Friday, February 27, 2009

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

Thursday, February 26, 2009

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.

Wednesday, February 25, 2009

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


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.

Tuesday, February 24, 2009

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.

Wednesday, February 18, 2009

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.

Tuesday, February 17, 2009

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.

Thursday, February 12, 2009

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.

Friday, February 06, 2009