On Fears for Free Trade

Tyler Cowen argued that:

What’s really happening is that many people, whether in the United States or abroad, are unduly suspicious about economic relations with foreigners. These complaints stem from basic human nature — namely, our tendency to divide people into “in groups” and “out groups” and to elevate one and to demonize the other. Americans fear that foreigners will rise at their expense or “control” some aspects of the economy.

Dani Rodrik retorted:

So the "us" and "them" characterization that Tyler attributes to irrational nativism perhaps has more to do with the absence of a common set of international rules on labor standards, environment, consumer safety, and so on.

Now, an anecdotal evidence from the English Premier League (I know Rodrik roots for ManU, and I Arsenal -- not that this fact's important though), on foreign players' impact on the three-lions national team performance, its Chairman said:

Does the Premier League hurt the national side? I think the answer to that has got to be yes.

What is more common than football's set of rules and standard? Yet, this Englishman prefers to blame those non-Britons players for the lousy performance of its national team that even doesn't qualify for Euro 2008 final round.

I can not imagine the EPL without foreign players.

Blame it on the liberalization?

Following the recent soy bean and other food commodities price hike, some people blamed globalization and liberalization of agriculture market as the main culprit. This is the logic (the abridged version): low import tariff drove down domestic prices so local farmers had little incentives to produce more. This creates high dependency on imports, which is bad because we are very vulnerable to global price fluctuations, like what we are experiencing now.

If we are talking about soy bean, then this kind of argument is fallacious. We have been a net importer of soybean since mid ‘70s. Long before the agriculture sector is liberalized. In other words, we have been dependent on imports since long ago. The second line of argument said that if we protect our farmers, at least our domestic production could have been higher so we can have a buffer stock as a cushion against global price fluctuation.

Actually, that can be true only if we are a big enough player in the global market. If we are a small player, like the case of soybean, then at best buffer stock can only ensure that domestic prices do not exceed global prices. But the overall trend of price increase may not be altered.

Now move to the food commodity in general. The fact is straight: the productivity of our agriculture sector is lower than that in the ’80-90s. Again, the question is whether liberalization of agriculture sector to blame. Let’s say that liberalization has got something to do with that. Nevertheless, these other factors have also affected productivity, and they have nothing (or less) to do with liberalization:

• Public investment in irrigation infrastructure is inadequate and has been declining. It needs about a third of the current central government budget to improve the irrigation infrastructure just to return to the mid-90s level.
• Investment in roads, especially rural roads, has also been declining. In 1994, public expenditure by all levels of government was 1.4% of GDP. In 2002 it was less than 1%. More than 40% of roads are in damaged or severely damaged conditions. Without proper roads available, it is difficult for rural farmers to reach the market it nearby towns.
• Real expenditure on agriculture research is only 0.1% of GDP (Bangladesh spends 1% of its GDP), and it is less than that in 1995. That explains the lack of invention in new, more productive crops or farming techniques.
• Only around 20% of land plots are certified. This explains the lack of access to credits that is still a problem among poor farmers.
• Domestic market failures resulting from imperfect or asymmetric information, bureaucracy, distribution chain etc. that creates a significant gap between the price consumers pay and farmers’ revenue.

Some of the problems are side effects of decentralization. There is still an unclear division of authority and responsibilities among central, provincial and district governments on infrastructure spending, farmer training or credit provision. But it’s sexier to be anti-liberalization than anti-decentralization, isn’t it?

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.

On inequality and globalization, again

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

He quoted the ADB'S Key Indicators 2007 that reported Asia's widening inequality. He rephrased the conclusion as:

... Asia's growing inequality is "not the tale of the rich getting richer and the poor getting poorer, but the tale of the rich getting rich faster than the poor."

Fair enough. But there are two things I'd like to note. First, in his article the main culprit is, of course, globalization. In other words, he blamed globalization for making the rich getting rich faster.

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

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

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

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

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

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UK updates and pollution-corruption resemblance

Most of this was written on a breakfast paper napkins as I was having my Scotch pancake tower with fresh berries, orange juice and a big mug of black coffee. Across the window was calmer sea tide (it had been rougher the past few days) in a cold summer breeze of Brighton.

