RIP: Gus Dur

We were deeply saddened to hear KH Abdurrahman ‘Gus Dur’ Wahid has passed away.

Gus Dur became the fourth president of Indonesia in 1999. At that time, I was in Canberra, Aco in Champaign, Ujang in East Lansing, Sjamsu on the way to Washington, DC from Ithaca, and Rizal in Kukusan Beji, Depok. It was a funny process. There was yet to be a direct presidential election. The president was elected by the MPR which consists of 500 elected DPR members, and another 195 non-elected members.

Megawati’s PDIP was the winner of the election. That made her the strongest candidate to become the president. But there was a strong resentment against having a female president, mainly from the Islamic parties. Some last minute maneuvers inside the MPR, known as ‘Poros Tengah’ initiated by Amien Rais (then MPR Chairman) broke the deadlock by installing Gus Dur as the president and gave Megawati the VP chair.

Gus Dur was a great pluralist, humanist, pro-democratic, moderate Muslim leader. Unfortunately, he was not a good president. Worse, he was an erratic president. Of course, he had great agenda. Some of which he could achieve – like bringing down the discriminative barriers against ethnic Chinese, pushing forward pluralism ideas, eliminating SIUPP and removing 'culture' from the Ministry of Education and Culture. But his erratic style made it hard for almost everyone to understand what he was doing, let alone to execute his other agendas. Soon the supports for him waned.

His most famous catchphrase was “Gitu aja kok repot?” In some ways, this proved to be an optimal strategy to deal with criticisms and dirty politicking. The problem was he used this strategy too much, even for things that needed his serious attention. Our senior colleague Hadi Soesastro once told a story when he, Prof. Emil Salim and some other senior economists gave an economic briefing, Gus Dur literally fell asleep. After someone woke him up, he just said, “Right, you take care of the economy…”

His presidency reached the anticlimax in July 2001 when the same MPR which elected him less than two years earlier agreed to impeach him following the infamous ‘Buloggate’ and ‘Bruneigate’ scandals. The same MPR which rejected Megawati then elected her to be the fifth president.

Nevertheless, no one can disagree that he was a great person. One of the best Indonesians we’ve ever had. And we will surely miss him. So long, Gus… Have a nice rest, now you no longer have to be repot…

On the octopus book

Re all this brouhaha on a new book by George Aditjondro, regular visitors might already know my take. Yes, I'm against any book banning -- regardless of the type and the quality of the book.

I'm not a big fan of Aditjondro. Far from that. So I have no interest in finding or reading his book. But if the center of criticism ie The President feels disturbed by that book, ban is not an option. It's good that SBY has expressed his will not to do that.

How to Read Newspaper Without Feeling Sorry

Let us read two examples on how journalist writes a column on bailout issues.

One is Andi Suruji's Kolom Politik-Ekonomi, Sistemik...!, Kompas, 12/26/09. The other is David Leonhardt's Economic Scene, Perhaps, It's Time to Play Offense, NYT, 9/16/08

If I gave Leonhardt's piece an A, what should I grade Suruji's?

Books banned, again

Five books are officialy banned by Attorney General Office (Kompas, 26/12). They are: "Pembunuhan Massal Gerakan 30 September dan Kudeta Soeharto", "Suara Gereja bagi Umat Penderitaan Tetesan Darah dan Cucuran Air Mata Umat Tuhan di Papua Barat Harus Diakhiri", "Lekra Tak Membakar Buku Suara Lenyap Lembar Kebudayaan Harian Rakyat 1950-1965", (until this, I thought the ban was because these books had painfully long and tasteless titles -- of course I was wrong) "Enam Jalan Menuju Tuhan", and "Mengungkap Misteri Keragaman Agama".

Book ban? Again? What an insult to humanity.

Defending infotainment

While we defend Luna Maya's right to express her anger towards some infotainment crews, we should make it clear that we likewise defend infotainment's rights to exist.

We therefore disapprove recent call (notably by some clerics) for banning infotainment. If you don't like such program, just turn off your TV or switch to other programs.

Merry Christmas!

To those celebrating it, Cafe Salemba wish you all a lovely Christmas!

Luna Maya

We hereby declare our full support for Luna Maya and against the infotainment journalists who sued her for expressing her ill feeling towards the latter, in her own twitter account.

Luna, from now on you can have coffee here for free as long as you like. Ariel can join, if he so likes.

Take-Home Final Exam Question

Suppose you have these finding from Reinhart and Rogoff (AER: 2009) showing that a banking crisis on average causes:

a. Unemployment to rise for 4.8 years, with an increase in the unemployment rate of about 7 percentage point.
b. Real GDP to decline for 1.9 years, with a decline in real GDP of about 9.3 percent.
c. Cumulative public debt to rise 186.3 percent in the three years following the crisis.

Questions:

a. What is the probability (P) you are willing to assign that not bailing-out Bank Century will not lead to a banking crisis?
b. Multiply P with either a, b, or, c finding above-mentioned. Do you still let Bank Century collapse? Of course you can put the cost of moral-hazard into your equation.

Instruction:

Submit your answer to those Indonesian lawmakers in that special committee before they get confused.

No Century for You (Yet)

Some of you may wonder why I don't serve something on Century brouhaha. It's for a simple reason: I do not have reliable data or information that can, to some extent, be verified. I follow the newspaper and some facebook debates, but the best I can have is something called investigative reports based on either BPK's audit report or BI's press release.

And crime investigation is not my thing.

But let me tell you my normative stance here. First, bank's bailout at time of crisis is theoretically defendable and systemic risk is not a snake-oil jargon. Second, any corruption related to the bailout should be investigated by authorized parties with credible tools and skills. As for political accountability joke process, just bring it on. I am always confident that ordinary citizens in general aren't that stupid.

Fair enough, yes?

Now, what Manohara has to do with Century? That's the question.

Slowly Reading Superfreakonomics

I am reading Superfreakonomics now. Very slowly. It's been two weeks and I haven't even reached the controversial global cooling chapter.

Somehow I don't find the book a page turner; perhaps because I found out that reading the original journal articles behind all of those anecdotes are more interesting. Those articles might not be as entertaining and have definitive finding as the book suggest (and oh, the math, too); but it is actually nice to see how those article's authors use their creativity (and hard work) trying to make interesting (and robust) case based on data.

Nevertheless, the book still serves a good entry point to those cute economic papers. Of course, you may have different opinion.

Facebook Solution

On a recent visit to my favorite secondhand bookstore here, I bought a small book with nice cover titled On Rumors, by Cass Sunstein. I like this short book while discussing its first two subtitles -- how falsehood spread and why we believe them-- (answer: informational and confirmatory cascade and group polarization) ; but not so much on the third -- what can be done.

It's a small wonder nonetheless, knowing that Sunstein, along with Thaler, is the leading figure in paternalistic libertarianism. He goes that to prevent falsehood to spread, we need to create a "chilling effect" against rumors through law.

But actually I like what he describes as (overly) optimistic market-for-ideas solution when he write:

"Perhaps the Facebook generation and its successors will treat a wide range of rumors, including negative and vicious ones, with bemusement or a yawn."

This is spot-on.

Econometrics Agony

Agony is when ManU/Liverpool/Chelsea/Arsenal lose to one and another --depends on what team you root for.

But for ones who ever do econometrics exercise for their paper, few beat the definition of agony in a short haiku by Keisuke Hirano that appeared in the highly recommended Angrist and Pischke's Mostly Harmless Econometrics.

T-stat looks too good
Try clustered standard errors --
Significance gone

OK, it's not as depressing as infamous Hemingway's six-word story ("For sale: baby shoes, never worn."); but trust me, if you ever work with regression and robustness test, you would share the pain.

Dr. Doom* says

"Indonesia, moreover, has shown resilience not only economically, but also as a nation. In spite of its diverse ethnic makeup and far-flung island territory, the country has made a quick transition from military dictatorship and has recovered from myriad challenges and setbacks, including the 1997 Asian financial crisis, the tsunami in 2004, the emergence of radical Islam, and domestic unrest. While Indonesia’s per capita GDP remains low, it is a country’s potential that matters in economic affairs, and here Indonesia shines."

" *Nouriel Roubini of NYU, in this commentary

On Banking Crisis

So if you like Kindleberger's Manias, Panics, and Crashes, chance is that you'll like this Reinhart and Rogoff's This Time Is Different.

One of the reasons is that the latter gives not only narrative, but also some simple numbers to ponder. My favorite chapters are on banking crisis, inflation, and currency crisis. The discussion on the Second Great Contraction (a.k.a current US financial crisis) is also worth for perusal.

Chapter 10 starts with these sentences:

"Although many now-advanced economies have graduated from a history of serial default on sovereign debt or very high inflation, so far graduation from banking crises has proven elusive. In effect, for the advanced economies during 1800-2008, the picture is one of serial banking crisis."

also,

"...there is indeed significant theoretical and empirical support for the view that a collapse in a country's banking system can have huge implication for its growth trajectory."

Moral of the story: dealing with potential banking crisis is bloody difficult and easier said than done.

On the role and limit of community

If I were a newspaper journalist, writing a story on the Nobel Prize winners should not be a difficult job. Just translate and rephrase the 5-page public information prepared by the committee, which has neatly summarized the contribution of the Laureates. Unless if you had a prior ‘agenda’ in your mind; e.g. attacking mainstream economics cum economists cum global capitalism. Then you risk writing something that has no connection between the report and your conclusion.

