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

Chicken Capital

Tired of social capital? Here's a completely different capital. It's called chicken.

Animal-rights activist, Pamela Anderson (hmm, I think I've heard this name somewhere) complained that Indonesia's KFC is cruel and abusive to chickens. Quoted:

Investigations by my friends at PETA [People for the Ethical Treatments of Animals] that chickens who are raised for KFC are bred and drugged to grow so large quickly that many become crippled under their own weight.

Maybe they are implanted, Pam?

Update: Since I'm in the mood for chicken, I find this story amusing. It says egg causes chicken. Well, not really surprising. I can prove it.

Chicken | Pamela

Putnam confirmed

In "Making Democracy Works" (1994), Robert Putnam shows how civic community matters in governance and democracy. He made Northern vs. Southern Italy has his case. Then, in "Bowling Alone" (2001) he wrote that civic participation has been declining in the U.S. TV and radio were to blame for that.

Scholars have been disagreeing over his work. I will leave the disagreement for another discussion. One interesting question to ask would be "how true is the claim that TV and radio contributed to declining civic participation?"

An interesting paper by Ben Olken tried to answer that using survey data from more than 600 villages in Centarl and East Java. The methodology is very interesting. He looked at the number of TV channels can be reveived in each village. Based on Putnam's work, he hypothesized that the more channels can be received, the lower the level of civic participation. Since Putnam also argued that level of civic participation correlate with governance, more channels should also negatively correlated with quality of governance.

But a simple linear regression suffers from reverse causality and omitted variable bias. There may be other factors correlated with channels reception and participation as well as governance. To deal with this problem, Olken exploited the exogenous factor that affects channel reception: geography of each village. Villages surrounded or near the mountain will receive less channels (perhaps only TVRI and RCTI). So he uses the information on several determinants of channel reception in each village (geography, topography, relative position from nearest transmitter etc.) as the instrument.

The IV regression results were fascinating. Number of channels is negatively correlated with participation in social groups (community meeting, gotong-royong, arisan or religious groups), trust (other measure of social capital), and "missing expenditure" (as proxy for corruption and governance).

So, Putnam's theory is confirmed then?

Methodology | Social capital

From the Manager

Our deepest condolence to all the victims of Yogyakarta earthquake...

Is Social Capital Really Capital?

The demanding Manager asked me to serve this drink in the cafe. She doesn't like the idea of moonlighting --including, even, serving my own drink at home. So here it is (cross-posted at here, with minor modification)

This is, of course, a fiction, in response to previous fellow host's posting:

Once upon a time an economist had been confused. He found two countries, Banana Republic and Togog Republic, have similar resources, endowment, size, economic structure, political system, etc --in short, they're almost identical, like twin. Yet he also learned that Togog Rep. grew so well, Banana didn't.

Having frustated to find the secret of Togog Rep., he went to entertain himself playing bowling. His bowling mate is an anthropologist who incidentally was reading Bourdieau (1986) for his ethnography work on the Mighty Maridjan case in Mt. Merapi Central Java.

The economist, while waiting his turn, read that book and encountered the term social capital. A light-bulb flashed in his head. He said to himself: "Voila, this is the answer. Togog Rep. had higher social capital".

He started writing, and to make it catchy and relevant to his readers --they don't have Maridjan's fortuneteller game-- he put a title with something related to bowling. It turns out everyone seems love the idea.

Except this crazy guy from Salemba, I, who ask how to have reliable social capital measurement, and more importantly, whether this social capital is similar to old definition of capital, that is, subject to diminishing return, reproduce-able (through investment), and has various rates of return (and what determine this return).

Social capital

Does internet connect or separate people?

This is a spin-off from my earlier posting on the Police's "Message in the Bottle." Actually, I wanted to comment on Roby's comment. But since this may be a different subject, I guess it's worth being posted as a new entry.

Roby argued that internet (blog, friendster etc.) might connect people. But at the same time it could also create alienation. This reminds me of a similar but different discussion on whether internet makes people from different groups (professions, political ideology, hometown etc.), or even segregate them more?

In the social capital discussion, Robert Putnam raised the concept of 'bonding' and 'bridging' social capital. Another thing he rasied in "Bowling Alone" (2001) was the declining trend in the of civic and community engagement in the U.S., partly because of TV. But other people challenged his argument by pointing that people may still engage in civic activties by other means. Town meeting, rally, petition may still exists but people now can do it through online petition, email communcation, blogging etc. So internet can be a source for 'bridging' social capital.

But internet can also be a source for 'bonding' social capital that segregate different groups of people. This paper shows how it can happen in science. Suppose A and B is are economists, but live in two geographically separate places. A has two colleagues, C and D, who are non-economists but live in the same area with A. Consider the world when communication was still difficult. A will interact more with C and D, which imply the possibility of a cross-disciplinary collaboration.

But because of the revolution in communication technology, A can now easily interact with his or her fellow economist, B. So economists will be more likely to talk only with economist, reducing the possibility of cross-disciplinary interactions. In the authors' language, internet will "Balkanize science."

Well, we could still argue otherwise. Because of communcation, economists who tend to group together can have more access to their non-economists colleagues. At the end, the conclusion can happen in both ways.

Social network

Marxian in the bottle

Time for retro music:

Just a cast away, and island lost at sea-o
One lonely day, no one here but me-o
More loneliness, any man could bear
Rescue me before I fall into despair

You should be cool enough to know which song it is. But do you know what philosophical idea this song is closely related to?

Well, this is the answer: Marx' alienation. Remember the idea of surplus, division of labor, division of class etc. that in the end made labor alienated from theirselves, their work, and their society?

I woke up this morning, don't believe what I saw
Hundred billion bottles washed upon the shore
Seems that I'm not alone in being alone
Hundred billion castoways looking for a home

Thank God that we now have internet, emails, blogs, friendster and everything that make us not really alienated...

