Thursday, August 30, 2007

Earmarking for What?

Suppose you think that the rising cooking oil (domestic) price badly hurts the domestic consumers. You want the government to impose an export tax on that commodity to prevent producers to sell it abroad, where price is higher; and maintain domestic supply with lower price.

From that export tax scheme, the government now gets more money. You want them to look even more noble, by earmarking the money to a program called "cooking oil for poor", that is, selling the cooking oil to the poor at low subsidized price. Does it sound like a good idea?

Alas, not always.

You may think that the program is prone to corruption or implies high cost. Who can guarantee that the cooking oil would not be resold at market price? And what about administering the logistic and disbursement mechanism?

Even if you are sure that there would be no corruption and administrative cost is zero, still it might not be a right idea in a more fundamental way. How come, you may ask.

Here's why. Government has to allocate the tax money to the most socially beneficial activity. Our "cooking oil for poor" program is not always that kind of activity. If, say, building an irrigation system gives us a higher social benefit, the money must go there.

The purpose of taxation is to correct the price (or more precisely the difference between marginal social benefit and marginal private cost). The use of tax income money, however, is an act of government's consumption or investment. With the money, government must carefully pick activity with highest social return.

Unless you just want to look populist.

Tuesday, August 28, 2007

On inequality and globalization, again

I saw an op-ed piece in Kompas this morning, written by a friend of mine Herry Priyono a.k.a. Romo Herry. The title was "Doubting Globalization."

He quoted the ADB'S Key Indicators 2007 that reported Asia's widening inequality. He rephrased the conclusion as:
... Asia's growing inequality is "not the tale of the rich getting richer and the poor getting poorer, but the tale of the rich getting rich faster than the poor."
Fair enough. But there are two things I'd like to note. First, in his article the main culprit is, of course, globalization. In other words, he blamed globalization for making the rich getting rich faster.

Unfortunately, this claim is at best only partially true. If you see the graph in this post (which I quoted from the report), it's hard to claim that "the rich getting rich faster" is the phenomenon of the most globalized countries. Come on. Is Nepal more globalized than Thailand? Is Lao PDR more globalized than Indonesia?

The report did say that globalization explained some of the story. But the other part of the inequality story lies on the domestic institutions (bad governance, race or gender-related inequality).

Second, as I implicitly argued in this post, whether the situation described in the report is a good or bad thing is hardly straightforward. True, in China for example, the consumption growth of the richest 20% is twice as high as that of the poorest 20%. In Thailand and Indonesia, on the other hand, the consumption growth of the poorest 20% is slightly higher than that of the richest 20%.

But if you focus only at the consumption growth of the poor, it is 3.4% in China, versus 2.35% in Thailand and 2.09% in Indonesia. That means, even though the rich in China gets rich much faster than the poor, still China's poorest grow faster than in Thailand and Indonesia.

Tricky situation, isn't it? (This is a more diplomatic version of Aco's remark in our private conversation, by the way).

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USD 7.4 million

If you had USD 7.4 million to disburse in Aceh, what would you do?

If I were to decide, I would not build a tsunami museum. For me, it just doesn't add up.

Monday, August 27, 2007

Paper or cloth, honey?

I always think of tissue paper (or paper tissue if you like) as one of the best inventions in the history of man- and womankind (the other being short pants with college name on the back, don’t you think so?).

With tissue, you wipe out your sweat and throw it to trash bin. You sneeze on another sheet and trash it with all the germs inside. You clean your Coke can with another sheet. You can even write on yet another one when you get an idea for your blog. Tissue paper is great.

But some students from one high school in Jakarta disagree. I saw them on TV campaigning the use of ... (cloth) handkerchief! According to one of them, using tissue is not good for the environment. It was not clear why but if I heard it right, she mentioned something about against cutting off too many trees for producing my and your tissues.

Poor kids. How many handkerchiefs do you need in one day? I guess back in the seventies, one. What can you do with one cloth handkerchief in a day? You use it to wipe your sweat, fold it, and slip it back into your pocket. Then you take it out again, sneeze your germs out onto it, fold it again, and put it back inside the pocket. (I guess you don’t want me to tell you what you do with it when you’re having a runny- or stuffy nose!)

(And out there a high school girl is crying having learned that her boyfriend has been cheating big time on her. Look, that little jerk, trying to be romantic, is offering her his ... well, handkerchief!)

