The Politics of Soybean (7)

Ap's note in Cafe Salemba. Agreed.

Jane's new movie

Jane Lawalata was my high school friend. Knowing her, I'm not surprised she's now in movie business. Congratz, Jane!

Argumentum ad misericordiam

Have you noticed the media's fad lately? In the wake of increasing commodity prices they have been running anecdotal stories about individuals or households who, according to them, have been made miserable by the surging prices of commodities. Professional writers, commentators, and even academics follow suit. They don't even bother to check if the causality they like to believe holds true. Particular story like someone who committed suicide brings a lot of attention and sympathy. No less than a prolific writer paints the story on a canvass of misery. And people are touched. Then easily blame it on inflation.

So much for logic: this is what we call argumentum ad misericordiam.

As for me, I try not to be trapped in this kind of fallacy. As much as I sympathize with those who suffer from price dynamics, I keep asking myself: Was it really the price increase that caused the death? Was it not some other things, say, irrational spending behavior? How did we conclude that he killed himself because he could not afford some prices, a story we believed in? Can we trust those who claimed to be told firsthand by the victim before the suicide? If, all this were true, then why do some still survive? Why not many suicide cases? There were times when inflation was far more hurting, here and elsewhere in the world. Were they followed by higher number of suicide cases? If so, were they causally related? If poverty was the cause of suicides, why then richer Japanese kill themselves?

Oftentimes, people buy what they hear just because the story is about misery. And some other people really use it to get the others. To get them agree with what they are going to say next.

The Politics of Soybean (6)

Thanks to Ari Perdana and Arya Gaduh, we noted that the share of soybean in household consumption is less than 2 percent. It's true that soybean has strong links to other commodities. But this fact (the 2 percent role) should be taken as an indicator for not to exaggerate the problem (I too might have sounded otherwise). Arya Gaduh and Dede Basri are right, subsidy, if given, should be addressed in the form of food subsidy, not particular commodity (e.g. soybean commodity -- see my discussion with Arya, and also Dede's in Diskusi Ekonomi).

The Politics of Soybean (5)

This is ridiculous.

Bulog asks for a permanent role in soybean import. That would mean they want a monopoly just like in the case of rice. If that is granted, it would be a setback. Currently soybean importation is open to general importers (IU). The fact that only four dominate the import reflects reluctance in the part of smaller importers who could not operate in the scale economies. The domestic shortage has resulted in sky rocket price. If the government wants to curb it, it could ask Bulog to import. Let's not forget, Bulog belongs to the government. Such import might not be the best option for a private company given the current situation, but again, let's not forget, Bulog belongs to the government: it's their job to take that risk. Not to use the situation to ask for monopoly.

The Politics of Soybean (4)

I just had discussion with Dede Basri. I was informed that the big four dominance in the soybean import might be a reflection of natural monopoly (or natural oligopoly, if they do not collude in any form). The reason is because the soybean importation is open to general importer ("importir umum"/IU). That means, soybean import is not subject to quantity restriction. So if the big four enjoys a "privilege", it's very likely to be natural. That is, they are the only importers who can reduce costs so as to still reap the benefits of scale economies -- in the midst of increasing world prices. They should not be punished for that.

Having said that, I still think that more domestic quantity is needed to suppress the price. Dede agreed and we both believed that one way to do that is for the government to ask Bulog to do the additional importation then proceed with some sort of "raskin"-type of subsidy. Another way is to directly subsidize the staple food. The money can come from that allocated to subsidize fuel. This is necessary because the budget is constrained. The government (i.e . the President himself) needs to be very decisive in this case: switching from subsidizing fuel to subsidizing food (do not forget that we have another big problem with oil price increase). It should not be very hard. After all people eat food, not fuel (forgive my sarcasm -- but you get the idea). In addition, spending 200 trillion rupiahs for subsidizing food (or better yet importation via Bulog) is way more sensible than spending it for fuel and electricity (most of which goes to the richer anyway).

Of course, this is for temporary use only. Any kind of subsidy is.

Update: Dede enjoins from Diskusi Ekonomi (with contributing comments from Arya Gaduh, Sonny Mumbunan, and others).

