Broken cartel -- don't tell us you're surprised

It is growingly clear that the political coalition of parties surrounding SBY is breaking up. The parties involved deny. The president asks the members to respect political ethics. And the usual story goes on.

Surprise?

Some quotes from Time (Bernanke's US Issue) that might as well be explaining Indonesia (ie, SMI-Boediono's rescue act and the noise that follows NOW)

"History is composed not only of what happened but of what didn't happen. The latter, of course, is impossible to really know" (Stengel, "To Our Readers")

"What we don't know is what the economy and our lives would look like if a few individuals had not acted on our behalf and had simply sat on their hands" (Stengel, "To Our Readers")

"Bank runs are even scarier now that they don't require an actual run on an actual bank. Billins of dollars can be withdrawn with a keystroke, and all sorts of nonbank players ar now dangerously intertwined with financial markets" (Grunwald, "Ben Bernanke")

"Now that the fire is out, it's easy to attack the firefighters for getting the furniture wet or holding their hoses improperly" (Grunwald, "Ben Bernanke")

"This wasn't a war of choice. It was a war of necessity" (Grunwald, quoting Tim Geithner, "Ben Bernanke")

"Bernanke has become a political victim of his apolitical success... It's now up to our dysfunctional political system to let him do his job -- and to fix the financial system so that he never has to save the world again" (Grunwald, "Ben Bernanke")

It's expectation, really

Alright if you insist Bank Century is small, it is small. If you therefore conclude such a small bank could not bring other banks down with it, then we should discuss about another concept: systemic risk.

For wonkish, go google Diamond-Dybvig model.

But let's make it easier. Some people seem to think "systemic risk" here means the bank is related to other banks and therefore can affect the latter in a contagious process. Maybe I'm wrong, but Burhanuddin Abdullah and Anwar Nasution seemed to use this concept in their hearing with DPR's Pansus. According to their logic, since BC is small, it couldn't have systemic risk whatsover.

Some others believe it is expectation that really matters. (I got that impression from for example Boediono's and Miranda Goeltom's responses to questions from DPR's Pansus). As a depositor in Bank A, you, a risk-averse person (and by the way, that's a fair generalization), would feel anxious when you see people run Bank B across the street. No matter how small Bank B is and no matter how unrelated Bank A and Bank B is. The only connection between the two banks is what we call human expectation, driven by the act of observing something that you then expect might happen to you, too. Your reaction can vary. If, by any chance, you have the information that general situation is manageable (eg there hasn't been any news about world struck by crisis or something; or any other relevant information), you might not withdraw your money from Bank A. Yet. But, in many cases, you can't have full information on whether or not the situation is "manageable". It can take only a couple of depositors loudly saying "Gee, that bank is falling! This bank is next, I'm gonna withdraw!". Before you know it, Bank A is rushed, too. Then Bank C, D, so forth. It is therefore "systemic". This latter situation is sometimes affected by your perception on the authority, in this case Bank Indonesia and MOF. When you know (or are told) that BI and MOF are short of liquidity and fiscal capacity to deal with a crisis, your incentive to quickly withdraw and save your money at home rather than bank increases. In other time, you think BI and MOF can handle the situation well (even if Bank B is rushed, their depositors are saved, etc), in which case, your incentive to withdraw is relatively small.

So, it's about expectation. I'm more persuaded by this second understanding about the word "systemic risk".

Dahlan Iskan as new PLN Chief

The government has just inaugurated Dahlan Iskan as the new chief of PLN. He was the man behind the success of Jawa Pos, a media group. Beyond that, I don't know much about him. I just learned from today's news that he has served as president director of two independent power producers in East Kalimantan and Surabaya (The Jakarta Post, 24/12).

But I fully agree with State Minister for SOEs Mustafa Abubakar's remark: "The leader doesn't need just a technical capacity. It requires also leadership and good management capacity".

Trade war with China

This growing tension against China in the midst of ASEAN-China FTA should also look at some facts. Indonesia's import from China has grown from 2.4% in 1985 to 7.2% in 2006 (as shares of total import). The corresponding figures of export are 0.5% and 9.8%. Contrast this with our trade with Japan, US (let's make it North America), and EU15. Our import from Japan was 25.8% in 1985 and down to 14.2% in 2006; while export down from 46.2% to 37.3%. Import from US was down from 18.7% to 16.6% and export to them was down from 22% to 18.9%. Finally, import from EU15 went down from 19% to 8.3% while export increased from 6.4% to 18%.

So de facto, we have had an increasing trade with China. Not just import, but also export.

Award for Sorry Thief

I don't have problem with those NGOs giving an award to Prita for she has become the symbol of consumers' right against lousy business.

But I can't understand why you should give an award to a petty thief. The legal system is weak, yes. Big thieves should be punished big time. But that doesn't mean you can just forgive small thieves. Because thief is thief, regardless of the scale of the theft.

A sympathy for an old woman who "were forced by situation to steal something almost worthless" might sound just. But giving her an award is I think just too much. You're sending a very wrong signal to the populace.

Avatar yes. Copenhagen whatever

What makes me more sympathetic to Mother Earth is Avatar the movie, not Copenhagen the wooshy wooshy.

Moral's immorality

On the call for suspension of VP and Minister of Finance by DPR's Inquiry Committe (and thus the President's refusal), Amien Rais and Din Syamsuddin are reportedly disappointed. They argue, even if the call is inconstitutional, it's "moral".

And disrespecting the law and constitution is moral, gentlemen?

Who's afraid of free trade?

Deputy Minister of Agriculture defends ASEAN-China Free Trade Agreement, saying that it will benefit Indonesia (BusinessNews, 16/12).
Agreed.

15 focuses is no focus

According to an official at the Coordinating Ministry for Economic Affairs, GOI has decided 15 sectors as the priority in infrastructure development within the next five years (Bisnis Indonesia, 17/9).

Fifteen?

More cushy cushion needed

The government declares they need an extra Rp 3 to 5 trillion emegency reserve in the 2010 budget to anticipate threatening world oil price. That would add to the currently allocated Rp 5.6 trillion.

As known, the state budget has assumed an oil price of USD 60 per barrel. Now the price stands around USD 70 already. And might even increase in the near future, considering the world economic recovery.

Now the budget also assumes that every USD 1 increase beyond the assumed USD 60 would add Rp 0.1 trillion to the deficit. Now, if Indonesian Crude Price (ICP) is USD 65 per barrel (usually it is USD 5 below the world oil price quoted in US market) then there is an increase of USD 5 trillion on top of the assumed price. According to the elasticity assumption, it should add Rp 0.5 trillion to the deficit. But, why ask Rp 3 to 5 trillion?

Stepping up the ladder

According to the IFC's Doing Business 2010, Indonesia is the most reformist country in East Asia and Pacific with regard to business regulation as observed in the latest IFC's survey. As a consequence, Indonesia's ranking is up to 122 from 129.

Congratulations.

The P in GDP stands for 'production', remember?

Joseph Stiglitz questions if statistics "are giving us the right signals" (Project Syndicate/Jakarta Post, 9/9). In the article that reads like advertisement of the chairman of the newly established Commission on the Measurement of Economic Performance and Social Progress, Stiglitz rightly says that GDP is not apt to reflect people well being.

Of course. It's just a measure of production. Yet, that's the best we have now -- for again, measuring production.

We already started "green GDP" here and there, taking account of natural resource depletion and environmental degradation. Despite the rough proxies used, it's a good way to remind us that the business-as-usual production might be harmful to the environment.

But many people push it even more to measure happiness (or in general, well-being). So far I'm skeptical. Production is measurable. So is green production. But happiness? It might be measurable on individual basis, or at least household. You might even come out with measures like aggregare willingness to pay to proxy demand for something (including intangible goods) at community level. But pushing it to grand scale like national GDP will encounter serious aggregation problem.

One of those happiness measures found that the most happy people live in Bhutan. I, for one, don't want to live in Bhutan.

Bye to monopoly, PLN

The Jakarta Post today (9/9) reports, "Legislature unplugs PLN's monopoly on electricity".

Great.

The mix feeling on Hatoyama's approach to the environment

The Japanese new premier Hatoyama is environmentally ambiguous. He promises rather progressive emission cut. But he will also cut gasoline tax. Worse yet, he will scrap toll way charges. Of course all this might change as he's not even sworn in yet.

Hopefully Japanese people's expectation for changes turns out good. Otherwise, it's just a regime change but with even more populist, short-sighted policies.

It's the magnitude, for crying outloud!

First, a disclaimer. Exegesis wanted to shy away from the Bank Century debacle, simply because we had no idea what went on, rightly or wrongly. But then the President took over that Privilege of Shyaway (The Jakarta Post, 3/9). He seems not to bother with this kind of issue, unlike those of Manohara or Prita.

So here's my take (figures and numbers aside). When a crisis struck, you deal with it with a non-normal treatment. Yes, you still need a system; but that system is only for emergency situation, hence a short term handling. When the situation is back to normal, you are also back to normal approach. You don't keep rebooting a computer when you only have a minor hiccup. When a bank is about to go astray, and with it it would take many others down, you're in a crisis situation. You need to make a quick decision. Calling all those House people for a late night consultation meeting is a waste of time.

But then you are using taxpayers money. No matter how urgent the situation is, you should keep remembering that it is not your money you're using to fight the fire. So make no mistake. Pour the water sufficiently, not overwhelmingly.

Now you're in difficult situation. Was it, the situation, systemic? Yes, no doubt. Were taxpayers money misappropriated? That one remains to be proven.

Of course it's the foreigners' fault

Kompas today runs an article on the first page titled "BI to be Watchful to Banks' Foreign Individual Owners" (BI agar Hati-hati kepada Pemilik Individu Asing, Kompas 3/9)). Knowing Kompas, I'm not surprised by its xenophobic tone. But I was curious who they quoted that statement from. So I read through. Twice. There are two quotes. And no one says so.

It is true that the two major shareholders of the failing Bank Century are Pakistanis with British nationalities. But jumping into a news article with astrong title leading to an impression that all foreign owners are bad guys is a journalistic folly. We still remember that more than ten years ago, when banks money were drained out, it was Indonesians who stole the money and ran away. But no news was titled "Be Careful with Indonesian Shareholders".

If we're efficient we might seem suspicious

A Bappenas official reportedly says that government spending on infrastructure this year could accomplish 90-95% of the allocated budget (Bisnis Indonesia, 2/9). That would be quite an achievement considering the previous records. But why not 100%? He says "It's tricky. Because people would think there is misappropriation involved".

