The Politics of Rice 6

(Crossposted at Cafe Salemba)

Again, another misleading headlines (here's the other). Kompas writes (in Bahasa): "Rice Stock Sufficient -- Prices Skyrocketting in Some Regions". What a contradiction. But let's play no more semantics. (But oh, I can't help it: the way I read it is, rice stock is enough, but there's shortage in the market, because the price has been wronged and it frees itself in some regions).

Instead, let's look at the content. Business association now worries that some people might abuse the import. Well, it's no surprise. Researcher from Kadin says "the number of 'deficit farmers' outweights the number of 'surplus farmers'". Be not confused by those terms. It's only another way of saying "in aggregate, our farmers are consumers" As a consequence, lower price is good.

This passage says it all (liberally translated):

A number of farmers in Kecamatan Adipala and Maos, Kabupaten Cilacap, complain the increasing price of rice.

Why is it so difficult to understand this?

Remove import ban. Allow everybody to import. Don't take peasants' rights to buy cheap rice.

The Politics of Rice 5

[Crossposted at CafeSalemba]

Kompas today has a report with a subheader: "It's a like a rat dying in a rice warehouse". This is an old saying Indonesians use to express the irony of someone's inability to make use of generous opportunity; or when someone is prevented to do what's best for him/her.

The saying applies to Indonesian peasants. The article reports that majority of the recipients of "raskin" ("rice for the poor" -- a government program that gives rice to poor families at price significantly lower than the market price). Why the irony? Because those peasants produces rice. Yet they have to buy rice. This is just another way to say that the poor peasants are net consumers.

Question: 1) For net consumers, which is better: higher or lower price? 2) Does import increase or decrease domestic price? 3) Is it good to give import license to only ONE company?

If you read my previous posts you surely know what my answers would be. Yes, higher price might stimulate increase in employment. But see my previous post citing a study by Warr. Yes, it's good to remove import ban. But giving a sole authority to Bulog is not. Allow everybody to import. If only Bulog can import, the effect is the same with quota. Every economics student knows that's bad.

"Reshuffle"

Finally, the undecisive president announced his cabinet reshuffle an hour ago. He has appointed Budiono as the new Coordinating Minister for Economic Affairs and Sri Mulyani Indrawati as the Finance Minister. The rest of the speech was a joke.

Slow... what?

One thing that I like from this country is, we love to create terms. No matter how foolish it is, as long as you say it first, you'll be known forever and get credits from the press. And here comes, the ... SLOWFLATION... Oh my God...

Not long ago, the President himself "invented" his own toy word: BIGBANG. Well, it's not like, he's the one who invented the word. Physicists did, long long time ago. But, our beloved president, SBY is the one who thinks he can use the term to refer to, well, persons!

And here's the best part: everybody starts using the terms! ("everybody" being the operative word. Meaning, google up yourself -- it's everywhere).

I remember, once upon a time, some Indonesian started using the term "QUO VADIS ----?" in his article. And then, kaboom, hundreds and hundreds of articles use that term, no matter how unnecessary it is.

Ever heard this term: LATAH?

The Politics of Rice 4

[This is a cross-posting to Cafe Salemba]

I've been meaning to bring up this issue of rice import in the Cafe, as I did here, here, and here. I'm for removing the rice import ban. But I am against the idea that the government should give an import monopoly rights to Bulog. That's even worse. When we allow importation, why should we allow it only for one single institution? I'll talk more on import monopoly rights next time. Now, I want to elaborate more on the first issue, import ban.

My supporting on import ban removal is based on the fact that majority of Indonesian peasants are net consumers. Therefore the arguments of keeping price high in order to protect peasants (or the poorest farmers) break down.

A moment of reflection, however, might undermine my claim. I failed to consider the employment effect of high rice price. That is, my argument only looked at the consumer price faced by both net producers and net consumers, not their incomes. High price, however, is an incentive for land holders to expand production. As production expands, the demand for landless laborers increases. This would increase employment and real wages of peasants. Therefore, any argument for or against rice import should look at both price effect and income effect.

Fortunately, Peter Warr of Australian National University has recently studied this issue. In his paper, he rightly uses a general equilibrium framework that involves 1,000 individual households. He factors in the distributional effects of rice import restrictions both on households' expenditures and their incomes. He even considers the effect of price increase on the demand for other staple foods, such as corn and wheat flour.

The Warr conclusion is interesting:

[T]he [Indonesia's] rice import ban raises poverty incidence by a little less than one per cent of the population. Poverty rises in both rural and urban areas. Among farmers, only the richest gain.

Therefore:

It is not possible to justify the import ban by claiming that it reduces poverty.

That said, I keep my position: remove rice import ban.

Informal Collection

In a seminar today, I reiterated my concern that the reason our products are not competitive is not merely due to production inefficiency. It is more of something beyond the producers' control. It includes poor infrastructure, illegal collection, and logistic inefficiency.

Negotiation in Politics

At the outset, I should make a disclaimer. I'm not a political scientist and also not a very good observer of politics.

It appears to me, political parties are preparing themselves to grab the opportunity of cabinet "reshuffle". But among all the parties, I think what PKS has been demonstrating is better than any other.

I always think that politics is about bargaining. You support somebody for a return -- or if you don't like that word, change it to "specific, pre-defined objectives". So, it really is not something surprising to read moves like this. (The account tells how PKS clearly stated their demand to the president). And that's what I think what politics should be.

On the contrary, I think this kind of move is strange. Note the statement given by a politician from another party. On the forming of some coalition that excludes PKS, the former ally of that group, he says, "... We exclude PKS, because it has crossed polite political ethics..." By that he means, because PKS has demanded certain positions, explicitly. Now I'm confused. Why demanding a position in return for a support in political arena is called unethical? If it is unethical, what are those other parties aiming for? Let's wait how long can we have these other parties' words. Experience says, don't trust them.

Facts of gasoline

Here, via Mark Thoma. Of course, in Indonesia, the story is way more complicated. The gasoline retail price here is not just about sum total of refining, distributing/marketing, taxes, and crude oil. It is made messier by complicated contract with foreign drillers, Pertamina's obligation to supply the army with special terms, etc. And there's the subsidy... And there's the cost-plus fee... And there's smuggling...

Economist-cum-journalist

Dave Warsh has a very interesting account on economists who happen to be journalists. Or the other way around. My favourite is, of course, the author himself. Krugman is a good economist. But he kind of sucks as journalist.

RIP: Peter F. Drucker

I'm a stranger in the field of management science. But I would be lying if I say I don't know Peter Drucker. So, I agree, his death is a big loss to academia. Here's a nice obituary by a colleague, Hermawan Kertajaya.

Cafe Salemba

A new cafe is opened. Recommended.

Cash Transfer

Here's my take on the current cash transfer program. Unfortunately, The Jakarta Post has edited it in a manner I wouldn't have suggested. To avoid misleading, here is the original, uncut:

A Perspective on the Cash Transfer Program

My main skepticism toward the current cash transfer program (CTP) lies on the failure of the government in identifying who are and who are not eligible. As with most other social safety programs, CTP suffers from adverse selection and moral hazard problems. Evidence for all this are widespread. Pick any local newspaper today, you will find stories about people run amok because they are deemed ineligible. Some old, thin person is pictured with his extremely poor house in the background, looking at the camera with empty eyes. The caption says it all: “Pak Fulan of Desa Bojong earns fifty thousands rupiah ($5) a month from scavenging around. With that, he has to feed his family of five. Yet, he is not on the list”. Or, there are news about how local government officials can manipulate the system by directing the CTP to their relatives and friends who are not eligible.

If the government’s objective is to improve income distribution, however, it deserves some credit. The government knows nothing what a given citizen really needs. It has no information whatsoever whether Family A is in desperate need for rice, or for motorcycle, or for health services at one particular moment. So, giving away cash is preferable than providing in-kind assistance: it gives freedom to the recipient to spend it anywhere he or she wants.

