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.

Does culture matter for growth? (2)

Following my previous posting, culture may influence economic development indirectly through another channel. Shulz and Williamson (2003) argued that the channel is financial and commercial institutions. The authors argue that the reason for relatively poorer performance of Catholic economies was because the incompatibility of institutions in Catholic countries with modern capitalism. For example, the medieval church regarded charging interest as a kind of economic transaction where “one of the parties would not be taking advantage of the other because of greater bargaining strength,” hence they tended to restrict interest. On the other hand, the (Calvinist) Protestants “viewed the payment of interest as a normal part of commerce, thereby making it possible for modern debt markets to develop.”

Catholic and Protestant countries also differed in their attitudes towards protection of creditors’ rights. The authors found that countries which main religion is Catholic tend to protect the right of creditors less than the Protestant countries. Catholic Church regarded private property and economic as subject to the good of society. That implies that some to a certain degree private property is a ‘common goods.’ However, the Church has an authority to define what goods considered as ‘common.’

On the other hand, as the authors argued, Protestantism reform led to a better protection for creditors because of the philosophy that:

Individuals were responsible for their actions and that they had to live up to the contracts they entered into of their own free will … there was no role for higher legal or religious authorities to step in and change contract terms for the good of society or for laws to be approved that would hinder individuals from entering contracts.

Consequently, according to the authors, protection to private property was higher in Protestant countries because the definition of the common good is passed down to the individual members rather than decided by a centralized power of Church.

The lack of compatibility to modern capitalist institution was also the reason for underdevelopment in the Middle Eastern Islamic world. This is the main point of a study by Timur Kuran (2003). According to Kuran, there were two main issues with the Islamic commercial institutions. First, the Islamic business partnership law came in a package with the inheritance law that provides a mandatory inheritance shares to all sons and daughters. While this kind of partnership was well suited the medieval economy in which it developed, it raised the costs of dissolving a partnership following a partner’s death. This has kept Middle Eastern commercial enterprises small and short-lived. Second, on the contrary with the Islamic system, European inheritance systems facilitated large and durable partnerships by reducing the likelihood of premature dissolution. As the result, European enterprises grew larger than those of the Islamic world.

The two studies above offered an alternative view on the role of culture in economic development. Culture, specifically religious norms, shape institutions. And the commercial institutions affect economic performance. Analyzing institution as the channel through which culture affect the economy can strengthen the argument that culture matters for economic development. However, there is still room to argue whether culture is the only variable, or the most important one, that explains how institutions were shaped. Such approach also can not explain what makes culture change, and how it changes overtime.

Does culture matter for growth? (1)

"If we learn anything from the history of economic development, it is that culture makes all the difference. … Witness the enterprise of expatriate minorities – the Chinese in East and Southeast Asia, Indians in East Africa, Lebanese in West Africa, Jews and Calvinists throughout much of Europe, and on and on." David Landes (1999), The Wealth and Poverty of Nations.

When discussing about the impact of culture on economic performance, one can not avoid discussing Max Weber’s Protestant ethics theory. This is no doubt the most influential theory in the area. Among different values and attitude that shape a culture, Weber argued that Protestantism, more specifically the Calvinist branch, has promoted the rise of modern capitalism. As Landes wrote when explaining Weber’s view, “Calvinist Protestants believed in the doctrine of predestination: one could not gain salvation by faith or deeds, but by hard work, honesty, seriousness the thrifty use of money and time.”

Furthermore, Landes implied that the Protestant Ethics help explaining why the Catholic world (the Spanish, Italian and Portuguese), who were the pioneers in exploring the new world, facing their decline entering the 18th century. Conversely, the Protestant economies, namely Netherlands and England, were rising. The problem with Spain, Italy and Portugal, as Landes argued in the Weberian framework, was they got rich very easy. Meanwhile, the Protestantism doctrine produced a new kind of businessman who did not aimed at riches. Simply, the Protestant valued work highly, and becoming rich is the by-product of it, not the ultimate goal.

