The Politics of Rice 21

Finally Kompas admits that rice import is necessary.

But, not surprisingly, Kompas goes on with its apologetic tone: "As long as it is supported by accurate data, importing rice is justified".

This argument has been used as well by economists who love export but hate import. Only if you notice, these are the people who always say that there is no reliable data on rice production. Yet, they argue using data from god knows where.

So, how can you justify a policy basing on data that are not reliable?

Paraphrasing their arguments, it goes like this:

1. Import is OK
2. As long as the domestic supply is really short, relative to the domestic demand
3. To be sure on # 2, look at the data on production
4. But be careful, because no data is to be trusted
5. So do not import
6. Or import...
7. As long as the production data is accurate

What is it they are really trying to say?

My suggestion, if you don't trust data, trash them. If, as you say, production data are all lies, use price as indicator. What does high price tell you? Supply is short. What's so damn difficult?

The Politics of Rice 20

So, now they panic with the very high price of rice. You've been warned, dear, you've been warned.

It's amazing that those who oppose rice market liberalization are still making empty rhetorics. You can say anything using fancy terms like 'agricultural revitalization' and all that. But as long as you distort the price, nothing will change.

Now I'm amused that people care about the skyrocketing rice price. I thought you want higher and higher price 'to help farmers'? Siswono, you happy now? Well, I guess you just don't care about Tarsemi, Darti and others.

By the way, I agree that the productivity issue should be addressed. Yes, but also, unleash the market. That way, you can see if you want to be productive or not. As I like to say, double productivity with double price means nothing.

And once again, I'm not a Bulog defender! No.

New article on Indonesian economy

Now available online (subscription required)

M. Chatib Basri and Arianto A. Patunru, 2006. Survey of Recent Developments. Bulletin of Indonesian Economic Studies 42(3): 295-319

I believe the print issue will be available next week.

The Politics of Rice 19

"Importing rice is a very easy thing to do, but that is too simplistic, it can't attack the root of the problem of poverty in Indonesia".

That is the song the week.

Why is it if something is easy, we should go for the difficult ones? Welcome to the if-you-can-make-it-difficult-why-make-it-easy society.

The Politics of Rice 18

As I said here, poverty increase in Indonesia has lots to do with the rice price. The World Bank report is in line with this claim, as reported in the media.

What is quite interesting is the tone-change of Kompas. Yesterday it ran this headline -- unusual for Kompas. Today, it changes tone back to its populist-leaning style. Yes, with the usual heroes quoted, of course.

Update: More from Kompas today. So, when an analysis is not like what you want, you can call it invalid. How cool.

Forgiveness gone too far

Yes, I say this is an overforgiving (and others, too). What is the point of having a legal system when you keep reducing the sentence? Whatever happened to the "deterrent effect" you promised? Shame on you, Justice!

To all criminals and criminal-wanna-be's out there, you're in good hands. Take this opportunity. Go commit your favorite crimes. You got jailed, no problemo. Just act like a nice boy inside and they will cut your sentence every Eid Day and every Independence Day. If you are seen praying regularly, you might get even more. Even as many as 36 months! What a minute, that's 3 years, no? Good deal!

Oh, this is even better. If you're likely to get capital punishment, before the verdict, do demand for it. Yes, tell them, challenge them court people, that you want yourself killed. That capital punishment is what you want. Then, you'll still see the sun in the morning. And the next morning. And the morning.

Shame on you, Justice! Shame on you!

Incentivized journalist

I like that word, incentivized. And I can certainly understand Mankiw's frustration with bad journalists. That reminds me of a question from an audience in one conference last month. I was asked how the media played its role in Indonesian economic and political discourse. I said it sucks. My example was Kompas. If even the best media in Indonesia sucks, what do you expect?

The Politics of Rice 17

So, the poverty rate has increased. Official statement from the Office of Statistics says, poverty line is very much affected by food prices. More specifically, the share of rice in households' expenditure is 35 percent. Not surprisingly, rice price increase contributes significantly to the increase in of poverty rate.

So, why not

... open up rice market?

Import now!

On country risk?

Who's afraid of country risk? Apparently, the newest UI econ Ph.D, Ferry Irawan is not one. I asked Irawan the following:

So Bank Indonesia has just [the exam was on Aug 11] lowered again its policy rate to 11.75 percent. Given the current Fed rate of 5.25 percent, there is a 650 basis points differential. If, the current "rule of thumb" holds, i.e. Bank Indonesia should maintain at least 600 bps above the Fed rate, then we still have a room of 50 bps. That means, we're fine if BI again cuts the rate to 11.25, provided that Mr. Bernanke keeps his words. Bank Indonesia officials yesterday have indicated their intention to make further cut, since the inflation rate is increasingly manageable. You agree?

Capital flies to wherever it can get the highest returns. High interest rate is of course more attractive than the lower ones. Theoretically, dictated by the law of one price, interest rates between two countries equilibrate. But the prices should take into account all other differences between the two countries, most of which is attributed to "country risk premium". I don't have scholarly references right now, but it seems that some BI officials still assign a 600 bps (6 percent) rule. That means, all else constant, the Indonesian country risk is somewhere near 6 percent equivalent of interest rate.

But, as Irawan rightly responded, we should not be too religious on the so-called "600 bps"-rule of thumb. The "all other differences" is a dynamic concept. It can not be always 6 percent. Improvement in investment climate contributes to a reduction in the differential. Price stability is another factor, as pointed out in Irawan's dissertation.

As an afterthought, however, I would ask: why bother too much with all this "country risk"? After all, as finance people like to say, "the riskier the crispier". In fact, Cornell's Assaf Razin has shown that the share of FDI in total inflows is higher in riskier countries since "the micro-management superiority of FDI investors over their domestic counterparts is more pronounced when the corporate governance in the host country is weak and financial institutions are not well developed."

That is, riskier countries are sexier to exploit. You agree?

Not good enough, Sir! It's still illogical

So, apparently the government listens. But the response is far from good. Again, we can't rely on The Jakarta Post web technology, so let me sum up:

Says The Jakarta Post:

The government is unlikely to press ahead with a proposal to force TV
stations with national coverage to merge as there are signs that some of them
are already on the verge of merging to boost efficiency.... [T]he government would not issue any directive requiring TV firms to merge in the foreseeable future

Right on. Even though, you don't even need the qualifier that some TV stations do want to merge. It's not your business. And what's with that "in the foreseeable future"? You still want to do it, don't you? My goodness.

And here goes the best part:

Because of the tight competition, [Minister Djalil] added, most of the stations were being forced to produce cheap, low-quality programs, such as soap operas, supernatural shows, gossip shows and crime programs... If there were fewer TV stations, each of them would be able to secure better advertising revenue. This would eventually enable them to improve their programs...

Alright now I'm confused. Crappy programs are reflection of lack of competition, Sir. You need to open up. Let Discovery Channel, National Geographic, Animal Planet and others reach the general public.¹ Translate if you like. That, trust me, will make all those craps, including the stupid-but-addictive infotainments, on TV driven out. We don't even need a fatwa, yes?

And you say fewer TV stations would enable programs improvement? Oh, I wonder why can't we just go back to the monopoly, TVRI then? Or, why in the world in countries with good programs there are 50 channels, including education programs?

¹ OK, some people start screaming at me. Am I saying we should let any station accessible by everybody -- kids? Well, let the family decide.

Dumping, anyone?

So, the United States Department of Commerce is going to impose a 118.63% antidumping duty to Indonesian's paper producer, PT Tjiwi Kimia, along with another 40.55% duty due to subsidy enjoyed by the company. Sounds typical.

If I were to draft a response letter, this is what I would send to DC:

Dear Sir,

It is saddening to see how you sacrifice economic efficiency just to please some lousy producers in your country. Americans have been enjoying cheap papers from Indonesia. But because some American producers can not compete with us, you are going to make the paper price higher there. You are going to force your people to buy expensive paper from inefficient producers. How thoughtful. Let us tell you, Sir. You should thank us for dumping cheap papers to your country.

