Steel fear, still fear, two years later

China produces a lot of steel. We need steel. When we buy, we like to pay at lower price. China overproduces: it's people don't need that much of steel. China would like to sell the remaining steel to other countries. Indonesia is close, so why not? Note that the term "overproduce" and "remaining" suggest lower price (why?). Conclusion: we can buy steel at a lower price that we used to. What's wrong with this story? Seems like everybody is happy.

But not so fast. It turns out, there is also a steel producer at home. It's been in the business for quite a long time (no, it's not an infant industry company). It worries that Chinese steel will outcompete theirs in price. What would it do? You're right. Ask for protection!

By the way, the company is state-owned. Sounds familiar?

WAIT! Where did I read that? Oh, I remember now, I posted it back in 2005. It's just that this news from Kompas today reminds me of it again. In the old posting it was the Krakatau Steel's head who said it. Now it's the Industry Minister. Same numbers, same paranoia, same confusion.

VP and MoT are making sense

I noted that Vice President Jusuf Kalla is to be commendable for his economic view. Here is one example:

People should not only look at the negative side [of the current rising prices of basic commodities]. You should also look at the positive side. When the price of corn goes up, it is likely that the prices of chicken meat and eggs will go up too. That is a negative as far as consumers are concerned. But the positive side is that corn farmers are happy.

I wish it were said by pop economists.

Today, it is Trade Minister Pangestu who shows her inner, true economist. Here goes (my interpretation):

Alright, we will keep an eye on the prices of rice, sugar, and kerosene. When they shoot up, we will import. In longer run perspective, we should focus on increasing productivity. As for the cooking oil, it is more of CPO domestic supply problem, so we might want to adjust again the export duty of CPO.

That is, more market solution. (It's relieving that Ibu Mari seems not to buy the 'wajib pasok' option (domestic market obligation) -- an idea supported by Ministry of Industry and Ministry of Agriculture). Good going.

Market failure and government failure: which one do you prefer?

When social interest does not line up with private interest, we say the market fails. (The economist will say: It is when the social benefits curve lies below the demand curve; social optimum is at the crossing of social benefits curve and supply curve while market equilibrium is at the intersection of demand curve and supply curve. What drives the wedge? Negative externality).

Externality in the market invites government intervention: e.g. use tax to deal with negative externality and subsidy with positive externality. When there is an externality problem in the government we say the government fails.

When we have both market failure and government failure then we are really in trouble. What are the ways out? We can rely either on the market itself or on the government.

In cases like that of Indonesia, it is hard to believe that the government is efficient. The fact that we are still struggling with bureaucratic reform reveals otherwise. In other words, there are externality problems in the government. We do have government failure.

So it strikes me that some noted economists call for government provision of safety net as a prerequisite for removing the distortions in the market. That implicitly assumes that there is no problem with the existing government. Well, I don't buy that. After all, if the government can not solve its own problem, how come it even want to solve the problems in the market?

2008 State Budget

Assumptions: 6.8% growth, 6% inflation, 7.5% BI Rate, IDR9,100/USD, and USD60/barrel of oil price.

The 6.8% growth assumption is wishful. I think the best we can go in 2008 is 6.5%.

EPA, PTA, FTA: tomato potato

This whole EPA party scares me. You may call it EPA, or FTA. To me it is PTA. And I am no fan. As we argued in this paper:

However, Indonesia’s engagement in FTA talks might not go as planned. Despite series of negotiations, only a few FTA schemes show progress, if any, with regards to trade liberalization. There are three factors that contribute to it. First, thus far FTA facilities are underutilized. Second, the proliferation of FTA distorts resources away from multilateral agreement, i.e. WTO. Third, FTAs are prone to overlaps which in turn will create very complicated conflicts across rules of origins – ‘spaghetti bowl effect’ (Bhagwati, 1995; Panagariya, 1998). This should not be underestimated as in any FTA there are competing protectionist interests in all sides.

Unfortunately, further unilateral liberalization is not easy amidst the creeping protectionism, whereas the progress of multilateral agenda is still in limbo as Doha seems to go nowhere. So Indonesia is left with a difficult position. That is, to rely on FTA/PTA for trade liberalization. There are at least three caveats to this. First, FTA should be in line with MFN non-discriminatory principles.

Second, engagement in any trade arrangement with foreign partners should be consistent with the effort to improve the quality of institutions at home. Third, when progress is made in the supply side, further unilateral liberalization should be resumed.

Recent development in this regard is rather mixed. So far, AFTA seems to be on track in this regard, but some bilateral FTAs might lead more toward trade diversion rather than trade creation. Indonesian government considers regional cooperation as a building block for longer term multilateral trade liberalization. It claims that AFTA and APEC are consistent with the Multilateral Trading System of WTO, including the enabling clause and General Agreement on Trade in Services (GATS) (WTO, 2007).

I am skeptical.

Update: Yudo at Ruang 413 is less skeptical, here and here. He says, trade diversion is not necessarily welfare deteriorating if you make an FTA with someone who is not too different (in terms of efficiency) from someone else outside the FTA. But why would you want to make an FTA with someone who is not significantly different from others?

