Tuesday, December 18, 2012
Wednesday, December 12, 2012
Tuesday, December 11, 2012
I don't think so. More likely, they will provide additional hours for science with additional fee (rich) parents are more than happy to pay.
Or, private sectors will spot market for private course on science, especially for those wealthy parents whose kids are enrolled in public schools that have to follow the instruction.
By the end of the day, well-off kids get more science -- so much for a new curriculum that cuts science.
Sunday, December 09, 2012
This paper measures the economic impact of climate change on US agricultural land by estimating the effect of random year-to-year variation in temperature and precipitation on agricultural profits. The preferred estimates indicate that climate change will increase annual profits by $1.3 billion in 2002 dollars (2002$) or 4 percent. This estimate is robust to numerous specification checks and relatively precise, so large negative or positive effects are unlikely. We also find the hedonic approach—which is the standard in the previous literature—to be unreliable be- cause it produces estimates that are extremely sensitive to seemingly minor choices about control variables, sample, and weighting.
Conceptually, DG are correct in noting that omitted variables can in principle cause bias in a hedonic regression and that fixed effects can control for time-invariant idiosyncratic features of the unit of observation, in this case the county. However, it is also possible that fixed effects can increase the bias due to omitted variables if time-varying omitted variables (or data errors) are more strongly correlated with the treatment than time-invariant omitted variables that have been removed via the fixed effects. These fixed effects increase bias stemming from both endogeneity and measurement error. We have identified some important data errors and time-varying omitted variables, like storage, that are strongly correlated with both weather (the treatment variable) and DG's dependent variable, reported sales minus reported expenditures. These data errors and omitted variables bias toward zero results obtained by regressions that use sales as a proxy for production value.
Fisher et al. (2012) (hereafter, FHRS) have uncovered coding and data errors in our paper, Deschênes and Greenstone (2007) (hereafter, DG). We acknowledge and are embarrassed by these mistakes. We are grateful to FHRS for uncovering them. We hope that this Reply will also contribute to advancing the literature on the vital ques- tion of the impact of climate change on the US agricultural sector.
Friday, December 07, 2012
Thursday, December 06, 2012
Wednesday, December 05, 2012
Tuesday, December 04, 2012
Now the business association pleads to the government to postpone the raise.
The recent minimum wage raises have been indeed dramatic. Jakarta, for example, set an increase of about 45%, Bogor 60%, and Bekasi 30%.
It's the workers' right to ask for pay increase, obviously. But we should understand that there's always two sides of a transaction. While the increase in wage benefits the existing workers, it suppresses the incentive for business to employ more workers (in fact, it creates incentive to lay off some of the existing workers) - so it is bad for those who are still looking for jobs. This especially hurts the SMEs whose labor costs can add up to 25% of total production costs (compared to less than 10% in the case of bigger firms).
Yes, we are still competitive in terms of labor wage, compared to countries like China, Philippines, or Thailand. But I'm not sure if the minimum wage keeps increasing in the order like those in the past weeks. Also, it's not just a matter of wage component. Presumably other labor-related costs will increase, for example severance payment (whose formula is a function of wage level). In the end, firms might shift the burden onto the product price. And hence creates inflationary pressure.
I'm not against wage increase (as a worker myself, I love a pay increase!). But as any econ-101 book tells us, wage should be a reflection of productivity. In the case of Indonesia, however, an increase in unit labor costs of 8% has induced a decline in export growth rates of 1.6 percentage points (World Bank 2012). Which means the wage bill has increased faster than productivity. OECD (2008) also calculates that since 2002 real minimum wage in Indonesia has been hovering above labor productivity. In fact if one takes the ratio of minimum wage to median wage, Indonesia has ratio higher even compared to the OECD countries.
I don't really understand why the government has been so lenient to these demands. Once in 2006 they attempted to revise the labor law but then backed-off following a big protest. And silent since then. I thought they were still fighting hard to cut down the unemployment rate. Maybe not so seriously.