Of course you complain about subsidy we give to our paper producers. Yes, you are right on this one. Subsidy is evil. Just like your subsidy to your farmers. Let's stop all subsidy, would you?

Dumping is good. Antidumping policy is ridiculous. Subsidy is bad.

Biofuel, anyone?

I can understand SBY's interest in developing biofuel. In the time of rising oil price (which is natural by itself), it is not surprising that people turn to, or look for, substitutes. Biodiesel and ethanol are logical solutions to the increasingly thinly supplied fossil fuel.

But, let's not be too excited as to exploiting the resources in the wrong time. (By "wrong" I mean, the price hasn't told us yet that it is time to switch).

One thing that people tend to overlook when talking about biofuel is the production costs of it. And that includes using fossil fuel to turn jathropa into biodiesel or sugarcane into ethanol. (Hey, you can't put sugarcane or jathropa or palm oil into your car tank!).

So yes, we need to compare how much fossil fuel we have to use to produce biofuel and how much fossil fuel we save by consuming the biofuel instead.

I might sound pessimistic. But I'm not alone.

Of course there are other considerations, such as employment creation. I have an impression that SBY wants to promote the jathropa planting at the same time as an employment creating project. It might be true. But that reminds me of the "to dig holes in the ground" solution. It might be effective in creating employment, but it's an illusion as far as economic development is considered.

Taking back Cepu

So, the ultranationalists think taking the Cepu to court is the way to go. They even have a spooky name: "Tambang Negara" (state mining), an acronym of "Tim Advokasi untuk Merebut Kembali Blok Cepu demi Bangsa dan Negara" (a legal team to confiscate Cepu block for the sake of the country).

The team is suing 1) Indonesian Government, 2) Pertamina, 3) ExxonMobil Indonesia, 4) BP Migas, 5) Ministry of State-Owned Enterprises.

Tambang Negara argues that the Cepu agreement has caused "the loss of opportunity to gain the maximum welfare from (exploiting the) oil and gas contained in Cepu Block". Heroic.

Well. Good luck with that.

Then please also, for the sake of the country, confiscate Freeport's Timika, Newmont's Nusa Tenggara and Minahasa, Inco's Soroako, and so forth. Because we had the opportunity! But it was stolen by the damn foreigners!

Djalil's nonsense

From The Jakarta Post today.¹ It's him again. Now, the Minister is saying: to foster competition, you need to reduce the number of players.

Oh my God.

¹ The Jakarta Post is so lame in its web version. As I'm writing this, its website is still of yesterday's news. OK, I'll just tell you then. The Minister of Communication and Information, Sofyan Djalil told the press that the Government is thinking to ask private TV stations to merge. It is "a move [the government] believes will streamline the sector for healthier business competition and the development of regional stations". In Djalil's words, "National television stations should merge to create healthy competition and survive. With fewer stations, we could provide fairer frequency allocation". Oh, now I see. It's a matter of government incapability. Here's a suggestion: think about price.

Mid 2006 Look

The first semester has just passed. Here's a summary:

Growth. Government’s target of 5.9 percent growth (revised down from 6.2 percent) this year is unlikely. We maintain our forecast of 5.4-5.7 percent. As for point estimate, it is close to 5.5 percent.

Inflation. Bank Indonesia is on the right track (i.e. tight monetary policy). So is the Ministry of Finance (fiscal expansion). As a result, inflation is relatively tamed. BI loosened up a bit by decreasing its policy rate to 12.5 percent. The percentage differential to US Fed is still 625 basis point. If The Fed keeps its rate at 5.25 percent, there is still room for BI to lower its own to 12 percent. The fiscal expansion, on the other hand, has not promoted growth as expected – most of it goes to government’s capital expenditure, local governments, social aids, and cash transfer program. The main driver of inflation so far is food prices increase. We maintain our forecast of 8-9 percent of inflation this year.

Employment. Unemployment increases. In February 2006 the rate of open unemployment is 10.4 percent, as opposed to 10.3 percent in February 2005. Labor force is close to 160 million. Fiscal expansion has not been helpful for job creation, as promised. SBY has been promoting his “New Deal” program, yet it is unclear.

Exchange rate and stock index. Indonesia’s Rupiah and stock price index are consistent with the regional pattern. However, it shows the highest volatility. The composite index hit an all time high in May 2006, i.e. 1,553.062.

Export. Export value increases. But the figure is illusive. That is, the main drivers of the “increase” are mining and agriculture which in turn benefit from higher international prices.

Expected policies. We still expect fiscal stimulus and stabilizing monetary policy. However, the government’s inability to spend is quite worrying.

Fingers crossed.

Doha is a waste of time

Just got back from Japan. Many things to catch up. For now, as I expected, the WTO's Doha round is failing.

When 'permanent' means 'temporary'

Reported in The Jakarta Post today, investors to Indonesia are offered permanent residence. Only that, it is "limited to five years".

What?

Got debt problem? Go to Bank Indonesia

Bank Indonesia (BI) is to limit credit card subscription, reported Kontan weekly.

A deputy governor of BI received a letter from an ordinary citizen. The latter told the former that he was in debt problem. He couldn't pay up his credit card bills. He got eight credit cards, all overdue.

And Bank Indonesia has a brilliant solution. It will issue a regulation to limit one's credit card subscription. No one can have more than two credit cards.

My goodness.

I'm thinking of writing a letter to the Deputy Governor like this:

Dear Deputy Governor:
I am poor. Every day I eat at warteg. ¹ Because I'm so poor, I usually eat and pay later when I have enough money. Some wartegs allow me to do that as long as I return the money with an extra penny or two. Recently, situation is getting worse. I lost my job. I have debt to pay to eight wartegs. But I need to eat, no?

And I'm imagining this brilliant solution: No one is allowed to be customer of more than two wartegs.

¹ Warteg is street vendor selling inexpensive food.

Wanna join?

So there they are. Indonesian Nationalists Association.

Good luck with that.

Pertamina under pressure

It's still early in the morning. But this news just made my day. Pertamina decreased the prices of its non-subsidized fuels again, due to consumers' switching to subsidized fuel after an increase last week. Mmh, sounds like Pertamina learned something.

But most entertainingly, Pertamina set the prices even lower at stations where there is ... competition:

Pertamina still applies a special, lower prices at locations near competitors (Shell and Petronas).

You say competition ain't good?

Thug War

This is what happens when you have lame Law. Or, even if you have Law, your police is simply impotent. These cowboy gangs. They're all the same. They think they are Law.

War war is stupid and people are stupid
And love means nothing in some strange quarters
War war is stupid and people are stupid
And I heard them banging on hearts and fingers
War!

Happy birthday, John!

Today, May 20^th, is John Stuart Mill’s 200^th birthday. J.S. Mill is arguably¹ one of the most important figures in liberalism.²

Let’s take a moment to remember Mill. The following are excerpts of his “On Liberty and Other Essays”:

[T]he sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self-protection.

The objections to government interference … may be of three kinds … [F]irst is, when the thing to be done is likely to be better done by individuals than by the government … [T]here is no one so fit to conduct any business, or to determine how or by whom it shall be conducted, as those who are personally interested in it. … [S]second is, though individuals may not do the particular things so well, on the average, as the officers of government, it is nevertheless desirable that it should be done by them, rather than by the government, as a means to their own mental education. … [T]hird is, the great evil of adding unnecessarily to [the government’s] power. Every function superadded to those already exercised by the government, causes its influence over hopes and fears to be more widely diffused, and converts, more and more, the active and ambitious part of the public into hangers-on of the government, or of some party which aims at becoming the government.

Sounds like he’s our man.

But no so fast. JSM was an ardent nationalist:

Free institutions are next to impossible in a country made up of different nationalities. Among a people without fellow-feeling, especially if they speak different languages, the united public opinion necessary to the working of representative government cannot exist.

That's from "Considerations of Representative Government".

Ain't really the man. Ain't really.

More clever and informative at Catallarchy.

----
¹ "Arguably" being the operative, considering Mill's tendency toward "soft-socialism" -- Rawls as an avid follower. See e.g. Hayek's criticism on Mills.
² Note, I said "liberalism", not "libertarianism".

