(This writing is an Abstract and Conclusion part of my conference paper, presented in the 8th International Conference of IRSA/Indonesian Regional Science Association and the 31st Annual Meeting and Conference of FAEA/Federation of Asian Economic Association. Both were in 2007).
Abstract
This paper studies convergence process across cities in East Java province of Indonesia. To do so, it particularly investigates the effects of human capital and public capital on convergence trend. It also explores the geographic dimension of knowledge spillovers that is perceived as a key mechanism for convergence and a particular pattern of economic (industrial) activities. This paper provides some evidence on the trend of economic divergence. During the study period, divergence trend was associated with both economic liberalisation and decentralisation, while convergence trend shortly existed during economic crisis. Further, the process of convergence is conditional. The effectiveness of policy interventions that may be able to enhance convergence is also discussed in this paper.
Main Points
This paper provides some evidence on the trend of economic divergence. During the study period, divergence trend was associated with both economic liberalisation and decentralisation, while convergence trend shortly existed during economic crisis. Further, the process of convergence is conditional. Conditional convergence is basically equivalent to sustained differences in the levels of city real output or income per capita, as evidenced by estimates with LSDV model, as supported with spatial regression model, and as implied with the pattern of concentration and specialisation. While it is true that there is some degree of (global) spatial autocorrelation, it is not strong enough to leak out some growth - enhancing spillover effects, such as knowledge spillovers. Thus, knowledge that is important to improve productivity (that eventually leads to higher growth rate) will only be contained in some clustering cities which are already rich and densely populated, providing higher degree of proximity among economic agents and facilitating knowledge externalities. Analysis on industrial concentration and cities’ specialization suggests that large geographical concentration of manufacturing employment has remained and convergence will therefore be conditional.
Is there any means to soften concentration to promote convergence? Improving infrastructure in East Java’s periphery cities is often suggested as one of policy measures. However, whether the outcome of improved infrastructure will promote spatial diffusion or, instead, enhance concentration is not clear, as there exists two conflicting forces at work. As infrastructure is improved, foreign firms which exercise a relatively large export share in comparison to domestic firms will more focus on cheap production possibilities. This behaviour will have a positive effect on spatial diffusion. Yet, even among foreign owned firms is it only in a few manufacturing sectors that the bulk of the production is exported. Thus, it seems reasonable to expect that the effect from improved infrastructure will be ambiguous and not necessarily reduce concentration (Sjöholm, (…), unpublished). In line with that notion, a variable of public capital used in this paper, utilised as a proxy for infrastructure, shows negative or non-significant relationship with convergence process (see table 2 for unconditional convergence and table 3 for conditional convergence). One interpretation can be derived from these results is that the spending of public capital (on infrastructure) is not cost effective, suffering from poor design and planning, mark-up, and corruption.
Though the role of human capital in this study proved to be convergence enhancing, I think that politicians and public officials tend to prefer infrastructure to human capital projects, as the former more fits their political or financial interests. As development strategy, from political perspective, infrastructure projects better fit five years of political cycle. Infrastructure projects take shorter time and are more visible, which are politically useful for boosting the chance of being (re)elected. Thus, more balanced development strategy between infrastructure and human capital projects is certainly a sensible policy option to reduce concentration and to promote convergence.
Under regional autonomy regime at city level that has been just implemented in Indonesia for about four years, city governments in East Java province are likely tempted to pursue some sorts of territorial competition policyto affect firms’ location decisions, while at the same time, less efforts are devoted in developing other local development strategies. Imbalanced economic performance will be augmented with imbalanced local development strategy by each city governments. Both literature and empirical works warn that such a policy option may be unnecessary or, worse, act as a strategy of waste (e.g. Cheshire and Gordon, 1996; Cheshire and Gordon, 1998; Rodríguez-Pose and Arbix, 2001). Considering that East Java province has long been one of the Indonesia’s main destinations of manufacturing activities (Mackie, 1993) and the spatial patterns as observed in this study, such a territorial competition policy, especially the poorly designed one, may be unnecessary for ‘core’ cities along Surabaya-Malang corridor. As a worse case, it may bring financial and technical burdens for ‘periphery’ cities. Thus, for city governments, this study should shed a light that a policy of ‘doing nothing’ with regard to East Java industrial agglomeration economies should be regarded as, if not the best policy, one of the sensible policy alternatives.
Some places benefit from structures created in the past, through a cumulative process, which has led to agglomeration economies. Hence, a pessimistic opinion about the relevance of policies attempting to reduce disparities between locations is a consequence of the analysis. If history plays such an important role, concentration of economic activity in places where agglomeration has been a product of a long time period seems inevitable. Furthermore, does there exist a cumulative process through history, policies cannot affect much density and thus productivity (Irawan and Allegria, 2006).
However, it does not mean that a policy of ‘doing something’ to promote human capital, local firms, and business environment are not encouraged. Discussing the paper by Ciccone and Hall (1996), Irawan and Allegria (2006) suggest that attempts of local and regional governments in order to increase productivity should be conducted to increase density. If concentration and proximity of workers is important, development of employment clusters or improvements of the city business centre are relevant to obtain productivity gains. In addition, policies satisfying the demand as well as reducing the price of commuting and the costs of doing business should contribute to the recreation of employment, reinforcing business and workers concentration, and agglomeration economies. At this point, the differences of underlying condition for convergence can be gradually reduced. Therefore, ‘the membership’ of convergence club can be expected to slowly expand.
Monday, April 21, 2008
Crime and the City
(The following is an excerpt from my conference paper, Crime and the City: An Economic Model and Evidence, presented at International Conference on “Improving the quality of human life: multidisciplinary approach on strategic relevance for urban issues”
September 6-7,2007, JW Marriot, Surabaya, Indonesia).
ABSTRACT: Using the Metropolitan Police Force’s data on London crime, this paper aims to assess whether the observed spatial concentration of crime is due to underlying people-place characteristics or to spatial spillovers. To explain spatial variations of urban crime, this paper employs some techniques of spatial econometrics and put forward two perspectives, namely: economic model and social interactions. This paper finds evidence of spatial spillovers of crime between neighbouring areas and argues that the channels for such spillovers are peer effects between single and less educated people. The peer effects are found to be larger for economically motivated crime.
The first murderer (Cain) built the first city
(Genesis 10:6, as in Glaeser and Sacerdote (1999: S243))
1 INTRODUCTION
It has long been observed that big cities have higher crime rates than in small cities or rural areas. Glaeser and Sacerdote (1999) find the positive association between city size (measured as natural log of city population) and crime rates per capita as well as murders per capita in the U.S., while Gibbons (2004) presents a cross-countries comparison, showing that crime is positively correlated with the countries’ degree of urbanisation. On the whole, there is a general pattern that crime tends to be geographically concentrated in big cities, metropolitan areas, or highly urbanised areas.
In addition, it is also identified that there is a spatial concentration of crime within cities. In other words, there is unevenness in crime distribution within cities or there are indeed ‘hot spots’ of crime within cities. As cited in Zenou (2003), Grogger and Willis (2000) point out that central cities are more prone to most crimes than suburbs. It is documented that, in U.S. between 1985 and 1992, central cities’ average crime victimisation rates were 0.409 per household, while they were much lower in suburbs, i.e. 0.306 per household (Bearse, 1996 in Zenou, 2003). Gibbons (2004) shows that in Greater London, there are 44.3 burglaries per 1000 households in Hackney, while the rates in Sutton are 12 burglaries per 1000 households. In New York City (NYC), the rates of serious crimes per capita vary, from 0.022 serious crimes per capita in the 123rd precinct of NCY to 0.21 serious crimes per capita in the 1st precinct of NCY (Glaeser et al., 1996).
A simple explanation suggests that these stylised facts are due to the variances of economic and social conditions across areas within cities. The study by Hakim (1980) finds that property crimes have a direct relation with an area’s relative wealth, while Costello and Wiles (2001: 31) review some researches that generally find that “offenders offend in areas dominated by the same ethnic group as the offender”. In this regard, in a single city, we can expect that personal assault crimes will be much higher in certain areas than the others.