My favorite newspaper provided a good example on how a single paragraph had successfully driven the article way out of context:

The economic collapse caused by the crisis was a blow to the Nobel Committee’s credibility. The public has seen how economic theories, which have been developed by economists and brought them previous Nobel awards, were proven ineffective, leading to the global economic catastrophe.

Surely, if the ‘reporter’ has spent some time in researching previous awards, he or she may have understood that a significant portion of the awards were given to economists who have devoted their career to show how market can fail. Moreover, although Ostrom and Williamson’s work was about non-market transaction, it is misleading to conclude that non-market transaction is a solution to the market at anytime and any place.

Remember, also, that the Nobel Prize in Economics is awarded to studies that have made significant contributions over the past two or three decades. That means, there is a 2-3 decades lag between the time the theories were developed and the Prize. During the period, many studies have followed the original works. So it doesn’t mean that this year’s Nobel marks a significant U-turn in the economic discipline.

One particular area is how communities can solve the coordination and allocation problem in the absence of working market – Ostrom’s contribution. In the past two decades, there have been a significant number of economic papers that studied this issue. I summarized some of them in this note.

In addition to that, I’d also want to point out some interesting papers written by MIT’s Ben Olken. Here he showed that higher level of ‘civic participation’ in the village is not associated with lower village corruption, contrary to the standard theory of social capital. In another paper he argued that, external monitoring (for example, audit by a government agency), is still more effective in minimizing corruption of local public expenditure compared to monitoring by community.

In this work in progress (co-authored with others), he showed that in identifying who are the poor in a community, full community-based targeting is no more dominant than the top-down approach. However, a combination of the two provides the best result. Then, in another paper, he concluded that higher level of civic participation in local political decision making has little effect on actual decisions. However, the inclusive process in itself can substantially increase satisfaction and legitimacy.

The bottom line is, while the role of community should be appreciated more and paid greater attention in economic works, we also need to understand the limit of community in solving the problem of allocation and coordination. No need to say, we should be very careful before making inferences on the relations of Ostrom’s works and the solution to the economic crisis.

Note: all Ben’s works above are using Indonesian cases.

On market, behavioral economics and poverty

In my Facebook note, which have somewhat become the substitute for blogging, we have a productive exchange on, again, market. Specifically, on why most economists believe in the market, what are the limits of the market, and how the economics as a discipline has evolved and integrated the so-called 'non-mainstream' approaches. One of the 'non-mainstream' approaches is the field of behavioral and experimental economics. Basically, they show how the rationality assumption is often violated due to cognitive, emotional, bounded rationality etc.

I just recalled some readings by Harvard's Sendhil Mulianathan that addressed how psychology and behavioral perspectives can help us understand more why rationality assumption often fails, particularly in the context of poverty: this one, this one (with Richard Thaler), and this one (with Marianne Bertand and Eldar Shafir). Those three are basically emphasizing each other. He discussed some cases in which the rational maximization model may not be a very good approximation of human behavior, especially when we talk about poverty: underinvestment in education, undersaving, loss aversion in property rights assignment, misaligned teacher's motivation or low take-out rate of social programs.

I admit that, yes, we have to keep rethinking our epistemological position on rationality and how the market works and doesn't. On the other hand, we as economists do know that market often fails, hence it results in suboptimal outcome. But what we doesn't always know why it fails, let alone what solution should we prescribe. The reason is because "all working markets are alike, every failed markets fails in their own way." Meaning, we need to see things case by case and come up with specific - take a deep breath - policy implication, if any.

So why do we still stick to our mainstream or traditional economic tools? Because it is still a good tool. It enables us to: 1) compare the outcomes when the market works (called the benchmark condition) with the one under market failure, 2) analyze which assumptions are violated, 3) think about what - take a deep breath - policy implication, if any.

And The Nobel was (not) given to…

Update: a typo in the 7th paragraph has been corrected. Thanks, Roby. Also, take a look of Haryo Aswicahyono's nice analogy of Williamson's work here (Facebook member only).

If you are betting on Oliver Williamson winning this year’s Nobel Prize, congratulations! According to Ladbrokes, his odd was 50/1. Elinor Ostrom was not even on the market as she is a political scientist by profession. (Don't forget also that Ostrom is the first female Laureate!).

But this is what makes the Nobel Prize in Economics interesting: there is no good predictor whatsoever on who’s going to win in a given year. You may tip someone to win it within, say x years, or win it someday. But I guess no one have ever made a good fortune in betting on the winner. Kaushik Basu once said, he was tipping his mentor Amartya Sen to win the Prize for five years in a row before he gave up. When Sen did win it in 1998, Basu did’t bet. In the 1990s, almost everyone predicted Paul Krugman will win the Prize. But just when everybody stopped thinking Krugman will win it at all, the Committee awarded him in 2008.

To be honest, I am not a follower of both works, so I won’t be a good reviewer of the decision. But the official Nobel Prize website has written a nice summary of their works (as well as a more elaborated one). What I am interested is what is the message, if any, sent by this year’s award? It’s not that the Nobel Committee has ever taken into account the recent economic situation or discourse in making their decision. However, it’s hard to disagree that the current global crisis has put economic science and profession under the spotlight more than ever. In that case, I am more interested in taking a closer look on who don’t win it.

Prior to the announcement, several names were being tipped as the strongest candidates. One name that has been constantly in the circulation for some years is Chicago’s Eugene Fama. He was referred to as the father of the ‘Efficient Market Hypothesis.’ I do think he deserves the Prize (most likely shared with Kenneth French), based on how influential his work is. But for many reasons, I can see that if he wins it this year, it will spark controversies, even bitter and harsh debates, however unfair it will be.

Another strong candidate was Ernst Fehr. He was well-known for his contributions in behavioral finance, experimental economics, even neuroeconomics – where people see how human makes economic decisions from neuroscience perspective. Fehr, and some other people that may share the Prize like Matthew Rabin, Richard Thaler or Armin Falk, has worked in a field that can somehow be a counter-argument to the efficient market argument. Bounded rationality, cognitive and emotional factors and other things make rationality assumptions are often violated. No one will doubt their significant contributions to economics. However, if the Prize goes to Fehr et al, I can see a wave of ‘I told you so’ attitudes, or even disproportionate attack against the rational agent vis-à-vis efficient market camp.

Well, I may be wrong. Those controversies may not happen at all.

Back to this year’s Prize. If there is any message from the decision, then it would be “Let’s pay more attention to other things apart from the market.” Ostrom and Williamson’s work show that many transactions happen outside of the market: within society or ‘commons’ (Ostrom’s), or firm (Williamson's). True, in many cases market fails to exist or work properly. But even in the absence of the market that is working properly, agents can still coordinate actions that is optimal, and that the government intervention is not always the answer. A closer look on what happens within the mezzo-institution will help us understand ‘what-to-do’ better.

That’s the best I can summarize. Better comments include:

The common theme underlying the prize this year is that markets do not solve all problems of resource allocation and incentives well or even at all. That is not a new idea. What is important is that people and societies find ways through organizational structures and arrangements, political and other institutions, values, incentives and recognition, and the careful management of information, to solve these problems. (Michael Spence).

Issuing the award to these two economists is a welcome trend because it once again leads us to focus on the microeconomic issues that have, when aggregated, macroeconomic consequences. … The joint award to Ostrom and Williamson could be read as a needed corrective on this macroeconomic approach. The common thread that links these two authors together is their concern with mid-size institutions that face serious questions of coordination and control. (Richard Epstein).

… the Nobel selection committee … is expanding the scope of "economic sciences" into the social sciences. That is probably a good thing for several reasons. … I think the point to emphasize is that Elinor Ostrom does great economics at the same time as she does great political science. So does Dan Kahneman. The overlap between the two disciplines is great. (Thomas Schelling).

They show how firms, communities and organizations come to solve these problems absent government regulation and how the choices they make can be disrupted or worsened by bad state policy or sustained by good rules that promote stable property rights and reliable contracts. (John Nye).

Yes, the market works for the poor

In 2005, The Economist published their special reports titled "A Digital Divide." The argument was one of the main reasons for the persistence of poverty is the lack of access to market (goods, labor, or financial). Information and Communication Technology (ICT) has the potential to provide the access to market. The problem is the poor tend to have limited access to such technology. Hence, one way to help alleviating poverty is to provide greater access for the poor to ICT.

A few years ago, this idea did sound absurd. What? Internet or mobile phones for poor farmers or fishermen, while most of them still even struggle to buy food? (Even Rizal once was skeptical. Back in 2005, I asked him how ICT can help the poor. "Sell the computer, buy them rice," was his answer).

However, anecdotal evidences do show that ICT can, and does, help the poor. The Economist's this week special reports provide a series of article - one may see it as a conclusion for their 2005 reports - on how ICT, mobile phone in particular, have transformed lives in the poor world in almost a revolutionary way. It connects buyers and sellers in remote areas; helps small businesses taking orders on the spot; enables farmers to get weather forecast hence deciding whether or not to plant their crops. Amongst all, in India and Africa, mobile phones are the new financial intermediaries:

... mobile money, which allows cash to travel as quickly as a text message. Across the developing world, corner shops are where people buy vouchers to top up their calling credit. Mobile-money services allow these small retailers to act rather like bank branches. They can take your cash, and (by sending a special kind of text message) credit it to your mobile-money account. You can then transfer money (again, via text message) to other registered users, who can withdraw it by visiting their own local corner shops. You can even send money to people who are not registered users; they receive a text message with a code that can be redeemed for cash.