Scratching your head? Me, too.

Upcoming gig: Asian Econ Panel Meeting

Asian Economic Panel Meeting
Keio University, Tokyo, September 6-7, 2009

The Global Financial Crisis?
Wing Thye Woo, Warwick McKibbin, Yonghyup Oh, Anwar Nasution

The Political Business Cycle in Japan and Instability of Budget Deficits
Naoyuki Yoshino, Tetsuro Mizoguchi, Renee Fry, Ryuhei Wakasugi

Taxing Pirates: Is It Worth It?
Desiree Desierto, Young Joon Park, Iris Claus

Unconventional Policies of Central Banks: Restoring Market Function
and Confidence
Kiyohiko Nishimura

Crisis Management: Difference between Japan and the USA
Yosuke Kawakami

Technology Development and Employment in China
Fredrik Sjoholm, Nannan Lundin, Changwen Zhao, Bhanupong Nidhiprabha, Wei Zhang

The Different Impacts of US and Japanese FDI on Trade Patterns
Kwong-Chiu Fung, Alan Siu, Arianto Patunru, Prema-chandra Athukorala

The Impacts of Globalization on Employment and Poverty Reduction in
India: The Case of Emerging Big Shopping Malls and Retailers
Kaliappa Kaliraja, Kanhaiya Singh, Shoko Negishi, Yuenpao Woo, Maria Bautista

How Integrated are the East Asia Economies: A Comparison of Integration Indices
Yuenpao Woo, Bo Chen, Chia Siow Yue, Fukunari Kimura, Harry Wu

Experimental Economic Approaches on Trade Negotiations
Han Kyoung Sung, Shigeyuki Abe, Alan Siu

Avoiding Another Subprime-Type Crisis in Financial Markets
Makoto Yano, Chalongphob Sussangkarn, Doo Yong Yang

My two courses this semester

Program: Undergraduate Economics
Course: Introductory Microeconomics (ECON 10100), aka "Pengantar Ekonomi 1 - PE1"
Instructors: Mari E. Pangestu and Arianto A. Patunru (TA: Rizky N. Siregar)
Classroom: A1-10, FEUI Depok, Mondays, 8-11am
Texts: Mankiw (Principles of Economics, 2008), Parkin (Economics, 2010)
Topics: concepts of economics, supply, demand, elasticity; basic consumer and producer theories, market structures, input markets, efficiency and public policy.

Program: Graduate Economics
Course: Advance Microeconomics (ECON 90103-3), aka "Ekonomi Mikro 3"
Instructor: Arianto A. Patunru (TA: Palupi)
Classroom: PLN-Room, Pascasarjana FEUI Depok, Wednesdays, 13-1530pm
Texts: Mas-Colell et al (Microeconomic Theory, 1995 plus a bunch of journal articles)
Topics: General Equilibrium and Welfare Economics

Office hours: Depok, Mondays before 1pm, Lecturers Room, Department of Economics, FEUI Depok.

Yes, it is sad that our domestic economy is disintegrated. (Mercantilist campaign continues, anyway)

In what seems to be its campaign against everything import, Kompas again runs a headline today with a bombastic lead and heroic tone urging the stop of food import (27/8). They even use (unjustly, to my impression) Faisal Basri's concern about disintegration of domestic economy as their ammunition to call for mercantilism. I've been in close contact with Faisal Basri lately and we both (and many others) are very concerned about the disconnection across regions in Indonesia. Bang Faisal many times illustrates this problem with the fact that it is far easier to go from Palangkaraya to Pontianak (two cities in Kalimantan) via Jakarta (in Java), than directly. In my papers, I put more emphasis on the fact that our logistic costs are one of the highest in the world (14%, cf eg Japanese's 4%). In addition, a study my colleagues and I did in 2008 on land transportation also concludes in the negative: we are very inefficient due to legal and illegal collections on the street, poor infrastructure, and difficult topography. Finally, our ports are lame and have little incentives to improve since under the current, existing system, one port management (Pelindo) who books a loss should not be worried as it will be subsidized by the other Pelindos (the new shipping law addresses this issue with improvement policy but it is yet to be in effect). Add to that the many hurdles in customs. All and all, the big archipelago is really not an integrated economy, it is merely a constellation of many islands and regions with stark differences in prices, and hence standard of living. What is the solution? As I argue here and elsewhere, it requires logistics reform which includes serious improvement (and repair) on infrastructure especially port and road. I was in Kupang last month with my research team. We saw one obsolete weight station whose capacity was only 10 tons. As a response to that, all big, seemingly overload trucks were not allowed to pass through the station -- they were asked to make a small detour around the station. Only smaller trucks are to be weighted. It's funny and saddening. In another occasion, our researcher who rode with a trucker in a nightshift observed how the truck driver threw a matchbox filled with a 10,000 rupiah bill to an empty inspection station. When asked why he did that despite there was no one asking for it, the driver simply said "it's a custom". Again, nonsensical and saddening. All this contributes to our high cost economy. And again, it calls for reform in the logistics.

But Kompas takes all this problem about disintegrated domestic economy as part of their argument to call for import bans. Yes, they cited Faisal Basri as saying that three months ago we should have imported sugar and now it seems too late because suppliers have increased the price. That is probably true. But then they are back to their whole anti-import campaign. This is misleading. It confuses between facts (say, of the crisis) and recipe for longer term economic development. We have been with this problem in logistics and transportation for a long, long time. It needs improvement regardless of the crisis. Yes, we were hit by crisis but happened to be more resilient partly because coincidentally our exposure to trade is relatively low. But the entire world can not step back to relying only on domestic economies. Because at the same time production network and trade-in-tasks are growing. We don't want to miss the train. Nobody wants. But hey those are two different things. The crisis needs a short-term solution, deviating from normal, longer term development (eg. stimulus). This chain of arguments that (a) A crisis hits us, (b) We're fine because we don't trade too much, (c) Therefore the best way to go is to suppress trade even more and to go domestic instead, (d) So, stop import (while export is okay), and (e) While we're going to autarky, we need to address the logistic and infrastructure issue -- is misleading. It mixes up short term problem and longer term solution.

And banning food import? Even if we were all mercantilists now, have we forgotten that our food import is merely USD 5 billion while our non-oil/gas export stand at more than USD 100 billion? Have we forgotten that we are a giant in the world CPO market?

Gold standard? Now? No way

Yesterday, as I was having sahoor, an academic cum cleric gave a talk on tv about sharia economy. He mentioned that one of the features of sharia economy is "gold or dinar standard". I'm not sure what he meant by putting gold and dinar side-by-side (maybe he thought now the dinar system is still fully gold-backed, and therefore the two are interchangeable).

A couple of days ago I participated in a seminar held by MOF. At lunch, an official, out of blue, asked my opinion about that same idea, ie gold standard. My response was "I don't think we will ever go back to gold standard. That BI storage will not be able to house the entire gold backing the money in circulation".

Today, Paul Donovan of UBS Investment Bank gives a more sophisticated answer (The Jakarta Post, 25/8). Bottomline is the same: There is not enough gold in the world. Here's his reasoning. Assume that globalization is steady with global trade stays at 20% of the world's GDP. If the the world's nominal GDP grows at 6-6.5%, then the supply of reserve currency should also rise by 6-6.5% to keep the international trade intact. Now, if we are to go back to gold standard, trade growth will not stay at 20%, let alone expand: it will shrink, as the supply of gold rises at 1.5% growth rate.

Dare to stop import?

Misreading of the crisis aftermath (Indonesia has been quite resilient -- Indonesia's exposure to trade was quite low -- therefore, stop trading, go domestic) is getting pervasive. Kompas yesterday (24/8) ran couple of articles with anti-import tone. Today it continues, featuring Kadin chief in its headline (25/8). As quoted by Kompas, Hidayat says "If the government does not have the guts (to stop food import) and instead play blame gain among each other, we would not be self-sufficient in the next five years".

As I said repeatedly here, our conception of self-sufficent is false. We reached the so-called "rice-self sufficiency" briefly on the back of heavy protectionism.

Interesting paper of the week: Deaton on Aging, Religion, and Health

Aging, religion, and health
by Angus S. Deaton - #15271 (AG HC)

Abstract:

Durkheim's famous study of suicide is a precursor of a large contemporary literature that investigates the links between religion and health. The topic is particularly germane for the health of women and of the elderly, who are much more likely to be religious. In this paper, I use data from the Gallup World Poll to study the within and between country relationships between religiosity, age, and gender, as well as the effects of religiosity on a range of health measures and health-related behaviors. The main contribution of the current study comes from the coverage and richness of the data, which allow me to use nationally representative samples to study the correlates of religion within and between more than 140 countries using more than 300,000 observations. It is almost universally true that the elderly and women are more religious, and I find evidence in favor of a genuine aging effect, not simply a cohort effect associated with secularization.As in previous studies, it is not clear why women are so much more religious than men. In most countries, religious people report better health; they say they have more energy, that their health is better, and that they experience less pain. Their social lives and personal behaviors are also healthier; they are more likely to be married, to have supportive friends, they are more likely to report being treated with respect, they have greater confidence in the healthcare and medical system and they are less likely to smoke.But these effects do not all hold in all countries, and they tend to be stronger for men than for women.

http://papers.nber.org/papers/W15271

On Local Tax Law

The newly approved Local Tax Law stipulates the following 5 taxes allowed for provincial governments: vehicle tax, vehicle title-transfer tax, vehicle fuel tax, surface water tax, and cigarette tax. As many as 11 taxes are allowed for district/city governments: hotel tax, entertainment tax, advertisement tax, street-light tax, non-metal mineral tax, parking tax, ground water tax, swallow-nest tax (!), building and property tax, land and building rights entitlement tax (for lack of better translation). The law also allows 30 kinds of 'retribution' (user charges), grouped into 3 types: general service retribution (eg marketplace services), business service retribution (eg terminal and auction place services), and specific licence retribution (eg route permits). Finally, there is a progressive tax on second or more vehicles (with a tariff from 2 to 10 percent).

The above is based on a column by Harry Aziz, Bisinis Indonesia, 24/8). The author was the head of special committee for the draft, from the House side. He mentions that the reasons for progressive tax on vehicles are: inelatic demand of vehicles (I wonder what hi numbers are), fairness principle, local competition principle. He also adds that the collected tax should be earmarked to local infrastructure development. A tall order indeed.

