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.

Fuel subsidy and the fallacy of "harga keekonomian"

The government finally says that the current (subsidized) gasoline ("premium") price is at its "harga keekonomian". This term supposedly means economic price, though they might be thinking of economic cost. And in other occasions it is made parallel to market price. All associations are false, for reasons below. The government also says that as the consequence, it is time now to scrap the fuel from the subsidy list.

Let's start with the second one, the good one. That is, the plan to remove gasoline from subsidy list. This means -- and I think the government should really make it explicit -- that the price would follow directly from the market dynamics. Meaning, when it (the crude oil price) is down like now, the domestic gasoline also becomes cheaper. But, when it is up (and there is reason to be prepared that it might swing up again), the domestic price should also follow suit . Now, many people are of course happy with the reduced price. But I bet they won't accept a rise even when the market price is up (a parliamentarian's remarks in Kompas today is a case in point). That's the real challenge the government should tackle. Say it out loud: taking the fuel out from the list means exposing the people to the two sides of market price: up and down, not just the latter.

Why did I say this subsidy removal was good? For one, it would lessen the burden on the budget so there would be more resources to spend on more sensible posts, e.g. basic education, etc. Second, in the long run it will be good for the environment. If you just care about the environment, aiming for taxing fossil fuel consumption makes sense. Of course it's hard enough already to go that direction all the way from a subsidy regime. Scrapping the subsidy now opens the door to start, at least gradually, thinking about taxing the fossil fuel consumption for environment purposes (I say this as if we don't have a tax on fuel consumption; well we do, but in effect what we have been having thus far is a net subsidy). That way, you discourage pollution and encourage fuel efficiency and hopefully create incentives for the development of energy alternatives.

Now, why the notion "harga keekonomian", or more precisely the statement like "the current price has hit the harga keekonomian (as in economic price/economic cost)" is a fallacy?

First, what do they really mean by that term? An article in Kompas today (06/12/2008) spells that out quite helpfully. Assume the crude oil price is $46. The crude price would translate to Singaporean MOPS price of $56. This Mean of Platts Singapore (MOPS) is the assumed relevant price for fuel in the region, which is traditionally $10 higher than the "world" crude price quoted in, say, London. Presumably the $10 addition is to take care of production and transportation costs. Then Pertamina has its "magic alpha". This is an item that is supposed to cover procurement costs, operational costs, etc. It might also have some profit margin in it, and that is why I call it magic: it's never really clear how they got to decide the alpha -- now set at 9%. So now the MOPS plus alpha is $61.04 (never mind the small miscalculation by Kompas there, the idea remains). That translates into the fuel price of $0.38 per liter. Assuming you need Rp 12,000 for every dollar, that becomes Rp 4,607 per liter. Now, add the 10% value added tax and 5% vehicle fuel tax (this is the tax I was referring above). Finally you end up with Rp 5,321 per liter. Compared that to the current administered price of Rp 5,500. That is why many people demand more cut: after all, why fix a price above the "harga keekonomian"? (By the way, they seem to completely forget that they want just exactly the opposite for rice). What's wrong with this? The calculation above seems pretty straightforward and sensible, yes?

Except that it is not about economic price (or economic cost for that matter). It is accounting price. Everything under the term accounting price or costs can (and should) appear on the bookkeeping. But there is an implicit cost that one has to consider when referring to "market price", the price that matters. This implicit cost is the opportunity cost. It does not appear in the accounting report, but it should register in the head of every sane decision maker. What is it, really? Opportunity cost is the value of the next best alternative. Which is forgone for you have decided to do something else. Again, what is it, really? For simplicity, think about selling fuel at home or at neigbour across the street. By selling it at home, you forego selling it to the neighbour. This is good if the price at home is actually higher than the price there. But otherwise, you're making a loss -- well let me be precise: economic loss (even though you might !score an accounting profit!).

But why in the world do we care about economic costs? Because if you don't, the market will punish you: smuggling, black market, etc. We have news from Kalimantan already. Yes, economic price and hence market price is more difficult to measure, especially when the market itself is rather distorted. But if you insist that the current price is already at (or even above) the economic price, would you put your money where your mouth is? Because if it were true, you need not be worried at all. Just leave it, the price, free to float and see what you would actually pay at the gas station. After all what happens in Kalimantan (as well as the still ongoing smuggling in many places) is a litmus test to see whether or not we have really hit the market price. Maybe tomorrow, or next week, or never. But today, I am afraid we have not.

Vindicating news from Kalimantan

The Jakarta Post today (4/12/2008) reported:

The price of subsidized gasoline in the Kalimantan hinterlands hit a record Rp 20,000 (US$1.61) per liter as of Wednesday -- just three dyas after the central government dropped the official price to Rp 5,500 per liter from Rp 6,000.

Furthermore, the newspaper quoted a street gasoline seller:

It's very hard to get fuel out here these days...

And yet another one:

I don't know when this situation will end... So if you want to buy gasoline, that's the price, no less...

As I said, this all shouldn't be surprising.

And you say it's not enough.

Sorry, we're out

When the price of stuff you're selling is down by a commando not by demand shortage nor by excess supply, what do you do?

Depends. If you're a good citizen you sell dearly. If you're a tycoon, you don't really care. And if you're smart, you hide that stuff, sell it somewhere else, or sell something else.

Don't be surprised if following the government populist cut on the subsidized fuel, you find a long queue in the gas station. If you're not patient enough, turn to the the small vendors across the street. For a more expensive price.

And you say it's not even enough.

Madman, economist and growth

"Anyone who believes exponential growth can go on forever on a finite planet is either a madman or an economist"

That is Ken Boulding, as quoted by Barro in his growth econ textbook.

Better than Pirates of Caribbean

First, they overtook Arab Saudi. Then they were beaten by India. The world is getting more and more interesting.

Which one, really?

Magawati Soekarnoputri, the ex president (who was a lame duck but never let go) is running again. Today she has an advertisement in Kompas. It says the Megawati's 100 day program should she be elected would be focusing on providing cheap basic staples. Then there is a note in the bottom of the ad defining what it means by "cheap", namely: any increase in the staple food prices should not exceed the increase of people's income. That's easy: open up import. But then the ad also says: to control the prices so as not to burden farmers and fishermen.

Rotten tomato is not a fresh tomato

You wanted to get rid of your tomato. In fact you had to, given you were short of money. You met with a potential buyer. He agreed that he would buy your tomato. Then today you find out your tomato is rotten. You are now busy seeking help to make your tomato look fresh. So that the potential buyer would not back off.

