Friday, November 30, 2007

Off with their head, or not?

What a thoughtful friend Rizal is. He remembers my favorite dialogue in the Alice in Wonderland. There is also another dialogue that I like very much from the story. It's between the Queen of Heart, who has a certain obsession of beheading people, and her card soldiers.

I forgot what the exact lines were, but it happened when the Queen ordered the soldiers to behead Cheshire Cat ("off with its head...!"). However, at that time, only Cheshire's head appeared. This confused the soldiers as a head without a body can not be beheaded. But the Queen insisted that anything that has a head can be beheaded.

I somehow recall this story after following the recent controversy over the KPPU (the Indonesian Competition Commission) ruling against Temasek group. The KPPU decided that Temasek group has violated the Law No.5/1999 by having a cross-ownership in two cellular phone companies, Telkomsel and Indosat. Together, both companies own 90% of the GSM cellular market share. The Law prohibits a "business entity to own the majority share in several companies within the same activity if the cross-ownership leads to the companies possessing more than 75% of the market share of the same product."

Here lies the controversy. According to Temasek, they are not the majority shareholder in both companies (in fact, they argued that the so-called 'Temasek business group' is not an entity). Temasek owns 40.8% share in Indosat, through Singapore Technologies Telemedia (STT), and 35% in Telkomsel through SingTel. So how come something that does not have a head can be beheaded?

However, KPPU's definition of majority shareholder seems to be broader than the portion of share owned. Collusive behavior, as indicated by the lack of price competition between Indosat and Telkomsel, and the dominance of Temasek in managerial decisions, are the basis to consider Temasek as the practically majority owner. Everything that has a head can be beheaded.

I'm not an expert on competition policy. So to be honest, I have no take on this issue, yet. But it's interesting to read our colleagues' take here and here. But somehow I agree with an old friend of mine: if Temasek if guilty, then so is the Government of Indonesia, via PT Telkom.

Odd Socks

#1. The big Jakarta's flood in February 2007 was due to global warming.
#2. The dengue fever outbreak in Bogor recently was caused by extreme change in precipitation patterns and warming temperature.

But,if the global warming were to blame, why there was no big flood nor dengue fever outbreak in, say, Surabaya, at the same time?

Saturday, November 24, 2007

Footballnomics #9: are foreigners to blame for England's failure?

Not surprisingly, England failed to qualify for Euro 2008. They should just simply accept that they are not good enough. Blaming the failure on the huge influx of foreign stars is clearly out of the line. Neither will imposing a cap on the number of non-English players will help. I agree with Arsene Wenger in this case.

For one, the English team have never been great. Before the EU single market that revolutionized the football transfer market in the early 1990s, when there were only three foreign players allowed to play, England never won anything except the 1966 World Cup (the only trophy they have ever won). So the number of foreign players in the English League can not explain the national team's performance.

And remember, the EU open labor market also applied to the other countries. Foreign players have been coming en masse to France, Germany or Italy. Yet these countries won the 1998, 2002 and 2006 World Cup respectively (Germany also won the European Cup in 1996, and France in 2000).

Some people argued that foreign players have limited the chance of English players to play or be recruited by top teams. That is simply because English players are too expensive, given their (average) quality. To judge the quality of English players, just look at how many Englishmen play in the continent at the top leagues. Currently, none. At its peak, four (Owen, Beckham and Woodgate in Madrid, Hargreaves in Bayern Muenchen; altogether, only them plus Gascoigne and Ince in the 1990s who have ever played abroad).

Italy can have a stronger team because their best players can still outcompete foreigners in Serie A. The French League, on the other hand, is less competitive than the EPL, Serie A or La Liga. There are a lot of foreigners, mainly from Africa, in the French League. But the best of French players are good enough to be the best players in England, Italy or Spain.

In short, the Englishmen can not blame globalization for their crappy performance. Globalization brings competition. It exposes the country's weaknesses that come out because of domestic problems.

Update: I forgot to mention David Platt and Steve McManaman as the other English players who have played in the top European Leagues in the 1990s. Also, Kevin Keegan did it in the early 1980s.

