Friday, March 30, 2012

The speech in my dream

A twitter @andidio said something about his dream about SBY announcing the fuel price hike, and apologizing to the people about the possible impact of it. Suddenly I wanted to write my own hypothetical dream. With an apology to the President, I would like to dream. So here goes.

Dear my fellow countrymen,

I am standing here in front of you to tell you that I have decided to make an adjustment on the prices of BBM, or fossil fuel. I apologize because this issue has created a rising tension among you. I understand that students and many others oppose the plan. But let me explain.

First off, I have to bring to you some inconvenient facts. Sorry to tell you, we are not an oil-rich country. We have to quit the OPEC because we are no longer eligible as a member of “petroleum exporter countries”. Our oil reserves now hover around 4 billion barrels – the proven ones are below that. Our lifting capacity is below 1 million barrels per day – not all of this is ready to consume: we have to export the crude and import the refined, because our technology is limited and our production is short. At the same time, our consumption keeps increasing – now it almost reaches 1.5 million barrels per day. And this is rising: our young people are abundant, but so is their energy need. If nothing is done to reduce the dependency on fossil-based BBM, if nothing is done to right the incentive for technology to improve our production, we will exhaust our reserves in 12 years down the road. Good if by that time we have alternative energy ready. But if we now keep holding the BBM price well below its market price, nobody will have the incentive to start developing the alternatives. Think about it: if you are an investor, would you put your money on an industry whose product’s expected price can not beat the existing alternative? So, my friends, if nothing we can do to adjust the BBM price, we are exposing ourselves to an energy crisis. Again, let’s face it: we are not an oil-rich country.

My fellow countrymen,

I am aware that out there some heated debates on the budget numbers, allocation, and all the nitty-gritties have been escalating. I thank Kwik Kian Gie and others who brought this up again. I appreciate my ministers and their staff who responded and clarified. And I embrace constructive reminders from students and activists.

But deficit or surplus is, my friends, only a small part of the big picture. It is good to be transparent on the budget details and to conduct thorough assessment on the numbers or the assumptions used. So I welcome any scrutiny from ICW and others. I have asked my staff to check all the numbers again very, very carefully. Let us improve the transparency and accountability for that matter. Nevertheless, may I humbly ask everyone to start looking at the bigger problem of this current subsidy scheme? This is not really a deficit or surplus issue. We are today facing at least three crucial issues: the lack of infrastructure, the mis-distribution of subsidy, and the harm to the environment.

First, let’s talk about infrastructure. It saddens many of you that in Jakarta, the price of Pontianak oranges are far more expensive than those imported from China. The cost of transporting goods on our land is almost 50% higher than that of the average ASEAN’s. Due to difficult access, the prices of cement or even staple goods turn exorbitant as they reach Yahukimo, Paniai, and other remote places. Now, one might say that because Indonesia is an archipelago, it would have been less expensive if we relied more on water transportation. Sounds logical? Well, as it turns out, the cost is even higher, at 150% higher than ASEAN’s average. Why? It is because the ports are not yet efficient. Isn’t it ironic that a country of thousands of islands doesn’t have a single hub port in par with those in Singapore or Hong Kong? Exporters complain. When they want to ship their products via ports, their container trucks have to compete with your cars and motorbikes just to get into the toll way. And that toll way is jammed, too. They also have problem entering the port. Let alone the still-heavy bureaucratic procedure in the port. Some rational firms shift these burdens on to the consumers. How? By increasing their prices. That explains, to some extent, why we are not very competitive in the international market. So we have to do something on all this. That is, we should improve our infrastructure and logistic system. Hence the heavy emphasis on these issues in our planning documents. But of course this needs a lot of money. The government budget can only cover 30% of it, while the private parties will come only when, understandably, they perceive good returns on investment. In the meantime, we keep allocating more money to subsidize the energy consumption than to build infrastructure. This is not productive.