P.S. Other Marxian philosophy of The Police can also be heard in Synchronicity.

Marxian philosophy

I'd rather teach a pig

I don’t think other hosts in this café ever took his class on money and banking or monetary economics. But I did. [Addendum: I forgot, Ujang also took his class]


Few of us who were in his class would deny that he is quite a character. From his cigarette puffing behavior inside class (inside? yes ! inside class) to bashing students for our questions or ineptitude, this man, Anwar Nasution, has absolutely no match.

Ujang and I had an idea to collect Mr. Nasution’s famous, often notorious, quotes. We urge all alumni to document his quotes which perhaps can be published in the future.

As a start, here are some in our memories:

On criticizing state-owned enterprises:
“Jangan naik Garuda kecuali urusan kau tamasya” (circa 1991)
“Don’t fly Garuda (state owned airline) unless you are in a vacation”

On ideology:
“Jangan cuma bisa Bismillah.. Assalamuaiakum, kelakuan kaya setan” (recently in an interview)
“Don’t be proud of saying Bismillah.. Assalamuaiakum yet behaving like a jerk”

On economics (reply to student answer in his Q&A):
“ Money supply mamak kau!” (right in front of me, circa 1991)
“Your grand ma’s money supply!”

“ Mamak kau tingkat bunga! “ (circa 1990 or 1991)
“Your grand ma is that interest rate!”

“Babi masih bisa diajar!” (happened in our seniors class)
“I’d rather teach a pig!”

On students late coming to class behavior:
“Kambing aja nggak telat masuk kandang!” (happened in our seniors class)
“Even goats are never late to return to barn!”

Self-Promotion #393: "...Because That's What Gets the Chicks... "

(See Self-Promotion #392 right here)

It's time for another installment of our infamous Self-Promotion^TM postings. Let me shamelessly quote two full paragraphs from a blog entry by Steven Levitt at Freakonomics:

You may remember Joey Cheek as a gold medal speed skater from the Winter Olympics. It turns out he is also quite smart. He was admitted to Yale, Princeton, and Stanford. (Harvard, however, turned him down.)

Parade magazine quotes Cheek as saying that he plans to study economics. And then he goes on to blow the secret we economists have so carefully guarded for all these years. He plans to study economics because “that’s what gets the chicks.”

Joey, Joey. You just can't keep a secret, can you? Here's the website of Mr. Chick Magnet himself for you ladies.

That, ladies and gentlemen, is Self-Promotion #393. (Or is it self-vilification?)

self-promotion economists

...The point, however, is to change it...*

Unfortunately I read Greg Mankiw's of Harvard paper (Title: The Macroeconomist as Scientist and Engineer --in pdf) right after giving last lecture of intermediate macroeconomics, with topic on the stabilization policy (the birth of, Keynesian, macroeconomics) and the subsequent New Macroeconomics. If not, I would like to add it as reading list. For non economists, don't worry, it's a non-technical paper (read: no math). You can take it as the biography of the macroeconomics.

In that paper, before coming into a rather disheartening verdict on the disconnection of macroeconomics as science and as engineering (or problem solving) Mankiw draws a very clear and readable history of macroeconomics as a discipline. Soon you would be engaged in a gripping tale on the battle of ideas between Keynesian and New Keynesian in one hand, and New Classical in the other.

Indeed some knowledge on intermediate macroeconomics would help to understand and follow what is being fought. You know: Philips curve and wage stickiness, rational expectation, systematic monetary policy, etc. But even for you who doesn’t have a chance, and privilege (kidding!), for being trained into the subject, it is still fascinating to enjoy the exchange, sometimes nasty, arguments amongst the proponent of each camp. Particularly between Bob Lucas (Chicago) of Neo Classical school and Bob Solow (MIT) Keynesian.

In page 12 Lucas was quoted saying:

"People don't take Keynesian theorizing seriously anymore"

While Solow called that it

"foolishly restrictive" for the new classical economists to rule out by assumption the existence of wage and price rigidity and the possibility that markets do not clear.

Mankiw thinks that Lucas represents the analytical rigour of the new classical --in other word, a sophisticated science--; and Solow concerns on the lack of reality of market clearing assumption -- bad engineering --.

Meanwhile the science itself develops in both camp of neoclassical and neo Keynesian (modern macroeconomics, you would like to say). The interesting research projects of the two schools have been discussed briefly, but excellently, in the paper. Both leads to a conclusion that now we know better about the subject.

But

If God put macroeconomics on earth to solve the problems, then the Saint Peter will ultimately judge us by our contributions to economic engineering. So let’s ask: Have the developments in business cycle theories over the past several decades improved the making of economic policy? p.15

Alas, no.

Mankiw shows that the macro-model used by US administration is basically the old Keynesian type --yes, that IS-LM and Philips curve stuffs-- with minimal contributions from New Macroeconomics researches. And come to think of it, I guess the IMF model --Polak model--, applied to countries in crisis in need for stabilization and IMF money, is also very much old Keynesian one. And I believe all macroeconomic models for Indonesian economy are no different.

This is indeed a disheartening that since Keynes (and to some extent Hicks) --well OK, call it Neoclassical-Keynesian synthesis-- macroeconomic framework in the 30s, no one come up with significantly different and better model of an economy.

I was expecting, and still hopes, that 1998 Asian crisis, a resemblance of 1929 Great Depression, would give a birth to a new Keynes –-perhaps from the East-- to revolutionize the way we see the economy and business cycle as well as devising better way for stabilization policies.

Apparently we still have to wait.

footnotes:
* yeah, it's Karl Marx's word, not on macroeconomists, but philosophers who are too busy interpret the world in various ways.

Macroeconomics