That's what comes to my mind when I read this whole Bumi debacle.

Ideas and Warnings for G20 Leaders

I have read the VoxEU.org book for G20 leaders. It has important ideas as well as warnings for the upcoming meeting.

Many authors agree that the IMF should be reformed and its lending capacity should be boosted (Rodrik, Buiter, Rajan, Eichengreen, Ito, Dobson, Berglöf & Zettelmeyer). Some propose new global institutions like World Financial Organization in the image of WTO (Eichengreen; note: this is, however, is not a substitute for IMF), or International Bank Charter for the world's largest banks (Claessens). Park suggests to apply the East Asia's model of reserve pooling (SRPA, self-managed reserve pooling arrangement) to broader areas.

While coordination across countries is important, some authors warn against wasting time on trying to establish a grandiose global super-regulator (most notably Dobson and Gürkaynak, but also Buiter). But Buiter proposes a uniform global regulatory framework for rating agencies. Many of them are also worried about the rising protectionism (Rodrik, Zedillo -- the latter uses the opportunity to remind the importance of Doha). However, Calvo thinks capital control might be allowed, at least as the second best proposition (Rodrik is surprised).

They seem to agree with the need for well-targeted fiscal expansion (most notably Alesina & Tabellini, Spence, Buiter, Rodrik), but do not approve too much government intervention (most notably Dobson). Explicitly, Alesina & Tabellini do not want bailout for unproductive industries like autoindustry (i.e. GM in USA) or failing airlines in Italy.

Other proposals that directly reflect on the current financial meltdown include cutting interest rates (Alesina & Tabellini)*, removing mortgages from damaged balance sheets, resetting terms, limiting foreclosures, and evaluating collateralized and structured assets (Spence, to some extent Buiter), returning to narrow banking, i.e. choosing between commercial banking or investment banking (De Grauwe), improving surveillance mechanism and reinforcing liquidity support to small nations (Ito).

*) It is worth considering also that economists who are not in the book like Jim Hamilton and Krugman are skeptical about lowering interest rates.

So long, Glenn

Glenn was an ordinary, 40-something man. What made him special was his strong determination to study. About 3 years ago I interviewed him to become a student in our econ postgraduate program. I was very impressed by his eagerness to continue formal study, despite his age. Eventually the other two interviewers also liked him. He was admitted.

Since then he had taken some of my courses. He flunked some, but quickly enrolled again. He missed some classes but when he came he was always quiet and serious. He took notes diligently. I knew later that he had to miss those some classes because he was sick.

And yesterday I was shocked. Glenn Rasad, the student, passed away the night before. According to his fellow students, he had a heart attack. The class was mourning. We were all sad. Then a student showed me one of Glenn's text messages before he died:

"Walaupun nilai gua nggak bagus-bagus amat. Apa kata Tuhan dech. Gua tetap belajar sampai Dia nggak menghendaki lagi"

Let me translate:

"Even though my grades are not that great, I don't care. I'd leave them to God. What I want is to keep studying until He wants me to stop"

Glenn, I'm sure God decided to take you back so you could study more peacefully up there.

So long my friend.

Addendum: Mirna from the program updated me. Glenn Rasad was born  June 16, 1963 (so he was 45 when he died). Glenn went to Universitas Indonesia and got an undergraduate degree in electro-engineering in 1989, got an MBA from the same university in 2003, and until the day he died he was still registered as an active student in economic doctorate program (since 2004). This semester he was taking my advanced microeconomics course.

Book for the G20

VoxEU.org has just published an e-book containing essays from world leading economists as a food for thought for G20 leaders in their upcoming summit. The introduction by editors Barry Eichengreen and Richard Baldwin is here. This is the book.

HT: Hadi Soesatro.

Global currency? I don't think so

Berly Martawardaya offers a solution to the global economic crisis: global currency (The Jakarta Post, 11/11/2008). He calls it radical. I don't think it's radical; it's impossible, at least in our lifetime. He rightly says the road to get there is "long and arduous" but he goes on to argue that "the benefit is too great to ignore". I don't think so. If the benefit is great and exceeds its cost, we should have been there already. Now, even the most established currency union like that of euro has coordination problems. Every year since World War II one economy on average exits currency union (Rose, 2007). Most importantly, if you want a global currency, you need a global central bank. And that to be effective, you would need a global government (Rogoff, 2001). Which is silly. I think Berly knows this. He says "an intermediate step of regional currencies would be a wise path to take". But even that, I have big doubt. Friends at campus may have known by now that I'm always skeptical with the idea of Asian single currency. Not because it is a bad idea, but I don't think it would work. Wait, I think it's a bad idea, too.

On the 2 billion blanket guarantee

Initially I was skeptical with the government's increasing its blanket guarantee from Rp 100 million to just Rp 2 billion (instead of full guarantee). The reason is, the neighboring countries like Malaysia and Singapore do not impose a cap on their guarantee. So it is very likely that big businesses from Indonesia will fly their capital to Malaysia and Singapore. It is true that the government will not be able to bail out all banks once they go bankrupt (which means the government will have to return all money to each deposits). So a cap is justified. But then, it seems increasingly unlikely that people would rush banks at the same time. Similarly, I don't think banks will go bankrupt at the same time. So, even if the government removes the cap and hence provides 100% guarantee, they will not be drained out instantly.

But I'm changing my mind.

Reading the interviews of Kadin chief, MS Hidayat by The Jakarta Post today (10/11/2008) made me very uncomfortable. The business chamber is urging the government to give full guarantee, among other requests. And it sounds like a threat: that they will move their money away from the country if the government doesn't grant their wishes. Now, come to think of it, it has been awhile that Malaysian and Singapore announced their full guarantee while Indonesia keeps its Rp 2 billion cap. Yes, there maybe some capital flight already. But if Kadin's threat is all credible, they -- the businesses or depositors with money more than Rp 2 billion in banks, have surely all gone. Why haven't they?

The tone given in the interview is very familiar. This is what I'm afraid about the current financial fiasco: the rise of protectionism. Remember, Pak Hidayat is not just talking about blanket guarantee. The interview reveals all the usual suspects: import restriction, etc. And with threats. It is one thing to quietly respond to incentives. Threatening is quite another thing, especially when it is not credible.

I think the government should not listen to those threats. If big money is to fly away, so be it.