Saturday, December 01, 2012
Friday, November 23, 2012
Y is X's cousin. She is unemployed. She's been hoping, after she finishes his SMP she could find a job to help her family. She wants to work in a garment manufacturing in her village, like her cousin X - even if she is paid below the minimum wage.
Now, thanks to X's demand, the minimum wage has increased - significantly even. All X's fellow workers are happy, too.
But Y and her fellow unemployed friends suffer. No business dares to hire and pay them below the now too high minimum wage. Y insisted, it's OK, she's willing to accept lower wage. "Please, you can even put me on weekly contract - not permanent". But the businessman said outsourcing and sub-contracting are illegal, too.
Wednesday, November 21, 2012
Nowhere in the article says something about "this too can be a good opportunity for Indonesians to work abroad". Maybe we are too low of quality?
Kudos for the first two (although, if the price is right, the transition should go automatically). But I'm confused with the last one. If private cars may not buy subsidized fuel and public buses should only buy gas, then whom the subsidized fuel are for? Supposedly motorbikes. But they're not the biggest consumers. Furthermore, who can guarantee there is no black market.
So I applaud the strong signal from the Ministry of Finance that the first option is the best.
Tuesday, November 20, 2012
Another article on the same subject again calls for "self-sufficiency" to overcome the problem. In fact, the author argues, this is the best time to impose self-sufficiency.
Which reminds of a good piece in the same newspaper that I overlooked yesterday. As the author said, competition is not always a bad thing. He gave examples of how competition brought good outcomes.
Once upon a time, the flour market in Indonesia was so distorted by a monopolist. The price went skyrocketing. The government finally decided, the only way to calm down the price was to open up the market to imported flour. Within days, the price was tamed. Search "Bogasari".
Monday, November 19, 2012
The resource persons interviewed reason that 1) self-sufficiency should be achieved and import should be further restricted, 2) the domestic stock is actually sufficient.
The two explanations contradict each other. If the domestic supply is sufficient, then we don't need the call for self-sufficient anymore. We're there already. Secondly, if we are self-sufficient, there's no reason for foreign sellers to ship their meat here.
And both explanations contradict the title of the headline. If now the price increase is "not normal", then an increase in the supply should push it downward. Self-sufficiency and import restriction are likely to have the opposite effect. As for the second assertion, if the domestic supply is sufficient, price should be normal. Apparently, as the headline says, it is not.
Saturday, November 17, 2012
I just read the Introduction, but because I need to work on something else now -- like reading Karlan's article on Observing Unobservables -- , I'll be back soon for more review. I may also write about the current state of economics education in our universities which share a theme with a report on how (the plan for filming) James Bond in the country was turned down by those in power due to some deep ignorance.
In the meantime, we will play jazz in this cafe. This time, Fall by Miles Davis Quintet (youtube).
Thursday, August 02, 2012
I believe Rihanna was a gladiator in her previous life. Not just your regular gladiator. But she's like the king, I mean queen, of all mean, cold-blooded gladiators in the history of mankind.
No seriously. Listen to this song We Found Love. Don't tell me you don't think of violence as you listen to the beat. Frankly, whenever I catch this song on the radio, I imagine Rihanna is sitting on a surrendered big bull, hurt the poor thing with something that looks like a leather whip. Or maybe an ice pick.
Like: We found love in a hopeless place (one poke on the bull's ear), We found love in a hopeless place (second poke on the bull's back), We found love in a hopeless place (third one on the belly), We found love in a hopeless place (by this time, Rihanna makes a crawl jump and lands on the bull's head).
Then the song repeats again.
Twice. No actually four times.
So, bulls, run for your life.
Update: So @acopatunru thought I confused "gladiator" and "matador". Ah, potato potahto. But wait, think of Rihanna as a gladiator, who, after knocking down her opponents in the stadium, goes for extra fun torturing bulls. That would do it.
