Pertamina as an oligopoly leader?

Minister of Energy and Mineral Resources Purnomo Yusgiantoro said that starting 2010 an oligopoly for distribution of subsidized fuel will be implemented (Kompas, 26/12/2008). For that, he went on, Pertamina will still be the "market-setter", because the government does not want a market that is "too competitive". Oh crap. What about the policy lowering the price to "follow the market"? Want to create now a mini OPEC in the country?

In the meantime, Pertamina, tapping the opportunity, is asking an adjustment for its "magic alpha", from 9 percent now to 12.5 percent on the assumptions of 50 dollar per barrel oil price and Rp 11,000 per dollar exchange rate. That would translate to an accounting price (or here falsely named "harga keekonomian") of Rp 5,400; if we keep the 10 percent value added tax and 5 percent vehicle fuel tax.

BHP

People have been protesting about the new education bill, UU Badan Hukum Pendidikan (BHP Law). They argue that the Law is a form of liberalization of education. As effects, tuition pay will increase and foreign investment will pour into Indonesian schools.

I agree with the BHP. I think universities should not be subsidized. The money could be used to fully subsidize basic education, instead. As for competition issue, I think it's time to have freer exhanges of educators and professors as well as foreign-affiliated schools and universities. That would force a good competition to the locals. And/so in the longer run, university tuition will not rise (at least not significantly).

Fadjroel's argumentum ad nauseatum

An op-ed by Fadjroel Rachman ("Merayakan Capres Independen", Kompas, 26/12/2008) really gives me nausea. He keeps saying his words on behalf of "171 voters". As if all the 171 voters care about the election, be it for party candidates or independent candidates like Fadjroel.

So long, exit tax

Another smart policy from MOF. Beginning next year, registered taxpayers can go abroad without having to pay an exit tax ("fiskal"). But those without NPWP (tax number) will have to pay Rp 2.5 million if go by air or Rp 1 million by sea. Until Dec 31 the amounts are Rp 1 mllion and Rp 0.5 million, respectively.

I've had my NPWP since 2004. Those who don't have one now have a good incentive to register.

NSW Phase 3 implemeted

Kudos for the government for the implementation of the third phase of National Single Window (The Jakarta Post, 24/12/2008). This covers Surabaya's Tanjung Perak Port, Medan's Belawan Port, and Tangerang's Soekarno-Hatta International Airport. The first phase in Dec 2007 was for Jakarta's Tanjung Priok Port and the second in mid 2008 for Semarang's Tanjung Emas.

Hopefully these NSW programs can help facilitate trade more efficiently. Indonesia has been notorious in its import and export procedure complexity. It has been estimated that there are 36 different government agencies involved in such procedure, with 48 different export documents, 106 different import documents, and 23 supporting documents (Frontier, Dec 2008).

Horray, we're exporting. Hopefully someone out there is generous enough to import from us

That's now the tone of rice business ("Ekspor Beras Mulai Juli 2009", Kompas, 24/12/2008). As reported, the country would export rice by July 2009. Rice import has been a sin in Indonesia (albeit 100 years of doing it). But now the country is hoping that other countries commit that very sin, ie importing from us.

And not only that, the farmers association HKTI also wants the importing countries to be stupid: Siswono Yudohusodo said exported rice should be of the lower quality, or the leftover stock from the previous years, as the "newly harvested, good quality" ones are for domestic consumption. Good luck with that.

Depression economics vs non-depression economics

Fine economists have been discussing depression economics at the TPMCafe. Brad DeLong defines "non-depression economics" as that following these rules:

• Short-run economic policy should be left to the central bank--the legislature and the executive should focus on the long run and keep their noses out of year-to-year fluctuations in employment and prices.
• The highest priority for central banks should be to maintain their credibility as guardians of price stability.
• Once that highest goal has been achieved, central banks can turn their attention to trying to keep the economy near full employment.
• They should try to keep the economy near full employment by influencing asset prices--pushing asset prices up when unemployment threatens to rise, and pushing them down when an inflationary spiral appears on the horizon.
• Central banks should influence asset prices through normal open-market operations--by buying and selling short-term government securities for cash, thus changing the safe interest rate and the price of longer-duration assets.
• Central banks should stand ready to intervene to prevent bank runs. Otherwise, central banks should let the financial sector run itself with a light regulatory hand--financiers can take care of themselves, and the central bank should view itself not as chaperone or duenna but rather as the designated driver in the case of financial speculative excess.