Secondly, the intention of all this subsidy business is to help the poor. Unfortunately, we now realize that the major bulk of the fuel subsidy is actually consumed by the not-so-poor. In fact, almost half of it goes to the high-income group; while less than 2% goes to the bottom 10%. This is regressive – we don’t want a subsidy scheme like that. Even worse, the resulting price gap creates an incentive to smuggle. Or, oplos. You may have read in the media that the government warns against speculators and irresponsible traders who take advantage of the price gap by buying low and sell high, or by mixing the different types of fuels and sell them at the price of whichever is higher, for a handsome additional profit. Now this practice is actually a form of entrepreneurship. In the ideal time, I would have encouraged this. But this is no ideal time. We are talking about security of energy, a necessary good whose stock is steeply decreasing amidst the absence of its alternative.

My third but in no way the least concern is about the environment. Climate change is happening. Yes, debates are still ongoing on the degree and the risk of it, but it does happen. We are one of the biggest carbon emitters. Our deforestation is one major culprit. But the contribution from energy sector that includes transportation is increasingly worrying. This is because the energy source is still dominated by highly-polluting fossil fuel. And the consumption of such energy is what we keep subsidizing. In other words, we actually encourage higher pollution. As I said above, the alternative, cleaner energy can’t compete against the dirty energy since the latter is protected by our subsidy.

My fellow countrymen,

With those three factors – infrastructure, poverty, and environment – accounted for, I hope we can now see the bigger issue beyond simply budget deficit big or small. By fixing the current subsidy regime, we hope to be able to improve our infrastructure, fine-tune our poverty eradication programs, and to help better up the environment. I’m fully aware that this might create a shock in the economy, especially to the poorest. But I hope the shock will be short-lived, as our experience has shown. We will also employ some temporary compensation to those at the bottom of the pyramid.

Dear friends,

That was long already. But let me close with some final remarks. Some of you said that I should have made this price adjustment last year. I cut the price two times in 2008 and another once in 2009 – in an attempt to follow the world price dynamics, as promised when I increased the price big time in 2005. I should have been consistent by raising it again in 2010 and especially in 2011. But I didn’t. I hope this time I can do better. Keep reminding me. If I somehow fail to improve the infrastructure after doing all this, you be the judge.

Wednesday, March 28, 2012

Looking for the right incentive

Below is an excerpt of my talk in the International Conference on Adaptation to Climate Change, Brussels, February 28, 2012. I think this has some relevance to the ongoing debate on fuel subsidy in Indonesia. In particular, as I have talked much about infrastructure, now it's time for the environment. Cheers. Aco.

Cooperation in Adaptation and Mitigation - Southeast Asia
by Arianto A. Patunru (University of Indonesia)

Managing the climate change is a public good issue. That is, it is not economically attractive to any private party to do it alone, despite the fact that the benefits of doing it will spread out to many parties. Therefore, it is prone to the problem of free riding.  On the other hand, what one does will affect the others, such that if left uncompensated the latter will be forced to move down to a lower utility, hence the negative externality. Furthermore, climate change problem is not contained only in one isolated place. It is almost impossible to localize the problem within a small range neighborhood. Due to these characteristics of climate change problem, it is imperative for all the parties affected to cooperate.

The idea behind many internationally arranged cooperation in terms of environmental causes such as climate change mitigation and adaptation is how developed countries help developing countries to reduce emission levels by proper compensation. One of the important aspects of international cooperation is that the fund involved often times requires a loop process where assistance is given with conditionalities. This is normal and in fact can be used to help the recipient country developing its own structure or system to support global initiative of green economy.  Cooperation for environmental cause can also be conducted using the already existing organization. In fact many of these organization already have initiatives addressing environmental problems in a coordinated way. In addition to developed-developing countries cooperation, there needs to be cooperation system between developing countries. Most naturally this would be formed on the basis of geographical proximity e.g Southeast Asian countries, for each country is prone to the externality originated from any other country in the region (for example on NOx and SOx pollution).

One of the areas that need cooperation especially among developing countries is clean energy. It is a fact that energy demand is always rising in a developing country. But the demand is often times met with a supply of energy that produces negative externality to the economy. That is, the supply of clean energy has been limited. Many Southeast Asian economies are victim of high oil prices, but they continue to pervasively subsidize energy. Countries spend even up to 25% on energy subsidies, for example Malaysia (USD 15 billion in 2009), and Indonesia (USD 15 billion in 2010). In 2008 the overall fossil fuel consumption subsidies amounted to USD 557 billion, of which non-OECD countries responsible for USD 400 billion.  These energy subsidies distort prices, and have negative effects on the environment as it can support pervasive activities that lead to environmental degradation or encourage overconsumption.  Although in developing countries energy is subsidized for economic development and poverty alleviation, subsidies for oil and other energy sources mainly benefit higher income groups and capital-intensive industries.