Sunday, July 29, 2012
Yet, our friend Haryo Aswicahyono (@Aswicahyono) shows that our love for tempe is actually quite feeble. Our soybean and its related product consumption is only about 2.5 percent of total food consumption. But, if you insist, let's assume that tempe is a must dish most Indonesian households need to consume, why we import soybean?
That's probably a wrong question to ask. Tempe is widely available on our dining table (in other words, affordable for many of us) because we can import (cheaper) soybean, rather than produce them domestically -- not to mention that soybean itself originally is not a tropical crop.
Regardless you like it or not, our love for tempe can grow thanks to imported cheap soybean.
Monday, July 23, 2012
- Basri, M. Chatib and P. van der Eng (Editors). 2004. Business in Indonesia: New Challenges, Old Problems. Singapore: Institute of Southeast Asian Studies.
- Booth, Anne. 1998. The Indonesian Economy in the Nineteenth and Twentieth Centuries: A History of Missed Opportunities. London: Macmillan.
- Dick, Howard, Vincent J.H. Rouben, J. Thomas Lindblad, and Thee Kian Wie (Editors). 2002. The Emergence of a National Economy: An Economic History of Indonesia, 1800-2000. Leiden: KITLV Press.
- Hill, Hal. 1996. The Indonesian Economy Since 1966: Southeast Asia's Emerging Giant. Cambridge: Cambridge University Press [Second, Updated Version: Hill, Hal. 2000. The Indonesian Economy. London: Cambridge University Press].
- Manning, Chris and Sudarno Sumarto (Editors). 2011. Employment, Living Standards and Poverty in Contemporary Indonesia. Singapore: Institute of Southeast Asian Studies.
- Pangestu, Mari. 1996. Economic Reform, Deregulations, and Privatizations: The Indonesian Experience. Jakarta: Center for Strategic and International Studies.
- Reid, Anthony (Editor). 2012. Indonesia Rising: The Repositioning of Asia's Third Giant. Singapore: Institute of Southeast Asian Studies.
- Thee, Kian Wie. 2003 (Editor). Recollections: The Indonesian Economy, 1950s-1990s. Singapore: Institute of Southeast Asian Studies.
- Thee, Kian Wie. 2012. Indonesia's Economy Since Independence. Singapore: Institute of Southeast Asian Studies.
Friday, July 20, 2012
But this is never the case. Instead, prices soar in response to a jump in demand. Because actually most people want better or even more extravagant meal to break the fast. Furthermore, events like "buka bersama" (breaking the fast together - usually with rich variety of food, in restaurants or otherwise) are pervasive. Some people have twice in one evening. Nearing the end of the fasting month, not only food's prices are high, but those of clothes also rise. Because people want new, fancier dress in the Lebaran Day. Then there is "mudik" (homecoming, special in Ramadhan for its massive flow of people - and money), where migrant workers go visit their hometown, bringing presents and usually, some good dose of cash. Some even buy new motorbikes, ship them with train, and have happy time in their villages.
Now, with these information, how do we not expect higher inflation?
But people and the media always blame the government for not being able to halt the soaring prices in this particular time. As a result, the government officials always appear in defensive mode. Some come up with funny arguments ("stop eating chilies", "we will punish sellers who raise prices too much", etc).
In fact, hiking prices are good in the above situation. They need to go up to respond to the large increase in quantities demanded. Otherwise, the filter effect of price is dead: we will see even more extravagant fiestas in the holy month - not that it's a bad thing.
So if any, the government should do something on the supply side, not on the demand side. And that's not by punishing the sellers who now see opportunity to reap extra profits. No. But by improving the logistics and infrastructure condition of the country. That is, keep working on tackling the most constraining factors in our economy. Yes, that's more like longer term program to address the economy as a whole, rather than a short term solution to the Ramadhan-led inflation. But why should it be the latter?