There have been many rebuttals to Weberian thesis regarding the influence of religious culture in economy. Historian Harry Tawney (1926) argued that the English economy took off in the sixteenth century only after the religious influence diminished, and the society moved into a more secular one. Later, Amartya Sen argued that Weber’s thesis only useful in explaining what happened in the past, but not really powerful in predicting the future. He pointed out the fact that, by the time Weber’s book was published in the early 20th century, Protestant economies was in a declining trend. On the other hand, the Catholic region Latin America was growing fast. Furthermore, Sen also mentioned that Weberian perspective can not explain well the Confusian growth miracles in the 20th century: Japan after the World War II, the East Asian tigers in the mid-1980s, and latter China. Later on in the end of the century, India also joined the fast growth club.

Weberian supporters can reply back by saying that one does not have to be a Protestant to share the Calvinist ethics. Japan, China and the East Asian tigers have something in common with 16th century Calvinist: hard working society and willingness to save for the future. But if culture – namely hardworking ethics – is the reason, then what took China and the East Asian tigers so long to take off, and remained poor for centuries? Interestingly, why Chinese had been very successful as immigrants but perform poorly as a country for a long time? Moreover, if culture is the reason behind the performance of these economies, how can it explain the collapse of East Asian miracles in the late 1990s, and Japanese slow-down since mid-1990s, which continues until today?

Same thing also applies for India. Cultural explanation somewhat failed to explain India’s recent turn around. The modest performance of Indian economy during 1950s-1990s was attributed by many to the Hindu culture (even the 2-3% consistent annual growth rate was branded the Hindu growth rate). Surely, cultural explanation can not be the reason for India’s near-to-miraculous performance since the late 1990s.

ID-ing the Poor

Although I agree that we do need a single identification number (or a SSN-type of ID) for administrative purposes, I would be very cautious in advocating the use of this type ID for any other purposes. In fact I think we need to make a clear distinction between creating ID for administrative purposes and collecting data for policy or research purposes.

The privacy concerns with linking a national ID to any sorts of individual or household data are well justified. There is no quicker way to undermine the credibility of a data collecting agency such as BPS than to ask them to make a transparent list of individuals and households with all of their characteristics. The agency and its activities will immediately be politicized by the government, political parties, researchers, media, businesses and very soon the public will stop answering any questionnaires. Mayling Oey Gardiner wrote an excellent column on this in Kompas which I wished more people have discussed. She said,

“…Patut disayangkan bahwa di kalangan pemerintah pun berkehendak mengetahui rincian orang miskin dengan nama, alamat yang rinci, keterangan tempat tinggal dan aset yang dimiliki… Ada dua hal yang patut disayangkan dari usaha ini. Pertama, pemerintah dengan sadar memberi tugas pada BPS agar melanggar kode etik statistik internasional. Kedua, daftar orang miskin yang akan dihasilkan oleh BPS, bagaimanapun canggihnya, hanya akan memuat nama dan alamat orang yang pada waktu pencacahan dinyatakan miskin…”

If BPS or any other agencies decide to link these IDs with data gathered from individual or household surveys, not only would they run the risk of violating international ethics on statistics, they might also violate the Indonesian law on statistics.

For our practical purposes as academic researchers, having these types of data will put us under enormous responsibility and may immediately jeopardize our chance to actually be allowed to do any research (or get any research funding). While rules governing research on human subjects varies between countries and between institutions, almost all of them include strong requirement to respect and protect the rights of the subjects, including the rights for privacy and to withdraw from the research.

So clearly there will always be a trade off between knowing with certainty who the poor are and respecting the rights of the human subjects, and in my view the latter should trump the former. Besides, isn't this the sort of challenge that econometricians and economists strive for?

Aside: There are several well known micro data sets that allow one to match individuals' administrative records with the records from individual or household surveys. Some well known examples in the US are the Survey of Income and Program Participation (SIPP), and HRS (Health and Retirement Survey). Numerous safeguards are usually in place to protect the confidentiality of the respondents. The restrictions include: who are the researchers, what research questions can be asked, what can be published, at what level the data can be merged, what information should be parsed out from the data before they are used, and so forth. In some cases, noises are even added to the data as extra protection.

