Friday, January 30, 2009
Wednesday, January 28, 2009
Friday, January 23, 2009
Thursday, January 22, 2009
A Tale of Two Cities: The Political Economy of Local Investment Climate in Solo and Manado, IndonesiaArianto A. Patunru, Neil McCulloch, Christian von LuebkeAbstract: 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.
The Political Economy of Rice and Fuel in IndonesiaArianto A. Patunru and M. Chatib BasriAbstract: 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).
Wednesday, January 14, 2009
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.
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.
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.
Tuesday, January 13, 2009
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.
Saturday, January 10, 2009
- Business cycle is not dead.
- Pay more attention to the "tail" events.
- Years of economic calm can be followed by tumultuous times.
- Schumpeterian creative destruction can happen in the macro.
- Free markets are not equal to unregulated markets.
- Institutions matter more than thought.
- Greed is neither good nor bad. But can be made good or bad.
- The giants don't self monitor well.
- Role of reputations should not be underestimated.
- Firm reputation should be derived from the behavior of individuals in that firm.
- Growth economics still very important.
- Recognize not just K, L, and technology, but also innovation and reallocation.
- Look at the institutional framework.
- Pay attention to the political economy of growth.
- Stimulus plans are fine, but consider their full set of implications.
- Ideological pendulum might swing too far to heavy government and away from market.
- Warning: anti-market policies are real threats to economic growth.
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.
Friday, January 09, 2009
Alright. How about if government decided that media should decrease their retail price? I would certainly be happy. Would Kompas be happy, too? "Logically"?
Thursday, January 08, 2009
"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"
"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..."
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".
Wednesday, January 07, 2009
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?
Tuesday, January 06, 2009
- 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.
- Facilities are given in order to maintain the stability of basic needs' prices.
- Facilities are given to protect consumers.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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).
- 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.
- 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.
I would add: the possible upward swing of the world crude oil price, massive layoffs, and the rise of protectionism.
This suggests the government limited capability to spend effectively -- a necessity for effective fiscal stimulus. Or, a more supply side economics?
- 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
Sunday, January 04, 2009
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.
Saturday, January 03, 2009
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".
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.
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.