Some updates for you from UK. Gordon Brown just assumed premiership, replacing Tony Blair. Smoking ban is effective nationwide as of 6am this morning. Glasgow airport was hit by a car bomb yesterday, suspects are caught and held, and the word ‘Al-Qaeda’ is again operative all over the media. As usual, TVs exaggerate things up -- while in London yesterday I heard no single word of terrorist attacks (well, except of course in airports). Rather, people talked about tennis. Wimbledon is packed but wet – many games are interrupted by rain and wind. Federer is relaxed, Mauresmo seems quite nervous. In the meantime, the two princes, William and Harry, are preparing a birthday party for the late mother. Yes, it would be tonight at Wembley Stadium and yes I would have to miss it – I’m flying back this evening. No, I’m not sad to miss Elton John or Duran Duran or David Beckham, but I hate to miss Joss Stone (the new soul beauty) and Fergie (the Duchess of Black Eyed Peas, not the Duchess of York, mind you).

Yet, I am still thinking of the discussion at the IDS, University of Sussex. We were talking about the many types of relationship between public authority and private capitalists in developing countries, both in national and in district levels. It is interesting that most if not all participants recognized that there are linkages, direct or indirect, between government officials and businessmen and that those linkages play role in affecting the flow of investment. Different speakers came up with different terms: public-private relationship, hand-in-hand relationship, collusion, trust, you name it. But I thought they were all referring to the same thing. And that same thing could lead to good or bad outcome. I am talking about corruption. It is true that some degree of closeness between public authority and private capitalists is needed to promote investment. But the critical question is how much. What if the ‘trust’ transforms into ‘collusion’? Of course this is a very difficult problem to solve, but I suggested other participants not to shy away from recognizing the danger of promoting any kind of interaction between public and private agents.

To make my case, I used an analogy with pollution. I think, the role of corruption in economy increasingly resembles that of pollution. Both are bad. But you can not completely eliminate them. The best you can do is to minimize them. Some participants looked horrified with this idea. But just as many people have accepted the notion of minimum level of pollution (as opposed to zero pollution – a darling term used by environmentalists), I expect that the same thing would happen to corruption, sooner or later. The growing literature on the optimal level of corruption is one indication of this trend.

OK, I miss home.

Puzzling Stuff, Japanese

Again, I'm amazed with Japanese. It is true that Japan is one of the biggest players in the global economy. But its advance stage of economy might have nothing to do with the rest of the world. Well, I shouldn't put it that way. Try this: Japanese do not care that much with foreigners. Maybe that's the better claim.

The evidence is, of course, anecdotal. But just look around in Tokyo. Even in the most international part of it, Roppongi, the Japanese characters still dominates. And the service sector people do not care to speak English.

Take in particular tourism spots. Don't you think it is a good idea if all the information and promotion is in English? Or at least the sellers speak it? Well, Japanese don't seem to bother too much. Many times you are struglling just to find how much you actually should pay, and you end up leaving without even entering -- out of frustration. It might make sense for Kamakura Shrine, because temple is supposed to be, well, traditional. But not really for a modern tourist attraction like Enoshima Aquarium. I'm not making this up, but they had this doplhin show with girls cheering and singing to the visitors. They sang and cheered everybody in Japanese. They even did some interactive game, yes, in Japanese.

So Anna and I asked my sister who had been living in Tokyo for five years about this. Her answer was striking. Japanese tourism spots are meant for Japanese tourists! I looked around, and she was right: I could only identify a handful of strangers, I mean, non-Japanese.

Then, everything made perfect sense.

Democracy: what kind do we want?

The 24th Annual Indonesia Update conference this year is themed "Democracy and the Promise of Good Governance". I've been thinking lately that the theme is too heavy. That is, the term "democracy".

What is it that we really want when we say we want democracy? The memorization machine back in primary school said: "democracy is a system where the people rule". And we took it for granted. Then there was a time when columnists thought it was more cool to say it in a latin expression: vox populi vox dei -- the voice of the people is the voice of god. Again, taken for granted.

But then. In "people" there should be many persons. It is unlikely that everybody agrees on everything. So whose voice is the voice of god? It seems, by what the memorized definition implies, that the majority's voice is. Therefore democracy means a system where the majority rules.

