Madman, economist and growth

"Anyone who believes exponential growth can go on forever on a finite planet is either a madman or an economist"

That is Ken Boulding, as quoted by Barro in his growth econ textbook.

Better than Pirates of Caribbean

First, they overtook Arab Saudi. Then they were beaten by India. The world is getting more and more interesting.

Which one, really?

Magawati Soekarnoputri, the ex president (who was a lame duck but never let go) is running again. Today she has an advertisement in Kompas. It says the Megawati's 100 day program should she be elected would be focusing on providing cheap basic staples. Then there is a note in the bottom of the ad defining what it means by "cheap", namely: any increase in the staple food prices should not exceed the increase of people's income. That's easy: open up import. But then the ad also says: to control the prices so as not to burden farmers and fishermen.

Rotten tomato is not a fresh tomato

You wanted to get rid of your tomato. In fact you had to, given you were short of money. You met with a potential buyer. He agreed that he would buy your tomato. Then today you find out your tomato is rotten. You are now busy seeking help to make your tomato look fresh. So that the potential buyer would not back off.

That's what comes to my mind when I read this whole Bumi debacle.

Ideas and Warnings for G20 Leaders

I have read the VoxEU.org book for G20 leaders. It has important ideas as well as warnings for the upcoming meeting.

Many authors agree that the IMF should be reformed and its lending capacity should be boosted (Rodrik, Buiter, Rajan, Eichengreen, Ito, Dobson, Berglöf & Zettelmeyer). Some propose new global institutions like World Financial Organization in the image of WTO (Eichengreen; note: this is, however, is not a substitute for IMF), or International Bank Charter for the world's largest banks (Claessens). Park suggests to apply the East Asia's model of reserve pooling (SRPA, self-managed reserve pooling arrangement) to broader areas.

While coordination across countries is important, some authors warn against wasting time on trying to establish a grandiose global super-regulator (most notably Dobson and Gürkaynak, but also Buiter). But Buiter proposes a uniform global regulatory framework for rating agencies. Many of them are also worried about the rising protectionism (Rodrik, Zedillo -- the latter uses the opportunity to remind the importance of Doha). However, Calvo thinks capital control might be allowed, at least as the second best proposition (Rodrik is surprised).

They seem to agree with the need for well-targeted fiscal expansion (most notably Alesina & Tabellini, Spence, Buiter, Rodrik), but do not approve too much government intervention (most notably Dobson). Explicitly, Alesina & Tabellini do not want bailout for unproductive industries like autoindustry (i.e. GM in USA) or failing airlines in Italy.

Other proposals that directly reflect on the current financial meltdown include cutting interest rates (Alesina & Tabellini)*, removing mortgages from damaged balance sheets, resetting terms, limiting foreclosures, and evaluating collateralized and structured assets (Spence, to some extent Buiter), returning to narrow banking, i.e. choosing between commercial banking or investment banking (De Grauwe), improving surveillance mechanism and reinforcing liquidity support to small nations (Ito).

*) It is worth considering also that economists who are not in the book like Jim Hamilton and Krugman are skeptical about lowering interest rates.

So long, Glenn

Glenn was an ordinary, 40-something man. What made him special was his strong determination to study. About 3 years ago I interviewed him to become a student in our econ postgraduate program. I was very impressed by his eagerness to continue formal study, despite his age. Eventually the other two interviewers also liked him. He was admitted.

Since then he had taken some of my courses. He flunked some, but quickly enrolled again. He missed some classes but when he came he was always quiet and serious. He took notes diligently. I knew later that he had to miss those some classes because he was sick.

And yesterday I was shocked. Glenn Rasad, the student, passed away the night before. According to his fellow students, he had a heart attack. The class was mourning. We were all sad. Then a student showed me one of Glenn's text messages before he died:

"Walaupun nilai gua nggak bagus-bagus amat. Apa kata Tuhan dech. Gua tetap belajar sampai Dia nggak menghendaki lagi"

Let me translate:

"Even though my grades are not that great, I don't care. I'd leave them to God. What I want is to keep studying until He wants me to stop"

Glenn, I'm sure God decided to take you back so you could study more peacefully up there.