Thursday, November 22, 2007

Big daddy rock and roll and what follows

Pasha, a salembanite from Ruang 413 is one of few economists who knows music very well and reads music books in between his econometrics. Some of you have complained that my playlists are a bit boring and damn it, "customer is king", you say. So, here it is. Ladies and gents: Pasha.
- Manager

Big daddy rock and roll and what follows

by Pasha

I’ve been a regular visitor of the café. The Manager felt that the tunes being played in the café is rather monotonous (monotonic?? J). She asked me to breathe new life to the musical atmosphere in the café by coming up with a weekly playlist, which I’m happy to oblige. You all know that Rizal and Aco like jazz, while Ape digs heavy metal or rather hair bands (right Pe? :D). I’ll do my best to accommodate different tastes while at the same time adding my own personal favorites, well actually they’re all my favorites. I would also like to do something different, rather than just provide you with weekly playlist, I think it would be interesting to share with you all the story behind the music. Sort of behind the scene to make it more appealing for you to read. It’s a bit digression from the usual posting here at the café but for me, I can’t learn economics without the good company of good music. So, without further ado, I give you this week personal picks.

Let’s start from the very beginning, the big daddy rock and roll. No, I’m not talking about Robert Johnson (I’m saving that for future posts). It’s not Elvis. He may be the king but he’s not the one who started all. But to be fair, he’s the one who brought rock and roll into popular audience. It may surprise you, I’m talking about Ike Turner. Yes, that infamous Ike Turner. In 1951, Ike Turner and his band “The Kings of Rhythms” released this song, Rocket 88. It is considered to be the first rock and roll song ever written. At that time the term “rock and roll” is not yet known. Back then, this type of music is called “Rhythm and Blues” or “R and B” for short and it is usually played in the black communities at that time, and this type of music have not yet cross over to the white communities, such as jazz. What is unique about this song is that it is the first song to use the now standard rock and roll chords. Thus, this is the grand daddy of rock and roll.

It is due to Alan Freed, a radio disc jockey in Cleveland, OH. At first, in his radio show he usually played jazz standards by the likes of Duke Ellington, Artie Shaw, and other big bands. He soon got tired of playing the same music over and over again in his show and needed to play something new and completely different. So, he went to the record store he frequents. In there he saw white teenagers gathering in the black section, which turned out to be the rhythm and blues section. He then asked the store manager why were white kids crowding in the black section (back then segregation was still in effect in certain states in the US). The manager simply replied that kids really enjoy that type of music. He got what he wanted, a fresh new music to bring into his radio show. He went home with numerous rhythm and blue records, among them are the relatively unknown Little Richard and Chuck Berry. But given the racial tension at the time, he needed a different name to call this new music. After considering several alternatives, he settled with the term “rock and roll” which was basically a code that he and his wife used if they want to have sex (funny how they come up with the phrase “sex, drugs, and rock and roll). Since then popular music is never the same and this is also the reason why the Rock and Roll Hall of Fame is situated in Cleveland. And so I give you this classic piece from Little Richard, Good Golly Miss Molly.

So, from then on new musicians emerged into the scene. So here it goes. First up, “The Killer” with the piano Jerry Lee Lewis with Whole Lotta Shakin Goin On. Let’s turn up a bit with Johny Be Goode from Chuck Berry. Next up, Buddy Holly with Peggy Sue. I think you all know this classic from Ritchie Valens.

Too close off, there was an anomaly. In the midst of the popularity of rock and roll, a jazz composition received a huge airplay in the radio. And so, I leave you with this tune from the Dave Brubeck Quartet. This is Pasha signing off, see you next week and happy thanksgiving!

Wednesday, November 21, 2007

Funny Pundit on Chicken Soto

Due to some costumers demand, I will not serve muffins this time. But we have chicken soto as the substitute.

Suppose you want to know what 150 million adults prefer: chicken soto or chicken satay. What would you do?

I read an observer, -or pundit, whatever-, has done the following: He asked 50 leading figures, or social activists, what they want to have, and found out that only four are for chicken satay, two order completely different stuff (chicken kebab), and fourty-four want chicken soto. Then he concludes that people want chicken soto.

But how on earth that he is sure that chicken soto is indeed what people want? Statistician, or anyone who ever have had Statistics 101, will quickly point out a whole range of sampling methodology issues.

Even putting that statistical problem aside, what exactly that fourty four activits mean by chicken soto? Is this the one with light yellow soup or thick coconut-milk, with rice vermicelli or not, with beansprout or not? We have so many variants, in so many localities, of chicken soto.

