Is it real or just bubble?

Many considers the recent oil price hike is driven by speculative motives, not a real phenomenon. You know, like what happened to the stock market, currency, housing, property and the '90s dotcom companies. This article (from The Economist) said it may not be the case.

Here's the argument:

[There is no] evidence that the growth of speculation in oil has caused the price to rise. Rising prices, after all, might have been stimulating the growing investment, rather than the other way around.

And that is because:

Investment can flood into the oil market without driving up prices because speculators are not buying any actual crude. Instead, they buy contracts for future delivery. When those contracts mature, they either settle them with a cash payment or sell them on to genuine consumers. Either way, no oil is hoarded or somehow kept off the market.

Ergo,

That makes it harder for a bubble to develop in oil than in the shares of internet firms, say, or in housing, where the supply of the asset is finite.

Although,

[t]here is, admittedly, a growing category of inherently bullish investment funds that seek to track commodity-price indices, in which oil is usually the biggest component.

However,

... even index funds make unlikely suspects. For one thing, they too invest in futures, rather than in physical supplies of oil. So every month, they must trade contracts that are about to fall due for ones that will not mature for several months. That makes them big sellers of oil for prompt delivery.

What is more, their growth is not as impressive as it first appears. Paul Horsnell of Barclays Capital, an investment bank, puts the total value of index funds and other similar investments at $225 billion. That is less than half the market capitalisation of Exxon Mobil, he points out, and a tiny fraction of the $50 trillion-odd of transactions in the oil markets each year.

That means that:

... the oil price is still a function of supply and demand. For the past few years, the world's production capacity has grown only sluggishly. Meanwhile, demand, especially from the developing world, has been growing faster. So there is hardly any slack in the system. Only Saudi Arabia and the United Arab Emirates are thought to be able to increase their output from today's levels, and even then, there are doubts, since Saudi Arabia, in particular, is secretive about the state of its oil industry.

That leaves the oil market at the mercy of even small disruptions to supply. Prices tend to jump each time militants sabotage an oil pipeline in Nigeria, bad weather threatens production in the Gulf of Mexico, or political clouds gather over the Persian Gulf.

The problem is exacerbated by a growing mismatch between the type of oil being produced and the refineries that must process it. The most common benchmark prices, including the one used in this article, refer to “light” crude, the least viscous sort, which produces the most petrol and diesel when refined. “Heavy” oil, by contrast, yields more fuel oil, which is used mainly for heating.

All of the above can be summarized in two words: demand, and supply.

Losing Tiger, Hidden Fortune

The Economist asks, "Other emerging economies are producing world-class companies by the dozen. Why aren't the countries of South-East Asia?"

You may be tempted to damn politically connected entrepreneurs, or the old stories of rent seeking, corruption, and cronyism. But the magazine cleverly avoids to replay these old songs, as it writes:

Similar things were once said of much of the rest of Asia—and sometimes still are. But somehow other countries' top businesses, even in India, the home of the licence Raj, have escaped this mediocrity trap.

So what are the problems of us, the losing tigers? First, diverse and fragmented SEA market (think of more unified China and India) prevents economies of scale in the local market. Second, lack of technology and higher education promotion results in SEA's middling labor productivity growth (in contrast to climbing East and South Asia's figures--look the very important Graph 3). And third, the conglomerates is less focused in doing particular industry. They want to do everything, --and goes nowhere.

I think above are well observed points. Yet, it is rather a too broad analysis on business climate. More micro analysis, like a thorough observation at firms level on, say, how Tata of India or Lenovo of China have managed their way up would help more.

Are we gonna be able to see 30 (or 50) Indonesian firms in Fortune Global 500 list in 2030? I do hope we can. It isn't a too ambitious project. China has 24 firms, India 6, and Brazil 5 on the list.

In 2007, I must add.

Anna and (The) Economist

Last Friday, I, Aco, and some friends had lunch at the School of Dentistry's refectory -- in building E, should you are curious where it is. While walking our way to that place, he told me that The Economist read a hilarious obituary on Anna Nicole Smith. Later on I looked upon that piece and can't agree more with Aco that it's a tragic yet comically amusing.

Now I'm going to ask Manager: if even the prestigious The Economist takes the trouble in making such obituary, can we do the same thing on, say, the late actress who has been found dead in a hotel near Salemba not so long ago?

