How to win an election with less money, or how to have efficient money politics

Welcome to the country where (vulgar) money politics is a common norm. Can you win a (local) election without money to buy votes? Very unlikely.

So money matters, but can you win the game if you have less money than your opponent? You might think it can't be. Money speaks and more money speaks louder.

But perhaps you can still make it.

Suppose your opponent has paid IDR 50,000 for each possible voters, and with the money you have, you can only pay IDR 10,000. My strategy would be to declare that I will give that IDR 10,000 to the voters, not now, but only after I win the election.

The rational voters will take IDR 50,000 from my rival, but vote for me. Why? Because it increases their probability to get additional IDR 10,000 from me --the amount that I will disburse only when I get elected.

But maybe things won't be that easy, my opponent might know my trick. If so, he/she will think that IDR 50,000 is too high and go for, say, IDR 15,000 --he/she is still richer than me, remember?

Let the game repeats. At the end of the day, we have the most efficient money bribe rate, do we?

Harry Potter and the Game Theory

Warning: possible spoiler

Call it what you want, but yes, I am a Harry Potter reader. I am now reading the seventh book (which I got it exactly on July 21st). I have halfway through so I can't tell whether Harry's going to die or, is he marrying Ginny, or else. But there are some passages from the book that, I think, make good examples of game theoretical concepts and situation.

So the Order plans to move Harry from the Dursleys' to the Wesleys'. But with Death Eaters patrolling, ready to intercept, they need to set a plan. The success would depend on what the Death Eaters' move when they choose one strategy. Similarly, the Death Eaters' strategy would depend on the Order's strategy. And so forth.

By the way, the initial strategy was to duplicate Harry into seven. This way, they hoped to split the Death Eaters' attention and efforts. Well, to make the story short, here are some quotes:

'We think the Death Eaters will expect you to be on a broom,' said Moody, who seemed to guess how Harry was feeling. 'Snape's had plenty of time to tell them everything about you h's never mentioned before, so if we do run into any Death Eaters, we're betting they'll choose one of the Potters who look at home on a broomstick..."

This was before they separated. So Moody was doing forward induction analysis.

Then, after they -- well, not all of them -- reached the Wesleys':

'You-Know-Who acted exactly as Mad-Eye expected him to,' sniffed Tonk.s 'Mad-Eye said he'd expect the real Harry to be with the toughest, most skilled Aurors. He chased Mad-Eye first, and when Mundungus gave them away he switched to Kingsley...'

Here we can see two things. Moody's another forward induction before they went, and a backward induction analysis on You-Know-Who's move.

Somehow, Voldemort and the Death Eaters were finally able to identify the real Harry. How?

'...Expelliarmus is a useful spell, Harry, but the Death Eaters seem to think it is your signature move, and I urge you not to let it become so.' [said Lupin].

This is an example of a strictly dominated strategy.

where the hell is NIKE PR?

Nike came into focus in Indonesia because it stopped ordering shoes from 2 firms (owned by a lady) that employs 14,000 people because Nike thinks that those firms have been continuously underperforming and would like to shift order to other firms (possibly within Indonesia or to other countries).

Nike is obviously just a buyer. Those firms, owned by the same lady, are the employer of 14,000 people, thus they are the ones who should be responsible for recruiting, paying, training, and managing production. On the contrary, from a business contract point of view, Nike has no slightest obligation to navigate the fate of those workers.

So far public opinion is split between those who understood that this is a an employment contract issue between two firms and their employee, versus those who think Nike is the actual employer.

Luckily many good op-eds have come forward to say that the owner of those firm is manipulating her turf card, 14,000 workers, to get the best out of this chaos.

But where is NIKE PR? How come I have not seen a sober and rational explanation behind what is going on? Is it really the case that shoes produced by those firms are lemons? Or is it Nike who is looking ways to shift to suppliers in other countries?

Whichever the reason is.. Where the hell is Nike PR effort??

Asmuniconomics

After abstaining for 6 months from the Cafe, I'm moved to say farewell to Asmuni, a veteran Indonesian comedian who passed away last Friday. Because this is too local for international audience, I'll write my obituary in Bahasa.

Innalillahi Wa Inna lillahi Raj'un.

Asmuni itu kenangan dari hiburan rakyat, jaman kita puas dihibur oleh Presiden yang sama sejak G-30S, oleh pertumbuhan ekonomi > 6%, oleh program KB nasional, oleh 1 siaran TVRI, oleh Aneka-Ria Safari, oleh liputan hari ABRI, dan oleh program swasembada beras.

Asmuni itu lambang perjuangan nasional para batur/pembantu yang ingin maju tetapi tetap kampungan. Asmuni lambang orang kaya desa, bangga dengan blangkon, cincin akik, dan sekuter. Asmuni juga representasi kebanyakan pejabat PemDa, camat, lurah, RT-RW, berusaha wibawa tetapi tetap tolol dalam tindakan.

Tetapi Asmuni melawan. Asmuni melawan keterbelakangan yang seolah menjadi nasib masyarakat kelas bawah. Asmuni melawan kemapanan. Asmuni melawan mitos penguasa adalah orang bijak. Asmuni mentertawakan Jawanisasi bawah sadar era Suharto.