Our pundit also lamented that we are on the verge of doomsday. In one aspect he said that we do not get bigger as fast as Argentina. But actually we do get bigger (around 6.4 percent this year) and at the higher rate than our closer peers in the neighbourhood (4.9 percent). Not bad at all, leave alone the fact that we fell severely ill nine years ago and lost weight by 13 percent in just one single year.

OK, OK, it's in Kompas daily, Analisis Politik, Tuesday, Nov 20, 2007

Oh no, today somebody told us that what they mean by chicken soto is actually not a chicken soto. It was a terrible adaptation of German soup. (Kompas, Opini, page 4, Wed, Nov 21, 2007)

Monday, November 19, 2007

Unruly City Works Well

I think the economy of big cities is one of under-researched topics in economics, particularly on the positive contribution from otherwise "unruly" features of a city --slums, city dwellers, crowded sidewalk, counterfeiting business, etc.

During this weekend, I am reading the captivating Jane Jacobs' classic, The Death and Life of Great American Cities. I know this is way too late, it has been published since 1961, but her fresh attack on how the then latest urban planning trend (such as Le Corbusier, --the architect, not the mentalist (sic!)) misunderstood city life still sounds relevant even today. It makes a lot of economic sense, too.

Having been reading some of the early chapters, I have a question, perhaps to criminologist: Is the crime record in Jakarta's crowded housing districts (Tanah Abang or Senen area) higher than in the suburbs (Depok, Tangerang, Bekasi), where the so called modern urban housing planning has been heavily exercised? --If the records are neither available nor reliable, a careful observation on Pos Kota will do.

My guess, it isn't. Presumably, high population density and close interaction will produce positive externalities of an informal surveillance system for public order. But maybe I am wrong.

Roy Boy

His name’s Roy and I was reading his letter. He said he needed help. He had just been arrested by the police because he was caught using drugs. Interestingly, this was his second arrest. Months before, after serving his first jail term, he had become an anti-drug campaigner. He was loved again, just like when he was young as a handsome movie actor. He now appeared in social gatherings, he gave lectures on say-no-to-drugs and all that. In that unlucky day, he just made a cameo in a police program to fight narcotics. Two hours later, he was high.

He thought he could use some help from the Café. He knew some folks here defended Kate Moss and well, him.

But this time is different. He made another, more serious crime. So I called him.

Roy, oh Roy. Poor fella. Of course we’d do anything to defend you. We still think laws banning drugs are ridiculous. But how come you are so stupid? They probably shouldn't arrest you for using drugs. It's your right to die on sabu-sabu if that makes you happy. But we really think you should be punished for being a total fool. You're a disappointment, Roy...”

Sunday, November 18, 2007

Microfinance, anyone?

Social networks or social capital is one of the topics have been discussed in this Cafe (even debated among its barristers). It is a topic that has been of a growing interest of some economists. Harvard's Economic Department even offers a course devoted specifically to this issue.

Roby, a sociologist, regular visitor of this Cafe, as well as close friend of the barristers, can be considered as the authority of this field. He sent us this piece about microfinance as a potential intersection for social scientists to study more about mechanism design problem. Although it is not the first time that microfinance is being discussed in the context of social network (this is one example, or here is a list of more serious stuffs), still it is interesting to see Roby's challenge will be answered in the Indonesian context.
Microfinance, anyone?
by Roby

I am one of the fans of this blog but so far I only contribute by writing rather negative comments. In this post I want to share something positive.

As you may know, I am not an economist but some of my colleagues here are economists or working on topics that are also of interest for economists. I must say that I like economics but can't stomach some economists especially when they start to pretend to understand something and come up with "explanations" that actually don't explain anything. Having said that, I do think economists have succeeded in creating some useful arsenals and insights to understand human behavior.

Recently my boss left his tenured position to join the microeconomic research group of a leading web company. Since his departure, I regularly come to his new office and meet a lot of interesting people with different background, including economists. I try to know more about the kinds of interdisciplinary work where computer scientists, physicists, mathematicians, economists, psychologists and sociologist are working together.

Social scientists and economists are hired by major internet firms to help those firms to understand user behavior, from buying or selling products to hanging out in social networking sites. Armed with the understanding, these firms hope they can find better ways to monetize the services they offer through their websites. From the scientific point of view, access to huge data of human interactions and relatively "unlimited" resources (in comparison to resources in
academia) give us the chance to study human dynamics in unprecedentedscale and detail.