Dear environmentalist-wanna-be who campaigned against tissue on TV yesterday. Let me tell you a little secret about handkerchief: you wash it. For that, baby, you need detergent and water and time. Ah, I guess that’s not very environmentally friendly, too...?

Saturday, August 25, 2007

Half-baked Theory on Cooking Oil's Price Hike

And now, this is from Steven Landsburg's latest book (to avoid problem with your office's internet filter, I won't mention the title here), page 137.
When prices spike sharply upward, economic illiterates everywhere are quick to see evidence of collusion or monopoly power among the oil companies. In fact, big price spikes are evidence of exactly the opposite. Colluders and monopolists don't have to wait for changes in supply and demand to hike their prices; they squeeze us to the limit all year round. Sure changes in demand and supply give them a little more leeway, so prices still fluctuates --but only a relatively small amount.

A monopolist always has price sensitive customers --because if they're not price sensitive, he'll keep raising his prices until they are. Therefore, even when market conditions change, a monopolist can rarely afford to raise prices very much. Big price fluctuations are evidence of competition. (All of this, incidentally, is standard textbook fare.)
Now, replace "oil" with "cooking oil" , recall this media fuss (Aco has good insight on the topic, by the way), and pay attention to the statement by our House of Representative's Commission VI chairman, asking government to prosecute colluders, monopolists, and hoarders. Does he make a good sense?

Apparently, according to Landsburg, alas, no. He failed to distinguish a "rising" price from a "high" price. Monopolists could be responsible for "high" price, but not for "rising" price.

Moreover, the recent cooking oil price rise is best explained by changes in (world) supply and demand (China and India apparently cook more roast duck and chicken tandoori as they grow richer). It also tells us that the market is competitive. In a competitive market, the best way to have lower price (and to fight against hoarders) is to have more supply, hence more competition. Recall: high price attracts more producers, and vice versa.

Monday, August 20, 2007

Economist's Dress Code

I so like these words of Tyler Cowen in his latest book, on counter-signaling:
At most administrative meetings I refuse to wear a tie. In part I find it the article of clothing physically oppressive. But in part I am showing that I am a tenured academic, and that my salary does not depend very much on the approval of any person in the meeting. I once heard my (former) dean say that a faculty member was not trusted "because he dressed too well." Everyone wondered just who that professor was trying to impress, or what other realm of achievement he was trying to enter. I wonder whether good academic dressers are more interested in political appointment or consulting gigs than in scholarship.
(Discover Your Inner Economist, p. 109)
So when we see a (too) well-dressed faculty member of a Dept Economics here, what can we infer about it? Here is some possible answers:
#1. His/her income depends very much on more non academic activities than in scholarship. Believe me, you don't want to know how much most of Dept of Economics in this country pay their faculty member.
#2. Even worse, his/her scholarship remuneration, appointment, and promotion doesn't depend on academic standard but administrative meetings.
#3. He/she wants to compensate his/her not-so-good academic quality by altering other's attention to his/her fashionable look.
#4. He/she aims for a ministerial post, or any government related high position. Ha!

Or, a more politically safe and simple answer:
#5. He/she knows how to dress well --and has money and manages to find time to do so.

p/s: Aco, I know you are grinning now :-)

Friday, August 17, 2007


They were talking over coffee when I interrupted. I asked them what they thought of nationalism. Here goes.
Aco: Nationalism? An idea to identify yourself -- so you can have passport and olympic games.

Ape: (For supporters) -- an idea to identify yourself so you can have a 'national team' that you and your rival supporters can watch together. (For players) -- a situation when you can play in the same team with your rival players against your club mates.

With a nod (or apology perhaps) to Ben Anderson, nationalism is an idea often times better left imagined
Sjamsu was not reachable at the moment, while Rizal's trying to settle down in Virginia.

Happy independence day!

Update: Rizal just sent his version, "
Nationalism is something that you don't really feel until you leave the country. A melancholy, for good or bad reasons."

Wednesday, August 08, 2007

Inequality: some trivia

All of these questions are a matter of personal taste, so no obvious answer for each question.

Question 1:

Do you prefer to be a rich person in a poor country, or a poor person in a rich country? (Note: this question is courtesy of Dani Rodrik. To compare your answer, see the facts here).