Saturday, July 14, 2012
Wednesday, July 11, 2012
So it is at odds that Kompas suggested to "block importation, for local producers need protection". They reported that Chinese massly-produced violins sell here at IDR 500-750 a piece. Again, a Ngatmin's violin, a better violin that is, sell at a higher price. So what's the problem? As Ngatmin himself says, the qualities are different. Isn't it just so natural that the one with higher quality is more expensive?
Kompas also wrote that those who purchase violins in bulk prefer Chinese made to local ones. Supposedly these are for schools or music training centers. I don't see any reason to complain. In fact, I hope more and more Indonesian kids (including the not-so-rich who can only afford Chinese violins) can play violin. Later, some of them who are serious and talented will sure buy the better one: Ngatmin's violin.
Saturday, July 07, 2012
Then he asked this: "How do you guys teach Development Economics?"
It took me probably four or five seconds of awkward silence -- the time for me to recall syllabus of my undergrad's Development Economics and some more recent courses related to Development Economics in the Department that I knew, and reconcile them with syllabus of the same courses in classes in his Department or other Department in another side of the river that I am also familiar with.
I had to do some jujitsu to make our current state of Development Economics not look too terribly lagged behind, only to, in the end, admit that we in Indonesian universities badly need an upgrade and update on the issue.
I think the current Development Economics no longer so much discuss structural transformation or long run growth or inequality from macro perspective, but moves toward on how to make marginal improvement for effectiveness of (credible) public policies at micro level. The contemporary Development Economics also makes extensive use of now more widely available micro data and/or feasible experiment/surveys equipped with now much better (microeconometrics) tools.
And this is perhaps what Department of Economics in Indonesian universities need to catch up with.
Sunday, June 17, 2012
Friday, April 20, 2012
For example: The US sanction against Iran, that our philosopher condemn as raising oil price at the cost of oil importer countries, is not a free market idea. It is a government (political) intervention.
2. You don't set double standard.
If you condemn the US unfairly manipulate its exchange rate (which I don't get why, because the US is also major importer), you should also applies the same level of condemnation against China.
.. and more to come
Monday, April 02, 2012
This argument came up to justify a very disturbing fact that more than 40 % of fuel subsidy in Indonesia is received by top 10% of the riches..
But, isn't this line of argument crazy? You don't pay tax as one-on-one payment for subsidy you get. Tax is to finance public goods production -- goods/services you can not exclusively consume and would not decrease if other also consumes, so that market price (supply and demand) will produce below optimum quantity.
Does gasoline falls into the category of non-excludables and non-rivalrous goods? Hell, no.
Even more puzzling to me, the other purpose of tax is actually to reduce consumption/production -- because there are some goods/services that produces negative externalities to the bystanders, like pollution.
How come then paying tax justifies for more consumption?
This is really an upside-down logic fueled by lack of very basic economics, which brings me to a question: when you complain (in twitter, facebook, on TV, and on the street) about tax and subsidy, do you really understand what you're talking about?
Addendum: a friend @NickyYuventius just tweeted me that the analogy to warung Padang is not accurate, for the warung is not subsidized. He offers another analogy: rich people buys/owns a unit of apartment in rusunawa (subsidized apartment). While it is possible that a designated location for street vendors incl. warung Padang kakilima are subsidized (like those in Solo, so rental fee of space is cheaper), I think his example is more useful. Thanks, Nicky!
Sunday, April 01, 2012
Hi all, here's another contribution by Pram Oktavinanda. Today Pram looks at the fuel subsidy debate. Enjoy! - Kate
The Baptists, The Bootleggers, and the Fuel Subsidy
By Pramudya A. Oktavinanda
There is a very interesting case study in Public Choice literature. Once in the United States there was a law called Sunday Blue Laws which basically prohibited the sale of alcohol in Sunday. One of the supporting groups for this law, we call them "Baptists", was a group consisting of people who wanted to prohibit such sale of alcohol based on moral and religious values. The other group, "Bootleggers", was the seller of illegal alcohols. They also supported such law but not based on altruistic or moral values, rather it was because such restriction increased their profits. The stricter the restriction is, the less the supply for the alcohol, the bigger the price that they can charge for their illegal products.