If that is true, I don't like democracy. Because it allows the tyranny of majority.

Better system, I believe, is the one when people are free to negotiate. Regardless of whether you are of minority or majority, as long as you can enter into negotiation without coercion, and there exists a rule of law that is respected by everyone, then any agreement that occurs should benefit both parties. Otherwise, there would never be any agreement in the first place.

Right, I'm not a political scientist. But am I that off? Or, really, what is democracy?

And Canberra is still cold.

Democracy

Thing Singaporean

After one meeting yesterday in Singapore, I took a cab from Boat Quay. And this conversation followed:

Me to taxi driver (TD): Hi, can you take us to Hyatt?
TD: Yes, come get in. (So we got in)
Me: We're gonna drop him (I was referring to my friend) off at Hyatt, and then you take me straight to the airport, OK?
TD: Well, no, Sir. Can't do that. I serve just "the city" now, can't go to the airport. You have to take another cab at Hyatt.
Me: You can't go to the airport? Is it a rule?
TD: Yes, it's the rule.
Me: Oh, I see. What if I ... double the pay?
TD: No, Sir. Can't do that. I will get another passenger in Hyatt. There's always a passenger. This is rush hour. (Then he was pointing at long queues waiting for taxis all along the Orchard Road). You see those long lines, Sir? This always happens. Around this time (he was pointing at the clock on the dashboard), everybody wants taxi. People should wait long to get one.
Me: (Teasing mode on) Singapore needs more taxis. Don't you think so?
TD: Oh, no, Sir. We're fine. We can handle (the demand, I suppose he meant).
Me: But ... you just pointed to me those long lines.
TD: Yes, but no need to add more taxis, Sir. Too many taxis already.
Me: Why, because that would drive down your price?
(Silent)

Singapore | Equilibrium

Globalize your teeth

Hey, don't laugh. I went to a otrhodentist to have custom transparent braces made.
The braces are based on a relatively new technology: http://www.invisalign.com/generalapp/us/en/index.jsp.
I believe it is a California based company.

What amazes me is the manufacturing process. First, I got my dentist measuring and checking all the problems. Then, he developed a special mouldings to map my teeth. Based on those prints, a team of expert will "simulate" the development of my teeth during the course of treatment using computarized mathematical programming.

Guess where are those guys who run the computer program ? Costa Rica.
Team of engineers in Costa Rica will use videostream to consult with my dentist on their design and the trajectory of my teeth. Once the design is complete, set of braces are made and shipped to my dentist before they delivered to me.

Why Costa Rica? They have pool of talented engineers, speak English, perfect weather I suppose. Another reason might be because leaders in Cuba are still too busy : )

Globalization

How more, not less, globalization can be beneficial for low skilled workers

In Indonesia as in many parts in the world, May Day was celebrated by or with the support of the anti-globalization movement. In the US, more than about any other issues, the last May Day is almost exclusively about the issue of immigration. Sylvia Tiwon at Indoprogess saw what happened earlier this week in the streets of major US cities as evidence of "the irony of globalization" and she argues that "it is time for the laborers in the US...to recognize that poverty is an integral part of globalization".

I agree with the first statement that there is indeed this irony: on one hand the US government is trying to curb the flow of undocumented immigrants, while on the other hand, US businesses and households are taking advantage of these (illegal) immigrants. But I can't disagree more with her second statement - the globalization-poverty nexus. If anything, loosening immigration, thereby implying more globalization in the form of increasing labor mobility may be the fastest way to equalize the wages for unskilled workers between Mexico and the US. By doing so, it also has the enormous potential to help reduce poverty south of the border. I am more sympathetic with Rizal's view:

"...if what we mean by globalization is a free mobility of factor of production, how can we simply put aside the labor movement --itself a very significant, if not the most crucial, factors of production beside capital and goods?"

Like Rizal, I also tend to believe that more globalization, not less, in the form of high mobility of labor can be beneficial for the low-skilled workers from poor countries.

