaming

Folks, sorry for disappearing for almost 2 months.
Allow me to share thoughts from my activities at workplace.

What is industrial policy? Well, there are many definitions but the most generic might be determination from the state (government) to favor and develop some economic activities than others. In particular, determination from the state to develop local entrepreneurs over facilitating foreign businesses.

It was like a déjà vu when I recently listen to a talk on industrial policy. There I was, just like the old days in Salemba, listening to a lecture on a topic that I thought was already dead. Instantly I recalled sitting in a class listening to talks (Faisal Basri and Dorodjatun) about the danger of protecting industries. An infant industry, as we used to say, is nothing less than a parasite, breeding corruption, fattening bureaucrats, and screaming for protection to achieve anything but ability to manufacture efficiently.

The speaker, Robert Wade of LSE, tried to make a case that industrial policy is increasingly relevant in an open economy. He then mentioned several approaches that at first sound innovative such as what he called “nudging” and “preferential treatment”. Example from the first is officials willingness to share information with domestic private firms on foreign incumbent cost structure, technological capability etc. Example from the second is rather blunt: officials imposing higher taxes over imported intermediate goods that would otherwise supplied by local suppliers.

But why now ?? Why is this still relevant now, 9 years after financial havoc ransacked Jakarta’s banking house of fraternity? Why talk about this after Chandra Asri (crony “foreign” chemical manufacturer), Bakrie (yeah.. hmm..), and IPTN (state aircraft industry) stumbled following years of sweetheart-oh yeah baby relationship with the state?

Moreover, I don't think Prof. Wade's example indicate new practices in institutionalizing industrial policy. Popular anecdotes from success stories are often used to highlight the importance of industrial policy (IP). Professor Wade mentioned a case from Taiwan glass and semi-conductor. His story suggests that there was a deep intervention of government officials in sharing and packaging strategic information about market potentials. Officials in Taiwan were also active in persuading foreign firms to switch to local suppliers. Other people mentioned about case studies from Korea shipping industry. There stories suggest even deeper relationship between the state and Chaebols (conglomerates). At some point, Korean government mandated that all oil import to Korea must be carried using Korean made vessels. Even Indian software industries are not immune. Some stories suggested that Bangalore was the location of many military labs with highly talented engineers. Finally China. They succeeded in putting few men around the earth orbital, period.

In short, fragmented stories hint that state signature is present behind the success of any country’s industrial development.

Indeed, Prof. Wade is not alone. Some have been die-hard believers of this concept, like Alice Amsden of MIT – although she uses anecdotes to make the case. Some have revived this idea and provide it with a high-powered shot of empirical evidence – like what Ricardo Hausmann, Jason Hwang, and Dani Rodrik have done. Oh, not to mention also some politicians and half-baked economists who are mixing self interest with bad economic policies. But from Hausmann, Hwang, and Rodrik, this is what they said:

" When local cost discovery generates knowledge spillovers, specialization patterns become partly indeterminate and the mix of goods that a country produces may have important implications for economic growth. We demonstrate this proposition formally and adduce some empirical sup- port for it. We construct an index of the "income level of a country's exports, document its properties, and show that it predicts subsequent economic growth" [ What You Export MattersRicardo Hausmann, Jason Hwang, and Dani Rodrik NBER Working Paper No. 11905]

Their paper clearly indicates that a country must think seriously on what product to make and to export. If I can be more blunt, they resonate the argument that low wages, banana harvesting, and t-shirt/sandal making do not get you that far. One needs to master the capability to manufacture with sophisticated technology if productivity is expected to take the economy to a higher level. In away, it sounds like idea of BJ Habibie, supposedly one of Indonesian brightest person.

At this stage, I personally agree. I think under general circumstances, relying on primary commodities will not take you off.

But somehow I still can not conceive that the ultimate recipe for success is to have the state meddling with affairs of private enterprises in developing path to success. My reasons are the following:
(1) Boring reason: Political economy. Many cases suggest that private sector could not wait to influence regulation by working with the state. Once they did, they do not have incentive to stay straight.

(2) Have boring reason some more: Costs of protection are usually too high and often resulted in inefficiency. Protection distorts price signals which enable firms to correctly internalize their costs. Say you again you give our cement factory, Semen Padang (SP), a subsidy. We can bet that SP have the chance to perform worse than before because their cost is artificially low. With proper corporate governance, low cost may not translate to higher productivity because some of the idle cash flow to local festivities – with local MPs.