Tuesday, November 08, 2005

Dazed and Confused

Not only are there some confused politicians in Jakarta, there also seem to be a lot of dazed citizens elsewhere. Well, maybe not a lot, but I am sure I am not the only one dazed by the extent to which the government has fumbled the ball in its handling of the cash transfer program. I am also at loss trying to understand how an economic team who were so skillful in explaining the intricacies of the economics of oil subsidy could come up with a cash transfer program so flawed.

Economists and public policy makers usually pride themselves on understanding the unintended consequences of human actions (and government policies). While arguing their case to lift the oil subsidy, the government and even SBY himself showed that they do have this expertise. In months leading to the fuel price hike, they succesfully pointed out the numerous unintended consequences of distorting the market to the general public (e.g, who were enjoying the subsidy, why the subsidy encourages smuggling, what the environment impacts are, etc.). Although their case was solid, convincing the public was not an easy task, so they should be applauded for the efforts.

Yet following the price hike, and within weeks of implementing the cash transfer program that were meant to cushion the impact for the poor, we have seen some of the unintended but entirely foreseeable consequences the program. For example, there were households that split in order to be able to receive more than one transfer payment. News reports told stories of households hiding their motorcyles to be eligible for the transfer. Now, news reports are just that, until we have a systematic way to evaluate the program objectively, we won’t know how widespread the problem is, so I won’t even think of chalking this up as evidence of failure of the program. [Aside: This being 2005, a program evaluation mechanism should have been designed even before the program takes place. Dare we hope?]

However, the apparent absence of any mechanism in the program that could minimize these “second order” effects, and even worse, the refusal of the government to even admit that they should at least have anticipated these effects, is astounding. Cases of mis-targeting or misidentifying the poor are inevitable in any cash transfer programs, but over time the problems may get worse as households and individuals adjust their behavior to meet the criteria. Anyone who understands how oil subsidy would distort the market and create unintended incentives should also be able to anticipate that a cash transfer program would create incentives for people to make themselves eligible.

Perhaps a best summary about how the program was flawed can be represented by a statement of a BPS official who lamented that some households were not being honest in answering BPS or RT’s officials' questions. Herein lies the problem. For a program of this scale, to hinge too much on people’s honesty is just a lazy way to pass down the responsibility from the policy makers down to BPS officials, RT officials, and ultimately the poor households. And that is simply dishonest.

high octane

Finally, the day of judgement is falling to our beloved state oil company Pertamina. As Aco has mentioned below, Pertamina, once a guru for Malaysian Petronas in the 70's and a current poster boy for an inept state enterprise, will face a direct retail competition from foreign or domestic private fuel suppliers. This means that the company will be become an incumbent in domestic fuel distribution for the first time since it was created.

For Pertamina, decades of walking in the park approach to oil business doesn't seem to bring them anywhere. Investment for exploration field is lacking, its fuel distribution remains vulnerable to shocks , public trust have diminished, and a handful of their officials have taken part in smuggling activities.

For consumers, decades of being neglected may soon come to an end. Private suppliers are likely to help distribution problem through their own supply chain. Private suppliers are also more likely to tap medium and upper income classes appetite for premium grade fuels. The market will also be open for other forms of product differentiation in the form of product choice such as: unleaded fuel, clean diesel, and liquid gas.

The slack in lower market segment is, however, likely to be filled by Pertamina at a subsidized price. This means that subsidy bill is reduced because most typical rich households of 4 persons with 9 European cars would get their high octane from private suppliers. Overall, economic efficiency should improve because the distortionary effect from rich people buying subsidized fuel wll be reduced.

