Great Forex-pectation (1)

Puspa is back and now with people's high expectation on her expectation of foreign exchange. As I was told, many economists share Puspa's frustration: that you have to know things, no matter what. Many times, as a result, we see the so called 'pengamat ekonomi ' or economic observers says stupid things on TV, just because they can't say they don't know in response to the journalists' questions. Or, maybe because they don't know that they don't know. All questions are good, nonetheless. At least they get us thinking. Puspa knows that she doesn't know some things but she keeps thinking about them. She is sharing with us her experience with one case of currency-financial issue, in two pieces. Later, she will continue talking about this 'forex-tation' in the context of Asian crisis. You will see that she actually knows more than she thinks she doesn't know. Enjoy.
- Manager

What can one expect an economist, who happens to work in an institute that conducts ‘strategic’ and ‘international’ studies, to be able to say about the exchange rate and the likelihood of another crisis?

Sometimes, a lot more than what she can handle.

For some reason, I find that in Indonesia, people expect a lot out of economists. Peers, friends of friends, distant relatives, colleagues of parents, upon knowing (or insisting) that I am an (aspiring?) economist, would often pose interesting questions to me. Sometimes, personal queries come from phone calls, “ Hey, did you see the paper today? The Rupiah strengthened considerably…I think I am going to buy myself some (US) dollars now. But, wait…do you think that’s wise? Should I wait for a couple of more months? What’s the value gonna be in a few more months? “

Sounds like a normal ‘I-wanna-have-your-opinion-so-let’s-talk’ kind of question, no? But wait, it goes further, “What? You don’t know? Come on, don’t you have any leads as to what the exchange rate is going to be in 3-4 months? Dude, you’re working in a strategic institute, don’t tell me you don’t have any leads about the exchange rate?”

Mind you, owing to the fact that this institute’s name contains the word ‘strategic’, people sometimes expect great ideas from their economists, especially on foreign exchange…You know, like ‘Great Forex-pectations.’ ;-)

My reply was, “Dude, I cannot tell you what the exchange rate is going to be because : (a) the exchange rate is market determined and I’ll be damned if I claim to have perfect knowledge on how the market’s going to behave like and (b) if I can predict with utmost accuracy on exchange rate movements, I would be rich person already by now! Besides, I kind of subscribe to the view that exchange rate movements follow a random walk, and thus predicting would be pointless.

Still along the lines of currencies and financial issues, a few days ago, I received another spontaneous question ...

(To be continued...)

Testosteronomics

All men are created equal
But some men are more equal then the others

OK, I admit. That was a twist of George Orwell's Animal Farm (which was itself a twist of the Declaration of Independence).

What I want to say is this study argued that some men - those with higher level of testosterone - prefers to be equally poor than being a bit richer while the other men become a lot richer. (If you don't want to see the whole paper, see the Economists' review.)

The researcher run an experiment using a series of ultimatum game, played by some Harvard students who have taken microeconomics. After the experiment, he took saliva samples from the students and compare their testosterone levels. The result: responders who rejected a low final offer had an average testosterone level more than 50% higher than the average of those who accepted.

The implication of this study, is as The Economist wrote:

... what people really strive for is relative rather than absolute prosperity. They would rather accept less themselves than see a rival get ahead. That is likely to be particularly true in individuals with high testosterone levels, since that hormone is correlated with social dominance in many species.

In other words, the more masculine someone is, the less important is money. It's how your position compared to the other.

However, i was informed by Tirta about a very important caveat. Read also the first comment to the post.

Nevertheless, this study was a valuable additional literature to a debate on inequality I encountered somewhere (read my summary here and here, and a relevant discussion here).

Moonlighting

In my 'spare time' (don't ask me to define it, please), I contributed a two-part article on why some countries are rich while the other are poor in a blog maintained by our colleagues. This is the first part, and here's the second.

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.

No Wikipedia on the bibliography, please

I received this one paper to review for an economic journal. I returned it to the Editor with notes for the author, among which was "please do not rely your argument(s) on reference like Wikipedia". Of course if the argument were sound and flawless, I wouldn't even care whether he cited something or not. But it was not sound and it was flawed, I think. No, I have nothing personal against Wikipedia. In fact, I think, it is a very useful resource for curious people like you and me.