However, more recent study by Glaeser et al. (1996) finds that these demographic and social variables are only able to account for little (no more than 30%) of the variation in crime across areas in NYC. This finding is in line with the ‘neighbourhood effects’ or ‘peer interactions’ story in explaining the spatial patterns of crime within cities. This theory argues that it is not only economic incentives that determine individual behaviour, but it may also depend on the behaviour of peers or neighbours (Freeman et al., 1996). In other words, provided that committing crime may give the same expected returns, individuals may be prone to crime, if their peers commit crime than they do otherwise (Freeman, 1999). Therefore, social interaction models should be viewed more complementary than substitute to economic models.
With regard to such phenomena, this paper is aiming at investigating the spatial pattern of crime across London wards, based on the Metropolitan Police Force’s data and the 2001 U.K. Census Data. In order to be able to provide explanation on what might constitute the crime disparities in London, this paper develops models that incorporate both wards’ individual characteristics and spatial spillover effects. The computed value of Moran’s I suggests that the spatial autocorrelation in crime among London wards does exist, hence, following Anselin (1988), spatial lag variables should be taken into account.
To summarise the results of this paper briefly: spatial spillovers do account for sizeable differences in crime clusters across London wards and improve explanatory power of the model that is otherwise only explained by underlying population characteristics alone. This paper starts by reviewing related literature on the determinants of crime in Section 2, followed by empirical framework in Section 3. Section 4 presents and discusses the descriptive and estimation results, while Section 5 concludes and provides some policy implications.
September 6-7,2007, JW Marriot, Surabaya, Indonesia).
ABSTRACT: Using the Metropolitan Police Force’s data on London crime, this paper aims to assess whether the observed spatial concentration of crime is due to underlying people-place characteristics or to spatial spillovers. To explain spatial variations of urban crime, this paper employs some techniques of spatial econometrics and put forward two perspectives, namely: economic model and social interactions. This paper finds evidence of spatial spillovers of crime between neighbouring areas and argues that the channels for such spillovers are peer effects between single and less educated people. The peer effects are found to be larger for economically motivated crime.
The first murderer (Cain) built the first city
(Genesis 10:6, as in Glaeser and Sacerdote (1999: S243))
1 INTRODUCTION
It has long been observed that big cities have higher crime rates than in small cities or rural areas. Glaeser and Sacerdote (1999) find the positive association between city size (measured as natural log of city population) and crime rates per capita as well as murders per capita in the U.S., while Gibbons (2004) presents a cross-countries comparison, showing that crime is positively correlated with the countries’ degree of urbanisation. On the whole, there is a general pattern that crime tends to be geographically concentrated in big cities, metropolitan areas, or highly urbanised areas.
In addition, it is also identified that there is a spatial concentration of crime within cities. In other words, there is unevenness in crime distribution within cities or there are indeed ‘hot spots’ of crime within cities. As cited in Zenou (2003), Grogger and Willis (2000) point out that central cities are more prone to most crimes than suburbs. It is documented that, in U.S. between 1985 and 1992, central cities’ average crime victimisation rates were 0.409 per household, while they were much lower in suburbs, i.e. 0.306 per household (Bearse, 1996 in Zenou, 2003). Gibbons (2004) shows that in Greater London, there are 44.3 burglaries per 1000 households in Hackney, while the rates in Sutton are 12 burglaries per 1000 households. In New York City (NYC), the rates of serious crimes per capita vary, from 0.022 serious crimes per capita in the 123rd precinct of NCY to 0.21 serious crimes per capita in the 1st precinct of NCY (Glaeser et al., 1996).
A simple explanation suggests that these stylised facts are due to the variances of economic and social conditions across areas within cities. The study by Hakim (1980) finds that property crimes have a direct relation with an area’s relative wealth, while Costello and Wiles (2001: 31) review some researches that generally find that “offenders offend in areas dominated by the same ethnic group as the offender”. In this regard, in a single city, we can expect that personal assault crimes will be much higher in certain areas than the others.
However, more recent study by Glaeser et al. (1996) finds that these demographic and social variables are only able to account for little (no more than 30%) of the variation in crime across areas in NYC. This finding is in line with the ‘neighbourhood effects’ or ‘peer interactions’ story in explaining the spatial patterns of crime within cities. This theory argues that it is not only economic incentives that determine individual behaviour, but it may also depend on the behaviour of peers or neighbours (Freeman et al., 1996). In other words, provided that committing crime may give the same expected returns, individuals may be prone to crime, if their peers commit crime than they do otherwise (Freeman, 1999). Therefore, social interaction models should be viewed more complementary than substitute to economic models.
With regard to such phenomena, this paper is aiming at investigating the spatial pattern of crime across London wards, based on the Metropolitan Police Force’s data and the 2001 U.K. Census Data. In order to be able to provide explanation on what might constitute the crime disparities in London, this paper develops models that incorporate both wards’ individual characteristics and spatial spillover effects. The computed value of Moran’s I suggests that the spatial autocorrelation in crime among London wards does exist, hence, following Anselin (1988), spatial lag variables should be taken into account.
To summarise the results of this paper briefly: spatial spillovers do account for sizeable differences in crime clusters across London wards and improve explanatory power of the model that is otherwise only explained by underlying population characteristics alone. This paper starts by reviewing related literature on the determinants of crime in Section 2, followed by empirical framework in Section 3. Section 4 presents and discusses the descriptive and estimation results, while Section 5 concludes and provides some policy implications.
A Market for Paid Sex
What will economists say about a market for paid sex?. Steven Levitt (Chicago’s economist, co-author of best selling book Freakonomics) and Sudhir Venkatesh (Columbia’s sociologist) did empirical analysis on street-level prostitution. Their research on the economics of street level prostitution uses official arrests record and field data on 2,200 transactions, collected from sex workers in three Chicago districts. Their work’s preliminary finding was presented in the Annual Meeting of American Economic Association on January 2008.
Here are main findings:
Prostitution, as a market, is highly concentrated in few locations. Yes, because prostitutes and their clients need to find each other easily. The market is large too. They estimate there are 4,400 street prostitutes active in Chicago in an average week.
Prostitutes earn premium wages, about $25-$30 per hour. It is about four times higher than they can earn in other productive activities. Yet, taking into account job risks, this amount is relatively meager compensation. The norm of sex without a condom and regular violent assault at least once a month is among the risks. Despite, the risk of legal action is low, opportunity costs can be high, since prostitutes are more likely to have sex (without get paid) with a police officer than to be arrested by one.
Prostitutes are also practicing pricing strategy. They maximize returns by segmenting market and assessing client’s perceived ability and willingness to pay. White customers are generally charged higher than black ones. There is a paradox. Though price increases along higher risks, but price premium for unprotected sex is small.
Supply of prostitutes is relatively elastic in a location where more people gathered for a national occasion. The 30% price hike could boost supply by 60%. Supply was flexible because regular prostitutes worked for more hours and prostitutes in other locations came in plus some seasonal prostitutes who are willing to offer sex service for higher wages.
Here are main findings:
Prostitution, as a market, is highly concentrated in few locations. Yes, because prostitutes and their clients need to find each other easily. The market is large too. They estimate there are 4,400 street prostitutes active in Chicago in an average week.
Prostitutes earn premium wages, about $25-$30 per hour. It is about four times higher than they can earn in other productive activities. Yet, taking into account job risks, this amount is relatively meager compensation. The norm of sex without a condom and regular violent assault at least once a month is among the risks. Despite, the risk of legal action is low, opportunity costs can be high, since prostitutes are more likely to have sex (without get paid) with a police officer than to be arrested by one.
Prostitutes are also practicing pricing strategy. They maximize returns by segmenting market and assessing client’s perceived ability and willingness to pay. White customers are generally charged higher than black ones. There is a paradox. Though price increases along higher risks, but price premium for unprotected sex is small.
Supply of prostitutes is relatively elastic in a location where more people gathered for a national occasion. The 30% price hike could boost supply by 60%. Supply was flexible because regular prostitutes worked for more hours and prostitutes in other locations came in plus some seasonal prostitutes who are willing to offer sex service for higher wages.
