The Baptists, The Bootleggers, and The Fuel Subsidy by Pram Oktavinanda

Hi all, here's another contribution by Pram Oktavinanda. Today Pram looks at the fuel subsidy debate. Enjoy! - Kate

The Baptists, The Bootleggers, and the Fuel Subsidy

By Pramudya A. Oktavinanda

There is a very interesting case study in Public Choice literature. Once in the United States there was a law called Sunday Blue Laws which basically prohibited the sale of alcohol in Sunday. One of the supporting groups for this law, we call them "Baptists", was a group consisting of people who wanted to prohibit such sale of alcohol based on moral and religious values. The other group, "Bootleggers", was the seller of illegal alcohols. They also supported such law but not based on altruistic or moral values, rather it was because such restriction increased their profits. The stricter the restriction is, the less the supply for the alcohol, the bigger the price that they can charge for their illegal products.

It goes without saying that these two groups are ideological opponents, but with respect to political matters, they were in the same side and their cooperation as interest groups allow them to provide the necessary voting power in the legislative to support the promulgation of the Sunday Blue Laws, effectively prohibited the sale of alcohol even though both groups have completely different reasons to support such laws. Public Choice theorists also use the same analytical structure when they review a very famous case in the United States, i.e. the Lochner case which dealt with whether New York may legislate the maximum working hours for workers in bakery shops.

New York argued that the law was passed to protect the health of the workers since during the beginning of the 20th century, the working condition of many bakery shops was so poor and many workers work for a very long hour in order to compete with each other. Some politicians support this law on the basis that they need to protect the interest of their citizens, giving protections to relatively weak workers from the capitalists. But the researchers also found out that the other supporters of this New York law are groups of major bakeries that already comply with such law and want to cut the competition by imposing a law that will destroy the business of many small bakeries that depend on immigrant workers.

Again, we can see how the cooperation between Baptists and Bootleggers worked very well in this case. The US Supreme Court finally deemed the law unconstitutional although after the passing of the New Deal by Franklin Roosevelt, more paternalistic laws were issued and the Supreme Court was pressed by the President to support those laws. But that will be another topic of discussion. For now, let us focus with the case of fuel subsidy in Indonesia.

We can quickly see two groups rejecting the reduction of fuel subsidy. The first group argue that reducing fuel subsidy will harm a lot of poor people. The fact that most of the time the subsidy is enjoyed by those who actually do not deserve it does not matter since once the subsidy is reduced, it will affect the overall price of goods in Indonesia and the poor people will suffer. There is a grain of truth here. You do not need to be a genius economist to understand that when you increase the fuel price, since it affects the price components of many other products, producers will most likely also increase their prices as a response. Consumers will be the victim here.

The second group reflects the people who enjoy the existence of fuel subsidy, those who buy the cheap fuel and those who illegally export the cheap fuel to other countries for considerable profits. For those who buy the cheap fuel, it is simply a rational choice, at least for the short term. Whether there will be huge inflation and whether it damages the environment are things that will happen in the future and discounting the probability of having such catastrophe in the near future, they might conclude that in the long run, all of us (this generation) would already be dead when the Earth is being struck by such catastrophe. So, why the heck should we care anyway? It's the problem of future generations, not us.

Combined these two groups, and you will find that they consist of the majority of Indonesian people. They might have different agendas, but they have the same goal, preventing the fuel price from going up. As such, I do not see why I should be surprised with the recent political maneuvers in our legislative board. Politicians, considering their rational incentives for maximizing their own interests, would always consider the present condition in making their decision. And the future for them would always be about the next election, meaning that they are very short sighted. Whatever beyond the election period is another issue to be solved when they reach another election.

Of course in the context of Indonesia, it also means that the idea of reducing the fuel subsidy will never be a popular one. You can't argue about the needs to conserve the energy or to pursue alternative energy sources in a country where most of the people have bleak futures. They don't care about such issues. If they are pessimistic with their futures, how could they appreciate the fact that our environment is in danger? For them, whether the environment will be destroyed or not in the future will not alter the fact that their life sucks now and most probably also sucks in the future.

