Law for Sale -- Revised Proposal

Pramudya Octavinanda has very interesting ideas on how to design anti-corruption policy in response to my earlier posting here. Let me start with his points that I agree with.

First, the main objective of penal sanction system should be to recover the state's assets corruptors stole as much as possible. Second, it also has to prevent corruptors to buy (il)legal protection and political position that allows them to steal in the first place and afterward. In other words, it should make bad guys miserably poor.

Yet, what I don't really agree with is the idea to link two or more anti-corruption agencies for the sake of efficiency. If you let this happen, what we would likely have is an anti-corruption monopolist. This monopolist can sell their services either to corruptor or to the state whichever pays higher price. So if you want them to work in favor of the state and arrest the corruptor, the state has to pay or provide incentive more than what corruptor can do. This is expensive.

So I think I'd still opt for competition amongst anti-corruption agencies.

Now let's discuss Pram's objection on this competition. He said that without (formal) case transferability, competition won't work. But this is actually the very basic premise of my proposal for more competition -- that is to increase transferability. In my idea of transferability, bad guys can not rely on one agency to get protected, because other agencies can still arrest them legally. Competition would remove privilege of one agency over another; and with this, a case can be "transferred" to any agency willing to arrest the bad guy.

As for incentive for these competing agencies, as also asked by Mova in his comment, I'm thinking to incorporate Pram's insight on making corruptors poor and maximizing state's stolen assets recovery in incentive structure as follows.

Let's make the state (say President, or the Ministry of Finance) determine how much money they want to see back to state's coffer. If there is 100 bn IDR state's loss in a corruption case, they can set, say, 90 bn IDR recovery target and announce this to the competing anti-corruption agencies. Any agency taking this offer has to provide 90 bn IDR to the state but can take the remaining receipt, i.e 5 bn IDR if the agency can make the bad guy repay 95 bn IDR to the state.

So the state doesn't need to add more resources (higher salaries, bonus, etc) to anti-corruption agency, but any residual outcome belongs to the winning agency.

Do you think it will work?

Law for Sale -- or Corruptor's Revealed Preference

I think it is good to have competition amongst anti-corruption squads or law enforcers. Think this way: a corruptor can bribe the police, but, in competition, the general attorney office or KPK will still be more than willing to arrest him/her - and vice versa.

Now you may want to say: what if the corruptor bribe them all? It's possible, but at least it is now more expensive to do so than with single anti-corruption office. The competition raises the corruptor's cost of wrongdoing and make anti-corruption more efficient.

Better yet if we can somehow set an competitive auction mechanism in which police, general attorney office, and KPK can bid to arrest a corruptor and force this corruptor repay the certain amount of the state's loss, and the office proposing lowest operational budget would win.

Who's afraid of such competition (a.k.a the loser)? First, the one from less efficient office. Second, and the foremost, the operation target, that is the corruptor him/herself. The non-corruptor would have no objection about this.

Now, if you know someone fiercely takes troubles and makes a lot of fuss on this competition among anti-corruption agencies, you may ask yourself and be suspicious if he/she is either from the less efficient agency or Mr/Ms Corruptor him/herself.

We economist call it his/her revealed preference -- regardless her/his stated preference as self-proclaimed anti-corruption bravados.

Gary Becker's World View -or Something Like That

One feature I like from Chicago political-economy school is their optimistic view on market-like competition and the ability of people to generate it --regardless of any (usually government) attempt to suppress such competition.

Gary Becker interview here is one example. Unlike the right-wing radicals who saw the passing of healthcare bill as a doomsday for America, Becker remains rather optimistic that voters as well as competing interest groups generally would place more realistic assessment and control on this political and politicians' product.

I share his view on the role of interest groups competition - including on the latest Pansus brouhaha.

My favorite lines, however, is his explanation on people's anti-market bias. Becker says at ease:

"There's one bias that we're up against all the time: Markets are hard to appreciate. People tend to impute good motives to government. And if you assume that government officials are well meaning, then you also tend to assume that government officials always act on behalf of the greater good. People understand that entrepreneurs and investors by contrast just try to make money, not act on behalf of the greater good. And they have trouble seeing how this pursuit of profits can lift the general standard of living. The idea is too counterintuitive. So we're always up against a kind of in-built suspicion of markets. There's always a temptation to believe that markets succeed by looting the unfortunate."

Yes, indeed market is hard to appreciate - mostly based on appeal to emotion.