Celebrity | The Economist

On Reason to Blog

Why do economists spend their time blogging?
The Economist, I mean the magazine, has some of the answers:

#1. “It's a place in the intellectual influence game,” Mr DeLong replies; and “It's a natural extension of my day job—to engage in intellectual discourse about economics,” Mr Mankiw says.
#2. Although there is no evidence of a direct link between blogging and publishing productivity, a new study by E. Han Kim and Adair Morse, of the University of Michigan, and Luigi Zingales, of the University of Chicago, shows that the internet's ability to spread knowledge beyond university classrooms has diminished the competitive edge that elite schools once held. (my word: to screw up the university's ivory tower)
#3. Blogs have enabled economists to turn their microphones into megaphones. In this model, the value of influence is priceless.

Now, assume (economists love to assume, some said) we, the hosts, are economists (we're economists, aren't we?) : What do you think our motives to deliver something that our Manager often despises as non-sensical in this cafe are?

I don't know about other hosts. But come to think of it, for me, none of abovementioned causes seem applicable. I do blogging for fun. OK, more precisely for showing you that economics can be, and is indeed, fun (and it's fun to read the comments, too). And trust me, the money from the Manager is a shame.

You don't buy it and raise your eyebrows? Fine. Allow me to spill a small secret. For Aco, AP and even Ujang (I don't know about Sjamsu), they blog to woo women.

OK, Rizal, too (I see them throwing cups at me)

Blogging

My Coconuts are Better than Your Big Macs

No they are not. While we're on the subject (fast food, not coconuts), let me belatedly say "Happy 20th Birthday!" to the Big Mac index. For those unfamiliar with this index:

"...The Economist's Big Mac index is based on one of the oldest concepts in international economics: the theory of purchasing-power parity (PPP), which argues that in the long run, exchange rates should move towards levels that would equalise the prices of an identical basket of goods and services in any two countries. Our “basket” is a McDonald's Big Mac, produced in around 120 countries. The Big Mac PPP is the exchange rate that would leave burgers costing the same in America as elsewhere. Thus a Big Mac in China costs 10.5 yuan, against an average price in four American cities of $3.10 (see the first column of the table). To make the two prices equal would require an exchange rate of 3.39 yuan to the dollar, compared with a market rate of 8.03. In other words, the yuan is 58% “undervalued” against the dollar. To put it another way, converted into dollars at market rates the Chinese burger is the cheapest in the table...."

With a Big Mac costing Rp 14,400 in Jakarta, rupiah is 49% "undervalued" against the dollar. Of course, no one is arguing that Big Mac is representative of what Indonesians are gobbling up. In fact, any Indonesian worth his paket hemat would know that we go to McDonald to get them chicken.

It turns out that several years ago, the financial giant UBS created an alternative Big Mac index, based on how long (in minutes) a typical worker would need to work before he earn enough money to buy a Big Mac. The 2005 numbers say that a typical worker in Karachi would have to work for 132 minutes to be able to buy a Big Mac. It would have taken 64 minutes of work for a typical Jakarta worker to be able to afford one (alternatively, he only needs to work for 19 minutes to get 1 kg of rice). Bangkok: 46 minutes, Singapore: 20 minutes (New York: 12 minutes). Like most cross-country indices, the numbers are more fun to look at than they are useful (what is a typical worker anyway?).

Dissapointed with these indices, Ms. Thu-Tam Doan, a travel writer, once proposed the use of her coconut index to compare purchasing power parity and cost of living in Southeast Asia,

"...I assumed that like all men, all coconuts too are created equal.....I took the given variables, the per capita income of each country in US$ and throughout my travels have noted the average cost of their coconuts. I divided per capita income by 365 to find their daily wages, then compared the cost of a coconut as a ratio to their wages (X:Y), where X = cost of 1 coconut as a fraction of their daily wages, Y....

..and so it went on. According to her calculation, in Indonesia, a daily wage would buy you around 12 coconuts. A daily wage in Thailand would buy you 24, and in Singapore 81. I don't know how useful those numbers are. But that's a lot of coconuts.

To her credit, Ms. Thu-Tam Doan recognizes the flaw of this index ,

....In conclusion, coconut quality inherently attributes to coconut cost, thereby influencing purchasing power parity (eg. the standard of living). This Coconut Index was a lot more work than I thought it would be - too much work for someone who is aimlessly traveling.

I give up.

Sound decision. Coconuts are not created equal after all. So I guess we're stuck with the Big Mac index, maybe for another 20 years. In the meantime, tall latte index is now a toddler.

The Economist | Big Mac | latte | coconut | ppp

Flashback - Homer to Marge: Did you know Indonesia is at a crossroads?