But where does the cash come from? It is from oil subsidy cut. The government claims that the subsidy has been benefiting the rich rather than the poor. It is now time to “give justice to the poor”: transfer the money from the rich to the poor. Some might ask, however: Why should a hardworking person be punished because he earns a lot higher than others? Who is the government to decide that Family B should give his money away to Family A? These questions are valid; but might be missing the point. The CTP now undertaken is financed through reduction in distortionary oil subsidy. People, regardless of income groups, have been enjoying oil subsidy for years. And that is not sustainable; unless everybody agrees to give up other development targets such as good infrastructure, education, and health facility. (Or, if everybody accepts tax increase). The demand for development increases over time. With limited financial resources, the subsidy should be removed gradually and let the “saved” resources be used for other development targets. Surely this is painful. The government is required to provide a pain reliever. Hence the CTP. To put simply, CTP is a means to take back some amount of subsidy from everybody and give it back in cash to the poor, not to the rich (for lack of better dichotomy). This is a form of redistribution. In its ideal, the CTP aims to leave the poor at least as well off as before the change. This is what welfare economists used to call “compensating variation”, measured by the “willingness-to-accept” the change. What about the rich? What is the compensation for them? The government uses statistics: even though everybody enjoyed the subsidy, it is the rich who enjoyed it more. The rich deserves no cash back. Fair enough.

As a side note, however, the compensating variations argument above may be shaky on theoretical ground. John Hicks, who first proposed the compensating variations as a measure of welfare change in 1943 defined it as the minimum amount a person would require as a compensation for welfare loss. We have yet to hear clearly how the government comes up with the Rp 100,000 per month per family. Is it really the minimum amount required? Or is it simply a back-of-the-envelope calculation subject to budget concern, regardless of people’s willingness-to-accept? If the latter is true, we should not claim it as a “compensating variation”. The fact that people stand in long queue to receive cash suggests that they are willing to accept it. However, “willingness-to-accept” – as the name suggests – should be based on voluntary exchange between both parties. In the absence of negotiation the long queue does not reflect the true minimum willingness-to-accept. It is a reflection of involuntary submission – “better than nothing”. In fact, it might be perceived as a pure “bribe”. At least, public bribe can be explained using political economics framework: the government has to cut on subsidy. People will suffer. Bribe them, so they will not react harsly. If “bribe” is too much a bad word, replace it with “compensation” (note the sarcasm).

Speaking of bribe leads us squarely to the issue of corruption. And this is where again my skepticism builds upon. Implicit in the first paragraph above, a smooth transmission mechanism is a necessary condition to ensure the effectiveness of any wealth transfer. But the coast is far from clear for a smooth landing. We have read evidence where aid does not work well in countries with severe corruption. Jeffrey Sach’s humanitarian effort for Africa will not work if all the aid he mobilized end up in the pocket of corrupt government officials. Nick Kristof writes in the New York Times (Oct 18, 2005) how Nigerians are starved by red tapes, not just by malaria and measles. In a more academic-oriented paper using cross country comparisons, Easterly (2005) finds support for democratic institutions and economic freedom as determinant of growth – while aid is less effective, especially in a corrupt environment. Cash transfer program works in similar mechanism as foreign aid. It is supposed to transfer some wealth from rich to poor. It is fair to say, therefore, that failure factors in aid programs might as well be existent in cash transfer programs.

Alas, we too live in a corrupt country. Many studies, including those by LPEM-FEUI, have found evidence of severe corruption in Indonesian economy. For example, in 2000, a typical business in Indonesia has to pay extortion as high as 10 percent of its total production costs (LPEM-FEUI, 2001). In 2003, the average size of bribes per annual production costs is 4 percent (LPEM-FEUI, 2003). Finally, the logistics inefficiency in export industries is almost 6 percent of total production costs (LPEM-FEUI, 2005), due mostly to poor infrastructure conditions and bad government regulations. Having listed just a few of them, it might be a better idea to use the resources from subsidy cut to combat the “high cost economy”. This includes establishing a solid set of rules of law. Robin Hood policy might look good in a very short run. But it is near useless if economic sustainability is of concern. With regards to the current problem, however, I have a slightly different position with some fellow economists. They believe that the subsidy cut should have been cancelled. There are ways around the budget problem other than cutting the subsidy. That includes, combating rent-seeking activities in oil and gas industry, mobilizing other sources of fund (e.g. tax reformation), and debt restructuring. I think we should do them all (including the subsidy cut). The domestic fuel artificial price has been the root of evils: it creates “triple-distortions”: between domestic prices and international prices, between industry price and household price, and between products (e.g. gasoline vs. kerosene). The world responds to the increasing oil price by investing on oil drilling and expanding refining capacity (supply side); and developing alternative energy resources and good public transportation (demand side). Both forces are likely to hold crude price well below $100/barrel. Unfortunately, such responses are not evident in Indonesia – the incentives are blocked by the artificial prices.

One might ask, if the saved resources are for building schools, roads, hospitals, etc., what is then the “compensation” for the poor who have to face higher prices? The better schools, the better roads, the better hospitals, the better rules of law, are it. This sounds cliché, true. But it is the government job to convince the people.

I should say, I am not claiming that cash transfer program can not be successful at all. A program called “PROCAMPO” (Program for Direct Assistance in Agriculture) in Mexico aimed to provide compensation for anticipated price effects of trade liberalization on basic crops is found to create multiplier effects when the farmer recipients put the money to work so as to generate further incomes (Sadoulet et al, 2001). It is hard to imagine that this can be done in Indonesia with the current CTP: the Rp 100,000 would simply vanish as consumption in a matter of days. The PROCAMPO transfers cash of $300 per year per family, or roughly Rp 250,000 per month. The program is relatively well-managed: eligible farmers have to show that they have planted at least one of the listed nine staple crops. In addition, the PROCAMPO card can be used as collateral in borrowing from commercial banks. The Mozambique’s Cash Transfer Program (“GAPVU”) is also successful, thanks to a well-designed program that succeeds in reaching household targets, using decentralized health and community administrative structures, and “strong political and institutional backing” (Schubert, 1995). GAPVU transfers cash of “only” $2.5 per month per capita, or roughly Rp 125,000 per month per family of five. Note, however, that GAPVU has nothing to do with compensation. It is merely a welfare program with clear targets: poor households with severely undernourished children or severely undernourished pregnant woman, elderly persons living alone, severely disabled persons living alone, and female-headed households with at least 5 family members. The eligibility is reviewed annually. Finally, the Social Safety Net Program (“RPS”) in Nicaragua uses conditional cash transfer system (Maluccio and Flores, 2004). Selected poor households should maintain their eligibility by sending their children to schools and visiting preventive health-care providers. They are eligible for a cash transfer of $357 per year per family, or roughly Rp 300,000 per month.

In conclusion, the current CTP might end up wasted, if not managed well. The government has two options: leave it and use the money for other development targets; or, make it better. As usual, either way is costly. And both needs better PR skill that has been lacking from the government.

New Euphemism

I learned from Mahalanobis, we now have a new euphemism: "constrained discretion". It is taken from Ben Bernanke's statement, and it means "a state where you have no idea what you're doing" -- my rephrasing Mahalanobis.

Speaking of euphemism, here's another one: "My priors shifted". Meaning: "I changed my mind". (via Arnold Kling).

A Glance on 2006

The following is the list of key macroeconomic assumptions for the budget year 2006, as agreed by the government and the parliament, last Friday. In parentheses are the government’s initial assumptions, before the discussion with the House.

• Economic growth 6.2% (6.2%)
• Inflation 8.0% (7.0%)
• IDR/USD 9,900 (9,400)
• 3-month SBI 9.5% (8.0%)
• World oil price USD 57/barrel (40)
• Domestic oil lifting 1.050 mbpd (1.075)
• GDP IDR 3,041 trillion (2,996)

Some notes are in order. If this year’s growth is 5.6% and the projected 2006’s is correct, then there is no reason to worry about stagnation. Furthermore, this year’s inflation will likely to be 13-14% (I initially thought it would be 12% -- due to BBM price hike; but then BI printed money). In other words, next year’s inflation rate will be lower. These two indicators are sufficient not to expect a stagflation (yes, unemployment might increase a little above 10% -- but it alone is not enough to qualify for a stagflation).

However, it is fair to say, that the lower inflation rate assumption would be easier to settle if the government refrains a little on spending. It has proposed a 1.1% deficit. The House, on the other hand, is more prudent with 0.6%. They agreed on 0.7%. If this is credible, I wouldn’t be surprised if the next year’s growth is 6.0%, not 6.2%. But that’s good, since it will hold down inflation rate a little below 8.0%. This year’s inflation is too high already that BI should probably set its BI rate at 13-14% (currently it’s 11%). Meaning, commercial banks’ borrowing rate might end up at 20-21%. That’s too much for the real sector. Some degree of prudence next year might then be a good idea. And by “prudence”, I also mean not talking too much.