So long my friend.

Addendum: Mirna from the program updated me. Glenn Rasad was born  June 16, 1963 (so he was 45 when he died). Glenn went to Universitas Indonesia and got an undergraduate degree in electro-engineering in 1989, got an MBA from the same university in 2003, and until the day he died he was still registered as an active student in economic doctorate program (since 2004). This semester he was taking my advanced microeconomics course.

Book for the G20

VoxEU.org has just published an e-book containing essays from world leading economists as a food for thought for G20 leaders in their upcoming summit. The introduction by editors Barry Eichengreen and Richard Baldwin is here. This is the book.

HT: Hadi Soesatro.

Global currency? I don't think so

Berly Martawardaya offers a solution to the global economic crisis: global currency (The Jakarta Post, 11/11/2008). He calls it radical. I don't think it's radical; it's impossible, at least in our lifetime. He rightly says the road to get there is "long and arduous" but he goes on to argue that "the benefit is too great to ignore". I don't think so. If the benefit is great and exceeds its cost, we should have been there already. Now, even the most established currency union like that of euro has coordination problems. Every year since World War II one economy on average exits currency union (Rose, 2007). Most importantly, if you want a global currency, you need a global central bank. And that to be effective, you would need a global government (Rogoff, 2001). Which is silly. I think Berly knows this. He says "an intermediate step of regional currencies would be a wise path to take". But even that, I have big doubt. Friends at campus may have known by now that I'm always skeptical with the idea of Asian single currency. Not because it is a bad idea, but I don't think it would work. Wait, I think it's a bad idea, too.

On the 2 billion blanket guarantee

Initially I was skeptical with the government's increasing its blanket guarantee from Rp 100 million to just Rp 2 billion (instead of full guarantee). The reason is, the neighboring countries like Malaysia and Singapore do not impose a cap on their guarantee. So it is very likely that big businesses from Indonesia will fly their capital to Malaysia and Singapore. It is true that the government will not be able to bail out all banks once they go bankrupt (which means the government will have to return all money to each deposits). So a cap is justified. But then, it seems increasingly unlikely that people would rush banks at the same time. Similarly, I don't think banks will go bankrupt at the same time. So, even if the government removes the cap and hence provides 100% guarantee, they will not be drained out instantly.

But I'm changing my mind.

Reading the interviews of Kadin chief, MS Hidayat by The Jakarta Post today (10/11/2008) made me very uncomfortable. The business chamber is urging the government to give full guarantee, among other requests. And it sounds like a threat: that they will move their money away from the country if the government doesn't grant their wishes. Now, come to think of it, it has been awhile that Malaysian and Singapore announced their full guarantee while Indonesia keeps its Rp 2 billion cap. Yes, there maybe some capital flight already. But if Kadin's threat is all credible, they -- the businesses or depositors with money more than Rp 2 billion in banks, have surely all gone. Why haven't they?

The tone given in the interview is very familiar. This is what I'm afraid about the current financial fiasco: the rise of protectionism. Remember, Pak Hidayat is not just talking about blanket guarantee. The interview reveals all the usual suspects: import restriction, etc. And with threats. It is one thing to quietly respond to incentives. Threatening is quite another thing, especially when it is not credible.

I think the government should not listen to those threats. If big money is to fly away, so be it.

Addendum: The Jakarta Post's editorial today (11/11/2008) comes with the same tone, albeit more politely: "If, with all these safeguards [vigorous enforcement of good governance practices for banks, etc], the big depositors, estimated to be about 60,000, still intend to withdraw and invest their money overseas with much smaller returns -- only because of the absence of a blanket deposit scheme -- let them go".