Yes, it's the HOW

Indeed, Ape's points below are well taken. I gave a talk in Media Indonesia two weeks ago, on 2006 Economic Outlook. They asked me what is actually the most urgent agenda for the government to do. As my other blog's visitors might have known, my priors shifted. On the very top of my list now is not cabinet reshuffle. It is a "data project": devote enough resources to conduct extensive ID-ing of the people. We have seen how good ideas meet stonewall just because we fail to identify the targets. It happens in the cash transfer program. It will happen in the implementation of the new tax law. Are we so far from having an "SSN"-type of ID? There's been discussion about this ("nomor identifikasi tunggal" -- single ID number), actually. However, I won't be surprised if people will confront that idea with privacy issue (or skepticism like: "why do the poor need to be ID-ed? -- and it's expensive"). Now, your options are to give up some uncertainty or to be uncertain on who gets what.

Competition is minority's best friend

The topic of my "Economics of Labor Market" class this morning was on the economics of discrimination. The instructor, Prof. G. Borjas, had to start with apologizing for severat times if what he would say on the theory of discrimination may offend anyone. Well, I found that he had no reason to apologize for anything. But the thing is, it seems that there are certain issues that are too politically sensitive.

And some people are just too oversensitive. Even in the academia. Remember what happened with Prof. Larry Summers after his comment on women's aptitude as a possible source of gender inequality in the academia? Racial or gender sensitivity is an important thing, off course. But oversensitivity is another thing.

After all, the theory conclude that discrimination is not profitable. And, as Becker said, "competition is the minority's best friend." I echoed that argument in my article 2 years ago.

Discriminated workers all around the world, support competition!

Beyond cash transfer

As an aside of Aco and Sjamsu's discussion on cash transfer below, I argued in Kompas a few months ago that the whole debate on fuel subsidy vs. direct subsidy just reminds us on one thing: we don't have a systematic policy to protect the poor. In the artictle, I argued that we must shift our debate from the pros and cons of cash subsidy to providing mechanisms for the poor in managing risk. Hence, the issue is "risk management for the poor."

Note: the Kompas article is in Indonesian. A working paper version (in English) can be downloaded here.

Compete or perish

In a TV news this morning, it's reported that Pertamina (the state-owned oil co) is going to improve, forced by competition. That includes improving its fuel quality as well as the gas station facility (toilets, praying rooms, convenience stores).

And you say competition ain't good?

Monday, November 07, 2005

Cash Transfer

While co-host Sjamsu likes the idea of the current cash transfer program in Indonesia, I have some reservation. I agree with giving people money, not in-kind assistance. But I'm a little reluctant to call what the government is doing now as compensation (or, more precisely, "compensating variation"). Here's my take in Jakarta Post -- but, please read the uncut version, as the newspaper has left some important points in the editing so as to fit the space. Among other things got cut by the Editor is my position that cutting oil subsidy, pursuing efficiency, mobilizing other sources of fund, and combating rent-seeking activities are complements, not substitutes. Also, in the end of the original writing I skecth some examples of cash transfer programs that have been known as successful.

Addendum: Reading Sjamsu's comment (below), it appears, we're not in disagreement. We both agree with with the idea of cash-giving (as opposed to in-kinds). I am skeptical to the implementation. It seems, Sjamsu does, too.

The hardest time for an economic tutor

What is the hardest topic in economics to teach? Right, the income and substitution effects. Struggling to understand the concept, back to my first year at FEUI, is one thing. Trying to make someone understand it, is another, much harder, thing.

Be prepared to common questions like, "What does it mean by taking away our income?" or "Why do we have this hypothetical budget line?"

Or even, "Why do you economists make life more complicated than it is?"

Friedman's paradox?

In “Capitalism and Freedom (1962),” Friedman discussed property rights mainly in the context of the limited role of government. He argued that the justification that the government may exist is that it has a role in defining and protecting property rights. Yet, he did not explicitly discuss or make any arguments about the basis of property rights claim by an individual. The only explicit argument that he made was “the existence of a well specified and generally accepted definition of property is far more important than just what the definition is (p.27).”

One thing we can infer from this argument is that property rights is basically a constructed definition that is generally accepted. But at the same time, he also argued that it is the role of the government to make such definition. Corollary, in Friedman’s view, government is the only source of property rights.