The Politics of Shoes 1

What is really entertaining when we follow the attitude of businessmen is their split personalities.

Now it’s about shoes. Indonesian shoemakers are so happy that European Union imposes an antidumping policy to China and Vietnam. As a consequence of this policy, Timberland, Lotto, Diadora, Lacosta and probably more later are relocating their production to Indonesia.

But the EU’s policy is harmful. It is harmful for EU’s consumers even though it is beneficial for some producers (who are also consumers of other stuff), and it is harmful for China’s and Vietnam’s economy. It’s probably “good” news for Indonesian shoemakers now. But not in the long run. Someday, when the demand for Indonesian-made shoes increases, the wages start to creep up. Until a level where EU starts to concern again. And if EU is to be consistent, it will impose an antidumping policy to Indonesia, just like what it does now to China and Vietnam. And Timberland and friends will fly again, trying to find better places.

At that time our shoemakers will change their mind. They will say: EU should not impose antidumping policy to us. They will forget already that they have praised what EU did to China and Vietnam.

(A fable here)

The Politics of Cement 1

I don't know the rules of stock market very well. I also don't collect the complete history of Cemex-SG fiasco. But this news (and others in that series) bothers me.

If you buy a share in some company. That means you've got an ownership, correct? What if you don’t want it anymore? Sell it. You have the right to sell anything you own to whoever you want and at whatever price you agree with the buyer.

It looks like it's not how it works here in Cemex-Semen Gresik thingy. Or is it just my ignorance? I gather, the Minister of State-Owned Enterprises (yes there is such thing here) Sugiharto is not happy if Cemex sells its shares to Rajawali. I'm having hard time to understand that.

Apparently the government can't keep Cemex from selling its shares. The only way for the government to keep its stake (whatever it is, in addition to the 51% it already has) secured is to, well buy them. Sounds fine? But... it has no money! The answer should be easy: then don't buy.

But as usual, they're stubborn. Especially under the pressure from nationalists or even worse, primordialists. Read here on Sumatera Barat’s governor statement. He insists that his people want the shares to be bought by the government (why don’t you buy them yourself?). And he thought, “To be more secured, the government should own more than 51 percent”. That’s laughable.

I won't be surprised if the government will again turn to their usual cash cows: other BUMNs, as they are not permitted by law to use APBN/D fund. Sugiharto has shown such intention.

The Politics of Fertilizer 3

You produce and sell Good A. For some reason, the price increases. You now have more incentive to produce more of this Good A. In producing Good A, you use Good B as one of the inputs. As your production increases, you demand more of Good B. That's a good news for those producing Good B. Because the demand for Good B increases, the producers of Good B naturally increase the price of Good B.

OK, that's a total simplification. Yet, that's very natural (if this is a T-Shirt, it will read: what part of it you don't understand?). We can add complication by issues like elasticity and all that. But let's just use common sense.

Apparently it is that common sense that is lacking from the government. It has been forcefully attempted to keep the price of rice higher than what it is normally be (which is a mistake by its own). Then it tries to suppress the price of the input, fertilizers. What is your reaction to this, if you were fertilizer producer? Hide your fertilizer, and try find a place where you can sell it well, because there are people who are willing to pay higher. (Minister Apriyanto will not be happy -- he will ask the police to get you).

This all is so predictable. The rice price is subsidized. If you can't afford to subsidized the inputs then you'll be in trouble. It goes on and on. And they never learn.

The Politics of Fertilizer 2

Said VP Jusuf Kalla:

Actually our fertilizer production is enough... But due to the increasing demand, it seems like it's not enough...

What is it are you trying to say, Pak?

In the meantime, Minister of Agriculture Anton Apriyantono explained that the government would increase fertilizer maximum retail price ("HET"). And that's due to "increasing fuel price". Further, he said, the government and the police would punish those who sell fertilizer above this HET.

How thoughtful.

As if this is a game or something, our honorable parliament member has to have his say, too. (And so this post qualifies for the "Politics of Rice"-series, no?). He urged the government to also raise the paddy's buying price ("HPP"). Because "farmers would have hard time if fertilizer price increases".


By his logic, we should also increase the price of ... everything.

Mannerless "Hero"?

Is there a hero without manner? Yes, his name is Ahmadinejad.

Before you get me wrong again, let me be clear and blunt. I don't hate Iran, and I don't have problem with its nuclear program and all that. Nuclear competition is healthy. That leads me (or you) to the natural question: so how about United States? Alright, I don't hate America. Well I like it, actually. But in case you're one of those generalists, let me be very clear again: I hate Bush. I think Bush is one of the most tragic accidents in American history (Ross Perrot and Ralph Nader come close).

Back to this Ahmadinejad. I applaude his strong determination -- regardless of what he's up to (for that matter, should I also applaud Evo Morales or Hugo Chaves? Well, let me put it this way: I feel sorry for them two).

But what makes me unhappy with Ahmadinejad is that he seems to be lacking of manner. I know, it sounds trivial as in: "For God's sake Aco, why do you even bother with such a small thing?" But think about it: a president who does not respect agreed time and schedule? In his meeting with SBY, for example, he took 30 minutes of SBY's allocated time (well that's partly SBY's men's mistake -- they should've cut him) . In his visit to University of Indonesia, he spoke 45 minutes longer than he was supposed to. And finally he stood up the press people who were desperately waiting for the scheduled press conference -- for two hours. You can do a lot in two hours.

Many students (who love everything against America) declare him a hero, nevertheless. (Yes, Morales and Chaves are also in their list).

A mannerless hero. Now that is an oxymoron.

Do we have Law? Maybe. Is it enforced? Maybe not.

My co-blogger at Café Salemba, Ujang, asked: "Is the [Indonesian] legal and regulatory environment better than two years ago?". I don't think so.

In fact, I think it's becoming worse. Now people are more afraid of FPI, FBR, and the likes than of the Law itself. The police seems useless. The media seems to be afraid of being attacked if they cover the violent actions of these people. If they don't like an action by a particular citizen, they terrorize him/her. Until the poor citizen apologizes. And they will go to frightened media, appear on TV saying "This is what you get if you are bad. Apologize to us and don't repeat your sin". The Law, in the meantime, is silent.

We might have the Law. But it's yet to be enforced. On the other hand, bylaws are produced every week. No matter how far off they are from the Constitution.

And Court is happening on the streets. Just yesterday hundreds of students in Makassar went to the street threatening Chinese-Indonesians, because of an alleged maid murder by an employer who happens to be of Chinese ethnic. Why did the students go to the street? It might be a reflection of their skepticism toward law enforcement. Worse yet, it's also an indication of economic tension, if we remember similar tragedy in 1980 and 1997.

Law simply doesn't work. You read news about soccer fans burning a trailer because one kid died after falling from and got hit by the trailer. The driver hopelessly explained to the media that he had repeatedly asked those kids not to jump up onto the trailers, because it was dangerous. Another day, you read hundreds of soccer fans from Surabaya destroying street vendors in Jakarta because they refused to hand them food for free.

And don't you forget about all this forgiving business. Political leaders are now talking about dropping the corruption case of the former president Soeharto and giving him an amnesty, due to his "poor health and old age". I'm totally for forgiveness, but hey, do we really not have any system? I'm afraid we're giving the wrong signal again. That is, you're free to commit corruption and all that. Enjoy the money while you can, and later, be sick and old. Because you'll be forgiven anyway. Hm, sounds familiar. Another wrong signal has been given a couple of months ago. Saying: you can abuse other people's money as much as you can. Then run away. When you're home sick, feel free to come back, as long as you return the money. Without interest.

Ujang, afraid the answer is no.

Fuel rationing?

One week away, I missed this. Bappenas' Paskah Suzetta is going to ration fuel consumption! That's stupid. He goes, "We should do this (rationing) quickly. Because the (world) price keeps going up". Somebody should tell Pak Menteri that when the supply of a normal good decreases, its price tend to ... increase. International or local, it's all the same.

