Losing Tiger, Hidden Fortune

The Economist asks, "Other emerging economies are producing world-class companies by the dozen. Why aren't the countries of South-East Asia?"

You may be tempted to damn politically connected entrepreneurs, or the old stories of rent seeking, corruption, and cronyism. But the magazine cleverly avoids to replay these old songs, as it writes:

Similar things were once said of much of the rest of Asia—and sometimes still are. But somehow other countries' top businesses, even in India, the home of the licence Raj, have escaped this mediocrity trap.

So what are the problems of us, the losing tigers? First, diverse and fragmented SEA market (think of more unified China and India) prevents economies of scale in the local market. Second, lack of technology and higher education promotion results in SEA's middling labor productivity growth (in contrast to climbing East and South Asia's figures--look the very important Graph 3). And third, the conglomerates is less focused in doing particular industry. They want to do everything, --and goes nowhere.

I think above are well observed points. Yet, it is rather a too broad analysis on business climate. More micro analysis, like a thorough observation at firms level on, say, how Tata of India or Lenovo of China have managed their way up would help more.

Are we gonna be able to see 30 (or 50) Indonesian firms in Fortune Global 500 list in 2030? I do hope we can. It isn't a too ambitious project. China has 24 firms, India 6, and Brazil 5 on the list.

In 2007, I must add.

Determinants of subnational growth, what do we know?

Last week Neil McCulloch, Bambang Suharnoko and Sumawah Yuningsih presented their empirical work on determinants of regional growth in Indonesia at the World Bank Office Jakarta (the paper is not yet available).

They did a standard Barro-type growth regression with growth rate on the left hand and a set of explanatory variables on the right hand, using district-level data. They did the regression in three different periods to capture the pre-crisis, crisis and post-crisis era. In addition to the standard variables like initial GDP level, share of population with secondary high school or more, telephone line density and some indicators of infrastructure, they introduced average growth of neighboring districts to capture the 'growth spillover effect.' However, because such data is not present, they were not able to add physical capital stock or investment in the regression.

A few weeks before the presentation I told one of the co-authors that I won't be surprised if they don't find anything significant in the regression. Indeed, except for initial GDP at t-zero, which indicates the convergence across districts, they found virtually nothing else was significant. Even the convergence seems to be driven by the crisis; richer regions got hit more.

This work was what Jeffrey Frankel once considered as 'zen economics' -- where your empirical work just prove... nothing. Or, in Neil's words, "We thought we knew what causes regional growth... In fact we don't."

Well, in empirical works, if nothing is significant then nothing is significant. But how do we explain such 'no finding?' Apart from some measurement error problems, I think of two things:

1. Before 2000 provinces and districts were not independent units of economic activities. Most of decision-making made by the central government. So what matters for regional growth were a) national growth, and b) the way resources were distributed by the central government. Hence the variation of regional physical or human capital did not explain the variation of regional growth.
2. Since decentralization has just formally started in 2000, the time frame is too short to see the effect. True, some regions perform better than the others. But perhaps that was due to non-standard variables such as leadership, or even luck. I think regions who do well are those lucky enough to have committed, visionary leaders. An article in Kompas about how Sragen became a pioneer in e-government, mainly because the leader had the vision and commitment to do that, provides an anecdotal evidence (unfortunately now Kompas doesn't provide the link to its previous editions).

I suggested my co-author friend to redo the regression ten years from now, when we have enough post-decentralization data points.

(Ir)rationally Fun Book

Tim Harford's latest book is probably one of the best popular books introducing rational choice (aka cost-benefit analysis) economics. But for a healthy dose for perspective from the other camp, that is, behavioral economics, I would really recommend the just-released Dan Ariely's Predictably Irrational.

The book is a good fun read -- so good that I missed the bus because I was so absorbed reading the first chapter and failed to proceed to cashier timely.

I enjoyed the way Dan set his creative experiment and most of the time got his points describing human predictably irrational behavior. My favorite chapter is on placebo effect --not to mention his practical joke about MIT's T-shirt that reads "Harvard: Because not everyone can get into MIT".

But somewhat I am bit wary with some of his suggested policy recommendation that gives a glimpse of paternalism. This is one example:

If you accept the premise that market forces and free market will not always regulate the market for the best, then you may find yourself among those who believe that the government (we hope a reasonable and thoughtful government) must play a larger role in regulating some market activities, even if this limits free enterprise. Yes, a free market based on supply, demand, and no friction would be the ideal if we were truly rational. Yet when we are not rational but irrational, policies should take this important factor into account.
--page 48

The problem: how can we find a rational government? More often than not, government is less rational than people under free market.