Addendum: This is shocking. Just an hour ago a collegue told me that October's inflation is ... 8.7% m-o-m! I couldn't believe it. But his source is an official from the Statistics Office (BPS). How can this happen? Moreover, the y-o-y inflation rate is 17.89% and y-t-d is 15.65%. Well, if all this is true, the arguments above break down... But I'm still having hardtime to understand the official figures. I hate to suspect (or blame it on) the politics.

Addendum's addendum: It is confirmed. The October's inflation is 8.7%. The biggest contributors are BBM (3.47%) and transportation (2.08%). BI has raised its BI rate to 12.5%. This means, the prime rate will be around 19.5%! (higher yet for concumption credit). This is saddening. BPS also informs that the open unemployment increases to 11.6 million (10.8% of the labor force), 0.4 million of which is "due to BBM price hike". I hope November and December inflation rates are well below that of October -- and there are reasons for that hope.

Marxian call for, well, market

CafeHayek, in a Marxian tone calls us:

Economists of the world, unite! Help the world understand the role of prices.

I'm in.

President should buy ... helicopter

Surely this kind of news shocks everybody. First, it shows how uncoordinated the administration is. Second, the timing is bad. In this account (in Bahasa), it is explained that the budget increase is for buying the president a private airplane.

I think, instead, the president should buy ... a helicopter! I hate it when the government officials are transported. It always creates traffic jams. That costs me time.

What? It's not Ben?

I don't know if this means official already. But CafeHayek tells us that Bush has chosen the new Fed chairman. And it's not Ben Bernanke. I don't know much about Robert McCleskey. What I know from the candidates list, Ben is quite the best replacement for Greenspan. I'm not alone.

Update: It's Ben.

Keynes is more than that, my friends

Recently, I gather that critics of Keynes usually don’t understand Keynes very well. They believe, Keynes is all about Big Government, and that is bad; full stop. So, they find it strange that a person like me, who loves how the market works through price mechanism and hates big government still has belief in Keynes. Worse yet, when I argue for liberalizing the market, they think I am a convert. Strangely enough, they are the ones who come up with policy recommendation such as cash transfer as a compensation for oil subsidy removal, that economic downturn is caused by investment shortage, that herd instinct is more desirable than hoard instinct in stimulating growth, that monetary policy “might have its limits”, that deficit spending is sometimes -- many times -- needed. And they say Keynes should be despised? In fact, they even call for bastardized Keynesianism: that the government should create jobs; that the government should lead growth. These two, even me have reservation.

Schelling gets the award

The 2005 Economics Nobel Prize is shared by Bob Aumann and Tom Schelling. I am not too good in explaining who they are. In fact I think it would be tough to explain their works to students in undergraduate level, especially Aumann's contrbution. As for Schelling, his works are (or, could be made) less complex, yet are powerful building blocks of evolutionary game theory. So, how would I explain them to my students? I will go:

Both Aumann and Schelling are top notch game theorists. Aumann's papers are tough. By contrast, Schelling has written some non-technical books. Go find them, especially The Strategy of Conflict.

Somehow I know what to answer the next time my wife complains to me why I don't like too many open options offered to me. ("You're strange. I thought economics is an art of choice. Why do you complain when I tell you that to go to Building X you can choose either way 1 or way 2 or way 3 or... so forth. You always want less options"). Now I know the answer. Schelling has taught us! It's the focal point that interests me. Too many similar options can blur my focal point. Yes, it's the... Schelling's Point.

BBM price hike and a credit for the govt

I was attending a meeting in Thailand when the news broke out (yes, another one was the Bali bombings -- I am too sad to talk about this). It said, the government of Indonesia cut the fuel subsidy and accordingly raised the price. I was admittedly a little surprised with the magnitude, having seen all the resistance while the policy was underway. For premium gasoline, for example, I was hoping a full subsidy removal, but expecting somewhere between 50 and 80%. It was 87.5%. As for kerosene, I wasn't that surprised (it was a 187% hike) -- knowing that its former price had been the root cause of illegal mixing with premium gasoline.

But, I applaud the decisiveness. After all, this was a brave, unpopular call. And it was inevitable. It was really a matter of time. Some people argue that the timing is bad. I think it's not. In fact, there should be a dampening effect with the seasonal Ramadhan shopping spree, as opposed to that if the price adjustment took place before or after the Ramadhan. In addition, experience has told us that such price hike will on average have only 3 months of effective impact. Therefore, while we should submit to a double digit inflation this year (probably 11-12%), next year should be better.

Having said that, I am not hesitant to give a credit to the government. I even raised a discourse among fellow critics that cabinet reshuffle might not be the most important issue anymore (I think the demand for reshuffle is a function of the success of dealing with the oil problem). The recently launched "October 1, 2005 Package" provides another justification for that position. The October Policy includes, among all:

• Reduction of sugar import tariff.
• Removal of industry raw material import tariff.
• Removal of converter kits import tariff.
• Reduction of container handling charge and installment of a 50% cap on surcharge.
• Closure of 73 truck inspection stations ("jembatan timbang").

This might be hard for some people. But that's the bitter pill for the better will.

Aceh

Gave a small talk in Aceh yesterday, regarding the "reconstruction and rehabilitation". My remarks are as follows:

• It is the right momentum to redevelop Aceh. Almost all needed sources are there. The exception, however, should be taken more seriously. It includes: accountable aid management, soft infrastructure, property rights system, and the balance between regulation and rooms for the locals to decide what's good and what's bad for them.
• That said, I tried to encourage the community not to rely completely on Jakarta. ("Acehneses knows themselves way better than anybody else").
• We're in the search for good property rights system. And that does not have to be dictated by central govt -- some systems might even have been existent already. Basically, the central government (or, local government for that matter) is needed only for their role in advocacy. ("We don't need to kick out big corporations. We need to use them. But in order to level the negotiation field, we might need advocacy -- that can come from the government or NGOs).
  
• Do not get trapped in the "poverty trap" assertion. The naive "Big Push" era in Rosenstein-Rodan's sense is over (as opposed to Murphy-Shleifer-Vishny's "big push" interpretation that look more on the institutional dimension). No matter how much money you get to boost up investment, if soft infrastructure is not ready, it all goes to consumption. (By "soft infratructure" I mean institution: political system and the people running it as well as the legal framework, and of course ability to adopt technology).

The discussion was good. In fact I enjoyed talking with the Aceh people. They're very open-minded. (Frankly, I was sort of expecting typical NGO-like resistance to economic solution -- as it turned out, this was way better).

Note: Just found out that the latest Economists' Voice contains two articles related to city redevelopment -- in this case New Orleans vs Katrina (one by env-economist Bob Hahn and the other by the ever-smart Ed Glaeser). Check them out (subscription required).

Be supportive, exers!

Some days ago I came across this news about ex presidents, ex vice presidents, and some other ex high profiles sat together and called for cancellation of BBM price increase. And they went on pointing out the current administration's weaknesses. As if, they were good at their time. They were not. Some of them were even worse. And look closely. Those presidents increased BBM price, too. Look more closely, there's an ex-con in the gang!

It seems to me, these people just love to act (or over-react for that matter) in front of cameras and appear as the never-wrong people.

The Politics of Rice 3

Many people asked me about my posts on rice. I think I should reiterate my position: I am for removing rice import ban (the way I support removing some export bans). One thing that I am obviously against with is if the import license is given to one single firm. And that firm, as we're not surprised, is Bulog. And as days go by, the politics reveal itself. We've been having rice at price higher than those in other countries. Pro-protectinists also argue that this is what we want: to protect farmers. I say, not completely. In fact, it may end up hurting the entire economy, as studies have shown that our farmers are net-consumers peasants who buy rice at the marketplace. In that regard, I agree with removing the import ban. Rice will flow in, adding to the domestic supply and eventually pressing down the price a little bit - and hence the inflation, for rice is a big weigh in the CPI basket.

