Thursday, June 22, 2006

Money or rice? Money or diamond?

Consider a poor family. The father works as a peasant in his uncle's paddy land, for a sack of rice every week. He still has to make money by working as tukang becak. 1 The money is barely enough to buy fish or vegetable, not to mention schooling or even decent clothing for the children and their mother.

According to BPS (Office of Statistics), the family is eligible for raskin. 2 That is, the father can buy 20 kgs of rice at price sixty percent lower than the market price every month. Sounds good.

But probably not too good. Remember, this family gets rice from someone (the father's uncle). So they don't need rice from the raskin program. What does the family need? I don't know, you might not know, and for sure the government doesn't know. It's probably medicine, books, kid's toys, we don't know. It's the family members who know for sure what they need.

Assuming they need medicine. They don't have enough money, but now, thanks to the raskin program, they have more than enough of rice. What would they do? Sell the surplus and use the money to buy medicine.

Now if the government wants to help the family, is it better to give it rice or ... money? Bear in mind, converting the rice into money might require transaction costs (looking for buyer, bargaining, etc). If the family gets the money, not the rice, they can avoid the costs and they can save time (imagine if the medicine is of urgency).

The government does have another program that gives away money -- hard cash. It is called the "BLT" (bantuan langsung tunai -- direct cash transfer). I was skeptical to this idea, but I heard the problems have been reduced, albeit gradually. 3 So if I had to choose between the two: money or rice, it would be the former.

You might think now that I'm a welfare statist. No, I'm just trying to compare the effectiveness of two welfare programs. Any such program should be temporary, if really needed. I raised the idea above in a meeting with officials from BPK (Supreme Audit Agency) who were requested by the Ministry of Finance to audit Bulog's (State Logistics Agency) performance. Raskin was a well-intentioned program. However, it's been a playground for corruption.

Now, let's think about another situation -- this time without the government. There are two lovers. The guy wants to impress the girl. Conventional wisdom tells him: buy her diamond. But is it better to give her ... money? So she is free to choose whatever she wants to buy: diamond, fancy car, Bottega Veneta, ...

1 Rickshaw driver.
2 Stands for "beras untuk orang miskin" (rice for the poor) Government's rice subsidy program started in 1998. The initial name was OPK (operasi pasar khusus, special market operation).
3 From conversation with Sudarno Sumarto of SMERU.

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  1. BPK = Supreme Audit Agency

    LOL, is that for real?

  2. Everything is a playground for corruption when it comes to our beloved country. Name a govt institution and I guarantee you (or anyone else for that matter) will be able to point out at least a number of examples. It's sickening to see how people struggle to fulfil their basic needs and at the same time hear about govt officials spending the state budget on unimportant "shopping sprees".

    Anyway, here's my thought. If the government is serious about lowering the poverty rate, the first step they need to take is to make sure the aid reaches its intended recipients, be it rice, money or diamonds. Too many holes along the way!

    And by the way, that farmer-rice situation is incomparable with the guy-diamond thing, but if I were the girl, I'll settle with the diamond. Taking money from a guy is...unromantic :-)

  3. Treespotter, I know it sounds like pizza, but they really call themselves that. Right, Yosef? :-)

    Morningdew, you're right. Almost everything governmentish is corruptable. We've got to choose the lesser of evils, or not moving at all.

    But, Dew, you call taking money from a guy unromantic? Good. I thought people call it prosti... shoot, I forget the word :-)

  4. Aco, let me spell it out clearer for you: A guy. Singular. Meaning, whoever the guy is, he should be someone real special, no? I was responding within the context of your example, you know ;-)

    And that word you forgot, funny you mentioned it, if it's indeed the same word as the one I'm thinking of. I had lunch with the guys who produced Little Britain the other day and according to them, the alternative word for it is freelancer. Go figure! :-)

  5. Ah, forgive my error, Dew.

    By the way, can I give diamond rings to many girls, or does that make me not special? (Don Trump, this one's for you!)

    Hey, freelancer sounds good :-)

  6. If a guy gives out diamond rings to lots of girls, he should worry about what might happen to his hairdo :-D

    Let's not turn this comment box into a chat board now, shall we? A non-econs related one, too! I don't want people to throw things at me. Carry on with the discussion, I'll just sit back and read what you guys come up with :-)

  7. Morningdew got a very good point. There is emerging and extensive literatures in economics on process regarding preference.

    So utility is not only depend on material gain but also how it is gained and in what form. So, eventhough the money has the some value is diamond, due to process regarding preference the total utility is different.

    The fact that very few (if any) man propose with money may be a strong clue that most man aware of this process regarding preferences. Women...

  8. ah, i was waiting for some gals to notice Aco's last paragraph... i don't mind the bogetta venetta, diamond, anything... even the money... is that make me a freelancer? i don't thing so... see, it all depend with THE WAY...
    on this topic, it called for femalenomics. :D see, woman act based on logics too. only sometimes it's different with the regular human's. the interesting thing is why men keep doing whatever women want? is there a logical reason behind that? or you know that you failed otherwise?

    i know in the text book that transfer are allowed. But how do you put that in practise. asymetric information is indeed everybody's flaw, even for government. how do you justified this?

  9. dHani, men keep doing/giving what women want/ask (be it diamond, money, etc), so far as they get what they want/ask (be it comicbook, money, etc) -- until they think it's not worth doing it anymore. It's pure and simple. At the equilibrium price the transaction gives each a surplus. (If only one gets the surplus, the other is called loser).

  10. Dasar ngasih duit, mungkin pikiran bahwa manusia akan berpikir rasional.
    Yg kenyataannya pada nggak, hal ini terjadi juga di AS dgn kartu kredit FEMA. Ada nggak sih teori yg berdasarkan bahwa kalo manusia mikirnya suka nggak rasional?