Friday, December 30, 2005

Another drop in fuel price

Our lovely Pertamina will again cut the prices of Pertamax (the high-octane premium gasoline) and fuel for industry. The official says, as reported in Kompas today, Pertamina should be competitive, since new entrants are coming in.

Why am I not surprised?

Don't fly here, you cheap!

Another funny thing in the beloved country. You think you're defending some people's right. It turns out, they don't like what you do. Read this news from Kompas today. A group named Society for Commercial Aviation (for bad translation) calls for banning foreign airlines in Indonesian airspace. The restriction, they call, should also apply to airlines with joint venture with foreign ownership. In the meantime, a House member agrees with slightly different reason: "We don't understand why Garuda and Merpati don't do well. As state-owned enterprises, we should support them".


Planting another time bomb

Kompas reports today, the government will subsidize domestic natural gas. Not only that, the price would be set different for household and industry. Here's a quote: "... if buyers and sellers don't agree, it is time for government intervention".

Some people just never learn.

Thursday, December 29, 2005

Money for the Military

One of the delicate issue in this country is how to finance the armed-forces --and the police. In fact, the state budget allocation is too small to pay the military officers salary and operation in this enormous area of the country. As a result it is a common knowledge that those officers do moonlighting and receive extra payment for their services.

National defense and security is a typical of public good, therefore deserves to be subsidized. But what if the money is short? One may argue then, let the private to participate --in other words, to pay for their services. And this is the case of Freeport's payment to Indonesian armed forces reported by the Jakarta Post daily.

As quoted

"...Mahidin (the general, my note) added, though, that such payments should not result in the military being seen as mercenary."We've been deployed to difficult areas. Don't we deserve better supplies?" he argued..."

We know the price of military officers services (read: the official salary) is wrong--as well as the public servant's. Who should fix this problem? The state to add the budget allocation --but hey, didn't i say that the state money is short?; or the private market that are willing to pay more for the services.

Morality aside, say, let us have private market, and, perhaps, legalize the bribe. But hey, is the national defense really a non-rivalrious goods (the Freeport's consumption would not suck up the service for indigenous people of Wamena tribe)--let alone considering the limited armed forces resources?

Or are we going to privatize the armed-forces/security services? Hang on, dude, does the state exist to monopoly the violence so that we have the so-called public order?

Apology for too many question marks on this posting. But I can't help it :-)

Wednesday, December 28, 2005

Financing tertiary education

I have been engaged in a series of discussion about university tuition subsidies in 1-2 mailing lists. Once again, I raised my arguments from my previous post. But I also came up with a new proposal: credit market (establishing education loan schemes).

Here is the basic idea. We know that on average, university student are from the middle class family, or above. So, it is not also ineffective to provide tuition subsidies for them. It is also injustice and immoral. If we want to subsidize, let it be targeted. Provide scholarship for the needy ones.

But the problem is: what about those who are not-so-rich but also not-so-poor-to-receive-subsidy? Well, one thing is that they may be poor now, but most likely be rich in the future. The education loan scheme then should bridge this intertemporal consumption problem.

Another advantage for education loan is it can also be combined with a loan repayment scheme. And the the loan repayment can be tied to some conditionals. For example, it can be granted for the alumni who work in low-paid jobs. Or for those who want to commit in certain careers that is important for the society, but the market rewards are low, such as school teachers, SME promotors, NGO-education activists, agrobusiness developers, etc.

Loan repayment can also be seen as ex-post subsidy. Unlike ex-ante subsidy, we can tackle the problem of adverse selection because the 'subsidy' is given after the recipient have shown their commitments in the prioritized jobs. We can reduce the possibility for cases like, for example, agriculture student who is subsidized and supposed to promote agriculture, but instead go to the banking sector after graduating. Private sector can also participate by providing loan repayment for the best accounting/management graduates who want to work in the capital market. Etc.

So, education loan/loan repayment schemes can achieve several targets: providing access to finance tertiary education; providing full subsidies for some students; and providing incentives for students to work in certain 'dry, low-paid' sectors. All work while at the same time minimizing distortions.

The Politics of Rice 6

(Crossposted at Exegesis)

Again, another misleading headlines (here's the other). Kompas writes (in Bahasa): "Rice Stock Sufficient -- Prices Skyrocketting in Some Regions". What a contradiction. But let's play no more semantics. (But oh, I can't help it: the way I read it is, rice stock is enough, but there's shortage in the market, because the price has been wronged and it frees itself in some regions).

Instead, let's look at the content. Business association now worries that some people might abuse the import. Well, it's no surprise. Researcher from Kadin says "the number of 'deficit farmers' outweights the number of 'surplus farmers'". Be not confused by those terms. It's only another way of saying "in aggregate, our farmers are consumers" As a consequence, lower price is good.

This passage says it all (liberally translated):
A number of farmers in Kecamatan Adipala and Maos, Kabupaten Cilacap, complain the increasing price of rice.
Why is it so difficult to understand this?

Remove import ban. Allow everybody to import. Don't take peasants' rights to buy cheap rice.

Tuesday, December 27, 2005

Art sub-oh-sidy

I love art. Whenever I travel abroad, I'd love to visit museums. Many of those museums are publicly supported. Meaning, the government collects money from taxpayers and allocate part of it to maintain museums.

When I pay cheap pass to a museum, I feel weird. Back then, honestly, I didn't care: hey, who doesn't love subsidy? But the more museums I visit, the more I think it's unfair to charge me less to enjoy the artifacts in Makassar's Fort Rotterdam, than to stare at Mona Lisa in Louvre. In other day, when I visited The Art Institute of Chicago Museum, I knew some Americans paid partial cost of my pass, through taxation. But not everybody of them loves museum. In short, the costs of art subsidy are very dispersed, while the benefits are concentrated.

My co-host Ujang loves art, too. So do many other goers of Yale University Art Museum. They all benefit if the pass to the museum is subsidized. But who bears the cost? Some art lovers and some art non-lovers (plus, probably some art-haters). Is it fair? Maybe not. But isn't this how every kind of public subsidy works? If that's bad, then every subsidy is bad.

Well, consider national defense. There is no way (at least, there should be no way -- that's the idea) in which the government can exclude certain citizens from national defense/security. This is called "non-excludability". And my consuming the good should not reduce the level that you can consume. This is "non-rivalrous". Art may qualify for the second condition, but almost always not for the first one.

Of course the above definition of "pure" public good is blur. So, let's just do the easy way: Marshallian distribution of wealth. If the aggregate benefits are greater than the aggregate costs, then it's a go. National defense is surely a go. But I'm afraid art is not: the costs to the many taxpayers are likely to exceed the benefits to the minority, museum visitors.

There have been some ways offered around this problem. One of which is to use "local subsidization" of culture. It works like this, more or less: it's alright to collect taxes from Makassar citizens to pay the maintenance of Fort Rotterdam. But not from Javanese. The more able the government to identify who's willing to pay more, the more succesful the program. Nobody says this is easy.

For good and healthy debate, see the special issue of Journal of Behavioral Economics, "Symposium on Subsidization of Cultural Activities", Vol 8 Issue 1, Summer 1979 (esp. the paper by Milton Russel, pg 69-75).

"Kemandirian Bangsa"

That literally means "the nation's independency" -- I guess. It has a broader (or is it narrower) meaning, however. When we don't import rice and instead we produce it all by ourselves, no matter how expensive it is, then we have "kemandirian bangsa". That also applies to sugar, fertilizer, oil, gas, you name it. It might as well mean: do not import anything at all -- I guess.

So, a banner hanging in Jalan Buncit says: "Refuse rice import! For the sake of the nation's independence/independency!".


To be honest, there's only one antiglobalization fighter that I have ever respected. His name is Mahatma Gandhi. As far off as he was, at least he was a consistent fighter. He wore his own clothes, unsown (unsewed?). He didn't wear shoes. (Was that pair of glasses made in India, by the way?)

While the antiglobalization fighters of today... they wear 501 Levi's, smoking Marlboro, and drinking Coca Cola... "Globalization is evil", say they... on a microphone made by Taiwan, with a tee shirt of Che Guevara, popularized by capitalism. And afterward: McDonald, anybody?

Monday, December 26, 2005

Self-Promotion #392: The Sexiest Trade Alive

(Probably #393, but who's counting)

From the Newsweek :

"Economics, perhaps the geekiest of geek subjects, got a serious makeover this year...What sparked the trend? It's a mystery—even to the number crunchers. "We'd like to say it's because economics is so interesting and because economists are so handsome and intelligent," says John Siegfried, an econ professor at Vanderbilt University..."

Amen to that, Mr. Siegfried! Wait. Did someone just call us geeks? Oh, well.