It goes without saying that these two groups are ideological opponents, but with respect to political matters, they were in the same side and their cooperation as interest groups allow them to provide the necessary voting power in the legislative to support the promulgation of the Sunday Blue Laws, effectively prohibited the sale of alcohol even though both groups have completely different reasons to support such laws. Public Choice theorists also use the same analytical structure when they review a very famous case in the United States, i.e. the Lochner case which dealt with whether New York may legislate the maximum working hours for workers in bakery shops.
New York argued that the law was passed to protect the health of the workers since during the beginning of the 20th century, the working condition of many bakery shops was so poor and many workers work for a very long hour in order to compete with each other. Some politicians support this law on the basis that they need to protect the interest of their citizens, giving protections to relatively weak workers from the capitalists. But the researchers also found out that the other supporters of this New York law are groups of major bakeries that already comply with such law and want to cut the competition by imposing a law that will destroy the business of many small bakeries that depend on immigrant workers.
Again, we can see how the cooperation between Baptists and Bootleggers worked very well in this case. The US Supreme Court finally deemed the law unconstitutional although after the passing of the New Deal by Franklin Roosevelt, more paternalistic laws were issued and the Supreme Court was pressed by the President to support those laws. But that will be another topic of discussion. For now, let us focus with the case of fuel subsidy in Indonesia.
We can quickly see two groups rejecting the reduction of fuel subsidy. The first group argue that reducing fuel subsidy will harm a lot of poor people. The fact that most of the time the subsidy is enjoyed by those who actually do not deserve it does not matter since once the subsidy is reduced, it will affect the overall price of goods in Indonesia and the poor people will suffer. There is a grain of truth here. You do not need to be a genius economist to understand that when you increase the fuel price, since it affects the price components of many other products, producers will most likely also increase their prices as a response. Consumers will be the victim here.
The second group reflects the people who enjoy the existence of fuel subsidy, those who buy the cheap fuel and those who illegally export the cheap fuel to other countries for considerable profits. For those who buy the cheap fuel, it is simply a rational choice, at least for the short term. Whether there will be huge inflation and whether it damages the environment are things that will happen in the future and discounting the probability of having such catastrophe in the near future, they might conclude that in the long run, all of us (this generation) would already be dead when the Earth is being struck by such catastrophe. So, why the heck should we care anyway? It's the problem of future generations, not us.
Combined these two groups, and you will find that they consist of the majority of Indonesian people. They might have different agendas, but they have the same goal, preventing the fuel price from going up. As such, I do not see why I should be surprised with the recent political maneuvers in our legislative board. Politicians, considering their rational incentives for maximizing their own interests, would always consider the present condition in making their decision. And the future for them would always be about the next election, meaning that they are very short sighted. Whatever beyond the election period is another issue to be solved when they reach another election.
Of course in the context of Indonesia, it also means that the idea of reducing the fuel subsidy will never be a popular one. You can't argue about the needs to conserve the energy or to pursue alternative energy sources in a country where most of the people have bleak futures. They don't care about such issues. If they are pessimistic with their futures, how could they appreciate the fact that our environment is in danger? For them, whether the environment will be destroyed or not in the future will not alter the fact that their life sucks now and most probably also sucks in the future.
The question is, how could we avoid this vicious cycle? One thing that might happen is to wait until the fuel price has reached a point of no return where it would be impossible for the government to maintain the subsidy. I note that this might be the political compromise made a couple of days ago. At least when you need to take an unpopular policy, you take it after you are in a desperate condition. Might actually work, but I can't predict whether the end result would be beneficial for all of us, since it might also be too late.