What To Do Against Big Boys

OK, I haven't had time to have coffee at the legendary murkycoffee at Clarendon and now they had closed the cafe down and moved to near Chinatown. But this op-ed by its former owner Nick Cho, is worth to ponder.

But if Starbucks brings one of these new concepts to Washington, I'll be among the first in line. To me, Starbucks is only a problem if the quality of their coffee gets worse, and this new spinoff might help it get better. (If they want to compete with the likes of Victrola and other great third-wave coffee bars, it's going to have to get a lot better.)

I hope the coffee wars help nudge the caliber of all coffee upward. Just because you're not a corporate behemoth doesn't mean you serve delicious brew. The dirty little secret of most independent coffee shops is that they don't know how or don't care to serve high-quality coffee. They believe that furnishing their shops with comfy chairs and knowing the names of their customers' dogs is all that matters.

Bottom line: competition is good. And if you have the right taste of (real) espresso, burger as good as Ray's Hell Burger, or rigorous research methodology; you shouldn't worry about Starbucks, McD, or any "imperialist" field of science.

Ain't Stupid Voters

So you think voters are stupid, so that you can just buy their votes?

Think again.

They are smart, help them!

I don't get this Jakarta Post headline: Olympiad winning needs gov't support. And a quote: "I have written to the President and the education minister, calling on them to grant gold medal winners full scholarships at the world's best universities, such as Harvard, Massachusetts Institute of Technology or Princeton"

Hello?

If the government needs to help after all, they should do it for the unfortunate less smart students who struggle with math, physics, liberal arts, economics, whatever. Not for those world calibre students, because the Ivy League surely would love to accept and grant them scholarship (They are genius, aren't they?).

Unless those top universities don't recognize such award contests.

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.

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.

Riding a Cab (and pay old fare) in Jakarta

If you ever traveled with a cab in Jakarta, you would notice that there are cabs with old (cheaper) fare and ones with new fare. Approximately, the former are about 30 percent cheaper.

The major cab company in Jakarta (that claims to have more than 50 percent of cabs market share in the city, according to their internal magazine I read while stuck in a usual traffic jam) belongs to the more expensive group. They adopt the new fare is due to the fact, again they claim, that higher fare does not bring down the number of passenger significantly. In economics jargon, the demand elasticity is low.

The two types of fare is actually quite new. It came into effect when the cab firms did not agree on increasing fare following the fuel price hike. Here, the government regulates the cab fare, based on input from the firms association (Yes, you read it right).

I actually like this kind of dual fare arrangement. In fact, I want more than two types of fares. It leaves me, as a cab consumer, a range of choice. If you have the money, or your company pays it, you can take the premium. Otherwise, when money is short, you can take the riskier and, perhaps, less convenient service.

Unlike public bus or economy class train --the mighty KRL--, I don’t see any reason why government should set the minimum fare for more luxurious cab service. Thus I would love to see those cab firms to disagree to each other –in other words, becoming a failing cartel –.

Without price cap, you may want to say that the major cab firm will drive the fare up steeply, and leave us worse off. I bet it won’t be the case. They can try to do so, but competition will bring other cab firms with more or less similar quality but lower fare to come in.

This might sound counterintuitive for some of café visitors that if you hate cabs that charge you high fare, what you can do is not trying to regulate price (to hold the price increase through government regulation), but to free the market.

Do modern markets really harm the traditional ones?

Errata. I wrote "the treatment group consists of traditional markets opened between 2003-2006 which are located within 5 km from a modern market." The correct passage should be "sellers in traditional markets which are located within 5 km from a modern market(s) opened between 2003-2006." Sorry.

One one occasion, a student confronted my statement that market competition does not necessarily means the weak will have to face the strong in one battlefield. This student used the traditional vs. super/hypermarket as the evidence. To be honest, although I thought his statement (as well as others who shared this view) was still debatable, I could not provide any scientific evidence to refute his argument.

But a recent study of our colleagues at SMERU Research Institute now provides the empirical evidence. Their study shows that although it is true that sellers in traditional market has been loosing profits, it can not be attributed to direct competition with modern super/hypermarkets. The report is not yet available online (thanks to Dr. Sudarno Sumarto for letting me quote and discuss their work). But it has been quoted by a local news magazine.