To drive this point further, an article by Stephan Faris at Salon is worth discussing. While he was living in Nairobi as a journalist for Time, he employed in his household the following: a nanny, a maid, a gardener, and a watchman, all for a combined daily wages less than the cost of the main course when he went out for dinner. All that was possible because he "drew Western salary and paid African wages" (a situation many expats in Indonesia may have no problem relating to). But he is smart enough to leave his troubled conscience behind and wrote:

"...Those who squirm at the idea of having servants should consider that there's little moral difference between me and my maid, and those who buy a washing machine whose low cost depends on other people's deflated wages. We've globalized capital, but not labor. A washing machine manufacturer can cash in on China's low wages, but the Chinese factory worker is barred from taking a boat to seek better pay. He's forced to sell his labor at much lower than the global market value. Both my maid and the factory worker would prefer to work for Western wages. But they can't because of immigration restrictions..."

Indeed. The main reason why people emigrate to other countries is to take advantage of the differences in potential earnings (Massive Movement of Refugees and IDPs and Chronic and Sustained Human Flight notwithstanding). Why wage discrepancies for the same skill level exist and why they persist are obviously determined by various things (e.g. endowment, technology, institution etc., see this for a simple yet powerful exposition). But perhaps one of the most important things that prevent these discrepancies to disappear is the set of immigration restrictions. Even with restrictions in place, the potential emigrants may internalize the cost and still view that the wage discrepancies are still worth taking the risks for.

Sounding like an economist, Faris then argues that:

"...From the standpoint of economic theory, liberalizing the flow of labor is no different from liberalizing trade. Both redistribute a nation's wealth, with a net positive effect. The difference is that liberalizing trade disproportionately benefits richer countries, while easing immigration restrictions would help the world's poor..."*)

Moreover, in most if not all countries, immigration restrictions disproportionally hold back the movement of low-skilled labors. A PhD in molecular science would be in better position to come to the US than a high school graduate (it is tempting to talk about brain drain and some misconceptions about it at this point but let's not). On the other hand, or rather because of it, the potential gains for unskilled workers are likely to be greater because the factor market for these unskilled workers is not as integrated as the one for highly-skilled labors. By loosening the immigration restrictions for low-skilled workers the dreams of better lives for them may be realized sooner. Even if it means that we need more globalization.

*) Some may be put off by any statement that begins with "From the standpoint of economic theory". But even the accidental darling of anti-globalization movement, Joseph Stiglitz, has the following message buried in his powerpoint file (see page 45) about the state of development in Latin America:

" The successful countries have actually followed models which are more in accord with economic theory than the Washington consensus "
(Hat tip to Martin for the link to the file)

Addendum:
Tyler Cowen of the Marginal Revolution fame and DanielRothschild wrote an op-ed in LA Times (via, what else, Marginal Revolution), addressing the same debate. Here's a quote:

"A key question for economists has been whether the influx raises or lowers"native" American wages. UC Berkeley's David Card, who studied patterns in different U.S. cities, concludes that immigration has not lowered wages for American workers. George Borjas of Harvard counters that immigration reduced the wages of high school dropouts by 7.4% between 1980 and 2000.

Most economists have sided with Card."

In the op-ed, Cowen and Rothschild also label Borjas as "the favorite economist of immigration restrictionists", an assertion I suspect many economists would also not find difficulties to side with.

Globalization labor

Flat world? Hold on

I'm not a huge fan of Tom Friedman. Yes, I was amused by his Lexus and the Olive Tree, but after attending his talk one day in the University of Illinois, I decided I don't like him too much. But everybody is talking about his recent The World is Flat. So, I grabbed one in Changi, as my in-flight reading to and from Cambodia.

It's not too bad. But I think Friedman is far too excited, he sounds like a little boy who just discovered a new toy. We all know that globalization is rolling and no one can stop it (bite me!). But calling a mere reduction in transaction costs which is so natural, given harsh and healthy competition, as "flattening of the world" is too bombastic.

And misleading, too.

The whole idea of trade is a state of differences. I don't trade with you if there's nothing different between us. I'm interested in you because you have something I don't. Vice verse. Hence, the trade. We both gain from trade, and trade occurs because we are different. But Friedman, while I think he understand the gains from free trade adage, uses his journalistic way of telling: bombastic title, repeated as a mantra throughout the book. I don't think he realizes how bad the world is when it is ... well, "flat". It's alright had he made it clear that what he meant by "flat" was nothing else than "cost redux": in transportation, in communication, you name it. But he failed to do that. He confuses between costs' race to the bottom and the leveling of playing fields between economic actors.

