Friday, September 29, 2006

Efficient smoking

Ujang is also here in Canberra writing a cool paper on the economics of smoking. (I heard he has promised the manager "to café" some piece of it). So there we were chatting about the issue over coffee.

Ujang mentioned a study in U.S. that found that price policy can not effectively change smoking behavior in favor of health. That is, when the price of cigarette increases, the sales drop slightly, but the nicotine accumulation rate in the smokers' blood remain constant at the least. This finding seems to have bothered Ujang who hypothesized that in order to discourage smoking (and thus to promote healthy life), you simply need to increase the price of cigarette. But that study came up with the surprising conclusion. I think that's why Ujang decided to test his model on Indonesian family data.

But I guess what happened in that study was ... an increase in smoking efficiency as a response to the price change. That is, before the price increases, smokers tend to smoke inefficently: to smoke only half or three quarter of the cigarette and throw it right after, to smoke while talking at the same time (so as letting the wind contributes in consuming the cigarette), etc. When the price increases to some "decisive level" (that is, a level that can alter marginal buying), the smokers might reduce their buy. But they now become more efficient in smoking. They smoke until it really hit the filter, they don't allow "joint-smoking" with the wind, et cetera. As a result, the nicotine level in their blood stays constant. Or even higher.

A friend who was also in the chat, Dede, disagreed. He said that smoking style is hard to change. One might enjoy smoking only half of his cigarette (the taste might not evenly distributed across the cigarette). Another might like to see his cigarette burnt by the wind while he is composing a poem. And so forth. Well, being a chain smoker himself, Dede might be right, too.

Another friend, Aceh, had a better explanation. Because the cigarette becomes more expensive, smokers try to keep the smoke as much as possible inside ... their lung :-)

What do you think, smokers?

Update: Ujang just texted me. The measured substance in the smokers' blood was "cotinine" as a proxy of nicotine intake. My apologies.

Sunday, September 24, 2006

Democracy: what kind do we want?

The 24th Annual Indonesia Update conference this year is themed "Democracy and the Promise of Good Governance". I've been thinking lately that the theme is too heavy. That is, the term "democracy".

What is it that we really want when we say we want democracy? The memorization machine back in primary school said: "democracy is a system where the people rule". And we took it for granted. Then there was a time when columnists thought it was more cool to say it in a latin expression: vox populi vox dei -- the voice of the people is the voice of god. Again, taken for granted.

But then. In "people" there should be many persons. It is unlikely that everybody agrees on everything. So whose voice is the voice of god? It seems, by what the memorized definition implies, that the majority's voice is. Therefore democracy means a system where the majority rules.

If that is true, I don't like democracy. Because it allows the tyranny of majority.

Better system, I believe, is the one when people are free to negotiate. Regardless of whether you are of minority or majority, as long as you can enter into negotiation without coercion, and there exists a rule of law that is respected by everyone, then any agreement that occurs should benefit both parties. Otherwise, there would never be any agreement in the first place.

Right, I'm not a political scientist. But am I that off? Or, really, what is democracy?

And Canberra is still cold.

Wednesday, September 13, 2006

The 2006 Economic Freedom Index

Let me begin by reporting that Aco had just stolen the show of the 2006 Conference of the Economic Freedom Network Asia in Kuala Lumpur. By arguing that Free Trade Areas or Preferential Trade Areas are basically an impediment for the real free trade, he was crowned as the true liberal in the forum of Asian liberals. OK, I am exaggerating. There was no crowning ceremony. But at least, in the forum Aco was called an (liberal) activist. Not only liberal economist, but activist...

Also in the conference was the launching of the 2006 Economic Freedom of the World Report and Index. According to its official publication, the Economic Freedom Index was based on Milton Friedman's concept of economic freedom:

[it] measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete, and security of privately owned property. Thirty-eight data points are used to construct a summary index and to measure the degree of economic freedom in five areas: (1) size of government; (2) legal structure and security of property rights; (3) access to sound money; (4) freedom to trade internationally; and (5) regulation of credit, labour and business.

One hundred and thirty eight countries was surveyed in the 2006 publication (the 2006 report publishes the data in 2004). The index takes value of zero to ten; zero means completely unfree, and ten means completely free. The overall index is based on 38 data points measuring the five components. In each component, each country also received the 0-10 score. The index is constructed from various secondary data. So it is not a direct survey of perception or a panel expert.

As the other indices (Human Development Index, Freedom House Political and Civil Liverty, Polity Index of Democratization, even Consumer Price Index), of course the Economic Freedom Index may suffer from the typical problems: measurement error, construction, defintion, level of aggregation etc. But still, it is worth having it as a quantitative measurement of quality of economic institution. The thing is, we need to be cautious in interpreting the data and translating into policy action. But let's just have fun and see what it says.

Hong Kong and Singapore are the two most free economies in the world, followed by Switzerland, New Zealand and the United States. Venezuela, two Congos, Myanmar and Zimbabwe are in the bottom five. Although Hong Kong and Singapore tops the overall score, they are not always the first in each categories. For example, El Savador ranks first in the 'government size' category; Denmark in the 'legal system and property rights'; Sweden (access to sound money) and Iceland (regulatory).

Taking a cross-country analysis, the Economic Freedom Index score is positively correlated with Human Development Index, life expectancy, income level of the poorest 10%, environmental quality and access to improved water sources. Meanwhile, it is negatively correlated with infant mortality, unemployment, share of children in the labor force and corruption. Of course, we can't imply anything from this correlation because it suffers from the usual reverse causality and omitted variable problems. But these simple correlations can at least challenge a popular perception: that liberalizing the economy is bad for the poor and quality of life in general.