While pursuing cooperation with other countries, each individual country should continue improving its own domestic policies and development practices. For example, in Indonesia agriculture is still the most important sector in terms of the large share of population working in it, as well as the high concentration of the poor. Hence any policy regarding this sector should take poverty issue into account. Simply requesting a low carbon agricultural practices might not tackle the root of the problem. The fact that many poor Indonesians are stuck in agriculture sector is also related to the rigidity of the labor market where the movement across sectors (for example for agriculture to more value-adding manufacturing) is relatively hindered. Furthermore, the ratio of land per farmer is very small (currently majority of Indonesian farmers are landless peasants and farmers who own less than 0.5 hectare of land) – and keeps reducing due to fixed resource of land versus increasing labor force in the sector. This leads to the problem of low productivity and sustainability. Therefore, it would be more logical if the policy in this sector aims to increase productivity (in a more sustainable manner) and to improve farmers’ access to wider opportunities like manufacturing. This also applies to peat and forestry sector.

With regards to energy and transportation, the governments' attempt to reduce dependency on fossil fuel and instead move towards renewables is commendable. However, the key culprit of the dependence of fossil fuel is the heavily subsidized price. The cheap price of gasoline has made riding private vehicles is far more attractive than using public transportation. On the other hand, the availability and reliability of mass transportation are still low. Therefore, the incentives for consumers to reduce their use of private vehicles (and hence fossil fuel) are scarce. On the producer and business side, the same incentive problem takes place. Because the fossil fuel is heavily subsidized, there is little incentive for business to develop renewables for their product will not be able to compete against the subsidized fuel.


Tuesday, March 27, 2012

Good Intention Gone Bad -- or Argumentum ad confusion #785

Following Aco's earlier posting, let me add another fallacy on fuel subsidy removal in twitland.

What about this: ".. I am against fuel subsidy removal because (poor) fishermen still buy fuel at exorbitant price..".

I fail to understand this logic at many levels. Fuel subsidy shall make the price low, not high. If our fellow fishermen pay high price, there must be some sort of fuel supply shortage.

One of them is probably the failure of government to deliver fuel through its distribution network. But the solution is to fix the distribution and it has nothing to do with fuel subsidy inefficiency removal -- in fact, this is more reason for liberalizing fuel retail business.

But even so, if the government can deliver the fuel to the buyers, at low subsidized price there is big incentive to smuggle it. Why? Because once you're out of Indonesia water, you can resell the fuel at higher international price and seize the margin. At the same time, it reduces fuel supply for local fishermen.

Now I hope you can see the bigger picture that boils down into this: Higher fuel subsidy raises incentive/profit margin for smuggling the fuel. (Domestic) fuel supply in places near international water declines. The fishermen are forced to buy even higher than international price.

Is that really what you want by asking for higher fuel subsidy?

Argumentum ad confusion

Some cause-versus-effect confusions circulate the Twitterland. Here's a few:

  • Attack and destroy the "Mafia Migas" (apparently this refers to some mafia who takes advantage on the current fuel and gas market in Indonesia), before removing the fuel subsidy. I'm dumbstruck. The main reason why mafia exists in the first place is to take advantage of price difference. Holding the fuel price well below it's corresponding market price is the best recipe for smuggling and hence a good reason for a mafia to form. You want to discourage the mafia? Cut the incentive. That is, reduce the price gap.
  • Develop alternative energy before reducing the fuel subsidy. Eh? What makes an investor attracted to a particular line of business? The expected price of the goods or services it will sell. Now, who wants to invest in renewable or alternative energy when the current fossil-based fuel - the competitor - is sold at a price too low? One might say, well, since the private will not be interested, the government should be the one developing the renewable energy. Great. So, the government should keep the huge subsidy now for fossil fuel. And in addition to that, the government should also allocate yet another bulk of subsidy on renewable energy. Au revoir, infrastructure. Good bye poverty eradication. Never mind basic education and health.
  • The government should wipe out corruption before adjusting the fuel price. This one is not so controversial, actually. I'm all for fight against corruption. But why wait until all corruption has been eliminated, then do the right thing on fuel price? The government should do both. In fact, the fight against corruption is an infinite task of the government. Here I can understand people's frustration to the President. This was one of his signature promise during the election campaign: to fight corruption. Now that his party is so tarnished with corruption allegation, unfortunately he doesn't seem to make an effort enough about it. But again, fighting corruption is one thing. Fixing the dire distortion in fuel market is quite another.