Addendum: The Jakarta Post's editorial today (11/11/2008) comes with the same tone, albeit more politely: "If, with all these safeguards [vigorous enforcement of good governance practices for banks, etc], the big depositors, estimated to be about 60,000, still intend to withdraw and invest their money overseas with much smaller returns -- only because of the absence of a blanket deposit scheme -- let them go".

Addendum 2: In the same issue of The Jakarta Post (11/11/2--8), Hartadi Sarwono, Bank Indonesia's deputy governor says that the full guarantee is not a bad idea. He says "A full guarantee does not mean that the guarantee will be executed..." Yes we know that, as I said above. But it strikes me that this statement comes from a ... top BI official! I wish they didn't give too many statements, especially if they are the ones who are supposed to be quiet.

So why the 10% threshold

It might or might not be true that there is no friction in the Cabinet, although it's hard to believe that a sane Minister of Finance bows down to a business interest of another minister. It might or might not be true that the suspension of the trading of particular stock is a common practice. But Vice President Kalla's arguments just don't add up. The 10% threshold for automatic suspension has already been installed. Any stock traded on the floor should be subject to it, without exception. So why do you still apply discretion on top of it? What is then the use of the 10% threshold?

Let's just hope things don't get uglier as Sri Mulyani is leaving for the G-20 meeting and Sofyan Djalil is taking over her position, ad interim.

Equality? What equality?

Kompas editorial today admits that the price of subsidized fuel is still below its economic price. But it quickly says that the pricing of domestic fuel should consider "fairness, equality, and responsibilty". Well that is exactly what you can achieve when the price is at its 'economic level'. The editorial accuses the government as being ambiguous. The same impression is exactly found in the editorial's tone.

As for the headline, Kompas reports that the government will also cut the price of subsidized diesel oil. It makes it even more obvious that the current administration is desperately seeking for popular votes using the oil politics.

A more rational way, albeit unpopular would be to announce that the government will let the domestic price follow the world market price. In fact this time is very apt to do it, as the price trend is on the decreasing path. However the public should be made fully aware that when the price increases, the domestic price will follow suit. In other words, no more subsidy. And headache.

Lower fuel price?

According to the news, the government will cut the price of subsidized fuel in response to the lower world oil price, effective December. As I wrote before, there is no economic justification to this populist policy since even with the current world price the subsidized fuel is still cheaper. The main objective of cutting the subsidy was to move domestic price closer to the international price so as to discourage smuggling and illegal mixing of gasoline and kerosene. So lower world price is good when you can't increase the domestic price. In addition, the subsidy thus far has been benefitting the wrong target, i.e the richer. So again, the rationale of the policy to reduce the price seems to lie completely on politcs. The election is coming, that is.

Random Crosschecking: Obama to Indonesia

In Kompas today.

Aviliani says if Obama cuts on military agression, the US budget deficit will improve. That in turns might reduce its import on oil and therefore oil price will be more stable. I think the opposite. If Obama withdraws his soldiers, yes budget improves. But it will not reduce the US demand for imported oil. It might even increase it.

A. Tony Prasetiantono says Indonesia might benefit from Obama being the US President if the US treats us like what they did to Mexico to help the latter cope up with the 1994-95 crisis. Somebody needs to tell Tony the real meaning of incentives. And yes he should read that Rubin book about what really happened in the White House at that time. The administration would not have helped Mexico if the US stake there were not that high.

Finally, A. Prasetyantoko thinks the economists who formulated Obama's econ plan are Volcker, Summers, and Rubin. I don't know if Pras confuses Clinton and Obama. But Obama's economists are Austan Goolsbee and Jason Furman.

UMKM Info

New definitons according to the Law 20/2008 on Micro, Small, and Medium Enterprises (UMKM). "Micro": non-land assets up to Rp 50 million and sales up to Rp 300 million per year. "Small": assets from Rp 50-500 million and sales Rp 300-2,500 million. "Medium": assets Rp 500-10,000 million and sales Rp 2,500-50,000 million

TKI/TKW Facts

Total remittance from Indonesian migrant workers now reaches Rp 60 trillions (USD 6 billion) per year. Everyday 2,000 workers leave Indonesia for work abroad. Average salary of Indonesian helpers in Hongkong is Rp 10 million per month with insurance up to Rp 135 million.

How it all started (Part 1)

Summary for class (click the picture for larger view)

To the students: do not take this at face value. Many above has been simplified. In fact I based it on an article from The Economist. So treat this just as a rough summary, we'll discuss more in class. I'll post some more (hopefully) on the more recent development.

Fake LPEM Site

I am so proud to find that someone out there loves us that much.

Hugo, howzit goin'?

Hugo Chávez' Venezuela, in the midst of falling oil price.

"We're in the same situation of people who have lost a limb but can still feel it," said Ricardo Hausmann, a Venezuelan economist who teaches at Harvard. "I don't know how long it will take for Chávez to realize he's lost a limb."

What to confiscate now, Hugo?

From the New York Times.

Capitalism is Dead for Sale

This reminds me of the triumph of Che Guevara t-shirts thanks to capitalism.

HT: The Austrian Economist and The Economist

Krugman the Nobelist

According to Krugman, something funny happened to him this morning. And that is that he got the Nobel. As usual, Tyler Cowen is quick to give everything you want to know about the latest econ Nobel laureate. So there's probably no need to say anything else.

I just want to reflect how I got to know Krugman's line of works...

I learned about Krugman first from classes taught by Faisal Basri (international trade) and Mari Pangestu (intermediate trade theory). I then wrote my assignment essay on Krugman's model of increasing returns to scale, of which I publish one paper in a student economic journal. Along the way, when I was his TA, Sjahrir gave me a couple of books written by Krugman. Then I noticed Krugman became NY Times columnist and wrote not only economic op-ed but also political analysis ... the latter many times confuses me... As Frankel (or was it Rogoff) said to him in one of those debates, Krugman is a top notch economist but when it comes to political analysis, "you're just less impressive"... My error: this last story is of Stiglitz. Apologies to Krugman.

The wisest editorial so far

The world economy is plainly in a poor state, but it could get a lot worse. This is a time to put dogma and politics to one side and concentrate on pragmatic answers. That means more government intervention and co-operation in the short term than taxpayers, politicians or indeed free-market newspapers would normally like.

That's The Economist, this week's issue.

Relevant sources now?