Sunday, April 20, 2008
Sex and The City
Today’s Kompas (Sunday, 20 April 2008) wrote a feature on Dolly,
Any related findings clearly suggest that issue of (women) prostitution contains problem of moral hazard (i.e. abuse imposed on prostitutes by other parties, most notably seen is their clients). The concept of moral hazard applies to this case generally to problems of a client who performs bad and dangerous behaviors toward a prostitute when her pimp-who is supposed to be a prostitute’s protector-cannot monitor client’ behavior and a prostitute herself can not do much things to prevent and/or to protect herself. The concept of uncertainty (i.e. incomplete insurance on prostitutes’ vulnerability to various kinds of risk) generally applies to a problem of a prostitute cannot select the least risky client and pimp.
Also, it suggests asymmetric information (i.e. a prostitute does not know whether her client is free from venereal diseases or HIV/AIDS and vice versa, most prostitutes do not know about reproduction health, Authority’s lax data and information on prostitutes), asymmetric market power (i.e. a prostitute, as ‘the sex seller’, is on far less bargaining power than her client, as ‘the sex buyer’. It applies when the client refuses to use condom. In another form, a prostitute, as ‘the protection buyer’, is much less powerful than her pimp, as ‘the protection seller’), and negative externality (i.e. one may argue that the existence of prostitution incurs some social costs).
When we are aware of limitation of the competitive (market) framework, problem of endogenous preference and legitimacy of preferences also occur in prostitution issue. The endogenous preferences applies in terms of it is difficult to suggest that to be a prostitute is rational choice of any woman. At the first place, it is much likely that a female prefer not to be a prostitute over to be. Yet, preference may also change as a result of consumption of ‘addictive goods’ (i.e. for instances, early sex experience, glamour lifestyle, overload information on well-being people, and drugs). Repeated use of sexual activity and consumption of utility she gets from it (i.e. money) may produce emotionally dependencies that increase the relative importance of this good in a female’s utility function. The legitimacy preference is subject to such a question whether public restriction or private suasions is more appropriate in judging rationales presented for mitigation on prostitution. This problem has something to do with severe debate between the moralist and the activists towards the issue of prostitution. The moralists often suggest that what prostitutes need is more intensive religious education and even hard punishment to make them quit from prostitution. The activists suggest that the most urgent things to be done are how to reduce prostitutes’ vulnerability, to educate them about how huge the risks are they will face if they keep doing prostitution, and to mitigate causing factors.
However, issue of prostitution is clearly not yet on the government policy agenda. I suggest that it is because policy elites may presume such an issue as politics-as-usual. Thus, because the government views such an issue as an issue with low political and economic stakes and little sense of urgency, one may expect that decision making upon this issue, if any, would be only incremental changes from the status quo. It is incremental in the sense that middle and lower level officials that involved are highly dependent on high level support for action and most concern on budget.
In addition to that, it has been recognized that government intervention on such an issue contains problem of ineffectiveness and inefficiency. These problems may waste such a limited resource even more, which in turn can discourage government’s attempt to put issue of prostitution in their agenda basket. The possible factors cause the government inefficiency and effectiveness are: 1). Clearly, the government experiences insufficient data and studies; 2). The government programs are often fund-driven instead of clear goal-driven. The most pronounced example is it was initially no program in state budget 1999/2000 for street children. However, international development agencies (i.e. World Bank, UNDP, and ADB) offered Rp.66 billion of fund for street children, the government suddenly put program for street children in the state budget. For sure, such a program was not well designed and devised because the main motive of the government was just how to disburse the fund quickly; and 3). The government often chose to work only with NGOs that are already on the government’s list without further scrutiny whether these NGOs really have access to the grass root level or these NGOs have been working in sustainable manner in particular issue, taking into account that many NGOs that only work if funding from government is available and/or only work in ad hoc project basis rather than sustainable program basis.
Taking all these considerations, partnership with NGOs and scale of priorities may have a merit. Any policy or action plan shall integrate the attempts on curbing supply side and pressing demand side simultaneously. Otherwise, we will be still hearing this on Dolly or other
Professors and Rock Stars
Professors or star scientists in a sense are rock stars (without sex, drugs, and rock n roll)! You can’t agree more if you think of past or future Nobel laureates in Economics like Joseph Stiglitz, Amartya Sen, Michael Spence or Paul Krugman (whose as sharp mind as his words), Steven Levit, and Daron Acemoglu. More abstract sciences, like physics, also have their rock stars, think of Richard Feynman, the 1965 holder of Nobel Prize in Physics for his works on quantum electrodynamics. He’s famous far beyond academic circle, handsome, and tall. Hey, Mr. Feynman has thick rather long hair too, no less sexy than one of Tommy Lee, Bon Jovi, or Dave Navarro.
Saturday, April 19, 2008
Shop 'Till You Drop...Some Questions
When was the last time you visited museum? Most adult working class people will answer ten or few years ago. When did you wander around shopping mall for the last time? Perhaps, it was just last evening and it has been three times during the week. Yes, shopping malls are urban people’s playground where they spend money and time. A sector of trade, hotel, and restaurant is economic backbone of Surabaya and many other cities. In Surabaya, this sector has grown 8 - 9% during the period of 2001-2005 while manufacturing sector’s growth rate was only about 2- 4.5% in the same period. Its share to Surabaya GDP has surpassed the share of manufacturing sector since 2002.
Here are some data and facts about urban (retail) trade sector I found interesting and they deserve some questions:
1. Mall-Population Ratio. In Singapore, one shopping centre serves 63,000 people. In Malaysia and Thailand, one shopping centre serves 105,000 and 170,000 people, respectively. In Jakarta and Surabaya (Indonesia), one shopping centre serves between 372,000 – 400,000 people. Question: Do Jakarta and Surabaya really need more malls?
2. Spatial Distribution of Mall and Traditional Market. Modern shopping malls make Surabaya appear to be monocentric, while traditional, some wet, markets make Surabaya polycentric. Question: Why?
3. Modern Shopping Centre vs. Traditional Market. In each five sub-regions of Surabaya, there are numbers of modern shopping centre and traditional market. Question: Are the two in head-to-head competition (for income, job creation, service) or are they complementary to each other?
4. Mall’s Commodity Profile. Regarding numbers of tenants (not talking about sales revenue or sales volume), malls are dominated by these following products: fashion and leather goods, foods and beverages, consumer electronics, and optic, watch, and jewelry. Question: Why? Is it supply that follows demand?
Here are some data and facts about urban (retail) trade sector I found interesting and they deserve some questions:
1. Mall-Population Ratio. In Singapore, one shopping centre serves 63,000 people. In Malaysia and Thailand, one shopping centre serves 105,000 and 170,000 people, respectively. In Jakarta and Surabaya (Indonesia), one shopping centre serves between 372,000 – 400,000 people. Question: Do Jakarta and Surabaya really need more malls?
2. Spatial Distribution of Mall and Traditional Market. Modern shopping malls make Surabaya appear to be monocentric, while traditional, some wet, markets make Surabaya polycentric. Question: Why?
3. Modern Shopping Centre vs. Traditional Market. In each five sub-regions of Surabaya, there are numbers of modern shopping centre and traditional market. Question: Are the two in head-to-head competition (for income, job creation, service) or are they complementary to each other?
4. Mall’s Commodity Profile. Regarding numbers of tenants (not talking about sales revenue or sales volume), malls are dominated by these following products: fashion and leather goods, foods and beverages, consumer electronics, and optic, watch, and jewelry. Question: Why? Is it supply that follows demand?
Children Prostitution
Even to a panel of experts, what factors that pose social problem so-called “children prostitution” are not so straightforward. Nonetheless, if we compile many reports on it and assemble information from the field, we will encounter both intrinsic and seemingly odd factors of this enormous problem. We can further conceive these factors as push factors and pull factors. The former is factors that are coming from situation inside a child’s family. The latter is factors that are going beyond a child’s control and incline her to certain experience to which she then behaves and responds.
The push factors include economic pressure, child abuse, sexual abuse, and early marriage. Low or absence of income in the family and ongoing increase of living costs depress parents’ ability to fulfill children’s needs and to send them to school. Then, these economic pressures invoke parents to do nothing when their children go prostitution. Instead, in some worse cases, parents themselves who feel reluctance if their children quit prostitution as it is the only significant source of family income. Family integrity is then out of the question. The pull factors encompass drugs syndicate and sex industry network, “cultures of denial” in the society for those who are losing virginity due to pre-marital sex, a colleague in school or informal work place, and demonstration effect of glamour lifestyle in adjacent entertainment or night life centre.