Depression economics is therefore the negation of all above. In situation of crisis like this, it is the latter that applies, not the normal rules.

Tourism crisis-proof? Oh, wake up

A director general at the Culture and Touris Ministry said that our tourism is a crisis-proof industry (The Jakarta Post, 19/12/2008).

He is in denial. Tourism is just like other export commodities: it is a function of exchange rates and foreign income. The situation now is that the positive effect from Rp depreciation is smaller than the negative effect from falling income of our trading partners.

In addition, in the case of tourism, the other key determinant is of course the attractiveness of the destination place itself. And we've been very lousy in this.

Again, DPR has no sense of crisis

So the financial system safety net bill was turned down by the DPR. Among those said to be of concerns are immunity for BI and the government, power overconcentration, central bank independence undermining, and shrinking role for the DPR members (The Jakarta Post, 19/12/2008).

I would think their main concern is actually on the shrinking role. But can you imagine if for every decision in this financial fiasco the government should consult first with the DPR? Bank rush is faster than those guys in Senayan to reach an agreement!

Revise the labor code!

Chris Manning and Sudarno Sumarto say it clearly and rightly ("Monetary crises, jobs and poverty in 1998 and 2008", The Jakarta Post, 18/12/2008).

"From the point of view of saving jobs, one alternative is to revise the labor code, in the direction of encouraging greater collective bargaining of wages and working conditions. Unfortunately, any move in that direction is off the political agenda until at least after the 2009 elections".

I don't see any better alternative.

No money left on the street

I recall I also rant much about smuggling in this blog. Why do people smuggle? Because they can. Or more precisely, because they would be a fool not to grab the opportunity in front of their nose. Let's continue our story. (I'm not gonna talk directly about smuggling, but hopefully you get the idea -- and yes, I'm going to greatly simplify again).

Suppose that there are many Yous and Brothers. What would happen? The Brothers would learn that they can be better off if they switch from selling newspapers to selling oranges. Say a fraction of this group migrate to the orange market. What would happen to the retail price of an orange? Very likely, it will decrease due to increasing number . As a consequence, the (accounting) profit also goes down. What would it be in the newspaper market? It is the opposite: as people leave the business, the remaining incumbents will be able to increase the retail price of the newspaper; and hence bigger accounting profits.

It is easy to imagine that the "migration" will stop when the profits in the two different places converge. Let's say, this happens when the "accounting profit" in the orange market and in the newspaper market is Rp 50,000. Don't forget, that is accounting profit. What is the economic profit? Right, it's zero! In the equilibrium, when the market is not distorted, the economic profit is zero everywhere. In other words, every potentials have been exploited (and that equilibrium is called optimum). Or, put it differently, no money left on the street.

Accounting vs Economic Profit

I've been ranting about people confusing accounting and economic concept. The following is my attempt to make it clear. (Beware of the crude simplification; but the idea remains).

You have an identical twin -- call him Brother. Both of you have the same skill, education level, and other qualifications. But your jobs are different. You work as an orange seller, while Brother is a newspaper seller. Every morning you go to marketplace, buy 100 oranges at the price of Rp 750 each and sell them for Rp 1,000 an orange. On the other hand, Brother goes to newspaper agent, buys 100 pieces of newspapers at Rp 500 a piece and sell them for Rp 625 each. Assuming you both sell everything, what is your profit? What's Brother's profit?

An accountant will tell you that your profit is (1,000 - 750) x 100 = Rp 25,000 per day. Likewise, Brother profits (625 - 500) x 100 = Rp 12,500 per day.