Finally, I was dumbfounded, when somebody tweeted about countries where gasoline prices are so cheap. "Oh, how fortunate them people living on those countries", said him - or something to that effect. Now, look at the list of those "fortunate countries". Many of them just experienced political turmoil aka Arab Spring. Some of them are authoritarian countries. Some are too rich and with state-of-the-art infrastructure and probably they can just waste their oil money to subsidize their people. Oh, there is of course Venezuela with a confused leader  - oops, I think I just offended his fanboys here. Sorry.


Addendum: Oh, I forgot to mention. The last time I checked, we're no longer sitting in OPEC, that is, the organization of petroleum exporter countries. Why? of course because we're now a net importer. So, wishing our country selling cheap oil like those exporters (setting aside infrastructure, poverty and other issues) sounds like a bad comparison, no?

Sunday, March 25, 2012

Some number-play on BBM's subsidy

Rizal emailed me yesterday, telling me that this "debate" on fuel (BBM) subsidy with KKG has been going nowhere since 2005. KKG uses his accounting with "convenient" assumptions to debunk anything government says about the subsidy and the budget. We have said repeatedly in the Cafe, that KKG's calculation is erroneous. Others have done the same. Teguh Dartanto has his take here. Ari Perdana has one here, and Arya Gaduh here.

But of course KKG goes on and on. And many media love his style. Many pundits and commentators use his argument without reservation. Politicians send message broadcasting KKG's numbers - people re-broadcast them, of course.

I think this debate is getting more and more off the mark. And the government (and DPR) should also share the blame. They're all trapped in the debate about surplus and deficit in the budget. Which is beside the point.

But fine, since I received so many questions about that KKG's piece, here's some thought. KKG says the government actually still has a "profit" of almost IDR 100 trillion from "selling BBM". Now I don't want to debate how he got this number (but see my PS below). In fact, let's assume KKG is right. In fact, let us even "help" him by doubling his claim to IDR 200 trillion a year (are you happy now, Pak Kwik?)

Now, what is the most important obstacle in Indonesia economic development? Yes, infrastructure. How much money do we need to allocate for infrastructure development in 2011-2014? IDR 4,000 trillion - or roughly IDR 1,000 trillion per year. Now, how much is the current capacity of the government to finance this? Thirty percent. That is, 70% must come from private parties (more specifically: 50% from pure private financing and 20% from public-private financing - PPP). Can we safely assume that private money will come "just like that"? Unfortunately, no. So long as our investment climate is still lousy, private money will find better places. As long as we still have not found a good risk-sharing mechanism for PPP, do not expect too much. Let's just assume that from IDR 500 trillion expected from pure private financing, 50% materialize. So we are still short IDR 250 trillion a year. What was KKG's surplus? IDR 200 trillion (that is, after we give him a bonus of IDR 100 trillion). Oops: still short!

So my point is, isolating the debate on surplus versus deficit can be useless. Because even if you have budget surplus, it still doesn't make sense to go ahead with the current subsidy regime. And in this post I only look at one aspect: infrastructure. As I said here, there are other two pressing factors: environment and poverty eradication.

PS: It's not that I never tried to check KKG's method. Here is my excel from long time ago, trying to replicate KKG's calculation. You can see that many of his assumptions are very shaky (changing the parameters a bit - scenarios to the right of KKG's numbers - lead to significant implications). These numbers are from old time debate (of course magnitudes of the parameters have changed, but I just want to show how I think KKG thinks)  - you can adjust it as you like, using the more update data on oil lifting, crude price, et cetera. But again, if I were you, better not wasting all your time with this.

PPS. Another tone used in the current debate is that government may as well keep the current subsidy system, if they do their homework well on budget efficiency, corruption eradication, et cetera. Woah, are these even subsitutes? Of course the government should make the budget more efficient and should keep fighting corruption. But while doing all that, why keep a wrong subsidy practice?

