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.