Albeit children prostitution may persist in forthcoming decades, we must convince many parties to undergo corrective actions about it. Notwithstanding we may not be able to terminate this social problem, we must levy our society obligation to mitigate the risks facing children prostitutes and to prevent other children go prostitution if we do not want to let the future pillar of our society collapse. Children prostitution is multidimensional problem, whereby we need comprehensive policy. Not only is it social affairs, but it is likewise economic, political, and legal affairs.
Is Decentralization Desirable?
In the last three decades, decentralization has been rather global norm than exception. Indonesia’s inherent features are definitely compatible with such global trend towards decentralization. These features include stage of development, the size of the country, the population diversity, and the “crisis effect”. Indonesia used to attain consistent high economic growth during the late 1980s and the early 1990s, accompanied with much improved social-economic indicators, yet with relatively high inequalities among regions. This pattern of development assures Indonesia as a good candidate to embark decentralization route. Next, with high population and cultural diversity, decentralization may allow the Government of Indonesia to accommodate regional differences and to commence development program that meets local preferences in better ways, as the distance between policy maker and policy target will diminish. Bulk of evidence suggests that such distance will only distort information needed to formulate and implement policy and will eventually erode its suitability and effectiveness. The evidence gives insight that major portion of the causes of Central Government’s failure to deliver public services that best suit local needs is due to high transaction costs concurrent with distance. Finally, the economic crisis that hit Indonesia in 1997, followed by political crisis in 1998 after the downfall of President Suharto as well as turmoil and resurgence of separatism tendencies in some provinces, such as Aceh and Papua, seemed to trigger and accelerate the process of decentralization. In this regard, decentralization basically acts as potential device to restrain separatism resurrection and ultimately make it cease. Moreover, unlike federalism, decentralization does not violate the vision of unitary state (i.e. Negara Kesatuan Republik Indonesia, NKRI) which has been founded and kept as final commitment since 1945 and valued as integral part of Constitution.
For Indonesia, decentralization is basically radical reform on state governance. It is a converse form of a centralized system under which Indonesia had been governed since 1950s. In this new governance sphere, for example, a city mayor is no longer a subordinate of a provincial governor. The latter will only act to mediate some possible conflicting interests between the former and the Central Government. To anticipate controversy and to confine resistance, two original decentralization laws (i.e. Undang-undang No. 23/1999 and Undang-undang No. 25/1999) envisaged a transition phase. The duration of the transition took two years (i.e. May 1999-May 2001). It allowed both regions to devote efforts in preparing their new functions and the Central Government to finalize coherent protocol deemed necessary for decentralization. To refine decentralization frameworks, two laws that replace the original laws was issued in 2004 (i.e. Undang-undang No. 32/2004 and Undang-undang No. 33/2004). These two new laws consist of more number of articles to incorporate and unify many views and recommendations from various preliminary assessments regarding the first three years of implementation. The articles and its supplement of explanations are also written in more rigid ways. By this approach, the articles and the supplement coincide to keep possible multi-interpretations minimal.
Despite there have been numerous presidential and ministerial decrees, circular letters, and other regulatory guidelines related to the decentralization laws, there is still lack of coordination that creates both contradiction among regulations at various levels and contradictions between decentralization-related regulations and departmental laws. The underlying causes of these problems overlap the technical capacity of bureaucracy. To deal with this matter, many associations of city governments and local and regional parliaments have been established as medium to coordinate policies and to develop mutual understanding. It can be hardly said that there is no improvement on this issue. Many sophisticated qualitative and quantitative studies commonly suggest that such improvement is in intermediate level. Apart from several flaws, the impacts of Indonesia’s decentralization are not as bad as previously feared. Neither is Indonesia’s decentralization experience mature yet nor temporary. It means that, on behalf of the spirit of reform, Indonesia can not suspend decentralization, but to keep learning, completing, and perfecting the manual and ethic of its implementation.
For Indonesia, decentralization is basically radical reform on state governance. It is a converse form of a centralized system under which Indonesia had been governed since 1950s. In this new governance sphere, for example, a city mayor is no longer a subordinate of a provincial governor. The latter will only act to mediate some possible conflicting interests between the former and the Central Government. To anticipate controversy and to confine resistance, two original decentralization laws (i.e. Undang-undang No. 23/1999 and Undang-undang No. 25/1999) envisaged a transition phase. The duration of the transition took two years (i.e. May 1999-May 2001). It allowed both regions to devote efforts in preparing their new functions and the Central Government to finalize coherent protocol deemed necessary for decentralization. To refine decentralization frameworks, two laws that replace the original laws was issued in 2004 (i.e. Undang-undang No. 32/2004 and Undang-undang No. 33/2004). These two new laws consist of more number of articles to incorporate and unify many views and recommendations from various preliminary assessments regarding the first three years of implementation. The articles and its supplement of explanations are also written in more rigid ways. By this approach, the articles and the supplement coincide to keep possible multi-interpretations minimal.
Despite there have been numerous presidential and ministerial decrees, circular letters, and other regulatory guidelines related to the decentralization laws, there is still lack of coordination that creates both contradiction among regulations at various levels and contradictions between decentralization-related regulations and departmental laws. The underlying causes of these problems overlap the technical capacity of bureaucracy. To deal with this matter, many associations of city governments and local and regional parliaments have been established as medium to coordinate policies and to develop mutual understanding. It can be hardly said that there is no improvement on this issue. Many sophisticated qualitative and quantitative studies commonly suggest that such improvement is in intermediate level. Apart from several flaws, the impacts of Indonesia’s decentralization are not as bad as previously feared. Neither is Indonesia’s decentralization experience mature yet nor temporary. It means that, on behalf of the spirit of reform, Indonesia can not suspend decentralization, but to keep learning, completing, and perfecting the manual and ethic of its implementation.
Development Aid or Economic Bait?
Contrary to classic paradigm, recent empirical studies during last a couple of decades have been converging to deny the notion that development aids are free from donors’ interests. The interests comprise, broadly speaking, political and economic ones. Those who advocate this thesis suggest that the ultimate goal of such aid release is to convert potential threats into strategic allies or at least to guarantee that the recipients are not becoming protectionists for their markets or hard liners against the aid providers’ exports or foreign policy. The donors include major industrial countries or international agencies backed by those developed nations. They are indeed few super powers in the global economy. Like a Trojan horse, the development aid is the main, if not sole, channel for these few super powers to intervene in other countries’ affairs, to extract whatever resources they may need, be it political, natural, or other economic resources.
In addition, various econometric models, based on dynamic longitudinal cross-countries data, have also attempted to simulate the long-term impact of development aids on economic growth, domestic saving, capital formation, and some other common development indicators of the recipients. Unlike common believe widely stated on popular media, these models whose won publication outlet in major top-tier academic journals predict that aid dependency indeed reverses the direction of development and the quality of development. The aid scheme often prohibits government to put public needs on the priority of their development agenda. Instead, the government focuses on donors’ agenda. The services made to debts or agenda that the donors insert on the aid scheme which they submit to the government eventually deteriorate the grade of development. Despite growth accounting records some positive numbers, unemployment among adults and malnutrition among children are steadily rising. It means that aid fails to add public goods, improve infrastructure, induce capital inflows, and create jobs. This picture is not a unique case of particular country, but apparent phenomenon in many economies. A quote from a pundit says that “aid is rather a mode of dependency than of development”. Those scientific predictions appear to confirm it, though the undesirable impacts may not be easily visible.
One can infer two main lessons from the discussion above. First, the end of Cold War era is definite, but the battle for seizing hegemonic power over the globe is not finite. It appears that the very basic foundation of real global politics remains the same, what is known as the principle-agent hierarchy. The asymmetric relations between the few super powers and the rest somewhat still survive. In other words, it suggests that not every animal is equal, as the power among players is not identical. Many say that comprehensive review and reform should be done to rectify these imbalance relations. Developing countries need to work together to innovate current practices of multilateral or unilateral actions that are not favorable to their own development agenda or not undertaken on a voluntary basis. However, pessimistic views suggest that the successor of the current system is not yet to come in the foreseeable future. Second, it is therefore only limited choice available to the weaker countries, that is adapt with or die by such less desirable system. It means that they must be able to isolate the malignant impacts of development aids and to fully exploit its benign values. They must be able to differentiate the harmful aid proposals from the necessary and useful ones. Yet, doing so is not as easy as separating chemical substances in sterile and controllable laboratory. Hence, the government of developing countries must equip development policy-making process with good skills in planning. Without it, government hardly succeeds to dispose effective and corrupt-free implementation in taking the best out of development aid.