(3) Ah.. am I clever or what: Information problem. Some cases show that those who succeeded in developing product for export are indeed good firms. The problem is that the government can only see if those firms have already done their export. Thus helping exporters in this case may not be efficient because those firms already have high likelihood in succeeding without the help from the state. Using Indonesian manufacturing data, I and Beata Javorcik did an empirical exercise where we found that growth in total factor productivity among firms is the highest during period about to become exporters. Once succeed in exporting, their productivity started to level off. State can only see productivity after they succeeded.

(4) Only wise (insane) person can say this: One difference between South Korea in the early 80s and Indonesia in early 90’s was luck i.e., God's willing. Indonesia had the ingredients to become S.Korea: strong government, strong military presence in all social and political aspects, liberalized capital markets, protecting its conglomerates, amazing economic growth despite weak institutions. South Korea built ships, we did airplanes. South Korea built cars, so did we. They made electronics,.. (who is making electronics in Indonesia?). South Korea had border skirmishes with N. Korea, we even went further to invade East Timor. But what missing was that Indonesia did not have a leader with highly discipline sons/daughter. Leaders were smart and honorable men, yet somehow their characteristics are absence in their family members (specially sons/daughters). Family members were recklessly fell in love with private sectors hungry for protection and generals hungry for cash.

Having said two boring, one bright, and one insane reason, what should a country do?
(1) Develop necessary infrastructure for entrepreneurship to flourish. Investment in public education and telecom are mandatory. A private consultant mentioned that Indian software industry took off after government enabled them to uplink their work via satellite and connect to the US. Rather than creating another state company, just figure out regulation to let private firms compete in providing their services.

(2) Develop necessary financial market that generates financial instruments for entrepreneurs to hedge their risks. Institute a credit rating agency that can identify lending risk based on pattern of lending repayment, not on after they defaulted or have been visited by the police. Induce private financiers to develop local skills and introduce sophisticated product for local entrepreneurs. Subsidized credit is not the answer. But regulation in allocating x% of loans to local entrepreneur can force banks, including foreign banks, to develop such knowledge.

(3) Identify market failures that impede innovative ideas to grow. R & D is expensive, but not for imitator. Work on law and institution in preserving intellectual property.

(4) Do a PR campaign. If fast food can appear healthy, why can’t the state appears that they are supporting local entrepreneurs?

While those suggestions indeed sound like a laundry list, but at least, I think they are good ideas.
Industrial policy Exporting Development policy

Flashback - Homer to Marge: Did you know Indonesia is at a crossroads?

Homer and Marge Simpson found themselves upgraded to the first class on a flight to Miami. They clearly enjoyed the luxury, and the following discussion ensued:

Homer: ‘Look at me. I’m reading The Economist. Did you know Indonesia is at a crossroads?'
Marge:‘Noooo!'
Homer:‘It is'
- The Simpsons, April 25th 2004

Yes, I know it's an old episode of The Simpsons but I don’t know how many of you read the edition of The Economist in the following week (5/1/04-5/7/04). On page 79, there’s a short article with the title:

Investing in Indonesia
At a Crossroads

The article talks about the legal uncertainty surrounding the Manulife vs Prudent Life Insurance debacle two years ago.¹ The "crossroads" refers to whether Indonesia, already burdened by endemic corruption, will move further in the direction of legal and regulatory chaos. Foreign investors were said to be driven away. Our FDI was recorded negative.

But of course for fans of The Simpsons who also happened to read The Economist, using “At a Crossroads” as the title of the article could only be interpreted as a brilliant and witty riposte from the magazine.

So that was two years ago. Even if you missed the episode and have not seen the article, there’s a chance that you have stumbled upon some websites that talk about it such as this, this, this, and this , just to name a few.

Two reasons why I'm posting this now.

First, two years after, the question is: where are we now? Is the legal and regulatory environment better than it was two years ago? How are we doing on FDI numbers? These are genuine questions, because we don’t talk much about macroeconomics here at the Café (maybe we should). I'm not a macro guy and in fact none of us here at the Café are hard-core macro person (hint: send your resumé²). Besides, for matters related to the political economy of businesses, foreign and domestic alike, I usually depend on the reporting of Yosef Ardi (see for example his excellent post on US businesses’ wish list a while back, just as an illustration). So, are we still on a crossroads?