Of course, Ed Leamer should point out the book's weakness far better than me (hat tip to Parinduri). I haven't read the review, though.

As I said, however, Friedman is a great teller. The book is nonetheless entertaining. For example, I still like his description of communism and capitalism (I think I have heard it somewhere, but anyway): "Communism is a system to make people equally poor and capitalism is a system to make people unequally rich". Indeed.

ps. Speaking of communism, the great author, Pramoedya Ananta Toer passed away on Sunday. To me, he is the best Indonesian author ever. Rest in peace, Pak Pram. Here's an account from BBC.
pps. Also left us is Harvard economist John Kenneth Galbraith. He's not my favourite economist, but he surely has stamped his name in the field, though not via academic journal papers, but more via his long time role as a "celebrity economist", as described by Paul Krugman. Or as Sisyphus, as Brad DeLong described him.

Globalization

Democracy and economic welfare

My first op-ed article in 2006 (the Indonesian version was also published by Kompas). Thanks to Jusuf Kalla for his remark. Because of the limited space, I had to drop some interesting issues:

1. Jagdish Bhagwati's rebuttal to Amartya Sen. According to Sen, famine never occured in democratic countries. But Bhagwati cited an example of an Indian state of Bihar, who had a famine problem in the 1980s although many other states had suprluses of rice production. The surplus state refused to transfer their surpluses, and the central government could not do anything. Finally, PM Indira Gandhi had to ask for help from Washington. This is on page 100-101 of "In Defense of Globalization" (2004).

2. The discussion about good institutions and economic welfare. Reverse causality issue: do good institutions create economic welfare, or are institutions good because prosperous countries can afford to have them? Acemoglu, Johnson and Robinson (2000) proved that institutions do matter. What's interesting from their paper is the use of settlers mortality rate during the colonial era as an instrumental variable, so they solved the problem of reverse causality. However, as we know, this guy doesn't really buy the idea, and argues that once you get rich, you can afford to have good institutions, good governance and less corruption.

Democracy

Globalization: mini story part-2

They may look alike. Speak the same languange at work, bow to customers in a culture where hospitality and punctuality (and cuteness) are highly respected. But apparently they are different nationalities working for the same company. I don't know since when Japan Airlines and its group have been employing stewardess from Thailand. But they are many of them, mainly employed in domestic and regional (China, Korea) routes.

I guess this phenomenon is part of evolution in the global aviation industry. Increasing fuel prices, competition from international carriers, resulting in thin - and perhaps volatile - profit margin. The story goes that in the old days, working for Japan Airlines is one of that young Japanes female can dream about. Highly paid and able to travel around the world, visiting those I call Dunhill cities: Paris-London-New York, in a frequency matched only by movie stars or member of the Rolling Stones (airline tickets were more expensive in real terms compared to nowadays).

Now wages in aviation industry seems to be stagnant and benefit are trimmed, as airlines profit are squeezed. In short, real income compared to other industries is not that great. Thus working as an Airline stewardess is no longer that glamourous. With Japan real appreciation due to increase in price of non-traded goods in the late '80s, labor market went tight and wage in all services industries also creeped up.

But Japan Airlines can not give up and start to hire old women (sometimes mean too) like what the US airline carriers have been doing for their domestic route. What would Japanese (and myself) passengers say if their well-being in 14 hours of trans-Pacific flight are in the hands of Oba-san (old, mean, fat, women) ?

Thanks to Thai women, who are highly skilled in the services industry. They came in to fill the gap. They trained themselves Japanese language, perfected their attitude on serving customers, and then they flew.

Similar story is also happening in the US' health care industry where nurses from the Philippines are filling in the gap. Not only they work for hospitals, but they also work in retirement houses, taking care the elderly.

Indonesia also supplies thousands of maids to countries where working as servants are not an attractive job. Also, since more than ten years ago Indonesian musicians have been performing in bands in clubs in Brunei and the Middle East.