In addition, various econometric models, based on dynamic longitudinal cross-countries data, have also attempted to simulate the long-term impact of development aids on economic growth, domestic saving, capital formation, and some other common development indicators of the recipients. Unlike common believe widely stated on popular media, these models whose won publication outlet in major top-tier academic journals predict that aid dependency indeed reverses the direction of development and the quality of development. The aid scheme often prohibits government to put public needs on the priority of their development agenda. Instead, the government focuses on donors’ agenda. The services made to debts or agenda that the donors insert on the aid scheme which they submit to the government eventually deteriorate the grade of development. Despite growth accounting records some positive numbers, unemployment among adults and malnutrition among children are steadily rising. It means that aid fails to add public goods, improve infrastructure, induce capital inflows, and create jobs. This picture is not a unique case of particular country, but apparent phenomenon in many economies. A quote from a pundit says that “aid is rather a mode of dependency than of development”. Those scientific predictions appear to confirm it, though the undesirable impacts may not be easily visible.
One can infer two main lessons from the discussion above. First, the end of Cold War era is definite, but the battle for seizing hegemonic power over the globe is not finite. It appears that the very basic foundation of real global politics remains the same, what is known as the principle-agent hierarchy. The asymmetric relations between the few super powers and the rest somewhat still survive. In other words, it suggests that not every animal is equal, as the power among players is not identical. Many say that comprehensive review and reform should be done to rectify these imbalance relations. Developing countries need to work together to innovate current practices of multilateral or unilateral actions that are not favorable to their own development agenda or not undertaken on a voluntary basis. However, pessimistic views suggest that the successor of the current system is not yet to come in the foreseeable future. Second, it is therefore only limited choice available to the weaker countries, that is adapt with or die by such less desirable system. It means that they must be able to isolate the malignant impacts of development aids and to fully exploit its benign values. They must be able to differentiate the harmful aid proposals from the necessary and useful ones. Yet, doing so is not as easy as separating chemical substances in sterile and controllable laboratory. Hence, the government of developing countries must equip development policy-making process with good skills in planning. Without it, government hardly succeeds to dispose effective and corrupt-free implementation in taking the best out of development aid.
A Postdoc in Larvaeic Rush
A witty short feature on a senior postdoc in evolutionary genetics at University of Lausanne in Switzerland appears in Nature (2008, Vol.452, No.10: 778). The feature basically portraits typical worries and dilemmas of those in academic world, struggling to move up in academic ladder to deserve professor title by means of constant publications. He thought himself like damselfly larvae (Lestes Viridis) that, like academics, have deadlines, and it stresses them out. Facing the deadlines, there will be shift on cost and benefit balance. In Larvae’s life cycle: feeding in the face of predation, trade off between mobilizing fat reserves versus reducing immune response. In academics’ life: aim lower and ensure quick publication versus aim high but accept more risks, e.g. rejection (He’s used to the ups and downs in academic publishing. Still, he finds rejection a bitter pill).
Thursday, April 10, 2008
Port Privatization, Efficiency, and Competitiveness
There are empirical studies that argue:
1. There is no clear-cut relationship, or even a negative correlation, between the type of ownership and port efficiency.
2. Port ownership has an effect on port efficiency.
So, it is not categorically proven that there exists a direct casual link between the degree of private sector involvement and economic efficiency. However, deregulation policies have been commonly used in many industries and across many countries (especially to the landside transportation sector), and privatization is perceived to be the most important policy for improving the efficiency of the ports sector (Cullinane et al., 2002).
A study by Tongzon and Wu (2005) shows that the best extent of private participation in container ports/terminals is between the Private/ Public and the Private mode, implying that it is better for port authorities to limit the private sector participation within the ‘‘landowner and operator’’ functions and take over the regulatory function. In other words, port authorities should introduce private finance, operation and management instead of state funds and administration while they remain in place as regulators. (I’m wondering whether the new limited role of PELINDO to be a mere regulator, due to new legislation, is the case of better or worse off situation. But I don’t expect the PELINDO employees who have actively protested recently read this study).
It is found that operation efficiency is very important for port authorities and port operators to gain a competitive advantage, implying that partial port privatization is a quite effective way to help port authorities to win in the competition. And it also implies that the customers of port services, shipping lines, do pay more attention to the port operation efficiency when selecting
the port services.
Finally, the results show that another most important factor determining port competitiveness is the adaptability to the customers demand. Since seaports are in a service industry, it is reasonable that port authorities and port operators should well understand the requirement of their customers and make efforts to meet and exceed their expectations.
1. There is no clear-cut relationship, or even a negative correlation, between the type of ownership and port efficiency.
2. Port ownership has an effect on port efficiency.
So, it is not categorically proven that there exists a direct casual link between the degree of private sector involvement and economic efficiency. However, deregulation policies have been commonly used in many industries and across many countries (especially to the landside transportation sector), and privatization is perceived to be the most important policy for improving the efficiency of the ports sector (Cullinane et al., 2002).
A study by Tongzon and Wu (2005) shows that the best extent of private participation in container ports/terminals is between the Private/ Public and the Private mode, implying that it is better for port authorities to limit the private sector participation within the ‘‘landowner and operator’’ functions and take over the regulatory function. In other words, port authorities should introduce private finance, operation and management instead of state funds and administration while they remain in place as regulators. (I’m wondering whether the new limited role of PELINDO to be a mere regulator, due to new legislation, is the case of better or worse off situation. But I don’t expect the PELINDO employees who have actively protested recently read this study).
It is found that operation efficiency is very important for port authorities and port operators to gain a competitive advantage, implying that partial port privatization is a quite effective way to help port authorities to win in the competition. And it also implies that the customers of port services, shipping lines, do pay more attention to the port operation efficiency when selecting
the port services.
Finally, the results show that another most important factor determining port competitiveness is the adaptability to the customers demand. Since seaports are in a service industry, it is reasonable that port authorities and port operators should well understand the requirement of their customers and make efforts to meet and exceed their expectations.
Port Performance and Efficiency
Tongszon (1995, Transportation Research A, Vol 29A, No. 3, 245-252) studies what determine port performance and efficiency. He measured port performance in terms of the number of containers moved through a port (throughput) on the assumption that ports are throughput maximisers. To measure port efficiency, he looks at the terminal operation aspect which is measured in terms of the number of containers loaded and unloaded while a ship is at berth. This aspect of terminal operation constitutes the largest component of the total ship turnaround time.
Functional Relationship:
TH = f (LOC, FS, EA, CH, E)
+ + + - +
E = g (CONMIX, BRLWT, GWLN, CHWH, TEUCH, CE)
+ - - + + +
where:
TH = number of containers (TEUs) in a year;
LOC = location represented by a dummy variable;
FS = frequency of ship calls (all);
CH = average government and port charges;
EA = level of economic activity measured by respective countries’ GDP;
E = terminal efficiency (i.e., average number of containers per berth hour);
CONMIX = average container mix represented by the proportion of 40-foot containers;
BRLWT = average delays in commencing stevedoring represented by the difference between the berth time and gross working time;
GWLN = average delays during stevedoring represented by the difference between gross working and net working time;
CHWH = average crane hours per working hour;
TEUCH = average crane productivity represented by the number of containers lifted per crane hour;
CE = average vessel size and cargo exchange.
Conclusions
The stronger influence of terminal efficiency relative to other factors in the determination of port performance provides an empirical justification for giving top priority to improving terminal performance in the overall process of waterfront reform. The dominant contribution of crane productivity (TEUCH) to terminal efficiency justifies the need to put more emphasis on enhancements of crane productivity.
