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.
Monday, December 15, 2008
Saturday, December 13, 2008
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.
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.
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.
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.
Friday, December 12, 2008
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.
Wednesday, December 10, 2008
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.
Saturday, December 06, 2008
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.
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.
Thursday, December 04, 2008
Vindicating news from Kalimantan
The Jakarta Post today (4/12/2008) reported:
And you say it's not enough.
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.
Tuesday, December 02, 2008
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.
Tuesday, November 25, 2008
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.
Thursday, November 20, 2008
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.
Tuesday, November 18, 2008
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.
That's what comes to my mind when I read this whole Bumi debacle.
Thursday, November 13, 2008
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.
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:
Let me translate:
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.
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.
Tuesday, November 11, 2008
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.
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.
Monday, November 10, 2008
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.
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.
Saturday, November 08, 2008
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.
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.
Friday, November 07, 2008
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.
Thursday, November 06, 2008
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.
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.
Tuesday, November 04, 2008
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.
Thursday, October 23, 2008
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.
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.
Hugo, howzit goin'?
Hugo Chávez' Venezuela, in the midst of falling oil price.
What to confiscate now, Hugo?
From the New York Times.
"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.
Wednesday, October 22, 2008
Capitalism is Dead for Sale
HT: The Austrian Economist and The Economist
Monday, October 13, 2008
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.
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...
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.
Saturday, October 11, 2008
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"
Thursday, October 09, 2008
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.
Which is not quite true.
China does. And so does private sector.
Wednesday, October 08, 2008
What's all this mean?
It mean can mean China is taking over the World Superpower.
That is Arvind Subramanian.
HT: Dani Rodrik.
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:
What are we really talking about here?
Update: Winterspeak also thinks its awful.
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.
Monday, October 06, 2008
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.
Saturday, October 04, 2008
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
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.
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 :-)
- 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:
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).
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:
- Opportunity costs
- Comparative advantage
- Efficiency
- Externality
- Property rights
- Demand
- Supply
- Growth
- Inflation
- 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
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
Tuesday, September 30, 2008
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.
Friday, September 26, 2008
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.
Thursday, September 25, 2008
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.
Monday, September 22, 2008
Wednesday, August 13, 2008
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:
and here's Koopman's blogpost.
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).
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).
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