Donate, no. Sell, yes

A small article in Kompas (27/8) talks about Indonesian Red Cross' difficulty in supplying blood for the needy. They oftentime have deficit than surplus as "there is more demand than supply". Yearly demand for blood is 4.3 million packs, while supply only stand at 1.2 million on average.

So stop relying on donation. Start blood market.

Info: Courses and Office Hours

The new academic term starts next week. I am assigned to teach Introduction to Microeconomics (undergraduate, co-teaching with Dr. Mari Pangestu) and Advance Microeconomics (PhD program). Info for students, I will be in Depok every Wednesday (Pascasarjana, 1-3pm) and Monday (not every week, as I'll take turns with Bu Mari; Departemen Ekonomi, 8-11am).

Separating underwriters from brokers

The government via the stock market regulator (Bapepam) is going to revise the Capital Market Law. The revisions include separation of investment management units from underwriting and brokering functions (The Jakarta Post, 22/8).

Not surprisingly, most securities firms react negatively as majority of them mix the two functions. The president director of Trimegah Securities for example reportedly said that the policy would "put pressure on our efficiency programs". He said that Bapepam should instead focus on enforcing good corporate governance.

I think his argument is ill-founded. What the Bapepam is doing is exactly an effort to enforce good corporate governance.

Monitoring sermons except those by...

The Jakarta Post reported that police would monitor provocative sermons given in mosques and mass gatherings (JP, 22/8). It is to avoid provocative and misleading preaches by clerics that can motivate violence and terrorism.

OK, what have they done to Ba'ashir? Was Ba'ashir's commending the bombers not provocative enough?

Are we going back to financial repression?

As if the strange deposit rate-cap policy isn't enough, Tony Prasetiantono calls for cut on profit margin (Kompas, 22/8). According to him, the agreement (to force deposit rate down to 8 percent and gradually closer to BI rate) will not be enough, because it only "affects the cost of fund". Sounds as if cost is not part of profit calculation, eh?

Add? For what?

So the World Bank urges GoI to increase budget allocation for infrastructure (Bisnis Indonesia, 21/8). Good. If only there is no problem in procurement and disbursement. Alas, everybody knows, GoI has not been capable in efficient handling of money. Even for the stimulus intended for infrastructure project (yes, stimulus for infrastructure -- funny), by end of July they could only spend less than 10 percent of it.

Force it down, eh?

As reported in Kompas (21/8), banks (mainly state-owned) agreed to cut deposit interest rates gradually to get closer to the BI rate. They think this will help "normalize" the movement of deposit and credit interest rates. I'm skeptical. First, as a depositor, one would seek for the highest real rate. If local banks set it low, she would transfer her money to some bank abroad, or convert it to other form of asset. Second, any agreement like this (between banks, in a moral suasion sort of way) is deemed to fail. One or two banks will eventually cheat and the rest will follow. Third, they miss the point. Banks' rates deviate from BI rate not because they just want to be different. It's because they still perceive a sizable risk. Attacking the rates is missing the culprit as it is the risk that needs to be minimized, through a more efficient credit bureau for example. Lastly, if the banks and the government and Bank Indonesia think that this forced rate is good for banks in general, they will be disappointed. Thus far, market has been segmented such that big depositors go to big banks and get interest rate higher than BI rate. The smaller depositors go to smaller banks and are paid interest below BI rate. Forcing big banks' interest down will attract the upper level of smaller depositors and therefore hurt the smaller banks.

Kudos to Pelindo I

I have been criticizing the management and system of the state-owned Indonesian Port Corporation (Pelindo), esp. on their cross-subsidization scheme. That is, if one Pelindo (we have four) books a loss, the others should subsidize it. This system creates no incentive to self-improve.

So, the news in the Jakarta Post (21/8) that Pelindo I has inked a joint commitment with private firms and local governments on a port development program is a good news.

SME prefers foreign banks

Kompas (20/8) reported that small and medium enterprises prefer foreign banks to local ones because of easiness in paperworks as well as lower interest rates.

Chair of Indonesian Young Enterpreneurs, Erwin Aksa, urged Bank Indonesia to be critical to this situation, or it will kill the local banks.

Typical.

On Ahmadinejad

So he's sworn in. I'm grateful my country is no Iran.

Less expansive? Good!

The 2010 state budget plan is considered less expansive by many, and some call it contractive. I take it as a sign that GoI will focus more on efficiency. That is, to reduce problems in budget preparation, approval process, procurement sluggishness. So it's a good thing.

@ SMERU

Was at SMERU Research Institute to wish all the best to Sudarno Sumarto for his sabbatical leave to Stanford; and to Asep Suryahadi for his new position as the new Head of SMERU.

Mas Darno, you'll be missed. Keep up the good work. Kang Asep, congratulations. Looking forward to working with you.

Bloghopping eq, moved again

Now it's Becker-Posner, Jim Hamilton, Cafe Hayek, EconLog, MargRev, Mankiw, Krugman, Env-Econ, and the new addition: Scott Sumner.

The best definition of inflation

"The rise in aggregate nominal income required to keep aggregate utility constant"

That is by Scott Sumner.

Congratz, Bang!

Congratulations to Darmin Nasution for his appointnment as Senior Deputy Governor of Bank Indonesia and the chairman of Indonesian Economists Association.

Bang Darmin was a former head of LPEM. We once taught a parallel course on Indonesian Economy (with Faisal Basri -- also a former head of LPEM) at the extension program of FEUI back in 1997. I love Bang Darmin's sense of humor. He's also very tough. Rumor around the office boys and janitors has it, Bang Darmin once challenged somebody for a fist fight over a parking lot in Salemba Campus. He won without the fight, needless to say.

Being Normal

SB Joedono, a former head of LPEM gave us his wisdom. "The most difficult thing to do is to become normal".

Thanks, Pak Billy.

Kudos to Pak Hadi

As many of you have heard, one of the Indonesian finest economists, Hadi Soesastro was awarded a doctor honoris causa degree in economics from the Australian National University.

I took Economics and Technology course from Pak Hadi sometime in 1993. I recall we had class often in CSIS (Tanah Abang) as Depok is too far. Then we became friends in seminars and conferences after I came back from US in 2004. We were also active in the Indonesian Economists Association (ISEI). Along these times, I keep learning a lot from Pak Hadi. I admire his vast knowledge as well as his international reputation.

Congratulations, Pak Hadi. It's long overdue.

Proud of students

These last weeks have been full of examining students' thesis defense. I'm impressed, especially by the senior college students (S1 Level, as opposed to the master's and PhD programs -- not that the latter two are lousy; they're great too, but not as impressive). Some of them write very well (some in proficient English, though not required). I'm also proud that many of them have left the "must have a regression or two no matter what"-paradigm. Instead, they demonstrate a lucid understanding of basic principles of economics. Yes, I have a very big hope on our S1 graduates. Keep up the good work, young fellas!

Sentence for the knive

The Economist this week runs a series of article reassessing the use of macroeconomics. In one of them, it says financial economics might be blamed for the recent crisis. That is akin to blaming a knive for a murder downtown.

Better proxy for human capital variable

Got problem in choosing good proxy for human capital in your estimating regression? Try school intensity (Duflo 2001, Comola and de Mello 2009 -- thanks for the paper, guys). It is the share of population born after 1963 multiplied by the number of schools built per children under SD Inpres program during 1973-78. The rationale is simple: the cohort of individuals born in districts that benefited from the program was more likely to stay longer at school and to earn more once joining the labor force.

Upcoming gig: 20th Annual East Asian Seminar on Economics

Commodity Prices and Markets

New paper on Indonesian Agriculture

Forthcoming in Choices 24(2), 2009

Agriculture in Indonesia: Lagging Performance and Difficult Choices
by Richard Barichello (Univ. of British Columbia) and Arianto A. Patunru (Univ. of Indonesia)

Abstract
Indonesia's agriculture is significant in several world markets and continues to employ large numbers of the population, but is facing numerous difficult choices. Lagging productivity, conflicts across high farm prices, politics, and poverty, and environmental challenges combine to give reason for a reform of policies in this sector. We identify six major issues, chosen from the perspective of their political importance as well as what we judge to be their importance to the country's agricultural development prospects. It is striking how similar they are to those in other agricultural sectors around the world, especially in the OECD countries. Producer- consumer food price conflicts, slow productivity growth, public support of biofuels programs, environmental conflicts, and poverty reduction have generated the key policy debates within the sector.

Money Illusion

Scott Sumner blogs! (HT: Dave Beckworth)

Eichengreen-O'Rourke, 2nd installment

Here at Vox.

Upcoming gig: Salzburg Global Seminar

Freeman Foundation Symposium 2009: Strengthening Cooperation Between the US and East Asia
Salzburg, Austria, June 6-11, 2009

Session One: The State of The Asia-Pacific Region
Charles Morrison, East-West Center, Honolulu, HI

Session Two: The Financial Crisis and Impact on Asia-Pacific
Peter Petri, Brandeis International Business School, USA
Gong Min, Xiamen University, China

Panel Discussion on Economic Recovery
Kenneth Cukier, The Economist
Mireya Solis, American University, Washington, DC
Arianto A. Patunru, Dept. of Economics, University of Indonesia

Session Three: Northeast Asia - Politics and International Relations
Ryo Sahashi, University of Tokyo
Fan Jishe, Chinese Academy of Social Sciences, Beijing, China
Balbina Wang, National Defense University, Washington, DC

Session Four: China's Rise and Roles
Sun Zhe, Fudan University, Shanghai, China
Carolyn Cartier, University of Southern California, USA
Zhang Yanbing, Tsinghua University, Beijing, China
Todd Hall, Harvard University, Cambridge, MA

Session Five: Southeast Asia - Politican Change and International Relations
Thitinian Pongsudhirak, Chulalangkorn University, Bangkok
Kim Trinh, National University of Singapore
Dian Fatwa, Radio Australia, ABC
Savanphet Thongphane, ASEAN Secretariat, Jakarta

Session Six: Global Issues and the Role of the Asia-Pacific Region
Open discussion

Session Seven: Perceptions, Media, and Public Diplomacy
Zhou Qingan, Tsinghua University, Beijing
Hugo Restall, Far Eastern Economic Review, Hongkong

Session Eight: Obama's Asia Policy - Change and Continuity
Open discussion

Demokrasi Niscaya Mengecewakan, Tapi...

Demokrasi Niscaya Mengecewakan, Tapi...

Posted at Facebook by Arianto A. Patunru on Thursday, May 14, 2009 at 6:17pm

(Catatan untuk diskusi dan peluncuran buku Demokrasi dan Kekecewaan, Salihara, 13 Mei 2009 -- dengan sedikit revisi pada typos -- AAP)

Demokrasi Niscaya Mengecewakan, Tapi...