The question is, how could we avoid this vicious cycle? One thing that might happen is to wait until the fuel price has reached a point of no return where it would be impossible for the government to maintain the subsidy. I note that this might be the political compromise made a couple of days ago. At least when you need to take an unpopular policy, you take it after you are in a desperate condition. Might actually work, but I can't predict whether the end result would be beneficial for all of us, since it might also be too late.

You see, the problem of this kind of policy is that in the end it is made to support certain groups at the expense of other groups. Right now, the Government supports both of the Baptists and Bootleggers groups at the expense of tax payers money, though I will argue that the Bootleggers are the ones who enjoy most of the policy. From Game Theory perspective, it is also a prisoner's dilemma game. I personally for sure will buy the cheap fuel. It is paid by my tax without my consent, and I will enjoy it to the fullest. I bet that many other people will also think the same. It will turn out into the tragedy of the commons and everybody will eventually suffer.

The Baptists group may produce a nice argument on the need to support the poor. It is a valid argument, but it fails to see the overall human incentives. Rational choices of many people may produce a bad result, that is the essence of the tragedy of the common. Everyone will be better off had they conserve the energy, but in a situation where every people can benefit themselves at other people expenses and there is a lack of supervision, the rational choice will be to spend the resources as soon as possible before other people take the resources for themselves. Why bother conserve the energy if we can't be sure on whether everybody will do the same? See the irony?

Is this a premonition for a bleak future for us? Who knows? We can hope that suddenly a miracle will occur, maybe someone will be able to produce energy from water and humanity will eventually survive. But until that day comes, you better cross your fingers and hope for the bests. After all, we are all together in this situation.

PS: I only provide a positive analysis of our current condition. There are many other people who have provided excellent normative analysis on the policies that should be taken on fuel subsidy and I don't think that my thoughts on the normative aspects will give an additional value so I decide not to dwell on it.

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.

Do Companies Have a Duty to Satisfy Their Employees’ Best Interest?

Dear cafe patrons, I'm glad to introduce to you our new guest barista, Pramudya A. Oktavinanda. Pram, as he is called, is a lawyer at a well-known corporate law firm. He blogs too (see here or here). Oh, this "capitalist-lawyer" also tweets as @PramOctavy. Today Pram invites us to think about what is fair in employer-employee relation. Enjoy! - Kate

Do Companies Have a Duty to Satisfy Their Employees’ Best Interest?

by Pramudya A. Oktavinanda

Introduction

Imagine that you are a worker in a major telecommunication company that has two divisions, one is a land line division, which is getting smaller each year to due to a major decrease in demand, and the other is a mobile phone division, which is getting bigger each year and generating a huge profits for the company. Unfortunately, you work in the land line division.

Suppose that for this financial year, the company generates a net profit of more than US$100 million, and 99% was generated from the mobile phone division. The employees in such division receive a considerable amount of benefits including big bonuses and better salaries compared those in the land line division. In fact, the salaries of the land line division’s employees have not been increased for years - let alone receiving a bonus.

How about the management, i.e. the board of directors and board of commissioners? Since the company has performed so well, the shareholders have agreed to grant a fat remuneration in the total amount of US$10 million to the entire members of the management. So everyone is happy in the company, except for the employees of the land line division.

So, the worker in the land line division plans to conduct a strike, stopping the operation of the land line division until the company agrees to increase their employee benefits. They say it is not fair if the company has generated such a big profit yet only a small fraction of that profit is being used for the benefits of their employees, specifically in the land line division. In their opinion, the company has a duty to satisfy their employees’ best interest, including their well-being. The major question is, do you think the company has such kind of duty?

The Company Does Not Have a Fiduciary Duty to Its Employees

As cruel as it may seem, our law says that a limited liability company does not have any fiduciary duty to employees. Fiduciary duty to a party means a duty to act in good faith for the best interest of such party. In fact, the company management only has fiduciary duty towards the company (yes, not even the shareholders). And what’s the best interest of the company? Its survivability, which can only be maintained when the company is profitable. A management that does not work for the best interest of the company can be sued by the company shareholders for any losses that they or the company may face due to the management’s failure to adhere its duty.

Of course this is troubling to some of us. How can we say that it is fair for the employee in the land line division if the management does not have any duty to improve their well being despite having a large amount of profit? To answer this, I will move on from the legalese, and give you another case to think about.

