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?)