But now the problem kicks in. The government thinks they can do this supplying business better than anyone else. So they give import license to none but this Bulog -- widely known for its corrupt behavior back in the New Order. So, what can you expect? Nothing but rent-seeking. And days go by: we now knew that in fact, the imported bulks of rice are priced higher than the domestic price! Note that my support for import is based on total welfare concern (which admittedly consumer-biased). But if we in fact import at higher price -- not lower price, this line of argument breaks down. The only explanation left is the belief that stock is really inadequate. But again isn't this the same story as that in BBM fiasco? Only that, this is sort of the beginning.

Moreover, the import has been set without legal auction. Something is really fishy here. Who's there in Thailand smiling wide now?

Votes

Received the paper ballot for AEA 2006 Officers election. Of course I don't bother sending it back. But I would have voted for Chris Sims as the Vice President. (Tom Sargent is surely the next President).

As for the upcoming Nobel Prize in Economics, my guess is for Bhagwati.

Finally, for this far-from-representative list of "world's top intellectuals", I voted for al-Qaradahawy, Toer, Becker, Bhagwati, and Posner. (Yes, there is a Friedman in the list -- but not THE Friedman).

Sachs the Prophet 2

I guess I'm not the only one puzzled by the new Sachs. (See my post yesterday).

The Politics of Rice 2

I knew it! (No, you need not to click it; just scroll down -- it's only two posts down the way). The government will import rice. And it's not hard at all to guess who gets the sole licence: Bulog (State Logistics Agency). In case you missed it, Bulog general manager had just claimed that Indonesia should not import rice. Cheap trick!

Sachs the Prophet

Enough is enough. Now Jeff Sachs declares himself a "prophet"? I'm having hard time to get it. Oh, maybe because he is indeed one of the best economist-speakers? For that matter he deserves the trophy.

(I have to confess. I have not read that guy's book, End of Poverty -- something like that. I just happened to watch the G8 parties endorsing his idea of spoiling the poor. At the time he came to Jakarta, I had two choices: attending his presentation, or watching a movie. The latter it was).

But not for his misleading populism. I can't elaborate my disagreement with his approach now. (The point is, I just don't think the mechanism will work out well -- as in my skepticism toward Indonesian compensation plan, see below). But of course Bill Easterly says it all.

And somehow this leads us to our own government plan to distribute lumpsum money to the poor families every month as a form of compensation after raising the oil and gas prices. If Sachs were indeed a prophet, he seemed to be a successful prophet in Indonesia.

[Via Mahalanobis].

The Politics of Rice 1

In a national newspaper today, the general director of Bulog -- Indonesian state-owned enterprise responsible for rice stock and distribution -- warns not to remove rice import ban. (By this he actually means: don't let anybody but Bulog to import rice. Yes, the law actually assigns Bulog as the only entity allowed to make import). His argument is typical: to protect farmers' income.

He is wrong.

Most of Indonesian paddy "farmers" are actually working peasants who don't own even slightest peace of paddy land. They are pure labors. But they eat rice. In other words, in general, Indonesian farmers are net consumers. Guess who gets hurt when rice price is artificially higher than market equlibrium price? Consumers.

In fact, the same general director says that Bulog is pessimistic that it can meet domestic demand for rice. They don't have enough stock after end of this year. Here comes the silliest part: he blames the shortage on smuggling out. Somebody should explain to this guy, what causes smuggling in the first place.

Policy Package That Isn't

The President announced yesterday an "economic policy package" to deal with the "likely economic crises". (It is so strange: I can't find any online news covering the package in its entirety!). To me, this package is not a package. It's a sermon -- a bad sermon. There's nothing specific in it. Nothing verifiable. In short, it's nothing. The President shouldn't waste his time and ours waiting for such crap announced.

Had SBY been more responsive, he should have announced instead:
1. When exactly he would eliminate the fuel subsidy, and what is the magnitude (numbers, please!). That is, what are the prices he would set for fuel and other derivatives.
2. When exactly he would fire his underperforming ministers.

About fuel price. I would suggest no more administered prices. Let the market decides. Invite competition from abroad. That will release the burden on the budget. Yes, there will be social resistance. Face it. It will be inflationary, yes -- for shorter run than worried, for smaller degree than imagined. The inflationary spiral will go first to rice price. Yes, but it can be curbed by removing the import restriction.

As for the number two, I tolerate some gestation period, as long as there's a definite date when the decision will be announced. A note however, all this complain about "businessmen should not be in the politics" is ridiculous. Why shouldn't businessmen have the same rights as other citizens? My problem is more on whether or not the businessmen who are now in the administration are the right businessmen. I think they are not. Fire them.

Approaching his one year in the administration, SBY so far has been extremely undecisive. It's time now to do something real. Even though I'm not too pessimistic (as in "we're having crisis"), a strong determination from number one leader is a must to calm the market.

Semester Kickoff

New semester has just started. I am teaching Microeconomics for undergraduate and graduate levels. And the hard work continues. This time I have lowered my expectation. Even though I'm assigned to teach advance microeconomics, I'll be taking the liberty (or lack thereof) to drill the basics once more. What's the point of forcing advance analytical tools while the basics are lacking? Why the need? Because in these past two semesters teaching environmental economics, I came to realize, most students simply have no idea what the key principles are. Central of the problems is the vague understanding of price. So, we'll labor a lot on that issue.

Welcome, unctuous expressions. I hope we can learn something. And have fun.

Repatriation?

[At the outset, let me state my position: I'm not that pessimistic considering our recent economic dowturn. The whole thing has root on the hiking oil and gas prices. The key problem is that, the country has no access to benefit from this incentive. The price movements are simply blocked. We see here and there some positive development, though: people are talking about alternative sources of energy, about the need of better technology, and of course about efficiency. Even officials (and yes, some legislatives) have started to welcome the elimination of subsidy; gradually, but that's ok for now, considering the likely social and political resistance.]

(Having said that) I'm not too excited with this whole idea about export repatriation.

Think about your home. What happens if you close the door? You can't go out, and .... neither one can come in. How to close the door effectively? Use the best lock. Otherwise, hire the best guard in town. My point is, repatriation will lead to reciprocity. And besides, monitoring costs are high.

Reshuffle?

Somebody asked my opinion on the possibility and feasibility of SBY's cabinet reshuffling due to poor performance. The media widely covers this issue of firing the President's economic team. My take is, reshuffle will send a good signal of strong determination by the President. In markets, signal is key. And the market has yet to see an decisive president since the last election: that's not good. However, recent circumstances provide justification (see my next post, above), not to do the reshuffle until at least, the general business cycle shows a more predictable direction. I would say, give them one more year. When the time comes, fire the coordinating minister for the economy, central bank governor, and minister of finance. Dissolve the national development planning agency and assign its current chief to a new post, that is the coordinating minister for the economy. in the meantime, the minister of trade should continue her work on reducing trade price distortions.

Hey, you asked me to opine.

Thank you, high oil price!

Nobody explains it better than Jay Hancock why we should thank hiking oil and gas prices. (The link brings you to Baltimore Sun website and it might ask you for free regsitration. But the points are):

The very high oil and gas prices have led to:

1. Billions of dollars invested in petroleum production. Supply will increase.
2. Chevron, Marathon, and many others are opening millions acres for drilling.
3. Oil and gas explorations create jobs in Rusia, Angola, China, Algeria, Britain, India, Canada, Azerbaijan, Nigeria, Poland, Malaysia, New Zealand, and Trinidad-Tobago.
   
4. The number of exploratory rigs around the world hit record high level since 1986.
5. Companies in South Korea, China, Singapore, and the US are building new hardaware to address drilling-rig shortage.
6. Chevron is expanding its refinery in Mississippi by 25 percent.
7. Kinder Morgan and Sempra are going to spend $3b on pipeline delivering natural gas from the Rockies to the Midwest and East.
8. Valero and ConocoPhillips are improving their ability to process sour crude that is cheaper than sweet crude.
9. Thai Oil is spending $1b on new ouput capacity.
10. Brazil in planning to increase processing capacity by 20 percent.
11. Florida is building 750MW-worth of wind-powered electricity generation.
12. China and India have doubled their refining capacity.
13. Everywhere people reduce unnecessary driving and encouraging fuel efficient cars and public transportation.
14. Sales are soaring for hybrid vehicles.

In short, incentives are all out there now for efficiency and better technology. We, too, can benefit from this situation, only as long as we free the prices.

Wife Attack!