The only effective way to "ration" stuff is through price. Market price.

Quantity rationing as suggested by Paskah is stupid. It's stupid here, it's stupid in China, it's stupid in the Philippines, it's stupid in Africa.

Even if it's not stupid (but it is! It is!), it will not be effective.

Debt and Aid in Indonesia

I participated in a conference last week in Seam Reap, Cambodia. It was organized by CALD, hosted by Cambodia's opposition Sam Rainsy Party and sponsored by FNS. The theme was "Public Accountability in Official Development Assistance". I gave a presentation on aid effectiveness in Indonesia. Below is some excerpt.

Facts

Indonesia is highly debt-dependent. The total debt amounted to USD 134 billions or almost 50% of GDP. The government debt constitutes almost 30% of the total debt, of which, 68% is in the form of Official Development Assistance (both bilateral and multilateral arrangement, in roughly similar weight). The ratio of government development expenditure over ODA in 2004 was 14%. This might be a new evidence against Pack and Pack (American Economic Review, 1990)'s conclusion that aid in Indonesia is not fungible. Of course, we need to realize that out of the total government expenditure, only 18% went to development expenditure (2004 data). For comparison, 17% went to interest payment and 23% went to subsidies (of which, 85% for fuel subsidy). Looking further to 2004 actual budget, it is disheartening indeed. As we know, the government ran a budget deficit of 1.3% of GDP. At the same time, 3.4% of GDP was used to finance subsidy, 2% to pay foreign debt amortization (gross drwaing was only 1% of GDP, resulting in a negative foreign financing), and 1% to redeem government bonds.

Donor-Recipient "Romance"?

I looked at the history of Indonesia's aid dependency. The donors seemed to really believe in Soeharto's administration, despite the poor state of democracy (and for that matter, poor governance). As the regime collapsed in 1998, democracy movement was underway. But the trust seemed to vanish, as evidenced by increasing conditionalities. The challenge now, therefore, is to regain trust/confidence while keep pursuing on democracy. ("There's always a price for democracy").

Challenges Ahead

Which leads me to an apparent conflict of "freedom to use" aids and the attached conditionality on ODAs. We can't but to seek a balance, therefore:

The paper is still being refined. For complete powerpoint presentation, send me an email.

The Politics of Sugar 1

This can go on and on and on. Now is sugar time.

Kompas reports the government has set a new "support price" for sugar. Read here (in Bahasa).

What is "support price"? It's just another form of protection given by the government to, well, support the price of a product. The idea is to "ensure that farmers receive a reasonable, fair price" -- just like Minister Pangestu claimed.

As the name suggests, support price is supposed to keep the price not to fall below a certain level. (Clearly for the benefits of producers and at the consumers' expense).

What happens if domestic production of a good increases? Well, naturally the price should go down. But the government and the producer don't like that. Hence the support price. What happens if domestic production stays constant or even decreases? Obviously, you don't need a support price. Or you can have one, but it will be useless, or ineffective.

But, surely an effective support price is an incentive for foreign production to enter the domestic market through import. How to "protect the domestic producers"? Impose import quota, or stronger yet, just impose a total ban on import.

Now the best part. What if the government sets a support price which is ineffective? "It's politics, stupid".

After all, the whole idea is to protect the sugar farmers (again, as the Minister claims). Now, the world market price is Rp 6,200 per kg, while the domestic support price Rp 4,800. If you really want to do farmers a favor, why not letting them enjoy that higher world price? But the government says, the buyers out there are ... evil (an evil who offers higher price?). Let's get back to this evil buyer issue later...

The Politics of Fertilizer 1

"Government to ban fertilizer exports, permit some imports" is the head of this article from today's The Jakarta Post.

The natural question is: "Huh?"

Look one by one:

1. Government to ban fertilizer exports. Why does it need to do this? Of course, if the policy is to be effective, the existing situation is such that the world price is higher than the domestic price. Otherwise, "banning export" doesn't make any sense, because after all, there is no incentive to export.
2. Government to permit some imports. Why does it need to do this? Of course, if the policy is to be effective, the existing situation is such that the world price is lower than the domestic price. Otherwise, "permitting import" doesn't make sense, because after all, there is no incentive to import.

But how come the two come together as suggested by the headline? Which one is correct? What goes wrong? Of course your answer would be: "It's politics, stupid".

Thugs, thugs, everywhere

As I'm writing this, the online version of today's The Jakarta Post has not been updated. But go read the editorial of today's print. It is aptly titled "Thuggery as Law". What The Post means by thuggery is exactly what I refer to as the act of the "terminators".

Of worth-thinking, The Post says:

In a confused libertarian society such as ours, lawlessness is glorified and agents of chaos knighted as persons of authority.

Indeed.

As I said earlier, I don't understand why the police are so ridiculed by these thugs. Now, almost every political party or organization has its own army of thugs. They are happy to terminate whatever they don't like.

And the government keeps silent. Where does our money go?

Yet another minor makeup

(Coerced) readers of Exegesis complained about my new skin. Rizal said: "Dude, I don't like your new skin". Patricia complained: "Too plain, too pale", Oki (Ki, set up yours, would you?) suggested: "Be a lil' more colorful". Ces Mad told me, "That's so not you: changing things up...". Thanks, guys. At least I know you come visit :-)

But, as I found out, part of your dissatisfaction came from your using Internet Explorer as your browser. Guys, that thing sucks! It shows things worse than they actually are. Change to Firefox!

Consumer is the king. So I have made a little makeover. Not too much. But I have put some pictures in the sidebar. I hope my cute-half doesn't mind my using our picture.

I confess, I have way more ideas to improve this blog than I can. Alas, I'm not a CS-HTML-and-all-that guy. Don't even think of "view page source" this site. It shows how novice I am. (It reminds me of my GAUSS programming days. It was exciting and embarrassing at the same time. Especially when my CS friend who is also an economist saw my 30-line code and he quickly suggested tranforming it into 10-something-line code!).

Update: When I said "consumer is king", I was in sarc mode. So Rizal, don't ask too much :-)

Supercops Terminators

That's it. These guys just never get it. It amazes me how they are free to do this over and over again. I have no problem with their burning any magazine, as long as they buy it first. For crying outloud! Look, the man says:

We have reported the chief editor of the magazine, the models, journalist, photographers and 26 companies that have placed advertisement in the magazine to the police.

Yeah right and yet you go on with your usual brutality, ignoring whatever the police says. Who needs police if you heroes exist?

The Selfish Labor

No, there's nothing wrong with being selfish.

But calling your selfish act as social in the name of the people is dishonest and misleading. I'm talking about workers that protest the revision of Indonesian 2003 Labor Law. Central in their rallies is the fallacy that protecting their rights is good for the whole country. I say bull. It's good for them employed workers only. (And that means just those working in the formal sector). It's obviously a barrier to informal workers and unemployment in general. There's nothing wrong with negotiation. But don't lie. If you are protecting 30 percent of the people at the expense of the other 70 percent, don't say you're protecting everybody.

Revise that law. Now.

Update: Rasyad A. Parinduri says it better.

Great disruption

Together with Mochtar Pabottingi of LIPI (Indonesian Institute of Sciences), I gave a talk on Fukuyama's Great Disruption at Freedom Institute. (It's not really a new book, but Freedom has just published the Indonesian edition -- an appreciated effort). Here's what I said, more or less:

Summary

Social capital is “a set of informal values or norms shared among members of a group that permits cooperation among them. If members of the group come to expect that others will behave reliably and honestly, they will come to trust one another”. Social capital (in the US and Europe) has been depleted: rising crime rates and increased family disruption. This is a “Great Disruption”.

Main reference

To elaborate on the views on “the contradiction of capitalism”, FF refers to sources like Edmund Burke (who blamed French Revolution and Enlightenment Era for the GD), John Gray (who blamed the fall of the Berlin Wall), Fred Hirsch (who blamed growth), and even goes further to Schumpeter, Daniel Bell etc (for possible conflict between market and social order). Thank God, FF doesn’t buy all this stuff – at least not all. In fact, he says those arguments are not even-handed. He then balances the literature with the likes of Montesquieu, Samuel Ricard, and Adam Smith (rightly, FF uses “The Theory of Moral Sentiments” rather than “The Wealth of Nations”) who argued, among all, that trade is good for developing social capital.