Asmuni itu vintage. Besar di era Orde Lama, Asmuni termasuk artis 3 jaman.

Apakah Asmuni seorang ekonom? Bisa jadi.
Well.. it might be a long shot. Tapi ini beberapa quote yang saya ingat:

1. On German efficiency "saya sudah konsultasi penyakit dengan dokter dari Jerman, namanya dokter Bode"
dr Bode itu figur virtual di iklan obat Bodrexin

2. On factor specialization "kamu sana belio rokok di Madiun"
konteksnya majikan ingin bermesraan, pembantu tetap harus kerja

3. On social issue "Lho.. orang kaya kok salah..!?? hahaha"
orang kaya sombong

4. On moral hazard "kamu tungguo di sini, saya ta' nunggu di Jombang"
konteksnya Timbul/pelayan disuruh menunggu datangnya Drakula sementara pejabat desa ngacir

5. On exchange economy "awas.. Keris ini asalnya dari ular.., ularnya saya jual terus dibeliken Keris"

6. On poverty ".. saya in cuma bisa makan CAP JAE.."
Chinese food adalah konsumsi elite era Ordelama. Konsusmi rakyat biasa nasi jagung.

7. On permutation ".. itu adalah hil yang mustahal .."

Selamat jalan Asmuni. Indonesia kehilangan salah satu seniman besarnya.

What CSR?

Here is from The Jakarta Post daily, 21 July, 2007.

The House of Representatives finally passed the controversial corporations' bill into law at a plenary meeting here Friday making Corporate Social Responsibility (CSR) mandatory for almost all companies outside the financial sector.

Article 74 of the law provides that a company that operates in any business field related to natural resources is required to institute social and environmental responsibility programs, and that sanctions will be imposed on non-compliant firms

What are CSR(s)? My take:
1. Making profit
2. Pay taxes to the government, and/or abide by the government regulation

Then you, our valuable cafe visitor, may ask:
1. Who will take care of social and environmental damage (read: negative externalities)? The government.
3. How? By imposing the right tax and regulation to minimize negative externalities.
4. Is there anything 'social' in making profit? Yes, you can make profit if you are competitive and efficient. And both lead to greater social welfare.

On Psycho-economics

Tirta, a psychologist-in-training who knows a little quite a bit about economics thinks psycho-economics still have a long way to go before we can use it to dismiss conventional economics. He's in fact worried that psycho-economics is fast becoming an empty fad. - Manager

On Psycho-economics
by Tirta

Here's a provocative comment from Terry Burnham (which was emailed to me by our sociologist friend a while ago):

"At one level, the logic of economics is so rigorous, but it is built on a foundation of folk psychology that we would mock in other fields..."

To put things in context, the comment was made in response to a 2002 study by Andrew Lo and Dmitry Repin, the former finance professor, the latter neuroscientist. The two guys jointly discovered that heart beat, blood pressure, and skin sweat were crucial in predicting the behavior of stock traders. They went on to claim that there's a lot of irrationality and emotion going on in Wall Street and places alike, which were once thought by many economists to be full of heartless people.

Incidentally, it turns out that Burnham was the guy who did the recent testosterone study, which found that the more you have the masculine hormone, the more you will reject unfair offers in standard ultimatum games. Alpha males, in other words, are psychologically fond of equality and distributive justice (not necessarily through philosophical reflections though, as I've alluded here).

Guys like Burnham are commonplace today. These are people who apparently are not satisfied with standard economics models of rational agents. They resort to psychological constructs and colorful brain pictures for insights on how to explain some economic behaviors. They like discussions containing words like 'intuition' and 'emotion' more than those sticking with 'rational', and seem to think that these psycho-economics explanations are one step ahead closer to the truth of why we behave the way we do.

Well I'm a psychologist-in-training who happen to know a tiny bit about economics (at least this Cafe's version of it), and I don't think so. Here’s why.

Psychologists have only began to explore the workings of intuition and emotion in the 1990s. In the 1920, we were obsessed with the relationship between stimulus and response, which at best gave birth to learning and conditioning theories applicable mostly to rats. In the 1950s, we finally saw the light, and dared to open the black box -- namely, the mind -- and started to converse in terms of memory, thought, personality, attitude, and the likes.

But we didn't talk about emotion or intuition until only recently. Of all topics in psychology, emotion and intuition are among the most alien and under-researched.

Current psycho-economics explanations are mostly tautologies, because the mechanisms of the mental properties they are referring to are themselves subject to active investigation. Yes, emotions do influence traders and ultimatum game players, so they are not as rational as they were thought to be. But the questions shouldn’t stop there: How exactly do emotions exert their influence? Which emotions? Under what circumstances? How do they interact with cognitive-based judgements and decisions? And the list easily goes on.

Psychology still doesn’t have a sound theoretical basis as to how emotion and intuition work, and more importantly, how they both relate to cognition at large. As interesting as those colorful brain images (usually coupled with paragraphs consisting of those weird latin words familiar mostly to medical doctors) can be, we still have no idea on how to tie them all together to explain why we do what we do – and why we think what we think.