Homer and Marge Simpson found themselves upgraded to the first class on a flight to Miami. They clearly enjoyed the luxury, and the following discussion ensued:

Homer: ‘Look at me. I’m reading The Economist. Did you know Indonesia is at a crossroads?'
Marge:‘Noooo!'
Homer:‘It is'
- The Simpsons, April 25th 2004

Yes, I know it's an old episode of The Simpsons but I don’t know how many of you read the edition of The Economist in the following week (5/1/04-5/7/04). On page 79, there’s a short article with the title:

Investing in Indonesia
At a Crossroads

The article talks about the legal uncertainty surrounding the Manulife vs Prudent Life Insurance debacle two years ago.¹ The "crossroads" refers to whether Indonesia, already burdened by endemic corruption, will move further in the direction of legal and regulatory chaos. Foreign investors were said to be driven away. Our FDI was recorded negative.

But of course for fans of The Simpsons who also happened to read The Economist, using “At a Crossroads” as the title of the article could only be interpreted as a brilliant and witty riposte from the magazine.

So that was two years ago. Even if you missed the episode and have not seen the article, there’s a chance that you have stumbled upon some websites that talk about it such as this, this, this, and this , just to name a few.

Two reasons why I'm posting this now.

First, two years after, the question is: where are we now? Is the legal and regulatory environment better than it was two years ago? How are we doing on FDI numbers? These are genuine questions, because we don’t talk much about macroeconomics here at the Café (maybe we should). I'm not a macro guy and in fact none of us here at the Café are hard-core macro person (hint: send your resumé²). Besides, for matters related to the political economy of businesses, foreign and domestic alike, I usually depend on the reporting of Yosef Ardi (see for example his excellent post on US businesses’ wish list a while back, just as an illustration). So, are we still on a crossroads?

The second reason for this post, totally unrelated to the first, is that The Simpsons reference was recently brought up again in the February 2006 edition of the Atlantic Monthly (subscription maybe required). The article discusses why The Economist, as a weekly magazine, seems to be more successful in terms of its readership as well as its influence compared to its competitors across the Atlantic Ocean. The author, who was also an editor of the magazine for 10 years, came up with these explanations:

• The snob effect: US consumers think British things are cool. It’s not an entirely outrageous explanation considering the number of ads and shows in the US that use British-accented actors (exhibit 1: Simon Cowell), supposedly to symbolize sophistication (okay, Cowell is a bad example). The snob effect is also exactly what the scene from The Simpsons was trying to portray.
• Unlike their counterparts in the US, The Economist never shies away from stating its position on various issues. After all, this is a magazine that is unbashful about its raison d’etre: “to promote free trade”.
• It is a magazine unintentionally targeted for a single global readership in the sense that the editorial never really sought its readers out. They did very little in terms of market differentiation. The order of contents of the magazine may be different between the US, Europe, Asia editions, but the sentences, the words are the same everywhere. This is not true for magazines such as Newsweek, or Time.

Well, the student organization I belong to when I was in college had a running subscription for The Economist. Even at that time (i.e., pre-crisis years- yeah, I’m that old), it was terribly expensive. Considering our organization was self-funded, I don’t know how we justified the subscription. Maybe we were awestruck by the free market orientation of the magazine. Perhaps it was the British wry sense of humor. But then again it could also be that we were just snobs.

Update: Indeed we might have just passed another crossroads. And took the wrong turn. In all likelihood, it seems that all charges against Soeharto will be dropped. Aco is clearly unhappy about this. If this is true, a collective mea maxima culpa from the political leaders is in order. A collective d'oh! would not be enough.

¹ Jakarta’s commercial court declared Prudent Life Insurance bankrupt, in a reprise of a 2002 verdict declaring Manulife bankrupt. Go figure. Anyone care to update me what happens to the case?

² Actually, no. Don’t send your resume.

The Economist The Simpsons The Atlantic Monthly

ID-ing Everybody

I share Ujang's concern that ID-ing the people is a tricky thing. It is a matter of political, feasibility, as well as ethical concerns. I don't know much about international ethics of statitistics or Indonesian law on statistics. Ujang's account is then very helpful to me.

Come to think of it, the administrative-purpose rationale is in fact what I had in mind. A single ID number would likely to help cut a lot of inefficiency. And it should be able to lend itself as the basis for targeting a public policy. This is where ethical concern amplifies. We don't want a Big Brother watching everything we do. But we want to have administrative procedures efficient. The solution should lie within the two objectives: there's a tradeoff. And that cries for a careful rule of conduct.