"I'm trying to make sense of all this financial fiasco from economics perspectives. I read blogs. But now there are way too many people talking about anything out there. Suggestion?"

"Don't read them all. Just check regularly those of Mankiw, Krugman, Arnold Kling (of EconLog -- in the meantime, just skip Bryan Caplan), Econbrowser (both Hamilton and Chinn)"

"What about magazines, newspapers?"

"New York Times. Don't miss Leonhardt. And of course The Economist".

"I'm not a professional economist. But if I were to read academic papers, what do you suggest?

"Ben Bernanke's papers in early 80s"

"Books?"

"Bernanke's Essays on the Great Depression"

"As for Indonesian context?"

"The two Basris: Chatib and Faisal"

The blame-game (3)

This crisis is so huge and complex that I don't think you can fairly cite anything as the main cause.  But it is certain that the way we account for securities has contributed, by turning illiquidity in various banks into insolvency.  Moreover, while deregulation played a role, so has regulation.  One of the reasons that severe markdowns are such a problem for banks is that the thin balance sheet triggers a ratings downgrade.  At that point, many large institutions are legally prohibited from investing in them; others are forbidden by charter.  The change in the government sanctioned rating kicks in government rules which ensure that bankruptcy rapidly follows a writedown.  Did I mention that financial firms are not allowed to restructure in bankruptcy?  They have to liquidate.

That's Megan McArdle.

Money has its own entropy, don't we forget

In a meeting yesterday, following the Jakarta's stock exchange suspension and all, a colleague read out an SMS he just received from a US-based investor: Now your country along with others are competing with us, the new emerging country United States of America in attracting money, FDI that is. And so the room was filled with sighs. But no one has money, said everybody.

Which is not quite true.

China does. And so does private sector.

What's all this mean?

It mean can mean China is taking over the World Superpower.

That is Arvind Subramanian.

HT: Dani Rodrik.

Seriously, I thought Cochrane was kidding

When he said the revised Paulson Plan is a "pinata full of ridiculousness". So I checked what he referred to with "bicycle commuters" thing in the now big fat 400+ page-long document. Here it is:

Title II. Sect. 211. Transportation fringe benefits to bicycle commuters.

[With]: "(i) QUALIFIED BICYCLE COMMUTING REIMBURSEMENT.—The term 'qualified bicycle commuting reimbursement' means, with respect to any calendar year, any employer reimbursement during the 15-month period beginning with the first day of such calendar year for reasonable expenses incurred by the employee during such calendar year for the purchase of a bicycle and bicycle improvements, repair, and storage, if such bicycle is regularly used for travel between the employee's residence and place of employment.... [and some more down the document]

What are we really talking about here?

Update: Winterspeak also thinks its awful.

The blame-game (2)

We also hear that it is the free market that is to blame. But the facts show that it was the government that pressured financial institutions in general to lend to subprime borrowers, with such things as the Community Reinvestment Act and, later, threats of legal action by then Attorney General Janet Reno if the feds did not like the statistics on who was getting loans and who wasn't.

That's Thomas Sowell

Uh, don't miss Steve Horwitz letter to the leftists.

The blame-game (1)

To blame laissez faire for today's economic crisis is akin to blaming the human body's natural and normal functioning for the illness suffered by someone who's overdosing on heroin.

That is Don Boudreaux.

Update: Also from the same person:

Saying that "greed" caused today's problems is like saying that gravity caused the death of someone pushed from the top floor of the Empire State building.

How about here?

(click graph to enlarge)

Would be interesting to see what we have here as the election is coming too. From what I gather so far, Wiranto's economic program promise (as campaigned in ads) is terrible, PKS' is rather mixed confusing. Others, same ol' song. Maybe.

What they say about the financial meltdown

Of course I'm stealing these from Mankiw. I put them down here for my future reading. The order follows appearance in Mankiw's blog.

• Peter Wallison and Charles Calomiris
• V.V. Chari, Larry Christiano, and Pat Kehoe
• Michael Boskin
• Jeff Miron
• Ken Arrow
• Richard Sylla
• Bill Poole
• Warren Buffett
• Charlie Calomiris
• Alan Blinder and Glenn Hubbard
• Charles Calomiris
• Kevin Hassett
• Doug Diamond and Anil Kashyap
• Ken Arrow
• Richard Sylla
• Alan Blinder
  
• Burt Malkiel
  
• Dani Rodrik
• Luigi Zingales
• Kotlikoff and Mehrling
• Vernon Smith
• David Leondhardt
• Nouriel Roubini
• Robert Shiller
• Nicholas Bloom
• Casey Mulligan
• Paul Volcker
• Thomas Sowell
  
• Arnold Kling
  
• Martin Feldstein
  
• Russel Roberts
• Scheherazade, Rogoff and Cochrane
• Bill Easterly
• Chris Carroll
• Charles Wheelan
• Nouriel Roubini
• Martin Feldstein
• Hubbard and Mayer
• Epstein
• Steve Kaplan
• David Leonhardt
• Mark Buchanan
• Larry Lindsey
• Ned Phelps
• Peter Wallison
• Larry Summers
• Lawrence White
• Steven Horwitz
• Robert Shiller
• Thomas Sowell
• Kevin Hassett
• Jeffrey Miron
• Lucian Bebchuk
• Steven Landsburg
• Anne Krueger
• Hubbard, Scott, Zingales
• Epstein
• Sebastian Mallaby
• Robert Samuelson
• Nouriel Roubini
• Bruce Bartlett

Of course other blogs have important notes, too. Don't miss Becker-Posner, Jim Hamilton, Arnold Kling, and Krugman, to name a view. And here's good summary as of yesterday by Alex Tabarrok.

Oh, and of course, Rizal's live reporting for Cafe Salemba!

Ah, I wish I were assigned macro this semester, in which case I would've read them all right away :-)

The most important concepts in economics

Met with an old friend. His background is engineering and now he is an avid journalist who is thinking to start covering economic news. Damn they're interesting, he said about economic issues. Then we talked about economic news coverage in Indonesian media. The best econ journalists, the most common fallacies and so forth...

Then he asked my opinion of what constitutes the most important concept in economics. Frankly, that's a tough question. Usually, if I only had one shot, then it is "choice". But that would be unwise not to elaborate that vague concept to the friend. It's relation to opportunity cost being the prime implication, for example. So I said, I would put down a list...