All of these are interesting but these kinds of work are not very relevant to Indonesia. Although the Internet in Indonesia is growing, the scale of the usage – in terms of business or social – won't be even near the usage in the US anytime soon.

However, I think there is an area in particular in which similar basic ideas can be applied in Indonesia: the microfinance industry.

I know next to nothing about microfinance, but here is what I think. To my understanding, microfinance is about figuring out ways how to do business with people who are traditionally unbankable. They are usually poor people in rural area. They are untouched by traditional
finance system because it is too hard to assess their credit worthiness or it's simply too risky.

One way to overcome the problem is to deal them collectively instead of individually. The idea is to utilize some group mechanisms to minimize the risk: group members would make sure everyone to repay the loan and hence guarantee continued access to lenders.

We can approach the problem as an interdisciplinary mechanism design problem: social scientists and social psychologists could study the relevant properties of group dynamics in (rural) Indonesia, then, together with economists, design how incentives could be structured
in a particular setting.

The project, I think, is intellectually interesting and would be easy to gain support since everyone cares about the poor in Indonesia.

Is this possible?

Wednesday, November 14, 2007

Against Rogue Pros

How many of you are damn sure that whenever you go to those fancy hospitals and health clinics in Jakarta, without medical insurance in hand, you are not ripped off by those, favorite, doctors? That, somehow, you feel that your headache is not that bad, but then you find yourself ended up into unecessary expensive procedures as well as pricey medicines? That you are sure that caesarean section is indeed in dire need, and not the way obstetricians make extra money off you? And, --this is is the worst--, that they really know what's going on inside your body?

But since you have no expertise in medical science, the only option for you is to shut your mouth up, and let the experts decide your fate. Worse still, they are the one who not only diagnose, but also will be paid for further treatment.

The same thing goes for laptop repair, or car mechanics. And this guy, Henry Schneider of Cornell, took the challenge to prove whether car mechanics, in 40 Connecticut garages, don't swindle their costumers. The result: only 20 percent pass the test.

I hope somebody's gonna hire economists to do the same undercover research for health services here in Jakarta, or Indonesia, instead of relying on anecdotal evidences and finger-pointing game on doctor's malpractices. Schneider's paper and model is not technically too complicated to replicate for our case.

I am looking forward to it.

Tuesday, November 13, 2007

Manado rythm

Looking at a piece of Manado bay from my room up here, at a rather new hotel as one of the outcomes of reclamation at Manado beach, I am amazed. This city had no plan. The additional sixty hectares of land was appended to the then shoreline with no single government's master plan. The initiatives, money and all came from private businessmen, I was told by city officials – proud they sounded. The government was just given sixteen percent of the new land – for a green belt supposedly, which by the way, has yet to be seen.

Ask me not about aesthetics, though. This parade of new malls and office buildings is so eye-torturing. They could have used some coordination to at least make the whole package interesting. Not even close. Bunaken half an hour away out there is way more beautiful. Or, is it just for now? I am amazed and puzzled. No-planning used to sound good to my ears. But if that leads to chaotic structures like this, what is the use? So there I was interviewing people on the street.

And my faith in market was reinstalled: they're just so happy with their new Manado. They don’t give a damn if the look is a no-no. Yes, wealth comes before beauty.

Update: Here is the nice one. Raf, I'll come back (next time, no books, no survey)

The sequel: The Good, The Bad, and The Unpleasant Arithmetic, Part 2

Let's carry on the game. Get your cup of Kenyan now, and I'll play Miles Davis' Freddie Freeloader.

You remember Alesina and Summers, right? Those guys said that independent central bank is good for the economy. Now let me introduce you to another guys, who are more or less in the same camp in favor of central bank's virtue, Kydland and Prescott (1977). With their work on time inconsistency, they lean toward something called rules based over discretion policies and make the idea of inflation targeting popular. The two, independency and inflation targeting, are now becoming the norm for central banking.

But Greg Mankiw, 2006, disagrees. He said that independency is loosely connected with rule based inflation targeting. Alan Greenspan is the most notorious example for his flexibility and somewhat discretionary approach, yet his policy works. Moreover, citing the work of Ball and Sheridan (2005), for the larger sample. inflation targeting doesn't explain recent trend of low, stable inflation rate. Bluntly, independency is not the prerequisite for good monetary policy.