So it's ironic when some economists think that they are significantly advancing the field by referring to psychological concepts like 'emotion' and 'intuition', which have only been around in the psychology literature for a decade or so, and of which our understanding is clearly minimal.

I think psycho-economics are becoming more and more like an empty fad. Some scientists got a little bit too excited and make too much out of it. As do the journals, newspapers, and blogs.

Here's another example, which actually got this post started in the first place.

A few weeks ago, I sent this op-ed to some of the cafe's managers. Roland Fryer, a Harvard economist, recently suggested that rewarding money would make bad NYC students more diligent and studious. Barry Schwartz, a Swarthmore psychologist who wrote the op-ed, disagreed. He pointed out that this simple reward scheme would distort the many other motives that are inherent to learning.

Responding to Barry's piece, here is an economist friend of the Cafe:

"Probably due to my own bias, but I tend to side with the psychologist on this. I have seen a similar phenomenon at [my place of work] where people who focus on the financial incentives do not produce quality work relative to those who are interested in the work per se. I think multiple objectives do compete (which is why economists don't believe in corporate social responsibility), and this incentive will skew the objective of going to school."

It's true that humans have competing motives all the time, and yes, money is one of them. And going to school, surely, should be based on the noble motive of learning-for-the-sake-of-learning.

But I'm not sure if I totally agree.

One may criticize economics, as I automatically did when I read the op-ed initially, for freakonomically assuming that everything -- learning and school included -- is about the right type and amount of incentive. Yet psychology, so far as it recognizes the many different faces of motives, intuition, and emotion, has no idea as to how these mental attributes really interact. We know that it’s not just about money. The problem is, we don’t really know what the rests are.

So here’s my question. When these bad students are already devoid of the intrinsic motives of learning, which I presume was what Fryer had in mind, which would you pick: play carrot-and-stick to at least feed their mind with something that is potentially useful, or leave them as they are on the street with no better mental arsenals to face the future?

I personally would opt to be pragmatic, simplify matters appropriately, and thus side with the conventional economist. At least for the time being.

The President Needs to Update His Reading Materials

SBY's jumbled speech against "communism", "capitalism", and "neoliberalism" on the 60th National Cooperative Day in Nusa Dua, Bali, has not gone entirely unnoticed. Ape said it's a pointless speech. In his fourth dispatch for us, MT writes that SBY has grown to be an ineffective president, and his incoherent speech merely reflects the administration's incoherent policies. - Manager

The President Needs to Update His Reading Materials
by MT

Whenever leaders fail they resort to either fascism or populism. More than two years after he was directly elected president, with an unprecedented level of popularity, President Susilo Bambang Yudhoyono finally registered the worst in his job approval rate. He also has grown to become ineffective President, with all his directives getting lost in the redundant bureaucracy. Case in point, his handling of Lapindo mudflow (also more than two years after the infrastructure summit, investors are running away from numerous toll roads project).

Last year, I went with him in a visit to Singapore and Malaysia during which he met with prominent business circle and offered scores of projects, but to this day I never heard them expressed interests. The palace asked me to join the President for a trip to South Korea next week, but I am taking a leave already). It is therefore predictable, that his administration resorted to jingoistic terms when dealing with calls for separatism.

In only less than a month, Yudhoyono administration had to deal with what could be considered as efforts on seccesionism; the South Maluku Republic (RMS) flag-waving incident in Ambon, the display of Morning Star flag during a dance performance at the Papuan Tribal Council Congress and the decision by former Free Aceh Movement big wigs to use the symbol of the former rebel group as logo for a new local party. Senior ministers in his cabinet said something about refusing to tolerate separatism and will resort to severe measures to crush it. The separatism issue, however, is a hard sell. Beyond sporadic protests from Muslim student-based organization, we saw no serious and organized responds for the so-termed separatism campaign.

But the most glaring example of Yudhoyono’s incompetence is his ill-advised decision to resort to populism. It is difficult to believe that in the early 21st century, a country leader made a head-scratching call for a rollback to bygone ideals.

The first was his decision with a smack of populism was to disband the Consultative Group on Indonesia (CGI) earlier this year. And last week we learned that the government decided to hike the foreign debt.

Last week, he said something about taking a middle ground between communism and market-based capitalism. Market-based economy, he said, has proved incapable of bringing social justice and equality to the people, and instead fosters greater disparity between rich and poor."Meanwhile, communism, in which the government fully controls the economy, has failed to reach the goal it believes it can achieve," he said. And to ensure equal distribution of wealth, Yudhoyono pledged to boost the roles of the government! But was it not the reason why this country has problems eradicating corruption? The rhetoric, however, was less an indication of his believe to olden days ideals than the incoherence of his government policies. And if his series of stately speech was of any indication, it is obvious that he had problems looking at problems and how to devise policies to address them.

