Tuesday, October 31, 2006

Childrenomics part 3 - household decision making

Another aspect that determines the outcome of children's health, education and other things is who makes the decision in the household (who decides what, and what's the relative 'voice' of each decision maker). Let's now narrow the decision makers to mother and father. We'll deal with another person (i.e. in-laws) later. Two extreme cases: 1) unitary model of household decision making, and 2) collective model.

In the first case, household acts as if there is only one decision maker. So, consumption/spending decisions are only affected by total household income. In the second case, imagine that the two parties (mom and dad) are 'bargaining' over what/how much to spend. The question is what determines each party's bargaining power?

The traditional approach on this is to assume that the bargaining power is determined by how much each party earns money. We can think of the other variants, such as relative 'assets ' (financial, social) brought when both got married, etc. We can think of an extreme situation in which only one party earns money, so he or she has all the voice over household decision. In this case, we are back to the first case.

Of course this is not the perfect approach. After all, we see a lot of cases where the wife does not earn antything but she takes full controls over everything. Welcome to the 'Dictated Husband Association' (Ikatan Suami Takut Istri, ISTI), guys!

Many studies found that when mother has greater say in household spending, it leads to better outcome of children's health. An example is a study by Duncan Thomas (1994), using log calorie intake, log protein intake, survival rate, weight for height and height for age. I can not recall which studies, but I also remembered similar results for mortality rate and low birth weight.

What about the decision made by other parties in the household? For now, I don't have any studies to quote. But we are having a real world experience with the issue...

Childrenomics part 2 - gender preference

Some societies have preference over boys. Perhaps because boys will carry the family's name, but also because they can rely on their boys to do heavy works. Other societies prefer to have girls; because in their cultures girls are responsible to take care of their parents in the old days. Or, parents may not have any preference over a certain gender, but they want to have both genders in the family. Each preference will have implications in the size and resource allocation of the family.

One implication of gender preference is gender discrimination - in terms of within-household resource allocation. Deaton (1989) measured the boy-girl discrimination in terms of the 'reduction of household expenditure on adult goods.' (Adult goods: tobacco, adult clothing, alcohol, eating out, etc.). When a kid is valued more, parents will be more willing to reduce their spending on adult goods. He found no evidence of gender discrimination in Cote d'Ivoire, and a small and insignificant bias in favor of boys in Thailand.

We can also measure boy-girl discrimination in terms of health outcome. Using data from rural Punjab, India, Monica Das Gupta (1987) found that the mortality rate of children below one month is higher for boys. However, as the children gets older, girls mortality rate surpasses boys. Child mortality rate is also much higher for girls who were born as the second child and over.

The fact that boys have higher probability to die within a month after birth is quite logical. Boys have the XY chromosome, while girls have XX. Remember that the Y chromosome is a 'mutated' version of the X - means that boys are by nature mutants (the 'defect' version of girls). That makes boys are more prone to death, which explains the higher rate of postnatal mortality rate. The higher rate of girl mortality rate at the older age reflects the different treatment of parents. For example, girls receive lower nutrition, less clothing etc. And the value of girls is even less when parents have already had more survived children.

My professor at Harvard, Robert Jensen (2006) raised another issue. Parents may not necessarily discriminate against girls (or boys). But they may still prefer a certain gender (let's say, boy). When the first child is a girl, parents is more likely to have another one. When the second one is still a girl, it is more likely for them to have a third one, and so forth. As the result, girls tend to come from big families. Even though parents don't discriminate, coming from big families, girls will have smaller allocation of household resources ("equal treatment, unequal outcome").

How true is that? The answer can't be theoretical - it should be empirical. That may also depend on where do we do the research. But according to his preliminary finding, some Indian states where preference over boys are strong tend to confirm this results.

Childrenomics | Gender

Childrenomics part 1 - fertility decision

Introduction: Having a baby makes me more exposed to children-related economic research. Or, perhaps it is the reverse: having been exposed to children-related research makes me (want to be) having a baby. Nevermind. Here are some literature review of some research in the topic.