Functional Relationship:
TH = f (LOC, FS, EA, CH, E)
+ + + - +
E = g (CONMIX, BRLWT, GWLN, CHWH, TEUCH, CE)
+ - - + + +
where:
TH = number of containers (TEUs) in a year;
LOC = location represented by a dummy variable;
FS = frequency of ship calls (all);
CH = average government and port charges;
EA = level of economic activity measured by respective countries’ GDP;
E = terminal efficiency (i.e., average number of containers per berth hour);
CONMIX = average container mix represented by the proportion of 40-foot containers;
BRLWT = average delays in commencing stevedoring represented by the difference between the berth time and gross working time;
GWLN = average delays during stevedoring represented by the difference between gross working and net working time;
CHWH = average crane hours per working hour;
TEUCH = average crane productivity represented by the number of containers lifted per crane hour;
CE = average vessel size and cargo exchange.
Conclusions
The stronger influence of terminal efficiency relative to other factors in the determination of port performance provides an empirical justification for giving top priority to improving terminal performance in the overall process of waterfront reform. The dominant contribution of crane productivity (TEUCH) to terminal efficiency justifies the need to put more emphasis on enhancements of crane productivity.
Mega Trend, Mega Container Ship
Land divides, but sea unites! Over the last one and a half century, world population has risen from 1.3 billion in 1850 to 6.4 billion in 2004 at about 1% average annual growth. In addition, trade in merchandise and unfinished goods increases faster than the world’s GDP and so does the demand for maritime transport services, since shipping is the cheapest mode of transport has fulfilled the need for exchange of goods between various nations, taking the advantage of differences in their natural resources, cost of production and surplus supplies to feed, clothe and provide daily necessities of life to the rising world population. World sea trade has grown from 50 million to 6.2 billion tones over this period at 3.2% growth, nearly 3 times that of population. Seaborne trade is about 90% of world trade. It’s seaborne trade that provides life blood to the global industry.
The seaborne trade might not be able to do was not possible without massive innovations in shipbuilding and naval architecture or marine engineering. As far as general cargo shipping is concerned, major change started with McLean’s first trial run of Ideal X, a converted tanker, in April 1956 in the form of containerization. The development of containerization since then is nothing but impressive. Even more impressive is the evolution and growth in the size of fully cellular purpose-built containership that arrived on the scene in 1968.The maximum size of containership has reached from a mere 58 trailers on the spar deck in 1956 to 9,000+ TEU ships nowadays. The story continues. There are now on the drawing board designs of bigger and bigger containerships, we can expect to welcome: The Korean design of 10,000TEU, the British Lloyd’s ULCS and the French BV’s Verimax of 12,500TEU, the Hyundai’s Germanischer Lloyd design of 13,000TEU, the Maersk’s design of 15,000TEU, the Dutch Malacca Max of 18,000 TEU.
There will be only a few numbers of ports used by these mega ships. They are not meant for each and every port in the world. Which ports will be chosen by these ships? Which ports are likely to succeed competing for them? There have been the biggest and latest super cars in most Indonesian wealthiest people’s garages. Yet, it appears that Indonesian ports will not house those mega container ships.
The seaborne trade might not be able to do was not possible without massive innovations in shipbuilding and naval architecture or marine engineering. As far as general cargo shipping is concerned, major change started with McLean’s first trial run of Ideal X, a converted tanker, in April 1956 in the form of containerization. The development of containerization since then is nothing but impressive. Even more impressive is the evolution and growth in the size of fully cellular purpose-built containership that arrived on the scene in 1968.The maximum size of containership has reached from a mere 58 trailers on the spar deck in 1956 to 9,000+ TEU ships nowadays. The story continues. There are now on the drawing board designs of bigger and bigger containerships, we can expect to welcome: The Korean design of 10,000TEU, the British Lloyd’s ULCS and the French BV’s Verimax of 12,500TEU, the Hyundai’s Germanischer Lloyd design of 13,000TEU, the Maersk’s design of 15,000TEU, the Dutch Malacca Max of 18,000 TEU.
There will be only a few numbers of ports used by these mega ships. They are not meant for each and every port in the world. Which ports will be chosen by these ships? Which ports are likely to succeed competing for them? There have been the biggest and latest super cars in most Indonesian wealthiest people’s garages. Yet, it appears that Indonesian ports will not house those mega container ships.
TVRI Talk: Kerosene - LPG Conversion
It was a live talk show and I did not have the copy of the show…so, as far as I remember, here are the main points of my talk.
Brief Background Information
In the mid 2007, the government has launched a program so called kerosene-LPG conversion. It was first started in East Jakarta and other regions in Java in 2007 and it will also be run in Sumatra in 2008. Up to 2010, it targets to replace 5.2 million kilolitres kerosene with 3.5 million tons LPG. In 2007 alone, the target was one million kilolitres kerosene. To do so, about six million of a 3 kg LPG tube would be distributed in 2007. Some data estimated it was only 3.9 million tubes (66%) that have been distributed. There was surely a problem of distribution. No wonder, people suffer of two kinds of scarcity: the kerosene and the LPG, despite of long queue everywhere.
Benefit-Cost
To state budget, the program will save as much as Rp. 30 trillion per year and it only costs Rp. 20 trillion of investment. To households’ pockets, a typical household will save Rp. 16- 25 thousand per month. Surely to estimate short term net benefit is not easy, if we also take into account:
1. Waste of productive time due to long queue. It’s not uncommon to find people queued for about ten hours.
2. The death of micro or cottage enterprises that largely depends on kerosene for their production process.
3. Unemployment due to the collapse of those micro or cottage firms.
Problems in the Field
Some constraints found in the field:
1. Socialization. Despite state budget has allocated some funds (as much as billions) for socialization, it’s not effective. Good socialization must be able to answer people’s typical questions: What benefit for them? Not only talking about the benefit for the government. If it were to secure or to improve the state budget, why does the government not first seize corruptors’ assets? Why is the government so powerful and coercive against its people but so weak and disable to use its coercive power against corruptors? Is the removal of subsidy or the saving created from the program able to send their children to school or to send them properly to hospital when they have health problems?
2. People’s resistance. It can be regarded as the consequence of poor socialization and the ambitious pace of the program.
3. Wrong target. The program is supposed to target housewives, the pure users of kerosene, a household with monthly expenditures less than Rp. 1.5 million, legal local inhabitants, and micro or cottage firms. Many eligible people haven’t received the conversion package as it’s, in many cases, distributed by nepotism and intuition.
4. Poor program infrastructure.
5. Rent seeking behavior. People bear illegal cost as much as Rp. 15 thousand to get the conversion package, that’s supposed to be free of charge.
6. About 11% of the distributed tubes are found in poor quality. Is it due to bad procurement process? This situation can hardly soften people’s resistance.
7. People resell the conversion package.
8. People receive the conversion package but not immediately use it.
9. People still use kerosene in combination with LPG.
10. The demand for kerosene is still high as poor fishermen in Northern Java’s coastal area have modified their boat’s machines so that the machines can use kerosene as fuel (due to the hike of solar price).
(Improving) Implementation
Government should also address the problem of poor fishermen’s lack of affordability for fuel, not only focusing on urban (poor) households. Otherwise, the conversion will be getting harder. The demand (for kerosene to as boat fuel) will always induce supply, illegally or not. Government should also address coordination problem among related agencies: Pertamina, BPH Migas, local government, Ministry of Industry, Ministry of Cooperative and SMEs, and private sectors. In monitoring and evaluation, government must involve universities and NGOs. Task force in tackling distribution problem should be established.
Deeper Issue: Energy Policy
Indonesia has been quite some time becoming of net importer for oil and gas. It’s hard to achieve production target of 1.3 million barrels per day. It surely puts burden on state budget, especially when world’s oil price skyrocketing to $ 100 per barrel. Oil concession with foreign and monopoly status of Pertamina in distributing oil for domestic market may also need to be revisited.
Yes, LPG is cheaper than kerosene but it’s hardly a sustainable solution. Many estimates suggest that after 2020, Indonesia will be a total importer for oil and gas, unless there are new oil and gas resources. Bio fuel is then regarded as possible alternatives. However, there’s also problem of land competition: planting corn for fuel or for food? Recall, Indonesia’s food security is also in question right now.