But, not as a key reference for an academic paper. Wikipedia is a good place to find facts, numbers, etc. It is even a useful place where you can be directed to reference somewhere else that is more credible. But, it is not by and in itself a reference. Basing an argument on what posted in Wikipedia itself is shaky, since everybody can change or add entry to the post any time. It is in fact designed to work that way, i.e. open encyclopedia. It is true that any false entries (or even vandalism) will eventually get corrected by those who care about the given post, but you never know if what you take from it is already the correct(ed) one or not.

(Of course blogs suffer the same thing. Blogs are for fun, not for academic citation).

By the way, this reminds me of an event organized by students last month. I was asked to participate in an academic writing workshop. The authors, they also seemed to like Wikipedia so much. But there was one case that's even worse. The author was writing a paper on labor market. She used not only Wikipedia as her main reference, but also some ... motivational books. Not that motivational books or chicken soups et cetera are bad, but for an academic paper? Yes, I get motivated when I read some fancy novels, but at least I kept them out of my papers (except maybe when I am writing literary criticism which may never happen).

Poverty update

The number of poor (and poverty rate) has declined, according to the latest BPS press release, based on the March 2007 SUSENAS data. Some people, the usual people, don't believe this. I believe the finding is 'within the range of acceptance.' I am happy to see that poverty declines whatsoever. But I am not too happy to see only a small decline. We haven't even returned to the 2005 level.

Those who don't believe the BPS number argued that how on earth can poverty declines when, at the same time:

• The (unconditional) cash transfer program - BLT - scheme has finished, while the proposed Conditional Cash Transfer scheme has yet to start.
• The prices of basic commodities are still high.
• The purchasing power is still low; real wages don't change and farmer's terms of trade index is decreasing.
• Job creation is slow
  

It's fine to have a different concept and definition of poverty, and the methodology for calculating it. I'd like to see them coming with their own calculation, if any. But the above points make at best weak arguments for disputing the BPS finding.

For a start, remember that the poverty numbers are the result of the 'negative' and 'positive' forces. The BLT is one of the 'positive' forces. True it finished a while ago. But that doesn't mean the impact stopped. The beneficiaries may have been able to use the cash transfer for productive activities that enabled them to have increase their consumption more than the price increase (which was reflected in the inflated poverty line).

On the other hand, true that high commodity prices is a 'negative' force. In fact, using this logic, poverty should have been much lower if had the government been able to control the price of rice. (Do you get my point?). The recent cooking oil price increase was also a problem. But I don't think that was already captured by the poverty statistics.

I don't have the real wages statistics readily available for this post. But let's say it doesn't change, or even declined. That should not be that significant in explaining poverty numbers, since most of the poor are outside the (formal) labor force. So real wage statistics are not too relevant. Farmers' terms of trade is a more relevant variable. In fact, the BPS found that farmers' ToT increases from 101 to 109 between March 2006-March 2007.

For the same reason, job creation should not be a significant factor in explaining the change in poverty rate for the past one year. Nevertheless, actually the open unemployment rate also declined by February 2007 (although we need to reduce it more). Of course, the same 'camp' doesn't believe in the unemployment statistics either.

But hey, what can I say?

Updates.

1. I forgot to mention about the consumption-smoothing mechanism among the poor, which was very likely helped by the BLT, Raskin and School Operational Support (BOS) schemes.
2. Average medium-quality rice price increased by 20% from March 2006-March 2007, compared to 33% in the previous period (Bulog website)
3. Only 15% of working-age poor individuals are wage workers (SUSENAS 2006).
4. Average real wage for all workers increased by 4.7% from November 2005-August 2006 (SAKERNAS 2005, 2006).
5. Average daily wage of labour-farmer declined but only slightly by 0.2% from March 2006-March 2007. (BPS press release).
6. Household-head unemployment rate is the lowest at the bottom expenditure deciles, suggesting the "unemployment as luxury" hypothesis.