The second reason for this post, totally unrelated to the first, is that The Simpsons reference was recently brought up again in the February 2006 edition of the Atlantic Monthly (subscription maybe required). The article discusses why The Economist, as a weekly magazine, seems to be more successful in terms of its readership as well as its influence compared to its competitors across the Atlantic Ocean. The author, who was also an editor of the magazine for 10 years, came up with these explanations:

• The snob effect: US consumers think British things are cool. It’s not an entirely outrageous explanation considering the number of ads and shows in the US that use British-accented actors (exhibit 1: Simon Cowell), supposedly to symbolize sophistication (okay, Cowell is a bad example). The snob effect is also exactly what the scene from The Simpsons was trying to portray.
• Unlike their counterparts in the US, The Economist never shies away from stating its position on various issues. After all, this is a magazine that is unbashful about its raison d’etre: “to promote free trade”.
• It is a magazine unintentionally targeted for a single global readership in the sense that the editorial never really sought its readers out. They did very little in terms of market differentiation. The order of contents of the magazine may be different between the US, Europe, Asia editions, but the sentences, the words are the same everywhere. This is not true for magazines such as Newsweek, or Time.

Well, the student organization I belong to when I was in college had a running subscription for The Economist. Even at that time (i.e., pre-crisis years- yeah, I’m that old), it was terribly expensive. Considering our organization was self-funded, I don’t know how we justified the subscription. Maybe we were awestruck by the free market orientation of the magazine. Perhaps it was the British wry sense of humor. But then again it could also be that we were just snobs.

Update: Indeed we might have just passed another crossroads. And took the wrong turn. In all likelihood, it seems that all charges against Soeharto will be dropped. Aco is clearly unhappy about this. If this is true, a collective mea maxima culpa from the political leaders is in order. A collective d'oh! would not be enough.

¹ Jakarta’s commercial court declared Prudent Life Insurance bankrupt, in a reprise of a 2002 verdict declaring Manulife bankrupt. Go figure. Anyone care to update me what happens to the case?

² Actually, no. Don’t send your resume.

The Economist The Simpsons The Atlantic Monthly

Corruption - a Devil's Advocate view

Is corruption (always) a problem for the economy? As the role of Devil is to test someone's belief, let me be the Devil's Advocate by raising these points.

1. Corruption as the ‘beneficial grease.’ If the commerce is the wheel for the economy, then corruption, instead of being a hindrance, can be the grease that speeding up the wheel.¹ In many developing countries – as well as the developed ones – bureaucratic procedures to obtain business permits usually take quite a long time. That happens because the incentive structure does not provide civil servants do enough motivation to work harder to speed up the process. However, a business player may be able to speed up the process of getting necessary permit by bribing the government official(s). We can argue that this is illegal or morally wrong. But from another perspective, bribery is basically providing an extra incentive for the official(s) to remove the bureaucratic inertia.

Or, consider another case in which a government official illegally sells a product or service in the black market cheaper than the official price. The official takes the money for him/herself, the state loses money but the consumer ends up paying lower price. ² At the end, it’s just a transfer from the state to the consumer. But the economic wheel moves rather than halts, so there is a net benefit for the economy.

2. Corruption as a ‘screening device.’ Consider corruption (bribery asked by government officials, extra charges to public services in return of special favors, etc.) as ‘additional taxes’ to business sector. Consider there are two types of firm: the high-profitable and low-profitable ones. Who is more willing to pay the ‘tax’? In some cases, we may think of the low-profitable firm is more willing to pay if by paying bribes it can gain access to special treatments. But this is conditionals to the expected profit it may get. In most cases, the low-profitable one, even though it is willing to, would not afford to pay such ‘tax.’

There are cases where the high-profitable firm is the one willing, and can afford, to pay. It is willing to pay if in return it can gain advantages over its competitors. It can afford to pay as long as the cost does is not significant compared to its profit. In this case, corruption acts as the ‘screening device’ that sort out efficient firms to non-efficient ones. Put it in another way, corruption is an ‘invisible foot’ that kicks out non-efficient firms out of the market. ³

3. Competition will naturally drives out corruption. Even if corruption do exists and is harmful, in the long-run the market and political competition will eliminate it. According to Nobel Laureate Gary Becker, market competition among as well as political competition among pressure groups will increase the cost for the rent-seekers. As the result, policy that favors the public interests more is the best strategy to gain support.⁴ I can give you two real examples. First, the competition among rent-seekers in Thai manufacturing industry after the 1950s has led to a competitive industry structure, since individual patrons or clients could not prevent their competitors from entering the lucrative market.⁵ Second, following the protests from other debtors who have paid their debts, the Indonesian government decided to cancel the idea to favor debt extensions to big corrupt debtors in 2002.⁶

I shall stop being the Devil's Advocate now before I become the Devil himself .