The question is, are anecdotal evidences good evidences? Contemporary studies seem to support the idea. This study is an example. (Of course, there is always a debate on external validity, generalization, etc.)

There is a bigger picture I'd like to point out: this is an example of how market incentives work, and work for the poor. Ten years ago, mobile phones were still a luxury. But in just a decade, costs have fallen dramatically so virtually almost everyone who wants to have a cell phone can have one. Competition and market liberalization has contributed to this falling costs.

On the other hand, (poor) people in the developing world are potential consumers. The market sends this signal to the producers and network providers, who keeps innovating their products. The innovation did not stop there; came Grameen Phone, came M-PESA, and so forth.

So, don't lose faith in the market economy, yet...

Surprising Conversion

No, I am not talking about your barista Aco who, after those years, finally uses Mac. It's Richard Posner, one of the Chicago gang's members, that became (old) Keynesian.

When it comes to macro, it is indeed hard to resist Keynes and his elegant aphorism.

HT: Greg Mankiw

Chicago Strikes Back

By way of a New Keynesian (Greg Mankiw's blog), I learn about John Cochrane's draft of counter attack against Krugman's innuendo.

I like this particular para:

(H)e argues for a future of economics that “recognizes flaws and frictions,” and incorporates alternative assumptions about behavior, especially towards risk-taking. To which I say, “Hello, Paul, where have you been for the last 30 years?” Macroeconomists have not spent 30 years admiring the eternal verities of Kydland and Prescott’s 1982 paper. Pretty much all we have been doing for 30 years is introducing flaws, frictions and new behaviors, especially new models of attitudes to risk, and comparing the resulting models, quantitatively, to data. The long literature on financial crises and banking which Krugman does not mention has also been doing exactly the same.

Which I would also like to shout at emphatically say to our friends the economics no-no (some are within the profession itself) who keep complaining about the lack of behavioural/social interaction/(insert what you want) contents of the discpline,

"Hello, where have you been?"

Addendum:
I recall a conversation with Ujang. He used different words, that is, "ke mana aje, elo?"

To Fast or Not To Fast

When Sisil was pregnant with Lintar, we decided that she skipped fasting during Ramadan. Our common sense says that it'd be healthier for the baby if the mother doesn't fast --and pay the financial compensation to the poor instead. But apparently, as seen from our friends' wall status at Facebook, our thinking differs from many who prefer to keep fasting during pregnancy.

Recently I come across two papers on pregnancy and subsequent offspring's health status. One is from Douglas Almond on the long term impact of in utero 1918 influenza pandemic in the US (JPE, 2006, vol. 114. no. 4); the other is from Reyn Van Ewijk (LSE's CEP working paper, 2009) on the long term health impact on the next generation whose mothers were fasting during pregnancy.

It seems that our common sense is vindicated. Van Ewijk writes:

Using Indonesian cross-sectional data, I show that people who were exposed to Ramadan fasting during their mother’s pregnancy have a poorer general health and are sick more often than people who were not exposed. This effect is especially pronounced among older people, who, when exposed, also report health problems more often that are indicative of coronary heart problems and type 2 diabetes. The exposed are a bit smaller in body size and weigh less.

We are aware that religious interpretation is a very personal affair, yet we still keep wondering what is the selfish true reason for insisting on fasting during pregnancy despite the available exemption option.

Flexible Professor's Wage

What makes economics professors (well, Jim Hamilton, to be precise) different from their non-economics colleagues (to be exact, the other UC's professors)?

The former is more willing to adjust their price and take salary cut (and be explicit about the term, instead of using an obscure word of furlough), when the economy goes bust, and demand for economics teaching and research down.

Of course when thing is the other way around, no difference between the two. Both would love to have a raise.

Krugman on Macroeconomics

Bias toward old Keynesianism and against Chicago school aside, Krugman writes a useful summary on the state of macroeconomics here. It'd help anyone who wants to know the difference between saltwater and freshwater schools as well who's who in the discipline.

My take is here, and for sure I don't take hostile perspective to the freshwater school the way Krugman did. Nonetheless, one thing I agree with Krugman: his opinion on the use of math in the profession that prefers beauty over truth. But it just reinforces my intention to learn more (gasp!) math. A heroically tall order for me indeed, but I just see no other way.

Democracy's Metric

In his latest book, The Idea of Justice, Amartya Sen writes:

But democracy must also be seen more generally in terms of the capacity to enrich reasoned engagement through enhancing informational availability and the feasibility of interactive discussions.

Back to current Indonesian democracy.
1. Informational availability, yes. We have various sources of information, thanks to free press, political websites, academic freedom -to mention some of information sources.
2. Interactive discussion, yes. Thanks to facebook, comment section of blogs, email threads, free electoral campaign, presidential debate, and warm warung kopi talks among ordinary folks.
3. reasoned engagement?

Many times I feel the most unreasoned too-normative arguments come from, ironically, the chattering middle class failing to fairly grasp the bigger picture and falsely believing in knowing all s@%ts --empowered by lousy journalism.

Mangan ora Mangan.. yang Penting Merkantilis

Selama tiga hari berturut-turut Kompas memuat berita terpuruknya sektor pertanian Indonesia. Setuju, peningkatan produksi dan peningkatan pendapatan petani memang perlu diperjuangkan. Sederet masalah sisi produksi masih menghambat petani kita. Fluktuasi harga menjadi momok petani sementara akses bibit, modal, dan teknologi juga menjadi penghambat daya saing produk pertanian.

Kompas juga tepat mengagkat isu dis-integrasi ekonomi domestik ketika kondisi ekonomi eksternal sedang kacau. Tantangan geografis kita sebagai negara kepulauan menyebabkan segmentasi pasar dan terbatasnya economies of scale sehingga menjadi salah satu kendala pertumbuhan ekonomi. Sulit membayangkan perekonomian Indonesia bisa tumbuh seperti China karena kita punya hambatan infrastruktur. Oleh karena itu, meningkatkan integrasi pasar domestik sebaiknya menjadi salah satu acuan Kabinet ekonomi mendatang.

Tetapi konten sentimen anti-impor yang ditulis Kompas tiga hari berturut-turut membuat saya heran. Apakah pemahanam para penulis teresebut terhadap ilmu ekonomi makin melorot? Mudah-mudahan tidak. Tetapi artikel Kompas tersebut rasanya sudah "terjebak" dalam pemikiran merkantilisme abad ke 18 yang menganggap impor suatu kejahatan dan penumpukan devisa di dalam negeri sebagai barometer prestasi ekonomi.

Artikel tersebut menuliskan bahwa Indonesia telah "terjebak impor pangan" karena impornya yang kira-kira mencapai $5 milyar per tahun. Konten berita juga mengesankan perlunya "kebijakan berani" untuk swasembada produksi.

Saya tidak ingin masuk ke teknis ekonomi pertanian, tetapi saya ingin mempertanyakan beberapa hal yang muncul dalam artikel artikel tersebut.

Pertama mengenai impor dan devisa. Memang kita mengimpor sebagian pangan dan total nilai impor 2008 mencapai $5 milyar. Dari mulai gula, kedelai, dan komoditas pertanian lain yang kita juga produsen seperti ikan tertentu Indonesia pun mengiimpor.

Yang tidak ditulis Kompas adalah total ekspor non-migas Indonesia tahun 2008 mencapai $107 milyar. Ekspor produk perkebunan, pertanian dan perikanan Indonesia di tahun itu saja juga mencapai $29 milyar dan $21 milyar tergolong komoditas pangan (termasuk sawit, teh, kopi, perikanan). Lalu kalau kita impor pangan $5 milyar, apakah ini sesuatu yang mencemaskan bagi negara dengan penduduk lebih dari 250 juta jiwa dan termasuk dalam 20 negara dengan PDB terbesar?

Betul, impor menggunakan devisa dan ekspor mendatangkan devisa. Tetapi apakah perekonomian akan lebih baik dengan hanya mengumpulkan devisa? Penumpukan devisa hanya akan mengakibatkan Rupiah terapresiasi dan akhirnya malah menurunkan daya saing produk ekspor. Memang, salah satu cara menghindari masalah ini adalah dengan meniru China yang menukarkan sebagian penerimaan devisa ekspor kedalam aset asing (seperti US Treasury). Tetapi ini juga yang mengakibatkan ketidakseimbangan global yang pada akhirnya memicu krisis keuangan saat ini.

Kedua, apakah keberhasilan adalah jika apapun dapat disediakan sendiri? Apakah para penulis artikel tersebut belum pernah mendengar istilah intra-industry trade?

Contohnya begini. Mengapa negara produsen keju seperti Belanda masih mengimpor keju dari Perancis? Arab Saudi pun masih mengimpor kurma dari Tunisia atau negara Arab lainnya. Australia sebagai penghasil wool terbesar masih mengimpor kain wool atau jas ketimbang menjahit semuanya sendiri. Mengapa Eropa sebagai penghasil Airbus masih membeli pesawat Boeing, Embraer, atau produk IPTN? Jepang, sebagai produsen mobil dunia masih mengimpor Daihatsu Grand Max dari Indonesia. Lalu mengapa Amerika sebagai penghasil kedelai, gandum, dan produk teknologi tinggi masih mau impor kecap ABC dan Indomie dari kita?