Earlier last week, when he opened the exhibition of tourism-related products, he said the need for Indonesia to jump from capital-intensive economy to creative industry-based one. (I thought we needed first to make a leap from land-based economy to technology-intensive first). In the speech, he also makes a reference to futurist Alvin Toffler (again this is early 21st century and yet he quotes a book conceived like twenty years ago).

But it also dawn in my mind that aside from his haphazard efforts to remain relevant but choosing big, empty slogans, it seems that he needs to read his reading materials.

Does Giffen behavior exist in reality?

Update: somehow I forgot that the Giffen thing has been discussed by Aco, more than a year ago. It was in September 2006, just when I arrived back in Jakarta. Maybe that's why I forgot to refer to it.

In every college-level microeconomics textbook, there is always a discussion on a special circumstance when the demand curve is upward-sloping: the Giffen good. Theoretically, the situation arises when the income effect outweighs the substitution effect under a price change.

A good can be a Giffen one if it is a basic commodity that makes up a large portion of a poor's income. The term was named after Sir Robert Giffen, a Victorian-era British economist, who argued that potatoes during the Irish potato famine fit this bill for the starving Irish:

Since potatoes already made up the bulk of their diet and consumed most of their income, as prices rose due to the potato shortages, what little discretionary money they had for meat and other food disappeared. No longer left with enough for even morsels of meat, the peasants desperately threw their remaining pennies back at the potato vendors for a few more spuds, thus driving prices of the scarce commodity up still further (a summary from The Nation).

If it's still hard for you to imagine the situation, consider Dani Rodrik's opposite illustration when the price declines instead of increases:

Imagine a very poor household who spend a very large part of its income on some subsistence commodity such as rice. Now suppose that the price of rice goes down for some reason. How does the household alter its pattern of consumption? One response is to increase consumption of rice at the expense of other things because rice is now cheaper. This is the standard substitution effect that ensures demand curves are downward sloping. But another is that the household's overall purchasing power--its real income--has increased and therefore the family may choose to consume things, such as meat, that richer families tend to consume. If this decrease in demand for rice outweighs the substitution effect, we have a Giffen good. Put differently, the lower price of rice allows the family to satisfy its nutritional needs by a tastier combination of products, one that relies less on rice and more on meat.

The question is, does a Giffen good exist in reality? No one is quite sure. Even Sir Giffen's argument was based on speculation instead of empirical evidence.

A recent paper by Harvard's Nolan Miller and Robert Jensen (was at Harvard, now at Brown; I happened to took their classes) claimed to be the 'first, rigorous empirical evidence of the existence of Giffen behavior. ' (Note: The authors preferred to use the term 'Giffen behavior' instead of 'Giffen good' since, as they wrote, "it is not the good that is Giffen, but the consumers’ behavior").

They ran a field experiment in the Hunan and Gansu provinces of China, in which they randomly subsidized households’ primary dietary staple (rice in Hunan and wheat flour in Gansu). As the prices of staples are cheaper, they observed a strong evidence of Giffen behavior with respect to rice in the Hunan province. They also found a less clear evidence of Giffen behavior in Gansu with respect to wheat.

They have an interesting way to begin the conclusion section in the paper:

It is ironic that despite a long search, in sometimes unusual settings, we found examples in the most widely consumed foods for the most populous nation in the history of humanity.

Are economists free-market ideologists?

Yes, according to a recent article in the New York Times. Read the article's opening paragraph:

For many economists, questioning free-market orthodoxy is akin to expressing a belief in intelligent design at a Darwin convention: Those who doubt the naturally beneficial workings of the market are considered either deluded or crazy.

The brighter side is, according to the author, there is "a Growing Will to Debate Fundamental Assumptions."

Of course this is an overstatement. Even Dani Rodrik, himself quoted in the article as one of the 'outside-the-box economists,' agreed so.

The degree of disagreement among economists are greater that the article portrayed.Like religion, surely there are zealots or fanatics. And that can happen in any discipline, not just economics. (There are fanatics in the environmental science, gender studies, philosophy etc., are they?). But still many economists critically believe in market mechanism. That said, the 'debate over fundamental assumptions' have been consistently happening . Not just recently, as the article suggests.

And what happened to those who dispute the free-market fundamental assumptions? They (well, at least some of them) got the Nobel Prize, said Greg Mankiw:

Many economists in the past have questioned "free-market orthodoxy"--for example, Samuelson, Tobin, Modigliani, Solow, Sen, Stiglitz, Akerlof, Phelps,.... Does the economics profession consider these guys "deluded or crazy?" No, we give them Nobel Prizes!

And not all fields within economics are the same. For example, on how theoretical versus empirical they are, said George Borjas:

There are some fields in economics--for example, labor--that are heavily empirical. The voice of the data rules. There are other fields in economics that are much less empirical and have a much stronger tradition of theoretically derived prescriptions. For example, trade.

As for me -- maybe because I was trained in a School of Government (as opposed to the traditionan Econ Department) in the East Coast (as opposed to the 'freshwater' tradition), I used to see free-market believers argue for 'what is the right intervention to a specific problem.' Some people, like these guys, are even establishing their own 'sect' which aim is to calculate the impact of a certain intervention.