Where FF stands

FF stands quite on the center. But not exactly. Note, for example, he says that the view that social capital belongs to the society is wrong. It is produced by private market. Being honest, trusted and all that is every firm’s way of maximizing its profit, not because it is concerned with the society (pg 314 of Indonesian edition). It’s not surprising. Had he been more in-depth on Hayek, he might not even need to write this book. A point that leads us to “spontaneous order”. “Slug” is definitely a spontaneous order. (Did I just reveal where I am in FF’s Figure 8.4?).

My impression

This book is confusingly ambiguous. You can easily find contradictions here and there (and you are asking yourself: Is this really that famous Fukuyama?). It might as well be just a reflection of FF’s political pendulum (neocon or what?). Or even his swinging academic viewpoint (We still remember how he declared liberal democracy as the last man standing and then later seemingly declared the death of the last man and turned to the state again). But anyway, I think the main weakness is on the methodology. It's one thing to say that social capital is declining and that the quality of life is lowering. But establishing the relationship -- causal, if possible -- between the two is another. FF fails to establish such connection. And what's so special about "trust" anyway? That guy Thaksin Sinawathra, to take a very recent example, lost the trust from his people. But what forced him to step down is also another trust: a trust that grew up within the people he had been oppressing. So, which trust are we talking about? Most dangerously is FF's attempt to persuade us to give trust to the State -- at least that's what he's implying by worrying that the participation rate in general election or membership in political parties were declining and that's not good for life quality, again no strong connection. What? The state should earn trust, not "get" it. If FF's line of argument flawless, we should just register to as many organizations as possible. That will increase our life quality.

If I were to write on this topic

I propose Sobel’s 2002 JEL paper definition: “Social capital describes circumstances in which individuals can use membership in groups and networks to secure benefits”. It is drawn from Pierre Bordieau (1986): “Social capital is an attribute of an individual in a social context. One can acquire social capital through purposeful actions and can transform social capital into conventional economic gains”. Obviously FF’s argument is not unique. Putnam (1995, 2000, “Bowling Alone”) has similar view, that, as summed by Sobel, “a dramatic decline in the level of participation in group activities” threatens the quality of democracy and the quality of life. He lists some negative effects e.g. destabilizing democratic institution, lowering schools effectiveness, etc. In short, Putnam’s view is pretty heroic. And Sobel attacks all that. If I were to review FF, I’d save time by suggesting people to read Sobel’s review on Putnam. The tone would be the same. Because GD is just another way to lay out Bowling Alone all over again. FF is Putnam. They both argue that, again borrowing Sobel’s sentence, “measurable declines in group activities cause bad outcomes”. As for me, SC is just a possible consequence of human action in his or her society. When it’s beneficial for him/her to engage with other people, vice verse, then SC is developed.

My countertrend

Just like Nicholas Lemann (1996, “Kicking in Groups”) who offered countertrends such as small business and restaurants, I would like to offer the … blogosphere. If Putnams says “You can’t make friends using telephones; but you can use the phone to maintain friendships”, I’d suggest him to go look Friendster. If you can measure somebody’s social capital by looking at the size of his Rolodex, why don’t you want to look at somebody’s circle of friends in his Friendster?

Can a scientist be wasted?

My brother-in-law works for the Tokyo-based NSK Ltd. He went to Tokyo Institute of Technology and got his PhD in "impact energy absorption technology" -- I have no idea what that is. Having earned his degree, he went home, trying to find a job. He couldn't find any that matched with his qualification. He even visited ITB (Bandung Institute of Technology) only to find that the Institute doesn't have a course of his specialization. He did pursue academic career further, but he likes "to apply it in a real life".

So he went back to Japan. Now he's busy with NSK's R&D Dept, researching "crashworthiness" -- again I don't know what that thing is. Despite his constant urge to come back home and work in Indonesia, he lives a happy life with his family in Tokyo. As I can tell from my sister's stories.

Why am I telling this? Kompas today runs this headline, saying that Indonesian scientists' talent and skill are wasted. The article blames the country's lack of "grand strategy" to develop science and technology and of good long-run program of human resource development.

I know what it means. But I don't think scientists can be a waste. If you can't "use" them, somebody else would.

Greg Mankiw's Blog

It's always a good thing when a professional economist comes back. The blogosphere welcomes Greg Mankiw. Yes, it's *the* Mankiw.

Via Arnold Kling.

Labor IS a factor of production

SBY seems to have missed his Solow chapter on growth. While he's correct that "real wage should equal productivity", he insists that "labor shouldn't be treated just as a factor of production". How not so?

Read here (Bahasa Indonesia).

Corruption at the United Nations?

A recent paper by Harvard's Ilyana Kuziemko and Eric Werker uncovers the likely corruption at the United Nations. Furthermore, it's likely that the UNICEF should be hold responsible the most; and that means... the U.S. Abstract:

Ten of the fifteen seats on the U.N. Security Council are held by rotating members serving two-year terms. Using country-level panel data, we find that a country’s foreign aid receipts rise substantially when it is elected to the Security Council: on average, U.S. aid increases by 54 percent and U.N. development aid rises by 7 percent. We find that the positive effect of Security Council membership on aid is much greater during years in which key diplomatic events take place, when members’ votes are likely to be especially valuable. Further, the increase in aid is shown to begin the year a country is elected to the council and to disappear after its membership ends. We find evidence that the effect of council membership on U.S. aid is especially large for dictatorships and U.S. allies, suggesting that the United States seeks to form alliances with the council members who are cheapest to bribe. Finally, the connection between U.N. aid and council membership seems to be driven by UNICEF, an aid organization over which the United States has historically exerted much control.

It's really everywhere.

via MarginalRevolution.

Unique, exclusive identity: (im)possible?

I agree with Amartya Sen:

"...A person's religion need not be his or her all-encompassing and exclusive identity. Islam, as a religion, does not obliterate responsible choice for Muslims in many spheres of life. Indeed, it is possible for one Muslim to take a confrontational view and another to be thoroughly tolerant of heterodoxy without either of them ceasing to be a Muslim for that reason alone..."

Here's the article from Slate.com.

Limiting a given individual's identity to a unique and exclusive association may disadvantage both the individual and the institution he or she is associated with.

When somebody commits terrorism and it turns out he or she is a Muslim, reductionists conclude: Islam is bad. This is an example of how an institution is disadvantaged by a unique, exclusive identity association.

As for how the effect harms the other way, think about the stigma from which Islam now has to suffer, thanks to reductionist way of thinking. Somehow every muslim is a terrorist.

Of course it is easy to find examples showing that the effect can be good. Sen uses Al-Ikhwarizmi as an example. He's a great mathematician and he's a muslim. I can't blame muslims who are proud of this. But saying that every muslim is a good mathematician is simply wrong, no matter how good it sounds.

U.S. support of Israel was and is a bad idea

The U.S. support for Israel should be eliminated. The U.S. shouldn't even have helped the creation of Israel in the first place.

The above paragraph isn't mine. I borrow it from a U.S. libertarian economist, Jeff Myron. Prof. Myron cites a controversial paper by Chicago's J. Mearsheimer and Harvard's S. Walt. The first sentence is drawn from the study, and the second is Myron's.

Here is the complete paper, and below is its abstract:

In this paper, John J. Mearsheimer of the University of Chicago's Department of Political Science and Stephen M.Walt of Harvard University's Kennedy School of Government contend that the centerpiece of U.S. Middle East policy is its intimate relationship with Israel. The authors argue that although often justified as reflecting shared strategic interests or compelling moral imperatives, the U.S. commitment to Israel is due primarily to the activities of the “Israel Lobby." This paper goes on to describe the various activities that pro-Israel groups have undertaken in order to shift U.S. foreign policy in a pro-Israel direction.

The Politics of Rice 16

You think I gave up with this series? Not so fast.