Perdagangan membuka pintu bagi spesialisasi produksi sehingga produsen bisa mengeksploitasi skala ekonomi dan keunggulan komparatif nya. Perdaganan juga memungkinkan terjadinya spesialisasi produksi yang memberikan keuntungan terbesar. Ini kredo dasar teori ekonomi yang saya tidak temukan setelah membaca artikel-artikel tersebut.

Ketiga, apakah "kebijakan berani" itu berarti proteksi, subsidi, atau tata niaga? Kalau maksudnya proteksi, tidak ada gunanya untuk dibahas karena ilmunya sudah jelas. Kalau proteksi tersebut untuk mengurangi ketidakadilan karena subsidi pertanian negara-negara maju, jalankan saja mekanisme safeguard WTO secara transparan dan bukan lewat larangan ad-hoc. Kita tinggal perlu membuktikan kalau subsidi impor produk pertanian tertentu membawa akibat desktruktif oleh karena itu bea masuk perlu dinaikkan.

Kalau subsidi, saya setuju tinggal pertanyaanya mekanisme subsidi bagaimana desain subsidi yang tepat. Apakah meniru subsidi pertanian di Eropa atau Amerika yang terjebak oleh lobi politik? Apakah sebaiknya terarah (targeted) kepada petani atau dalam bentuk irigasi, bibit, dan extension services? Dengan perbaikan infrastruktur fisik, rasanya produk pertanian kita juga bisa kompetitif di dalam negeri. Miris rasanya kalau betul marjin keuntungan mengimpor jeruk China bisa lebih tinggi ketimbang mendatangkan jeruk Medan atau Pontianak.

Bagiamana dengan tata niaga? Kecuali beras yang memang punya bobot besar (22%) dalam konsumsi rumah tangga miskin, sulit menjustifikasi perlunya tata niaga untuk produk pertanian lain. Tata niaga dapat mendistorsi sinyal harga dan meningkatkan resiko petani terjebak dalam produksi komoditas tertentu saja. Katakanlah kita memaksakan adanya tata niaga kedelai. Bisa jadi harga kedelai naik secara artifisial sehingga petani tidak dibiarkan menanam produk dengan harga yang menarik seperti holtikultur (sayuran dan buah-buahan).

Keempat mengenai ketahanan pangan. I'm not an agriculture economist but why the concept of food security seems narrowly focused on the ability to produce rather on securing the ability to access food?

New Order's Rerun, Not

Many observers and pundits warned that the recent maneuvers of political parties and politicians to regroup and form coalition, regardless their stands in the last elections, is the sign for the return of New Order's regime.

They misunderstood the situation while too easy labeled it as the New Order's rerun.

These political observers puts too much attention to political parties and overlooked the people as voters and interest groups. Important as it is, political parties (and their coalition tendency) is not the essence of democracy. You need to look at what happens to the voters, interest groups, and the game itself.

As voter, can you voice your concern without fear of being kidnapped? Can you openly disagree with the current administration? Can you say that President is stupid in a public forum, and next day you are still walking free? Can the voters punish the political parties if they go to unwanted direction? Can the voters generate pressure group?

Lest you forget or wasn't yet aware of those repressive days, it wasn't long ago that you can not do all of these. We are by far not in New Order-like regime --no matters who wins the last election.

Addendum: Even if those pundits insist on just looking at political parties, the very possibility that the parties can easily regroup and form non permanent coalition dismisses the idea of the return of New Order era.

Ben Again

Obama has re-nominated Ben Bernanke for the 2nd term of Fed Chairmanship. A good move. As any student of monetary economics knows, Bernanke is the leading scholar when it comes into monetary policy transmission and business cycle.

His work on agency cost, net worth, and business fluctuation is important. For those who want to force Indonesian banks' lending rate down (by regulation or any non market mechanism), that article should be on the top of their reading list.

Unlikely Opposition

Is it theoretically feasible to expect opposition parties arise in the current Indonesian politics?

I do not think so. It likely does not pay for the parties to become opposition if voters preferences are clustered in the median of most important issues. And, in policy making, cycling is prevalent.

RIP: Rose Director Friedman

I was reading The Great Contraction, 1929-1933, by Milton Friedman and Anna Schwartz when Kate emailed and asked me to write a short obituary for Rose Director Friedman.

Rose was the half of the Friedmans, with whom Milton Friedman shared and voiced opinion on issues unrelated to price theory and monetary economics (Overtveldt, 2007). The two were the strong supporters for voucher system in education; voluntary army; profit under fair competition as firm's social responsibility; and negative income tax (or direct transfer for the poor). In short, individual freedom.

May she rest in peace.

Rendra and The Students

There is something between Rendra and the university students.

In my undergraduate days, I learnt development economics from Todaro's Economic Development and Rendra's Potret Pembangunan Dalam Puisi. Todaro's provided me with methodology and numbers in analyzing development; but it was from Rendra's that I learnt how poverty, unemployment, inequality, and corrupt institutions really mean to people's life.

And the power of hope. Sajak Joki Tobing Untuk Widuri, for example.

But I had to wait until one cold raining evening of another long day in 1998 in Depok to see before my eyes the most subversive poet that Indonesia has ever had read his poems.

He was still officially banned from the University, a state university as it is, because he was considered enemy of the state --so much for the power of poetry and the irony of dictatorship guarded by thousands of soldiers and terror. But somehow friends at KMUI were able to smuggle him in to stage before hundreds of students on one of Suharto last days.

There, Rendra read his own Sajak Kenalan Lamamu. It was astounding beyond words. Magical. And on those days, bloody relevant --as if it confirmed that what we did those days were indeed worth doing.

I thank Rendra for that. Hat off.

Taxing the Wrong Stuff

I am amused by the idea of taxing junk food as reported by The Economist. Here is the logic of its supporters: junk food causes obesity. Obesity causes diseases. In state-sponsored health care system, the cost of curing these diseases has also to be shared by non-obese taxpayers. Thus, as the existing junk food consumption doesn't reflect true social cost, tax on junk-food shall be imposed.

This is nonsense. The Economist itself says that:

More important, junk food is not itself the source of the externality—the medical costs that arise from obesity. Unlike smoking, or excessive gambling and drinking, eating junk food does not directly impair the well-being of anyone else. And because obesity is determined by lack of exercise as well as calorie intake, its ultimate relationship with health costs is more tenuous than that of, say, smoking. It is possible to eat a lot of fatty food, exercise frequently and not generate any externalities. A more direct, though controversial, approach would simply be to tax people on the basis of their weight.

Double Whopper, anyone?

What To Do Against Big Boys

OK, I haven't had time to have coffee at the legendary murkycoffee at Clarendon and now they had closed the cafe down and moved to near Chinatown. But this op-ed by its former owner Nick Cho, is worth to ponder.

But if Starbucks brings one of these new concepts to Washington, I'll be among the first in line. To me, Starbucks is only a problem if the quality of their coffee gets worse, and this new spinoff might help it get better. (If they want to compete with the likes of Victrola and other great third-wave coffee bars, it's going to have to get a lot better.)

I hope the coffee wars help nudge the caliber of all coffee upward. Just because you're not a corporate behemoth doesn't mean you serve delicious brew. The dirty little secret of most independent coffee shops is that they don't know how or don't care to serve high-quality coffee. They believe that furnishing their shops with comfy chairs and knowing the names of their customers' dogs is all that matters.

Bottom line: competition is good. And if you have the right taste of (real) espresso, burger as good as Ray's Hell Burger, or rigorous research methodology; you shouldn't worry about Starbucks, McD, or any "imperialist" field of science.

Interpreting Election (and Democracy)

To political pundits in the newspaper and politically literates commenting on general election, this quote might be useful:

Thus, even if the emergence of states is better explained as cooperative efforts undertaken to benefit all members of the community rather than as a power move by one group in society to exploit the rest, it is now clear that the use of the majority rule to make collective decisions must transform the state at least in part into redistributive state.

--Mueller, 2003, after discussing the positive properties on majority rule and redistribution (see Riker, 1962 and Tullock, 1959)

In other words, stop using the term (and believing in) national interest in explaining the political parties and politician behavior in general election. It is unavoidable that election is the game on who gets the larger cake out of public policy (and taxpayer's money)

Waiting for a Keynes-like Macroeconomist

The Economist published an interesting article on the crisis of macroeconomics. If you happen taking, have had taken, or are about to take the subject, you may want to read that article too.

My personal take on that piece is this: one of the reasons on why I find macroeconomics fascinating is precisely the fact that the subject is still very much evolving. This is the branch of economics where the fight between schools of thought is still kicking, alive, and relevant, particularly after the recent crisis. And it's is a good sign, unless you just want things that already well-settled a.k.a boring.

True, as The Economist states, that for many economists the Great Moderation period from mid 80s to just before current crisis means the end of debates in macroeconomics as the business cycle was then tamed. But I was, and am, not convinced. Ten years ago, the Asia Crisis in 1998 got me thinking that there should be a new way to see the macro economy where economic activities and markets are now much more internationally linked at much speedier pace. I was expecting a new approach out of then the debates between market fundamentalists and panic approach on Asia crisis. Alas it never was.