And, contrary to the common perception, nowadays it's harder to find free-market believers in this place.

Related stories:

• SBY's speech, a very bad one, about his catch on ideologies and economic systems.
• How a recent policy on public transport safety was a typical Chicago-school solution.

Great Forex-pectation (2)

(Continued)

Still along the lines of currencies and financial issues, a few days ago, I received another spontaneous question (during a wedding reception, of all places), “Is it true, what they’ve been saying, that there’s going to be another financial crisis? Isn’t one unfolding in Thailand right now, as we speak? Is it going to have a contagious effect again, thus spreading to Indonesia? What if the exchange rate shoots up to 20.000 IDR per USD? ”

Interestingly, this particular query hailed from someone who is an importer of sorts. To my understanding, she is about to sign a purchase order contract for a few years with a foreign supplier, but is concerned that the imported products might not sell very well at home, if there is a crisis that would prompt a significant increase in the prices of these particular goods.

To be honest, I had no ‘well-rehearsed’ analytical and comprehensive response to her query. This past year, my research mostly dwells on trade and regionalism issues, so yes, I’m a little rusty on my finance and monetary. Yet I still had the audacity to confidently respond to her, “No, Tante, I wouldn’t trust the ‘rumors’ so much. True, no one has control over financial crises, in fact history has shown that the financial crises-triggered panic are over the world [I was thinking of Charles Kindleberger’s classic: Manias, Panics, and Crashes : A History of Financial Crises], yet I would not bank on another crisis of a similar magnitude and depth as that of 1998. Yes, [short-term] shocks could happen, but as of this moment, I do not see that there is anything to worry about.” I paused for a moment, ”Not yet, at least!”

I based my argument mainly on two assertions/observations: (1) Macro and finance indicators suggest that Indonesia is now less vulnerable and (2) Authorities are now better equipped to deal with the crisis. A lot of (IMF-induced) financial reforms have taken place to restore the banking and finance sector, as well as set the scene for a more salient and prudent regulatory regime. Furthermore, East Asian countries have stepped up regional financial cooperation within the spirit of preventing the recurrence of the 1997/98 events. The crisis, interestingly, prompted a strengthening in the wave of regional financial cooperation. A lot has been discussed at the ASEAN Plus 3 (ASEAN + Japan, China and South Korea) Finance Ministers Level. A notable one would include a mulilateralization of Bilateral SWAP Arrangements known as the Chiang Mai Initiative (see here). ASEAN Plus Three Finance Ministers supported the idea of pooling their reserves as some kind of stand-by arrangements. The idea is that in the event of a liquidity crisis in a particular country, each central bank, according to how much it pledges, will release the funds to help the country experiencing liquidity problems.

Besides, I added, even if there is going to be another financial shock/crisis, the Rupiah would not depreciate by the same magnitude as it did in 1998. The pre-crisis level of 2,500 IDR per USD was undoubtedly undervalued overvalued, while the current level of 8,900-9,200 seems to reflect the ‘equilibrium’ more. Adjustments, if any, would not be as grave as before.

This particular query, delivered while I was ‘elegantly’ munching away on Poffertjes at the wedding, had the predicted effect of triggering my curiosity. Later on that night, when my mind was more free to contemplate, I thought more about all these currencies and crisis issue. Curiosity nearly killed the cat. I got to thinking, what lies behind all this recent worries about the likelihood of another crisis? Why now, ironically, when the region in growing again, such that it has been touted as the fastest growing region in the world (see Eichengreen’s commentary here)? What exactly is happening in Thailand right now? What are the financial and prudential indicators like: are we exhibiting signs of vulnerability? Are there signs that the fundamental macroeconomic and monetary conditions that preceded the 1997 crisis are now recurring?

An attempt to answer the above, and some insights on lessons-learnt from the Asian Crisis, are coming your way…Stay tuned…!

Great Forex-pectation (1)

Puspa is back and now with people's high expectation on her expectation of foreign exchange. As I was told, many economists share Puspa's frustration: that you have to know things, no matter what. Many times, as a result, we see the so called 'pengamat ekonomi ' or economic observers says stupid things on TV, just because they can't say they don't know in response to the journalists' questions. Or, maybe because they don't know that they don't know. All questions are good, nonetheless. At least they get us thinking. Puspa knows that she doesn't know some things but she keeps thinking about them. She is sharing with us her experience with one case of currency-financial issue, in two pieces. Later, she will continue talking about this 'forex-tation' in the context of Asian crisis. You will see that she actually knows more than she thinks she doesn't know. Enjoy.
- Manager

What can one expect an economist, who happens to work in an institute that conducts ‘strategic’ and ‘international’ studies, to be able to say about the exchange rate and the likelihood of another crisis?

Sometimes, a lot more than what she can handle.