Let us imagine that now you are acting as an employer to two persons in a small firm that produces cute necklaces. The first person almost contribute nothing to the business while the other one is very productive and has contributed a lot of necklaces that worth selling in the market. What will you do in this case? Will you differentiate the salary of these two guys? Will you give better payment to the more productive one?

Or try imagining other case where you and your two friends invest in a business. You and one friend invest 90% of the total capital while the other one only invest 10%. After the business generates nice profits, will you share more to the one who only invest 10%, or will you distribute them proportionately with the money contributed by each person?

I would assume that in both cases, you would agree that those who contribute more should receive better benefits than those who contribute less. So why don’t we apply that principle to our first case? The law regarding fiduciary duty of the company’s management is in line with the basic rule of efficiency, i.e. resources should be allocated to the ones who are able to put it to the most highly valued use. Wasting money for a non profitable business would be deemed inefficient and the management can be held responsible for that. Sadly, our case involves the lives of many people and this is where the dilemma comes.

Can The Government Intervene?

My first response is no. The difficulty lies within the baseline or the original position that we should held when we want the Government to involve in this kind of case. I know that our case can easily attract sympathy. After all, it’s the story about a greedy company/management that does not care about the well being of its employee. But suppose we change the story a bit, suppose we’re talking about a paging business. I am not sure whether there are still many people who remember the success of paging business, but around 10-12 years ago when mobile phones are still expensive, pager is a cheap and quick solution for companies who want to contact their employees whenever and wherever they are. Yet, technological advance and the growing of people’s income enable mobile phone producers to cut their prices significantly to the extent that almost all people can own their own mobile phone. The effect was disastrous for paging business. What started as a profitable business turned out to become a bleak one. And now, I am quite certain that not a single paging company in Indonesia survives the competition with mobile phone. The iron rule of efficiency once again wins.

In this case, since the paging companies were going bankrupt, most of their employees were layed off. Now, does the Government needs to help these poor guys? Do you find similarities with our first case concerning two separate divisions in a telecommunication company? Both types of employees suffer because of technological development, something that can’t be prevented by anyone (or what economists call “creative destruction”).

Indeed, this is what I call as a hard case. To find an all for one solution would be impossible. Asking the Government to force the company in our case to provide better benefits to its land line division would be ludicrous, and it is questionable whether the government should do the same for the other type of victims of creative destruction. If you are in the employer position, would you like to be forced to bear additional inefficient expenses?

But if the Government does not take any action, who will be responsible for all of these employees? Would it suffice to let them follow the flow of the market force? My initial answer is provide a better social security to the citizens but I would love to hear other people comments on this matter.

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?

What's the diff between FPI and WITT?

This is insane. An NGO named Indonesian Women Against Tobacco (WITT) is going to raid smokers in Jakarta's public places. Apparently law enforcers are too weak they need all this militia groups? What next? Another NGO raiding people that chew bubble gum? What if I hate dangdut concerts that ruin my sleep at nights? Will I and my NGO, Indonesian Slumbers Against Noise, be allowed to raid them from the city, too? Ridiculous.

Law 239

With this kind of reading list, how could you not to think to at least try to sit in the class? And Tyler gives you no exam.

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.

Weird iPhone

I can tell that iPhone is indeed a damn cool gadget. But to take it home with you, and use it, you need to subscribe to AT&T for a 2 years plan. Until now, it can't work on other network.

This is actually a weird arrangement, that is, limiting your users coverage, but it turns out that:

...Apple gets $3 a month for every existing AT&T subscriber who has bought an iPhone and $11 a month for every new customer. That looks like about $150 per user for Apple, on top of the margin on the phone itself. So although Apple can make money selling iPhones to anyone, the company gets considerably more if it drives those users to AT&T. Which is what it is doing...(from John Naughton of the Guardian website)

I dislike the idea for a personal motive: AT&T's is not the cheapest plan. But I can not blame Apple to sign the contract with them. Apple has the right to do so.

So does the consumer to unlock the machine and use cheaper network, I must say.

But, alas, AT&T lawyer seems ready to bring you to the court, preventing that unlocking business. The law, so far, doesn't say anything yet on this matter. But if the law rules against unlocking iPhone, as Naughton wrote in that column, the law is an ass.

By the way, unlocking iPhone would not be a problem in Mangga Dua, would it? Has anyone tried it?