Addendum: I made a mistake in the infrastructure fund needed in 2011-2014. The number above (IDR 4,000 trillion) is for total investment needed. Infrastructure share is about IDR 1,800 trillion. Annually this translates into IDR 450 trillion. That means, using the story above (assuming 50% of the expected pure private financing materialize), IDR 112.5 trillion is needed. This is above KKG's IDR 100 trillion "profit.

Saturday, March 24, 2012

Widjojo #289

In a meeting in his office in the old Littauer, a senior Harvard Econ faculty told me, "Widjojo is the best technocrat I know in my entire career". Some years ago, in a centuries-old college in another Cambridge, England, Widjojo's name came up as a prime example on how to run economic development.

When I told him Pak Widjojo passed away, another faculty here, familiar with contemporary Indonesian political economy said, "I wish history did better justice to him". This is how I know Widjojo -- through other respectable people's high appreciation. Unlike Aco, I've never had an opportunity to even directly talk to him.

But, you don't have to know him in person to recognize that he must have had done something right. The easiest way is by comparing all Indonesian economic indicators in late 1960s to now. You may say that we don't have counter-factual evidence, but if one said he worked to make Indonesia more prosperous and the data says so, this is the least uncertain fact we can take. Widjojo deserved the credit and, for me, no doubt about it.

Widjojo strongly believed in the strength of economics analysis in development. If Gary Becker proposed an economic approach to human behavior in 1978, Widjojo wrote in his inaugural speech as Guru Besar FEUI, on the importance of economic analysis on development planning, back in 1963. He also wrote on the role of research in universities. Fifty-years ago, very few in Indonesia thought about it and the words "economics", let alone "research" was very foreign to us.

Widjojo knew and, without so much fuss, showed that economics and research can make a big difference to human lives and well-beings. He quietly showed us, especially at FEUI, perhaps indirectly, that proper economics matters a lot.

And this is why Pak Widjojo will be sorely missed.

Thursday, March 22, 2012

It's not really about deficit

So as usual, KKG is again spreading his attack against the plan to cut fuel subsidy. Politicians like Dyah Pitaloka happily embrace his elaborate take and broadcast it all over. Their argument is, the current budget deficit is not as bad as the government claims, will not explode, and there should be enough money to keep subsidizing the fuel consumption.

Which misses the point. Look, even if we have a budget surplus, the current fuel subsidy is still wrong. This is not about deficit big or small - or even (very unlikely) surplus. This is about misallocation, mistargeting, and misincentive. The budget is misallocated because the money spent to cover the subsidy would have been in better use if otherwise spent on infrastructure development. The subsidy is mistargeted, for the major bulk of it is enjoyed by the top rich. And the subsidy system is suppressing the incentive for the development of renewables, for the environmentally-friendly energy products will not be able to beat the price of the heavily subsidized gasoline.

In short, the current fuel subsidy practice is unproductive, pro-rich, and environmentally harmful. Too bad, the government is also focusing the debate too much on the deficit issue.

Sunday, March 18, 2012

RIP: Sajogyo

Rest in peace, Prof. Sajogyo, the quiet man behind the poverty line measurement. You are deeply missed.

Sunday, March 11, 2012

Widjojo (1)

Widjojo (1)

He was loved and he was hated. Now he’s gone. No doubt, we in The Café are in the group who loves him dearly. We are aware that Kwik Kian Gie, Rizal Ramli, and the likes hate him. We don’t care. For us, Pak Widjojo is eternal. He lives in our way of thinking, way of seeing things. It’s not only economics. It’s about how one should deliver an idea. How to argue civilized way. How to respect even the unknown. We are way his juniors. Our experience is a tiny fraction of his. But if there is a model we would like to follow, that’s him.