Sunday, December 25, 2005

Blame it on...the market

Aco once text me about this guy's writing on I La Galigo which indeed shows a syndrome of inferiority complex. And today I read another writing on the art of painting and market force in Kompas daily.

On the ups- and-downs of current price of Indonesian painting works, he believes that Indonesian painters are victimized by market force. Some of his points are:
1. The big capitals owner --through capital network and image engineering-- can manipulate the consumer. And as Indonesian consumers are more stupid than their counterpart in the other side of the world due to it's paternalistic cultural setting, it allows the operation of that network.
2. In this setting, the victims are the painter. Why? They don't act like Bill Gates since they merely producer --not trader nor capital owner. And the benchmark (for pricing) is not based on artistic qualifications
3. To fight againts that victimization, set a cooperation between the painters and society to change the nation's mentality.

Frankly I am real puzzled by this article. My comments are:
1. Who does he mean the big capital owners and their network in this Indonesian art market? Surely most of any kind of market is characterized by the image engineering -or we may call that product differentiation. Yet, we can't say we are victimized by different type of tooth paste in the supermarket shelf, can we?
And surely the degrading remark on Indonesian customer demonstrates the syndrome that Aco has mentioned in his text earlier.
2. If painter is only producer, so what? It is called division of labor. And Bill Gates' affair shows a, competitive, market that does not work. It is called monopoly.
And what the hell is artistic qualification if Duchamp's urinal can also be considered an art? You can't measure the level of utility of a person seeing that artwork --as well as making interpersonal comparison out of that.
3. A cliche --therefore empty words-- flavored by some hints on misleading marxian revolution idea.

Mind you, it is actually OK to criticize market mechanism as the best instrument for resource alliocation. But please don't mix-up things in this funny way.

Friday, December 23, 2005

Kompas' Folly is Our Loss

Apologies for the long absence (or more appropriate, "Appy-polly-logies", since during the hiatus I watched one of Kubrick's classics* - again). But I digress.

I was not going to post anything until next week, but I came across this post by Roby Muhamad on the nexus of flu epidemic and population mobility in his blog.

Two very interesting issues to discuss here. First, the refusal by Kompas to publish his article, and in particular the reason given by Kompas - "tidak mengarah ke pemaknaan masalah atau membuka pencerahan baru".

The second thing to discuss is of course the article itself which I think merits much attention, to put it understatedly. The article is a more accessible version of an article that Roby and several co-authors published in the PNAS. In the latter, the authors' develop a model of an epidemic that takes account not only of the interactions within sub-populations (say, workplaces, villages, cities) but also the interactions between these sub-populations that can depend , among other things, on actual transportation networks.

The mobility of individuals to travel between population scales, from workplace to villages to countries and so on is essential during an outbreak. This is exactly why, in the Kompas-rejected article, Roby emphasizes the danger on focusing solely on hoarding vaccines while not paying enough attention to developing strategies to restrict the mobility of infected individuals. Their model also offers some explanation why the SARS epidemic that was estimated to have the similar basic reproduction ratio (R0) to that of the great flu epidemic in the 1918, resulted in very different final epidemic size. Thanks to those travel advisories, they argued. It's a cool paper even for those who are not too familiar with the literature (including yours truly).

The theme of the study is probably not entirely unfamiliar to economists who are studying the economic aspects of transmittable diseases such as HIV, malaria, a lot of whom have been focusing on the role of economic and behavioral factors, extended household networks, marriage market, in addition to the biological transmission rate. For most of us, however, this is quite an eye opener, especially since stories like this , this, or this , are abound. Which is why, Kompas' decision not to publish the article is lamentable.

More later..

*) It just so happens that Anthony Burgess, whose book "Clockwork Orange" was the source of the movie, lost his mother and sister when he was one year old, due to the great flu epidemic of 1918.

Credits for G

Reading Kompas today.

The government deserves some credits:
1. For cancelling the additional 5-10 percent tax over automobiles.
2. For cutting the export duty on CPO.

But the credits are given with a little discount:
1. For imposing 5 percent duty on coal export. MoF says there'd be a "flexible tax refund". It's unclear.

Thursday, December 22, 2005

Is Bono annoying?

I came across this writing in International Herald Tribune yesterday and love the typical New Yorkers's cynicsm in the opening paragraph. Let me quote it for you:

"...There are probably more annoying things than being hectored about African development by a wealthy Irish rock star in a cowboy hat, but I can't think of one at the moment..."

Apart from that, the article makes good point: Excessive aid may ruin the incentive system -like disastrous brain drain; and without accountability (read: good governance), it is useless. Instead the author, drawing from Irish experience, proposes more modest agenda of education and economic rationality,

I am always skeptical with the over-optimistic Jeff Sachs' (and Bono's, too) agenda to end poverty in Africa as laid down in his recent --not-so-convincing-- book. You know, the more money to Africa, the sooner the poverty perished.The problem in Africa is complex, and I think almost any kind of development design has been implemented there in the last 50 years --from the leftist to the rightist ideas--. Think Ghana, for instance. Yet the continent is still in trouble and doesn't grow.

Things are very messy and it is difficult to assess, say, the impact of good governance on aid effectiveness. Aid went to dictators, some turned good, some didn't. And if you put governance standard as a condition, surely no country in Africa deserve the aid.

Sachs also talk about the importance of right technology -therefore more aid for its improvement. But financing technology is also a subtle matter since the return is yielded through the notion of externalities.Let alone on how to pick the type of technological path. Somehow, I think the Japan or East Asia technological progress-- as example- is somewhat a historical accident; instead of a result of careful design by the government. Many says, including above author, that education matters most. Not the case of Asia' story. Philippines has the highet educational attainment figures, but only stagnant growth

For curing the dismal Africa, Mr Bono, I have to say that "I still haven't found what I'm looking for" . But at least, the rockstar is real good in making people aware of the problem. Hat-off for that and at this point I don't think that he's annoying, right?

p/s: does the agenda of "more money, with no condition, to people to alleviate poverty" in Africa ring a bell to Indonesian context? The recent plan of Direct Cash Disbursement to the poor. perhaps?

Wednesday, December 21, 2005

Fertilizer: what's going on?

Kompas' business section today has an article with head reads like this: "The Government to Run 'Market Operation' to Stabilize Fertilizer Market". Then there's a subhead: "The Supply (of Fertilizer) is Sufficient -- But Farmers Queue".

Econ new students, do not trust news like that. What you are taught as the "Law of Supply and Demand" is still the correct one. That is, when the supply is "sufficient", there's no need for any intervention. In fact, there should not be any farmer standing in line.

Here's an alternative (I'm trying not to use the term "better" -- I respect your right to choose) explanation. The supply of fertilizer is "sufficient". Now, due to high demand, market forces bid the price up. However, the know-everything government thinks that the price is "wrong". Hence, the "ceiling" price below the competitive market equilibrium price. The result is simple: excess demand. You can call this a "shortage" of fertilizer. But shortage is not necessarily the same as "scarcity". The fertilizer might be there safe and sound in the storage, but the supplier is not willing to sell it. Why? It's simple. Because the price has to be low -- even though farmers are standing in the demand line. (Look at the last paragraph of the article. That KTNA chairman's suggestion makes a very good sense. Yet, it can even be better if he says: the government should let the price works its way. The farmers need the fertilizer. They are willing to pay to get them. Why does the government need to get in the way? (Note the statement by the Minister. He blames the farmers of "overusing" fertilizer. This is so typical of government officials. They always think farmers are stupid. While in fact, farmers know what they are doing. Think about this: if it is indeed an overusing; what triggers an overusing? Artificially low price).

This is not unique to fertilizer. Think about the fuel (BBM). You see the pattern? When the price is forced to stay below its natural level, you're basically giving a room for speculation -- as indicated by the first paragraph of the article. Of course you can prevent this, in the name of protecting the people form high price, but only with the strongest monitoring. Mind you, monitoring is costly. I'm not surprised with the news at all. The way I wasn't surprised by the long queue in all SPBUs (gas stations) couple of months ago. There's every incentive for the suppliers to smuggle out seeking for higher price somewhere else, though illegally. Or, keep the stuff in the storage, waiting for price to get freed.

Finally, be careful with the political economics behind all that. Look who has the authority to distribute the fertilizer: is there one? Two? Many? Is it competitive? Also, who produces it? (You can go on to: Is the producer state-owned?) If you believe that supply is "efficient", yet farmers are queuing, that means something is wrong with the mechanism. And most commonly it is because the price is distorted. When today an official --usually from an enterprise that has monopoly rights granted by the government -- says supply is sufficient; then tomorrow he says the country needs import to safeguard the stock; then the next day his company gets a sole authority to import (i.e. import monopoly right), then you're looking at a rent-seeking activity. Remember the rice story? This fertilizer story is pretty much the same. Only that, in the rice case the price is distorted above the competitive market price, in the fertilizer case it's the opposite (just like the BBM case). Both are harmful to the economy.