You see, the problem of this kind of policy is that in the end it is made to support certain groups at the expense of other groups. Right now, the Government supports both of the Baptists and Bootleggers groups at the expense of tax payers money, though I will argue that the Bootleggers are the ones who enjoy most of the policy. From Game Theory perspective, it is also a prisoner's dilemma game. I personally for sure will buy the cheap fuel. It is paid by my tax without my consent, and I will enjoy it to the fullest. I bet that many other people will also think the same. It will turn out into the tragedy of the commons and everybody will eventually suffer.
The Baptists group may produce a nice argument on the need to support the poor. It is a valid argument, but it fails to see the overall human incentives. Rational choices of many people may produce a bad result, that is the essence of the tragedy of the common. Everyone will be better off had they conserve the energy, but in a situation where every people can benefit themselves at other people expenses and there is a lack of supervision, the rational choice will be to spend the resources as soon as possible before other people take the resources for themselves. Why bother conserve the energy if we can't be sure on whether everybody will do the same? See the irony?
Is this a premonition for a bleak future for us? Who knows? We can hope that suddenly a miracle will occur, maybe someone will be able to produce energy from water and humanity will eventually survive. But until that day comes, you better cross your fingers and hope for the bests. After all, we are all together in this situation.
PS: I only provide a positive analysis of our current condition. There are many other people who have provided excellent normative analysis on the policies that should be taken on fuel subsidy and I don't think that my thoughts on the normative aspects will give an additional value so I decide not to dwell on it.
My favorite, because it is so funny I can not stop laughing at, is an argument that went, "..you support fuel subsidy removal because you got scholarship abroad..."
Hello? What if I got scholarship for studying biology or religious study?
In other words, another Jaka Sembung Naik Ojek moment for me.
Friday, March 30, 2012
Wednesday, March 28, 2012
Tuesday, March 27, 2012
What about this: ".. I am against fuel subsidy removal because (poor) fishermen still buy fuel at exorbitant price..".
I fail to understand this logic at many levels. Fuel subsidy shall make the price low, not high. If our fellow fishermen pay high price, there must be some sort of fuel supply shortage.
One of them is probably the failure of government to deliver fuel through its distribution network. But the solution is to fix the distribution and it has nothing to do with fuel subsidy inefficiency removal -- in fact, this is more reason for liberalizing fuel retail business.
But even so, if the government can deliver the fuel to the buyers, at low subsidized price there is big incentive to smuggle it. Why? Because once you're out of Indonesia water, you can resell the fuel at higher international price and seize the margin. At the same time, it reduces fuel supply for local fishermen.
Now I hope you can see the bigger picture that boils down into this: Higher fuel subsidy raises incentive/profit margin for smuggling the fuel. (Domestic) fuel supply in places near international water declines. The fishermen are forced to buy even higher than international price.
Is that really what you want by asking for higher fuel subsidy?
- Attack and destroy the "Mafia Migas" (apparently this refers to some mafia who takes advantage on the current fuel and gas market in Indonesia), before removing the fuel subsidy. I'm dumbstruck. The main reason why mafia exists in the first place is to take advantage of price difference. Holding the fuel price well below it's corresponding market price is the best recipe for smuggling and hence a good reason for a mafia to form. You want to discourage the mafia? Cut the incentive. That is, reduce the price gap.
- Develop alternative energy before reducing the fuel subsidy. Eh? What makes an investor attracted to a particular line of business? The expected price of the goods or services it will sell. Now, who wants to invest in renewable or alternative energy when the current fossil-based fuel - the competitor - is sold at a price too low? One might say, well, since the private will not be interested, the government should be the one developing the renewable energy. Great. So, the government should keep the huge subsidy now for fossil fuel. And in addition to that, the government should also allocate yet another bulk of subsidy on renewable energy. Au revoir, infrastructure. Good bye poverty eradication. Never mind basic education and health.