For some reason, I find that in Indonesia, people expect a lot out of economists. Peers, friends of friends, distant relatives, colleagues of parents, upon knowing (or insisting) that I am an (aspiring?) economist, would often pose interesting questions to me. Sometimes, personal queries come from phone calls, “ Hey, did you see the paper today? The Rupiah strengthened considerably…I think I am going to buy myself some (US) dollars now. But, wait…do you think that’s wise? Should I wait for a couple of more months? What’s the value gonna be in a few more months? “

Sounds like a normal ‘I-wanna-have-your-opinion-so-let’s-talk’ kind of question, no? But wait, it goes further, “What? You don’t know? Come on, don’t you have any leads as to what the exchange rate is going to be in 3-4 months? Dude, you’re working in a strategic institute, don’t tell me you don’t have any leads about the exchange rate?”

Mind you, owing to the fact that this institute’s name contains the word ‘strategic’, people sometimes expect great ideas from their economists, especially on foreign exchange…You know, like ‘Great Forex-pectations.’ ;-)

My reply was, “Dude, I cannot tell you what the exchange rate is going to be because : (a) the exchange rate is market determined and I’ll be damned if I claim to have perfect knowledge on how the market’s going to behave like and (b) if I can predict with utmost accuracy on exchange rate movements, I would be rich person already by now! Besides, I kind of subscribe to the view that exchange rate movements follow a random walk, and thus predicting would be pointless.

Still along the lines of currencies and financial issues, a few days ago, I received another spontaneous question ...

(To be continued...)

Testosteronomics

All men are created equal
But some men are more equal then the others

OK, I admit. That was a twist of George Orwell's Animal Farm (which was itself a twist of the Declaration of Independence).

What I want to say is this study argued that some men - those with higher level of testosterone - prefers to be equally poor than being a bit richer while the other men become a lot richer. (If you don't want to see the whole paper, see the Economists' review.)

The researcher run an experiment using a series of ultimatum game, played by some Harvard students who have taken microeconomics. After the experiment, he took saliva samples from the students and compare their testosterone levels. The result: responders who rejected a low final offer had an average testosterone level more than 50% higher than the average of those who accepted.

The implication of this study, is as The Economist wrote:

... what people really strive for is relative rather than absolute prosperity. They would rather accept less themselves than see a rival get ahead. That is likely to be particularly true in individuals with high testosterone levels, since that hormone is correlated with social dominance in many species.

In other words, the more masculine someone is, the less important is money. It's how your position compared to the other.

However, i was informed by Tirta about a very important caveat. Read also the first comment to the post.

Nevertheless, this study was a valuable additional literature to a debate on inequality I encountered somewhere (read my summary here and here, and a relevant discussion here).

Moonlighting

In my 'spare time' (don't ask me to define it, please), I contributed a two-part article on why some countries are rich while the other are poor in a blog maintained by our colleagues. This is the first part, and here's the second.

Riding a Cab (and pay old fare) in Jakarta

If you ever traveled with a cab in Jakarta, you would notice that there are cabs with old (cheaper) fare and ones with new fare. Approximately, the former are about 30 percent cheaper.

The major cab company in Jakarta (that claims to have more than 50 percent of cabs market share in the city, according to their internal magazine I read while stuck in a usual traffic jam) belongs to the more expensive group. They adopt the new fare is due to the fact, again they claim, that higher fare does not bring down the number of passenger significantly. In economics jargon, the demand elasticity is low.

The two types of fare is actually quite new. It came into effect when the cab firms did not agree on increasing fare following the fuel price hike. Here, the government regulates the cab fare, based on input from the firms association (Yes, you read it right).

I actually like this kind of dual fare arrangement. In fact, I want more than two types of fares. It leaves me, as a cab consumer, a range of choice. If you have the money, or your company pays it, you can take the premium. Otherwise, when money is short, you can take the riskier and, perhaps, less convenient service.

Unlike public bus or economy class train --the mighty KRL--, I don’t see any reason why government should set the minimum fare for more luxurious cab service. Thus I would love to see those cab firms to disagree to each other –in other words, becoming a failing cartel –.

Without price cap, you may want to say that the major cab firm will drive the fare up steeply, and leave us worse off. I bet it won’t be the case. They can try to do so, but competition will bring other cab firms with more or less similar quality but lower fare to come in.

This might sound counterintuitive for some of café visitors that if you hate cabs that charge you high fare, what you can do is not trying to regulate price (to hold the price increase through government regulation), but to free the market.

No Wikipedia on the bibliography, please

I received this one paper to review for an economic journal. I returned it to the Editor with notes for the author, among which was "please do not rely your argument(s) on reference like Wikipedia". Of course if the argument were sound and flawless, I wouldn't even care whether he cited something or not. But it was not sound and it was flawed, I think. No, I have nothing personal against Wikipedia. In fact, I think, it is a very useful resource for curious people like you and me.

But, not as a key reference for an academic paper. Wikipedia is a good place to find facts, numbers, etc. It is even a useful place where you can be directed to reference somewhere else that is more credible. But, it is not by and in itself a reference. Basing an argument on what posted in Wikipedia itself is shaky, since everybody can change or add entry to the post any time. It is in fact designed to work that way, i.e. open encyclopedia. It is true that any false entries (or even vandalism) will eventually get corrected by those who care about the given post, but you never know if what you take from it is already the correct(ed) one or not.