Thus, in services, global factor mobility has started in what the WTO classified as Mode 3 of labor movement across border. The key to sucessfully joining the movement is constantly arming our labor with skills needed in the services industries.


Globalization

Globalization: mini story part-1

On the way to Jakarta again. Outbound from Chicago O'Hare to Tokyo, I sat next to an ordinary looking American guy. By looking at his appearance, you can tell he's from the heartland (Midwest states): thick brown hair - combed just like '77 Saturday Night Fever, blue sweater with Ohio State University logo (apparently his daughter went there), slightly baggy jeans and a white tennis shoes. Indeed he is from Ohio, from a small town (I forgot the name) one hour from Columbus.

Americans love to chat. So does he. He said that this was his first trip to Japan in the last 8 years (this is my 2nd in the last 2 months). I asked him about what he does. Then we chat over several cans of Sapporo beer. He explained and for me the rest is a story of globalization, a story about falling trade and investment barriers, and an example for intra-industry trade theory.

The guy works for a glass factory, a Japanese owned one, Asahi Glass Corporation, with headquarter in Nagoya. They opened a plant in Ohio, nearly 15 years ago as a Foreign Direct Investment to supply car windows for Honda automobile plants in the US. Now, Asahi Glass also supplies car windows for the General Motor and Ford.

In 1989, Gene Grosman and Elhanan Helpman wrote a paper (in J. of Political Econ.) describing how technological innovation drives specialization and induce trade. The paper is a prologue to their 1991 seminal paper (in Review of Econ. Studies) on quality ladder and endogenous economic growth. One of their main predictions, or perhaps illuminations, is that countries with abundant high-skilled labor have the incentive to be the leader in the quality ladder. In a world with a free-entry, imitating is almost costless, therefore leader can not afford to loose and will push their research and development (R&D) to maintain their position. As a result, these countries tend to specialize in a high quality, research intensive, products (high definition TV, digital technology, high end textile fabrics), while the rest specialize in products with lower quality that requires less research (ember plastik or plastic bucket, tooth brushes, low end textile fabrics). However, if barriers for trade and investment fall, then there is nothing to stop a country - or its multinationals- to fragmentise their production: doing R&D in the home country while manufacturing in countries where labor is relatively cheaper.

Asahi Glass and Honda fit their story very well. Honda came in to the US to be closer to its market, reduce manufacturing costs, but mantain most of their R&D in Japan. Similarly for Asahi Glass, it came to the US to follow its customer (Honda) and mantain its R&D in Japan and manufacturing their glass in Ohio. They also continue to innovate. Both Asahi and Honda started to do R&D in the US, employing US' engineers, and as a result, they found new customers: GM and Ford.

Globalization

People were mad at me...

... when I thanked the high world oil price. And when I said I didn't think world crude oil would hit $75, they stared at me, like I was insane.

Fast forward.

Well, I suppose, they forget already what I said, even when now my prediction comes close. Here's a recent example. And don't forget this and this.

My professor once told me: if you think you're an economist, wait until many people condemn you, before you can call yourself as such. Maybe he's right.

Another drop in fuel price

Our lovely Pertamina will again cut the prices of Pertamax (the high-octane premium gasoline) and fuel for industry. The official says, as reported in Kompas today, Pertamina should be competitive, since new entrants are coming in.

Why am I not surprised?

Do you speak English? Litte-little sih I can...

Read a funny story on the Jakarta Post about the quality of one Minister's English. The news said that during a session between the president, some economic ministers and the executives of an Indian software company in India, this Minister asked a question, supposedly in English, but no one could understand what he was trying to say. The president was reportedly irked with him.

Some quotes of the news:

[The minister's] muddled assemblage of apparently English words, left the executives visibly perplexed and the audience silent for a long, uncomfortable moment, as everyone attempted to decipher the verbiage. President Susilo had a disturbed look on his face and turned and glared furiously at [him].

"If he is not sure of his English, he must not ask questions. It is embarrassing. I think he should take an English course to catch up with fellow ministers, who have shown their capabilities," said an official from the Ministry of Foreign Affairs."

