Adios, SBIs

Bank Indonesia is going to scrap the SBI papers (The Jakarta Post, 4/1). The SBIs are short term promissory notes used by the central bank as part of its open-market operations. Thus far, however, these certificates have served more as safe haven to many investors (and even banks) as it carries relatively low risks with more certain yields. Scrapping this will leave the investors with government debt papers - those with higher risks.

As SBI is no longer an effective tool to control the money supply, this move is justified. It obviously will help the central bank cut the costs of its market operation. However, as the alternative, ie the government debt papers, carry higher risks, banks would be more careful. As a consequence, some banks might hedge against the higher uncertainty by keeping interest rate high. These days Bank Indonesia has been urging banks to lower their interest rates, following the consecutive cuts in the central bank's policy rate. While this stands on a shaky ground for justification, the central bankers should realize that scrapping SBI papers might not be in-line with their other objective to reduce the interest rates.

On bonded zones regulations

The Jakarta Post today (4/1) reported the new regulations on bonded zones. The Ministry of Finance Regulation PMK 147/2011 and PMK 143/2011 have ruled that, among all, 1) bonded zones of less than 10,000 square meters are to be (re-)located in industrial estates, 2) 75% of output should be exported (up from 50%), and 3) firms in bonded zones can do subcontract except for early checking, sorting, final packing or packaging.

The Post reported complaints from business community saying that the regulations are too strict and might backfire to the ongoing practices. They claimed that relocation would mean high costs as they have to re-invest in new plants, etc. I agree. Why doesn't the government just limit point one above to new firms and let the existing ones stay where they are? The businessmen also complain about obligation to export 75% of their outputs. I don't think this complaint is well justified. In fact, the main idea of bonded zones is to facilitate export. So, I actually think it has to be 100%. As for the third point above, I don't think it's necessary to restrict sub-contracting. The firms know what's the most economical way of producing. And they know better than the government. If the production sees it more profitable to sub-contract part of the manufacturing processes out to other firms, then let them do it. The government can just focus on monitoring the flow of goods, namely export.

Picks from The Latest NBER Research (2012-01-02)

The Competitiveness Impacts of Climate Change Mitigation Policies
by Joseph E. Aldy, William A. Pizer  -  #17705 (EEE ITI)

http://papers.nber.org/papers/W17705

Abstract:

In order to clarify ongoing debates over the competitiveness impacts of climate change regulation, we develop a precise definition that can be estimated with available domestic production, trade, and energy price data.  We use this definition and a 20+ year panel of 400+ U.S. manufacturing industries to estimate and predict the effects a U.S.-only $15 per ton CO2 price.  We find competitiveness effects on the order of a 1.0 to 1.3 percent decline in production among energy-intensive manufacturing industries, representing about one-third of the policy's impacts on these firms' output.

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Organization of Disaster Aid Delivery: Spending Your Donations
by J. Vernon Henderson, Yong Suk Lee  -  #17707 (PE)

http://papers.nber.org/papers/W17707

Abstract:

This paper analyzes how different organizational structures between funding and implementing agencies affect the quality of aid delivered and social agendas pursued across neighboring villages in a set disaster context.  We model the implied objective functions and trade-offs concerning aid quality, aid quantity, and social agendas of different types of agencies.  We analyze three waves of survey data on fishermen and fishing villages in Aceh, Indonesia from 2005-2009, following the tsunami.  Different organizational structures result in significantly different qualities of hard aid, differential willingness to share aid delivery with other NGOs in a village, and differential promotion of public good objectives and maintenance of village religious and occupational traditions.  This is the first time these aspects have been modeled and quantified in the literature.  Some well known international NGOs delivered housing with relatively low rates of reported faults such as leaky roofs and cracked walls; others had relatively high rates.  For boats, some had very high rates of boat "failure", boats that sank upon launch, were not seaworthy, or fell apart within a month or two.  We also document how a social agenda of particular agencies to promote greater equality can be thwarted and distorted by village leaders, potentially increasing inequality.

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Trade And Industrialisation After Globalisation's 2nd Unbundling: How Building And Joining A Supply Chain Are Different And
Why It Matters
by Richard Baldwin  -  #17716 (ITI)

http://papers.nber.org/papers/W17716

Abstract:

Revolutionary transformations of industry and trade occurred from 1985 to the late-1990s - the regionalisation of supply chains. Before 1985, successful industrialisation meant building a domestic supply chain.  Today, industrialisers join supply chains and grow rapidly because offshored production brings elements that took Korea and Taiwan decades to develop domestically.  These changes have not been fully reflected in "high development theory" - a lacuna that may lead to misinterpretation of data and inattention to important policy questions.