¹ See the discussion in Shang-Jin Wei, “Corruption in Economic Development: Beneficial Grease, Minor Annoyance, or Major Obstacle?” World Bank Working Paper No. 2048 (1999).

² Andrei Schelifer and Robert W. Vishny, “Corruption,” The Quarterly Journal of Economics 108(3), pp. 599-617.

³ I borrow this argument from Prof. Ashim Ijaz Khwaja of Harvard University.

⁴ Gary S. Becker, “A Theory of Competition among Pressure Groups for Political Influence,” Quarterly Journal of Economics, vol. 98(3) (1983): 317-400.

⁵ See my old article here.

⁶ See my old article here.

Corruption

Kedai Kebebasan

Café Salemba welcomes Kedai Kebebasan (literally, Freedom Café). Need more like this.

Hi from the Manager

Hi,

It's funny. I'm having a donut... Jakartans are currently in J.Co craze -- this one is a donuts-and-coffee brandname. And I remember Jaco. Jaco Pastorius, that great bassist.

So, let me send you donuts with Jaco bass in the background: Okonkole Y Trompa (forget Balawan already? Jaco plays drum on his bass!), Opus Pocus, and of course Jaco's take on Miles' Donna Lee.

Rest in peace, Jaco.

How more, not less, globalization can be beneficial for low skilled workers

In Indonesia as in many parts in the world, May Day was celebrated by or with the support of the anti-globalization movement. In the US, more than about any other issues, the last May Day is almost exclusively about the issue of immigration. Sylvia Tiwon at Indoprogess saw what happened earlier this week in the streets of major US cities as evidence of "the irony of globalization" and she argues that "it is time for the laborers in the US...to recognize that poverty is an integral part of globalization".

I agree with the first statement that there is indeed this irony: on one hand the US government is trying to curb the flow of undocumented immigrants, while on the other hand, US businesses and households are taking advantage of these (illegal) immigrants. But I can't disagree more with her second statement - the globalization-poverty nexus. If anything, loosening immigration, thereby implying more globalization in the form of increasing labor mobility may be the fastest way to equalize the wages for unskilled workers between Mexico and the US. By doing so, it also has the enormous potential to help reduce poverty south of the border. I am more sympathetic with Rizal's view:

"...if what we mean by globalization is a free mobility of factor of production, how can we simply put aside the labor movement --itself a very significant, if not the most crucial, factors of production beside capital and goods?"

Like Rizal, I also tend to believe that more globalization, not less, in the form of high mobility of labor can be beneficial for the low-skilled workers from poor countries.

To drive this point further, an article by Stephan Faris at Salon is worth discussing. While he was living in Nairobi as a journalist for Time, he employed in his household the following: a nanny, a maid, a gardener, and a watchman, all for a combined daily wages less than the cost of the main course when he went out for dinner. All that was possible because he "drew Western salary and paid African wages" (a situation many expats in Indonesia may have no problem relating to). But he is smart enough to leave his troubled conscience behind and wrote:

"...Those who squirm at the idea of having servants should consider that there's little moral difference between me and my maid, and those who buy a washing machine whose low cost depends on other people's deflated wages. We've globalized capital, but not labor. A washing machine manufacturer can cash in on China's low wages, but the Chinese factory worker is barred from taking a boat to seek better pay. He's forced to sell his labor at much lower than the global market value. Both my maid and the factory worker would prefer to work for Western wages. But they can't because of immigration restrictions..."

Indeed. The main reason why people emigrate to other countries is to take advantage of the differences in potential earnings (Massive Movement of Refugees and IDPs and Chronic and Sustained Human Flight notwithstanding). Why wage discrepancies for the same skill level exist and why they persist are obviously determined by various things (e.g. endowment, technology, institution etc., see this for a simple yet powerful exposition). But perhaps one of the most important things that prevent these discrepancies to disappear is the set of immigration restrictions. Even with restrictions in place, the potential emigrants may internalize the cost and still view that the wage discrepancies are still worth taking the risks for.