Here's what I am thinking:

1. Opportunity costs
2. Comparative advantage
3. Efficiency
4. Externality
5. Property rights
6. Demand
7. Supply
8. Growth
9. Inflation
10. Interest rate

I so believe that a fair level of understanding the above ten basic concepts would do so much good to economic journalism -- and probably to op-ed economists, too. (My colleagues and I have mentioned some of them sporadically in Cafe Salemba).

Econ Nobel "Nominees", 2008

From Thomson Reuters:
Hansen, Sargent, Sims (dynamic econometrics)
Feldstein (public econ)
Alchian, Demsetz (theory of the firm)
and other usual suspects (Fama, Bhagwati, Grossman, etc)

My fave: Alchian and Demsetz


HT: Mankiw

Some Nobel laureates are just unbelievable lately

Stiglitz got an F. And McFadden, oh my goodness.

HT: Cafe Hayek and EconLog

Economics, Politics, Political Economy

[E]conomics is a science, politics is a subject, and political economy is a branch of moral philosophy.  Just because politicians talk about economics doesn't mean they are making any sense, and just because some economists compromise in political discourse doesn't mean they are doing economics.

That is Pete Boettke.

You want it down? Fine. But when it increases, it increases, how about that?

As Malaysian government reduces the fuel price, the students and public at large here quickly demanded the same policy. This is wrong in two counts. First, Indonesian subsidized fuel's price is still under the market price. So if you want it closer to the market, you should increase the price, not reduce it. Second, if your logic is based on "when the market price is down, domestic price should follow suit", be consistent. That is, when the market price is up, domestic price should also follow suit.

You're on your own

Have you read newspapers lately? I'm talking about those people trying to ask compensation from the government for their investment loss due to the crippling effect from the Wall Street's recent fiasco. They are amazing. When they decided to put their money in private investment bank, they did it out of respectable greed and of course without consulting any government whatsoever (in fact it's really like: hey this is my money, you government stay away!). Now the bank they put their money with is facing serious problem and is likely to share the pain with their individual 'investors'. And they're asking the government to pay for their loss? I don't get it. I really don't.

US should learn from Indonesia and its past...

... that BPPN-type simply isn't working.

Appreciation hurts the trade account

... or so we think. But not necessarily as much as we might expect. It depends whether the export has high or low import content. Here's the paper by Koopman et al. Here's the abstract:

As China's export juggernaut employs many imported inputs, there are many policy questions for which it is crucial to know the extent of domestic and foreign value added in its exports. The best known approach - the concept of "vertical specialization" proposed by Hummels, Ishii and Yi (2001) - is not appropriate for countries that engage actively in tariff/tax-favored processing exports such as China, Mexico, and Vietnam. We develop a general formula for computing domestic and foreign contents when processing exports are pervasive. Because this new formula requires some input-output coefficients not typically available from a conventional input-output table, we propose a mathematical programming procedure to estimate these coefficients by combining information from detailed trade statistics with
input-output tables. By our estimation, the share of foreign content in China's exports is at about 50%, almost twice the estimate given by the HIY formula. There are also interesting variations across sectors and firm ownership. Those sectors that are likely labeled as relatively sophisticated such as electronic devices have particularly high foreign content (about 80%). Foreign-invested firms also tend to have higher foreign content in their exports than do domestic firms.

and here's Koopman's blogpost.

Hawk or dove?

US and EU are both still facing inflation threat. Relatively, US' Fed is more dovish and EU's ECB hawkish. Why? Trade unions matter, says Marty Feldstein (HT. Mankiw).

How about Pak Boediono's BI? He said that BI would bring down inflation to 6-7.5% in 2009. But given the recent development that sounds too ambitious. (Unless Pak Boed becomes more hawkish. That is, to raise the BI rate again for, say, 50% then 25%. Keeping the margin at 25 bps might not be strong enough. A 50 bps should send a firmer message to help shape the expectation).

Again, just privatize Merpati!

Ross McLeod wonders if Merpati should be privatized. He implies so, and I agree. Whatever happened to that plan?

What? SUV and Doha?

How to explain the Doha collapse to a kid ... (of course with much, much, much simplification)

1. OK, so you want a big, sport jeep...
2. That SUV needs lots of gasoline
3. Fossil fuel are running out, substitutes are needed
4. Governments encourage biofuel and biodiesels production
5. Big subsidies on biofuel/biodiesel
6. Less incentive for farmers to plant corn for food, more incentive to plant corn for biofuel
7. Less incentive for farmers to produce palm oil for cooking, more to produce it for biodiesel
8. Massive acreage switch from corn-for-food to corn-for-biofuel
9. Likewise in palm oil production
10. Massive migration from producing wheat to producing corn for ... biofuel
11. Less quantity of wheat and corn-for-food and palm-oil-for-cooking-oil in the world market
12. Soaring prices of those wheat, corn, palm oil
13. India, the wheat eaters, panicked
14. India banned its rice export to induce consumption switching from wheat to rice
15. Vietnam thought it should also ban its rice export following India
16. Philippines had a bad luck: from rice exporter now is a rice importer
17. Philippines put high tender on rice
18. World rice price surged due to (14),(15),(16), and (17) above
19. China grew faster, needs more energy (and so start again from (1) above)
20. Developing countries are much worried then ever with food security
21. Bring the concern in (20) to Geneva
22. US and EU are still stubborn with their farm subsidy (see also (5))
    
23. Doha collapses .... (i.e (21) vs (22))
    
24. Countries lose hope on multilateral trade agreements
25. Back to regional and bilateral negotiations
26. Spaghetti bowl effects are coming
27. Protections are on the rise again
28. Less gains from trade
29. ... (this is where the kid can't take it anymore. Treat him/her with a good dose of ice cream)

New poverty lines proposed

Now the line is going to be $1.25. More realistic. It's close to our own poverty line. Better yet, use the relative ones. (Note: make sure you read Ravallion clarification to Birdsall's post.

(General Wiranto, before you come up with another laughable statement in your advertisement, remember this: 1 is not equal to 2 and is not equal to either 1.25 or 1.54).

In other words, outliers are important

Weitzman is a Black Swan.

HT: Env-Econ.