Why do people decide to have kids? Is it driven by preference or constraint? Earlier, I raised the debate between the 'family-planning' vs. 'desired demand' hypothesis of fertility. The former argued that people have (many) children because of constrained access to contraceptive. The latter argued that people have many children because they do want to have many children.

I'm leaning towards the 'desired demand' hypothesis. Having children is a rational choice (although for some people, it may be an 'accident' - no judgement on that). Rational means parents calculate the benefits of having kids compared to its costs. The benefts and costs do not have to be perfectly known, nor they should always be measured in financial terms. The bottom line is, economic theory also allows us to predict human behavior in terms of fertility decision.

What's behind the demand (desire) to have kids? In Indonesia, we know the term 'more children, more prosper' ('banyak anak banyak rejeki'). Behind the old saying, there are economic rationales.

First, old-age security. Parents expect their children to take care of them when they are old. Missing market, in this case the market of pension fund and senior citizen care gives the reason for this view.

Second, family (cheap) labor, usually for rural agriculture households. Again, this happens because of the missing or imperfect market for labor, as well as market for goods; so households will have to rely on own production.

Hence, missing markets help explain why people have many children.

In addition to that, parents may decide to have many kids to increase the number of survived kids. This may happen when the health situation and infrastructure is poor. By having many kids, parents can achive their 'targeted' number of kids. Lastly, number of children may also be affected by gender preference. The probability of having a second, third and next child is greater if parents has a preference over a certain gender (more on this).

Childrenomics | Fertility

Monday, October 30, 2006

Friday, October 27, 2006

New member

We'd like to proudly announce the newest addition to the Café Salemba family: Cemara Perdana.

P.S. Regardless of your opinion about population control, please note that my wife and I did not contribute to the population growth. In fact, we were adjusting the supply and demand for children disequilibrium.

Thursday, October 26, 2006

Econ101: Preference

Hi again. It’s time now for the third installment of our Econ101 series. After introducing some key concepts needed to speak the 'baby' language of economics, let’s now turn to a more structured and systematic approach. That is, we’re going to follow a text book structure, without having to religiously adopt its verbal and mathematical presentation.1 Yes, we’re going to do it the Cafe-way (and that may as well mean irregular schedule!). Lean back and enjoy your coffee.

When we analyze an individual behavior (in making decision, or more accurately in choosing between available options, given his constraints), we need to make some assumptions with regards to his preference. The most important assumption is that the guy is rational.

What do we mean by rational in this context? We mean his preference relation is complete and transitive. Complete means you can describe the relation between any two goods that he is considering. So, if the guy is considering apple, orange, and banana, you have to be able to say whether he prefers apple to orange. Also, you have to be able to tell his preference over apple and banana, as well as banana and orange. The good thing is, telling that he likes banana as much as apple is a valid statement – we say he is indifferent between banana and apple.2

Transitive means consistent in choice ordering. If our guy prefers apple to orange and orange to banana, he should prefer apple to banana. Yes, this assumption is strong: I know a friend who likes Manchester United more than Liverpool and prefers Liverpool to AC Milan, but he loves AC Milan more than MU. That’s fine, but for now, let’s assume away such intransitivity. Don’t worry; we will relax the transitivity assumption sometime later. (That soccer freak friend of mine; he ain't crazy, he's just irrational, as we 'have to' call him).

How do we conveniently talk about preference? By assigning numbers to the preference order. In our example, the preference order of the guy is: apple-orange-banana (in decreasing order of importance). Now let’s assign some numbers. Yes, we’re assuming that we somehow can measure satisfaction. Suppose the satisfaction experienced by the guy if he consumes an apple is 10. Then, the corresponding number of an orange should be less than 10. Say 7. How about a banana? Yes, it should be less than 7. Say 5. We say, for the guy, the utility of apple, orange, and banana are 10, 7, and 5, respectively. Can we change the numbers? Yes, we can. But mind the order! So, if you like you can use 1,000-700-5, or 356,464-100-0.3. But combination like 3-5-1 or 7-4-10 is not allowed, given the guy’s preference. You see, utility function is an ordinal concept, not cardinal. That is, all that matters is the order, not the number itself. So, if we can use simple numbers as long as we keep the order, why make it complicated?