There’s another question: if the problem is energy scarcity and state budget burden, why does government not first convert PLN’s PLTDs (Diesel-powered electricity generators) into PLTGs (Gas-powered electricity generators)? This alternative can save about Rp. 25 trillion of solar subsidies for PLN (state electricity company) and the technology for this conversion is readily available and cheap.
Deepest Issue: Inherent Problem of Subsidy
Subsidy (or the removal of it) always triggers debate. The time frame, the target, the criteria, the amount, the design, the equity/welfare/distributional impacts are the heart of the problem. It’s increasingly becoming sensitive when it’s applied to vital commodity/goods: fertilizer, food, education, health, and, in this case, kerosene or everyone’s fuel, especially the lower income people. Subsidy creates some disparities. It possibly invites rent-seeking behavior or creates some other hazards, like: panic buying or panic stocking.
Subsidy is, however, always necessary for those who most need it or for some strategic reasons. I’m afraid the radical and careless removal of subsidy will make most vulnerable Indonesian people feel their lives much worse than the live of European cattle or American corns that receive so many subsidies to compete in world market.
Brief Background Information
In the mid 2007, the government has launched a program so called kerosene-LPG conversion. It was first started in East Jakarta and other regions in Java in 2007 and it will also be run in Sumatra in 2008. Up to 2010, it targets to replace 5.2 million kilolitres kerosene with 3.5 million tons LPG. In 2007 alone, the target was one million kilolitres kerosene. To do so, about six million of a 3 kg LPG tube would be distributed in 2007. Some data estimated it was only 3.9 million tubes (66%) that have been distributed. There was surely a problem of distribution. No wonder, people suffer of two kinds of scarcity: the kerosene and the LPG, despite of long queue everywhere.
Benefit-Cost
To state budget, the program will save as much as Rp. 30 trillion per year and it only costs Rp. 20 trillion of investment. To households’ pockets, a typical household will save Rp. 16- 25 thousand per month. Surely to estimate short term net benefit is not easy, if we also take into account:
1. Waste of productive time due to long queue. It’s not uncommon to find people queued for about ten hours.
2. The death of micro or cottage enterprises that largely depends on kerosene for their production process.
3. Unemployment due to the collapse of those micro or cottage firms.
Problems in the Field
Some constraints found in the field:
1. Socialization. Despite state budget has allocated some funds (as much as billions) for socialization, it’s not effective. Good socialization must be able to answer people’s typical questions: What benefit for them? Not only talking about the benefit for the government. If it were to secure or to improve the state budget, why does the government not first seize corruptors’ assets? Why is the government so powerful and coercive against its people but so weak and disable to use its coercive power against corruptors? Is the removal of subsidy or the saving created from the program able to send their children to school or to send them properly to hospital when they have health problems?
2. People’s resistance. It can be regarded as the consequence of poor socialization and the ambitious pace of the program.
3. Wrong target. The program is supposed to target housewives, the pure users of kerosene, a household with monthly expenditures less than Rp. 1.5 million, legal local inhabitants, and micro or cottage firms. Many eligible people haven’t received the conversion package as it’s, in many cases, distributed by nepotism and intuition.
4. Poor program infrastructure.
5. Rent seeking behavior. People bear illegal cost as much as Rp. 15 thousand to get the conversion package, that’s supposed to be free of charge.
6. About 11% of the distributed tubes are found in poor quality. Is it due to bad procurement process? This situation can hardly soften people’s resistance.
7. People resell the conversion package.
8. People receive the conversion package but not immediately use it.
9. People still use kerosene in combination with LPG.
10. The demand for kerosene is still high as poor fishermen in Northern Java’s coastal area have modified their boat’s machines so that the machines can use kerosene as fuel (due to the hike of solar price).
(Improving) Implementation
Government should also address the problem of poor fishermen’s lack of affordability for fuel, not only focusing on urban (poor) households. Otherwise, the conversion will be getting harder. The demand (for kerosene to as boat fuel) will always induce supply, illegally or not. Government should also address coordination problem among related agencies: Pertamina, BPH Migas, local government, Ministry of Industry, Ministry of Cooperative and SMEs, and private sectors. In monitoring and evaluation, government must involve universities and NGOs. Task force in tackling distribution problem should be established.
Deeper Issue: Energy Policy
Indonesia has been quite some time becoming of net importer for oil and gas. It’s hard to achieve production target of 1.3 million barrels per day. It surely puts burden on state budget, especially when world’s oil price skyrocketing to $ 100 per barrel. Oil concession with foreign and monopoly status of Pertamina in distributing oil for domestic market may also need to be revisited.
Yes, LPG is cheaper than kerosene but it’s hardly a sustainable solution. Many estimates suggest that after 2020, Indonesia will be a total importer for oil and gas, unless there are new oil and gas resources. Bio fuel is then regarded as possible alternatives. However, there’s also problem of land competition: planting corn for fuel or for food? Recall, Indonesia’s food security is also in question right now.
There’s another question: if the problem is energy scarcity and state budget burden, why does government not first convert PLN’s PLTDs (Diesel-powered electricity generators) into PLTGs (Gas-powered electricity generators)? This alternative can save about Rp. 25 trillion of solar subsidies for PLN (state electricity company) and the technology for this conversion is readily available and cheap.
Deepest Issue: Inherent Problem of Subsidy
Subsidy (or the removal of it) always triggers debate. The time frame, the target, the criteria, the amount, the design, the equity/welfare/distributional impacts are the heart of the problem. It’s increasingly becoming sensitive when it’s applied to vital commodity/goods: fertilizer, food, education, health, and, in this case, kerosene or everyone’s fuel, especially the lower income people. Subsidy creates some disparities. It possibly invites rent-seeking behavior or creates some other hazards, like: panic buying or panic stocking.
Subsidy is, however, always necessary for those who most need it or for some strategic reasons. I’m afraid the radical and careless removal of subsidy will make most vulnerable Indonesian people feel their lives much worse than the live of European cattle or American corns that receive so many subsidies to compete in world market.
Adam Smith Was Right
Last Monday evening (7/4/08), I gave a talk at TVRI Jatim on the conversion of kerosene to LPG. When TVRI asked me to be a resource person, I was at first reluctant, because I felt I was not quite fit yet and many paper works had been piling up during my bed rest, so I would rather spend the evening to start sorting out the homework. But on the second thought, I couldn’t afford to refuse the invitation for these reasons: 1) it’s a call of duty; 2) it’s time to pay forward to others many opportunities that I’ve received and some knowledge that I’ve gained ; and 3) it’s a simple job, a labor of love, with noble values. Morally speaking, did I do something good? I don’t know. But it’s obvious I did serve TVRI request as it served my interest too. The interest needs not be a financial interest, to “feel better off” by doing or not doing something is also an interest. In this regard, even when someone is saving a prayer, he/she’s basically pursuing his/her self-interest, if by doing it, that someone feels better-off.
Adam Smith is right when he said: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”.
Adam Smith is right when he said: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”.
Arrrghhh...(2)
Somebody please tell me
Why one’s faith on “KWI” and “TFUIHAM” can start shaking
When it appears that politics and balancing game rule
If it were actually hell, instead of heaven
(As one might previously believe)
Everyone could convert to be (another) devil
Loyal? I have been…
Voice? I did…
Exit? ...Why not?
Why one’s faith on “KWI” and “TFUIHAM” can start shaking
When it appears that politics and balancing game rule
If it were actually hell, instead of heaven
(As one might previously believe)
Everyone could convert to be (another) devil
Loyal? I have been…
Voice? I did…
Exit? ...Why not?
Arrrghhh...(1)
Been sick....one week for bed rest, one week for recovery...can’t take “the machine” right to the top speed yet...what a waste of productive time...so much to do, so little time…I’m wondering if people need no sleep and all those activities/situations that make us idle…and dull.
Wednesday, March 26, 2008
Do We Need More Public Holidays?
Again, Indonesians enjoyed another long weekend as there were two subsequent public holidays on last Thursday and Friday (20 and 21 March for Maulid Nabi Muhammad SAW and Easter Day). In 2008, most Indonesians enjoy 26 public holidays, similar to Myanmarians, Filipinos, Cambodians, Saudis and Iranians. Citizens of other developed economies and even of Vietnam (that just embraced market system recently and would like to be the next China) don’t have such high luxury. Vietnamese may think that too much holidays will slow down the rate of convergence process they’re now working on. While Indonesia’s level of inward investment has yet to reach the pre-crisis level, Indonesia doubled its number of public holidays during the period of 1997-2008. Do we need more or less public holidays? What is the optimum number of public holidays? First glance at the table below suggests that the association between number of public holidays and countries’ level of development may not be straightforward.