On political ads

"I'm sick of Sutrisno Bachir's ads everywhere"
"Why? Isn't this a free country?"
"Yes, ... but, I don't know... I'm a little annoyed here"
"Everyone's annoyed by one thing or two, don't you think"
"I guess you're right"
....
"But hey, why are now people doing ads? I mean political ads? We didn't have this back 5, 10 years ago. Right?"
"For one, I guess, because they are many now"
"What do you mean?"
"When there are many sellers selling similar products, each needs to stand out from the crowd"
"You mean, like that thing you called perfect competition?"
"No, one step before that. It is called monopolistic competition"
"Ugh, monopoly?"
"Not monopoly. Monopolistic competition"
"OK, you lost me here"
"Look. Market spectrum goes this way from only one seller to sooo many: monopoly, duopoly, triopoly, ..., oligopoly, ... all the way to perfect competition, where there are so many sellers already, no single one can affect the market price"
"I see... but didn't you say monopolistic competition?"
"Yes, I'm getting to that term. But first off, let me tell you that that term is an unfortunate misnomer"
"Why?"
"Because it confuses people. Many think that it means monopoly. While in fact the term refers closer to the other extreme: perfect competition. Many sellers ... but not too many as in the perfect competition... Why is it confusing? Because, basically everything in between the two poles -- monopoly and perfect competition -- can be termed monopolistic competition... So I don't blame you if you're confused"
"Ugh..."
"But here's an advice. Don't tell people that I tell you this. When you have four sellers -- ok, let's not call it seller too often, let's use player -- when you have four players, you can safely call the market monopolistic competition... The textbook will require you to prove that the products sold are pretty much similar, too. But don't get too harsh on this..."
"Why four?"
"Because it's not easy to say tetrapoly, hahaha, I'm kidding"
"Examples would be helpful here..."
"OK, since we're talking political advertisements... let me think... OK. Remember Soeharto's era? Back then in the general election, we only had one candidate. That's monopoly. Then we had Gus Dur, Mega, who else... I guess there were 3 presidential hopefuls competing? Oh, Amien Rais? SBY? That was triopoly, at least let's assume it is, I can't find better example... Nowadays we have a lot more: SBY, Wiranto, Prabowo, JK, Sutrisno Bachir, Amien Rais, Rizal Mallarangeng, Gus Dur, Megawati... who else? My point is, now there are many"
"... But not too many"
"That's right. Not too many. Not 200, not 300. Only enough to make it a monopolistic competition"
"Meaning...?"
"Meaning: ads matter. Listen. When you have some competitors, say 5, 6, or 7. And your products are quite similar, what would you do?"
"Ugh... sell smarter? harder?"
"Yes, but how?"
"Nice marketing? Unique?"
"There you go. Unique marketing. Meaning: advertisement. Iklan"
"Iklan"
"Yes, iklan. When you are monopoly, you don't need that. When you are in perfect competition, you don't need that. But you need iklan when the market structure is a monopolistic competition one"
"Oh I see... That's why Soeharto didn't use big billboards at Thamrin or Sudirman or Gator Subroto? No ads on TV? ... But wait, he did have some iklan layanan masyarakat, right?"
"That's different. That's propaganda"
"...?"

a credit card conversation

"Hi, my name is --- I am your customer for the card number ---"
[usual identity checking]
"Alright, Sir, thank you for your cooperation. How can I help you?"
"My credit card is broken. I guess the way I put it inside my wallet is responsible for that"
"That's too bad. But can you still use it?"
"Sometimes yes, many times not. And that's why I'm calling you now. Even if it works, it's only after multiple sweeping by the store guys"
"I see"
"So, can I get replacement?"
"Let's see... Yes you can. But your card will expire September. That is... in two months"
"And your point being?"
"For a replacement you're charged 50 thousands rupiahs"
"That's fine. I need the card. I travel a lot"
"Sir..."
"Yes"
"Do you have other credit cards"
"Yes I do. But why is it relevant?"
"Because I think you'd better use them while waiting for the new card in September. That way, you save Rp 50,000"
"Oh, you're suggesting not to use your card in this coming two months?"
"Ugh, yes, sir"
"What if your boss know this?"
"What do you mean?"
"Never mind"
"Sir, if you have another card, why do you want to use our card?"
"Well, for one, I want the points. I want to convert them later to my mileage bank"
"Oh I see. But again, Sir. Just use the other card. You save Rp 50,000"
"Alrite, I have to hang up now"
"Ugh, Sir... may I ask where you work?"
[I told him where]
"Ugh... is there an opening? Vacancy or something? I have an S1 in ...."

New paper

Heterodox Reform Symbioses

Christian von Luebke
Neil McCulloch
Arianto A. Patunru
Siti B. Wardhani

2008

Abstract

Many countries are embracing investment climate reforms in order to facilitate higher investment and economic growth. Interestingly, these policy efforts – although based on similar institutional recommendations – give rise to distinctly different results across and within countries. Much of the existing investment climate literature favors a rule-based 'good governance' approach, in which less advanced economies are advised to boost investment and growth by adopting well-established OECD-type institutions and practices. While there is little doubt that the protection of property rights, low corruption, and effective public services are desirable long-term objectives, 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 city of Solo, we argue that relationship-based (rather than rule-based) cooperation can be a key factor for policy reform. In this paper we demonstrate that 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' public-private symbiosis – between the mayor and a broad spectrum of multi-sectoral/scale/ethnic firms – has stimulated important regulatory and administrative reforms and contributed to a rise in private investment. ***

The paper was presented last week at IDS, Univ. of Sussex, UK. The revised version will be posted here.

one week wrapup

It was a very busy week (well three weeks actually with Paris and Bangkok - Paris for this and Bangkok for a talk in Thammasat University). That explains the blog vacuum. Not that there was no interesting stuff to blog while in UK. Of course I should have at least talked about Wimbledon (my favorite Ana Ivanovic, who I 'found' last year, lost it to a Chinese, Anna Kournikova lost it to a fellow Russian and was called bitch by a male chauvinist pig who happens to be a top official at ATP), Euro Cup (back from Bangkok that Saturday at 1.30 am, only to find my fave flying Dutchmen lost to the Russians -- yes, Ape, I know only that much about football, I mean soccer, sorry I mean football -- so I was in grief while trying not to miss the flight to London; later teasing Christian von Luebke my German co-author that the Turks played better than the Germans -- I had no idea actually -- it was just a bad luck); and about the Mandela Concert (I should have gone to Hyde Park to see Amy Winehouse! But I had promised Alfie some good reads, so that came first -- well in all honesty, maybe I was still traumatized by Monas incident so, no political rally for awhile? Sorry, Mandela, but happy birthday, and you know I hate Mugabe, too).