Mind you, this minister holds a degree from Pittsburgh! The paper, naughtily, raised this alma mater issue:

[The minister], who holds a degree from a university in Pittsburgh, might have felt obliged to ask a question after Minister of Trade Mari Elka Pangestu, who studied at the University of California, Davis, and Coordinating Minister for the Economy Aburizal Bakrie successfully asked questions about the Infosys success strategy.

And, ironically, the chairman of the company "told the audience that among the key successes of Infosys, and India generally, in developing the software industry was good skills in English in order to communicate well with the international community."

Well, if there is to be a cabinet reshuffle, perhaps one criteria should be... TOEFL score...?

Strange root, young French wine, and Tiger penis

Sorry for being passive for the last week. I decided to take a bed from this blog because of work. Now let me get back at you folks with some story telling.

A week ago an auction sold a giant truffle, a rare delicacy, for about than 40,000 USD/pound. For those who are not familiar with this wild root, this item is chic enough to drive restauranteur and executive chefs from restaurants such as New York's Union Pacific to California's French Laundry crazy. Looking somewhat similar like a potato yet slightly pungent in aroma, ordering a salad-du-jour sprinkled with truffle, a splash of cold pressed extra virgin olive oil, and Parmigiano-reggiano cheese can asymptotically transform your average appearance to a regular bloke in the discontinued trans-Atlantic Concorde flight.

Exit straight East. Last Thursday, Japanese consumers were to be the 2nd largest consumers of Beaujolais-Nouveau, a young French wine, in the world. By law, this type of French wine can only be consume simultaneously on the 3rd Thursday regardless where you live. Apparently it has become a ritual race to serve wine fanatics around the globe on Thursday early midnight. For the last month, unnoticed mammoth logistical operation had taken place to transport millions of bottles around the world, from Lyons to Tokyo, Singapore, Jakarta, as well as the cafetaria of my workplace.

Move westward. China. One billion people with excess appetite for endangered species parts from turtle, monkey brain, shark’s fin, bear claw, and tiger penis. Some consume because their belief in the healing power of those delicacies and some are just plainly hungry for new yet sometimes raw adventure. Tiger penis’ soup in fact are priced according to how many times that poor animal meat has been used. The first "boil" is supposed to be the most expensive.

Let us all not be deceived. My point in each illustration is that there is an immense value created from the production, transaction, and delivery processes of each good/services.

Back to last month posting by AP on Friedman paradox (government role to protect property rights vs. to serve individual interest). I do not intend to answer your posting directly.

But what I do intend is for us to imagine how would it be if none of us has the right to legally defend our idea and our possession. Imagine a world without governance, without any legal protection whatsoever for your ideas and possessions. Then truffle would be cultivated by savage tribes; auctioneer will be likely found dead before even announcing the winner; and executive chefs can be kidnapped and force to work for any restaurant run by gangster. Not to mention resources spend on arming yourself and your family against looters. Red wine ? No Japanese will be able to consume because the shipment will not likely to pass even 5 km from Lyon. The UPS driver is likely to be lynched by mob who are desperate to possess the wine at the same time forgetting that no value can be created if there demand is suppressed at the other end. Tiger penis? Except Chinese royals or communist party officials, average bloke like us can’t get access to that rare thingy, hence “consumer surplus” evaporates (Don't get me wrong, I'm not advocating to eat /hunt down tigers. I believe this is an endagered species and its extinction is worse for all of us)

Thus IMHO an institution (or an agent zero as said in the infamous Mascolell et.al) that can credibly facilitate an efficient and secure bargaining process is needed if parties are interested in achieving optimal bargaining outcome. Othewise, as characterized by the Nash bargaining problem, short-sighted, short-tempered, ill-informed parties have less likelihood to achieve greater outcome and more likely to get the trheat value (low equilibrium).

...Mmmmm...... we need a government ?

Argentina's crisis in the game theoretical perspective

This week I have a group task of discussing Argentina's 2001 crisis. Each group is assigned a role to play: as the government, IMF, opposition party or private sector. It's quite an interesting exercise; we learn the crisis in a game theoretical perspective.

Consider stage 1: between the government and the IMF. The government's strategy is to do reform or do nothing. The IMF can either support (bailout) or leave. Hence the possible outcomes were reform-support (best case), reform-leave (on your own), no reform-support (moral hazard), and no reform-leave (crisis).