Here's a shock: 18 percent of "raskin" ("beras untuk yang miskin", or subsidized rice for the poor) is stolen by corrupt officials.

A recent study by Ben Olken of Harvard and NBER reveals another evidence of corruption behind the largest redistributive program in Indonesia. Here is the paper. Abstract:

This paper examines the degree to which the corruption in developing countries may impair the ability of governments to redistribute wealth among their citizens. Specifically, I examine a large anti-poverty program in Indonesia that distributed subsidized rice to poor households. I estimate the extent of corruption in the program by comparing administrative data on the amount of rice distributed with survey data on the amount actually received by households. The central estimates suggest that, on average, at least 18 percent of the rice appears to have disappeared. Ethnically heterogeneous and sparsely populated areas are more likely to be missing rice. Using conservative assumptions for the marginal cost of public funds, I estimate that the welfare losses from this corruption may have been large enough to offset the potential welfare gains from the redistributive intent of the program. These findings suggest that corruption may impose substantial limitations on developing countries’ redistributive efforts,and may help explain the low level of transfer programs in developing countries.

I'm not surprised.

Skin change

Let's just say I was bored with the skin I had been using since 2003. No, it's not a bad thing. In fact I was in a dilemma: 1) I wanted a new skin, 2) I felt that I was betraying my old skin. Furthermore, the latter included a guilty feeling to the great creators I had borrowed ideas from, especially Jason Sutter (the original creator of the former skin, before I messed it up) and John Irons (an excellent economist who invented ArgMax, including it's useful newsBot).

I ended up with this new skin you're looking at now. It's much more simple. Notice, I don't put my long list of favourite blogs, news sources, etc anymore. I believe everybody who blogs use aggregator (I use Bloglines). Technology is amazing. We don't even need to put our feed address anymore. The aggregators can find it easily. Incredibly easy searching is also the reason why I don't keep the ArgMax's newsBot anymore. Don't tell me you can't find it.

Another reason I changed skin was that many friends complain that Exegesis "don't take comments", which isn't true. Well, it didn't until last year. But due to so many alterations on the template, I think I made it obscure. Now it's more obvious. I welcome your comments.

I remember the first time I set up this blog. It was October 2003, as you can see in the archive. I wasn't sure I could even maintain it. It was just a media to vent out my stress trying to meet dissertation deadlines. But it worked quite well. So far...

As you might have seen, I've been swinging on themes here and there. My first posts were all about the life of a graduate student struggling with his work. Then I came back home. Things were no less interesting. It was all the reality, and boy, "reality bites". Now, most of my current posts are comments to national headlines. My apologies to many of you who don't read Indonesian; I linked to Indonesian newspapers a lot. But I always try to make my points clear, even if you don't click the links.

Did I bore you already? You can always go to the café next door...

KPPU shouldn't punish Semen Gresik; the market would

So the nation's antitrust committee, KPPU has reached another verdict, this time against PT Semen Gresik. According to KPPU, Semen Gresik has violated the Commpetition Law (UU No. 5 Th 1999). Among all, SG allegedly 1) sets retail price , 2) decides who are allowed to do business with its distributors, and 3) forbids its distributors to sell cement produced by its competitors.

Semen Gresik denies. It says, this is common practice in business.

I agree with Semen Gresik. I don't think KPPU is the right entity to punish (or to decide the punishment for) SG for such conducts. The distributors have the options to leave Semen Gresik anytime and serve Semen Tonasa, Semen Cibinong, whatever. If Semen Gresik is doing something bad, it will lose its distributors and consumers. The market will punish it.

Islamic parties good for fighting corruption?

Here's a recent evidence in a paper by LPEM researcher, Ari Kuncoro. Here's the abstract:

Indonesia has a tradition of corruption among local officials who harass and collect bribes from firms. Corruption flourished in the Suharto, pre-democracy era. This paper asks whether local democratization that occurred after Suharto reduced corruption and whether specific local politics, over and above the effects of local culture, affect corruption. We have a firm level data set for 2001 that benchmarks bribing activity and harassment at the time when Indonesia decentralized key responsibilities to local democratically elected governments. We have a second data set for 2004 on corruption at the end of the first democratic election cycle. We find that, overall, corruption declines between these time periods. But specific politics matter. Islamic parties in Indonesia are perceived as being anti-corruption. Our data show voting patterns reflect this belief and voters' perceptions have some degree of accuracy. In the first democratic election, localities that voted in legislatures dominated by secular parties, including Megawati's party, experienced significant relative increases in corruption, while the reverse was the case for those voting in Islamic parties. But in the second election in 2004, in those localities where corruption had increased under secular party rule, voters "threw the bums out of office" and voted in Islamic parties.

Refurbished, anyone?

Domestic market is flooded with "reconditioned" TVs, reports Kompas (Ind). The association of electronics makers urges the government to impose a "national industry standard" to "protect both consumers and producers". I say crap.

All that is needed is a simple label saying "Refurbished" (or, "Reconditioned", if you like) on those TVs' package. Sell them at a lower price than the newly made. That way, you "protect" the consumers who want to wantch TV but have fewer money. You also "protect" the producers who make use of used stuff and are willing to accept lower return. In the meantime, the producers of new TV sets should resort on quality enhancement.

If you're not convinced, read the paragraph saying "the selling price (of the "reconditioned" TVs) are darn cheap and tempting". So, what's the problem? Information. Failing to tell the consumers what's inside while deluding on lower price can be seen as a cheat. That's why we need the label, bro.

Oh, did we forget to give a job to the government? How about this: enforce the labeling. Inspect once in a while, pick at random, and punish those who violate (selling a refurbished TV with no label saying such).

Cut the tax!

While I'm not in favor of their approach (look who suffers), I think what the transportation associations demand is in the right direction. The government should take this momentum to further cut taxes in other areas, too. There's no point of collecting so much tax, if the government is incapable of handling it.

Conspiranomics

When economics is studied only marginally on the discussion about corruption while the rest are a total conspiracy theory, this kind of article is very likely.

Speaking about conspiracy, how about constructing a new one? Try this: some politicians conspire with businessmen to overthrow a multinational from a particular country. It's easy. Create chaos. The share value goes down. Buy the corporation, low. Then sell high. Sounds good? Probably. Can I prove it? What? No! And that's the beauty of conspiracy theory.

Ultranationalists strike back

This kind of crowd always gives me anxiety attack. Old soldiers (and friends) really never die.

Supply chain, service.

Dede is right on. We have to take part in international production network. I would go further: if we can't really produce, we should facilitate the flow of goods. Then we charge for the service. Transhipment, anyone?

It's called "service", no?

Read this article and let's try to have a bigger perspective. What's really going on? American and European shoemakers can't compete against Chinese. So they ask their governments to help them through high tariff (In case you forget, the effect would be that US and EU people should end up with more expensive shoes). Chinese would respond by rerouting their delivery through Indonesia. Indonesian shoemakers freak out, 'cause they also can't compete. Even though it is obvious that some ex shoemakers are better off enganging in the "modern value chain", the association thinks it's not a good idea. I think otherwise. If we can't really make competitive shoes, why force? Now that international modern business are switching to borderless value chain, we should be happy to become one of the first players. Of course Singapore has been doing it all this time. And it's called "service"...

Here's a fable to think about.

Delayed posting for the delayed package

I have been meaning to welcome the government policy packages recently announced. It was supposed to be "January Package" as promised before by Minister Budiono. But apparently it had to wait until early March to have it announced. Here is the policy package for investment climate improvement. It complements the earlier package for infrastructure policy and last year's "October Incentives".

Some comments on the investment climate improvement policy package. First off, it's not bad. It covers four important areas: 1) Custom and excises (the most troublesome, as far as investment climate is considered), 2) Taxes, 3) Manpower, and 4) Small and medium esterprises and cooperatives. The good things include, in no particular order: 1) Explicit mention of responsible ministries and time target (so they are at least qualified for anti-moral hazard verification), 2) Promise to streamline (and eliminate, if necessary) of problematic regulations that have been hindering investment, 3) Promotion of more flexible labor market, 4) Effort to clean the bureaucracy hurdles, especially in the MoF, 5) Simplification of visa and working permit issuance procedure.