OK, that's it. As for the more serious stuff, we would post them here, later.

Addendum: And I did my homework last evening, i.e. reading a one-week worth of belated news on Indonesia. It was quick, because apparently not much important things happened last week. Except maybe two. No, three. First, House will put a cap on fuel subsidy. Kudos to some parliamentarians (some ones, not those others who keep talking bullshit like "hak angket" against subsidy reduction). Second, the students' riot with molotov cocktail, car burning and all (gee, "hari gini?"). And third, Rizal Ramli. Whatever happened to Rizal? He sounded soooo angry. I mean he is usually angry. But not at this level. (Someone just told me: all the three issues above are actually related. Really?)

Mobile operators guilty of prixe fixing

KPPU (Commission for Business Competition) found six mobile operators guilty of price fixing text message services.

Do that to Organda, too, then.

Taxi fares should be expensive, says well, who else?

Jakarta's Organda (that is the name of public transportation companies association) issues a decree for increase in taxi fares. It says, those who set price below that stated in the regulation will be punished.

Ridiculous.

On the investment climate

From the OECD meeting in Paris (too bad I was there not for watching Nadal beat Federer), here's my comments for the preparation of OECD's survey on Indonesia, to be launched next month:

1. In order to improve the investment climate in Indonesia, the government has issued commendable policy packages, including three presidential decrees (Inpres 3/2006, Inpres 6/2007 and another one underway), infrastructure package, financial package, and 2007 Investment Law. However, we often heard and learn that these good packages are followed by not-so-good implementation. Many packages could as well end up as laundry lists and evaluation on them are oftentimes reduced to routine check-listing that overlooks priorities.
2. Most concerns heard from the business community (domestic and foreign) deal with the new Investment Law and its derivatives (Presidential Regulations 76/2007, 77/2007, 111/2007) – albeit its praised, significant improvement over the old laws. These concerns include
1. The fact that attempts or needs to limit foreign investment are not entirely well-argued. E.g. in express delivery service sector, foreign service is perceived as competitor to the domestic service while in practice they are complementary.
2. Grey areas in the Negative List regulation. For example it is stated that the regulation "shall not reduce the obligation of investors to obey the prevailing provision and requirements to undertake business activities, which are issued by authorized technical institutions that supervise capital investment fields..."
3. The Report mentions about reducing the size and scope of government. Particularly important in this regard is the issue of coordination between central and local government.
1. There have been problems such as reluctance of local governments to undertake policies issued by the central government. For example, many Finance Ministers regulations are simply ignored at the local level either because they do not come from Minister of Home Affairs or because they are not in direct interests of local governments to raise their own-revenues.
2. There is issue about low capacity at the local level. For example, the government decided to delegate the authority to establish new firm to local governments only to find that it did not speed up the process but in fact slow it down and hence the central government decided to take the authority back to Jakarta.
3. The fact that the salary of DPRD (local parliament) members is a simple function of the local government's own-revenues has been found as a source of incentive for the local parliamentarians to quickly (and carelessly) approve any proposals from the government that lead to increase in charges and retributions (local taxes).
4. Bureaucratic reform. As we know the government has started to reform itself as has been demonstrated especially by the MOF. Alas there is a surprising reaction from the business community and that is their aspiration for not going too fast with the reform! To take a very recent example, a couple of weeks ago the corruption commission (KPK) raided the Customs Office at Tanjung Priok Port, following a neat and silent coordination with Minister of Finance and DG Customs. The Commission found hard evidence of illegal money collection and even caught some officials red-handed making illegal transaction. The raid was considered as a big success and was highly regarded by the media. However, it was followed by complain from some business people that that event might backfire as the Customs official may become "less cooperative" and as a result, slow things down at the ports.

This phenomenon is also evident in the local level. Our study on domestic trade barriers found that the trucking costs are very high in Indonesia compared to those in the neighboring countries. Many of these are due to illegal charges collected by police, DOT officials, and local thugs. But surprisingly, many respondents showed hesitance to cooperate with our researchers, because they were afraid that the study would come up with a recommendation to clean up the road from such charges that would then backfire in the form of higher level of insecurity!

These two anecdotal evidences are not to be underestimated. Are we looking at the "dilemma of reform" or to put it in differently: are these necessary costs of our long-awaited good governance and transparency (or bigger yet: democracy)?

5. Finally my colleagues representing the government has mentioned about the policy constraints of the Indonesian progress, including the nature of democracy that is still in the maturing process and the lack of trust from the public at large. What are the binding constraints, in the government's point of view, in terms of economic dimension? The Report implies that such constraint lies more on the supply side rather than the demand side. In particular, problems in infrastructure and logistics have been mentioned as key constraints. Is this a correct reading and are there any other constraints that bind?

Thank you

Malaysia follows suit

They, too, have to raise BBM price.

BI Rate Up

So they raised it 25 bps. Another 25 is coming. And another one before the year ends.

Phew Energy

Eureka! I have found a new source of energy! This is a clear winner. I call it Phew Energy. Here's how it works: take a deep, deep breath, hold it for 5 seconds, then blow big through your mouth, full power ... phew! I sure think you can move some stuff an inch or two with that.

Mind you, this is far cheaper than that Blue thing. Now, somebody please get me to Cikeas!

BI decision tomorrow

I expect, alright not only expect but also hope, that BI will raise its interest rate by at least 25 bps. And without much talking.

Why students' protests?

According to Ross McLeod and Steve Hanke,

Other protests [against fuel price increase] have been driven mainly by student activists from various universities, whose tertiary education does not seem to have imbued them with the inclination to properly analyze the policy issues involved. Absent this analysis, the conclusion is always the same: Price increases are bad, end of story. Perhaps their response might have been different if the government had been able to couch the fuel price increases in terms of a reallocation of spending away from consumption subsidies and into investments in Indonesia's future.

HT: Ross

The Unlaw of Demand

This law is not happening in here so long as subsidy prevents it.

HT: Greg Mankiw

Indonesia Project Blog

We welcome the new blog by friends at ANU.

I hate this peace time! Bring back the good 'ol days!

Crap. No more wars? We want fights. Anyone, please find us enemy. That way, we can do real fight and win and claim "Kebangkitan Nasional".

 

That is what I read from this article.

Why of why Kompas editor is so careless: "Why is the concept of trade-off so damn difficult?" and "Subsidy can be a sin, but yes, we need it" - departments

First, Fadjroel argues that the government should provide BLT and/but BBM price should not be increased. Next, he says BLT is the right of the poor, because it comes from the cut of BBM subsidy. So basically he says: cut the subsidy, but don't increase the BBM price. How convenient.