They interviewed fresh food sellers in traditional markets in Greater Jakarta and Bandung area. The sample was then divided into two groups:

• Treatment group consists of traditional markets opened between 2003-2006 which are located within 5 km from a modern market.
• Control group consists of markets located in the same districts with that in the control group where no modern market exists within 5-km radius, but according to the regional site plan, there will be a super/hypermarket opening nearby in 2007. This last criteria is important to isolate the placement effect (the fact that a modern market is opening soon means that the location is equally attractive to modern markets).

In addition, the markets in both groups must not have been renovated after 2003 (the benchmark year in this study).

The difference-in-difference result (see below) showed that from 2003-2006, sellers in both group are losing profits. Interestingly, those in the control group (who faced no direct competition with modern markets) experienced bigger decline in percentage term. However, the difference is statistically not different from zero (but still provides no evidence that the modern markets harmed the traditional ones). The bottom row shows that in terms of earning, the control group experienced bigger decline. This may suggest that to cope with declining profits, traditional sellers tend to maximize sales rather than profit. Still, the difference is not statistically significant.
To put it in another words, this study shows that with or without modern markets, traditional markets are declining. If financially strong modern markets are not the main culprit, then what are? According to the qualitative part of the study, many sellers view street vendors (those selling similar products outside the marketplace) as more of the problem, as well as bad management.

Before we either believe or bash this study, there are some caveats needs to be taken into account:

• First, the question of external validity: can the sample represent the population? (SMERU has acknowledged this in their study).
• Second, as our friend Arya Gaduh pointed, although they had tried to correct the placement-endogeneity bias by only considering locations where a modern market is opening, the problem may still exist. The decision to open in 2007, not earlier, may perhaps reflect location preference.
• Third, our co-blogger Sjamsu raised the issue of selection bias. Could it be that those who were interviewed only represents the 'winner,' while the 'losers' have already exit the business?
• Fourth, the study was limited to fresh-food sellers. Sjamsu also referred me to a study conducted by a consulting firm that fresh food sellers are still the winner as they still have a comparative advantage: freshness. They start selling early in the morning (when modern markets are still closed). And, in the urban/suburban areas, even the most of the mid-high income still buy fresh food from the traditional markets (or ask their pembantu to do that). So perhaps the result was skewed towards the 'winners.'

Nevertheless, SMERU study has provided us a very valuable empirical evidence. More than just anecdotal or 'romanticizing' the David vs. Goliath epic in market competition.

Addendum. As presented, the numbers in parentheses from the table above are standard deviations calculated from the sample. The authors did not present the standard errors for the mean values and the DiD coefficients. However, in the appendix section of the report, the authors presented the standard error and t-statistics for the DiD coefficients. The t-statistics are 0.76 (changes in profit) and -0.32 (changes in earnings). So statistically speaking the DiD coefficients are not different from zero. The authors estimated several models, adding some controls in the regressions. The coefficients changed slightly, but the results are consistently not significant.

Should 'halal' certificate be compulsory?

According to some reports, the Majelis Ulama Indonesia (MUI; Indonesian Council of Ulema') is considering to issue fatwa regarding some products which halal status is in doubt. Its chair also thinks that the current law on consumer food (sic?) to be amended to make the halal certificate compulsory, not optional.

There are two issues here - first is the fatwa. I am not a theologist. But from what I know, according to the Sunni tradition, fatwas are non-binding. Therefore, I will respect such fatwa just as guiding principles. But whether or not I would consume the products listed in the fatwa, if it were to be issued, that would be my personal discretion.

Second, the more problematic one, is the proposal for a compulsory halal certificate. Let's for a while forget the halal part of the phrase, and focus on the certificate. Why do we need certificates or labels on any products? Sure, the answer is to protect the consumers by providing necessary information. License for chefs means we can be assured that our meals in the restaurant are made by Certificate on airline safety helps the consumers distinguish which airlines has met the certain standard. Certificate on genuine software product helps consumers know that a software is pirated. Green certificate helps consumers who are aware on environmental degradation avoid furnitures assembled using illegal logs.

(At least that works theory. In pratice it may nor work as expected. Similarly, the consumers may not care. But that's another issue. On the other hand, Aco may have different opinion - price is enough to create the necessary certificate).

But certification can (and will) also increase production cost. On the darker side, it can (and will) create the room for rent-seeking activities. Also, instead of giving protection for certification may in fact be the protection device for uncompetitive producers. Think about local producers who screamed that the second hand electronic goods imported from China are illegal, hence they need to be certified.

