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.