But what really is this concept called Widjojo? Unlike that of prolific economic writers such as Chatib Basri, Sadli and Emil Salim, Widjojo’s writings were dry, almost boring. But the messages were strong and important at the same time. Read his 1963 professorial inauguration speech 1963. That was dry and dismal. But it was incisive and contemporary. At the time, Robert Solow’s 1956 seminal paper on neo-classical growth model was a big thing. One of the model’s predictions is growth convergence between rich and poor countries that share the same steady state (current textbook example: Germany and Japan in the aftermath of World War II). This is theoretically neat. But empirics do not always confirm: some poor countries remain poor, rich keeps progressing. It took some time before the profession agreed that the convergence that goes with the empirics is conditional convergence. That is, a country will converge to its own steady state. Or, if any, countries with similar starting points will meet. But what if this similar starting point is nowhere to find? What if savings rate or technological rate of a less developing country never catches up with that of the developed? Almost two decades after Solow’s paper, Krugman came along with an inconvenient truth: it is possible that a rich country keeps leaving the poor behind due to increasing returns and economies of scale. And of course, from more micro-perspective we are now familiar with poverty-trap, et cetera. Today, ground researches by members of the younger bastion like Banerjee and Duflo attest this. But Widjojo, among a few, had warned us in 1963. He wrote that a big gap in initial levels of income might not be neutralized simply by equal rate of growth in income. In order to overcome this situation, he added, less advantageous countries need a rational planning with economic analysis – and implement it vigorously and consistently. Then he explained in greater details what he meant by planning – in that inaugural speech. Two years ago, Widjojo admitted in his book, that that speech went against the tide: people were unconvinced that economic issues were important. Worse yet, people were skeptical to economics as a “text-book thinking” approach.

Now, this same person, the text-book-thinking Widjojo was no blind supporter of heavy state planning. He was actually more pragmatic. In 1955 – he was 28 years old – he debated Wilopo, the former influential prime minister. The event was the fifth anniversary of Department of Economics, University of Indonesia. Wilopo, the key-note speaker, presented an argument against economic liberalism. In particular, Wilopo disapproved private initiatives and individual property rights. Widjojo called this contradiction – that Wilopo treated private initiatives as necessary evil in development. Instead, according to Widjojo, private enterprises should be given a role in economic development. He also warned that by “private” we should not just mean big enterprises (to name a view, he mentioned a Dutch-owned oil company BPM and an American Stanvac), but also the small ones. As he put it, “the little farmers with a piece of land of no more than 0.1 hectare are also private”.  (Note that Widjojo’s stand with regards to private role in economic development had shaped even before he went to UC Berkeley in 1957).

(this might be continued).

A Tribute to Widjojo by Pram Oktavinanda

Dear cafe patrons, our friend Pram Oktavinanda shares his tribute to Pak Widjojo. This is cross-posted at his blog too. Being a lawyer and legal scholar, Pram highlights Widjojo's contribution to the economic analysis of law in Indonesia. Enjoy. - Kate.

An Introduction to Economic Analysis of Law - A Tribute to Prof. Widjojo Nitisastro

by Pramudya A. Oktavinanda

It was a sad day indeed for Indonesia as one of its greatest economists, Prof. Widjojo Nitisatro, passed away yesterday. What a great loss! Although I have never met him in person, I know him through his splendid articles and books about him, especially the Kesan dan Pesan Sahabat-Sahabat Widjojo Nitisastro. Two of my favorite articles of him deal with the economic analysis for national development and the economic analysis of Article 33 of the 1945 Constitution (which discuss the correct economic structure for Indonesia). I consider those articles as the classical example of economic analysis of law in Indonesia and they have significant impact on inducing me to pursue the art of Law and Economics.

While I have been writing about law and economics for many times in my blog, I have never formally written about an introductory article on economic analysis of law itself. I guess this is the right time to do so as a tribute to the late Prof. Widjojo Nitisastro. You will surely be missed and may you rest in peace. God bless you.

Economic analysis of law or law and economics is a school of thought primarily developed in the United States that uses the powerful tool of economics to analyze various legal issues. It discusses three primary questions: (i) What is law? (ii) Why law exists in the society and can have binding power? (iii) What can be considered as a good law? Two prominent scholars can be considered as the early developers of law and economics, Gary Becker, a prominent economist who won Nobel prize in 1992, and Richard Posner, a prolific legal academician who is also considered as one of the best judges in the United States. Both teach at the University of Chicago and contribute significantly to the development of law and economics.