Tuesday, December 20, 2005

irrigation, anyone?

Apology for the late delivery, please kindly have your order now -- on infrastructure.

Early next year, we will have the second infrastructure summit. Apparently the first summit earlier this year did not meet the target of significant increase of infrastructure development.

I agree with Easterly (2001) that, due to the so-called stabilization policy,

... (T)he compression of infrastructure spending does not guarantee the sustainability of the public sector. Infrastructure spending cuts not only reduce the public deficit (thereby raising the public sector's net worth) but also leads to a decline in infrastructure stock accumulation and in output growth as well...

Studies on business obstacles in Indonesia also point out that bad infrastructure hampers investment and economic activity.

And everybody in the government seems agree with this, too. Yet, the next question is what kind of infrastructure to be prioritised –due to limited government money. Of course it is the ones that have larger output multiplier effect. LPEM-FEUI (2005) study finds that irrigation has the largest output multiplier (0.126), followed by road (0.088) and electricity (0.086).

Alas, somehow we never heard the plan to build irrigation during the infrastructure summit.

WTO and ... sorry... globalization

I was invited by Jogjakarta-based USC-SATUNAMA to give a talk on globalization before a group of NGO representatives. That's not an easy job, especially after yet another WTO fiasco in Hongkong.

It was a good crowd, though. They might hate globalization but at least they were willing to listen what actually globalization means. Some of them came to realize afterward that what they initially thought of globalization was actually globalism. That what they thought they hated was WTO, not the globalization itself. That liberalization, deregulation, and privatization are just some actions or process taken by institutions to cope with globalization. That globalization has both effects: positive and negative depending on how you react or respond.

Of course there were some who refused that globalization has positive effects. This included one participant who approached me at lunch time. He asked me lots of question as if I were Pascal Lamy. He was surprised that I didn't believe the WTO talks would work out well. In fact, I told him, I'm skeptical with all the WTO rounds. The fact that the US' and EU's governments are not willing to wipe out the huge subsidy to their farmers is enough not to believe that the WTO agenda will work for both developed and developing countries. I won't be surprised if both groups will have not reached agreement by March 2006, as they claimed they will. But I have hope that subsidy and other form of protections will diminish -- not thanks to WTO rounds, but to the time where everybody sees the merit of free trade. And globalization makes that possible. Globalization is inevitable, with or without Doha.

I was tired. In my flight back I grabbed a newspaper. There was this article reporting the premiere of the movie "Memoirs of Geisha" in Tokyo. According to the article, some people make fuss about it, because the movie is about Japanese women, but it is produced by Hollywood, directed by an American, and it features a Chinese as the geisha ("wrong nationality"). That reminded me of a play I attended two weeks ago. It was about the epic journey of Sawerigading as told by I La Galigo, a Bugis counterpart of Homer, the teller of Odysseus' journey. The play was directed by an American. It used spectacular lighting from Germany. The dialogues were delivered in Bugis and Makassar. The music were mixed: traditional Bugis, Java, and even Chinese tone. How can I not like globalization?

Sunday, December 18, 2005

Hi from the Manager

Hi, I'm the manager of this Cafe. From now on, I'll be handling the managerial tasks. I'm not responsible for anything Aco, Ujang, Sjamsu, Ape, and all guest bloggers say. My job is just to make sure that logistics are alright. You can contact me at cafesalemba @ gmail . com. Or, if I'm not accessible -- yes I'm a busy manager -- you can reach me via one of the hosts. As you already know, the Cafe has invited a special guest (I have asked Aco to do the introduction). We'll do this more often. So, expect more special guests to come. Cheers!

Saturday, December 17, 2005

Protection, protection, protection 2

Why am I not surprised to see this news? AirAsia, a Malaysian carrier with low-fare strategy has been doing aggressive advertisements in media. Indonesian government think this is a threat to the country. Why? Read the news, and pay attention to the part where it reports an opinion of Lion Air's PR. Lion Air is an Indonesian carrier. That PR says that Lion Air is ready to compete in a "healthy" way. And by "healthy" he surely means, be protected from foreign competition.

Ah, all too typical.

Friday, December 16, 2005

Special Guest: Rizal

Dear Visitors,

The Cafe is pleased to welcome a special guest. Please meet Rizal. He will be guest-blogging at the Cafe until mid January next year.

Welcome, Rizal.


Down with the minimum wage

In one seminar yesterday, a participant called for higher minimum wage for labors. He asked why is it so difficult for the government to raise the minimum wage? The question was not addressed to me directly. But I would have responded like this:

My mother hire two maids. In Jakarta, it's normal to pay 700 to 800 thousand rupiahs to a maid each month. Say it's 800,000. Now imagine that the government require households to comply with the minimum wage law. For Jakarta, it's Rp 1 million. What would my mother do? Well, she might give up one maid, and hire only one. Or, if she ever thought to hire a third one, she would cancell that. In the first case, my mother would send one person to unemployment. In the second case, my mother could have created one employment, but thanks to the minimum wage law, she called it a no.
What's the moral here? Minimum wage law is good only for those already in the job and who are lucky not to get kicked out by the saving employer. Minimum wage law is bad for unemployment.

You might ask: but minimum wage law is not required for households. What difference is there between companies and my mother?

Thursday, December 15, 2005

Neoliberalism, again

A nice article in Kompas today about neoliberalism, by an old mate Romo Herry-Prijono. I consider it a nice piece, not because I agree with the content, but because of the way he (always) presents his arguments. Among all the leftist arguments againts liberal/neoliberals, he is the one I respect most.

He made two important, points. First, neoliberalism is not the same as market economy (neoclassics?). Not all market-oriented policies like privaitization can be considered as neoliberalism. Hence, those who are against neoliberalism are not, and shoud not be, against market economy. True! This is one mistake most people tend to make.

Second, policies like BLBI or bailouting banks are contradicting with the market economy principals. True again! And most of us neoclassical economists also agree with that.

But his critics regarding Becker (1976) -- the one when Becker argued that economic theory offers a framework to understand almost all aspects of human life -- was weak. He did not elaborate why Becker, or economists, are not supposed to make that claim. It would be much stronger if he could point out how and why Becker and other economist' arguments were incorrect, rather than just saying that "no, they can not do that...!"

I expect more people like him to bring more color in the academic discussion on economic system and ideology. Most people who argue against neoliberalism tend not to have good understanding about what neoliberalism itself means. So they tend to argue against anything that they dislike, and brand it as 'neoliberal.' It is somewhat similar to the situation when people tended to label everything bad with 'communist.'

On the other hand, this is a challenge for liberal economists like us to engange in this kind of intellectual battle. We tend to be good in explaining things technocratically, but rather weak in explaining and spreading the philosophy behind our theories.

Excuses, excuses...

I know I've been lurking too long, leaving almost all the burden to fill this blog to our Indonesian-based host. But I have excuses -- too many excuses -- for my absence:
  1. "Are Western and Muslim values irreconcilably at odds?"
  2. "How liberalism, Marxism and organic-statism view capitalism?"
  3. "Why did the West extend the franchise? Democracy, inequality and growth in historical perspective -- some comments."
  4. "Does social trust matter for economic growth."
  5. "Oaxaca decomposition and gender discrimination in the labor market in Indonesia."
Those are the title of my essays, which I have to finish by Christmas. And, off course, my final theses. But I always follow the postings and comments. Thanks for your great comments! (Back to lurking mode...).

Wednesday, December 14, 2005

The Politics of Rice 5

[Why # 5? I have written a post on rice import here. As I said, I have been grumbling on this issue over at Exegesis. Since this issue is getting more and more political, I am taking the liberty to continue the series as a crosspost between the two blogs]

Kompas today has a report with a subheader: "It's a like a rat dying in a rice warehouse". This is an old saying Indonesians use to express the irony of someone's inability to make use of generous opportunity; or when someone is prevented to do what's best for him/her.

The saying applies to Indonesian peasants. The article reports that majority of the recipients of "raskin" ("rice for the poor" -- a government program that gives rice to poor families at price significantly lower than the market price). Why the irony? Because those peasants produces rice. Yet they have to buy rice. This is just another way to say that the poor peasants are net consumers.

Question: 1) For net consumers, which is better: higher or lower price? 2) Does import increase or decrease domestic price? 3) Is it good to give import license to only ONE company?