Rock Nationalization

Usually, the word nationalization is associated with Hugo Chavez or Evo Morales. But now Gordon Brown has joined the club. The UK government nationalizes the ailing Northern Rock--the UK bank that hit badly by current US sub prime mortgage crisis.

Add this action to the already signed US economic stimulus package, it got me thinking (and confused) on the way developed countries government handles financial and banking crisis

This is my simple math: nationalization plus "business as usual" equals moral hazard, because you just put too little stick -and perhaps too much carrot--into the equation.

Why don't they just learn from our experience, albeit developing country, with the messy BLBI, bank re capitalization, BPPN and all those government bail-out plan that have just led to a slow and mediocre impact on banking performance?

(HT: Marginal Revolution)

How does economics change the world?

From a discussion thread in an online forum, someone asked a question: how do economics (and economists) save the poor of the world?

Ladies and gents, I'm on the fence here. I need some sound examples of how higher order economics has benefited the people in the LDCs. Give me proof that with all he equations formulated, and theories being expounded, the men and women on the ground in sub Saharan Africa benefit or stand to benefit from what economists publish in journals or ruminate about in their ivy tower armchairs. ... It also doesn't help when you have Muhammed Yunus, the founder of the Grameen Bank, proclaiming himself the impracticality of his academic work.

Many people responded by pointing some examples -- from Amartya Sen, Jeffrey Sachs to the Poverty Action Lab. But this is what I consider the best reply:

Honestly, if your goal is to help people, become a nurse or a midwife and move to Africa. I'm not being sarcastic, I'm being serious. That's the way to directly help people who need it, in a real, immediate, life-changing way.

Becoming an economist is at least as much about your own ego as it is about saving the world. To believe that you can help people by getting a PhD, you have to believe in a couple of things. First, you have to believe in slow, one-step-forward- and-two-steps-back progress. You have to believe that the long run matters, that it is conscionable to sacrifice today's wellbeing for the sake of the next generation. You have to be pretty optimistic. And second (this is where the ego comes in) you have to believe that you can add something to the discussion. That the ideas you have might just be the ones that change the world. And you have to be willing to spend a hell of a lot of time and energy on yourself before you will be in a position to help anyone else.

Research economics is about helping people the same way space exploration is about helping people: it contributes to our understanding of the world. And there are some short-run, oh-by-the-way findings that have practical applications that really help people, but those aren't the focus most of the time, and they certainly aren't what the training emphasizes.

And even when economists do have good ideas, there's a lot of politics between the proof and the implementation. So seriously, if your only goal is to help people, do it some other way.

But if you want to have a chance at participating in changing the way people think, at asking questions that no one else has thought of, if you think there is a chance that you will someday look at something in a completely new way, and you're willing to work your *** off just to see if that glimpse pays off -- then become an economist. If you thrive on poking holes in ideas, on asking "what if" just because you can, playing devil's advocate to your own devil's advocate, then grad school is for you. Just don't go into it believing that you are doing it for the good of mankind, or you are only setting yourself up for frustration. Coding in STATA does not save lives.

I remember someone in Exegesis and Ekonomi-Politilk Indonesia constantly asked why the knowledge of economists could not solve the problem of soybean price hike. I don't know why this guy even look for solutions in the blogsphere at all.

Walking Westward

Today, Kompas published an op-ed from the poet Sapardi Djoko Damono commemorating 100 years anniversary of Sutan Takdir Alisjahbana. Takdir was one of the Indonesian intellectuals who in 1949 wrote an essay on his idea of being Indonesia. Inspired, apparently, by the European Renaissance, modernism, and industrial revolution, he defined progress as to follow the western path.

But in his time, when post-war nationalism was at its heydays, when as a young nation the problem of identity was very much troubling, his idea of progress as by looking up western standard was anything but hard to accept by many who argued for something called particular Indonesian values and way of living. For them, defining our own identity was seen as more critical than any attempt for inclusiveness toward universal values (even if by that myths needs to be invented --and then taught to school children in my generation as Indonesian history.)