The Politics of Soybean (3)

Bustanul Arifin offers his solution. For long run, do something on infrastructure, irrigation system (I agree) and "incentive system with macroeconomic support" (he's not clear on this, though). For short run, he mentions the availability of factors of production: fertilizers, pesticides, etc. I think all that is not a short run solution. Production is long run or at least medium term perspective, given the current situation. Based on my limited readings (here and also in a book "Ekonomi Kedelai di Indonesia" edited by Amang, Sawit, and Rachman 1996 and published by IPB Press), the cycle for soybean ranges from 3 to 5 months for maturity (assuming a stable warm weather). I stick with my suggestion: allow for more parties to do import, rather than just the privileged four. The removal of the 10 percent import duty was justified as a means to "tease" the comfort zone enjoyed by the big four (Cargill, Gunung Sewu, Teluk Intan, and Liong Seng). Next, expose them to more competition.

On economic freedom, competition and the role of government

Note: I'm cleaning up the files in my laptop. Found some old articles I wrote. I'll put some in this blog, whenever I have the time. The one below was written for a discussion on economic freedom in an event in Bangkok last year. A related, longer version was included in a volume published by Economic Freedom Network Asia.

On Economic Freedom
Arianto A. Patunru

On the first day of 2007, local newspapers in Indonesia brought a bad news, breaking the Happy New Year celebrations across the country. They ran a headline about a Boeing 737 jetliner that never reached its destination. With it, one hundred people were missing. After two weeks of searching with no avail, families started to loose hope. What they were left with was prayer, to at least see the bodies of their loved ones. Especially when later one fisherman found part of the plane’s tail floating in the Makassar Strait close to the western coast of Sulawesi island.

Winds and storms aside, many people started to blame the accident on competition. Some fifteen years ago Indonesia’s domestic flights meant expensive tickets. Most people traveling across islands in the archipelago opted for sea transportation as they could not afford flying with air planes. Today, nearly everybody can get cheap air ticket. It is so cheap, sea vessels’ customers are shifting from people to big-size containers. Even long distance in-land buses are competing with airlines.

In the wake of the missing air plane, grieves led many to reflect, albeit with misunderstanding, on how they had been enjoying cheap tickets. Thanks to liberalization in the Indonesian airline industry, private airlines started to mushroom. Next was a race to providing the least expensive tickets to win a sizable market share. The carriers, they cut on meals, they printed tickets online, and so forth. But apparently some went even further. Realizing the fact that the safety standards enforcement was rather lame, they started to get loose on safety. Why not use old fleets? Why bother with regular maintenance? Why hire the most qualified pilots? In short, cheap air tickets were made possible not only by some cut on decent meals or some boost in fly frequency, but also by less safety. Enter the premature accusation: competition has caused this entire race to the cheapest tickets. With that, safety is sacrificed. And all they get is accident. (They do not even bother to look at the ratio of accidents over the fly frequency. It is likely that the ratio gets smaller, given the far busiest air traffic today then ten years ago). In conclusion, competition is evil. Better get the government to fly us, because private simply can not do.

Accidents are saddening. But so is the misunderstanding. It mixes up competition issue and the issue of law enforcement. In the story above, it puts blame on the liberalization of airline industry instead of on the government alleged failure to enforce safety standards regulation. While the two are closely related, they lead to very different policy implications. Solving the competition issue might lead to giving airline business back to the government. Tackling the law enforcement issue will lead to stricter monitoring of how the business is run. True, if effective, both will possibly result in more expensive air ticket, but the causes are different: in the first case it is because the private airlines are no longer able to cut the costs by risking on safety; while in the second case it is due to the monopoly power of the government. History has taught us, the latter case might increase the price higher than the former. Nonetheless the second case is more attractive. Who denies that curbing competition is easier than monitoring it?

Maximizing profits is a form of economic freedom. Given opportunities to raise revenues or to cut costs (or both), a firm would be stupid not to use them. Ethics aside, this includes an opportunity to play around rules, should there be a room. In the absence of competition, the incentive to find all opportunities to maximize profits is rare. Rather, it is the monopolistic power that is used to do the task. But (non-natural) monopoly denies the freedom of others to engage in business. Worse yet, it denies the freedom of consumers to access more choices and lower prices. Competition therefore has a lot to do with freedom.