So now, Central Bank got their point cut. Central Bank 0 - MoF 0.

Saturday, November 10, 2007

A Muffin Jam

Suppose you know that for our health, shortbread is better than muffin. By that, substituting muffin with shortbread in our diet is good. Yet, many people, as they love muffin, understandably, will not alter their diet to shortbread by persuasion, even for the noble purpose such as public health.

In anticipation to that, the cafe introduces more shortbread at low price, and due its limited capacity, they can not provide you with muffin as many as before. And, it's a small wonder that muffin eaters grumble. They complain that muffin is now hard to find.

But on the second thought, wouldn't it be the perfectly predictable, and desirable, effect --to make the muffin relative price to shortbread rises? Sooner or later, they will respond and switch to shortbread, and as time goes, switching will be less painful.

Now, replace health, shortbread, muffin, the cafe, muffin relative price increase, and switching responsiveness; with travel time, the busway, driving your private car, Jakarta busy thoroughfares,traffic jam, and elasticity of substitution. I hope by now you get the idea, thanks to Econ 101.

Oh, and the muffin eaters/grumblers, they are the popular voices oftenly appear in newspapers, TVs, and, well, politicians' words. Just want to say: come off it, mates!

Tuesday, November 06, 2007

The Good, The Bad, and The Unpleasant Arithmetic

I can't find a good metaphor for what I'd like to blog here, so let us be a little bit more serious. But not too serious as you can still think about it, while sipping your espresso and listening to Dave Brubeck's Take Five, -the way we in this cafe make money out of you.

In macroeconomics, there are two great enemies an economy, a country, always wants to get rid of: low growth and (too) high inflation --and the other is high unemployment. Low growth is like having your pie getting bigger, yet at lower rate than your neighbourhood has. Inflation is that your money in your pocket now can not buy you a pie as big as before.

To handle a normal economy, we have two important offices: Ministry of Finance (MoF) and Central Bank. The former is more to stabilize the output (the pie) against its ups and downs, keeping it on track for an upward path. The Central Bank is responsible for money supply, maintaining the inflation rate sensible, hence, your money purchasing power.

And in standard macroeconomic model, both are well linked.

Now, enter favorite words that you may often hear as a cocktail conversation or read in newspaper: the central bank independency. The argument goes that in managing the economy, central bank's policy (on money supply and inflation rate) needs to be independent from MoF's (output stabilization). Why?

MoF policies oftentimes, due its proximity to political pressures, go for higher budget deficits (government spends more, say, on big projects or subsidies than what it gets from taxes), rely on pushing central bank to print more money --a politically induced inflation, that is. And in a corrupt country, it spurs a big business on monetary policy misuses. In this part one of this story, MoF is the bad guy. (See Alesina and Gatti, 1995)

In part two, meet the unpleasant monetary arithmetic (Sargent and Wallace, 1981). Now suppose Central Bank thinks that current inflation is higher than targeted rate, because, say, MoF carelessly raises the budget deficit. The Bank dispatches then a tight money policy (reduce the money supply). But while lowering current inflation rate, it is at the cost of future inflation rate. The catch is here: higher expected inflation rate in the future tends to raise current price level, a.k.a current inflation, as the current price level depends not only to current but also all anticipated money supply. Feel dizzy already? Don't worry, just recall: There is a good chance that the Bank's effort to curb current inflation is ineffective.

If you want, you can order another cup of Colombia supremo now, before we move on.

Now, let's get into another easier-to-imagine situation. If the Bank always want to tame inflation independently, it will react every ups and downs of price shocks. And as the latter is usually volatile, so is the money supply set by the Bank for keeping it steady. As money supply affecs the size of our pie (output) and employment, these two will be more volatile accordingly. This is bad and, here, Central Bank is the bad guy. (Rogoff, 1985)

But you may ask that earlier the bad guy is MoF. So which is which? When you are in this situation, play Sherlock Holmes with Google Scholar finding the empirical evidences. The most famous one (Alesina and Summers, 1993) says that for OECD (meaning the rich countries), central bank independency brings lower inflation and no effect in output and employment. So, the Bank is the good guy for the economy, let him be independent. Central Bank 1 - MoF 0.

OK, time out. But before you go, let me give you a question to think about: Is it really the Kebon Sirih gang better than the Lapangan Banteng's? Next time you drop by at our cafe, tell me