Arianto A. Patunru

Saya awam sungguh akan Rancière atau Badiou. Akan le politique atau la politique. Tapi kegusaran Goenawan Mohamad (GM) akan wujud laku demokrasi di Indonesia menarik untuk direnungi. Tentu saja para penanggap terbaik telah tersedia manis di buku baru ini, Demokrasi dan Kekecewaan. Mengulang mereka bukanlah efisien. Saya ingin mengganggu saja. Bahwa memang demokrasi bisa mengecewakan.

Tahun 1785. Ahli matematika Marquis de Condorcet menunjukkan sebuah cacat demokrasi pada sahabatnya, ekonom Jacques Turgot. Ada 300 rakyat yang akan memilih presiden: SBY, JK, atau Mega. Para pemilih itu berkerucut menjadi 3 kelompok, masing-masing 100 orang. Kelompok 1 lebih menyukai SBY ketimbang JK dan JK ketimbang Mega. Kelompok 2 paling suka JK disusul Mega lalu SBY. Kelompok 3 lain lagi; urutan preferensi mereka adalah Mega, SBY, lalu JK. Masuklah demokrasi: Siapa yang bakal menjadi presiden terpilih? Antara SBY dan JK, SBY lebih populer: di Kelompok 1 dan Kelompok 3, ia lebih disukai ketimbang JK. JK hanya unggul di Kelompok 2. Berarti dua pertiga rakyat, atau 200 orang akan memilih SBY, dan hanya 100 untuk JK. Kesimpulannya, antara SBY dan JK, SBY-lah yang akan menang. Bagaimana dengan JK versus Mega? Tampak bahwa mayoritas lebih suka JK ketimbang Mega: antara JK dan Mega, pemenangnya adalah JK. Terakhir, SBY versus Mega. Prinsip transititivitas dalam ilmu ekonomi berkata: Jika SBY lebih disukai ketimbang JK dan JK lebih disukai ketimbang Mega, maka tentulah SBY lebih disukai ketimbang Mega. Ternyata tidak: demokrasi lewat voting mayoritas dan satu-orang-satu-suara itu melanggar prinsip transitivitas. Relatif terhadap Mega, SBY hanya disukai di Kelompok 1; sementara Kelompok 2 dan Kelompok 3 lebih memilih Mega. Suara mayoritas demokratik mengunggulkan SBY ketimbang JK, JK ketimbang Mega,namun: Mega ketimbang SBY. Selamat datang di Paradoks Condorcet.

Apakah demokrasi memang sedemikian murungnya? Sebagian kita berkata, dunia Condorcet tadi terlalu naif dan menggampangkan. Dalam dunia nyata para pemilih punya otak. Dan mungkin ideologi. Kata pembela demokrasi, coba masukkan ideologi ke dalam cerita Condorcet, maka analisis rasional anda akanmusti membuang skenario yang tidak logis. Mari kita coba. Untuk berbicara ideologi, baik mungkin kita contohkan partai ketimbang individu. Bayangkan opsi PDIP, PD, atau PKS. Kelompok 1 yang sangat nasionalis lebih suka PDIP ketimbang PD, apalagi PKS. Kelompok 2 yang tidak suka ultra-nasionalisme lebih senang PD ketimbang PKS, dan masih lebih bisa menerima PKS ketimbang PDIP. Kelompok 3 cenderung alim dan islami. Mereka lebih suka PKS ketimbang PDIP, tapi lebih suka PDIP ketimbang ... PD. Sebentar, kata anda. Bagaimana mungkin pendukung PKS secara ikhlas memilih PDIP yang ”sungguh abangan” ketimbang PD yang lebih moderat, masih puasa dan jumatan? Di sini, informasi tentang demografi ideologi yang linier (maksudnya, ketiga partai seolah bisa dijejer di spektrum mistar garis lurus) membantu anda (dan mungkin, pemilih sendiri) untuk memprediksi keluaran pemilu. Logika itu berkata, Kelompok 3 sesungguhnya tidak eksis. Maka dengan hanya dua kelompok tersisa, anda tahu bahwa persaingan PDIP versus PD akan berakhir seri, PDIP versus PKS seri, dan PD versus PKS dimenangkan PD. Kesimpulannya: PD menjadi pemenang pemilu, sekalipun transitivitas sedikit dilukai. Ideologi linier menyelamatkan demokrasi dari Paradoks Condorcet. Atau tidak?

Betulkah ideologi terdistribusi linier macam itu? Jalin-kelindan partai-partai papan atas belakangan ini memberi jawab negatif: ideologi tidaklah linier. Bahkan mungkin sekali ideologi sesungguhnya tak pernah ada. Ada pemilih PDIP yang kecewa melihat partainya mesra-mesraan dengan Prabowo, ada simpatisan PKS yang kaget melihat panutannya mengusung Soeharto serta bertandang ke SBY. Dan besoknya kecewa. Lalu gonta-ganti pasangan lagi. Lusanya berubah lagi. Jika ideologi (atau ketiadaan ideologi) gagal membendung Paradoks Condorcet, demokrasi bakal macet. Siap-siaplah kecewa.

Sengkarut demokrasi itu bahkan kian gelap di tangan ekonom Kenneth Arrow. Berhujjah Arrow: Jika sebuah tata sosial voting bersifat transitif, ”konsisten pada kebulatan suara”, dan”bebas tetek bengek”, maka pasti ia adalah: kediktatoran. Jika anda lebih suka SBY daripada JK dan JK daripada Mega, maka anda haruslebih suka SBY ketimbang Mega; ini adalah transitivitas kita tadi. Jika semua orang di negara ini suka dengan Mega, maka apa pun mekanismenya, Mega pasti jadi presiden; itu adalah konsistensi kebulatan suara, unanimity. Jika anda lebih suka SBY ketimbang Mega, maka kehadiran Prabowo atau Wiranto sebagai alternatif tidak boleh menjadikan anda tiba-tiba berbalik memilih Mega ketimbang SBY – struktur preferensi anda mesti bebas dari alternatif yang tidak relevan terhadap pilihan awal; ini yang saya sebut serampangan sebagai ”bebas tetek bengek”. Dan lembar-lembar matematis Arrow membuat dunia semakin dismal: tidak mungkin sebuah tata sosial dengan sistem voting bisa sekaligus transitif, unanimous, bebas tetek bengek, dan non-diktator pada saat bersamaan. Inilah Teorema Ketakmungkinan Arrow. Ia membuat demokrasi sedih sungguh. Ketakmampuan sistem voting menghindari perangkap Condorcet dan Arrow menjadi sistem demokrasi plural-penuh rentan akan pilah suara, vote splitting. Anda dan kawan-kawan anda mendukung Golkar, karena tahu bahwa JK akan maju jadi presiden. Tiba-tiba Ical Bakri atau Akbar Tanjung juga mencalonkan diri. Suara Golkar terpecah. Akibatnya Golkar kalah, tak satupun dari mereka jadi presiden. Alhasil, demokrasi internal di Golkar mandeg.

Cara demokrasi macam itu – voting mayoritas – juga tumpul belaka dalam penyediaan barang publik. Tiga puluh keluarga di Kampung Salihara memerlukan lampu di jalan-jalan mereka Biaya menerangi jalan sekampung adalah 99 juta. Jika rakyat Salihara memutuskan untuk ”melampui” jalan, semua keluarga harus sawer sama rata. Ada 3 kelompok keluarga di sana (maka biaya per kelompok adalah 33 juta). Kelompok A adalah mereka yang melihat lampu jalan wajib hukumnya. Mereka sesungguhnya rela mengeluarkan uang sejumlah total 90 juta untuk keperluan tersebut (ekonom menyebut ini ”harga reservasi”, harga tertinggi yang tak anda ucapkan sebelum transaksi, namun rela terima jika terjadi). Kedua kelompok sisanya, B dan C, ternyata punya prioritas lain di atas lampu jalan. Harga reservasi mereka masing-masing 30 juta. Di sini voting kembali akan berakhir gelap: Kelompok A tentu setuju pelampuan jalan, mengingat biaya yang harus mereka tanggung (33) jauh di bawah “harga reservasi” mereka (90). Namun Kelompok B dan C akan menolak, karena biaya bagi mereka 3 juta lebih tinggi daripada jumlah yang mereka rela bayarkan (30). Mayoritas, 2/3 dari rakyat Salihara, dengan begitu akan menolak rencana pemasangan lampu jalan. Desa Salihara akan tetap gelap, ekonomi tetap sembab. Dan itu karena demokrasi.

Kita hampir putus asa. Dengan segala buram demokrasi di atas, akankah ia bisa terselamatkan? Syukurlah jawabnya: mungkin bisa. Di sebuah kampung lain bernama Internet, ternyata Paradoks Condorcet serta Kemuraman Arrow bisa diatasi. Sistem itu bernama voting berentang, range voting. Alih-alih mencontreng SBY, JK, atau Mega, berilah mereka skor dari 1 sampai 10. Seperti ketika Anda menilai buku di Amazon.com atau filem indie di YouTube. Tidak nyaman mungkin untuk mempanjangbeberkan bukti matematisnya di sini, namun beberapa ilmuwan ekonomi politik serius telah setuju bahwa ada solusi atas kedua masalah demokrasi di atas. Kuncinya adalah, anda bisa memberi angka yang sama kepada SBY dan JK – atau kombinasi apapun; sesuatu yang tidak boleh dalam sistem Condorcet dan Arrow. Transitivitas dan unanimitas menjadi lebih lunak, alternatif baru tidak akan mengganggu urutan preferensi, dan semua ini mungkin terjadi tanpa kediktatoran. Alhasil, pilah suara nan kacau itu takkan terjadi.

Atau biarkan pasar yang ambil alih. Tengok kembali Kampung Salihara yang masih gulita saban malam. Jika saja kelompok-kelompok keluarga di sana boleh bertransaksi bebas, maka niscaya akan ada tangan gaib yang merelokasi iuran. Kelompok A yang ngebet lampu bisa memberikan sebagian uang mereka kepada Kelompok B dan C sedemikian rupa sehingga kedua yang terakhir ini bersedia mendukung proyek pelampuan. Misalkan Kelompok A memberi 4 juta kepada masing-masing mereka. Maka, Kelompok A praktis mengeluarkan uang sejumlah 33 + 4 + 4 juta, alias 41 juta – masih jauh di bawah reservasi mereka. Akan halnya Kelompok B dan C, kini defisit 3 juta di masing-masing mereka dapat tertutupi oleh sumbangan 4 juta dari Kelompok A. Reservasi mereka seolah disubsidi, naik dari 30 juta menjadi 34 juta, dan karenanya mampu membayar iuran 33 juta. Alhasil, benderanglah Kampung Salihara. Gerobak ekonomi berdecit lagi bahkan ketika malam. Satu kosong untuk pasar. Benarkah?