Sounding like an economist, Faris then argues that:

"...From the standpoint of economic theory, liberalizing the flow of labor is no different from liberalizing trade. Both redistribute a nation's wealth, with a net positive effect. The difference is that liberalizing trade disproportionately benefits richer countries, while easing immigration restrictions would help the world's poor..."*)

Moreover, in most if not all countries, immigration restrictions disproportionally hold back the movement of low-skilled labors. A PhD in molecular science would be in better position to come to the US than a high school graduate (it is tempting to talk about brain drain and some misconceptions about it at this point but let's not). On the other hand, or rather because of it, the potential gains for unskilled workers are likely to be greater because the factor market for these unskilled workers is not as integrated as the one for highly-skilled labors. By loosening the immigration restrictions for low-skilled workers the dreams of better lives for them may be realized sooner. Even if it means that we need more globalization.

*) Some may be put off by any statement that begins with "From the standpoint of economic theory". But even the accidental darling of anti-globalization movement, Joseph Stiglitz, has the following message buried in his powerpoint file (see page 45) about the state of development in Latin America:

" The successful countries have actually followed models which are more in accord with economic theory than the Washington consensus "
(Hat tip to Martin for the link to the file)

Addendum:
Tyler Cowen of the Marginal Revolution fame and DanielRothschild wrote an op-ed in LA Times (via, what else, Marginal Revolution), addressing the same debate. Here's a quote:

"A key question for economists has been whether the influx raises or lowers"native" American wages. UC Berkeley's David Card, who studied patterns in different U.S. cities, concludes that immigration has not lowered wages for American workers. George Borjas of Harvard counters that immigration reduced the wages of high school dropouts by 7.4% between 1980 and 2000.

Most economists have sided with Card."

In the op-ed, Cowen and Rothschild also label Borjas as "the favorite economist of immigration restrictionists", an assertion I suspect many economists would also not find difficulties to side with.

Globalization labor

Glenn Hubbard plays Sting

Aria sent me this link to a funny parody made by Columbia Business School's students. Here goes Bush's man Glenn Hubbard:

Every breath you take, every change of rate
Jobs you don't create, while we still stagflate
I'll be watching you
Every single day, Bernanke takes my pay
When growth goes away, inflation will stay
I'll be watching you
Oh can't you see
The Fed's where I should be
How my poor heart aches, each mistake you make

In case you don't know, Hubbard really wanted Greenspan's chair. It went to Bernanke.

Fed

From the Manager

Hi,

Sorry for being away too long. What is this week's pick? I'll let you choose yourself, cause I'm still exhausted.

Anyway, as I'm writing this, C&J Radio is playing Nial Djuliarso's take on Juwita Malam. It's OK. The bass is kicking. But I want more anarchy, honestly.

Have a nice week.

Flat world? Hold on

I'm not a huge fan of Tom Friedman. Yes, I was amused by his Lexus and the Olive Tree, but after attending his talk one day in the University of Illinois, I decided I don't like him too much. But everybody is talking about his recent The World is Flat. So, I grabbed one in Changi, as my in-flight reading to and from Cambodia.

It's not too bad. But I think Friedman is far too excited, he sounds like a little boy who just discovered a new toy. We all know that globalization is rolling and no one can stop it (bite me!). But calling a mere reduction in transaction costs which is so natural, given harsh and healthy competition, as "flattening of the world" is too bombastic.

And misleading, too.

The whole idea of trade is a state of differences. I don't trade with you if there's nothing different between us. I'm interested in you because you have something I don't. Vice verse. Hence, the trade. We both gain from trade, and trade occurs because we are different. But Friedman, while I think he understand the gains from free trade adage, uses his journalistic way of telling: bombastic title, repeated as a mantra throughout the book. I don't think he realizes how bad the world is when it is ... well, "flat". It's alright had he made it clear that what he meant by "flat" was nothing else than "cost redux": in transportation, in communication, you name it. But he failed to do that. He confuses between costs' race to the bottom and the leveling of playing fields between economic actors.

Of course, Ed Leamer should point out the book's weakness far better than me (hat tip to Parinduri). I haven't read the review, though.

As I said, however, Friedman is a great teller. The book is nonetheless entertaining. For example, I still like his description of communism and capitalism (I think I have heard it somewhere, but anyway): "Communism is a system to make people equally poor and capitalism is a system to make people unequally rich". Indeed.

ps. Speaking of communism, the great author, Pramoedya Ananta Toer passed away on Sunday. To me, he is the best Indonesian author ever. Rest in peace, Pak Pram. Here's an account from BBC.
pps. Also left us is Harvard economist John Kenneth Galbraith. He's not my favourite economist, but he surely has stamped his name in the field, though not via academic journal papers, but more via his long time role as a "celebrity economist", as described by Paul Krugman. Or as Sisyphus, as Brad DeLong described him.

Globalization