Fadjroel argues that students should refuse BKM because he thinks it's a sin to receive money from the government and that it would damage students' morale. What about the public education subsidy they have been enjoying so far, Fadjroel?

Why of why Kompas editor is so lousy: "I need to publish an article whatever flawed stuff I have to put in it; the point is I just want to see my article published" - department

I can't believe Kompas print this. What an embarrassing display of logic breakdown.

argumentum ad hominem

"I think that guy has a good idea. Let me tell you..."
"No, wait, which guy? What's his name?"
"XYZ"
"What's his position?"
"Adviser to the government, among all"
"OK, I got it. It must be a crazy idea. I don't want to hear his argument. Whatsoever!"
"You sure you don't want to hear his idea? Just the idea"
"Hell no. His argument MUST BE bad. Because he's close to the government".
"I see. So who should we listen to?"
"Anyone opposing the government. Students, street protesters, politicians, populist newspapers, pick any of them. As long as they oppose the government"
"No matter what their arguments are?"
"What are you a philosopher? Of course we don't need to know their arguments. They MUST BE good"

we want it too. just cheaper.

Say, "This whole thing is stupid. Comparing BBM price here and there in richer countries? That just doesn't make sense. We're poorer for crying outloud! So cheaper BBM should be the case!"

It's like saying, "We want a computer with exactly the same specs as those the guys in richer countries use. Just, we want it far cheaper".

whom to spoil?

Say, "Those cash transfer is spoiling the poor. Stop it". Read between the lines: "Please don't quit spoiling us, the middle class. Pour your subsidy on us, the richer. We don't care with the poorest, really. All we want is your subsidizing our car tank every day. Please, please. Don't take the subsidy away from us in order to give it to somebody else, that poorest".

Finally...

Yes, finally the government has the guts to increase the BBM price.

As for our novel project, the politician is so happy that 1) the government really increases the price 2) the people are angry. He and his friends throw a party all night long. Their next program: impeachment. Our politician smiles: it's a matter of time... we will win this, he tells himself. He puffs.

Macro vs micro

Another support why, even though assigned to teach macro, I always emphasize to students that macro without sound fundamental micro is at best undefendable. Of course my nits might not be as big as Kling's. One reason is, to understand Indonesian economy (or let me put it slightly differrently: to understand economic fallacies brought by popular economists here), you need to at least know the macro framework.

As an aside, the previous Kling's post is also interesting. I happen to be interested in (and have been trying to keep up with) number 1 all the way to number 8, skip number 4 on his list. Yes, I suck at finance. I guess I (pretend) to substitute international trade for it.

Self-sufficiency? Yeah right.

A good read for Anton Apriyantono.

Consumer protection once again

Becker:

Important exceptions notwithstanding, the overall trend toward greater regulation of consumer choices is disturbing. Consumers make worse decisions when they are not responsible for their decisions, or when they can sue or otherwise get compensated when they make bad decisions. Consumers make mistakes, but they learn from them when they have to bear the consequences of their decisions. They are generally far more competent to make decisions in their own interests than are regulators or lawmakers as long as consumers are the ones who benefit from good choices and are hurt by bad choices. This is why I continue to be a minimalist on government regulation, and greatly prefer the controls over behavior that stem from consumer responsibility and the discipline of competition.

More ideas for the ambitious novel project

Thanks for the comments on my dream project. At least I can now tell Rizal of Cafe Salemba that I'm ahead of him: he's still reading and pretends he's an intellectual, while I have moved into a whole new world: writing a novel! (even though it is just in a dream).

OK, back to this would-be-the-first political-economy novel with Indonesian setting. One commenter suggested that it might as well be a non-fiction. Ehm, that's an interesting idea. Except that I don't feel like doing factual investigation with interviews and all that. So let's keep it fiction. That way, I can escape any accusation or allegation of defamation or things like that (or can't I?). Right, maybe I should not name my president character SBY. I'll try SBX.

But still, SBY is my very inspiration, I confess. So I'll keep this SBX guy as a president who is so indecisive, boring, yet warm-hearted. He, the character, will always have hard time whenever a decision making is due. By the time he announces something, things have changed. Right, that was all the description of our protagonist character at this stage. I'll update you as it grows.

What about the antagonist? Of course it's the evil politician. I haven't got a name, so drop me any suggestion, if you have. Think about someone who is trained in economics but everything he says as a politician is economically nonsense. He is also a teacher, maybe. He teaches economics at one big-name university but that's is the only place where he can be identified as certified and sane economist. Everywhere else he is a socialist: parliament, newspaper, TV talkshow, you name it. So, if Ayn Rand is famous with her character's "Who's John Galt?", our antagonist here will be known as someone who always says "Theoretically, economics bla... bla... bla... But, in reality bla bla bla".

But of course I don't want to make this end up like sinetron where the characters' attitude and behavior are either black or white. You can choose to be a total evil (who will die with face full of maggots) or an extreme angel (who has no heart to kill a stinking mosquito), but never in between. While I want something like Jekyll-Hide persona. Or at least a good person who sometimes slips, like a normal person. Or a bad guy who loves children and flowers. In short, I want the readers to be confused whether or not to like SBX or the politician (note that I have dropped the adjective "evil" now). In fact, the terms "protagonist" and "antagonist" should later be irrelevant.

Any ideas? Next time let's talk about plots and possible major scenarios.

my new novel (dream on)

I feel like writing a novel or at least a short story. The key character would be an evil politician. Here's what he would tell his fellow party members:

We should topple SBY down. This is a good time to do that: BBM issue. We should make sure that he finally really increase the BBM price. That way, it is easier to beat him in the upcoming general election. But we should also make sure that the public at large keep believing that fuel subsidy is good. Yes, this has to be played smart. Because on one hand we want SBY to cut the subsidy and on the other hand we want the public to hate that, so later we can use the public sentiment against the president. So, let's keep opposing the plan, but let's pray that SBY continue with it. Play smart, fellas.

NY and WI projects

Following our successful project in Illinois, we are now finalizing two similar projects in New York and Wisconsin. Here (pdf, big) is the initial report of the latter two. Two academic papers are under review. The team now consists of John Braden, Laura Taylor, DooHwan Won, Nicole Mays, Allegra Cangelosi, and me.