I have heard many economists are frustrated in delivering their messages. Not that people can not follow the logic, but because economists are bad explainers. I usually tell my collegueas: "Don't blame those who don't understand you. Blame yourself who fail to explain". That advice applies to ... me, too.

And this one case is special. My very own wife is "attacking" me. To avoid endless debate -- see, I am a bad explainer -- I suggests her instead to read my regular columns in this magazine.

Economic Principals is no blog -- it should not

Dave Warsh says it all. We all have benefitted from the blog revolution. But as a regular EP reader, I don't want it to follow the euphoria. Warsh's column is special and no blog can beat it: professional journalism as well as well-researched arguments. Warsh doesn't hold an Econ Ph.D., but that does not bar him from being better than Krugman sometimes -- many times -- in economic analysis.

Keep up the good work, Dave!

Unfair Diplomas

Different?

I recently raised a concern to some collegues. On examining two master's thesis defense, I was surprised by the huge gap of quality between the two. Yet, both passed. Why so? I was told, because one student was from "regular" program, while the other one from "executive" program. "So the executive program should not be as tough as the regular program". Fine. But I was curious: would they hold identical certificate? To my surprise, the answer was: yes.

I usually don't care with how people gets their jobs. If two persons with different quality end up in the same workplace, do the same thing, and get paid the same amount, I say: none of my business.

But this one is a slightly different problem. It involves maintaing the standard quality of our graduates. I would feel bad to let students leave unprepared for job market. In addition, I don't want the market to perceive that we produce graduates with low quality.

It's happening, unfortunately. I hope this is not simply because we desperately need to raise money and have to sacrifice quality.

Thinking about it a little further, this situation is not only harmful to the department/university itself, but also to the students, and to the employers. A prospective student of the regular program would think twice: why should I work harder than some other students, if we would all get exactly the same labels? Below is a brief explanation of the effect to the hiring company (see graph above):

Think about a company seeking for two employees with master’s degree in economics. Assume that two of our graduates fill in the application. The company doesn’t want graduates from other university. Our two graduates hold the same diploma. But their quality differs. Graduate L has low probability (P) of failing his assignment, while H has high probability. Both alumnae’s utility curves are shown accordingly. Note that C is “coverage”, or think about wage; and d is “premium” or, for that matter, effort required from the employee. Don’t over-interpret “effort”. It simply means, “If you are not good enough, then you should work harder to be in par with the other – if you demand equal wage”.

The company system goes like this: the more likely you are to fail your task, the more effort you should undertake, and we will pay you accordingly. Obviously from employee’s point of view, less d and more C is preferable – hence the shape and the direction of the utility curves.

If the company can clearly separate between the “low-risk” and “high-risk” employees, it can require different effort levels. For a given wage level, therefore, the equilibrium is A for the good graduate and B for the worse graduate. However, many times, companies fail to identify which one is which – especially when their diplomas are identical. So, since both types prefer A to B, the former will be chosen by both. In this case, the company will make zero "profit" with L-type and negative profit with H-type. If the company wish to prevent any H-type (whichever graduate it turns out) to move to point A, and therefore implements a single rate (d*L_H), it will make profit at the cost of low-risk employees.

On the other hand, the good graduate is surely disadvantaged by the situation. With the same effort level with the worse graduate, but with higher quality, he is underpaid (or put differently, the worse graduate is overpaid).

In plain words: moral hazard is at play. And maybe adverse selection as well.

Microeconomics Exam

Below is the final exam for my intermediate microeconomics course (by the way, just got the instructors evaluation result: I rank 6 out of 30 -- not too bad).

1. Think about a monopoly market.
1. A monopolist is a single player in its market. He/she can search for an optimal price. However, a rational monopolist can not set any arbitrary price. Why?
2. Imagine an apple monopolist in Medan. He told you that today he gained maximum profit. You know from his neighbor that his marginal cost of production is Rp 4,000. But he sells his apples at Rp 7,500 each. There is another monopolist selling apple in Jakarta. She prices at Rp 5,000 and produces at the same marginal cost as the Medan monopolist’s. A friend of yours claims that the price difference is due to “Medan people are more responsive to apple price changes than Jakarta people”. Is he right or wrong? Give me a proof (assume away arbitrage between Jakarta and Medan).
   

2. Following on # 2:
1. The Jakarta monopolist – let’s call her Patrice – turns to you. She complains that there are now new competitors coming in to Jakarta. The first competitor uses advertisement that goes: “New Kind of Apples: Redder!”. The second competitor goes: “Super Apples: They Smell Better!”. So do other competitors; all try to appear differently. You, however; know that actually consumers don’t care that much with color or smell of the apples. What kind of market is this now in Jakarta?
2. As it turns out, the new entrants put downward pressure to price. Now you can buy apple in Jakarta at Rp 4,500 each. Given the same marginal cost, is the market now efficient?
3. Threatened by the increasing competition, Patrice changes her strategy. She buys a new technology from Singapore that allows her to be more efficient. Too bad, one competitor named Patrick follows suit. Other competitors can not compete anymore against Patrice and Patrick; they quit. What kind of market is this now?
4. As they are the only players now, Patrice and Patrick become extra cautious. Meaning, one’s decision takes into account the other’s as given. What type of equilibrium do you expect?
5. Explain the interaction process between Patrice and Patrick if: i) Each assumes other’s output as given then act accordingly; ii) Each assumes other’s price as given then act accordingly; iii) Patrick observes Patrice’s output, then decides his own.
   

3. Exhausted from harsh competition, Patrice and Patrick agree to negotiate. They agree that profits will be joined, then shared proportional of outputs produced. Each may choose to produce 50, 75, or 100 apples. You are told that the total joint profits are Rp 3,200, Rp 3,500; Rp 3,000; Rp 2,100; and Rp 1,000 for total quantities of 100, 125, 150, 175, and 200 apples per day, respectively.
1. Find the Nash equilibrium.
2. Find the Stackelberg equilibrium, assuming Patrice as the first mover.

Save the energy and all the nonsense, 2

So, Bappenas chairperson denies that the Presidential Instruction for energy saving will not affect productivity, as earlier claimed by Bank Indonesia's governor. The vice president seems outraged. I think Ibu Ani is wrong this time, Pak Jusuf is misled, and Pak Burhanuddin is right. It's true that "stop/reduce using elevators, air conditioners, etc" can save energy. But it also can reduce productivity. So, it's a matter of calculating how much energy you want to save while willing to sacrifice some degree of productivity. If, by any chance, you can direct the save-energy campaign so as to make works more efficient, that's good. If you can produce the same output with less electricity, you save energy and increase productivity. The problem is, it is not simple to identify which one is which. You want to reduce the use of electricity. For that, you encourage efficiency in computer using. Some of your staff indeed needs the computers. But some use it to play solitaire. The problem becomes harder if some workers (can) do important jobs while busy chatting with friends, and some are used to multitask between office spreadsheet and solitaire. If you can find a way to discourage office abuses only, you already increase productivity and save the energy.

But if you want the shortcut by turning off the LAN at 4pm, I'm afraid that's not a good idea. I had a discussion with a consultant hired to help manage one of the state-owned enterprises. She complains that now she rarely can work as productive as before because "there is no internet to access important documents online". I believe this is not peculiar to her. In some busy offices, you need to stay until nine at night, because you have to exhange urgent emails or calls with somebody in New York who happens to be in his/her morning primetime. Some stockmarket analysts really work after midnight and they do make use of cables broadcasting real-time financial news. Now you want to stop all that?

Think about the president's instruction to stop wearing suit ("let's now wear our own traditional customs" -- my goodness; the government now wants to tell you what to or what not to wear??) , start using stairs rather than elevators, reduce the use of air-conditioners. It sounds good. But what is the reason for having ACs and elevators at work in the first place? Convenience, comfort. And why are convenience and comfort important? For better productivity. Imagine office workers with less elevators and ACs. Do you expect increase in productivity?

I'm all for rational energy saving. But not for all the nonsense as I have written below.