Namun, sebelum kita tersenyum terlalu lebar membeli kedua kabar baik di atas – voting berentang dan pasar – saatnya kini untuk melihat caveat emptor. Yang lebih mudah adalah untuk voting berentang. Dengan empirik di jurnal ilmiah dan internet kita bisa percaya bahwa demokrasi masih bisa diandalkan. Namun sebagian kita tetap kecut kuatir. Jika memang voting berentang dapat mengenyahkan Condorcet maupun Arrow, apakah ia steril terhadap, lagi-lagi, main mata para pimpinan parpol? Mungkin tidak, tapi mungkin ini sudah bukan tanggung jawab demokrasi lagi. Atau bolehkah ini termasuk ke dalam apa yang disebut Herbert Kitschelt dan Ihsan Ali-Fauzi sebagai ”partai non-partai”?

Kedua, tentang pasar. Ada gundah dalam GM dan beberapa penanggap akan ekonomi pasar bebas. Bahwa laissez faire telah mati dan saatnya kini bagi ”kompromi Keynesian”. Keynes memang menulis obituari untuk laissez faire, namun obit itu cenderung hiperbolik; dan hiperbola tentu saja adalah gaya Keynes (sebagaimana Chairil Anwar berhak untuk marah pada masa, gaya, dan tempatnya sendiri). Namun Keynes tidak pernah menafikan pasar dan kerja pasar ke titik nol. Ia berusaha menyelamatkan kapitalisme. Dalam itu ia benar; dan juga salah. Salah, bahwa perangkap likuiditas abadi adanya. Benar bahwa ketika itu, seperti hari ini, dunia kekurangan permintaan agregat. Mengharapkan pasar sendirian menutup senjang permintaan-penawaran dalam jangka pendek mungkin musykil. Pasar memang bisa melakukannya, tapi lambat dan menyakitkan. Atau paling tidak, mencurigakan.

Jika Kelompok B dan C di Kampung Salihara tadi mafhum bahwa Kelompok A bersedia mensubsidi mereka, timbullah risiko moral. Mereka akan berlaku seolah harga reservasi mereka adalah ... nol, sembari mengharap semua biaya ditanggung Kelompok A dan mereka tinggal menunggang gratis. Tapi kita tahu, takkan ada lampu, karena total dana 90 juta tidak mencapai total biaya 99 juta. Lampu hanya bisa ada ketika kedua kelompok penunggang gratis ini juga merogoh kocek mereka sendiri masing-masing 4,5 juta, demi menutup senjang 9 juta. Berapa lama proses ini berlangsung? Bisa lama. Kalau ia tentang lampu, kita bisa sabar. Negosiasi di Kampung Salihara biarlah berjalan pelan tapi pasti, menuju keseimbangannya yang damai: 90-4,5-4,5-Benderang. Atau keseimbangan ceria yang lain di antara itu dan 39-30-30-Benderang, tergantung kuat-kuatan tawar. Ada banyak sekali kemungkinan di spektrum ini. Namun butuh waktu untuk mencapai salah satu saja. Waktu yang mungkin lama. Lagi, jika itu lampu, kita tunggu. Tapi jika ia obat penangkal flu ganas, stimulus fiskal peredam krisis ekonomi, berapa lama kita menunggu? Tentu jangan lama betul, kalau kita tidak rela melihat flu ganas itu merayap, krisis ekonomi itu menyayat. Di sini kemudian kita buka sedikit ruang bagi pemerintah. Jika negosiasi antar pelaku ekonomi bakal terlalu mahal, jika sebuah barang publik dinikmati gratis sekelompok orang dan dibiayai oleh kelompok lain yang terzalimi, maka pemerintah bisa membantu ”relokasi”. Pemerintah perlu membantu. Hanya, membantu adalah kata kerja sementara. Dan seringkali pembantu perlu dibantu. Topik untuk diskusi yang lain, mungkin.

Kompromi Keynesian dengan begitu bukanlah pilihan biner antara pasar dan negara. Ia adalah tentang sempit-lebarnya pintu kita buka buat pemerintah, untuk masuk ke ruang bernama pasar. Di sini sepertinya kita perlu arif dan hati-hati: di dalam ruang itu ada proses-proses bernama demokrasi. Biarkanlah mereka bergerak dinamis tanpa pernah sampai. Sebab sekali ia sampai, ia bisa jatuh pada kesesatan atau kesetanan logika serta penghianatan preferensi konstituen. Cukup ia menjadi alat, menjadi kendaraan. Ia adalah piranti distribusi antara elit kekuasaaan dan warga negara. Elit membutuhkan rasa kuasa, dan uang. Warga negara mencari uang, atau kesejahteraan (yang selalu bisa ”diuangkan”).

Penengah di antara kedua gaya tarik-menarik ini mustinya adalah demokrasi: sebuah alternatif rasional yang lebih murah ketimbang revolusi – dengan segala kekurangannya. Ia bandul yang bergerak, dan sebaiknya bergerak, menjaga ekuilibrium dinamis di antara negara dan warganya. Lewat GM, kita tahu bahwa Laclau dan Moffe itu akan setuju dengan ini: kwasi-stabil, equilibrium yang bergerak. Kalau ia berhenti, ruang itu menjadi kaku. Konsensus, seperti dikuatirkan Robertus Robet. Mungkin memang kita bisa lebih nyaman denganproses bor Bill Liddle pada kayu keras, ketimbang ketika kayu itu akhirnya tembus berlubang – sampai, dengan kata lain. Rocky Gerung kuatir bahwa masalah demokrasi sebenarnya adalah ketegangan antara politik elektoral dan politik kewarganegaraan. Tapi justru demokrasi adalah jembatan di antaranya.

Tentu, kalau ia, demokrasi, bergerak terlalu liar, kita gugup. Maka kadang-kadang pintu itu kita buka, mengundang pemerintah untuk sesekali memperbaiki bandul, lalu keluar lagi dan menonton dari balik kaca. Asal demokrasi bergerak. Gerakan itu mungkin yang bisa menenangkan GM dari mimpi buruknya akan ”kurva lonceng” demokrasi. Baik atau buruk, bukankah SBY dulu datang dari ekor kurva? Betul bahwa seiring pergerakan hari, SBY pun merapat ke massa di tengah kurva lonceng. Sebagaimana Felipe Gonzáles Márquez atau bahkan Hugo Chavez.

Kita yang di dalam ruangan coba menikmati saja (atau kata Rizal Panggabean: terima dengan rasa dongkol dan sebal). Jika kita resah dengan kurva lonceng yang berat di tengah, kita ingat saja bahwa kurva itu masih punya ekor di kiri-kanannya, tempat di mana angsa hitam bermunculan mendadak. Apakah demokrasi Superman-Beckham-Papanya-Cynthia lebih baik daripada selingkuh di pucuk-pucuk pimpinan antarpartai? Kita tidak tahu. Mungkin tak perlu tahu, dan tak perlu buru-buru menjawab Dodi Ambardi: menjadi pelaku sejarah atau pencatat sejarah. Karena kepolosan tampaknya masih bisa berhelat. Tinggal pandai-pandai kita menangkap kairos.

Jakarta, 13 Mei 2009

That myth again

Told you so. Swasembada beras is a myth.

2009 PAPI Workshop

Upcoming event.

Very, very useful resources

For those studying or doing research on commodity futures markets. Compiled by Scott Irwin of UIUC.

Thanks, Scott!

Publishing as Prostitution?

Survival in academia depends on publications in refereed journals. Authors only get their papers accepted if they intellectually prostitute themselves by slavishly following the demands made by anonymous referees who have no property rights to the journals they advise. Intellectual prostitution is neither beneficial to suppliers nor consumers. But it is avoidable. The editor (with property rights to the journal) should make the basic decision of whether a paper is worth publishing or not. The referees should only offer suggestions for improvement. The author may disregard this advice. This reduces intellectual prostitution and produces more original publications.

That's Bruno S. Frey in Public Choice 116:205-23, 2003. Amusing read. This post's title steals the paper's.

Overheard in the Politician's Room

"Welcome Gentlemen, thank you for coming"
"What's this for? We're busy"
"I know. We appreciate your giving us your precious time. You know we have been very..."
"Oh, cut the crap. What is it?"
"OK. Here's the thing. The situation is dire, as you are all well aware. And we need trust from the people... You know, election and all..."
"So?"
"So, we need you in two things"
"Yes?"
"First funding..."
"Hey, you call us here for that? We've been giving you money like forever. That's not news anymore"
"Alrite. Thank you for that. The second one is far more important... Wait I should say equally important"
"Quick"
"Yes, it's eergh we want you to understand that we will have to bash you, the wealthy, in public..."
"Hah? What do you mean?"
"You know, in this time, it is very important to be seemed as being supportive to the unlucky -- the poor that is. The world situation is bleak because of what Madoff and his ilk was doing..."
"What the hell does it have to do with us?"
"Well, you're rich. To average people, you're guilty by association"
"Damn"
"I know. But please understand. This is just a ... well, game, if you like. We're gonna say in public that you, the rich, are the roots of all evil... Pardon my language... But off course we don't mean that"
"Say again?"
"We'll call you evil. We need to do that to gain support from the general population, especially the poor. But we don't mean it"
"OK, I don't care"
"Thank you, Gentlemen... May God bless you"

Lame Police Doesn't Understand What Law Is For

A little news in Kompas today (22/3/2009). Chief of South Sumatra Police Department gave an award to a driver who killed two robbers by crashing them with his car. See the problem? Yes, you don't need the police. Average citizens, go kill the bad guys.

Equally saddening is the tone of the news. The journalist who wrote sound proud of that killer driver.

Sustainable development and economic valuation

Below is my address to the East Asia's Sustainable Automobile Society in a meeting in Bangkok last week.