But the economist will see this a bit differently. He will tell you that Bother is actually losing. Why? Because, given the same potential, he could as well be selling oranges, instead of newspaper. That is, by making the (accounting) profit of Rp 12,500 in newspaper business, he sacrifices getting Rp 25,000 like you in orange business. In net, he makes an economic loss of 12,500 - 25,000 = Rp 12,500 (or in different words: he makes an economic profit of minus Rp 12,500). Using the same logic, you can say that you make an economic profit of Rp 12,500; since by profiting Rp 25,000 in orange business, you (rightly) sacrifice your chance to get Rp 12,500 in newspaper.

Race to the bottom, for the sake of votes

Who benefits from the gasoline price cut? The incumbent politicians. SBY and JK, that is; because their popularity improves, a necessity for the election. What would be the logical reaction from their competitors? Denounce the incumbent's "achievement" and beat it down. So the headline of Kompas today (16/12/2008) is no surprise.

Partai Amanat Nasional (PAN) says the price should be Rp 4,675 per liter. Partai Demokrasi Indonesia Perjuangan (PDIP) believes it should be Rp 4,800. Another guy at DPR says Rp 4,500. Don't be surprised if someone else will come up with even more bombastic numbers. It's all political motives: election is around the corner and many people are willing to be fooled.

And don't we forget. They all talk about accounting costs, while calling them "economic price"!

Import restriction postponement unpostponed

Trade Minister Pangestu finally cracked under protectinists' pressure. She changed the schedule from Feb 15 to Jan 1 (The Jakarta Post, 16/12/2008). (Guess what? No one says she is being inconsistent now. Businessmen, I thought you hated change of schedules? What say you now?).

And Industry Minister Idris was quick to seize the moment. He wanted extension to more commodities: cosmetics, ceramics, steel, energy-saving lamps, cell phones, auto parks (spark plugs and filters) and bicycles.

Why not protecting everything then? For that matter, why not a complete isolation?

And the time bomb has been activated

Rather than telling the people that we would let the fuel price follow the world crude price, down or up, the government made a terrible mistake: capping the prices.

President SBY and Minister Mulyani just announced that the price of premium gasoline got a further cut to Rp 5,000 and diesel oil to Rp 4,800. As if that's not enough, they also put caps on the two fuels, i.e. Rp 6,000 and Rp 5,500. That is a guarantee that whatever happens next year, the prices can not exceed the set caps. Who says this is inline with market dynamics?

Studies in time series econometrics (e.g those by prominent econometrician Jim Hamilton) have found that the world crude price behave as a random walk. The standard deviations are extremely high you can only say that the price in two years from now can go down to $30/barrel OR up to $300/barrel! See the risk there? Clearly the government does not.

The capping is really, really bad. This is why I hate election time. All the bad economics are showing.

Two new papers published

We have our papers just published as a twin articles in the Journal of Great Lakes Research 34(4), December 2008. The authors are John B. Braden, Laura O. Taylor, DooHwan Won, Nicole Mays, Allegra Cangelosi, and Arianto A. Patunru.

This first paper (p. 631-48) measures the economic benefits of remediating the Buffalo River, New York. It finds values equivalent to between 6-14 percent of property values, depending on the methods and areas. In other words, the pollution in Buffalo River has reduced the value of houses in the surrounding area up to 14 percent their values without pollution. (As a note, the idea of hedonics approach is to measure the value of a non-market good using a market good -- house or property in this case-- as a surrogate price revealer). Full remediation will potentially increase the value of the area as high as 14 percent of the current level. Finally you can read this as saying that the community members' willingness to pay for cleaner river there is as high as 14 percent of what they pay for their houses.

The second paper (p. 649-60) applies similar techniques to the Sheboygan River in Wisconsin. The numbers found are equivalent to 8-10 percent of property values.

Note: JGLR is a cross-disciplinary journal devoted to researches related to issues and problems of the Great Lakes (lakes spanned across Canada and America). Other papers talk about things like epidemiological aspects, engineering, etc.