- The government should wipe out corruption before adjusting the fuel price. This one is not so controversial, actually. I'm all for fight against corruption. But why wait until all corruption has been eliminated, then do the right thing on fuel price? The government should do both. In fact, the fight against corruption is an infinite task of the government. Here I can understand people's frustration to the President. This was one of his signature promise during the election campaign: to fight corruption. Now that his party is so tarnished with corruption allegation, unfortunately he doesn't seem to make an effort enough about it. But again, fighting corruption is one thing. Fixing the dire distortion in fuel market is quite another.
Sunday, March 25, 2012
But of course KKG goes on and on. And many media love his style. Many pundits and commentators use his argument without reservation. Politicians send message broadcasting KKG's numbers - people re-broadcast them, of course.
Addendum: I made a mistake in the infrastructure fund needed in 2011-2014. The number above (IDR 4,000 trillion) is for total investment needed. Infrastructure share is about IDR 1,800 trillion. Annually this translates into IDR 450 trillion. That means, using the story above (assuming 50% of the expected pure private financing materialize), IDR 112.5 trillion is needed. This is above KKG's IDR 100 trillion "profit.
Saturday, March 24, 2012
When I told him Pak Widjojo passed away, another faculty here, familiar with contemporary Indonesian political economy said, "I wish history did better justice to him". This is how I know Widjojo -- through other respectable people's high appreciation. Unlike Aco, I've never had an opportunity to even directly talk to him.
But, you don't have to know him in person to recognize that he must have had done something right. The easiest way is by comparing all Indonesian economic indicators in late 1960s to now. You may say that we don't have counter-factual evidence, but if one said he worked to make Indonesia more prosperous and the data says so, this is the least uncertain fact we can take. Widjojo deserved the credit and, for me, no doubt about it.
Widjojo strongly believed in the strength of economics analysis in development. If Gary Becker proposed an economic approach to human behavior in 1978, Widjojo wrote in his inaugural speech as Guru Besar FEUI, on the importance of economic analysis on development planning, back in 1963. He also wrote on the role of research in universities. Fifty-years ago, very few in Indonesia thought about it and the words "economics", let alone "research" was very foreign to us.
Widjojo knew and, without so much fuss, showed that economics and research can make a big difference to human lives and well-beings. He quietly showed us, especially at FEUI, perhaps indirectly, that proper economics matters a lot.
And this is why Pak Widjojo will be sorely missed.
Thursday, March 22, 2012
Sunday, March 18, 2012
Sunday, March 11, 2012
Dear cafe patrons, our friend Pram Oktavinanda shares his tribute to Pak Widjojo. This is cross-posted at his blog too. Being a lawyer and legal scholar, Pram highlights Widjojo's contribution to the economic analysis of law in Indonesia. Enjoy. - Kate.
It was a sad day indeed for Indonesia as one of its greatest economists, Prof. Widjojo Nitisatro, passed away yesterday. What a great loss! Although I have never met him in person, I know him through his splendid articles and books about him, especially the Kesan dan Pesan Sahabat-Sahabat Widjojo Nitisastro. Two of my favorite articles of him deal with the economic analysis for national development and the economic analysis of Article 33 of the 1945 Constitution (which discuss the correct economic structure for Indonesia). I consider those articles as the classical example of economic analysis of law in Indonesia and they have significant impact on inducing me to pursue the art of Law and Economics.
While I have been writing about law and economics for many times in my blog, I have never formally written about an introductory article on economic analysis of law itself. I guess this is the right time to do so as a tribute to the late Prof. Widjojo Nitisastro. You will surely be missed and may you rest in peace. God bless you.
Economic analysis of law or law and economics is a school of thought primarily developed in the United States that uses the powerful tool of economics to analyze various legal issues. It discusses three primary questions: (i) What is law? (ii) Why law exists in the society and can have binding power? (iii) What can be considered as a good law? Two prominent scholars can be considered as the early developers of law and economics, Gary Becker, a prominent economist who won Nobel prize in 1992, and Richard Posner, a prolific legal academician who is also considered as one of the best judges in the United States. Both teach at the University of Chicago and contribute significantly to the development of law and economics.