Up to now, when it comes into macro, I can not really make up my mind and pick between (new) Keynesian or neoclassical school. Both are equally theoretically plausible and empirically defendable. I also am not fully convinced whether micro-foundation of macroeconomics is really the only way to progress, or more pragmatic positive methodology a-la Friedman and Keynes might be more useful.

But make no mistake, I very much enjoy every bit of this my state of not-knowing. It keeps me thinking and rethinking my position. It is good that the crisis of the subject forces macroeconomists back to the drawing board. Hopefully a Keynes-like figure would emerge and come up with a macroeconomics we never knew before.

And to those aspiring macroeconomists, I do not think the current state of macroeconomics should discourage you. If anything, this is the best time to study macroeconomics and join the game. Perhaps you are the Keynes-like we are waiting for.

Banality of Serial Bombings

The latest bombing incidence in Jakarta made me think to reread some economic literature on (rational) suicide bomber, --there are some out there--, but somehow I don't feel like doing it. The serial bombings is still always a disgusting and damned act, but it is now becoming banal, in a sense that it is no longer a surprise, fails to spread excessive fear, and somehow beats the dead horse.

So let the police does their CSI homework, may they identify and capture those bastards as they did in the previous incidents, and life goes on. To show that we are not easy to be scared off, the cafe still to play some jazz. Here are three Miles Davis' albums in a row: Kind of Blue, Sketches of Spain, and Miles Davis Live at Carnegie Hall.

Keep jazzin', folks.

A book of un-common sense, soon to be on the shelf at the cafe of un-common sense

So about more than a year ago, Gary Becker called to Cafe Salemba. He said he liked the cafe and had been very much inspired by it. "And, your tagline: a cafe of un-common sense, I love it!" he added.

Of course I'm lying. It's the other way around: we have been inspired by Becker and the likes: Stigler, Levitt, Friedman (Milton and David, not so much Tom), and of course Cafe Hayek.

I just couldn't help fantasizing the scene of Becker calling me, as I came across his new book with Posner: Uncommon Sense. Recommended.

HBS, Hilarious B-school

Do you know how the HBS students made the school pay for the BMW they rode to school? Or the difference between Sloan, Kellogg, Wharton, and HBS?

I did not until I read this book, Ahead of the Curve: Two Years at Harvard Business School.

To give you some idea, it's written by Philip D Broughton, an Englishman, former Paris correspondence for British The Daily Telegraph, holder of undergraduate degree in Classics from Oxford, who decided to give up journalism for MBA at HBS even without knowing how to run Excel on the first day of the School. In short, a page-turner hilarious account with strong hint of typical Englishmen wits and dark humor on life at one of world's most prestigious B-Schools.

Recommended for summer reading and for those who contemplate to take B-school or live business and corporate life.

Cultural Explanation Gone Nowhere

In 1977, Mochtar Lubis thought that Indonesians are hypocritical, unaccountable, feudalistic, superstitious, artistic (sic!), and some other bad traits.

In 2009, Rhenald Kasali thinks that Indonesians suffer from ten negative "economic culture" (whatever it may mean). He believes that Indonesians love to: bypass (regulations), engage in conflict, be suspicious to each other, insult each other, be photographed (sic!), mobilize mass violent acts, be shameless, be populist, set unnecessary (bureaucratic) procedures, and procrastinate.

My take: I am not convinced at all -if not to say that I don't buy it- for the following reasons.

First, so far I do not see neat working definition for each of those adjectives they used.

Second, I do not see systematic empirical efforts and findings to justify those assertions --let alone considering they take the nation's population as their unit of analysis.

Third, compared to what (nations at what period)?

Good Scot

My favorite Bagehot of The Economist asked which Scots are Good Scots; and gave three options: Andy Murray, Susan Boyle, or Gordon Brown.

That's easy. All of them. But still the best Scot so far is Bond, James Bond.

How to Read Interest Rate Paid by The Poor

You may often hear this as argument against informal moneylenders to the poor: they charge exorbitant annual interest rate. For example, IDR 2500 a week for IDR 100K loan means 261 percent annualized interest rate.

But that's not quite accurate.

One of the lessons from the diaries is that interest paid on very short-duration loans is more sensibly understood as a fee than as annualized interest. When researchers annualize all interest rates, they maybe following standard accounting practices, but distorting the real picture.

--Portfolios of the Poor by Collins, Morduch, Rutherford, Ruthven, p.22

What is the real picture? For instance, paying that interest, --no, fee--, will enable a poor to buy new cloth for his/her kid to celebrate Eid festival. A very rational motive. And perhaps, thinking at annual base is a luxury for the poor.

Kevin Murphy's Example

Here is an interview with one of my favorite economists, Kevin Murphy.

In my opinion, that interview gives you ideas on how economists, ideally, see and think about things. First, find interesting research questions and set it right. Second, stick to positive analysis.

See, for example, the discussion on smoking and drug addiction, and contrast it with the recent discussion amongst FEUI faculties on cigarette; you will find that Murphy never mentions normative statements on the issue --e.g whether smoking is morally a bad thing.

That is the economics as we in cafe salemba know it.

HT: Marginal Revolution

Presidential Summer Reading

If you were to recommend summer reading for Indonesian presidential candidates, what are two books you want them to read?

My recommendation:
#1. Capitalism and Freedom by Milton Friedman, to help them comprehend how market economy works, even if they eventually dislike it.
#2. Catcher in the Rye by JD Salinger, to remind them how being phony can be so sickening for others.

What's yours?

Stubborn General

Apparently our friend Sunaryo, the cafe's office boy, knows economics better than him.

And Sjamsu's headache remains.

Black-haired Capitalist

As expected, presidential election campaign produces some funny lingo. This one comes from the incumbent SBY who doesn't want the economy be dominated by global as well as black-haired capitalists.

What the hell does he mean by black-haired capitalist?

He would have been in better position if he said that he denounced the capitalists who asked for government protection to prevent market competition get into their way and punish their inefficiency. But calling these crooks black-haired capitalists doesn't help --if not puts him in, alas, the same league as his opponents in term of economic literacy.

The Pourers of Cold Water and The Clueless Cheerleaders

Sometime ago, Kate the manager asked me why economists are hated. She could not reconcile this fact with her own experience getting along with the baristas in this cafe, who, albeit, in her words, little bit chauvinists, are mostly harmless.

Today she told me that she finally got the answer from her summer reading of George Stigler's Memoirs of an Unregulated Economist. (Please note, with this pick of summer reading, Kate is now officially an econ geek)

Stigler wrote:

Why it has been fashionable to abuse economists (even granting the possibility that they may deserve it)? The main reason is easily named -economists have been the premier "pourers of cold water" on proposals for social improvement, to the despair of the reformers and philanthropist who support these proposals.

Thus, it is small wonder that in the midst of elections when promises of social improvements comes cheap as politicians exploit almost anything -from neoliberalism to, well, neoliberalism -; economists are more hated. Yet, the most depressing part is that many faux economists themselves are engaged in such futile promises, and call them economics. Instead of the pourers of cold water, they are bunch of clueless cheerleaders.

Bikin pusing..

Kadang bingung mendengarkan orang dengan keunggulan ilmu tertentu berkoar-koar di bidang ilmu lain, apalagi kalau dia mengusung poster/grafik.

Itu yang terjadi watu saya melihat interview LetJen Prabowo di TV-1 beberapa waktu lalu. Beliau klaim bahwa sistem perekonomian salah karena selama ini selisih antara penerimaan ekspor dan pengeluaran impor tidak tercermin dalam akumulasi kekayaan devisa kita.

Dengan benar, beliau bilang bahwa sejak dulu akumulasi cadangan devisa kita di Bank Indonesia tidak pernah naik dari US$50 milyar sekian.. Dengan bantuan latar belakang grafik besar, beliau juga tunjukkan angka surplus ekspor terhadap impor kita yang cukup besar. Bahkan, kalau saya hitung dari angka Neraca Pembayaran BI, surplus neraca perdagangan barang (balance of trade in goods) per-tahun dari 2004-2008 sebesar US$20 milyar, US$ 17 milyar, US$29.6 milyar, US$ 32.7 milyar, dan US$ 22 milyar.

Jadi, kalau mengikuti argumen Pak Prabowo, dari tahun 2004-2008 saja, seharusnya ada peningkatan cadangan devisa sebesar paling tidak US$120 milyar !! Sementara itu. .devisa yang dipegang Bank Indonesia, kok hanya US$50 milyar???

Lebih afdhol lagi, paparan tersebut dilengkapi dengan tudingan bahwa pemerintah (dan Bank Indonesia tentunya) tidak becus mengelola perekonomian.. Lebih runyam lagi pertanyaan seperti "dikemanakan uang rakyat", "bagaimana ini kekayaan kita dikuras", "sistem ekonomi apa ini" dsb.. ikut keluar.