If you read my previous posts you surely know what my answers would be. Yes, higher price might stimulate increase in employment. But see my previous post citing a study by Warr. Yes, it's good to remove import ban. But giving a sole authority to Bulog is not. Allow everybody to import. If only Bulog can import, the effect is the same with quota. Every economics student knows that's bad.

Monday, December 12, 2005

Porter Hypothesis

The Economist latest issue takes (again) on the global warming. It includes a story on how yet another big shot goes green -- this time the General Electric. As I said before, the main likely reason why they go green is, well, profit motive. And there's nothing wrong with that. Over at Env-Econ, John Whitehead has his take on what has been called "Porter Hypothesis". It's worth reading.

And here's my take:

“Porter Hypothesis” (Porter, 1991) is a three-level hypothesis. First, a strict environmental regulation can benefit the firms providing environmental services (e.g. scrubber producers) on their customers (e.g. electric utilities). Second, a stricter regulation benefits some regulated firms (i.e. more competitive ones) at the cost of other regulated firms (i.e. less competitive ones). Finally, stricter regulation would enhance the competitiveness of a nation as a whole. Porter and van der Linde (“PL”, 1995) extend the discussion of environmental policy and technology adoption by introducing the notion of “innovation offsets”. They argue that the costs of complying with environmental standards might be offset (partially or fully) by innovation induced by the regulations. This is supported by the fact that the activity to reduce pollution is in many cases coincident with productivity improvement with regards to resource use. Therefore, they conclude, firms may achieve net benefits from more stringent environmental regulations.

I find this argument flawed. Coincidence between reducing pollution and improving productivity is not sufficient to accept the hypothesis that strict regulations can enhance competitiveness. One needs to systematically prove this conjecture before reaching such strong conclusion. Innovation offsets, albeit theoretically possible, are rare in practice. PL argue that emissions and discharges of pollution are the manifestations of inefficiency. Instead of dealing with them, firms can enjoy substantial innovation offsets by improving their resource productivity, and this can be obtained through technology adoption. I agree. However, I barely see any reasons to expect that this can only (or, better) be achieved by environmental regulation.

PL believe that loose regulation can be complied with secondary treatment. Stricter regulation, on the other hand, forces firms to comply more seriously with fundamental solutions so as to lead them to innovation. They argue further that the potential for innovation offsets may exceed the cost of complying with stricter regulation so it is possible that net cost of compliance decrease as regulation becomes more stringent. It may even become net benefit. Again, I find this argument weakly supported and highly speculative. I believe that as one acts rationally, she would choose to innovate, provided that it pays her some positive benefit, and this may have nothing to do with regulation. A study by Altman (2001), for example, proves that there is no reason not to expect that a firm will be reluctant to “becoming greener”, if such transformation is costly and only serves to offset the private costs. In addition, Khanna and Zilberman (1997) find that even in the absence of any environmental policy, a firm may adopt technology that reduces emission when some “precision technology” is available.

That said, I believe that not all idleness are wasteful. It seems that PL overlook the concept of “slack capacity” (Oi, 1981). Idleness may occur in equilibrium state due to some opportunity costs (for example, why schools are closed at weekend?). Forcing a stricter regulation may only deteriorate the existing condition.


  • Altman, Morris. 2001. When Green Isn’t Mean: Economic Theory and the Heuristics of the Impact of Environmental Regulations on Competitiveness and Opportunity Cost. Ecological Economics. 36:31-44.
  • Khanna, M. and D. Zilberman. 1997. Incentives, Precision Technology, and Environ-mental Protection. Ecological Economics 23:25-43.
  • Oi, W.Y. 1981. Slack Capacity: Productive or Wasteful? American Economic Review. 71(2):64-69.
  • Porter, M.E. April 1991. America’s Green Strategy. Scientific American. 264:168.
  • Porter, M.E. and C. van der Linde. Fall 1995. Toward a New Conception of the Environmental-Competitiveness Issue. Journal of Economic Perspectives. 9(4):97-118.

Protection, protection, protection

China produces a lot of steel. We need steel. When we buy, we like to pay at lower price. China overproduces: it's people don't need that much of steel. China would like to sell the remaining steel to other countries. Indonesia is close, so why not? Note that the term "overproduce" and "remaining" suggest lower price (why?). Conclusion: we can buy steel at a lower price that we used to. What's wrong with this story? Seems like everybody is happy.

But not so fast. It turns out, there is also a steel producer at home. It's been in the business for quite a long time (no, it's not an infant industry company). It worries that Chinese steel will outcompete theirs in price. What would it do? You're right. Ask for protection!

By the way, the company is state-owned. Sounds familiar?

Monday, December 05, 2005

Back to Super State?

Did I say the government is always busy doing things it's not supposed to do? If memory serves, yes I did, and here's yet another example.

According to the news, the President has just signed four new regulations on broadcasting. Among all, those regulations give full authority to the government to remove broadcast licence, to give sanction to broadcasters (incl. shutting down), and --bear with me-- to decide what can and cannot be broadcast!

The Jakarta Post has good editorial on this issue today. The paper also features an article by a member of the Press and Broadcast Society of Indonesia. The latter cites Article 17 (5.a) of that Government Regulation No 50/05 on Private Broadcast Institutions:
Private Broadcasting Institutions are forbidden to relay regular broadcast programs originatingt from foreign broadcasting institutions, which include program types: a. news; b. music programs; and c. sports broadcasts which show sadistic acts.
Once upon a time, we had this communist-type of ministry called "Departemen Penerangan" (Ministry of Information). Then, thank God, it was abolished (the function was given away to an independent body outside the government). Then it was reinstalled again (it's now the Ministry of Communications and Information). What, are we in Nazi era?

Minister Djalil, why don't you just ban the internet as well?

By the way, parents, if you think those stuff on TVs are immoral, it is your responsibility to protect and educate your children, not the government's. Trust me, you know your kids way, way better than the government does. And, in case you think the government can ban or filter information, it simply won't work.

Update: At least some guys up there still have ears. Wait and see.

Thursday, December 01, 2005

On global warming

Environmentalists might hate me for this. I agree with DeLong and Lomborg. The world has spent too much on the global warming issue. The benefits are so far, miniscule -- even the expected ones. We could've devoted the resources more on combating AIDS, malaria, and other deadly epidemics.
After all, life is about choice. Choose wisely.

Wednesday, November 30, 2005

Blabbermouth BIN?

Disclaimer: I am not a political scientist. But, well, I am a student of a School of Government anyway, so I'm the one having the most authority among four of us speaking on this issue...

Following a controversy around a statement from the head of BIN (Badan Intelijen Negara = State Intelligence Agency). He said, to prevent religious terrorism and radicalism, they won't hesitate on planting their agents to infiltrate into suspicious Muslim groups or boarding schools. The statement created a controversy among moderate and hardliner Muslims leaders.

I personally don't see any problem with this plan. After all, it is a spy's job to infiltrate. It would be wrong if BIN is granted the authority to arrest. It would also be wrong if the police arrest someone just purely based on intelligence reports, without committing a crime. But planting a secret agent is part of a greater means to provide security. And it part of the reason why we need a government.

But one thing is obviously wrong. An agency like BIN is not supposed to be blabbermouth; it should keep their job secret. That's why they are called 'secret agents.' Telling the public what they are going to do is stupid.

But again, there's always something funny with Indonesian intel. They like to show-off and make their presence obvious. Remember the old activist jokes about intels: when they 'infiltrate,' they do it with their crew-cut hair, military boots or ... handy talkies! Or they would even declare themselves, "Don't mess with me... I'm and intel..!!!"

This adds an irony about our government. Their role is to reduce information gaps. But not in this way, off course!

Monday, November 28, 2005

Avian Flu and Government Role

This is another example of "when we don't need the government, it's everywhere; when we do, it's nowhere". Ujang has raised the issue of Indonesia's avian flu problem some time ago. He was wondering what the government had done to tackle the problems. We learn from news that the death toll number keeps increasing. But there seems to be no clear policy on this.

In The Becker-Posner Blog, Posner argues that the spreading avian flu pandemic has much to do with government's planning failure. He even relates the failure to the same mistake with regards to handling the hurricane Katrina:
[W]e are seeing basically a repetition of the planning failures that resulted in the Hurricane Katrina debacle. The history of flu pandemics should have indicated the necessity for measures to assure an adequate response to any new pandemic, but until an unprecedented number of birds had been infected and human beings were dying from the disease, very little was done.
On its economics and how the government can help, Posner says (my emphasis added):

A specific problem with respect to preventing flu pandemics is the difficult economics of flu vaccines. Because of the frequent mutations of the virus, a vaccine may be effective for only one season, in which event the manufacturer must recover his entire investment in the vaccine in just a few months. The expected cost of the vaccine to the manufacturer is increased by his legal liability (a form of products liability) for injuries due to the side effects of the vaccine. If a large population is vaccinated, a percentage of the population, amounting to a very large number of people, will in the normal course experience illness in the months following the vaccination. Many of them will be tempted to sue, and uncertainty about the causation of an illness may enable a number of persons to recover damages who would have become ill anyway. This problem can be solved in a variety of ways: by requiring proof of negligence rather than imposing strict liability for side effects of vaccination; by increasing the burden of proving causation in vaccination suits; or by the government's undertaking to indemnify the producers for damages attributed to the vaccine. Even if such steps were taken, there would be a strong case for the government's financing vaccine development and procuring large quantities of vaccines for distribution as needed.