Why economics can be a useful tool in analyzing the law? The primary notion used in this school of though is that men act rationally. Not in the sense that they can always make perfect calculation at all times but in the sense that they respond to incentives and pay attention to the costs and benefits of their actions, even when they are subject to various limitations in doing so. This is the basis of positive law and economics which deals with descriptive analysis on the law and how it will affect human behavior.
The second notion in law and economics is the pursuit of efficiency and welfare maximization of society. This is used by normative law and economics which believes that law should be designed to maximize the welfare of the society, whereas to reach that goal, law must be designed as efficient as possible. The more efficient the better, since it means that we can save costs while produce the biggest benefits to the society.
Interestingly, despite the fact that law and economics has reached a very strong position in the United States, dominating the legal thought there, it is relatively unknown in Indonesia which sadly, still focuses its law teaching with classical legal thought. I guess this should be changed if we really want to improve our Indonesian legal system.
Why law and economics is helpful for developing our legal system? I have three main reasons. First, by paying attention to how the law can shape the incentives of the people, we can shape our law to effectively affect the behavior of the people. As an example, I once argued on limiting the use of prison as a sanction for corruptors and instead using the sanction of assets confiscation. Assets and money are the bloodline of corruptors, the ones that significantly induce them to do the crime in the first place. If we only send them to prison but fail to secure the assets back, that will allow the criminal defendant to use the money to buy his way through the legal system (remember the case of luxury prison).
Second, by paying attention to the notion of efficiency, we will also pay attention to the costs and benefits of having regulation. Only regulate if the costs of doing so are lower than the benefits. Do not try to regulate everything because we cannot have an effective regulation without effective enforcement. And enforcement can be costly, the bigger the scope of the enforcement, the bigger the costs. Classical legal thoughts believe that law should be obeyed because it is promulgated by the relevant authorities. This is completely wrong. It is obeyed either because we find a mechanism to enforce it or the general society believe unanimously that such law is useful. Hence, the need of enforcement.
One good example of this would be laws that deal primarily with regulating private behaviors that do not produce clear harms such as how to dress publicly. On the one hand, regulating those kind of things will be costly, imagine the price for enforcement and the potential social unrest that it will create since it will give legitimation to people to violate other people on the basis of dress. On the other hand, there is no clear benefit of regulating such behavior in the first place other than to serve the idea of several people about morality. We've seen a lot of these absurd laws, such as laws that try to regulate how to name your child. I wonder how these laws could even exist if not only for the purpose of political maneuver.
Finally, by putting the goal that laws should always aim to maximize the welfare of the society, we will have a good guide in developing laws that will be useful for the society. And there are a lot of things that we can discuss here. Some good examples that I have once discussed: how to efficiently regulate liability of people in tort cases (such as whether we need to establish good samaritan liability), whether we should maintain death penalty (do the benefits justify the costs?), how to prevent rape crimes effectively, the extent to which we can limit foreign investment in Indonesia, how to share the legal risks of infrastructure development in order to induce more investors to come to Indonesia, how to reduce courts burden by cutting unnecessary costs for judging petty crimes (the latest Supreme Court regulation is a nice example of this), and many more.
I believe that it is important for law makers and legal enforcers to always strive for welfare maximization in rendering and interpreting the law. You do not enforce the law for the sake of the law itself. Law is not holy, it is not untouchable, it is not derived from the sky, rather it is made to serve men and should be made in view of men needs. Prof. Widjojo Nitisastro has started the idea of using economic analysis in shaping our national development and making sound economic policy long time ago. It was a great contribution, something that we, youngsters, must also strive to achieve. The least thing that I could do is to introduce law and economics to Indonesia and contribute in offering good public policy for our nation.