I found this position quite problematic. The whole point of Friedman’s argument in “Capitalism and Freedom” is about how the government is merely a tool to serve individuals’ interests. This means, individuals exist before any forms of government. That should imply that before there was government, there have already been property rights. But this contradicts the earlier statement that defining property rights is the role of government.

Anyone has an idea on explaining this paradox?

Sunday, November 06, 2005

Education creates employment, or the other way round?

Just got my proposal for Second Year Policy Analysis being reviewed and, well, criticized by my supervisor. I plan to do some analysis regarding Female Labor Force Participation. One thing he mentioned: education is not endowment. It is a choice variable. It's not "education that creates employment". Instead, it is the (chance of getting) employment that creates the incentive to go for education.

On a different case, but pretty similar, this guy just decided to quit Harvard because the marginal return of another year at Cambridge, MA 02138 is very small (even negative?).

Saturday, November 05, 2005

confused politicians

Media Indonesia on-line 4 Nov '05 reported that Amien Rais and Soetardjo (both are high profile politicians) thought that direct cash transfer would not educate the poor, have caused horizontal tension, and wrong. They also concluded that fuel price increase have worsen people's misery and therefore, in the name of the people, government should: (i) stop the cash transfer programme and (ii) bring fuel prices to the original level.

What they observe about peoples' misery may be right. In a short-term, except oil companies, who gains from higher fuel price anyway. But they are wrong about the long-term economic effect of fuel price increase . They are confusing the idea of direct cash transfer with results from its practical implementation.

There are solid reasons to increase fuel price which I will not bother to elaborate further (please visit Aco's other blog site on this issue). My point here is that resources are stuck in the short term and therefore price will only adjust upward causing temporary inflation. But forcing to bring the oil price to originial level will be more disastrous as deficit would soar, attack on currency would gone wild, and would certainly kill any debate on alternative energy (let alone conserving energy).

On cash transfer programme, my first take on this is that it is a pure compensation program, not an education program. It is based on a simple static economic reasoning (see ca$h and carry) to address adverse income shocks. The real wage decreases after price increase and one would not able to consume the same amount of goods from the same amount of working hours. Thus cash transfer compensates for the drop in income i.e. negative income effect as economist would say.

Second, compensation program through cash transfer does not solve poverty. The key link between compensation program and poverty alleviation lies with the ability of the program to gear poor people's incentive to break out from of poverty by improving their: education, work, and health. Many countries have done the so called conditional cash transfer (Mexico, Brazil). Their cash transfer are conditioned upon poor household taking action to participate in education or work programme. For example, cash support is given if poor household: sends kids too school; perform healthy life-style; or do wage earning work.

Thus real challenges for us and our often confused politicians are to (i) fix the implementation of the current cash transfer and (ii) come up with bright ideas on conditional cash transfer.

Wednesday, November 02, 2005

produk kultural

Hari ini, 1 November 2005, Financial Times memuat tulisan tentang produk kultural RRC. Tertulis bahwa pemerintah Cina sejak tahun 2000 aktif mendorong tumbuhnya industri kultural dari mulai seni vokal, fashion, erotisme (ini rasanya unofficial), media, sampai sinematografi. Singkatnya, koran itu bilang kalau "Chinese are no longer willing to play manual to the west's mental labor"

Tiga bulan lalu, kafe Gelatto di Dharmawangsa Square, gue terlibat obrolan dengan seorang budayawan/dosen Pelita Harapan dan seorang antropolog/calon S-3 sosiologi Kyoto Univ. Yuka, si budayawan bilang kalo secara budaya dia milih menjadi bangsa seperti Cina ketimbang menjadi bangsa kayak Indonesia sekarang. Alasan dia, secara kultural kita tereksploitasi, secara ide kita terkooptasi, secara materi kita kere. Secara umum menurut dia globalisasi menggiring kita menjadi pengemis. Dia bilang perlu rasanya revolusi kebudayaan Mao Ze Dong dibawa ke Jakarta supaya anak2 muda kita yg keleleran di mall, sok asik separo-separo berbahasa Inggris tau apa artinya memiliki bangsa. Hipotesa dia adalah dengan revolusi kebudayaan, secara bangsa Cina akhirnya bisa melahirkan sinematografer sekaliber Wong Kar Wai dan John Woo. Sementara secara kultur kita masih macet sebatas film AADC, iklan obat masuk angin, dan sinetron bertemakan orang kaya atau demit.

