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.

Pertamina as an oligopoly leader?

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

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

BHP

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

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

Fadjroel's argumentum ad nauseatum

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

So long, exit tax

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

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

NSW Phase 3 implemeted

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

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

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

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

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

Depression economics vs non-depression economics

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

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

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

Tourism crisis-proof? Oh, wake up

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

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

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

Again, DPR has no sense of crisis

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

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

Revise the labor code!

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

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

I don't see any better alternative.

No money left on the street

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

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

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

Accounting vs Economic Profit

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

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

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

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

Race to the bottom, for the sake of votes

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

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

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

Import restriction postponement unpostponed

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

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

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

And the time bomb has been activated

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

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

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

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

Two new papers published

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

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

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

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

Import restriction postponed

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

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

Layoff, expectation, and wages

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

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

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

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

Here's my money, please save it for me

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

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

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

Econ101: Green Jobs

Worth reading, from Env-Econ blog.

De-blaming it on deregulation

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

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

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