Stay tuned.


1 The text I’m referring to is Mas-Colell, Winston and Green. This book is one of the most elaborate modern microeconomics text. However, it is designed for graduate course. In one of its strongest part i.e. general equilibrium analysis, it uses differential topology, so you might want to consult some graduate math texts. Many times, students find it useful to combine this text with the more compact, Varian. If you want a good text for undergraduate level, we recommend Mankiw.

2 Seriously, guys, this is just an illustration. I really don't care if you happen to like orange more than apple :-)

Monday, October 23, 2006

Capitalism is good (even for the poor)!

Loan sharks (rentenir; tengkulak; lintah darat) are always portrayed as the enemy of the society. As the name portrays, they are fierce predators of the poor farmers or traders. In Indonesian they are called lintah darat (leeches) because they live by sucking other people's blood.

Are they really bad? As usual, we economists do not have the moral judgements. We are more interested in why they exist. Well, simply they exist because there is an excess demand of capital. There are poor village enterpreneurs with high needs of capital to start up or expand their small businesses. However, for many reasons, they can not borrow from the banks. Perhaps because they do not have anything to serve as collateral. Perhaps because the scale of their businesess is too small for the banks to make a significant margin out of it. Perhaps because there are no banks around.

Loan sharks fill this gap. They offer accessible loan with small or no collateral. In some ways, they contribue to making the local economic wheel rolling. True, when the debtors fail to pay, loan sharks turn into true sharks. But the fact that they do exist and continue to exist means the demand for their 'service' is still high. (Remember also that by lending their money, loan sharks are also subject to risk and opportunity cost of money.)

Moral of the story: what the poor enterpeneurs need is access to capital. Not that they don't know how to do business. They do - but they just don't have the necessary capital.

Not that they need to be helped in paying the interests. Remember, many of them are able to repay the loan sharks' exorbitant interests. A study by LPEM-FEUI (thanks to my colleague Syarif Syahrial) showed that microfinance activities in Kuningan, West Sumba and East Sumba had no problem with unpaid loans even though they charged higher interest rate compared to the market price.

This explains why Adi Sasono's initiative when he was the Minister of Cooperatives and Small-scaled Enterprises during the Habibie administration (1998-99) failed. Assuming that SMEs were hurt by high interest rate, the government offered a subsidized interest rate for SMEs, at 13% compared with then market interest rate of 40-50%.

But people responds to incentives. Many new SMEs were established. But the motive was to be able to borrow at 13%, put it in the bank, then got the 30%+ interest margin. Who wants to do real business at that time, when the economy and security was very uncertain?

So, developing financial market and institution that reaches the poor is one important way to alleviate poverty. Since financial market is the backbone of modern capitalism, we can conclude that capitalism is good for the poor. At least, we can't conclude it is bad for the poor.

Rural finance

Friday, October 20, 2006

Nobel prize

I know this is a belated entry. But it would be ‘strange’ if we do not mention at all about this year’s Nobel Prize in economics. Columbia University’s Edmund Phelps was honored the prize in the age of 1973. Since I am no macroeconomist, I can not really comment on his works.

I know that he was among those who developed the “micro foundations of macroeconomics” approach, along with his compatriots Milton Friedman and Robert Lucas who had won the Prize much earlier. He also reshaped the understanding of Philip’s Curve and the relationship between inflation and unemployment. His other contribution was in growth theory literature: the “Golden Rule” of savings and capital accumulation. (Basically, we can’t save too much!)

Here is a summary of his work. See also a very good but concise explanation about his works in the Marginal Revolution.