Addendum 2: In the same issue of The Jakarta Post (11/11/2--8), Hartadi Sarwono, Bank Indonesia's deputy governor says that the full guarantee is not a bad idea. He says "A full guarantee does not mean that the guarantee will be executed..." Yes we know that, as I said above. But it strikes me that this statement comes from a ... top BI official! I wish they didn't give too many statements, especially if they are the ones who are supposed to be quiet.

So why the 10% threshold

It might or might not be true that there is no friction in the Cabinet, although it's hard to believe that a sane Minister of Finance bows down to a business interest of another minister. It might or might not be true that the suspension of the trading of particular stock is a common practice. But Vice President Kalla's arguments just don't add up. The 10% threshold for automatic suspension has already been installed. Any stock traded on the floor should be subject to it, without exception. So why do you still apply discretion on top of it? What is then the use of the 10% threshold?

Let's just hope things don't get uglier as Sri Mulyani is leaving for the G-20 meeting and Sofyan Djalil is taking over her position, ad interim.

Equality? What equality?

Kompas editorial today admits that the price of subsidized fuel is still below its economic price. But it quickly says that the pricing of domestic fuel should consider "fairness, equality, and responsibilty". Well that is exactly what you can achieve when the price is at its 'economic level'. The editorial accuses the government as being ambiguous. The same impression is exactly found in the editorial's tone.

As for the headline, Kompas reports that the government will also cut the price of subsidized diesel oil. It makes it even more obvious that the current administration is desperately seeking for popular votes using the oil politics.

A more rational way, albeit unpopular would be to announce that the government will let the domestic price follow the world market price. In fact this time is very apt to do it, as the price trend is on the decreasing path. However the public should be made fully aware that when the price increases, the domestic price will follow suit. In other words, no more subsidy. And headache.

Lower fuel price?

According to the news, the government will cut the price of subsidized fuel in response to the lower world oil price, effective December. As I wrote before, there is no economic justification to this populist policy since even with the current world price the subsidized fuel is still cheaper. The main objective of cutting the subsidy was to move domestic price closer to the international price so as to discourage smuggling and illegal mixing of gasoline and kerosene. So lower world price is good when you can't increase the domestic price. In addition, the subsidy thus far has been benefitting the wrong target, i.e the richer. So again, the rationale of the policy to reduce the price seems to lie completely on politcs. The election is coming, that is.

Random Crosschecking: Obama to Indonesia

In Kompas today.

Aviliani says if Obama cuts on military agression, the US budget deficit will improve. That in turns might reduce its import on oil and therefore oil price will be more stable. I think the opposite. If Obama withdraws his soldiers, yes budget improves. But it will not reduce the US demand for imported oil. It might even increase it.

A. Tony Prasetiantono says Indonesia might benefit from Obama being the US President if the US treats us like what they did to Mexico to help the latter cope up with the 1994-95 crisis. Somebody needs to tell Tony the real meaning of incentives. And yes he should read that Rubin book about what really happened in the White House at that time. The administration would not have helped Mexico if the US stake there were not that high.

Finally, A. Prasetyantoko thinks the economists who formulated Obama's econ plan are Volcker, Summers, and Rubin. I don't know if Pras confuses Clinton and Obama. But Obama's economists are Austan Goolsbee and Jason Furman.

UMKM Info

New definitons according to the Law 20/2008 on Micro, Small, and Medium Enterprises (UMKM). "Micro": non-land assets up to Rp 50 million and sales up to Rp 300 million per year. "Small": assets from Rp 50-500 million and sales Rp 300-2,500 million. "Medium": assets Rp 500-10,000 million and sales Rp 2,500-50,000 million

TKI/TKW Facts

Total remittance from Indonesian migrant workers now reaches Rp 60 trillions (USD 6 billion) per year. Everyday 2,000 workers leave Indonesia for work abroad. Average salary of Indonesian helpers in Hongkong is Rp 10 million per month with insurance up to Rp 135 million.