Question 2:
Do you prefer to live in a relatively equal country (in terms of personal income or expenditure), or in a relatively unequal one?

Question 3:
Which country do you prefer: Country A where the income growth of the richest 20% is twice as high as that of the poorest 20%, or Country B where the income growth of the poorest 20% is slightly higher than that of the richest 20%?

Question 4:
Which country do you prefer: Country X where the poorest 20% have the ability to experience income growth of 3.4% over a period, or Country Y where the income of the poorest 20% only grows at 2.09% over the same period?

Question 5:
What if Country A = Country X (let's name it 'China'), and Country B = Country Y (let's call it 'Indonesia'). Which one do you think is better for the poor? To visualize it, see the graph at the bottom of this post.

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Tuesday, August 07, 2007

Footballnomics 8: Who wants to pay to watch EPL?

There is currently a discontent among the English Premier League (EPL) watchers as this season the broadcast rights are owned by Astro TV, a new subscription-based TV. That means, those who only have access to free, network-based local TV won't be able to watch the games. Even for those who have access to other paid channels, like me, are upbeat because it is still unclear whether Astro will block ESPN/SkySports broadcast in other channels.

The problem began when the former holder of the rights, Trans7, decided not to continue broadcasting EPL. That was in spite of them having the first option to extend the rights. As I happened to 'work' for them, and personally know some people in the EPL production team, the new management does not consider EPL as profitable. (You may recall that Trans7 was formerly TV7, bought by Trans TV in August last year).

"The broadcast rights are very expensive, and we have to purchase all games as a package," my friend explained.

"That means we have to pay for 'small' games or games played in weekdays. Compared with the revenue from our sponsors, the margin is not that big. We showed EPL games mostly for image, not financial reasons," he added.

That means, the management thinks that it would be much profitable to allocate the weekend prime time slots for, let's say, broadcasting Hollywood Blockbuster (lower costs, same revenue, means higher profits), or another 'Extravaganza'-type program (higher revenue, similar costs, also means higher profits).

But that means we, the consumers are losing with this kind of business, aren't we? True -- it hurts my type, and other EPL-watcher type, of consumers. What about the other customers? Well, just see how much we are willing to pay to have EPL in our TV.

The thing is, in the non-paid networks, consumers' willingness to pay is irrelevant. Because we don't pay the station to broadcast the program we like. It is the sponsors. But the sponsors' decisions are based on consumers' willingness to pay for the products (how many cigarettes you'd buy after watching the game, how many SMS you'd send to join the quiz, etc.). Or, at least on the consumers' willingness to watch the program (e.g. via the rating system).

True, EPL watchers are fanatics, football lovers. But unfortunately that is not translated in substantial willingness to pay for watching the games. Many would be willing to pay high for a Liverpool-MU match. But who wants to pay to watch a Wednesday midnight match between Charlton and Watford? Who wants to pay to see ME commenting on that game (I may have to pay you to watch it!).

Things may be simpler if the TV can buy the match rights-per-show. So the TV can charge the consumers or sponsors only for the selected matches. However, the fact that the rights are sold in a bulk make the discussion irrelevant.

As a paid-service, Astro can then translate the consumers' willingness to pay into actual financial revenue. The fact that you'll have to pay a flat rate regardless of your match preference reflects the cross-subsidy from prestigious matches to the smaller ones. (Cross subsidy also comes from Astro customers who subscribe for non-EPL reasons).

For EPL lovers, the choices are:
  1. If you consider the subscription charge worth all matches that will be shown (or even only for a fraction of matches you'd plan to watch), then it's worth subscribing.
  2. If you are willing to pay only for selected matches, then watch them on the nearby pubs. Make sure that your expenses do not exceed the monthly subscription rate you'd have to pay instead.
  3. If you can identify who else are pissed off with this decision, you can coordinate and collect money among yourselves to buy the rights, then give it to a local TV network (or subsidize the TV station). I personally like the idea. But definitely I would free ride on your efforts.
Note: a similar situation happened when my favorite radio, M97 FM, ceased to exist. Classic rock lovers are a cohesive group and highly fanatics. But as long as it does not translate into willingness to pay (or, indirectly, willingness to pay for sponsors' products), that will be irrelevant.

Update: Rara's anticipating the new season of EPL...