Addendum 1: A friend wrote me: "OK, you're saying that the Presidential instruction did not even touch the root of the problem. What is the root of the problem?". My response: "Comprehensive energy policy". He goes, "Well, that's cliche. Give me one reason why you think reducing the use of elevators, business suits, etc is not gonna work". I replied, "Illustration might work for you. Look at the chronic traffic problem in Jakarta. If you happened to be trapped in the traffic jam Friday last week, you should have come to realize that your car was simply, well, an umbrella. A very expensive umbrella, why? Because it protected you from the heavy rain; yet the fuel was burning all the time while the car stayed still in the jam for hours. How many litres of fuel do you think Jakarta people waste in their daily traffic problems? A lot. Indonesian people? Even more. Do I think it's higher than the energy we can save from reducing elevators, suits, etc? Yes I do. So I would like to see a comprehensive energy policy that also, among all, addresses the traffic problem". My friend was not satisfied, "But don't you think there are people wasting energy in the offices?". I responded, "Of course I do. Go to government offices at nine o'clock. How many officials are playing solitaire? How many are reading gossips in the internet? How many are chatting in friendsters? A lot. The problem is, can the government itself identify all this? And even if it can, can it tell the inefficient officials from the efficient ones? Probably not. Moral hazard is at play, and pooling equilibrium is sometimes an easy shortcut...". My friend: "Stop it, you're getting too academic. Give me a break: What is your 'comprehensive energy policy' in one word?". Me: "You're typical. You don't even want to listen. But I'm getting used of people like you. My answer is: PRICE". My friend left.

Addendum 2: A collegue called me. Him: "Why do you sound so harsh to Mbak Ani? Isn't she your tutor at LPEM?". Me: "Don't get me wrong. She's not only my tutor, she is my teacher. In fact, she is one of my favourite economists. And that's why I don't want her to go the wrong way. I still want to believe that it's the newspaper who misquoted her. I don't believe that she really meant that saving energy has really nothing to do with producticity. That's why I critiscized the statement in the newspaper. That's what friends are for, isn't it? After all, I praise what she does right. Knowing her, I think what she was really saying is actually: 'Saving energy is good. Productivity is good, as well. Now there are inefficiency here and there. Let's tackle them so as to save energy and to increase productivity' So the problem really is, how to exactly identify the sources of inefficiency and shoot your silver bullet. But as I say, this 'INPRES' is at best a pain reliever. It's not solving the problem. No, as long as you we live with distorted prices".

Addendum 3: A relative called up: "Why do you and your friends keep suggesting correcting the (BBM-) prices?". "Why don't you just recommend a total cleanup in the corrupt Pertamina?". My take: "We should do both: correct the market failure and ccombat corruption". The relative continued, "The price hike. Why now?". My answer, "So, when?".

Addendum 4: A fellow blogger commented (see "comments" below) that she agrees with "leave-your-suits-at-home" policy, because of a reasonable reason. However, my point was more on citizen's freedom of wearing what he or she likes. The Government really should stay away from this one (and many others, for that matter). (It occurs to me, by the way, my friend's example of "kemben" can not be generalized. My traditional clothes are far complicated than business suits. But, no I don't really love business suits either; stop by my office, if you don't buy this-- it's just that I hate government intervention in every private matters).

Save the energy and all the nonsense

The government seems to be incapable even to offer solutions that at least make sense. The oil and energy desperado has resulted in a series of childish and myopic "solutions". Among all, the "funniest" ones include 1) persuasion/request/invitation/directive (instruction?) to office workers not to use elevators, 2) p/r/q/d to reduce the use of air conditioners, 3) p/r/q/d not to wear suit in office -- so not to demand more fresh air from the air-con, 4) p/r/q/d (i was told, this is soon to be official instruction) to radio and tv broadcasts not to run from 1 am to 6 am, and 5) p/r/q/d to start switching off more house lightbulbs every night.

I say, oh my God. It's indeed hurting to see people are fighting for an access to fuel with "affordable" price. But the price has been manipulated. What stays in people's mind is wrong price. And it needs to be corrected so as to stop lying to people. But instead of trying to fix the price, everybody prefers to prolong the lie and to keep singing the fatal lullaby, that the price is alright. That this is temporary; tomorrow everything should be okay. Better to use some persuasion. Since when moral suasion works in this country? Unfortunately not only the government; some analysts, celebrities, and other public figures start echoing all the nonsense. Either they don't know what they're doing, or they deliberately do it to win the public's heart. Being politically popular is key to maintain political power. And it's not necessarily economically logical. Some "economists" even deny the very basic economics. That when you hold prices below what it is supposed to be, you would see either of two results: 1) the market cries out for subsidy, 2) a long line of queue. In worst situation, you will see both results. As in now. Even for these economists, being popular seems more important than to acknowledge the real examples of what they learned in schools.

What's so hard to understand that people do respond to incentives? If you really face a shortage problem, trust me, the only effective measure to fight it is ... well, price-- since shortage means the price is distorted (not necessarily means "scarcity"). Think again of your "heartful" solutions: stop using elevators, air-cons, suits, etc. Did you ever think why these pratices existed in the first place? Because people need a comforting environment to work more productively. Now go tell your staff to cease using elevators. Shut off all the air-con system. That's fine. You are saving the energy. But don't tell me you still expect a boost in production, or even to maintain the existing one. And what's with the midnight broadcasts? Some people have their peak productivity at night time. They work extremely well at night. With the accompany of ... well radios or tv programs (news wire, Bloomberg index, you name it). But sorry dudes, your government is imposing a new work habit for you!

The real sad thing is, this way of thinking is not peculiar to energy problem... It is pervasive.

Lines for BBM

It's truly saddening to see people queing up for hours trying to get gasoline. But isn't this exactly what happens if you keep holding prices down distortively? I have been telling this to my classes. Now they can see one perfect example. BBM prices have been false all these years. They're not the true signal of what is going on in the market. You face a lower price than. You would think you could easily buy the product with your money -- well, it's cheap. As it turns out, when you go to the marketplace, the good is rare. Why? What's going on? Because the prices are wrong. Now you have to compete with others to get the remaining litres. Hm, sounds like an opportuinity for rent-seeking by the suppliers. Hence the blackmarket.

Solution? None. Nothing, unless you are willing to listen -- even if it's not popular.

Coordination razzle-dazles: infrastructure

Over at a discussion on JBIC's new survey results on Japanese companies' perception on Indonesia as future production base in the region, a debate arose around the poor infrastructure condition. A spokesperson from East Jakarta Industrial Park blamed the government for not giving priority to improve the road condition to facilitate better logistics from industrial park to the port. The government's national planning bureau (Bappenas) denounced the charge, saying that they did have "concrete plans" (what's "concrete plans"?) to develop better access from the park to the port. However, when they were about to implement the plan, they found out that the state-owned company responsible for managing toll roads, PT Jasa Marga had already have a contract plan with some private companies. So --bear with me-- the Bappenas could do nothing about it. As to why even the Jasa Marga had not realized the plan was a mystery to the audience. We only knew that, given all the "concrete plans" they have, the government officials seem to value grandiose, ivory-tower event like the Asian-African Summit highly above infrastructure improvement. In fact, a source told me that the money had been rerouted to develop the new toll road to serve the summit's VIPs. Yes, the new toll road now also serves commuters from Jakarta to Bandung (or the other way around), but at the same time it creates severe bottleneck for the flow of export goods coming from Cibitung, Cikarang, Kerawang, and Cikampek (the industrial parks) to Tanjung Priok (the shipping port). [One of ongoing research in LPEM now is to identify logistics inefficeincy in export industries. Surely, this would be a very important issue].

But, continuing on my frustation yesterday, it simply appears to me that the government really has coordination problem. Mind you, Bappenas is government. Jasa Marga is state-owned. Sounds familiar?

Coordination razzle-dazle: oil

Pick any national newspaper these days. They all talk about the happening oil crisis in Indonesia -- once known as an oil exporter. We knew it's coming and we would have suggested higher price to help anticipate that. But that's aside for now (calm down!).

What really bothers me from all the news is the mess in coordination. The state-owned oil company, Pertamina blames it on the government, and the government via the Ministry of Finance fires back to Pertamina. In the meantime, the state-owned energy company, PLN blames the government for not backing them up when they are short to pay the supply from Pertamina. Pertamina refuses to supply since it is not "appropriately subsidized" by the government. The Minister of State-Owned Enterprises seem confused. And there comes Pertamina-Exxon dispute. Cepu is supposed to produce one tenth of the national oil output. That's a lot, especially in these tough days. But the government seems lame in solving the dispute.