New paper

(Full draft will be made available here soon; the paper was prepared for and presented in a conference organized by FONDAD).

M. Chatib Basri and Arianto A. Patunru,

University of Indonesia, 2007

How to Keep Trade Policy Open: The Case of Indonesia

Abstract:

We survey the dynamics of trade protection in Indonesia. In the aftermath of the 1998 crisis, Indonesia underwent impressive trade liberalization. However, from 2001 on, protectionism was on the rise again. The paper aims to elucidate how conflict over trade policy takes place in Indonesia after the economic crisis and to examine the prospect for further trade liberalization. We argue that it is unwise to assume that pressures for trade protection will easily subside. To support our key arguments we discuss the cases of rice import ban and crude palm oil export tax. We conclude that unless Indonesia can maintain the competitiveness of the real exchange rate, overcoming the supply side problems, improving infrastructure and reducing high cost economy, further trade liberalization will not be easy.

2007 State of the Nation Address

I thought I was listening to SBY's speech on the Independence Day. As it turned out, I was dreaming. Here is what I heard in the dream:

My fellow countrymen,

Congratulations to all of us. Today we are celebrating the sixty second anniversary of our beloved country.

I’m standing here before you with good news. I will not bore you with statistics. This is no place for gloom nor is it for blame game. My staff – I mean my vice president and cabinet members – will tell you anything with numbers later. Because I will only talk about three issues and I do not want to distract you with allusion to figures.

First, politics. I know full well that many of you are still anxious about our relationship with Singapore – sand, telecommunication, extradition, military training, transshipment, et cetera. Don’t you worry, my fellow countrymen. Singapore is no threat to us. That little city state is not to be taken too seriously. Yes, they have technology and money. But Karimun, Bintan, and Batam are our properties. We’ll do business with them, and we’ll do it right. Lee Kuan Yew thinks he knows Indonesia. Well, I’ll show him what the real Indonesia is.

Indonesia is the rising superpower. This great nation has taught the world how to run a democratic election. It is now in the center stage of world democracy. So let’s seize the moment. There are still loopholes in our local election, in our bureaucracy, in our parliamentary system, and in our legal system. But we’re making progress.

Some of you worry that zero tolerance to corruption means zero growth. That is a valid concern. Just like what we do to pollution, let’s minimize corruption, if we cannot eliminate it altogether now. If this sounds too shocking to you, let me put it in other words. That is, we’ll fight against corruption all out, but we can only do it gradually while at the same time fixing our legal framework. That way, we can respect the presumption of innocence. That way, we don’t need to waste time fighting over baseless allegation.

That includes me. Yes, I made mistakes. I should’ve not entertained people who just wanted to attack me ad hominem. I promise you, no more overreaction on my side. But I welcome anything constructive rather than pure nuisance. Great leaders will always deal with noises, be it external or internal. It is how they manage them that differs them from no-so-great leaders. I want to be one of the former.

Second, on the economy. We have recovered from crisis. We sure don’t want to fall into another one. Our fundamentals are good and reserves are sufficient. That is of course no reason to go imprudent. Meaning, we have to weight benefits and costs very carefully. We want lively real sector; but we don’t want too high an inflation. We want high growth; yet we don’t want poverty. We want clean environment; but we also want affordable energy. What I’m trying to say, my fellow countrymen, is that tradeoffs are everywhere. I want you all to understand this. That patience is a virtue. That short-run pain might be required for a long-run gain. That friction might occur while waiting for the next stable equilibrium. That inefficiency will subside, and efficiency will take over. And that you can’t have everything at the same time, pronto.

We are a key player in the world economy. While the Doha Development Agenda is in limbo, we believe that non-discriminatory principle is the best. So, we are still in support for the WTO and hope it will materialize someday not too far from now. We, together with countries we lead in G-33 will demand United States to stop fooling around with their agriculture. We will also continue our unilateral liberalization. Because waiting is losing. We talk with other countries but are careful with bilateral agreements. We don’t want too many FTAs as they will lead to great confusion, complexity, and conflict. And they distort our resources away from multilateral improvement.

Finally, social matters. We are both healthier and more educated now. However, modern life is followed by modern disease and epidemic. We should improve our education system as well as our health support system. We have to work hand-in-hand with other countries to combat HIV, avian flu, and God knows what comes next. Our school enrollment rates have never been better. But quantity means not much. We have to keep improving the quality of education. We will start by increasing the salary of teachers in primary and secondary schools -- and providing the education gratis. Where does the money come from, you ask me. From removing the subsidy enjoyed by universities. Basic education is public good. University education is not.

Now that I’m talking about subsidy, let me go on. We’ll cut completely the subsidy on fuel, kerosene, and gas. That way, alternative energy can become more competitive and the pressure to environment is reduced. (I can add employment issue here, but I’ll save that). Yes, there will be a short term dislocation. But we will dampen the impact by conditional cash transfer combined with cash-for-work programs. We only need to make sure that everyone understands that such programs are temporary. Once the coast is clear, everyone has to be on his own. We don’t want another time bomb.