This is the paradox, however. The idea of Indonesia as a nation was born from people who were inspired by the very European ideals, that is, the young intellectuals in the early 20th century. Pramoedya Ananta Toer's This Earth of Mankind describes beautifully the tension, amazement, and restlessness that arose from the meeting between old values and the new (European) values as seen from narrative of its protagonist Minke.

Fast forward to 2008, the tension remains. But this time thing is more complicated because the idea of "western" is now becoming more and more difficult to comprehend. In philosophy, various writings under the rubric of postmodernism deconstruct the notion of western modernism. In practice, these days, the virtue of western civilization can not be easily observed by watching MTV or seeking explanation why democracy can appoint George W Bush lead to Iraq war.

We live in the situation of neither horizon nor ready answers of all queries. By that, one may look inward, mutter "I told you so" while arguing the supremacy of being Indonesia --whatever it may mean. But I think Soedjatmoko, another Indonesian great thinker made a point as early as 1967

"The jump from the a-historical Weltanschauung of traditional agrarian society, with its chiliastic yearnings for the perfect society, to the closed and self-contained system of thought and the vision of the perfect state of Marxism is apparently a smaller one than the jump to the concept of an open future and the acceptance of the Imperfect State as part of the human condition. It is much more difficult to feel attracted to the insecurity of freedom than to the historical inevitability of a perfect world order from which comfort and strength can be drawn" (Australian Outlook, December 1967:288-89)"
--Hanna Papanek and Goenawan Mohamad, Obituary: Soedjatmoko (1922-1989). Journal of Asian Studies, Vol. 49, No. 2. (May, 1990), pp. 449-451

Ladies and gentlemen, as you may be familiar with the old saying "there is no such thing as a free lunch", please welcome the price tag of freedom: the insecurity. Rock on.

Who's Afraid of the Latte Liberals?

I came across the words "latte liberal" while reading an article in The Economist on the US presidential election --which is, by the way, waaaay better than this so-called analysis in Kompas daily.

The Latte Liberals are the term used by Hillary Clinton camp to describe young and educated supporters of Obama. Geographically, they are mostly located in big cities in Northeast and West Coast. Surely it is a variant of the old word of "anti-establishment east upper side Manhattanites", whom Woody Allen's films represent.

And this does not refer to the "neo liberals", to whom some of us love to hate for being responsible for our economic problems. Liberals in the US are the Democrats, who, in economic sphere, most of the time, are for rather high tax and more subsidy and transfer --hence less ardent free market supporter than their fellow Republicans.

Latte liberals are on the rise here. And actually I am curious: to whom our own latte liberals supports for our next President election? Also, if you are the candidate, would you really take them into account as important voters?

But, in the first place, who are actually our latte liberals?

(Okay, I hear you, Co. Latte ain't coffee. Can't agree more. And you Manager, don't say that latte liberals are bunch of snotty people. Likely, they are our cafe's target market)

Are We Too Human?

I can not believe I am engaged in the debate on the use of rational choice theory again --this time with my three fellow students here.

Starting with a small conversation on the use of Beckerian approach on economics of religion, it went into question on how many percent of human behavior can be explained by rational choice theory. Make no mistake though, it is not whether rational choice theory works or not at all, but rather how confident you are to assign the tool in analyzing human behavior (0-100 percent).

I go for around 97 percent, the other two 100 percent, and one 80 percent. Our 80 percent friend gives us an interesting thought, nevertheless. She asked what about if we are dreaming, drunk, or delusional.

The standard reply was that we most of the time are not committing into such behavior. But how sure we actually are on how much of one's mind is neither delusional nor resembling a non-rational animal instinct (assuming that animals do not apply our human rationality).

I am asked why leaving 3 percent off the equation. I said that I am trying to keep a healthy dose of skepticism. But maybe I have to revise my reply. It reflects my willingness to admit that we human maybe not that completely sober, not delusional, and free from animal instinct.

The economist of Cinta Laura

With Sjamsu

I can forgive you if you don't know who this year Nobel Laureates were. But if you don't know who Cinta Laura is, dude... get a life. She's the Indonesian Paris Hilton, in case you wonder. No, no... don't think of the video scandal. Cinta's still innocent. And she doesn't drive, yet.

Sjamsu just circulated the famous quotes of Cinta Laura. Thanks to someone crazy enough to collect them from various tabloids and infotainment interviews. We thought that some of her comments are examples of real-world applications of economic concepts. Here are some examples. I keep the Indonesian version because, well, it's hard to translate his words in any language to be honest.