What in the world is going on? Do we not have that function we usually call "coordinating" minister? If the government really can't manage itself, isn't it a justification for more privatization? (Oh by the way, I was told, the coord-min wants privatization; it's only that, some ministers are strongly against it).

And, to add to my frustation: Speaking about oil, this is a piece (in Bahasa) by an adventurous politician sometimes calling himself an economist (I was a big fan of his writings -- not anymore after his pieces like this and this) and now trying to wash his dirty hands, using angelical words. I'm disgusted.

Fine survey, poor inference

In a seminar on decentralization yesterday, a team from the World Bank presented their survey result done with Gajah Mada University. The "most comprehensive study of the impact of decentralization on the quality of public service to date" concluded that "autonomy leads to improved public services". Well...

I'm not against decentralization. In fact, I like the idea of decentralization. But I have problem with the inference drawn by the research team -- or rather, on the way the team drew their conclusion. Look at their questionnaire here. One question to -- supposedly -- capture households' perception on decentralization, i.e. "local autonomy" is

"Local economy is currently undergoing since 2001. In your opinion, how is the quality service [sic] of [...] in the district/municipality compare to year 2000?" The items for [...] are school, puskemas (health clinic, head of village, sub-district office, and district/municipality office. The options for responses are 1) Worse, 2) Same, 3) Better, and 4) Don't know.

Now, from that kind of question, do you dare to make an inference about the effect of autonomy on public services? I would not.

Try another one:

"In you opinion, how is the quality of [...] program implementation in this district/municipality in 2001 compare with [sic!] year 2000?" The items include for example "poor people empowering" and the response options are 1) Decreasing, 2) Constant, 3) Increasing, and 4) Don't know.

Again, can this kind of question lead you to conclude that the autonomy or decentralization lead to improvement or disimprovement?

Probably yes, if you can find some way to isolate any possible other factors that might determine the change in "poor people empowering" etc. Just because many respondents said that "poor people empoering" is "increasing" is no justification to conclude that it was due to autonomy policy or decentralization, even though you picked up the relevant periods of time.

This is the same with the former question above. Just because majority of respondents said that the school quality is better in 2001 compared to 2000, you can't just conclude that it was because the autonomy/decentralization.

All that was presented yesterday was data frequency and percentages. No parametric treatment whatsoever. So, I was very surprised with such a strong conclusion.

It strikes me that people can rush to make inference that way. That is a dangerous approach to data.

Credit, motorcyle, and interest rate

It's always good to talk with those really engaged in the ups and downs of the economy. At least two challenging issues I gathered from a friendly talk with Kim Eng Securities analysts. First, with regards to the decreasing role of private consumption in the total economic growth of 1Q05; I was offered insightful theory. That there's a changing consumer behavior triggered by extremely easy credit scheme for motorcycles. Average lower income household has a takehome pay for about Rp 1 million a month (USD 105). The easy credit tempts many of such household to buy motorcycles. They end up paying Rp 5oo,000 to Rp 600,000 (USD 53-63) each month. The leftover is really small, compared to the time where motorcycle credit is unaffordable. Hence the low private consumption number. I would add that the recent plan of Jakarta governor to develop special paths for motorcyclists in the city of Jakarta will contribute further to the skyrocketting of motorcycle sales. (My related post on this motorcycle credit, here).

Secondly, still related to that easy credit. It seems to my friends that interest rate really does not matter to the motorcycles buyers. They just require a credit scheme -- no matter how high or low the interest rate is. This is worth investigating. Since, "it is possible that the credit scheme is not a function of interest rate anymore -- it is the other way around!". This is really intriguing as well as challenging. If I have time and data, I'd love to test this hypothesis. (Students: want a good topic for thesis?)

Old Soldier Strikes Again

Friedman -- THE Friedman, and that means: Milton -- strikes again. He calls for legalizing marijuana (i.e. replacing prohibition with taxation). Here's the story. Here's the list of signatories of a petition led by Friedman -- unlike what the story tells, not all of them are distinguished economists. Only a handful, of which Friedman of course stands out. Talking about this guy, he's just been interviewed here (via MR).

(Somehow I remember my wild idea last year to legalize the now-illegal logging using a strongly enforced tax mechanism)

Freakonomist Has New Column

Recommended new column: Freakonomics goes to NYT. Here's the debut. How can you not like a reading like this:

"Chen is a hyperverbal, sharp-dressing 29-year-old with spiky hair. The son of Chinese immigrants, he had an itinerant upbringing in the rural Midwest. As a Stanford undergraduate, he was a de facto Marxist before being seduced, quite accidentally, by economics. He may be the only economist conducting monkey experiments..."

May's Inflation is Even Lower

BPS Press Release says:

"May 2003, was marked with 0.21 per cent of inflation. Based on the Consumer Price Index (CPI) calculation in 43 cities, inflation was experienced in 30 cities, while deflation happened in 13 cities. The highest inflation was in Palu (2.31 per cent), whilst the lowest inflation was in Palangkaraya (0.01 per cent). Meanwhile, the biggest deflation was experienced in Padang Sidempuan (-1.09 per cent) and the smallest inflation happened in Bandung and Purwokerto (-0.04 per cent). The inflation was contributed by the increase in the prices of some goods and services groups as follows: prepared food, beverages, and tobacco products (0.01 per cent), housing (0.76 per cent), clothing (0.35 per cent), health (0.81 per cent), education, recreation and sports remained stable (0.00 per cent) and transportation & communication (0.03 per cent). Meanwile, unprepared food experienced a decrease as high as minus 0.28 per cent".

So, what do you say about the "terrifying impact of BBM price hike on inflation rate" now?

Meanwhile, some economists claim that BPS growth report is misleading. Since "it does not take unemployment into account" and "the fact is, consumption has been decreasing; why would then we have high growth?". Since when, we put un-employment into growth accounting? Since when, GDP is just consumption?

NR&Env Econ Exam

Technical Note: A friend who uses Internet Explorer told me that this post had weird notation. It was meant to be a footnote. I work with Mozilla Firefox and I don't see weird stuff coming out from my footnote numbering. But, as many of you still use IE, I now have "fixed" the problem by changing the number into an asterisk. My suggestion, however, STOP USING INTERNET EXPLORER! GET MOZILLA!

The Natural Resource and Environment Economics, final exam last week. This is somewhat a watered-down version of the mid-term --which turned out not to be very rewarding.

1. What do we mean by efficient allocation of scarce water? Do you think we in Indonesia have allocated the water efficiently? Why? Do you have suggestion on how we should manage water use in Indonesia?
   

2. What do you think of the “Global Scarcity Hypothesis”? Does it make sense? Why or why not?
   

3. Should we privatize our forests? Why or why not? (For either case, please provide an economic argument, not a romantic one *).
   

4. Explain again, why maximum sustainable yield can be a bad target for fish catching if the objective is to conserve the fish?
   

5. Give me one reason why the government should intervene in supplying water. Elaborate on that. If you don’t think there is any single reason, argue.

*) Though, I’m not saying economics/economist can not be romantic!

Second best: corrupt fundamental

These many days media have been flooded by news on corruption. Opinions and editorials have follow suit. And now the president, out of desperation, again calls for religious teachings for combating the corruptive mentality.

But will these all work? Looking at the chronic situation in Indonesia, I sadly see no prospects. Corruption is already a culture. It's ubiquitous.

While, to add to that pain, we've got little money and resources left. Yet, we've got to grow.

Now, I could start understand the points made by Avinash Dixit in his "Lawlessness and Economics". In short, you can't wait until the coast is really clear. You have to be able to develop and to grow on a ... corrupt fundamentals.

I'm back -- I'm trying!

One month of blogless day. What am I, a Robinson Crusoe?. I confess I've got no time to write. There's been a major change in the board of management in my office. I have been busy -- I should be busy.

Here are some things that I would have blogged within last month:
1. My pick for Alan Greenspan's successor: Ben Bernanke.
2. Daron Acemoglu deserves John Bates Clark Medal.
3. The economics rationale of getting married. Oh by the way, this is another reason why I have been absent for awhile.

Quality OK, Delivery No

Last week Faisal Basri and I joined a team visiting four export-oriented factories. It seems to me that our low competitiveness is not due to bad quality, nor it is on technology. It is because inefficiency in delivery. Among all, the most problematic culprit is transportation infrastructure. The trucks with containers from these factories have to waste several hours every day dealing with traffic jam and long queues in toll way gates and port gate. Once they enter the port, they have to fill in several documents, many of which are not required by laws, but by "convention". In addition, the corporate income tax return takes so long a time it hinders the cash flows of those firms.