It was basically a dynamic game, because the Argentina-IMF interaction has been ongoing since the Tequila crisis, even before. Interestingly, according to papers by Andra Powell and Frederico Sturzenegger, there was no pure strategy Nash Equilibrium in that game. Only mixed strategy Nash equilibrium: each party was just randomizing between actions. The equilibrium prior to 2001, however, was reform and support.

Nevertheless, in 2001 Argentina deviated from the equilbrium when the government rejected the Lopez-Murphy plan. This deviation led to IMF to change the strategy. In the end, the equilibrium moved to the southeast corner, which is no reform and no support a.k.a. crisis.

Then in the second stage, the actors were the big private business and the opposition. Private sector can either pull out or stay and support the government. The opposition can either overthrow the government or not.

Note that all the games here were played simultaneously, which makes the case interesting. According to Powell, actually there were multiple equilibria for this game. It just happened that Argentina ended in the 'bad' equilibrium. But everything could have been avoided basically, and the country could be in the 'good' equilibrium. Well, it was a just a counterfactual now.

One thing I am curious now is: did all players have a focal point at that time? Or was it a true case of mixed strategy?

produk kultural

Hari ini, 1 November 2005, Financial Times memuat tulisan tentang produk kultural RRC. Tertulis bahwa pemerintah Cina sejak tahun 2000 aktif mendorong tumbuhnya industri kultural dari mulai seni vokal, fashion, erotisme (ini rasanya unofficial), media, sampai sinematografi. Singkatnya, koran itu bilang kalau "Chinese are no longer willing to play manual to the west's mental labor"

Tiga bulan lalu, kafe Gelatto di Dharmawangsa Square, gue terlibat obrolan dengan seorang budayawan/dosen Pelita Harapan dan seorang antropolog/calon S-3 sosiologi Kyoto Univ. Yuka, si budayawan bilang kalo secara budaya dia milih menjadi bangsa seperti Cina ketimbang menjadi bangsa kayak Indonesia sekarang. Alasan dia, secara kultural kita tereksploitasi, secara ide kita terkooptasi, secara materi kita kere. Secara umum menurut dia globalisasi menggiring kita menjadi pengemis. Dia bilang perlu rasanya revolusi kebudayaan Mao Ze Dong dibawa ke Jakarta supaya anak2 muda kita yg keleleran di mall, sok asik separo-separo berbahasa Inggris tau apa artinya memiliki bangsa. Hipotesa dia adalah dengan revolusi kebudayaan, secara bangsa Cina akhirnya bisa melahirkan sinematografer sekaliber Wong Kar Wai dan John Woo. Sementara secara kultur kita masih macet sebatas film AADC, iklan obat masuk angin, dan sinetron bertemakan orang kaya atau demit.

Dave Lumenta, si antropolog, nggak terlalu setuju. Satu, dibandingkan jaman kolonial, dia bilang Indonesia mengalami de-globalisasi. Dulu batasan negara kabur, orang gampang pindah2 antar batas wilayah tanpa memusingkan batas kenegaraan. Kedua, invasi kultur pop Jepang dan to certain extent Korea dan juga Cina adalah bentuk rebelion terhadap budaya pop barat. Lah ? "Cool Japan" sudah meng invasi sentra budaya dari New York hingga nadi eropa kontinental seperti Paris dan London. Komik anime, manga, sushi lounge, game sudoku, musik J-Pop, menjadi sesuatu yg sangat cool. Belum lagi fenomena dan trend gadis2 Shibuya yg akhirnya menjadi patokan riset perusahaan besar seperti provider ponsel Vodafone. Intinya, Dave bilang kalau Asia punya interpretasi lain terhadap pop kultur barat. Karakter Britney Spears, Spice Girls, dicerna oleh Asia lalu terus diinjak2 lewat karikatur anime dan diludahkan kembali ke muka publik barat lewat film Kill Bill.

Ok, fine. Gue tanya, "kita Indonesia ada di mana?" Yuka ketawa sinis, Dave cuma narik DjiSamSoe. Kita ya itu, macet di film Eiffel I'm in Love, iklan-2 obat masuk angin, sinetron dukun, dan so what gitu loochh