Just a note: although the comments are in Indonesian, read them in English pronunciation.

Gains from trade:
"Bahasa Indonesia saya buruk sekali, jadi Cinta will be going to Australia to improve Bahasa Indonesia Cinta."

Efficiency and constraint (the government must learn how to do that):
"Dari kecil papa sudah punya banyak mobil waktu di German kita punya 5 mobil tapi karena garagenya tidak cukup jadi papa menjual mobil-mobil itu tinggal 2. Tapi aku paling suka yang Audi A4."

Comparative advantage:
"Kamu nggak cocok pake logat english karena kamu dari kecil tinggal di Indonesia," Cinta Laura told Samuel, a teenage newcomer artist who has an 'Indo' face but was born and grew up in Indonesia.

Intertemporal optimization:
"Banyak orang-orang yang ikut dunia entertainment langsung drop out of school, itu menurut aku that's really really stupid. Soalnya mereka nggak pikirin long term."

Coner solution in utility maximization (if one good is free, one will only consume that good and set the consumption of the other one zero):
"Aku kalow di dalam negeri sukanya liburan ke Bali karna aku punya apartmen disana."

Bequest in the overlapping generation model:
"Aku udah keliling keliling dunia, ke London, German and several countries karena papaku General Manager di Hyatt."

Survival model of firms -- heterogeneity matters:
"Not all beautiful people bisa menjadi famous."

Matching definition of transfer beneficiary:
"Aku gak suka dengan istilah boyfriend... aku lebih suka disebut teman dekat..teman buat punching, running, lari lari kecil ..."

What the f@!#???:
"Cinta mengucapkan selamat puasa semuanya. Rock on..!"

RIP: Bill Saragih

It was in an 1997 --or 1996-- afternoon. I was one of the foot soldiers of the Jazz Goes To Campus organizing committee. Padang Wicaksono, then one of the generals responsible for the rundown of the event, knowing that I had nothing to do in campus lobby A, asked me to join him to see some performers to request them to play with economical pay under low student's organization budget.

So off we went. And the first jazz player on the list to meet was Bill Saragih. We're warmly received in his suburban house in South Jakarta and this guy, I must say, was such a cool and cheerful person. With his thick North Sumatra accent he entertained us with stories about jazz and the youngsters (Hey, we were very young back then). Oom Bill was glad that some students, like FEUI, still care to organize a jazz festival. It was the time when alternative-grunge-rock bands as well as boy bands were at their peak of popularity.

When we eventually shyly raised the honorarium issue, he told us not to worry. And on the D day, Bill Saragih fulfilled his promise, kicked the JGTC off, masterfully played his flute and saxophone along with his nephews, chatted, and joked with the audience despite the scorching Depok afternoon sun.

That man, the great entertainer with his distinctive throaty voice, now passed away. To pay respect, the Cafe plays What a Wonderful World, by Louis Armstrong

So long, Bill.

And the US now is Keynesian

Something odd is going on here in the US. As you know, the country suffers from the excessive borrowing and lending, on sub-prime mortgage, the bubble went bust and seemingly dragged the economy down to recession.

I feel a kind of dejavu. Apparently the US does not learn the very same lesson from the series of Asia and Latin America crisis. And even more surprising, US administration took different set of policies than what they had suggested to the rest of the world on how to overcome recession, that is, tighter monetary and fiscal policies.

Instead they go for relaxing policies and launch an aggressive economic stimulus plan. In this package, the Fed cut of key interest rate (monetary) and tax rebate plan (fiscal).

Whether you agree with this Keynesian counter-cyclical policy or not is a matter of not only empirical, but also difference in school of thought. Some argue that economy needs a bail out (from government) to get out from the mess, the others prefer to let the (market) economy pays for its mistake.

The debate aside, apart from the positive response from stock market index, we do not know yet the impact of such stimulus scheme on output. Nevertheless as Krugman, Hausmann, and Landsburg point out, the tax rebate plan is likely doomed to failure by design. The bulk of rebate would go to relatively financially OK household, so it would not be spent, hence little multiplier effect (Krugman); or it is less likely to put American into work, and enhance domestic investment (Hausmann and Landsburg).

If US economy were truly resilient, dynamic, and strong --as many of us would like to believe--, I think it's time for them to be tough in this difficult time, the way we, East Asians, stood up and recovered, following their very own prescription.