His co-blogger, Gary Becker agrees (again, my emphasis):
[T]he world's population would be willing to pay a lot for an effective vaccine against avian flu, but companies are given weak incentives to spend a lot on developing such vaccines. That is the challenge posed to effective public policy, and I agree with Posner that so far the US and other governments have failed to meet the challenge.
Bottom line: this is the case where we cannot rely on the private sectors. The incentives for them are just not enough. The government should take the lead. Sadly, as usual, governments are busy doing things they're not suppose to do. (Why is it for example, the government officials' salary more important than avian flu?)

Saturday, November 26, 2005

On rice imports

I've been meaning to bring up this issue of rice import in the Cafe, as I did here, here, and here. I'm for removing the rice import ban. But I am against the idea that the government should give an import monopoly rights to Bulog. That's even worse. When we allow importation, why should we allow it only for one single institution? I'll talk more on import monopoly rights next time. Now, I want to elaborate more on the first issue, import ban.

My supporting on import ban removal is based on the fact that majority of Indonesian peasants are net consumers. Therefore the arguments of keeping price high in order to protect peasants (or the poorest farmers) break down.

A moment of reflection, however, might undermine my claim. I failed to consider the employment effect of high rice price. That is, my argument only looked at the consumer price faced by both net producers and net consumers, not their incomes. High price, however, is an incentive for land holders to expand production. As production expands, the demand for landless laborers increases. This would increase employment and real wages of peasants. Therefore, any argument for or against rice import should look at both price effect and income effect.

Fortunately, Peter Warr of Australian National University has recently studied this issue. In his paper, he uses a general equilibrium framework that involves 1,000 individual households. He factors in the distributional effects of rice import restrictions both on households' expenditures and their incomes. He even considers the effect of price increase on the demand for other staple foods, such as corn and wheat flour.

Warr's conclusion is reassuring:
[T]he [Indonesia's] rice import ban raises poverty incidence by a little less than one per cent of the population. Poverty rises in both rural and urban areas. Among farmers, only the richest gain.
Therefore, unsurprisingly:
It is not possible to justify the import ban by claiming that it reduces poverty.
That said, my position remains: remove the rice import ban.

On press (again) and rice imports

I have a similar concern with Aco regarding our press coverage in certain policies. Few weeks ago, the 'consensus' was "fuel price hike is evil," with the portraits of frustrated (urban) population after the policy.

Nowadays, the media reported a series of protest against government's rice import policy. Again, this policy is also considered as 'evil' because it will harm the (rural) farmers.
One leading daily paper published a news (looks more like a feature than news for me) titled "Rice husk price continued falling - decision to import rice has been widely rejected." This story was following an earlier feature, in the first page, about how the decision to import was rejected by the 'people'.

OK, so raising the fuel price was an evil policy. Now, importing rice, as a means to keep food price down, is also evil. Rendra once asked "Good deeds -- good deeds to whom that you meant, Sir?" I am not sure whether Rendra will agree that I am using his line to question the rejection for fuel price hike and plan to import rice. But his famous line is really relevant in this case, indeed.

Another media, interestingy belongs to the same group as the previous one, still wrote a good editorial in this issue, though. The editor pointed out that:

The imported rice will only amount to about 0.002 percent of national consumption, which is estimated at 32.85 million tons this year, against national production of 33 million tons. ... In fact, past experience has shown that farm-gate rice prices always remain stagnant even when retail prices are rising sharply, meaning that the farmers rarely benefit from rice price increases, except those mandated by the government.

The editorial could even be stronger if they quote the SUSENAS statistics regarding the composition of farmers (land-owners vs share-croppers), and how the share-croppers -- which are the majority -- will be benefited from lower rice price. But it is a good editorial, nevertheless, and hope to see more of the likes of it.

Thursday, November 24, 2005

Should university tuition fees be subsidized?

Some ECONOMIC arguments against university tuition subsidy (I mean a general tuition subsidy, not targeted scholarships):

1. The private benefits of tertiary education is higher than its social benefit. University graduates will be the 'elite' groups of the society, and they will make a big private return of their education. Anne Booth (2000) argued that the increasing Gini coefficient in Indonesia in the early '80s was a result of more-than-proportionate government subsidies to tertiary educations. University graduates were the ones benefited most from economic boom in the early '90s. Unskilled labor, on the other hand, benefited less from the boom.

2. Rich kids can afford their education -- they (including me!) are even willing to pay for university admission test tutorials (bimbingan tes). They are the ones who will be more likely to get admission to favorite schools, and not the poor kids in a poor district somewhere in a remote place of the country. So what's the justification of subsidizing them?

However, there is a valid ECONOMIC arguments why it should be subsidized (not the populistic type arguments that are usually based on moral justice, inequality, government's responsibility etc): higher education has an increasing return. Hence, the benefit for the whole population will be high only if a significant portion of the population have higher education -- there will be a positive externality from interactions among educated people.

But increasing returns to education imply that people will tend to underinvest. If only a small fraction of the population have high education, there will be small incentives to invest in higher education. Hence the government intervention is needed to create incentives for people to go to universities, for instance by subsidizing tution fees. (Sometimes, intervention may not be needed. Consider the IT boom in India, pioneered by the Bangalore Inst. of Technology. The attraction to work in Silicon Valley is enough incentives for them).

How to reconcile these two arguments? The government provides tuition subsidies for universities in areas where the social benefits of tertiary education will be higher than the private benefits. In practice:

1. The subdidy should be provided to smaller universities in 'disadvantaged' areas, to create education in such places. Not for top, elite universities like UI, ITB, UGM and the likes.

2. Create the 'community college' systems. Or, the existing small private universities can be given status as community college, hence eligible for subsidized tuition fees. In this instance, students of UWI (Universitas Wiraswasta Indonesia, Jagakarsa, South Jakarta) are more eligible for subdidized fees rather than UI students.

Note: my arguments are only concerning tuition subsidy. I don't make any claims about government subsidies on university research. That would be another story.

De Soto's solution for Australia

In its recent edition, 'The Economist' published a story from the Down Under about a proposal to give the Aborigins private title on communal lands. This proposal was raised by an indigenous Australian, who is very lucky enough to have a law degree from Sydney University.

This Hernando De Soto's type of proposal, in my opinion, is worth delivering. If we want to help indigenous people, settling them in preservation areas, and give them money in the forms of 'public welfare programsm,' won't work. Well, it indeed had not worked for all these years. So the best way is to integrate them into the market economy. Provide them with private property rights, in this case private land titles, is the first step.

Too bad, somehow this proposal was not too popular, even among the indigenous people.

Iman vs incentive

I still wait for the forwarded newspaper report. But just heard a story from a colleague that an official of Bank Indonesia's sharia division recently appealed that the customers of sharia banks should remain 'loyal,' and not to move their funds to the conventional banks. This appeal was made after the interest rate (of the conventional banking system) rose, following the increase of inflation, making it more INTERESTing to save in the conventional banks.

'Iman' is one thing. But at the end, it's the incentives that matter, no...?

Wednesday, November 23, 2005

Do you speak English? Litte-little sih I can...

Read a funny story on the Jakarta Post about the quality of one Minister's English. The news said that during a session between the president, some economic ministers and the executives of an Indian software company in India, this Minister asked a question, supposedly in English, but no one could understand what he was trying to say. The president was reportedly irked with him.

Some quotes of the news:

[The minister's] muddled assemblage of apparently English words, left the executives visibly perplexed and the audience silent for a long, uncomfortable moment, as everyone attempted to decipher the verbiage. President Susilo had a disturbed look on his face and turned and glared furiously at [him].

"If he is not sure of his English, he must not ask questions. It is embarrassing. I think he should take an English course to catch up with fellow ministers, who have shown their capabilities," said an official from the Ministry of Foreign Affairs."

Mind you, this minister holds a degree from Pittsburgh! The paper, naughtily, raised this alma mater issue:

[The minister], who holds a degree from a university in Pittsburgh, might have felt obliged to ask a question after Minister of Trade Mari Elka Pangestu, who studied at the University of California, Davis, and Coordinating Minister for the Economy Aburizal Bakrie successfully asked questions about the Infosys success strategy.