Dave Lumenta, si antropolog, nggak terlalu setuju. Satu, dibandingkan jaman kolonial, dia bilang Indonesia mengalami de-globalisasi. Dulu batasan negara kabur, orang gampang pindah2 antar batas wilayah tanpa memusingkan batas kenegaraan. Kedua, invasi kultur pop Jepang dan to certain extent Korea dan juga Cina adalah bentuk rebelion terhadap budaya pop barat. Lah ? "Cool Japan" sudah meng invasi sentra budaya dari New York hingga nadi eropa kontinental seperti Paris dan London. Komik anime, manga, sushi lounge, game sudoku, musik J-Pop, menjadi sesuatu yg sangat cool. Belum lagi fenomena dan trend gadis2 Shibuya yg akhirnya menjadi patokan riset perusahaan besar seperti provider ponsel Vodafone. Intinya, Dave bilang kalau Asia punya interpretasi lain terhadap pop kultur barat. Karakter Britney Spears, Spice Girls, dicerna oleh Asia lalu terus diinjak2 lewat karikatur anime dan diludahkan kembali ke muka publik barat lewat film Kill Bill.

Ok, fine. Gue tanya, "kita Indonesia ada di mana?" Yuka ketawa sinis, Dave cuma narik DjiSamSoe. Kita ya itu, macet di film Eiffel I'm in Love, iklan-2 obat masuk angin, sinetron dukun, dan so what gitu loochh

ca$h and carry

The act of compensating Indonesian poor family from their slashed fuel subsidy is currently taking the hot seat in the arena of public debate. The idea of giving cash money in helping out poor family may not jive well with the average person’s sense. Average person would often think that this cash compensation is useless or stupid. Some would go as far as to question the logic of compensating individual and what does that have anything to do with helping the poor.

First, average view is relative and affected by any person lack of knowledge. Second, more importantly, the rationale behind the act of compensating is often forgettable. Almost every individual has some experience on taking compensation from certain grief. When we were a child, our parents would compensate us with toys, ice cream, a ride around town, and even cash, from their ill promises. You also often have to compensate you spouse for your negligence toward her/him.

Compensation is meant to reduce loss or heal wounds. The compensated individual should be offset from his/her undesirable misfortune, or at least, endure les s suffering. This is the basic for thinking about the economics of compensation.

Poverty is not an easy subject. People like Amartya Sen of Harvard University got a Nobel prize for defining and sharpening the idea about being poor. However, the idea of injecting cash to compensate a poor person's income should not be difficult to grasp. We all have needs and most of them are measurable in monetary terms. Therefore, giving cash is one way to compensate misfortune individuals in helping them to achieve their needs. A child will be happy to forgive their parents forgotten promise in exchange of a new toy car. A stranded airline passenger will be less pissed after receiving a free long-distance call and meal vouchers. Finally, a poor person can maintain his consumption bundle even at a higher price level after receiving cash.

Most poor Indonesian family spend most of their money on food, particularly rice. Increase in fuel price will also have an indirect effect through increase in the price of food and other goods. Therefore, a cash transfer for the poor can help alleviate suffering from inability to fulfill their needs.

Simple eh..

Politics Not For Businessmen?

Recently, there are concerns about businessmen become government officials. The critics argue that the country should not be managed by "saudagar" (businessman, enterpreneur). I disagree. I agree that government officials should not mix business with politics -- in fact they should give up their role in business once they are active in the administration. But, saying that enterpreneurship should not become an approach in the government is wrong. In the contrary, I would like to see more enterpreneurship in the administration. For I believe, the lack of enterpreneurship is one of the reasons why the government is lame. Yes, there are some "saudagars" in the administration. But are they the "right" saudagars? I think not.