Hope all these are not just promises. And it'd better be worth the wait.

For your own safety, don't use wrong examples

This is a small tip for fellow econ instructors, especially in microeconomics.

We teach students that in general, firms maximize profits. Then we talk about the anatomy of profit. That is, it consists of revenue and costs. So, profit is simply revenue minus cost. Then we go on with some examples.

My suggestion, avoid using state-owned enterprises as example. Never use Pertamina, PLN, Telkom and all that. Because, when they report profit (or loss, usually), we have no idea how they calculate it. The profit (or loss, usually) figure is there. But notice. When it comes to introducing or installing a new policy that affects these enterprises, the government always has to ask the cost figure (in particular primary production costs). And they ... start to calculate! It happened to Pertamina, now we are WAITING for PLN's cost calculation! So what profit (or loss, usually) they always report? Well, either they don't know how to calculate profits, or they lie.

Avoid using bad examples.

RIP: Aslam Effendi

Allow me for a word of mourning. I received an email from Pakistan's economist, Khalil Ahmad. It was a sad news. Aslam Effendi, a great economist from Pakistan passed away after a "protracted illness". I don't know much about Dr. Effendi, but the fact that Henry Hazlitt wrote a foreword to his book, "Hard Facts of History" says it all.

A friend from the Phillipines, Nonoy Oplas offered another obituary, saying that "I am sure Mr. Effendi died a happy man because there are now plenty of [us] who continue what he has started..."

Condolence.

MF on globalization, market, and externality

From New Perspective Quarterly:

New Perspectives Quarterly (NPQ): With globalization, are we seeing the freest world economy we’ve ever seen?

Friedman: Oh no. We had much freer trade in the 19th century. We have much less globalization now than we did then.

Will we go ahead back to this freedom of the 19th century? I don’t know. We have a freer world because of the collapse of the Soviet Union and the changes in China. Those two have been the main contributors to freedom in our time. The countries that have risen and separated out as a result of the collapse of the Soviet Union are, on the whole, following freer economic policies. Most of these states have freer government and less restrictions on trade.

This free-market base will likely expand from there by example to others not so free. Everyone, everywhere, now understands that the road to success for underdeveloped countries is freer markets and globalization.

NPQ: In the end, your ideas have triumphed over Marx and Keynes. Is this, then, the end of the road for economic thought? Is there anything more to say than free markets are the most efficient way to organize a society? Is it the “end of history,” as Francis Fukuyama put it?

Friedman: Oh no. “Free markets” is a very general term. There are all sorts of problems that will emerge. Free markets work best when the transaction between two individuals affects only those individuals. But that isn’t the fact. The fact is that, most often, a transaction between you and me affects a third party. That is the source of all problems for government. That is the source of all pollution problems, of the inequality problem. There are some good economists like Gary Becker and Bob Lucas who are working on these issues. This reality ensures that the end of history will never come.

Hat tip to Steven Levitt.

The Politics of Rice 15

This news strikes me. The Jakarta Police has launched a probe into the House of Representatives due to PKS and PDI-P's opposition against the government's decision to import rice. This is ridiculous. Yes, the parties' call for import ban was silly. But that doesn't give a right to the Police to investigate them.

If the Police wants to play cop, they should probe into another office. Think about it.

The Politics of Rice 14

So the government finally admits that Bulog is ineffective. Unfortunately, the solution is worse. Instead of doing something about Bulog, it blames the market. Says Minister of Ag:

"Bulog turns out incapable in driving down the price. Therefore, we need to re-evaluate market operation and rice import". -- my italic.

If only you say "...., we need to re-evaluate the existence of Bulog"... that would make more sense.

Inflation Update

The inflation data for January 2006 is up on BPS’ website. It is 1.36% month-on-month, or 17.03% year-on-year. This is slightly lower than LPEM-FEUI’s estimation of 1.44% and 17.12%. Unless the floods continue to halt paddy harvesting, we expect a deflation in February by 0.17%.

The Statistics Office (BPS) reported that the major driver of the high January inflation was rice price increase. HKTI and DPR, are you happy now? The Bulog’s rice import of 110,000 tons failed to stabilize the price. Again, it is proven that Bulog is ineffective. The solution to this should be straightforward. Don’t rely on Bulog. Just allow everybody to import. (I should’ve titled this post “The Politics of Rice 14”, no?).

In the meantime, people have started to make fuss on the likely increase of electricity rate. However, a 50% increase (already happened in some regions) in rice price is more harmful than 30% increase (popular estimate) in electricity rate, as far as inflation is considered. As we estimate, the former will add 4.3% to the inflation, while the latter 0.89%. But, the second round inflation should also be expected. It seems that the government doesn’t learn from past mistakes. By keeping silent on the exact rate of increase the government is again toying with people’s expectation. Last year inflation was driven more by expectation amid the uncertainty and mixed signals from government officials. Now, they’re doing it again with electricity rate.

There’ve been talks over the January’s inflation figure, that Bank Indonesia might increase its policy rate again next week. I would think it’s premature, even though it's not impossible, considering that the Fed has raised its rate to 4.5% last Tuesday.

BPS also reported that the 2005 export value hit a record high of 19.53%. We shouldn’t be overly happy with this. Note, the number reported is value. That is, price times quantity. Last year export was driven by mining sector, whose world price rose significantly. So it’s not that we exported a lot; only that the price was good. If we are for promoting more export (in quantity, not just relying on international price), we should continue cleaning up the mess in customs and duty clearance procedure.

Rules vs Discretionary

or... Friedman vs Greenspan. I can't let this go unnoticed.

Hat tip to Mark Thoma.

Democracy Bush and Blair Don't Like

The Economist has its right to be skeptical on the current development in the Palestine. It says, under Hamas, things will go worse. Well, that's an editorial judgement, and it's fine.

But it's different when it comes to world "leaders": Bush, Blair and the likes. As the Washington Post reported, Bush was "conciliatory". While Blair worries that Hamas might not practice democracy. Well, if you're concerned with democracy, first of all, you should respect the result of the democratic election. You like it or not, Hamas is winning.

[By the way, allow me for a word about Evo Morales, the new "hero" who just joined the Castro-Chaves Gang. I kinda not like him. But I respect the Bolivian people decision. Bush and his gang should learn to respect that, too].

Update: I just noticed, Posner and Becker are discussing about this, too, with economics. They apply Schelling-way of thinking and both comes to conclude that the world should not worry (too much) about Hamas victory. Says Posner, "Hamas' victory may be the best thing that has happened to Israel in years". While Becker says, "I am more optimistic than Posner and many others about the chances that Hamas' victory will improve rather than worsen relations with Israel."

The Politics of Rice 13

The Jakarta Post's editorial today. It is sensible. While I can't agree more that "[a]rguing that the [rice] import would hurt Indonesian farners is an insult to common sense", there are some points I don't agree with completely. First, that the government requires import at the situation where the quantity of rice falls below 1m tons and the price rises above Rp 3,500. I think when that happens, foreign rice will automatically come in; provided that everybody is free to import. Second, and this always troubles me, the claim that rice is a "strategic and vital" commodity, so that the government should always have some buffer stock. If market can handle that, why bother the stocking?

Barking up the wrong tree (©The Jakarta Post, Jan 24, 2006)

The House of Representatives, already facing a very tight legislative agenda, will simply be wasting its resources if it pushes ahead with its demand to exercise its right of inquiry and investigation into the government's decision to import 110,000 metric tons of rice.

Arguing that the import would hurt Indonesian farmers is an insult to common sense. How could the import, which accounts for a mere 0.003 percent of national consumption, disrupt domestic market prices? Therefore, we cannot help but smell a hidden political subterfuge behind the stubborn opposition to the rice import.

It is indeed the right and duty of the House to oversee government policy. However, in so far as the rice import is concerned the dogged opposition by the majority of the House members is utterly irrational, an insensible subterfuge that would only stupefy the general public.