Rasanya perlu diakui, pertanyaan Pak Prabowo amat sangat bagus. Tetapi perlu dijelaskan bahwa urusan cadangan devisa ini tidak segampang mengurangi dua angka ekspor minus impor dan kalau kurang dari itu berarti ada maling atau dicuri orang asing

Pertama, trade balance adalah bagian dari identitas pendapatan nasional (PDB) yang tidak dapat dibaca sepotong-sepotong. Trade balance bukan berapa yang seharusnya Indonesia dapat, melainkan bagaimana pendapatan Indonesia (PDB) dialokasikan ke dalam aktivitas berbeda (expenditure allocation). Jika ingin melihat berapa yang Indonesia dapat, maka perlu konstruksi PDB lewat pendekatan pendapatan (income approach) yang sampai sekarang kita belum punya (Indonesia punya 2 versi pendekatan PDB: expenditure dan value added)

Kedua, ya tidak segampang itu bilang kalau ada selisih besar antar surplus ekspor impor dengan cadangan devisa maka negara ini penuh maling atau diperkosa asing (diperkosa koruptor dalam negeri sih mungkin)

Devisa dari surplus trade balance masih harus ditambah atau akan dipergunakan oleh aktivitas-aktivitas lainnya.

Di Neraca Pembayaran, ada komponen Neraca Jasa (service balance) dan Neraca Modal yang mempengaruhi posisi akhir perubahan devisa kita. Neraca Jasa memperlihatkan surplus/defisit transaksi jasa seperti telekomunikasi, transportasi (naik Garuda atau SQ), cargo, bayar konsultan bule, dsb. Sepanjang yang saya tahu, Neraca Jasa Indonesia selalu defisit.

Kemudia ada Neraca Modal (capital account) yang memperlihatkan selisih modal masuk/keluar dalam bentuk penanaman modal tetap (Toyota buka pabrik, SingTel beli Telkom, orang Arab bikin hotel, Indofood buka pabrik di Afrika, Djarum buka pabrik di Brazil, dsb.) dan potfolio (surat berharga). Total dari trade balance, service balance dan capital account itu adalah secara teori adalah perubahan cadangan devisa (tentunya setelah penyesuaian karena kesalahan pencatatan dsb). Kalau pakai pendekatan ini, maka secara teoretis selama 2004-2008 Indonesia mengalami peningkatan cadangan devisa sekitar US$25 milyaran, bukan US$ 120 milyaran seperti klaim LetJen Prabowo

Belum tentu ada yang salah Jenderal, cuma itung-itungan Bapak belum tuntas saja

The Library As Big As The Ritz

I am truly glad that finally UI decides to seriously build the much needed library. I'd be even happier if it turns out to be bigger in size than the Rectorate building.

But, did the UI's deputy director of corporate communication say the largest library in the world? You kid me not.

How Neoliberal Confusing Are You?

Nicholas Kristof of The Times posed two nonpolitical questions to tell whether you are liberal or conservative.

#1. Would you be willing to slap your father in the face, with his permission, as part of a comedy skit?
#2. Does it disgust you to touch the faucet in a public restroom?

Conservatives would tend to say no and yes respectively, and liberals the otherwise. My answer is no and no. So what am I? Neoliberal?

But wait a sec, are we talking the same liberals here? Unlike in Indonesia, in the US, liberals turns out to be the ones on the left.

Boy, this is confusing. Give my summer break --and jalapeño ice cream-- back.

The Ghost of Neoliberalism

AP, at his best:

A specter is now haunting Indonesia: the specter of neoliberalism. I call it a specter, or ghost, because everyone is talking about it but few are really sure about what it is.

Neoliberalism is mainly referred to as a political economic system. However, for economists, it is not a common term to classify a set of ideas or policy orientation. One can find those claiming to be liberal, socialist, conservative, existentialist, Keynesian or neoclassical, who passionately defend the schools of thought they subscribe to, but I don't think there is anyone who considers her or himself a *neoliberal'. This is due to a feature of the so-called neoliberal philosophy: it is defined by its critics.

As the name suggest, neoliberalism is seen as the revival of Adam Smith's economic liberalism. The core philosophy of neoliberalism is that of liberalism: freedom for individual transactions, guided by market mechanisms where price is the signal to allocate resources based on demand and supply, minimum regulation and government intervention in the market, and the elimination of all barriers to exchange and trade.

So what is "neo" about neoliberalism? There is a spectrum of arguments raised by its critics. But they seem to converge on a couple of things.

more here

Et Tu, Jekus?

That was Kate's reply five minutes after I emailed her this JK's posting in his Kompasiana blog --with a snobbish show-off note saying "sent from Blackberry" at the bottom of her reply.

And she is right. JK's writing is a terrible example on how one misunderstands market economy, and coming from JK, the current VP and next presidential candidate, the inability to comprehend basic economics and the economy is even more depressing.

In his opening paragraph, JK argues that liberalization would put farmers into danger. But does he really think that most of Indonesians are rice farmers? For a presidential candidate, ideally he should be more knowledgeable on what most Indonesians are actually doing for life, so, if elected, will pick the policy benefiting the majority of people.

But is he up to expectation?

Your barista, Aco, coauthored a forthcoming paper on the political economy of rice and fuel pricing. There you'll find that 75 percent of total households in Indonesia do not grow rice and 82 percent are net rice consumers. Even in rural area, 63 percent of rural households are not rice growers and total around 72 percent of rural households are net consumers of rice

What does it have something to do with liberalization? If importing rice means lower rice price, at least 75 percent of national households and 63 percent rural households will benefit from that free market policy.

What to do with the rest? My take is two things: first, if import led them to fell down below poverty line, they deserve to get across the boards anti-poverty transfer, like direct cash transfer scheme --not because they are rice growers, but because they are now poor. Second, and more importantly, do not block their access to move into more dynamic sectors in the economy. And getting rid the obstacles they face means removing anti market competition policy like inflexible labor regulations, corruption, and lack of infrastructure.

In the second paragraph, JK thinks that in the international trade the developing countries are victimized as price takers, while the developed countries reap most benefits as price makers. Really?

Last year, as all of you know, there was a steep increase of the world's price of (primary) commodities produced by developing countries --like food and agriculture products. It would not have been the case if the developed countries, as the major consumers, could set or make the price as JK thinks.

But maybe JK is right, the current international trade of agriculture product is not fair because the developed countries as producers, and the competitors of developing countries, deliberately distort the market by applying high subsidy and trade barriers --in other words, violating free market principles. By that, here, what we want is, well, free trade so that we can sell our products and fairly compete in their markets too.

And on his remark that the price 1 kg of cocoa is far below the price of 1 kg of Silverqueen, what should I say? You just don't make one kg Silverqueen with one kg cocoa. You need to put some milk and mix it with other ingredients. Then you want to wrap them in in a nice package, advertise and distribute them to stores.

Still, you can not write your price tag as high as you want, if you still want somebody to buy your products. You need to consider the price of Ghirardeli, Toblerone, Lindt, Cap Jago, Haribo, Trebor, licorice, etc --all are your products' direct competitors -- as well as its indirect substitutes.

If you let market to work, your price reflects only normal profit, or some temporary supernormal profit that is always subject to natural creative destruction. It is not fair if you get government protection or commit in unlawful acts against your competitor. But you can not blame market mechanism for these faults, because what is unfair is the government discriminative anti-market protection.

Bottom line: it is rather unintelligent to support the argument for fairness by comparing cocoa's price to Silverqueen's and asserting an upside-down argument blaming market mechanism for the anti-market outcome.

Back to Basics

Greg Mankiw, himself the author of an excellent introductory economics textbook, offers several subtle changes in teaching Econ 101 amidst the recent crisis by giving more emphasize on the role of financial institutions, the effects of leverage, the limits of monetary policy, and the challenge of forecasting.

Sorry, rightly so, no neoliberalism on the menu.

Mankiw also noted that:

Despite the enormity of recent events, the principles of economics are largely unchanged. Students still need to learn about the gains from trade, supply and demand, the efficiency properties of market outcomes, and so on. These topics will remain the bread-and-butter of introductory courses.

Which brings me to wonder after reading some protectionist pundits' and faux economists' remarks on recent neolib hullabaloos: what did they learn from their introductory course --if they ever had taken it?

In defense of consumerism #137

I'm a big fan of Samuel Mulia. But less so this morning. No, I'm not talking about Samuel's column in Kompas -- it's still good as usual. I'm talking about O-Channel's "Pagi Jakarta" broadcast now. The topic is Style, Brand, and Status. Erwin Parengkuan and Jill van Diest are featuring Samuel Mulia.

The trio are lambasting consumerism quite excitedly. Samuel just talked about a new trend in Jakarta: exclusive bags for rent. He was concerned about Jakartans new way to show off by renting Hermes or Gucci by hour.

What's wrong with that? Samuel -- and Erwin and Jill -- think that way of life is artificial and not good for your health and pocket. I fail to understand it. On the contrary, I thing bag-for-hourly-rent is an excellent idea. When else do the not-so-rich can wear Hermes or Veneta? Kudos for the inventor of this idea. Because of you, the exclusive bags are not so exclusive anymore, give a room for others to fill.

Error by Omission or Maybe Something Else

Against free market, Kwik Kian Gie wrote:

Because anything goes without government regulation, she (the producer) starts to conduct competitive strategy that kills her competitors through dirty practice, supported by her wealth. For example, she sells her products at price below cost of production. She would suffer loss, but she can bear it, thanks to her already accumulated wealth. At such price, all competitors would lose and go bankrupt. Except she, who has the largest capital. After the competitors go bankrupt, with her monopoly power, she increases her product's price very steeply.