Is potato Giffen?

Samuelson says yes.
Varian doubts it ("Samuelson reads too much Marx").
Statsny says it depends.
Rosen writes in JPE.

I'd say just call the whole thing off.

Freakonomics

The blogosphere welcomes Steven D. Levitt who is named "the most brilliant young economist in America" by the New York Times. [via Marginal Revolution].

Klein answers Thaler-Sunstein

As you might have noticed, I mentioned the Thaler-Sunstein "theory" on "libertarian paternalism" many times already (here and here are examples). I think it's a good paper, but at the same time, the term "libertarian paternalism" sounds like an oxymoron -- even though Thaler and Sunstein denounce it. Now comes a rebuttal from Daniel Klein. Klein accuses Thaler and Sunstein to confuse the terms libertarianism and paternalism (and the "oxymoronic gimmick", henceforth) with benevolence. The dessert placement in TS paper, arues Klein, has nothing to do with libertarianism or paternalism -- it is a mere benevolence. Klein goes on to take Thaler-Sunstein way of argument so as to fit with whatever: libertarian socialism, libertarian communism, libertarian dirigisme (sic!), or libertarian repression. To Klein, paternalism involves coercion. And that is where it is diametrical to libertarianism -- hence "libertarian paternalism" is non-existent.

My take: It is tempting to then replace the l-p with "benevolence" and that would fit the examples in T-S paper. But, I would have asked Klein, what should we call government planning endorsed by the house of representatives?
Looking forward to T-S's reply. Or better yet, some words from the rhetoric expert, Dee McCloskey.

If people just want to think

Why haven't I elaborated my thinking about the controversy surrounding the gas price hike, in this blog? Because it's near useless. Have tried to talked many times and have answered many questions. But only two or three persons are willing to listen. You go find any newspaper or simply open your newsgroups. People even make stupid jokes on the issue. One of them goes like this: "In order to reduce the number of the poor, raise the gas price". And the readers laugh cynically. Yes, those who got no intention to even think. Who are not even open to a possibility that the silly "joke" might be true. Try it: just add this condition: "... and transfer the money from the less-entitled rich to the more-entitled poor". See? I can understand people's sympathy to the poor. But I can't stand those who use them to gain popularity. Some of them claim to practice "economics for the people" (for lack of better translation); while they simply rephrase "Pancasila" here and there (no, not a bit of stuff like Amartya Sen's). If this is popularity contest, I'd switch the channel to Indonesian Idol.

This is getting pestiferous!

Midterm Exam: Environmental and Natural Resources Economics

1. We have discussed about the two opposing views of the future: optimistic- and pessimistic models. Summarize their claims briefly. Since they talk about the future, we cannot satisfactorily decide which one is right now. (The “famous bet” between Ehrlich and Simon might just be a pure coincidence – well, it was a bet!). So, what criteria do you think we might propose for evaluating the predictions of the two views?
   

2. Economists have been valuing the environment. Do you think it is ethical? Why or why not? Why do we need valuation? What are the limitations of environmental valuation methods offered by economists?
   

3. Sustainable development is a matter of sharing costs and benefits between generations. True or false? Why? We don’t know what our grandkids really want, but we sometimes assume that they would like the forests to be preserved, instead of a huge shopping mall to replace the forest. Why do we do this kind of “paternalism”?
   

4. One of the practical implementations of Coasian approach in environmental policy is marketable pollution permits. Do you believe market can take care of the environmental problems? Why? In case you do, tell me how. Another thing, is it ethical to look at the pollution as a factor of production? Give me your argument.
   

5. In discussing the issue of population bomb, we talk about the economics of population control. Now tell me what you know about the economics of childbearing. Gary Becker says, children are durable goods. Maintaining them incurs costs and benefits. So, optimize! Comments?
   

6. Read the small box in Tietenberg page 293. Yes, it’s about the “Harbor Gangs of Maine”. It seems to me that informal arrangement can be sufficient to ensure efficient harvesting. Am I right or wrong? Why?
   

7. We have talked about environmental injustice. It is the condition where those who bear the negative externalities of environmental deterioration are also those who are poor. But hey, this is like what’s happening everywhere. Can you think of a rich community that is willing to bear the negative externalities? If you can imagine one, why do you think the relatively rich people want to do that?
   

Ticket for gas

My insightful sister was wondering. Why doesn't the government just sell tickets with different nominal values to the BBM consumers? Those with high income should buy one ticket 5 times as much as those with low income, for example. The problem with this type of mechanism is, as I told her, monitoring. Mr. Rich will ask Mr. Poor next door to buy tickets for him. With some incentives, Mr. Poor will do it happily. Moral hazard and adverse selection at play. (Still this is worth elaborating. After all, even the compensation mechanism offered by the government is not free from such problems).

Addendum:
My sister responded again:

I got the point of difficulty in monitoring. In fact what I was particularly wondering is how to make people that use public transport, regardless of being poor or rich, pay bbm/liter less than those use private cars. The justification made is simply that people using public transport use up much less space of the road and do not get as much convenience as people using private vehicle. I am fully aware of the absurdity of effort to identify who the poor or rich are in Indonesia.

I mentioned about ticketing for buses through which government gives subsidy to the public transport users, i.e: users buy bus tickets at Rp. X, then the bus operator can reimburse the tickets at Rp X+Y. ticketing system has been applied for KRL (have no info of how it works). Unfortunately, as you said, for ticketing, there is always an issue of ticket faking. Now, what about allocating oil stations for buses where oprators can get cheaper bbm?

To which I replied:

Nice thoughts. On your last question. We sure hope the bus drivers do not have some evil pact with some guy somewhere: fill up their tanks repeatedly, and go sell somewhere else at higher prices. Arbitrage at play.

And I told her, please keep stimulating such good ideas; and don't get tired by economists' skeptical starting points in looking at things -- they are skeptical.

BBM and sustainable development

Finally someone looks at the BBM fiasco from sustainable development perspective. Very well done, Bang. Thanks for educating that to public.

That's an SMS I sent to this great person (I have no idea if this site is official or not) in response to his article today in Kompas.

Libertarianism vs Conservatism

Mises Economic Blog brings this debate into the blogosphere. Agree with them, this is a must read. Beware, don't confuse liberalism and libertarianism. Also, keep in mind that American conservatism/libertarianism are different with those of Europeans. Especially when it comes to economics. Why is Friedman "conservative" but libertarianically opposes big government? Political Compass may have some answer -- think about "liberal conservative".

Somehow, I am relieved that I don't need to resort on either one. I have my own principle and so far so good.

Malaysia, you're getting into my nerve!

Malaysia is off the line. Alright, on that illegal migrants thingy, the blame might be on us. But just because of that, doesn't mean you can annex my country! Get off!!

IMF is loosing its focus, too

Attending the IMF's presentation yesterday, I was amazed. It was supposed to be "The Role of IMF in the Globalization". As it turned out, it was simply a roadshow promoting their "new focus": poverty reduction. Say what? Are these guys now trying to takeover the job from its neighbour across the street?

Microeconomics 2

Started the new semester for Microeconomics 2 last week. It's supposed to be the second in a three-part series of microecon course for graduate students. As it turned out the syllabus I had prepared had many overlaps with that for Microeconomics 1 taught by my colleague, Arindra Zainal. So I made changes. The result is as follows:

Texts: Hal Varian (HV) and Andreu Mas-Colell et al. (MC)
Coverage: Markets (Perfect, Monopoly, and Oligopoly), Uncertaity, and Game Theory.
Outline: 1) Overview/review (HV 1,26,27; MC 1, Math App), 2) Perfect Competition (HV 13, MC 10), 3) Monopoly (HV 14, MC 12), 4) Oligopoly (HV 16, MC 12), 5) Uncertainty (HV 11, MC 6), and 6) Game Theory (HV 15, MC 7,8,9).

I know this is unusual. As some have said: when it comes to HV and MC, it's an "either-or" thing -- you can't use both at the same time. Let's see how it plays out.

Having done the changes, I guess I would also adjust my Microeconomics 3 course next semester as to stress more on General Equilibrium and Welfare Economics and less on Game Theory and Uncertainty.