Import restriction postponed

Kompas today (13/12/2008) reports that the government has decided to postpone import restrictions on garment, footwear, electronics, toys, food and beverages. Kudos to government. The same newspaper has information on the shrinking capacity in those sectors. What is not written is that means the ability of domestic industries to supply such commodities has decreased quite significantly. As the supply can not match the demand (again, the commodities are basic), the prices will shoot up. Unless you allow for importation. (In fact even if you do not allow it, they will come illegally. So why not just let them in and get some reasonable duties?) What the government does is commendable.

Of course local businesses condemn it. They say the government is inconsistent, as the regulation for import restriction was issued October 31 and to be effective Dec 15. But they postpone it. I can easily imagine that their complaint would be totally different had the government never issued such restriction. After all, what they want is protection from competition.

Layoff, expectation, and wages

One article in this month's Esquire takes the plummetting immigration to US as a real indicator of how bad the current (and arguably the foreseeable future) is. The logic is clear. Low wage workers come to US with great expectation. As the economy shrinks, that expectation falls.

Two days ago I chatted with an official from Blitar local government. That is a district in East Java. He told me that they were so worried with the massive homecoming of Blitar people who otherwise work in Surabaya and other business centers in East Java. The number keeps increasing from day to day. Thus far in East Java about 10,000 workers have been laid off. Almost 15 percent of it come from Blitar. And now they have no choice but to come home. Majority of them become dependents of their families who used to be the beneficiaries of their remittances.

I was thinking about the minimum wage regulation. Of course we can't blame all this on it. But inability to cut wages surely affect employers' decision to fire workers.

Expect more layoffs. But that might slow a bit if wages and compensation are made more flexible.

Here's my money, please save it for me

I overheard this talk between two government officials as we were headed together to the airport.

Both officials were complaining about the small salary and compensation they received each month. Official One thought they should get a raise of 50 percent at least. Official Two said he would be fine with 25 percent raise as long as the government withheld another 25 percent for his pension.

If you were to choose, which one would you pick? I would go with Official One. I want all my money and let me decide whether I would save and how much. Official Two is the type of person who thinks government would take care of him forever.

Econ101: Green Jobs

Worth reading, from Env-Econ blog.

De-blaming it on deregulation

Ever heard the tragedy of the commons, regulation edition? Here's one.

"We're so, so, so not deregulated. The institutions that are falling are some of the most heavily regulated in the world. Investment banks are regulated by the SEC, the Federal Trade Commission, state attorney generals, and state banking commissions. But too many regulators are as bad as no regulators -- none of them feels responsible since a failure can be blamed on all the others..."

That's Ken Kurson, writing in Esquire, this month issue.

Fuel subsidy and the fallacy of "harga keekonomian"

The government finally says that the current (subsidized) gasoline ("premium") price is at its "harga keekonomian". This term supposedly means economic price, though they might be thinking of economic cost. And in other occasions it is made parallel to market price. All associations are false, for reasons below. The government also says that as the consequence, it is time now to scrap the fuel from the subsidy list.

Let's start with the second one, the good one. That is, the plan to remove gasoline from subsidy list. This means -- and I think the government should really make it explicit -- that the price would follow directly from the market dynamics. Meaning, when it (the crude oil price) is down like now, the domestic gasoline also becomes cheaper. But, when it is up (and there is reason to be prepared that it might swing up again), the domestic price should also follow suit . Now, many people are of course happy with the reduced price. But I bet they won't accept a rise even when the market price is up (a parliamentarian's remarks in Kompas today is a case in point). That's the real challenge the government should tackle. Say it out loud: taking the fuel out from the list means exposing the people to the two sides of market price: up and down, not just the latter.

Why did I say this subsidy removal was good? For one, it would lessen the burden on the budget so there would be more resources to spend on more sensible posts, e.g. basic education, etc. Second, in the long run it will be good for the environment. If you just care about the environment, aiming for taxing fossil fuel consumption makes sense. Of course it's hard enough already to go that direction all the way from a subsidy regime. Scrapping the subsidy now opens the door to start, at least gradually, thinking about taxing the fossil fuel consumption for environment purposes (I say this as if we don't have a tax on fuel consumption; well we do, but in effect what we have been having thus far is a net subsidy). That way, you discourage pollution and encourage fuel efficiency and hopefully create incentives for the development of energy alternatives.