It would be much better for the House, if it is really concerned about the farmers' income, to scrutinize the implementation of the integrated program to revitalize the agriculture sector, which the government launched last year. There is also an even more important legislative agenda of almost 30 bills that have to be completed by the House during the current session period, which will end in March.

The rationale of the rice import is quite obvious. The government has explained that it would be required if the State Logistics Agency's (Bulog) stocks fall below one million tons and domestic prices rise above the Rp 3,500 (US$0.30) ceiling retail price per kilogram. The government also has assured that imported rice will not be released to the domestic market unless local prices rise far in excess of the ceiling. It would then be in the best interests of the farmers if the House helps the government to install a control mechanism to ensure that the imported rice achieves its objective.

It is strategic and even vital for both political and economic stability that as the world's fourth most populous country with more than 230 million people, the government should always have a buffer stock of at least one million tons to meet urgent needs in emergency situations such as natural disasters or crop failures. It is also worth emphasizing that most rural households are net consumers of rice, and steep rises in rice prices could trigger a social and political crisis because food usually accounts for the bulk of the spending of poor families and weighs heavily in the consumer price index.

It is also a fact, despite the government campaign over the past three decades to diversify the national staple, that food security still means the availability of rice, the main staple, at affordable prices.

The government has not changed its rice policy. It remains the same -- controlling rice prices within a periodically reviewed range of floor and ceiling prices to ensure fairness for both consumers and producers and totally banning rice import to protect the farmers from unfair import competition.

Hence, the import is not a permanent policy, but only a contingency measure, aimed at preempting any shortage before the start of the next harvest in February. Starting preparations for imports only after a major shortage takes place would be calamitous because what may start as an isolated shortage could soon escalate into a crisis as speculators join the fray.

Building the stocks from the domestic market now when most rice farmers have sold their surplus output would benefit only traders. Procuring such a big volume in one transaction within such a short period of time also could disrupt the market and trigger excessive price rises.

The government, nevertheless, should also be blamed for the unnecessary furor over the rice import. It does not seem to have taken a lesson from the controversy over the fuel price increases last March and October.

The rice import, like fuel price hikes, is quite rational, making a lot of economic and political sense and is for the good of the people. However, both measures will always be politically controversial if the public opinion environment is not conducive.

The government cannot simply launch a policy and sit back and relax, hoping that all things will run smoothly. The government should still go all out to sell its policies to the public.

However, the policy cannot be sold in a vacuum, meaning that the environment should be made favorable to the policy. The government needs to change Bulog's notorious reputation. The logistics agency has been known as a corruption-infested institution, a cash cow for rent-seekers and vested interest groups, who profited the most from the trading of such controlled commodities as fuel, rice and sugar.

A high degree of transparency early on regarding the real condition of the national rice stock, the process of imports, which parties are involved and how the imported rice will be controlled could have helped precondition the public opinion climate for the contingency measure.

The Politics of Rice 12

Once again, my position with regards to the rice furor is: 1) Rice import is good, 2) Giving an exclusive right to Bulog is not good. It seems to me that people think that the fact that I support rice import automatically means I also support the role of Bulog. No. In fact, whenever the right to import is given only to one entity, my suspicion arises. The effect of such practice on the economy is just similar to the effect of quota. And it's bad.

Readers should not, however, confuse between rice import issue and Bulog's role issue. They are two different things, to be addressed separately, even though the policy implication would be heavily related. I have raised both issues simultaneously many times to avoid misunderstanding that my supporting rice import meaning I am supporting the import mechanism as it is now. Which is fallacious.

The press have quoted me in the way that might lead such misunderstanding about my position. Read here or here, for example. In the latter, they misinterpreted my table. I presented a simple calculation to show that Bulog's claim that they can stabilize rice price is not well founded. I compared two periods, namely the period when Bulog was given the sole right to import rice, and the period when the rice market was liberalized. The coefficient of variation of rice retail prices in Indonesian regions were all higher in the first period than in the latter. Meaning, under Bulog's authority, prices were more unstable. So, the claim was false.

Today, The Jakarta Post has an opinion written by Peter Milne. As I'm writing this, the online version isn't available yet. Milne argues, correctly, that importing rice is pro-poor. Please find and read it.

2006 Outlook

We just released our 2006 outlook yesterday. Here's a press coverage by Bisnis Indonesia (non-permanent link). Keypoints:

1. The economy is to slow down up to the 1st half of 2006, then rebound in the third quarter.
2. The government should focus on effective fiscal policy (especially in the first two quarters), while maintaining tight monetary policy.
3. The effectiveness of government bureaucary is still an obstacle in promoting better investment climate.
4. Reducing high cost economy, ensuring labor market flexibility, and improving the effectiveness of decentralization are keys.
5. Further liberalization is needed to foster growth.

The Politics of Rice 11

Finally, a newspaper editorial on the rice furor that makes sense (Over at the Cafe Salemba, Ape has pointed out the other sensible editorial, also by the same newspaper). The Jakarta Post has another good editorial today about what it calls, "The Politics of Rice" -- sounds familiar? (The problem with the Jakarta Post's web version, it doesn't provide permanent links, so don't be surprised if you click the link tomorrow and you are brought to another piece of article. To avoid you missing this important piece, I copy paste it in its entirety below -- I hope JP doesn't mind).

The politics of rice (© The Jakarta Post, Jan 12, 2006)

The current furor over rice imports flared up when late last year the trade minister gave clearance to the State Logistics Agency (Bulog) to import over 70,000 tons of rice to supplement its buffer stock. The agriculture minister protested, saying the country's stocks were sufficient, and that importing rice would depress domestic prices, penalizing rice growers, most of whom are subsistence farmers.

After several meetings, the agriculture minister backed down and agreed the country needed to import rice to fortify Bulog's stocks. Earlier this week, the government announced it would allow Bulog to import another 110,000 tons of rice from Vietnam through the end of January.

From this, it may be safe to assume the country does need additional rice supplies to keep prices from rising out of control. Higher rice prices are bad for inflation, as rice plays a major role in the calculation of the consumer price index. At the same time, there are people who are making huge profits importing the rice. Well, that's the politics of rice.

It is necessary to take a more rational look at the issue of rice imports. Seen from the interests of the nation, i.e. keeping rice available and affordable for most people, importing rice is not bad, and is also a way to contain inflation.

But we need to take a look at the bigger picture of the role rice plays in Indonesia. As the most important staple food for a large portion of the population, rice is not just another commodity. It is both a market and a political commodity, and any government that failed to ensure the availability of rice at affordable prices would face serious problems.

But just how far should the government go in controlling the rice trade, and who should the government favor in its rice policy -- the growers or the consumers?

By keeping rice prices low, the government sides more with consumers than growers, while at the same time keeping inflation in check. By allowing prices to go up, the government helps farmers and penalizes consumers.

So a balance must be reached. But even such a balance would not be a true balance, as one group would benefit over the other. The easiest and least politically risky decision would be to keep rice prices low. It is rarely beneficial for a politician to favor the interests of rice farmers, who are largely uninterested in politics. Which is why most politicians would rather come down on the side of consumers, especially urban residents who want low rice prices, are politically active and make campaign contributions.

Keeping rice prices low also benefits farmers, who normally become consumers between harvests. So, consumers outnumber growers, making siding with consumers more morally defensible.

Given all of this, the best rice policy would be to keep prices affordable to most people, while importing rice is the best remedy when domestic prices begin to creep up. Imports should also serve as a way to improve the efficiency of our rice growers, so they can eventually become more competitive.

As long as the domestic market remains protected, importing rice will remain attractive for anyone eager to make a big profit. Putting domestic prices on a par with prices in the international market should be the ultimate objective for the country, which would protect farmers from rice imports.

Rice imports are not a problem, but a solution. The problem lies in the process of importing rice. When done by cronies of government officials and Bulog executives, through dubious tenders, the people have a right to raise questions. The government must make the process more transparent. Then no one will raise questions, and the people will have all the affordable rice they can eat.

I hope to see many of this.