However, freedom does not mean anarchy. They are starkly different. The former requires rules of the game, the latter not. This is where people tend to mix things up, as illustrated above. When problem arises, is it a problem of competition i.e. freedom or is it a problem of law enforcement? You can not really put and enforce standards on ethics, but you can put and enforce standards on safety. This is why and where we need the government. That is, to make sure that rules are in order. Alas, many times inability to enforce rules leads the government to do other things, including running the business itself and/or curbing competition. Authority to guard rules also brings another problem: the incentive to over-regulate. Sometime governments establish rules only as a vehicle to abuse their power. Another time, they simply put (good) rules in a wrong place. Requiring seat belt in cars and setting age standard for air carriers might sound similar as far as policy objectives are considered. But they are different: you can see if the car you are about to get in has a seat belt attached or not. But you can not know the condition of the air plane you are about to board in. In the former case, there is no need for the government to step in, but in the second case, there is: to make sure that the plane is safe for you and other passengers. In the first case both you and the car owner/seller know that the car is seat-belt-less. Here the market can work well, as indicated by the resulting price. In the second case, the information is asymmetric. The airline knows exactly how old its plane is; you, most likely, do not. The government helps to ensure that the information reaches you, so the market can work as properly.

The Politics of Soybean (2)

This is a text message I sent to a friend in Kompas. "You guys are hilarious. When rice price increases you say it's good for farmers. But when the price of soybean increases, you say it's bad." I should have added, "... And equally amazing, in both cases you call for banning imports". This should also be addressed to observers and commentators who fill the media with their misleading fallacies.

Read Kompas' Fokus today (19/1). You know what and whom I mean.

The Politics of Soybean (1)

I'm no expert in soybean economics. I follow rice dynamics more diligently than that of soybean. The only research I have done regarding soybean is one in which we (Patunru, Trialdi and Havidz, 2005) looked closely into its price transmission across production and consumption centers (provincial levels with East Java being the reference market). The study found that prices across main provinces were in general weakly integrated, and some were not integrated at all in the long run. The study concluded that soybean price transmission (at least in 1993 to 2003) was constrained. In other words, the market was less than efficient.The possible causes of this were 1) weak marketing institutions, 2) poor infrastructure (esp. that to support distribution), and 3) inability of local farmers to match the international price. The latter came with qualification as the transmission from international to domestic price was also far from perfect.

Recently, there has been a big fuss over the increase of soybean price.

Kompas ran a couple of articles and op-eds. The tone, as you would have predicted, was of course to blame it on the government and liberalization. The observers cited there were both confused and confusing. Take this article for example. A parliamentarian reportedly said that the removal of import duty was absurd, because it "would not have any effect on price and the current shortage of soybean". He called it an "empty policy". But later in the article he was quoted as suggesting that the government should create incentive in the form of "high tariff when price is low and low or no tariff when price is high". That is exactly what the government just did (assuming of course that the "tariff" and "price" written by Kompas journalist mean import duty and world price, respectively).

The President, on the other hand, said that tempeh and tofu (both use soybeans as key ingredient) makers needed to adapt to the increased price. Sure. But then he went on with "the government will look for cheaper imports". His work would be much easier if he let the private sectors do the job. In fact, importation has been exclusive for only four big companies. Removing import duty might not be very efficient if the limited number of importers could collude to fix the price. The notion as said by one source that the "price crisis" is a result of "too much import" is foolish. The more you import the larger the quantity in the domestic market and the pressure to price is to take it down -- the magnitude of which depends on other things, e.g. distribution. The study on price transmission suggested that distribution is problematic, too.

So what's to do? In the short run, more, not less, import should be allowed. In the longer run, distribution and production problems are to be tackled. That includes improvement of road infrastructure and irrigation, as well as technology that leads to better varieties and farm management.

RIP: Pak Sadli

One of Indonesian most important economists passed away last night (Jan 8, 2008; 23:15). Good bye, Pak Sadli. Thank you for your great contribution.

The Politics of Rice 27

Read Kompas today. The headline of business and finance section reads "Beware of 2008 Rice Production". It reports about more than 50 thousands hectares rice plantation damaged by flood during October-December 2007 alone. That is indeed worrying. Oddly enough, Kompas does not mention at all about import. Instead it cites a statement from a farmers' association head who calls for government clear take both for short- and long term policies. However, the article (and the association's statement) is all about longer term policy, i.e. increase in the level of productivity. They shy away from admitting that importing rice would be the only feasible short term solution. (Another thing is again Kompas laziness to cross check their information with facts. The reporter mixes up the potential of dry and wet periods in 2008. He then carelessly attributes dry period to La Niña, not El Niño).