Now, why the notion "harga keekonomian", or more precisely the statement like "the current price has hit the harga keekonomian (as in economic price/economic cost)" is a fallacy?

First, what do they really mean by that term? An article in Kompas today (06/12/2008) spells that out quite helpfully. Assume the crude oil price is $46. The crude price would translate to Singaporean MOPS price of $56. This Mean of Platts Singapore (MOPS) is the assumed relevant price for fuel in the region, which is traditionally $10 higher than the "world" crude price quoted in, say, London. Presumably the $10 addition is to take care of production and transportation costs. Then Pertamina has its "magic alpha". This is an item that is supposed to cover procurement costs, operational costs, etc. It might also have some profit margin in it, and that is why I call it magic: it's never really clear how they got to decide the alpha -- now set at 9%. So now the MOPS plus alpha is $61.04 (never mind the small miscalculation by Kompas there, the idea remains). That translates into the fuel price of $0.38 per liter. Assuming you need Rp 12,000 for every dollar, that becomes Rp 4,607 per liter. Now, add the 10% value added tax and 5% vehicle fuel tax (this is the tax I was referring above). Finally you end up with Rp 5,321 per liter. Compared that to the current administered price of Rp 5,500. That is why many people demand more cut: after all, why fix a price above the "harga keekonomian"? (By the way, they seem to completely forget that they want just exactly the opposite for rice). What's wrong with this? The calculation above seems pretty straightforward and sensible, yes?

Except that it is not about economic price (or economic cost for that matter). It is accounting price. Everything under the term accounting price or costs can (and should) appear on the bookkeeping. But there is an implicit cost that one has to consider when referring to "market price", the price that matters. This implicit cost is the opportunity cost. It does not appear in the accounting report, but it should register in the head of every sane decision maker. What is it, really? Opportunity cost is the value of the next best alternative. Which is forgone for you have decided to do something else. Again, what is it, really? For simplicity, think about selling fuel at home or at neigbour across the street. By selling it at home, you forego selling it to the neighbour. This is good if the price at home is actually higher than the price there. But otherwise, you're making a loss -- well let me be precise: economic loss (even though you might !score an accounting profit!).

But why in the world do we care about economic costs? Because if you don't, the market will punish you: smuggling, black market, etc. We have news from Kalimantan already. Yes, economic price and hence market price is more difficult to measure, especially when the market itself is rather distorted. But if you insist that the current price is already at (or even above) the economic price, would you put your money where your mouth is? Because if it were true, you need not be worried at all. Just leave it, the price, free to float and see what you would actually pay at the gas station. After all what happens in Kalimantan (as well as the still ongoing smuggling in many places) is a litmus test to see whether or not we have really hit the market price. Maybe tomorrow, or next week, or never. But today, I am afraid we have not.

Vindicating news from Kalimantan

The Jakarta Post today (4/12/2008) reported:

The price of subsidized gasoline in the Kalimantan hinterlands hit a record Rp 20,000 (US$1.61) per liter as of Wednesday -- just three dyas after the central government dropped the official price to Rp 5,500 per liter from Rp 6,000.

Furthermore, the newspaper quoted a street gasoline seller:

It's very hard to get fuel out here these days...

And yet another one:

I don't know when this situation will end... So if you want to buy gasoline, that's the price, no less...

As I said, this all shouldn't be surprising.

And you say it's not enough.

Sorry, we're out

When the price of stuff you're selling is down by a commando not by demand shortage nor by excess supply, what do you do?

Depends. If you're a good citizen you sell dearly. If you're a tycoon, you don't really care. And if you're smart, you hide that stuff, sell it somewhere else, or sell something else.

Don't be surprised if following the government populist cut on the subsidized fuel, you find a long queue in the gas station. If you're not patient enough, turn to the the small vendors across the street. For a more expensive price.

And you say it's not even enough.