(Of course blogs suffer the same thing. Blogs are for fun, not for academic citation).

By the way, this reminds me of an event organized by students last month. I was asked to participate in an academic writing workshop. The authors, they also seemed to like Wikipedia so much. But there was one case that's even worse. The author was writing a paper on labor market. She used not only Wikipedia as her main reference, but also some ... motivational books. Not that motivational books or chicken soups et cetera are bad, but for an academic paper? Yes, I get motivated when I read some fancy novels, but at least I kept them out of my papers (except maybe when I am writing literary criticism which may never happen).

Poverty update

The number of poor (and poverty rate) has declined, according to the latest BPS press release, based on the March 2007 SUSENAS data. Some people, the usual people, don't believe this. I believe the finding is 'within the range of acceptance.' I am happy to see that poverty declines whatsoever. But I am not too happy to see only a small decline. We haven't even returned to the 2005 level.

Those who don't believe the BPS number argued that how on earth can poverty declines when, at the same time:

• The (unconditional) cash transfer program - BLT - scheme has finished, while the proposed Conditional Cash Transfer scheme has yet to start.
• The prices of basic commodities are still high.
• The purchasing power is still low; real wages don't change and farmer's terms of trade index is decreasing.
• Job creation is slow
  

It's fine to have a different concept and definition of poverty, and the methodology for calculating it. I'd like to see them coming with their own calculation, if any. But the above points make at best weak arguments for disputing the BPS finding.

For a start, remember that the poverty numbers are the result of the 'negative' and 'positive' forces. The BLT is one of the 'positive' forces. True it finished a while ago. But that doesn't mean the impact stopped. The beneficiaries may have been able to use the cash transfer for productive activities that enabled them to have increase their consumption more than the price increase (which was reflected in the inflated poverty line).

On the other hand, true that high commodity prices is a 'negative' force. In fact, using this logic, poverty should have been much lower if had the government been able to control the price of rice. (Do you get my point?). The recent cooking oil price increase was also a problem. But I don't think that was already captured by the poverty statistics.

I don't have the real wages statistics readily available for this post. But let's say it doesn't change, or even declined. That should not be that significant in explaining poverty numbers, since most of the poor are outside the (formal) labor force. So real wage statistics are not too relevant. Farmers' terms of trade is a more relevant variable. In fact, the BPS found that farmers' ToT increases from 101 to 109 between March 2006-March 2007.

For the same reason, job creation should not be a significant factor in explaining the change in poverty rate for the past one year. Nevertheless, actually the open unemployment rate also declined by February 2007 (although we need to reduce it more). Of course, the same 'camp' doesn't believe in the unemployment statistics either.

But hey, what can I say?

Updates.

1. I forgot to mention about the consumption-smoothing mechanism among the poor, which was very likely helped by the BLT, Raskin and School Operational Support (BOS) schemes.
2. Average medium-quality rice price increased by 20% from March 2006-March 2007, compared to 33% in the previous period (Bulog website)
3. Only 15% of working-age poor individuals are wage workers (SUSENAS 2006).
4. Average real wage for all workers increased by 4.7% from November 2005-August 2006 (SAKERNAS 2005, 2006).
5. Average daily wage of labour-farmer declined but only slightly by 0.2% from March 2006-March 2007. (BPS press release).
6. Household-head unemployment rate is the lowest at the bottom expenditure deciles, suggesting the "unemployment as luxury" hypothesis.

A leftover from UK

For me, the most interesting thing about this year’s Wimbledon apart from Ana Ivanovic of Serbia, is the ticket business. It was reported in the UK newspaper, Daily Mail, that because Amelie Mauresmo literally smacked down Mara Santangelo in (slightly!) less than one hour (i.e. 57 minutes), the organizer, The All England Club, lost almost one million pound sterling. That is because, the rule says if you buy a ticket for a game and that one game is finished in less than an hour, your ticket is fully refunded. Fair enough.

And interesting. If only the result could be predicted beforehand, plenty of economic opportunity could have been exploited by Mauresmo and Santangelo and The AE Club – behind watchers’ back. How? AE could ask M and S to play slightly over one hour – 61 minutes will do. In that case, AE does not have to refund tickets. That means, it could save a million pounds. Then, it could share the saved money with Mauresmo and Santangelo.

But sport is no dirty business, you say. Who knows? (I remember back in the days where we read how enraged Don King whenever Myke Tyson knocked out his opponents in the first round. Yes, then boxing business had an answer to this. It provides a whole lot side entertainments before the main course, just in case the latter lasts only 3 minutes).

The Police can't win, can they?

I don’t generally like Budhiarto Shambazy’s Politika column in Kompas. I think he is a good writer when he writes about Led Zeppelin, Pink Floyd or anything related to classic rock. I think he is not a good political writer. And his jokes, when he attempt to do so, are garing at best. But his last column was an exception. I like, and agree with what he wrote.