Why economics can be a useful tool in analyzing the law? The primary notion used in this school of though is that men act rationally. Not in the sense that they can always make perfect calculation at all times but in the sense that they respond to incentives and pay attention to the costs and benefits of their actions, even when they are subject to various limitations in doing so. This is the basis of positive law and economics which deals with descriptive analysis on the law and how it will affect human behavior.

The second notion in law and economics is the pursuit of efficiency and welfare maximization of society. This is used by normative law and economics which believes that law should be designed to maximize the welfare of the society, whereas to reach that goal, law must be designed as efficient as possible. The more efficient the better, since it means that we can save costs while produce the biggest benefits to the society.

Interestingly, despite the fact that law and economics has reached a very strong position in the United States, dominating the legal thought there, it is relatively unknown in Indonesia which sadly, still focuses its law teaching with classical legal thought. I guess this should be changed if we really want to improve our Indonesian legal system.

Why law and economics is helpful for developing our legal system? I have three main reasons. First, by paying attention to how the law can shape the incentives of the people, we can shape our law to effectively affect the behavior of the people. As an example, I once argued on limiting the use of prison as a sanction for corruptors and instead using the sanction of assets confiscation. Assets and money are the bloodline of corruptors, the ones that significantly induce them to do the crime in the first place. If we only send them to prison but fail to secure the assets back, that will allow the criminal defendant to use the money to buy his way through the legal system (remember the case of luxury prison).

Second, by paying attention to the notion of efficiency, we will also pay attention to the costs and benefits of having regulation. Only regulate if the costs of doing so are lower than the benefits. Do not try to regulate everything because we cannot have an effective regulation without effective enforcement. And enforcement can be costly, the bigger the scope of the enforcement, the bigger the costs. Classical legal thoughts believe that law should be obeyed because it is promulgated by the relevant authorities. This is completely wrong. It is obeyed either because we find a mechanism to enforce it or the general society believe unanimously that such law is useful. Hence, the need of enforcement.

One good example of this would be laws that deal primarily with regulating private behaviors that do not produce clear harms such as how to dress publicly. On the one hand, regulating those kind of things will be costly, imagine the price for enforcement and the potential social unrest that it will create since it will give legitimation to people to violate other people on the basis of dress. On the other hand, there is no clear benefit of regulating such behavior in the first place other than to serve the idea of several people about morality. We've seen a lot of these absurd laws, such as laws that try to regulate how to name your child. I wonder how these laws could even exist if not only for the purpose of political maneuver.

Finally, by putting the goal that laws should always aim to maximize the welfare of the society, we will have a good guide in developing laws that will be useful for the society. And there are a lot of things that we can discuss here. Some good examples that I have once discussed: how to efficiently regulate liability of people in tort cases (such as whether we need to establish good samaritan liability), whether we should maintain death penalty (do the benefits justify the costs?), how to prevent rape crimes effectively, the extent to which we can limit foreign investment in Indonesia, how to share the legal risks of infrastructure development in order to induce more investors to come to Indonesia, how to reduce courts burden by cutting unnecessary costs for judging petty crimes (the latest Supreme Court regulation is a nice example of this), and many more.

I believe that it is important for law makers and legal enforcers to always strive for welfare maximization in rendering and interpreting the law. You do not enforce the law for the sake of the law itself. Law is not holy, it is not untouchable, it is not derived from the sky, rather it is made to serve men and should be made in view of men needs. Prof. Widjojo Nitisastro has started the idea of using economic analysis in shaping our national development and making sound economic policy long time ago. It was a great contribution, something that we, youngsters, must also strive to achieve. The least thing that I could do is to introduce law and economics to Indonesia and contribute in offering good public policy for our nation.

Saturday, March 10, 2012

RIP: Widjojo (2)

Here's some hallmarks in Pak Widjojo's life:

Born 1927
Head of LPEM-FEUI 1955-1957
Professor of Economics, FEUI 1962
Dean of FEUI 1964-1968
Director of LIPI 1964-1971
Head of Bappenas 1967-1971
State Minister of Bappenas 1971-1973
Coordinating Minister for Economic Affairs 1973-1983

RIP: Widjojo Nitisastro

Taken from The Indonesia Today

The Cafe is mourning. Pak Widjojo passed away yesterday. We'll post and link to some articles related to Pak Widjojo. For now, Ape's 3-piece article in JakartaBeat is of relevance: Part 1, Part 2, Part 3.