Generally, countries with better EF Index also score better in the Freedom House' civil and political liberties. But we may see countries like Singapore, United Arab Emirates or Kuwait who are under the 'partially or totally unfree' politically score well in the EF Index. (We can also add Hong Kong in the list if we consider it is part of China now.) However, those who economically are not free are consistently not free politically. Note that we are still unable to answer what causes what. Whether economic freedom causes political freedom or vice versa, or nothing causes anything, is still an open field to disagree.

What about Indonesia?

The country's overall score in 2004 is 6.0 -- it ranks 83 out of 132 countries in the survey. Lower than Malaysia, Thailand, the Philippines, even Egypt and Iran (!). Well, at least Indonesia ranks better than the likes of Vietnam, Brazil, Turkey or Fiji.

The country's score in 2004 is lower than that in 2003, in which it ranked 73. Breaking down by components, the country's government size score is not different from that in 1985, the period when Indonesia just started the deregulation (and worse, means bigger, than that in 1990-2000). Regulation quality score is worse compared to 1990, and virtually unchanged during the 2000s. Legal system and property rights is also worse than that in 1985, 1990 and 2003 (although higher than that in 2000 -- if that's something to cheer about). The country also scores lower in the access to sound money category compared with 1985-90. Although in terms of freedom to trade internationally, the situation in 2004 is much better than in 1985-90, althogh worse than that in 2000.

So who says that our economy is getting freer and more liberal?

Discriminatory trade arrangements

Yes, that is what the Free Trade Areas (FTA) should be called. An FTA is not free trade. It is a PTA, preferential trade agreement/arrangement. And "preferential" means discrimination. Suppose we have JFTA -- Jakarta Free Trade Area. Goods exported by West Jakarta to North Jakarta are tariff-free. But goods from Depok, Tangerang, and Bekasi are imposed some tariff if to be sold in Jakarta area. As a result, they can't compete with goods made in Jakarta. What do you call this, free trade? Nope. It's discrimination.

Suppose again, labor from Tangerang are cheaper than those of West Jakarta in producing hats (I use hats here, so that I can assume similar technology, no?). In the absence of tariff, Tangerang-made hats should be cheaper than West Jakarta-made ones. In the meantime East Jakarta doesn't produce hats. But their people like hats. Which hats they would rationally buy? Tangerang hats, of course. But what is the main goal of JFTA? To make the Tangerang-made hats less competitive. That is, by imposing the damn tariff, JFTA makes the Jakarta-made hats cheaper. Or more precisely, deceptively cheaper. East Jakartans now are buying hats from the inefficient West Jakarta's producers. And you're calling this free trade? Give me a break.

That was the main point in my presentation this morning in Kuala Lumpur for the 8th Annual Conference of Economic Freedom Network Asia. The theme this year is "Preferential Trade Agreements: Local Solutions for Global Free Trade?". Of course I wasn't talking about my imaginary JFTA. I was concerned with all the current movements in the region toward PTAs (and other type of discrimination, bilateral trade agreements, BTAs). I know WTO's Doha Agenda was fractured. But at least, if you really have to have some kind of "clubbing", do it on MFN (most-favored nations) principle. That is, a non-discriminatory way. And if you don't want the "spaghetti bowl effect" (boy it's messy), try unilateral improvements at home. While waiting for the WTO's major surgery.

Oh by the way, the Network also launched the 2006 Annual Report of Economic Freedom of the World. As usual, the Report has some interesting stuff inside, including of course the Economic Freedom Index; and now with a special chapter by William Easterly. Ape, who's also here will be talking about that. Ape, the floor is yours.

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Friday, September 08, 2006

More on education and contraception

Now I've found an interesting pattern. Discussing polygamy or condoms is how to get many comments and hit rate.. :-) Many thanks for the comments on my previous posting. I was about to make a response to some comments, until I realize my reply worth a separate entry.

Then Yudo mentioned about the need to estimate the effect of education on different contraceptive methods. Actually, that was what I did. In addition to 'any modern method'* I estimated four different methods: 1) birth pills, 2) IUD, 3) periodic abstinence, and 4) condom. There four represents different 'levels of difficulty.'

In terms of difficulty, birth pills are moderate. It is easy to use, but requires some careful attention and understanding on how to effectively use it. IUD is easier -- you just come to the clinic and let the doctor do that for you. But on the same time, you need to have knowledge or awareness and access to the clinic. Periodic abstinence is, well, difficult. A lot of careful calculation is required. Condoms, on the other hand, is no rocket science.

My prior hypothesis is that the more difficult a contraceptive method is, the higher is the impact of education on the probability of using it. So, this is another way to estimate the return on education. But, as I mentioned earlier, I found no statistically significant impact of education on the probability of using the first three. The reason was because the family planning program in Indonesia has been quite successful. So regardless of education and wealth, Indonesian women has relatively had high knowledge and access to contraception.

Interestingly, for condoms -- the easiest method of those four -- the coefficient is (marginally) significant. Meaning that the probability of using condoms still depends on the level of education. This opens the room for more exploration.

Remember that unlike pills, injections or IUD, the use of condoms put the responsibility on men (husbands).** Remember also the unbalanced relative position between men and women in terms of sexual relationship and behavior (read: men are less responsible). For women, more schooling may mean two things: 1) more bargaining position in the household, and 2) higher chance of getting a more educated, more responsible husband.

* Modern method = the term to distinguish 'traditional' or 'folklore' contraceptive method. Boys, please be informed that asking your girlfriend to drink Sprite or jump up and down after having sex is not a modern contraceptive method! It is not even a method...!

** Still yet to find the story for periodic abstinence.