Let me restate my take on predatory pricing: as long as there is no government regulation discriminating other producers, I don't see it as a problem --or dirty practice. And letting the market work will set the price back at producer's normal profit level. But you can not see that in Kwik's story because it was not yet finished and the next part of the story was omitted either by error or incomprehension.

Why?

The supernormal profit from after-predatory pricing monopoly power will attract the old producers and new producers to enter the market, as long as there is no government restriction. This will keep the price down again.

Also, any monopolist is subject to the consumer's demand -if you look at demand function in a monopolistic market, it's downward sloping. Thus, first, charging higher price means lower quantity demanded. Second, consumers do not solely look at a single product, she will always take into account the substitutes. For instance, if the price of espresso goes crazy, even a coffee freak like me will switch to teh botol. As a result, the predator needs to consider a whole arrays of competitors.

Where do I get this idea from? Econ 101 textbook. And by the way, the textbook always states that what matters for economic agent's decision is the marginal cost and marginal revenue (or benefit), not accumulated wealth.

Your baristas talked about this misleading op-ed during the break, and perhaps Ap will join me to serve you his comment.

Dear Kate: Neoliberal

Dear Kate,

I observe a suddenly-famous term: "neo-lib". What is this "neo-lib" actually about? Why do people seem hate it? Is it some kind of virus?

Best,
Al @ Berge

Dear Al,

To tell you the truth, I don't know. But I got an impression from the media that all those protesters mean by 'neoliberal' is market-friendliness, trade with other countries, and everything American or western.

In other words, neoliberal is an Aunt Sally.

Take care,
Kate

On Faithless Neoliberals

Following the Boediono-Neolib controversy, I think the problem is not so much that some people dislike neoliberalism. It is perfectly OK if you disagree with something, but it'd be better if you have clear idea on what you disagree with is about.

In my old posting, quoting Stanley Fish, you can find the broad definition of neoliberalism (at least from the perspective of its critics) that I won't repeat here. Problem of definition aside, the real catch is that --also from Stanley Fish, quoting Boas and Gans-Morse of UC Berkeley in his subsequent Times' column --, its force is more rhetorical (Boediono, you accursed neoliberal) than analytic.

In the last debacle on neoliberal here in Indonesia, I think the problem is even more depressing: some people attach moral or religious value on neoliberalism. It is akin to say that because you are neoliberal, your faith is questionable.

In Boediono case, you can confirm this by reading the weird flip-flop statement from Tifatul Sembiring who said that Boediono is not a neoliberal because during his time as Coordinating Minister of the Economy, shariah economy was developed and he passed the Law on Shariah Economy.

While Homer Simpson would say "D'oh!", Econ 101 students would say: the opposite of neoliberalism is socialism.

I am fine if you are socialist. I will disagree with you, and sometime ridicule you, but I will never question your faith based on your socialist viewpoint - unless you kidnap, torture, and kill others.

Harold

My favorite summer reading: Harold and the Purple Crayon.

Harold is terribly funny. He mistook oatmeal bowl for a flying saucer.

A Friendly Reminder

When I wrote the previous posting on neoliberalism, I could not relate why one commenter asked about Boediono and his religious attitude.

Only after I read Faisal Basri's take on Boediono that I become aware of the Boediono-Neoliberalism controversy, that the commenter might think I was talking about, which I wasn't.

Kate apparently gets really annoyed with that controversy, and all baristas here know too well that hell has no fury like Kate scorned.

Just wait what she's gonna say. Stay tune.

Added: My take on the commenter's question remains the same, nevertheless.

The Impact of Neoliberalism on Religiosity

Another boring and tasteless title, you say?

No.

It's what I think after reading the Spiritual Economies: Islam and Neoliberalism in Contemporary Indonesia, by Daromir Rudnyckyj in Cultural Anthropology, Vol 24, Issue 1, Jan 2009, pp 104-141.

Check this interesting ethnography work on how, or why, Krakatau Steel, a state owned enterprise on the verge of privatization due to current market reform, decides to hire ESQ. And according to the editor of that Journal:

"In Indonesia, religion is not a "refuge" from or resistance to neoliberalism, nor is it a retreat into "magic and mystery" in response to global capitalism. Instead, religion and capitalism are brought together to address the challenges of globalization. By enabling Islamic virtues of self-discipline, accountability and entrepreneurial action, one becomes both a more pious Muslim and a more productive employee. Rudnyckyj argues that "managers, state technocrats, and religious reformers sought to enact a set of neoliberal practices by creating a new type of subject, a worshipping worker, for whom labor was a matter of religious duty."

My first reaction: Marxian false consciousness at play. But Sisil, the one with real anthropology training, differs and thinks it more as Weberian ethics with Islam twist.

Nevertheless, if neoliberalism indeed brings greater religiosity, what you say, MUI? Or anti neoliberal?

The Most Boring

paper's title I've ever heard: The Impacts of Monetary Policy Shocks on the Indonesian Economy.

Author: me.

Update: I change the title, but, alas, our friends in Kebon Sirih might not be happy with that.

Hi

Hi, long time no see. As you know, I've been busy with my thesis. My anonymous, external examiner is tough (I think he is Zuckerberg). Just got time for a little break now. An update, Aco just got back from Brighton, UK (and is getting ready for Salzburg); Ujang is taking a basket ball course (and writing a bit of economic paper) in Duke, NC; Ape' is back to school in Melbourne and recollecting his memory of the fall days of Soeharto; Rizal of course has been your constant barista from Virginia (the only one here who is FB-less); and Sjamsu is probably in Bali now trying to find a gig in between ADB events. Bye now.

Statesmanship as Fiction

With all of my due respect to Magnis-Suseno, Syafii Maarif, and Satjipto Rahardjo, please stop hoping and asking for politician to be statesman. The latter is just a fiction. Not because they do not exist (maybe there are few of them), but because it doesn't help in analyzing the politics and its social impact. We will too easily slip into pointing out any failure of politics in providing higher social benefit to the lack of statesman quality in politicians.

Banks Are No Charity

I fail to understand this news titled "banks put profit at the front-seat, or banks are more keen to seek profit" --or something like that.

First off, what is wrong with that? Banks are profit maximizer, for sure. But if you think borrowing from the bank is pricey, you are free to seek another (cheaper) source (if any) --your own retained earning, for example.

Second, on why the gap between deposit and lending rate widened lately, perhaps Bernanke and Gertler in their classic article Agency Costs, Net Worth, and Business Fluctuations (AER, Vol. 79, No. 1, Mar.1989, pp. 14-31) might help. From borrower's balance sheet approach, they demonstrate that lower net worth increases agency cost (hence higher lending rate) and business downturn decreases net worth.

I haven't look up the data on the borrowers' (households and firms) net worth, but certainly in the last quarter we have been, at least perceived, at business downturn, no?

On the other (good) side, people still go to bank to borrow despite high lending rate. So perhaps, the demand --some would say real sector-- is still strong, or at least not as weak as we may think.

I am neither monetary or finance specialist, but has anyone had better idea?

Meta-what?

Can anyone give me idea what exactly a meta-commodity means, so that I can understand the following sentence?

We should remember that food constitutes a meta-commodity that cannot be treated merely according to economic calculations.

Does it mean a sacred stuff, like amulet or keris --the Javanese dagger? But even we can calculate the economic value, the market price, of keris, no?

My Friend Highschoolers

To my friends in highschools who are attending national exam today, I sincerely hope all the best to you all. Many will make it, but some of you maybe not. And for you who do not make it, do not stop and give up. Retake it and play the game again. I am never less proud of you -- for all what you need to do is work on it harder and longer.

And no finger-pointing and blame-game necessary, like some elders seem love to do.

I hope you learn a lot from today's exams, whatever the result might be. Rock on!

Advice # 876: Take A Longer Perspective

I look at a graph showing Indonesia per capita GDP level and annual growth from 1970 to 2007 and could not stop to marvel (if it is the right word) that the depth of our 1997 crisis actually makes the US zero growth this year look like a one lazy Sunday afternoon.

It takes a mere two years from around 15 percent GDP per capita contraction to regain positive growth, as Reinhart and Rogoff (in pdf) rightly point out; but around 7 years to get back to pre-crisis income per capita level. Even more daunting, after the crisis, the average annual growth has been substantially lower than before, despite its accelerated upward trend.

And today we have global recession. I just hope that we don't take a wrong lesson by taking short-sighted economic populist policy and dramatically departing from market-based reform that has been responsible for much of the longer-run pre crisis growth and post crisis recovery.

Getting off the track is too expensive. Although the temptation is high, especially if you want to run for President/House members/funny pundit.

Non-voting does not equal Golput!

I always get irritated when anyone refers to those who do not cast their vote as 'Golput.' Even in the media it is very often we see a passage like "Golput rate reached 30%." You may not like math, but the number cited is the non-voting turnout rate. Non-voting turnout is simply non-voting turnout, which is 100%-turnout rate. Become a Golput is one reason, among many reasons, for not voting. People may have other reasons not to vote; lazy (in academic jargon, the benefit to go to the ballot is smaller than the cost), no candidates matches one's preference, unregistered to vote, unable to be present, and so forth.