A week later, the Nobel committee announced that this year’s Nobel Peace Price was honored, not our President SBY, but to Dr. Muhammad Yunus and an institution he established in 1976, the Grameen Bank. Here is my comment on that. One quote from my article:

… the Grameen business has worked not on a charity basis. Nor has it worked by eliminating market mechanisms. Many argue that market mechanisms are bad for the poor. This is an incorrect assumption. Poor people suffer because the market does not work. So the right thing to do, as the Grameen group has shown, is make the market work for the poor.

I also argued that, despite its success, don’t see Grameen Bank model or microfinance initiatives as a magic bullet for ending world’s poverty. Nothing is a magic bullet (that includes the so-many-priorities-at-the-end-it-has-none Millennium Development Goals, right Prof. Sachs?). This article has a similar tone.

Nobel | Microfinance

Wednesday, October 04, 2006

Bike attack...!!!

According to a Ditlantas Polri (err... how to translate this, by the way?) estimation, there are around 35 million motorcycles hitting the road in the country in 2006. That is 70 percent of total population of vehicle. The number is twice as much as that in 2002, or 2.33 times higher than that in 2001.

Yes, yes, incentives are all that matters. Traffic jam, cheaper than car, more certain than public transport, explain why more people prefer to ride motorcycles. It may also be good for the economy. Nevertheless, it explains why driving (and walking) in Jakarta becomes more and more difficult. And damn dangerous too...! In the Jakarta area alone, according to PDAT, the number of motorcycles is around 3.3 million (2003). It is estimated that the number increases by around 350 thousand per year. So in three years, motorcycle in Jakarta increases by more than a million (conservative estimation).

Sunday, October 01, 2006

Show some respect, please!

A banner in my neighborhood asked people to “respect those who are fasting” ("hormatilah orang yang berpuasa"). I tried to think, what is ‘respecting those who are fasting’? In my childhood, I was taught that it simply means not eating or drinking in front of people who fast. Perhaps if I someone who fasts sees me enjoying my meals, he or she will get tempted to break the fast.

But then, refraining yourself from eating and drinking (and smoking and having sexual relationship) during the day is the essence of fasting, isn’t it? Giving up one’s utility from eating and drinking is and individual choice. Then, respecting those who fast is a matter of respecting property rights and personal choice. When it’s a personal choice, no one is justified to force them to eat or drink during the day (or tease them or humiliate them).

Similarly, it’s an individual choice not to fast. And the non-fasting people also have the rights to remain eating, smoking or drinking. No one is justified to ask them to stop, in the name of ‘respecting the fast.’ And during the night, whether one was fasting in the day or not, one has the right to spend the night in café or pubs. The café or restaurant owners have the right to do keep their business open at any time. Nobody has any justifications to prevent anyone to go to restaurants at any time. Nobody possesses the right to force restaurants, pubs or cafes to close at any time. (Unless, of course, if the pubs create noise that prevent one from sleeping.)

The rights to perform fasting as a religious duty include the rights to tell others that it is already time to start fasting when they are OK to be told (or when they asked you to do so). Similarly, people have also the rights to remain sleeping and not being disturbed by ‘wake up calls’ from masjids or minutemen. Hence, in my opinion, those shouting ‘sahur… sahur…’ using megaphone from masjids are abusing own’s right, and violating other’s property rights. The solution is simple: use alarm clock, telephone, or if it necessary, put a sign in front of your house that you want to be waken up.

Another obvious thing, whether fasting or not, we do have the rights for a ‘petasan’ (explosives)-free environment. If we ever need the government during this Ramadhan month, it is to regulate petasan and noise from masjids. Not closing down business or night lives.

Back to the banner in my neighborhood. Usually, a banner is a signal of something. What does it possibly mean?

One, those who fast felt that they are not respected enough. Two, those who don’t fast have given enough respect, but those who do ask to be more respected. Three, it signals a kind of threat: respect us, or else…