And, ironically, the chairman of the company "told the audience that among the key successes of Infosys, and India generally, in developing the software industry was good skills in English in order to communicate well with the international community."

Well, if there is to be a cabinet reshuffle, perhaps one criteria should be... TOEFL score...?

Big Shots Go Green

When Goldman Sachs goes green:
The big investment banking firm has announced a policy that details how its 24,000 employees - be they bankers, analysts or purchasing agents - should promote activities that protect forests and guard against climate change,
i'm really not surprised that it does that voluntarily. Was there a pressure from the government? No, the "pressure" comes from J.P. Morgan and Merrill Lynch:
This year, J. P. Morgan Chase set out strict environmental dos and don'ts for each part of its business. And Merrill Lynch now includes environmental issues in the due-diligence checklist its bankers use before underwriting stock issues.
I remember a conversation between my student ("him") and me in Env-Econ class:
Me: I happened to visit two big, export oriented companies located in East Jakarta. They told me, they're green. The first company allocated some fraction of its annual sales to fund environmental cleanup. The second established an environmental awareness program in its community. I curiously asked them, why they did that -- as far as I knew the government had not issued any regulation for that. They said, well, their competitors did that, too.
Him: Yeah, right. But you didn't know what their intention was, did you? It's probably just a pure profit motive -- you know, to build good image, than attract buyers.
Me: I don't give a damn to "intention". What I know is, they were green. I don't care with the motive.
My point was, and is, that competition can play a role in favor of the environment. You don't really need government.

Of course there are times when such good competition might not be possible. For example, in areas that suffer from environmental injustice, the community might not be able to get attention from private companies. In this case, a little role of the government might have its justification. Some kind of taxation is a case in point. Here's a paper I co-wrote on this issue.

"Who Stands to Gain" Is Not A Proof

If you are as sick and tired as I am of how people buy so much into conspiracy theories, you are not alone. Wikipedia has an amusing entry on this , but I'd just like to point out one of the most annoying lines of twisted reasoning that I often find in our daily newspapers (mostly from interviews with public figures or 'experts', not bylines) so that we'll recognize them next time we see it.

The "Who Stands to Gains" Approach
This refers to the approach, usually used by an 'expert' or a public figure, following a major event such as bombing/economic crisis/tourism slump/kemben melorot, that usually start with a strong denial, "No, it can't be X who did this." Why do you think that's true, Sir, we ask obligingly. "Look, let's see who stands to gain from this bombing/economic crisis/tourism slump/kemben melorot? Who are happy that we are suffering from this bombing/economic crisis/tourism slump/kemben melorot?" asks the so called expert, followed by wink, wink, a pause, and a smile. And before we can say "Sorry, Sir, that's a bunch of bullcra...", he goes for the thumping conclusion, "See, Y stands to gain from this bombing/economic crisis/tourism slump/kemben melorot, so it must be the case that Y is the one who did this."

I'm sure you have seen people say these things, most likely you have seen worse! So let me hear them!.

On privatization, a non-financial measure of success

Joining the fray...

At the heart of the argument against privatization of public utilities is the fear that profit oriented firms will ration out poor consumers, either by price or simply by failing to provide services to the poor population or regions from which no profits could be made. The proponents of privatization, on the other hand, argue that privatization leads to increased efficiency, and along with it, increase in service quality. The fear that the poor will lose access to high quality services or any service altogether (through price or other mechanism) means that an increase in the profitability should not be the only metric by which we judge the success or failure of the privatization. Quality of services and access to the services are equally important.

That is why a good study on the effects of privatization should go beyond looking at the firm's profitability or other financial indicators. In fact, there is also no reason to stop at studying the coverage or the quality of services. Why not keep on going and look at the real outcomes? For example, what are the effects of privatization on the welfare (pick a measure) of the poor? Let's ask for the sake argument, what are the effects of privatization of water services on health outcome of the population?

Ok, some of you probably know I'm cheating here, because yes, I am going to refer you to the study by Galiani, Gertler and Schargrodsky (Journal of Political Economy, February 2005) on the effects of privatization of water services on child mortality in Argentina. If you haven't seen the paper, take the time to download the paper from JSTOR, or the working paper here , I'll wait.

Done? That was quick. As you see, the authors look at the effects of privatization in the '90s of around 30 percent of water companies in Argentina covering around 60 percent of the population. By exploiting the variation in the timing and locations of the privatization, and looking at what happened to child mortality across time and locations, they were able to tease out the causal effect of the privatization on child mortality. The paper is interesting in a number of ways: it looks at the real outcome of privatization, namely child mortality; it also addresses -with varying success but overall convincing- all sorts of the econometric problems that might bias the results (e.g., selection into privatization, heterogeneity in responses to privatization) .

If you buy their approach, the conclusions were striking:
  • network increased significantly in the areas that privatized
  • child mortality went down in the areas where privatization took place, and the effect was largest in the poorest areas
  • as a robustness check they also test and show that the drop in child mortality was due to the decline of deaths due to infectious and parasitic diseases and not from the decline of deaths due to causes unrelated to water conditions
and here's a kicker:
  • while private companies may provide suboptimal services, they did much better job than the public sector or the non-profit cooperative sector
Of course we know better than to generalize too much and think what happened there will happen anywhere. What about institutions, political context, historical background, you might ask. But the point in bringing this up is that while the debate on privatization has been going on so long, rarely have we seen people go beyond the rhetorics and start digging for empirical evidence. It's high time to take the debate to another level.

Blogowner, I agree with you, both the scientific community and the mass media have a lot to learn on how to communicate with each other. The burden is on us to make our ideas more accessible.

Rizal, thanks for the reference. There's a new book coming out, Reality Check: The Distributional Impact of Privatization in Developing Countries", edited by Nellis and Birdsall of the CGD . It looks like a case studies book. The chapters are downloadable.

Tuesday, November 22, 2005

Cumulative Responses (Aco)

Dear visitors,

I'm sorry to respond you this way (please get used to it -- smile). First off, on behalf of the Cafe, I would like to thank all the commenters (we're thinking of giving you some "membership privilege"-kind of thing). Here are my replies to those commenting on my posts (as for the disputes between hosts, we usually settle them over in the kitchen) .
  • Spammers, thanks for leaving a mess here. But you're not welcome anymore.
  • "blogowner", no, don't slap journalists; we need news, and bad journalism forces us to think harder than the good one. About privatization, yes, energy is a political thing. But so are others. The government can claim anything political.
  • "dHani", thanks for visiting. I don't oppose charity. I oppose "forced charity" (ouch, an oxymoron, no?); I too give until I think I'm spoiling the recipient.
  • "chrysalic", thanks for reminding the hosts to post. Of course, privatization and monopoly can be good. But loss is loss, be it public or private.
  • "rizal", yes, Umberto Eco it is.
  • "jay", I will try to stop by at the "Confession" discussion (today?).
  • "fantarara", yes, we are in the process of recruiting a special host from Europe (he's asking a very high pay).
  • "za", that's the curse of env-econ. thanks for visiting.
Did I miss anyone?

Monday, November 21, 2005

Privatize PLN!

An economist who is also a member of the parliament was cited in Kompas today. Commenting on the 2004's Rp 2.02 trillion loss of PLN, the state-owned electricity monopoly, he said, "PLN is a public-service oriented company. Therefore, it should not be treated as a profit center". He then asserted, "Accounting practice for PLN should differ from those for private companies. Furthermore, PLN should not be decentralized, because otherwise it will create cost inefficiency, since prices will be different across regions".

This is like a father telling his adult son. Son, you have to support your brothers and sisters. Therefore, I will keep supporting you. Just do your work, no matter how bad you do. Where I got money to support you from is of no concern for you. (Of course I'll tax your brothers and sisters).

The only way to make PLN more efficient is to leave it to private and expose it to competition.

Saturday, November 19, 2005


Ini lucu.
Pemerintahan sosialis di Calcutta, atas nasehat konsultan global PwC, akhirnya meminjam uang pemerintah (kapitalis) Inggris untuk memberi pesangon dan memecat karyawan BUMD yang tergabung dalam serikat pekerja komunis untuk kemudian diprivatisasi. Setelah menerima uang pesangon yang cukup royal, maka keluarlah statemen bersama bahwa apa yang dilakukan adalah privatisasi yang manusiawi (silakan baca).

Wooii BUMN Indonesia yang bermasalah dan para pendukungnya !! Sebenernya apa sih yang anda mau ? Modal cekak, disuruh kerja keras malas, kompetisi ogah, tapi dikasih uang kok mau.