That’s it, my fellow countrymen. Let’s get back to work.

Merdeka!

Virginity and the mayor

Apparently the mayor understood the power of reputation. So when his jurisdiction suffered from a stigma of free sex among school kids, he decided to take a drastic measure. Yes, test your virginity (disclaimer: the link goes to Poskota, a newspaper I hardly trust, but hey, this is funny). The news reported that the desperate mayor would run virginity test to 3,500 female students in Indramayu and report the result to their parents.

I wonder. Would he go check the dudes -- not just the gals? How? Would the test be so cool, it could also detect your past? 'Cause it would be interesting to know when was the first time the mayor 'got lucky', and with whom. By the way, did he consult with his kids? Just to make sure his lovely daughter, if any, would pass the test, maybe?

A loyal tourist, a new tourist and a refuser

Oh, he's here again. With the same tone -- no, not the economics one, but the other one. And, look, there is another Nobel laureate in town. Quite an accomplishment, I guess, for the country to be visited by two Nobelists? Honestly, I prefer Beyoncé.

Speaking of Nobel, Indonesian own awards were given out yesterday by Freedom Institute. One awardee, Franz Magnis-Suseno refused the award. Because Freedom Institute is related to Aburizal Bakrie who is related to Lapindo Brantas, the company blamed (by people, not so far by court) for mud flow disaster in Sidoarjo, East Java. Isn't this like refusing a Nobel because Alfred Nobel is related to dynamite? Interesting. Hm, maybe one should also condemn scholarship given by, say, Bill & Melinda Gates Foundation because it is related to Bill Gates who is related to Microsoft that is related to antitrust case?

I feel like I am watching sinetron Hidayah. Where bad people are too bad to be true and good people are too good to be true -- no one in between.

Din's flipflop continues

Hizbut Tahrir Indonesia wants a caliphate. Its members believe democracy is bad. Because "it brings you secularism, an arch enemy of Sharia".

Then enter Din Syamsuddin, the chairman of Muhammadiyah. He says caliphate system is good and "we shouldn't reject it". But he also says, "[Caliphate system] should not undermine the inclusivism and and pluralism of the nation" and it should conform with Pancasila.

We know Pancasila is almost identical with democracy. 'Inclusivism' and 'pluralism' are the children of democracy, or so we were taught in schools.

So, Din, apparently you have to choose one. You can't have 'em both, Mister. Trick or treat?

Teaching Intro in S1

The undergraduate faculty mail list is running a thread discussing about opening up new fields such as tourism economics, health economics, et cetera. I don't think it is a good idea. Even now they already have too many fields -- and again, it is undergraduate level! What I think is more important is to focus on the core principles of microeconomics and macroeconomics, while introducing math/stat and econometrics as the key tools of analysis and let the students apply them in their senior thesis on whatever topic they are interested in. To harness those interests, they can choose electives: environmental economics, monetary, trade, and so forth. Offering too many specializations in undergraduate econ program is an overkill.

Or worse yet, this is even more likely to happen. My co-author Laura Taylor has a very interesting paper about econ PhD students with weak foundation. I believe what you are taught in undergraduate affects that too (your understanding about economics, while being a PhD student). It is true that you don't have to have an econ undergraduate degree to become a good PhD economist, or economist. But that doesn't mean you can skip your extra homework to understand the basics. And while you're doing that, you might want to set aside many other stuff for a while. You can always get them back later.

CSR (2)

The populist bastion from Kompas is on fire again. Now on CSR. Its today’s Fokus focuses on the all-good-thing about CSR. They invited businessmen from corporations that had successfully implemented CSR. They did not even bother to ask those who had not. Of course they got positive responses only. This is what we call selectivity bias.

They run five or six articles praising CSR. And they all miss the point. What is being objected by business majority is the coercion, not the merit of CSR. Yes, CSR is good. Yes, it has positive correlation with profit – you don’t need a Porter to tell you this. You don’t even need Perkins gossip book to make your case. Every company who runs CSR -- in the absence of coercion from government ran it for profit consideration. So it should have positive correlation with profit. Otherwise, it would not have been done in the first place. Of course those companies will tell you they are doing it purely out of social motive. That is a lie. They are doing it to attract more customers or to avoid being attacked by community members or to hide something bad they have done, e.g. tax evasion.

Imagine you just invested big chunk of your money in some stocks. Then you read in the newspaper that the company will give out a large amount of money for CSR. If you really love CSR, you should be glad and even encourage that company to use all the dividends for that, should you not? You will praise the CEO, will you not? I guess, if you are just honest, the answer would be no and no. If you are both honest and smart, you will agree to allocate a little amount of profit for CSR – only to the level where it is sufficient to impress the public so as to turn them into your loyal customers. You don’t want a CEO who spends all your money just to build little bridges out there.

Again, CSR is good. So is drinking more water and less coffee. But as you do not want the government to put you in jail if you do not drink more water, you do not want the government to put you in jail if you do not do a CSR. After all, drinking too much water makes you puke.