Ladies and gentlemen,

Economy and the environment are not independent one another. In fact, economic activities take place in environment and their outcomes are both affected and affecting the environment. This is true particularly because both consumption and production – the two basic economic activities – use resources from the nature as their inputs. Furthermore, those activities generate both output and waste. The capacity of the environment to assimilate waste will determine the future condition of the environment and hence its ability to support economic activities. Finally it should be mentioned that economic activities end up at the provision of utility to economic agents. Here too, the environment can have direct impact. That is, amenity may or may not enter directly into one's utility function. Recognizing the interrelationship between environment, natural resources, consumption, production, and utility is necessary to put economics into the realm of sustainable development, i.e. development that strikes the balance between economic activities and environmental preservation as well as between generations.


In order to appreciate the role of the environment and natural resources in economic context, one needs to have a framework. This framework would preferably be able to lend itself into the widely used cost-benefit analysis. Here the problem lies: it might be easy to calculate the cost of improving the environmental condition (e.g. building up a giant air purifier, water treatment, etc). But that is just half of the materials to come up with sensible cost-benefit assessment. To justify spending of public money for say, cleaning up the air, there has to be a justification to the proposed costs. That is, we need to calculate the expected benefit of such action. Alas, this is no easy task. Measuring the economic benefits of consuming food or clothes is easy, for they are 'market goods': goods traded tangibly and have price tags on them. The direct proxy of their benefits is simply their market price. But for environmental goods, this is not the case. One needs to apply a particular technique to attach a value to such 'non-market' goods as a proxy of the benefit that later can be contrasted against the cost. That is the objective of economic valuation.


Economic valuation can be based on two different sources of data. First, stated data set. This information is obtained via direct question to respondents. Second, revealed data – information obtained by observing what an economic agent does. There was a time when economists tend to be skeptical on the former, as economics is a 'science of observation'. However, experience has dictated that not every time and for every case historical data are available. This is particularly true for the cases of non-market goods such as environmental quality. Therefore, economists have to rely on stated data: surveys, questionnaires, interviews are employed. Recently, there has been an increasing amount of researches using both resources in combination. One message from these studies is that whatever data resource is employed, what matters is how one can come up with a sensible measure of the value of improving the quality of the environment. The principle here is that, you can not preserve the environment if you have no idea what it is worth. To know the value, you need to calculate how much benefit people will enjoy on top of the cost of the improvement. That again is the use of valuation. 

Thank you

Stimulus for works

The GOI claims that its Rp 73.3 trillion stimulus will create 3m employment, assuming an employment-growth elasticity of between 431 and 450 thousands (The Jakarta Post, 26/2/2009). It seems that GOI expects workers to come to its infrastructre projects that will take Rp 12.2 tr from the stimulus, on top of the Rp 90 tr already allocated in the 2009 state budget. With all this, GOI expects to see a poverty redux from 15.4% last year to 12-13% this year, assuming growth between 4.5 and 5%.

Two notes. First, growth will likely be at 4% and that means employment and poverty targets might be missed. Second, setting targets is one thing, attempting to reach them is quite another. GOI has set so many targets but it is seldom crystal clear how they will achieve them. For one, infrastructure is said to be the champion, but at the same time populist moves such as fuel subsidy increase keeps coming. Also, arguably under DPR's resistance, GOI can't implement more effective modes for stimulus such as direct cash transfer.

More redux?

DPR is asking further cut in fuel price from Rp 4,500 to Rp 3,500.

It's DPR. So you judge yourself.

Paper pick: Jacks et al on Commodity Price Volatility

Commodity Price Volatility and World Market Integration since 1700
by David S. Jacks, Kevin H. O'Rourke, Jeffrey G. Williamson
NBER Working Paper -  #14748, 2009

Abstract:

Poor countries are more volatile than rich countries, and we know this volatility impedes their growth.  We also know that commodity
price volatility is a key source of those shocks.  This paper explores commodity and manufactures price over the past three centuries to answer three questions:  Has commodity price volatility increased over time? The answer is no:  there is little evidence of trend since 1700.  Have commodities always shown greater price volatility than manufactures? The answer is yes.  Higher commodity price volatility is not the modern product of asymmetric industrial organizations - oligopolistic manufacturing versus competitive commodity markets - that only appeared with the industrial revolution.  It was a fact of life deep into the 18th century.  Does world market integration breed more or less commodity price volatility? The answer is less.  Three centuries of history shows unambiguously that economic isolation caused by war or autarkic policy has been associated with much greater commodity price volatility, while world market integration associated with peace and pro-global policy has been associated with less commodity price volatility.  Given specialization and comparative advantage, globalization has been good for growth in poor countries at least by diminishing price volatility.  But comparative advantage has never been constant.  Globalization increased poor country specialization in commodities when the world went open after the early 19th century; but it did not do so after the 1970s as the Third World shifted to labor-intensive manufactures.  Whether price volatility or specialization dominates terms of trade and thus aggregate volatility in poor countries is thus conditional on the century.

Forced apology

So there they are. The arrogant guys at Commission VII of the House win. They have successfully forced the bullied Karen Agustina of Pertamina to apologize for something she did right. Effendi Simbolon, Sonny Keraf and their ilk, shame on you.

Feenstra's newest

New paper by Feenstra:

Over the last three decades, the value of Chinese trade has approximately doubled every four years. This rapid growth has transformed the country from a negligible player in world trade to the world's second largest exporter, as well as a substantial importer of raw materials, intermediate inputs, and other goods. This paper provides an overview of the microstructure of Chinese trade, its macroeconomic implications, trade disputes with other WTO member countries, and the role of foreign firms.

Bullying Karen

If the story in the Jakarta Post today (17/02/2009) is true, I'm with Karen Agustiawan, the new chief of Pertamina. It is reported that Sony Keraf, deputy chairman of Commission VII stopped the hearing while Agustiawan was still responding to the House's queries.

I'm sick of DPR's demand for respect. They do not deserve one.

Different alpha again?

The Energy and Mineral Resource Ministry is asking another 'alpha' for Pertamina. Now they want a fixed figure of Rp 693.5 if Indonesian Crude Price (ICP) is between $40 and $50; and Rp 704 if between $50 and $60. If we assume ICP match WTI, then those two rupiah figures correspond to an alpha of 15.8 and 13.5, respectively, taking the midpoint of both ranges.

BIES Interactive Forum

The first of its kind. Truly innovative.

31 trillion subsidy

is said to be allocated this year to BBM

Cochrane on Fiscal Stimulus (2)

... and Krugman's rebuttal.

Cochrane on Fiscal Stimulus

Saved for later reading. (HT: Mankiw, Rodrik)

MUI bans sleeping

Of course I'm  kidding. But who knows?

13.4

Pertamina is asking for another adjustment on their "alpha" to 13.4% (Kompas, 22/1/2009). Given the assumptions of 45dpb crude oil and 11,000Rp/$ exchange rate, that would translate to an accounting price of subsidized gasoline at Rp 4,983 or ~ Rp 5,000, again keeping the 10 percent value added tax and 5 percent vehicle fuel tax.

The work in progress here at Canberra

This:

A Tale of Two Cities: The Political Economy of Local Investment Climate in Solo and Manado, Indonesia

 

Arianto A. Patunru, Neil McCulloch, Christian von Luebke

 

Abstract: There is little doubt that the protection of property rights, low corruption, and effective public services are desirable long-term objectives of many countries. But it remains questionable whether orthodox institutional prescriptions are the most promising pathway to get there. By taking a deeper look into the political economy of the cities of Solo and Manado in Indonesia, this paper shows that relationship- (rather than rule-) based cooperation can be a key factor for policy reform. Informal deliberations between government leaders and local firms can provide an effective mechanism to improve local investment climates. In the case of Solo, a 'heterodox symbiosis' between public and private actors – involving the mayor and a broad spectrum of multi-sectoral/scale/ethnic firms – has brought about important regulatory and administrative reforms and contributed to a rise in private investment. Solo's informal relationship-based deliberation process – between a reform facilitator (well-skilled responsive mayor) and a diverse 'reform group' (multi-sectoral/ scale/ethnic firms) – has provided a constructive basis for regulatory and administrative improvements. On the other hand, Manado's informal relationship-based process has led to rent-seeking bureaucracy. Given that, it may make sense for local leaders to focus on a handful of key investors. But failing to address the rent-seeking bureaucracy could make development less inclusive/more unequal. And failing to plan effectively reduces the amenity value of the development that happens.

And this one:

The Political Economy of Rice and Fuel in Indonesia

 

Arianto A. Patunru and M. Chatib Basri

 

Abstract: Rice and fuel are arguably the most political/politicized commodities in Indonesia. Demand for protection in the case of rice has traditionally taken the form against price decrease; while that of fuel is characterized by government subsidy to avoid price increase. In general, Indonesia has been a rice net importer for a long time; however, resistance to importation is always strongly pronounced. Consequently, government policy tends to bias against the majority net consumers of rice, a group dominated by the poor. This paper argues that the lobby of net producers is stronger than that of net consumers, because the latter group relatively lacks the incentive to fight. Further, the demand for protection is likely to be affected by the movement of real effective exchange rate. As for the case of fuel, the paper argues that the subsidy policy has been mis-targeted, partially thanks to both populist agenda and public ignorance. Again, the poor is disadvantaged because they can not voice up effectively. Finally the paper argues that the poverty incidence has much more to do with rice price increase (thanks to import ban) than with fuel price increase (thanks to subsidy removal).

Light blogging

Until early February blogging will be very light, if any, as I am visiting with Australian National University in Canberra.

On the election, part 2

What are the populist, vote getting policies then? Take fuel. SBY is, I think, the first president of RI that cuts gasoline price. And by tomorrow, he will have done that three times in a row. Yes, the world crude oil price has been free falling, from about 150 dpb to less than 40 today. So yes, a redux in domestic price of gasoline is in order. But don't forget that the price has been supported by subsidy almost all the time. So it is not really a normal price cut. Now the price is set at Rp 4,500 subsidy-free. But the govt says that it guarantees that, should the world price go up, the domestic price will not go beyond Rp 6,000. This is politically smart. But might be economically harmful given the random walk nature of the crude price (see my post also on the fallacy of 'harga keekonomian').

While gasoline is conditionally subsidy-free, other energy sources like kerosene and diesel still enjoy big subsidies. But most saddening is the fate of PLN, the state-owned electricity company. This company is an all time loss maker. The reason is simple: they have to sell their product below the production costs. Two years ago PLN introduced a more market oriented approach: businesses that operate in peak hours should pay double. Fair enough. But even with that, the price is still below the cost. For example, a business with 30 MVA that operates between 6pm to 10pm should pay Rp 880/KWH. In normal times it only pays half of that. The production cost, on the other hand, is Rp 1,300/KWH. Now, the government just announced that the penalty rate is cut from double to 1.5. Meaning, the business in our example should pay only Rp 660/KWH should they opt for peak hours. Yes, due to lower oil price, the production cost should be lower, too. But the best PLN can go is Rp 900. See?