Addendum: judul diganti agar lebih relevan

Strange root, young French wine, and Tiger penis

Sorry for being passive for the last week. I decided to take a bed from this blog because of work. Now let me get back at you folks with some story telling.

A week ago an auction sold a giant truffle, a rare delicacy, for about than 40,000 USD/pound. For those who are not familiar with this wild root, this item is chic enough to drive restauranteur and executive chefs from restaurants such as New York's Union Pacific to California's French Laundry crazy. Looking somewhat similar like a potato yet slightly pungent in aroma, ordering a salad-du-jour sprinkled with truffle, a splash of cold pressed extra virgin olive oil, and Parmigiano-reggiano cheese can asymptotically transform your average appearance to a regular bloke in the discontinued trans-Atlantic Concorde flight.

Exit straight East. Last Thursday, Japanese consumers were to be the 2nd largest consumers of Beaujolais-Nouveau, a young French wine, in the world. By law, this type of French wine can only be consume simultaneously on the 3rd Thursday regardless where you live. Apparently it has become a ritual race to serve wine fanatics around the globe on Thursday early midnight. For the last month, unnoticed mammoth logistical operation had taken place to transport millions of bottles around the world, from Lyons to Tokyo, Singapore, Jakarta, as well as the cafetaria of my workplace.

Move westward. China. One billion people with excess appetite for endangered species parts from turtle, monkey brain, shark’s fin, bear claw, and tiger penis. Some consume because their belief in the healing power of those delicacies and some are just plainly hungry for new yet sometimes raw adventure. Tiger penis’ soup in fact are priced according to how many times that poor animal meat has been used. The first "boil" is supposed to be the most expensive.

Let us all not be deceived. My point in each illustration is that there is an immense value created from the production, transaction, and delivery processes of each good/services.

Back to last month posting by AP on Friedman paradox (government role to protect property rights vs. to serve individual interest). I do not intend to answer your posting directly.

But what I do intend is for us to imagine how would it be if none of us has the right to legally defend our idea and our possession. Imagine a world without governance, without any legal protection whatsoever for your ideas and possessions. Then truffle would be cultivated by savage tribes; auctioneer will be likely found dead before even announcing the winner; and executive chefs can be kidnapped and force to work for any restaurant run by gangster. Not to mention resources spend on arming yourself and your family against looters. Red wine ? No Japanese will be able to consume because the shipment will not likely to pass even 5 km from Lyon. The UPS driver is likely to be lynched by mob who are desperate to possess the wine at the same time forgetting that no value can be created if there demand is suppressed at the other end. Tiger penis? Except Chinese royals or communist party officials, average bloke like us can’t get access to that rare thingy, hence “consumer surplus” evaporates (Don't get me wrong, I'm not advocating to eat /hunt down tigers. I believe this is an endagered species and its extinction is worse for all of us)

Thus IMHO an institution (or an agent zero as said in the infamous Mascolell that can credibly facilitate an efficient and secure bargaining process is needed if parties are interested in achieving optimal bargaining outcome. Othewise, as characterized by the Nash bargaining problem, short-sighted, short-tempered, ill-informed parties have less likelihood to achieve greater outcome and more likely to get the trheat value (low equilibrium).

...Mmmmm...... we need a government ?

Friday, November 18, 2005

Wanted: A Better Press Corp

Some colleagues and I were talking about how cheap the news in the media can be. DeLong's frustration -- see his "Why Oh Why Can't We Have Better Press Corp"-series would as well apply in Indonesia. Worse yet, not only the press fail to deliver objective news, they also do bad journalism. We remembered one case when a newspaper bombastically reported an "expert opinion" using this kind of headline. It didn't even bother to present it as a quotation in the title. (One of the colleagues in fact happened to meet with the expert and the latter told him it was a "grumble out of frustration". He was surprised that the press used it as a headline title).

Another thing. It seems that the press really likes to report in populist tone. So don't expect too much of reading articles about "trade is welfare-enhancing". Instead, you can find easily stuff like "we need more and more protection for the good of the country". I know, people buy the latter, no matter how false it is.

There are more, and there are worse. Pick any newspaper and count the economic fallacies it carries. I bet it is more than five a day, at best (you know why I'm not giving you links for this -- they're ubiquotous). Problem is, many readers don't think they are reading fallacies. In fact, the more populist-leaning a newspaper is, the better sell it seems to make. Maybe second only to gossip papers. It is pervasive, for example, to find statement like "Store A is charging too high a price for its product". So far so good. But then the reporter suddenly changes to be doing op-ed --not merely reporting, and goes on "... and that is evil". Hey, if the seller's selling at high price is evil, what about you asking for too low a price when you are consumer? Does that mean you are evil? (I find it amazing: a person who likes to curse stores that charge high prices turns out to be the fierciest bargainer when he/she is about to buy something).

Monday, November 14, 2005

Soccer and game theory

Had a discussion in the FEUI mailing list with an old friend about game theory. One of the discussion points was whether there is such thing as a 'mixed strategy' in the real world. He argued that no, there is no rationales for any agent in the real world to randomize between strategy. I argued that such thing is possible (remember my piece on Argentina-IMF in 2001), quoting this interesting paper.

In a personal conversation, he insisted that basically the penalty takers are not really randomizing. "They won't kick the ball backward," he replied. I replied back, saying that kicking backwards is NOT a strategy -- it's not in the payoff matrix -- therefore we don't have to bother considering such option.

Anyway, talking about penalty kick, last month Arsenal's Robert Pires found another strategy: instead of kicking directly into the goal, he instead PASSED the ball (yes, from the penalty spot) to Thierry Henry. That new strategy was not successful anyway -- so better to use orthodox ones next time. Yes, just try to kick it directly to the goal, either it to the left, right or center. As Bill Shankly once said, "If you don't know what to do with the ball, just put it inside the net. We can discuss the other options later...."

Speaking about penalty, again, still remember the sweet win in Istambul last spring... Priceless..!! (wave to Ujang).

Note: the paper I referred is A. Chiappori; S. Levitt; T. Groseclose, "Testing Mixed-Strategy Equilibria When Players Are Heterogeneous: The Case of Penalty Kicks in Soccer," The American Economic Review, Vol. 92, No. 4. (Sep., 2002), pp. 1138-1151.

Sunday, November 13, 2005

The Industrial Revolution: why did it happen in Britain?

Continuing my piece on the Industrial Revolution, (by the way, I visited the legacy of the Industrial Revolution in Lowell, MA last month) Clark’s made a valid point in championing the endogenous growth theory as the best-so-far explanation for the Industrial Revolution. His analysis was parallel to what David Landes (1999) argued about the nature of human civilization in Europe at that period that paved the way to the Industrial Revolution. Landes emphasized three factors that characterized the human progress at that time: 1) the growing autonomy of intellectual inquiry, 2) the development of common method of invention, and 3) the routinization of research and diffusion.

These three considerations what made the distinction between Europe and the Islamic or Chinese world. The other civilizations have produced some progress (for example, gun powder was invented by the Chinese, and the concept of 'zero' was invented by the Arab). Nevertheless, they failed to make the progress continued and uninterrupted.

However, Clark’s analysis did not really touch one important question: why did it happen in England, and not somewhere else in Europe, if not in the other part of the world? In fact, as Landes mentioned, in 14th century Italy there has already a technology of processing silk that flourish the Italian silk industry. This industry has many things in common with the English cotton mills some four centuries later, in terms of technology and factory-like system of production. So why then the Industrial Revolution had to wait, and why when it happened finally, it happened in England?

Landes gave two answers. First, it was a matter of supply and demand. Silk was a luxurious product, costly to make so the price was high. Only the elite segment of the society could absorb the supply. Meanwhile, the cotton-based textile produced in England was met with the demand for the product. Second, England has already had the advantage of being a nation. It was not only a “state or political entity, but a self-conscious, self-aware unit characterized by common identity and loyalty and by equality of civil status.”

If these explanations have to be true, then it may explain why it was not Italy or Germany. But why it was not Spain or Portugal? Is cultural explanation significant, and if it is, how do we put it into the framework of endogenous theory?

The endogenous growth theory, although it is more superior to the other two theories as Clark has shown, still raises more new questions.

The Industrial Revolution: why did it happen?

Just finished my essay on British Industrial Revlolution. I made an assessment of a paper from Gregory Clark (2003). Clark’s paper sought to explain why there was a very long period in the human civilization history before the Industrial Revolution brought a sustained growth of the world economy – at least for a group of countries – in 1820. The Industrial Revolution and the ‘great divergence’ that followed it could not be explained by massive growth of capital accumulation, both physical and human capital. As he argued, “physical capital accumulation explains only a third of the growth of income per person over time, and about one third of the differences in income per person across countries,” while adding human capital accumulation “only explained another 0.18% of the growth.”