Yes, I think there is something wrong in our society. Despite their success in arresting some members of terrorist network led by Abu Dujana, the Police have yet to win the support from the public. (No, not the Sting/Summers/Copeland trio). Many people – and the politicians make matter worse – are still reluctant to praise the Police’s achievement. Some of them even view the Police as the villain, and Abu Dujana as the hero.

I made an elaborated personal comment on this issue here (read also Tirta's comment on the entry; unfortunately all is in Indonesian). I’ll just make some points related to the issue of strategy in the game theoretical setting (courtesy to a colleague of mine, a former journalist turn media analyst).

First, the Police should understand that they are playing against two players: the terrorists themselves, and the public. So far, they focus more on the first player, but less on the latter. A good media strategy is definitely needed. In fact, they have made a poor move when they show how Abu Dujana and companies were chained hand-to-feet, guarded by face-covered soldiers. The image created to the public was ‘Guantanamo.’

Second, other reason why the Police can't win the public appreciation for the terrorists is because the politicians still entertain the idea that the war on terrorist is the war on Islam. Changing the equlibrium requires changing the people mindset. That means our leaders and politicians need to send a message that draws a clear boundary between ‘Islam’ and ‘Muslim terrorist.’

However, political calculation still shows that this is not a dominant strategy. Any position that puts ‘Islam’ and ‘terrorism’ in the same line will be dominated since it would end up in losing supports from their Muslim constituents.

Aside: an article in the Economist wrote, in a similar framework, how the Bush administration is also facing the problem on how to win both the war on terror and public/international support. Seems that they lost in both arena.

Who wants to be a farmer?

The feature section of this week’s Kompas Sunday edition wrote about the ‘Going to Village’ holiday program for school kids. Of course, for urban school kids, who don’t know anything about life in village. There is a conversation between the kids and their guide. It happened when the guide explained about paddy. That’s it – the plant that makes the rice we are eating.

Guide: “Now, who wants to be a farmer?”
Kids: (silent)
Guide: “Nobody? Then who would prepare our rice?”
Some kids: “Err… someone else?”

This section was supposed to be the nyinyir part of the article. But I found this conversation fascinating. Even from the very young age, the kids have understood the concept of trade and division of labor.

It’s fun to know how farmers to grow rice. But for God sake, you don’t have to be one if you don’t want to. (You may, if you want, of course). And it’s good to have somebody to grow our rice, to transport it to our city, and to prepare it. So our kids don’t have to grow their own rice. They can be pilots, doctors, or economists, or whatever to earn their living, so they can buy rice from the market.

That, my friend, is the secret of the wealth of nations.

P.S. This article had also triggered some family dispute between my wife and I. Read the story here.

UK updates and pollution-corruption resemblance

Most of this was written on a breakfast paper napkins as I was having my Scotch pancake tower with fresh berries, orange juice and a big mug of black coffee. Across the window was calmer sea tide (it had been rougher the past few days) in a cold summer breeze of Brighton.

Some updates for you from UK. Gordon Brown just assumed premiership, replacing Tony Blair. Smoking ban is effective nationwide as of 6am this morning. Glasgow airport was hit by a car bomb yesterday, suspects are caught and held, and the word ‘Al-Qaeda’ is again operative all over the media. As usual, TVs exaggerate things up -- while in London yesterday I heard no single word of terrorist attacks (well, except of course in airports). Rather, people talked about tennis. Wimbledon is packed but wet – many games are interrupted by rain and wind. Federer is relaxed, Mauresmo seems quite nervous. In the meantime, the two princes, William and Harry, are preparing a birthday party for the late mother. Yes, it would be tonight at Wembley Stadium and yes I would have to miss it – I’m flying back this evening. No, I’m not sad to miss Elton John or Duran Duran or David Beckham, but I hate to miss Joss Stone (the new soul beauty) and Fergie (the Duchess of Black Eyed Peas, not the Duchess of York, mind you).

Yet, I am still thinking of the discussion at the IDS, University of Sussex. We were talking about the many types of relationship between public authority and private capitalists in developing countries, both in national and in district levels. It is interesting that most if not all participants recognized that there are linkages, direct or indirect, between government officials and businessmen and that those linkages play role in affecting the flow of investment. Different speakers came up with different terms: public-private relationship, hand-in-hand relationship, collusion, trust, you name it. But I thought they were all referring to the same thing. And that same thing could lead to good or bad outcome. I am talking about corruption. It is true that some degree of closeness between public authority and private capitalists is needed to promote investment. But the critical question is how much. What if the ‘trust’ transforms into ‘collusion’? Of course this is a very difficult problem to solve, but I suggested other participants not to shy away from recognizing the danger of promoting any kind of interaction between public and private agents.

To make my case, I used an analogy with pollution. I think, the role of corruption in economy increasingly resembles that of pollution. Both are bad. But you can not completely eliminate them. The best you can do is to minimize them. Some participants looked horrified with this idea. But just as many people have accepted the notion of minimum level of pollution (as opposed to zero pollution – a darling term used by environmentalists), I expect that the same thing would happen to corruption, sooner or later. The growing literature on the optimal level of corruption is one indication of this trend.

OK, I miss home.