If you want more examples, we have LPG, fertilizers, etc. Not to mention the privileges given to selected business sectors to be exempted from value added tax and import duty. And don't forget the political gestures. When SBY cut the fuel subsidy in 2005, and therefore effectively increased the domestic price, it was obvious that he didn't want to take the center stage. Now, to announce the price reduction, a populist move, he did it himself. What does that show? You tell me.

Two caveats. First, yes, it's great to see prices are down and hence affordable. But many of them are superficial, on the back of big subsidies. In the longer run, somebody, we, have to pay for all that. Second, yes, in this time of crisis, stimulus is needed. But it would be far more effective to target the consumers rather than those selected producers. The interesting question would be why the government bows more to the one with smaller multiplier effect? Here comes the politics. Businesses are stronger lobbiers than any group of consumers, let alone individuals, especially the poor.

On the election, part 1

What is the benefits and costs for SBY and his staff to lower prices of basic or strategic commodities?

The benefits are clear. He will gain popularity and votes to win the election once again. If he looses, these benefits are gone, but so are the costs.

The costs, depend. Whether he wins or loses, the monetary cost will not matter much -- it's taxpayers money, not his. The bigger cost however, should he win, would be a hardship to his administration. Lowering prices now with support of subsidies is akin to set the time bomb for the next administration. Whoever wins will face a tough job managing the budget as the economy starts to recover probably in the middle of the period.

Well, maybe I overstate the problem for SBY. Note that he can't run for the third time. So the burden, even if he wins, would be less heavy than if he would have a third opportunity. But what does this imply? Yes, the incentive for SBY to run policies or programs that are economically sound now is small. He might as well trade them for more populist, vote getting ones. A clear advantageous position, to his rivals dismay.

Where the stimulus will go

Further to the post below, I gather the Rp 15 trilion additional stimulus will go to electricity tariff discounts, diesel oil subsidy for motorists, infrastructure, and poverty alleviation programs (The Jakarta Post, 14/1/2009). Fair enough. (Note however that the government has allocated larger amount to business sector alone, ie Rp 50 trillion)

Revised again

Minister Sri Mulyani has announced the revision made to the 2009 state budget (Kompas, 14/1/2009). Assumptions now are: growth 4.5-5.5, world oil 45, inflation 6.2, SBI 7.5, oil lifting 960,000. Particularly worrying is the world oil assumption. In the earlier budget it was assumed 80, fair enough. But now, as if the price risk has reduced (it has not), they cut it to 45. Add to that government decision to make further cut to fuel price to Rp 4,500. This price is said to bear no subsidy. But, and here's a political manouvre, when the price rises to Rp 6,000, they will give back the subsidy.

Furthermore, the budget deficit is set at 2.5, up from 1 in the earlier version. You might expect bigger stimulus. But not entirely true, as it is the revenue that goes down (Rp 985.7 trillion to Rp 877.7 trillion), not the expenditure goes up (stays at Rp. 1,037.1 trillion). The reduction in revenue is due to lower tax and non-tax revenues.

However, the Minister said that fiscal stimulus will be increased to Rp 15 trillion (up from Rp 12.5 trillion). I'm not very clear now where that number came from.

A good thing, the government will not give stimulus for industry materials (alas, still give it to finished goods). I'd rather see stimulus goes directly to (esp the poor) consumers.

Politically smart, economically harmful

As predicted by Exegesis, SBY would make yet another cut in fuel prices. The prices of gasoline and diesel would be set at Rp 4,500, effective January 15 (The Jakarta Post, 13/1/2009). The government also promised there would be no shortages.

Back then, when SBY announced a plan to increase fuel prices, consumers rushed to gas stations. What would retail sellers do when told that the price of the product they sell would be cut? Well, either they reduce the quantity of that product and increase others, or stop selling that product and find another business, or go find black markets and sell high there.

Time will tell.

Daron's wisdom

The lessons from the crisis of 2008, as identified by Daron Acemoglu (below are my expressions based on his splendid essay -- I suggest you to read the whole thing directly)

1. Business cycle is not dead.
   
1. Pay more attention to the "tail" events.
   
2. Years of economic calm can be followed by tumultuous times.
3. Schumpeterian creative destruction can happen in the macro.
   
2. Free markets are not equal to unregulated markets.
1. Institutions matter more than thought.
2. Greed is neither good nor bad. But can be made good or bad.
3. The giants don't self monitor well.
   
1. Role of reputations should not be underestimated.
2. Firm reputation should be derived from the behavior of individuals in that firm.
4. Growth economics still very important.
1. Recognize not just K, L, and technology, but also innovation and reallocation.
2. Look at the institutional framework.
3. Pay attention to the political economy of growth.
5. Others
1. Stimulus plans are fine, but consider their full set of implications.
2. Ideological pendulum might swing too far to heavy government and away from market.
   
3. Warning: anti-market policies are real threats to economic growth.
   

HT: Arnold Kling, who also offers his takes on Acemoglu's.

Misplaced supports

I'm sick of KADIN, the Indonesian chamber of commerce. As reported in The Jakarta Post today (10/1/2009), they are now asking further cut in fuel prices to Rp 4,500 for gasoline and Rp 4,300 for diesel. They have also asked for more electricity subsidy. Some of these people have been given privileges not to pay value added tax or import duty.

SBY on the other hand keeps giving room for those rent seekers. Chances are he's gonna do it again to boost up his popularity.

Economic stimulus in this difficult time is justified. The objective is to boost the aggregate demand. The most effective way to do that is to give it to consumers, not producers. Programs like cash transfer is particularly good because it directly goes to the poor, the people with higher marginal propensity to consume (I owe this to a discussion with Chatib Basri yesterday). Others targeting the supply side like tax- or duty exemption and subsidies are less effective, because they require direct channeling to the demand side -- something that does not happen instantaneously, if not at all. Businesses should know, they might be given facilities so as to keep producing. But in this situation, who's gonna buy those stuff?

Addendum: I've been thinking more. In addition to cash transfer to the poor, the government can also stimulate the other income groups, including the non-poor, using payroll tax holidays. In developed countries this would be much easier (virtually everybody is in payroll system), so they don't even need the cash transfer program. But in countries like Indonesia, majority of workers are not in a payroll system -- at least not in a system that allows easy integration of data. This is partly because many are in informal sector -- thanks partly to the rigid labor law.

Kompas lowers its price, happily

No, I made that up, the title. Sorry. But I can't help it as I am reading this Kompas editorial today (9/1/2009). Talking about the fuel shortage problem, Kompas goes: "Logically, no one would be mad if the government lowers fuel price". (And the editor is confused why in fact problem arises at gas stations).

Alright. How about if government decided that media should decrease their retail price? I would certainly be happy. Would Kompas be happy, too? "Logically"?

A conv between two taxpayers

"I don't really get this NPWP vs 'fiskal' thing"
"Why?"
"You know, I travel a lot. It's like twice a month. I always show our office's NPWP when paying the fiskal. So the office will deal with the refund at year end"
"And?"
"Yes, now I should use my own personal NPWP, instead of office's"
"What's problem with that?"
"Well, think about it. If I go abroad twice a month, it means I'm exempted from paying Rp 24 million a year -- or Rp 60 million if you assume Rp 2.5 million per travel like that now imposed on the non-NPWP holders"
"And the problem is...?"
"If I were a taxman, I'd go suspicious: hey this lady goes abroad 24 times every year. Ehm, she must be rich. Let's go after her records and all... While of course I go on duty, not for my own pleasure"
"I still don't see a problem. Let them do that, no?"
"Oh, you don't wanna do that. Dealing with taxmen is hell. No matter how right you are..."
"Really?"

Great, lots of supply. But hey, why is price down?

HKTI chief Siswono Yudo Husodo is uneasy. The price of rice is decreasing (Kompas, 8/1/2009). If you recall, everybody has been happy with increase in rice production. Export is still constrained. And people like Siswono has suggested against too much export. Once he said we should only export quality rice (as if buyers are stupid). As for the domestic consumption, we all know its pretty stable. So here you go: supply increases, export is constrained, domestic demand is stable. What do you expect of the price?

President's antieconomics

President SBY is calling the people of Indonesia to buy more own made goods than imported ones (Kompas, 8/1/2009). Fine. Realizing that there is now way he can force citizens to always do that, he approaches to the supply side. That is, SBY urges domestic producers to be more competitive.

And here is the kicker. "Prices should not be higher than those of competing products from abroad. Should at most be the same. Better yet if less expensive. But the quality should at least be the same. Better yet if higher".

Nothing further.

On Trowulan brouhaha

The media has been reporting public disappointment toward the development of Majapahit Information Center right on the cultural site of the historical Trowulan Museum in Mojokerto, East Java (eg Kompas, 4/1/2008). Underneath the site lays a huge set of archeological artifacts that records the glory of the Kingdom of Majapahit.

The local government and the Ministry of Culture and Tourism are under fire. The project was initially a part of a bigger initiative to save cultural heritages in the area. Presumably the future management would need some kind of information center to serve the public. Alas and ironically, the information center is being built with significant damage to the heritage! Hence the angst.

This is another area where economics should have been helpful. Nowhere in the media is a mention of how much the cultural site is really worth. Economic valuation helps to quantify this kind of value, taking into account your and my valuation regarding the site, regardless of whether or not we 'use' the site (if not, we're talking about 'non-use' value). It is true that measuring the value of 'non-market' goods like cultural heritage is damn difficult, if not ridiculous. But economics profession has come to establishing tools for such that. For example, 'contingent valuation' technique has been improved so well after its famous 'test-case' in the Exxon-Valdez oil spill in Alaska twenty years ago. This technique is relying on people perception. The other technique, hedonics approach uses the value of something else that can be directly priced in market (eg house) as a 'surrogate mother' of the price of the non-market good (eg cultural heritage). It has been successful in estimating the economic value of clean air, for example.

Of course we can never measure such things in an exact, accurate manner. But the fact that many people are angry about the Trowulan destruction is a clear indication that the thing has a non-zero value. Most importantly, for public good like cultural park, public money (ie tax) is at stake. The rule for any project is 'go when the net benefit is positive'. Net benefit means benefits minus costs. It is easy to measure the costs (labor, tractors, etc). But measuring benefits is no piece of cake. It is in this case the measurement of non-market good: how much people put a value on the historical site. We have now science for that.