The Industrial Revolution, then, was characterized by the ‘unexplained’ part of the standard growth accounting. This unexplained part is often referred to as Total Factor Productivity (TFP) or technological progress. After about two millennium of low growth technological progress, the world economy marked a jump in the growth of technological progress, from 0.1 to 0.77 percent per year in just a century. Clark called this phenomenon as a growth driven by “knowledge capital.” This knowledge capital alone explained 50-70 percent of growth of income per person.

Why then, there was a sharp increase in growth of knowledge that led to the Industrial Revolution? Clark presented three theories that could explain this: the exogenous growth theory, multiple equilibrium theory, and endogenous growth theory According to the exogenous growth theory, some changes outside of the economy, notably institutional change, were the driver for this growth. These changes would include “changes in the institutions governing the appropriability of knowledge, or the security of all property.” Among the sources of this exogenous growth theory, Clark mentioned the arrival of constitutional monarchy in England in 1689 (North and Weingast 1989) or the Enlightenment movement in 18th century Europe (Mokyr 2003).

Clark disagreed with the exogenous growth theory for at least two reasons. First, still it did not explain why such an institutional change should wait until 1820. Even if it was the constitutional monarchy regime switch and enlightenment movement that drove the changes, the Industrial Revolution should have taken place two hundred years earlier. Second, the data of number of patents did not suggest that the Industrial Revolution economy has provided good protection and reward for innovation.

A second theory is the multiple equilibrium theory. The proponent of this theory, most notably Gary Becker and Robert Lucas, argued that the world economy before Industrial Revolution was in a stagnant, ‘bad’ equilibrium characterized by the Malthusian trap. Only a shock would move the economy from this ‘bad’ to a ‘good equilibrium’ that provided driver for growth. Becker and Lucas argued that the shock was something that created incentives for family to invest in human capital; a signal “in the form of higher relative earnings for educated children.”

Clark again disputes the validity of this theory. He argued that “no evidence of any market signal to parents as we approach 1800 that they need to invest more in the education or training of their children.” Moreover, there was also no evidence that average family size was declining prior to 1800, something that should have verified Becker’s ‘less children, more quality’ argument.

The third theory, the endogenous growth theory, is his champion. According to this theory, the source of growth that led to the Industrial Revolution was within the economy. This internal feature “evolved over time in the long pre-industrial era to eventually create the pre-conditions form modern economic growth.” The internal feature is ‘ideas.’ According to Michael Kremer (1993), “there was substantial but slow productivity growth in the world economy in the years before 1800, and that all got translated into a huge expansion of the world population. That larger population produces more ideas and more rapid growth.”

Clark supported this theory for the reason that it is consistent with the empirical findings that: a) the productivity and technological change growth was positively correlated with growth of population over time, and b) the rate of technological advance is also positively correlated with the size of land area, sin the bigger the land area, the higher is the potential population. He even concluded that not only this endogenous growth theory help explaining how the Industrial Revolution took place, but also why it took place at a certain time in the history. And, finally, this theory led to the conclusion that Industrial Revolution is inevitable.

Solo project...

In addition to playing in the Cafe Salemba, I try to resume my solo career project. Don't worry, I'll keep playing for this quartet. I may play different music in my solo career, though may not be too different anyway...

Saturday, November 12, 2005

Spare anything, Sir?

As my co-hosts are busy (we've got lots of outside orders), allow me to bore you even further. The food for thought this time is whether or not we should keep giving away. Here is a teaser I borrow from Tim Harford:

Dear Economist,

Around South America hundreds of children have held their hands out to me and I’ve ignored many and felt terrible. But my £1 can be worth six of their currency - will I still go to heaven?

Yours sincerely

Natalie Chalk, by e-mail

Dear Natalie,

You would be astonished how difficult it is to give money away properly. Because there are few good jobs in poor countries, the understandable generosity of relatively wealthy visitors risks turning begging into a comparatively attractive profession - which is a self-defeating process.

Imagine that a poor farmer can make £1 a day, and a beggar can make £5 a day. Who would be a farmer? Farmers will leave the fields to beg until five times as many beggars are chasing the same tourists, returns collapse to a £1 a day, and the rest of the farmers continue farming. Similar reasoning applies to where families send their children: to the fields, to school or to the streets? For the same reason, guides and taxi drivers will wait hours or days for the single lucrative tourist. This doesn’t do anyone any good.

It’s true that begging often carries a stigma. Perhaps farmers would rather farm for £1 than beg for £2. Unfortunately, this is no better: your money is still doing nothing more than compensating beggars for the stigma of begging.

This process of “rent-dissipation” is not limited to beggars. For instance, the net benefit of being crushed but getting cheap goodies in the New Year sales should be roughly zero - otherwise more people would be there in the scrum...

Continued on

I remember one day there was this program at a local TV. The host was interviewing a street beggar. Host: "Sir, if you are given one million rupiahs today. What would you do with it? Do you want to use it for investment? How?". Beggar: "I will buy stuff. Investment? Why?". Host: "Then what are you going to do after spending all that mony?". Beggar: "Of course, I will do my job -- begging. It's a good pay, by the way".

Friday, November 11, 2005

Env-econ is, well, economics!

This blog pretty much reflects the position I share -- though I might disagree with some of theirs -- on environment and economics. One good post that has triggered interesting debate is this. Even today, I find it amazing (and amusing, I should add) that many people think environmental economics is all about tree-hugging. At best, we are thought of as double-agents: environmentalists accuse us as being unethical ("Who are you to put price on the environment?") while "mainstream economists" (for lack of better term) calls us a sect.

This is an exam I once gave in class. And this is my frustration. (Today, I still find it at odds that some environmentalists oppose fuel price increase that follows a subsidy cut!).

Wednesday, November 09, 2005

That Gossip Book is Popular

This is funny. I called my favorite bookstore in Jakarta, asking if it had Tim Harford's Undercover Economist. The person there responded to me: "Sir, is this a follow up of that book -- Confessions of [an Economic] Hitman?". I said no. Then she insisted: "But, is this also a story about espionage? You know, like the Confession?". Sounded like she associated "undercover" with "espionage".

It seems, that the confession book -- now a new bible for many populists and conspiracy theory lovers -- is indeed very popular.

Sorry, we're closed

While government offices were shut down and public services suspended during the long, long, long, Lebaran holiday, we wonder: how is that avian flu preparedness plan coming?

Argentina's crisis in the game theoretical perspective

This week I have a group task of discussing Argentina's 2001 crisis. Each group is assigned a role to play: as the government, IMF, opposition party or private sector. It's quite an interesting exercise; we learn the crisis in a game theoretical perspective.

Consider stage 1: between the government and the IMF. The government's strategy is to do reform or do nothing. The IMF can either support (bailout) or leave. Hence the possible outcomes were reform-support (best case), reform-leave (on your own), no reform-support (moral hazard), and no reform-leave (crisis).

It was basically a dynamic game, because the Argentina-IMF interaction has been ongoing since the Tequila crisis, even before. Interestingly, according to papers by Andra Powell and Frederico Sturzenegger, there was no pure strategy Nash Equilibrium in that game. Only mixed strategy Nash equilibrium: each party was just randomizing between actions. The equilibrium prior to 2001, however, was reform and support.

Nevertheless, in 2001 Argentina deviated from the equilbrium when the government rejected the Lopez-Murphy plan. This deviation led to IMF to change the strategy. In the end, the equilibrium moved to the southeast corner, which is no reform and no support a.k.a. crisis.

Then in the second stage, the actors were the big private business and the opposition. Private sector can either pull out or stay and support the government. The opposition can either overthrow the government or not.

Note that all the games here were played simultaneously, which makes the case interesting. According to Powell, actually there were multiple equilibria for this game. It just happened that Argentina ended in the 'bad' equilibrium. But everything could have been avoided basically, and the country could be in the 'good' equilibrium. Well, it was a just a counterfactual now.

One thing I am curious now is: did all players have a focal point at that time? Or was it a true case of mixed strategy?

ID-ing Everybody

I share Ujang's concern that ID-ing the people is a tricky thing. It is a matter of political, feasibility, as well as ethical concerns. I don't know much about international ethics of statitistics or Indonesian law on statistics. Ujang's account is then very helpful to me.

Come to think of it, the administrative-purpose rationale is in fact what I had in mind. A single ID number would likely to help cut a lot of inefficiency. And it should be able to lend itself as the basis for targeting a public policy. This is where ethical concern amplifies. We don't want a Big Brother watching everything we do. But we want to have administrative procedures efficient. The solution should lie within the two objectives: there's a tradeoff. And that cries for a careful rule of conduct.