A leftover from UK

For me, the most interesting thing about this year’s Wimbledon apart from Ana Ivanovic of Serbia, is the ticket business. It was reported in the UK newspaper, Daily Mail, that because Amelie Mauresmo literally smacked down Mara Santangelo in (slightly!) less than one hour (i.e. 57 minutes), the organizer, The All England Club, lost almost one million pound sterling. That is because, the rule says if you buy a ticket for a game and that one game is finished in less than an hour, your ticket is fully refunded. Fair enough.

And interesting. If only the result could be predicted beforehand, plenty of economic opportunity could have been exploited by Mauresmo and Santangelo and The AE Club – behind watchers’ back. How? AE could ask M and S to play slightly over one hour – 61 minutes will do. In that case, AE does not have to refund tickets. That means, it could save a million pounds. Then, it could share the saved money with Mauresmo and Santangelo.

But sport is no dirty business, you say. Who knows? (I remember back in the days where we read how enraged Don King whenever Myke Tyson knocked out his opponents in the first round. Yes, then boxing business had an answer to this. It provides a whole lot side entertainments before the main course, just in case the latter lasts only 3 minutes).

The Police can't win, can they?

I don’t generally like Budhiarto Shambazy’s Politika column in Kompas. I think he is a good writer when he writes about Led Zeppelin, Pink Floyd or anything related to classic rock. I think he is not a good political writer. And his jokes, when he attempt to do so, are garing at best. But his last column was an exception. I like, and agree with what he wrote.

Yes, I think there is something wrong in our society. Despite their success in arresting some members of terrorist network led by Abu Dujana, the Police have yet to win the support from the public. (No, not the Sting/Summers/Copeland trio). Many people – and the politicians make matter worse – are still reluctant to praise the Police’s achievement. Some of them even view the Police as the villain, and Abu Dujana as the hero.

I made an elaborated personal comment on this issue here (read also Tirta's comment on the entry; unfortunately all is in Indonesian). I’ll just make some points related to the issue of strategy in the game theoretical setting (courtesy to a colleague of mine, a former journalist turn media analyst).

First, the Police should understand that they are playing against two players: the terrorists themselves, and the public. So far, they focus more on the first player, but less on the latter. A good media strategy is definitely needed. In fact, they have made a poor move when they show how Abu Dujana and companies were chained hand-to-feet, guarded by face-covered soldiers. The image created to the public was ‘Guantanamo.’

Second, other reason why the Police can't win the public appreciation for the terrorists is because the politicians still entertain the idea that the war on terrorist is the war on Islam. Changing the equlibrium requires changing the people mindset. That means our leaders and politicians need to send a message that draws a clear boundary between ‘Islam’ and ‘Muslim terrorist.’

However, political calculation still shows that this is not a dominant strategy. Any position that puts ‘Islam’ and ‘terrorism’ in the same line will be dominated since it would end up in losing supports from their Muslim constituents.

Aside: an article in the Economist wrote, in a similar framework, how the Bush administration is also facing the problem on how to win both the war on terror and public/international support. Seems that they lost in both arena.

Who wants to be a farmer?

The feature section of this week’s Kompas Sunday edition wrote about the ‘Going to Village’ holiday program for school kids. Of course, for urban school kids, who don’t know anything about life in village. There is a conversation between the kids and their guide. It happened when the guide explained about paddy. That’s it – the plant that makes the rice we are eating.

Guide: “Now, who wants to be a farmer?”
Kids: (silent)
Guide: “Nobody? Then who would prepare our rice?”
Some kids: “Err… someone else?”

This section was supposed to be the nyinyir part of the article. But I found this conversation fascinating. Even from the very young age, the kids have understood the concept of trade and division of labor.

It’s fun to know how farmers to grow rice. But for God sake, you don’t have to be one if you don’t want to. (You may, if you want, of course). And it’s good to have somebody to grow our rice, to transport it to our city, and to prepare it. So our kids don’t have to grow their own rice. They can be pilots, doctors, or economists, or whatever to earn their living, so they can buy rice from the market.

That, my friend, is the secret of the wealth of nations.

P.S. This article had also triggered some family dispute between my wife and I. Read the story here.

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.