One thing needs to be said though. The measurement does not necessarily end up in favor of keeping the heritage. It might be the case that the information center development is justified! It might sound unpopular, but it's not you or me or some random artist and culture lover to decide. It's us, the people with different interests, collectively. If you're not comfortable with that, try think about this: once upon a time the world was full of dinosaurs. We love dinosaurs. But do we really want them to come back alive now? Well, maybe one or two in a cage might be cute. Who decides?

I wish I could do something on this Trowulan thing. I feel a little bad that my valuation works have been applied in another country, while I can't really use them at home. Science itself is expensive, unfortunately. Anyone interested to collaborate?

and the winners are...

As part of its effort to provide stimulus for the economy amidst the global (and hence domestic) crisis, GOI has decided to give privileges to some sectors. 'Fortunately', rather than a direct picking-the-winner strategy, GOI did have a general set of criteria (albeit vaguely) -- or so it claimed. Here are the criteria for those who are exempted from paying the value added taxes:

1. Facilities are given to sectors affected by economic slowdowns, but with the following nature: can absorb large number of employment, produce goods needed by the general public, belong to 'promoted sectors' (sektor unggulan) that contributes highly to the country's export.
2. Facilities are given in order to maintain the stability of basic needs' prices.
3. Facilities are given to protect consumers.
   

And here are the criteria for exemption of import duty:

1. Criteria for industry: a) produce goods or services for general public and/or for protecting consumer's interest (see how vague this is?); b) increase competitiveness; c) increase job creation, and d) increase country's revenue.
2. Criteria for goods and materials: a) not yet produced domestically, b) has been produced domestically but not yet meet the required specification, and c) has been reduced domestically but not sufficient enough.

And the winners are:

1. Free from value added tax: steel material, machine used for the 10,000 MW electricity projects, mini machine to produce ice for fishery, machine for cold storage for fishery, textile for garments, leather and rubber for footwear, materials for ship building, materials for (car?) assembly, silver materials for handicrafts or jewelry, materials for train locomotive, materials for film production, crumb rubber, rattan for furniture, fish/shrimp feed, non-subsidized plant-based oil, cooking oil, and gas and geothermal.
2. Free from import duty: ballpoint, materials and components for heavy weight industry, materials and components for development of small electricity generator, materials for milk production, supporting materials for methyltin mercaptide (?), materials and components for automotive industry, electronics components, fiber optics and components for telecommunication, materials and components for ship building, supporting materials for sorbitol industry, materials and equipments for film, electricity, health equipments, aircrafts.

Sounds like many, with alas, unclear criteria (protecting consumers by protecting producers? How's that?). And yet, the list will grow, apparently.

Core programs of 2009

And here is the GOI's 2009 agenda of what they call "four core programs":

1. Financial sector programs: to submit draft laws of deposit guarantee institution, amendment to Bank Indonesia law, financial sector safety net; to extend the business credit for low income families (KUR); and financial sector assessment program.
2. Fiscal policy programs: to continue the fiscal consolidation; budget expansion for infrastructure, education, and poverty eradication; more tax stimuli; and targeted subsidy for agriculture (fertilizers, seeds) and energy (fuel, liquefied gas, and electricity).
3. Real sector support policy programs: real sector stimuli (taxation, customs), investment climate (licensing, national single window); market support and sector empowerment (export-import monitoring, domestic product promotion, etc); trade financing; micro and SME empowerment; infrastructure development acceleration; improvement on energy and food production.
4. Anti-poverty programs: PNPM expansion, direct cash transfer for 2 months, rice for the poor (18.2 million of target households with an allocation of 15 kgs per each); and PKH expansion.

Although these four "core programs" seem to be the squeezed version of the Presidential Decree 5/2008 on the Economic Program Focuses, I would think even more trimmed version is desirable. All above still seems too many to accomplich within one year. If GOI could just complete what has been started on electricity and road infrastructure, and make more effective cash transfer, that would be great. Forget about expanding too much on agri and energy subsidies.

Prospect of 2009

Still from the GOI's presentation yesterday, here is their projection for 2009 (in %, yoy): C 4.8, G 10.4, I 6.5, X 5.9, and M 6.1, which brings the GDP growth to 5%. Sounds quite optimistic.

The 2009 challenges

According to the government, the key economic challenges of 2009 are: 1) The need to increase the quality of human resources, 2) The need to fill the infrastructure gaps, 3) The integration with global economy, 4) The need to increase the quality of bureaucracy, and 5) The need to improve income distribution.

I would add: the possible upward swing of the world crude oil price, massive layoffs, and the rise of protectionism.

Explaining the small deficit

According to Minister of Finance, the very small budget deficit realization of 0.1 (see macro summary below) is due to higher-than-target revenue and lower-than-target expenditure. The revenue realization of 2008 was 9.6% higher than that targeted in the 2008 budget (APBN-P 2008). This came from tax (8.1% higher) and non-tax (13.2% higher). Grant on the other hand was below target (only 78.3%). Meanwhile, state expenditure only met 99.6% of the target in APBN-P 2008. This was due to lower spending for ministries and other central government institutions (99.4%) even though transfer to local governments was higher than target (100.1%).

This suggests the government limited capability to spend effectively -- a necessity for effective fiscal stimulus. Or, a more supply side economics?

Macroeconomic summary of 2008

From GOI's presentation on economic evaluation of 2008 and prospect of 2009 in Jakarta, January 5, 2009. Below is the macroeconomic summary of 2004-2008. The first numbers indicate those of 2007, the second 2008.

• Growth (%) 6.3 - 6.2
• Inflation (%) 6.7 - 11.1
• Bank Indonesia's policy rate (SBI 3 month rate, %) 8 - 9.3
• Exchange rate (Rp/$) 9,130 - 9,691
• Foreign reserves ($ billion) 56.9 - 50
• Current account (% GDP) 2.6 - 0.9
• Budget deficit (% GDP) 1.2 - 0.1
• Foreign debt (% GDP) 32.7 - 30.4
• Debt service ratio (%) 21.5 - 17.5
• Open unemployment (%) 9.1 - 8.3
• Poverty rate (%, BPS method of daily calorie) 16.6 - 15.4
• Poverty rate (million of population, BPS method of daily calorie) 37.2 - 35.0
• Poverty rate (%, WB $1/day, PPP) 6.7 - 5.9
• Poverty rate (million of population, WB $1/day, PPP) 15.5 - 14.2
  
• Poverty rate (%, WB $2/day, PPP) 45.2 - 42.6
• Poverty rate (million of population, WB $2/day, PPP) 105.3 - 100.7
  

Welcome, black market

The media these days have been running headlines about fuel shortages across the country. As Exegesis has constantly argued, that's what you would see when you force price to stay below its market equilibrium, without sufficient resources to back it up. Long lines at gas stations are not surprising.

The natural consequence of all that would be a rise in effective prices. That is, the administered prices will lose its relevance -- you simply need to check with your vendor across the street, or else go to more remote areas. In other words, the rise of black markets.

You have been warned.

Note: For fairness, I should add that the recent shortage also has something to do with Pertamina swicthing to a new operation system. As usual, it takes time to adjust.

Dumbing down on tax strategy

I have commended the Tax Directorate policy to punish individual citizens without NPWP (tax registration number) with an exit tax of Rp 2.5 million per travel, as opposed to zero for those holding NPWP. I thought that was smart.

Apparently, not smart enough. Kompas today (3/1/2009) reported that an official from DG Tax said that on January 1, 2011, everybody including those without NPWP will not need to pay any exit tax.

Hm, funny. My friends who refuse to pay taxes already called me: "See, we're right after all. We don't want to have NPWP. Going abroad? That can wait until Jan 1, 2011, my friend".

And fertilizers should follow suit?

Further to my post below, I should mention about fertilizers, too.

Kompas also had an article on fertilizers in the same day (2/1/2009). It argued that the government should guarantee a sufficient subsidy on fertilizers for each farmer. The MoA's regulation that those eligible for such subsidy are farmers registered in a 'farmers group' and fill out a specific form, was deemed insufficient.

According to Kompas calculation, with the current budget allocation for fertilizer subsidy (ie to provide subsidized fertilizer of 4.3 million tons in 2008, against a demand of 5.8 million tons; for 2009 the numbers are 5.5 million and 5.82 million tons, respectively) is not enough. The newspaper went on to project these numbers on a unfertilized paddy area of as much as 1.2 million hectares (assuming a 250 kg/hectare fertilizer). That would mean 4 million small farmers (those with area less than 0.34 hectare per family) would not get subsidized fertilizers.

And here goes the typical Kompas' provocation: "If those 4 million farmers go on strike in front of the House office, it is more than enough to shake up the capital city".

Ah. So next time you hear the term 'rice self-sufficiency', just be advised that it means sufficiency with all kinds of subsidy, from fertilizers to paddy to rice. In other words: false sufficiency.

SBY's new decree on rice

Reported by The Jakarta Post (2/1/2009), SBY has issued a new decree on rice, effective January 1 (Inpres 8/2008). The decree stipulates the following: GOI will pay rice at Rp 4,600/kg from farmers; ie a 7% increase; unhusked paddy (GKP) at Rp 2,400/kg (a 9% up); and husked paddy (GKG) at Rp 3,000/kg (a 7% increase).



Economists Bustanul Arifin and M Maksum said the increases in government buying prices were now merely for administrative purposes, not for protecting the farmers (Kompas, 2/1/2009). That means the prices are set only to help ease the management in Bulog, the state logistics agency with a monopoly on controlling the national rice stockpile. Bustanul Arifin argued that the government should provide compensation when the market prices fall below the administered price. Maksum on the other hand calculated that the it needed 1.54 kgs of GKG paddy to produce 1 kg rice, suggesting a conversion ratio of 54%. The set prices could only hold if the ratio were 65.5%, argued Maksum. In short, the two economists are for higher administered prices and an effective compensation should the price fall below them. In other word, headache. That's what you should deal with when playing around with prices against the market forces.



The Jakarta Post also reported that the rice output might jump to 40 million tons in 2009 (from 38.6 million tons in 2008, which was said to exceed the domestic consumption of 37 million tons; hence the much proud 'self-sufficiency'). What is the implication of supply exceeding demand? Yes, a drop in price (and hence compensation as asked by Bustanul), unless you can effectively export the difference (and yes, another headache, as other countries are just like Indonesia: import hater).



All in all, expect more 'good news' and wishful thinking regarding rice in the coming months. Rice is all the more important as we're entering general election.