Now, back to the laptop... I mean, the halal certificate. What use of such certificate? Well, to protect the Muslim consumers (to be precise: those who care) from consuming non-halal food. Fine. It works so far, in the sense that it helps the consumers who care, it does not matter for those who don't, the cost is not significant for producers. And it is not compulsory, meaning that if you want to target Muslim customers, you'd want to invest on such label. If you don't, or you don't think your customers don't care, then you can skip the process.

However, making the certificate complusory is problematic. It won't matter for big producers (like Indofood). But it will matter for small and medium producers because they should bear additional costs for getting the certificate, while the benefit for the may not be significant. As this guy argues, SMEs in small, remote cities will be mostly hit as they may need to 'invite' the MUI officials, provide transports and accommodation etc.

Hence, can we find a way to be religious (if one wants to) without sacrificing efficiency? There is one thing: don't make such certificate compulsory, and leave the religious way of life as a personal choice. We don't need the state to nanny us. In Australia, the Islamic Council periodically issues a list of products that may be consummable by Muslims. The list includes some toothpaste, marshmallow, baking powder, and the addresses of butchers selling halal meat. And it works.

On the Tasteless Garuda Billboard

When my relatives came to visit us in Yogya about two weeks ago, one of them saw the billboard above, towering over the intersection between Jl. Kaliurang and the northern ring road, and he said: "Wow, that's such a bad taste, unethical to say the least". The ad says,

Finally, safety, timeliness, comfort, of your flight become your first priority.

Yes, it's a Garuda ad, and the billboard first went up not long after Adam Air KI 574 went missing. Tasteless. Unethical. There is an illusion of safety with Garuda, and the airline doesn't shy away in exploiting it. Unspun may have commended Garuda's Emirsyah for doing a good job in the aftermath of the GA 200 accident, but someone should tell the president director about those ads his company been running since early this year.

Do people buy into it? I can say I did. I had to fly back and forth between Yogya and Jakarta in the past 4 months and since the KI 574 accident, I fly only with Garuda. The fact that Garuda could afford to run those ads without much of a backlash show that the illusion of safety is widely held.

Seeing the billboard, my other guest went as far as saying it's almost inevitable that the ad will backfire in one way or another. It's a jinx, "pamali", "takabur". Well, I was never into superstitions - I am more concerned with the conditions of the runway at Adisutjipto - short and bumpy.

I agree with Rizal that it is not the time to play the blame game, and I certainly wouldn't blame recent airline disasters on competition. What we need is indeed a thorough audit not only on airlines but on the whole aviation infrastructure (see Roby's comment here).

Who's afraid of banana?

My baby boy loves banana. I was told by his doctor that banana is good for babies. I so assume that many parents feed their babies with bananas, too. For them, and for the babies' sakes, less expensive banana is therefore a good thing.

Apparently, the government (and Indonesian Banana Association -- of course this is not their name, I made it up) disagree. So far, Indonesian banana market has been a good sale place for cavendish bananas from the Philippines. Last year, the price was good (as consumers, we don't care why it could be less expensive, we only care that it was relatively not expensive). As it turns out, and if the government accusation is correct, them Philippinos were doing a dumping strategy. That is, they were selling bananas at lower price to us than to their own folks.

And the government had to do something: cheap bananas are not good for the economy. So they came up with a decree imposing an anti dumping tariff on cavendish bananas from the Philippines (if you are curious, it is the Ministry of Finance's Decree No. 81/PMK.010/2006).

Ah, again.

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.

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?

Privatize PLN!

An economist who is also a member of the parliament was cited in Kompas today. Commenting on the 2004's Rp 2.02 trillion loss of PLN, the state-owned electricity monopoly, he said, "PLN is a public-service oriented company. Therefore, it should not be treated as a profit center". He then asserted, "Accounting practice for PLN should differ from those for private companies. Furthermore, PLN should not be decentralized, because otherwise it will create cost inefficiency, since prices will be different across regions".

This is like a father telling his adult son. Son, you have to support your brothers and sisters. Therefore, I will keep supporting you. Just do your work, no matter how bad you do. Where I got money to support you from is of no concern for you. (Of course I'll tax your brothers and sisters).

The only way to make PLN more efficient is to leave it to private and expose it to competition.

high octane

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

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

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

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

Competition is minority's best friend

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

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

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

Discriminated workers all around the world, support competition!

Compete or perish

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

And you say competition ain't good?