The Golput original term was brought to the vocabulary by this person. Back in the 1970s, Suharto 'simplified' the political system by allowing only 10 parties to compete in 1971, then reduced to three in 1977-99. Golput was an expression that no one, including the government, can take away one's political right. So Golput was a resistance movement against an undemocratic election. Even Prof. Budiman himself admit that the current election is already democratic, hence Golput is no longer relevant. Well, you may choose not to vote because you don't like the candidates for any reasons. But the fact is your not being stripped off your rights.

Of course, no one has the patent or copy rights to the term. So anyone can basically use the word, even if it has already been distorted from the original meaning. At your own risk (of embarassment), you may also claim that all non-voting voters have one interest, which you can represent, and think that all of them will vote for you. Wanna try?

An ugly system, but compared to what?

Many people, including some friends, tend to complain (or at least criticize) the current election system that makes individual candidates, rather than parties, are competing with each other. Well, the thing is election is the key element of democracy. The more direct the election (i.e. choosing individuals rather than parties), the better it should be. Of course, there are some caveats. Individual competition leads to distorted signals, increased searching costs, or 'supermarket effects' (where too many choices may lead to not choosing at all). But when we are to say one system is bad, we need also to ask, "compared to what?"

Here is my idea. Assuming that: 1) we still want democracy (not despotism or authoritarianism), 2) Arrow impossibility condition exists, 3) Plato's philosopher Republic is simply not attainable, then we may want to consider, I am proposing two possible alternatives:

1. Random assignment. A lottery is assign to (s)elect leaders or representatives. All eligible citizen will have equal probability to be leaders or representatives.
2. Take turns. Just like (1), but do a random assignment only once in the beginning. Then design a mechanism where each will take turn every a certain period. (Oh wait, who will have the authority to design the system?)

What do you think? For me, I still like the competitive election better.

To Our Lazy Journalist/Editor

Let me spell it slowly: S, T, I, G, L, I, T, Z and W, E, I, S, S

Got that?

If not, you'd better ask the the panelist you invited, or google it and in 1 second you'll get the said paper; than have this deeply embarrassing headline.

The Best of This Year's April's Fool

is this.

But only if you know some who's who in economics and economic policymaking in the US. And the fact that only economists could laugh out loud at it, while the rest most likely goes "huh?", is actually awkwardly funny by itself.

HT: Alex Tabarrok

The Bright Side of Possibly Lower Turnout

So you think that this year's election would see lower turnout. Is it a bad sign?

Imagine you find yourself on the election day, which also happens to be an official public holiday in Indonesia. You have option of either going to vote or doing something else, like spending time at the zoo, reading the Watchmen, listening to Efek Rumah Kaca, or even just a simple good lazy afternoon nap. What would you do?

The catch is here: That something-else becomes more precious as your wage rate goes up. If your wage rate is higher, you have to sacrifice more money for not working and just reading Anna Karenina.

So on April 9, when you are forced not to work and decide to have these something-else, instead of going to the voting booth like what you did five years ago; it may mean that your wage rate are actually higher than five years ago. (And political complainer literate like you, or pundits in the media, should be happy to know it)

Who would vote then? The ones who are less ignorant to politics and the ones with lower wage rate --who hope election to bring better wage. The former would devote more time and the latter have better incentive to learn relevant information on politicial party and politicians. As a result, a better election quality.

Articles as Important as Superman Comics

For those who want to learn what was going on in the early days of current financial turmoil, the latest Journal of Economic Perspective, Vol 23, No.1, Winter, 2009 has the symposium on it. All papers look interesting and important. Also, a paper by John Taylor (the economist, the Taylor's rule; not that guy of Duran-duran), A Black Swan in the Money Market is worth to look at.

The JEP articles are for subscribers only, but thanks to google scholar, you can get some un-gated version of them. Or, you can come to our cafe, it's on the shelf next to the Rolling Stone and Superman comics.

HT: Garett Jones

Weird Definition

Economist has a funny way to describe a sophisticated person: A person who does not suffer from time-inconsistency problem. The rest, me included, is a mere naive person.

Wanted: Positive Political Analysis

Can anyone tell me what national interest means? I have been trying to translate it into a kind of operative utility function to which politician might want to maximize as suggested by our numerous political pundits in their so-called analysis of Indonesian election campaign. And it goes nowhere.

The more workable proposition is to take that politicians are self interested or partisan, that is, trying to maximize social welfare function for disproportionate benefit of particular group in society (Persson and Tabellini, 2000). With that, your positive analysis for social calculus could fly better. Of course after you carefully set up the payoff, constraints, political market structure, as well as sufficiently address the problem of time consistency in your analysis.

Otherwise, you'd end up with empty boring statement like politician must put national before individual interest to make everyone happy; or politician running for this year's election must follow the example of (fill in the name of your favorite dead politicians from 1950s) who was a genuine defender of national interest. Yadda yadda yadda.

Jamal at the Pershing

After the Java Jazz hype, let us get back to the jazz as we know it. This time, Ahmad Jamal at the Pershing, 1958.

People, here we have Surrey with the Fringe on Top and Poinciana. The latter is considered as Jamal's classic, something like Brubeck's Take Five, and here is the youtube 2005 version with Idris Muhamad at drums.

By the way, how do you think an album called Slank at the Java Jazz, 2009?

What profits are for

A coffee stall at one corner of The University of Melbourne claims to have a 'new concept of business'. They let the customers decide how the profits from their cup(s) of coffee would be distributed: to the owner, or to one of their causes (social, environment or cultural). Every time they buy coffee or snack, customers would be given a card, which they will put into one of four pigeon holes representing each purposes. At the end of every month, profits will be distributed based on the distribution of cards in each pigeon holes.

Yesterday, for the first time I bought their coffee (it tastes and smells good, and costs less than other coffees in the university and its surroundings, by the way). Then I put my card into the first pigeon hole: the owner. Yes, I want the profit from my cup to be enjoyed by the owner. My philosophy is simple. It is a small business, and if the owner can't enjoy a substantial profit, they might go out of business. Somehow, most of their customers also think so. The highest percentage of cards so far went into the 'owner' hole.

My preference may be different had it been, say, Starbucks or Dunkin Donuts. Not that I want to 'punish' them for making big profits. But those companies may have earned enough profits to keep them in business. Up to some point, a reallocation the profits may leave them as well-off as before, but it increase my utility if they sponsor an exhibition, a movie project or a concert. Off course, needless to say, that would also depend on to where or what kind of activities they will share their profits.

When Wen Sneezes

Not so long ago, you may recall, when Alan Greenspan sneezes, the world catches cold.

Last Friday, when Wen Jiabao sneezes, I wonder, who catches cold?

Envious Revivalism

I come across an interesting job market paper (download the pdf in the relevant link) on a theory of the Islamic revival by Jean-Paul Carvalho of Oxford University. He wrote that the origins of Islamic revival since 1970s in developing countries are traced to a growth reversal that failed to deliver the promise for upward mobility; and increasing inequality that hit the lower middle class.

Perhaps you may not even need economics to come up with this conclusion.

But, what makes his paper interesting from economics perspective is the use of a behavioral economics model of religion based on psychological notions of envy and unfulfilled aspiration. Here, the agents have reference-dependent preferences, contrary to Becker-Stigler approach for independent and stable preference.

Math aside, the paper gives interesting survey on Islamic revivalism. Now, regardless your economics knowledge, do you think envy and unfulfilled aspiration motives explain what has been going on in Indonesia?

Fish on Neoliberalism in the University

Stanley Fish opines in the NYT on why neoliberalism is hated:

The objection (which I am reporting, not making) is that in the passage from a state in which actions are guided by an overarching notion of the public good to a state in which individual entrepreneurs “freely” pursue their private goods, values like morality, justice, fairness, empathy, nobility and love are either abandoned or redefined in market terms.

Short-term transactions-for-profit replace long-term planning designed to produce a more just and equitable society. Everyone is always running around doing and acquiring things, but the things done and acquired provide only momentary and empty pleasures (shopping, trophy houses, designer clothing and jewelry), which in the end amount to nothing. Neoliberalism, David Harvey explains, delivers a “world of pseudo-satisfactions that is superficially exciting but hollow at its core.” (”A Brief History of Neoliberalism.”)

This logic, according to the critics of neoliberalism, somehow is embedded into universities and narrows their function as merely instrumental, commercial, and practical. And because the universities are privatized (under neoliberalism agenda, they accuse), their faculty members becomes more and more in favor to professionalism over social responsibility and taking position in controversial issues.

Fish makes his own defense on its effect on academic freedom issue and you better read his excellent essay yourself.

My two cents is, in Indonesia, it's the other way around. The state universities are underfunded, partly because they can not freely adjust tuition fee to its actual cost. As a result, most faculty members, who are underpaid, could not develop their professionalism. Facing this problem, they end up taking too much social responsibility (in non academic-related jobs) and making up sloppy position in controversial issue (and funny commentaries) without, alas, adequate scientific professionalism.

I shall add that the university's social responsibility is to provide high quality higher education and academic research, which, in case you don't realize it, is quite costly. This higher education itself, if done properly and professionally, would have huge social impact.

OK, I know what's in your mind. Some of your baristas here are perhaps guilty as charged, too.

That we admit we blog too much.