Country/Economy # of Public Holidays
1997* 2008**
Vietnam n.a. 10
United States 10 11
Spore 12 11
Taiwan n.a. 12
South Korea 17 15
Israel 24 15
UK 8 16
Brunei Darussalam n.a. 17
Malaysia 14 19
Hongkong 16 19
Irak 19 20
Thailand 16 22
Japan 20 22
China 9 22
Australia 10 23
Filipina 12 25
Saudi Arabia 19 25
Indonesia 12 26
Myanmar 18 27
Cambodia n.a. 31
Iran 24 31
India*** 11 43
*, Source: www.unesco.org
**, Source: www.qppstudio.net
***, India actually has three national public holidays, the others are regional in
nature or limited to certain religious/ethnic/linguistic groups.
One may argue that more public holidays will yield higher social capital which is good for society. Joachim Merz and Lars Osberg (2006), using the variation in public holidays across German Länder (regional unit), argue that public holidays have beneficial impacts on social life and there is a case to be made for more public holidays. Critics would say that the empirical work may suffer of endogeniety problem. In addition, nowadays, where people’s social knits are largely work-based social networks, more public holidays might reduce or, at least, hinder the accumulation of social capital. More public holidays should not be regarded as infinite addition. Suppose, there’s no such problem of endogeneity and social capital indeed takes place outside business realm, (i.e. more public holidays indeed add more social capital linearly), and there will be another problem: what is the optimum level of social capital? Social capital in itself also contains inherent defect, that is negative externality that possibly reduce trust to external members, the outsiders of the group. In total, it may act like zero or even negative sum game for the society. Next, in a country like Indonesia which is presumably more social capital abundant country than Germany, do we really need more social capital? Or, are more public holidays worth taking to have more social capital? Why not through other means to accumulate more social capital?
One may also argue that more public holidays will solve, in economic jargon, coordination problem (among family members or at least, between working spouses) to have some more time together. It may be true, but, what about coordination problem among business partners? More public holidays may actually delay the execution of business plan on hand.
Social capital is always necessary for Indonesia or for every society. Yet, Indonesia is hungry for and in severe competition with other countries for inward investment to add its capital stock. Otherwise, economic growth can not be sustained. Also, it’s too early for Indonesians to be a leisure society. We need to learn better how to be working class society. In local dimension, public holidays can spur local economic development, especially in places that to be favorite vacation destination. But, overall, we need more working days (and better quality of work) and less holidays. Don’t let Brian May write another song for Indonesians: “Too Much Holiday Will Kill You”
Country/Economy # of Public Holidays
1997* 2008**
Vietnam n.a. 10
United States 10 11
Spore 12 11
Taiwan n.a. 12
South Korea 17 15
Israel 24 15
UK 8 16
Brunei Darussalam n.a. 17
Malaysia 14 19
Hongkong 16 19
Irak 19 20
Thailand 16 22
Japan 20 22
China 9 22
Australia 10 23
Filipina 12 25
Saudi Arabia 19 25
Indonesia 12 26
Myanmar 18 27
Cambodia n.a. 31
Iran 24 31
India*** 11 43
*, Source: www.unesco.org
**, Source: www.qppstudio.net
***, India actually has three national public holidays, the others are regional in
nature or limited to certain religious/ethnic/linguistic groups.
One may argue that more public holidays will yield higher social capital which is good for society. Joachim Merz and Lars Osberg (2006), using the variation in public holidays across German Länder (regional unit), argue that public holidays have beneficial impacts on social life and there is a case to be made for more public holidays. Critics would say that the empirical work may suffer of endogeniety problem. In addition, nowadays, where people’s social knits are largely work-based social networks, more public holidays might reduce or, at least, hinder the accumulation of social capital. More public holidays should not be regarded as infinite addition. Suppose, there’s no such problem of endogeneity and social capital indeed takes place outside business realm, (i.e. more public holidays indeed add more social capital linearly), and there will be another problem: what is the optimum level of social capital? Social capital in itself also contains inherent defect, that is negative externality that possibly reduce trust to external members, the outsiders of the group. In total, it may act like zero or even negative sum game for the society. Next, in a country like Indonesia which is presumably more social capital abundant country than Germany, do we really need more social capital? Or, are more public holidays worth taking to have more social capital? Why not through other means to accumulate more social capital?
One may also argue that more public holidays will solve, in economic jargon, coordination problem (among family members or at least, between working spouses) to have some more time together. It may be true, but, what about coordination problem among business partners? More public holidays may actually delay the execution of business plan on hand.
Social capital is always necessary for Indonesia or for every society. Yet, Indonesia is hungry for and in severe competition with other countries for inward investment to add its capital stock. Otherwise, economic growth can not be sustained. Also, it’s too early for Indonesians to be a leisure society. We need to learn better how to be working class society. In local dimension, public holidays can spur local economic development, especially in places that to be favorite vacation destination. But, overall, we need more working days (and better quality of work) and less holidays. Don’t let Brian May write another song for Indonesians: “Too Much Holiday Will Kill You”
Thursday, March 20, 2008
Regression: Economists' Favourite Toy
I just ran four million (growth) regressions.
Xavier Sala-i-Martin
Xavier Sala-i-Martin
Correlations are common in economics. Yet, it doesn’t mean that identifying whether the correlation between two or more variables represents a causal relationship is always an easy task. Countries who invest more in infrastructure would also have higher income levels or growth. Does it mean infrastructure raises income levels or is it the case that richer countries can simply invest more? To answer this sort of questions, economists employ regression analysis to quantify the relationship between one variable and the other variables that are thought to explain it. Regression analysis can also examine how close and well determined the relationship is. Nowadays, running thousands of regressions has become commonplace and easy. In fact, any empirical economic study appears to have a regression in it.
Despite its benefit, regression analysis is also subject to drawbacks and abuse. People like to use it, misuse it, or deliberately mislead other people with regression. Exhaustive, if not mortal, difficulties in performing regression analysis include the following: ommitted variables, reverse causality, mismeasurement, and too limited a focus. These difficulties make regression analysis suffer of inherent wounds, namely: First, It’s inductive. You can’t be 100% sure; Second, It suffers of some kinds of black box in explaining the mechanics of the observed relationships between variables.
Regarding growth regressions, Pritchett (2006) identifies other wounds commonly found in growth regressions:
1. Growth regressions never satisfactorily resolved the "symptoms versus syndromes" problem.
2. Growth regressions were widely seen as producing estimates of gains from policy reform that were orders of magnitude larger than the microeconomic estimates of those gains—without any particularly convincing economic explanation.
3. Growth regressions have a tough time dealing with the huge differences in country experiences.
4. Growth regressions cannot predict turning points— either accelerations or decelerations—and we know that developing country growth rates have these turning points.
5. Growth regressions did not help policymakers anticipate either the disappointments or the surprises of the experiences of the 1990s.
Despite its benefit, regression analysis is also subject to drawbacks and abuse. People like to use it, misuse it, or deliberately mislead other people with regression. Exhaustive, if not mortal, difficulties in performing regression analysis include the following: ommitted variables, reverse causality, mismeasurement, and too limited a focus. These difficulties make regression analysis suffer of inherent wounds, namely: First, It’s inductive. You can’t be 100% sure; Second, It suffers of some kinds of black box in explaining the mechanics of the observed relationships between variables.
Regarding growth regressions, Pritchett (2006) identifies other wounds commonly found in growth regressions:
1. Growth regressions never satisfactorily resolved the "symptoms versus syndromes" problem.
2. Growth regressions were widely seen as producing estimates of gains from policy reform that were orders of magnitude larger than the microeconomic estimates of those gains—without any particularly convincing economic explanation.
3. Growth regressions have a tough time dealing with the huge differences in country experiences.
4. Growth regressions cannot predict turning points— either accelerations or decelerations—and we know that developing country growth rates have these turning points.
5. Growth regressions did not help policymakers anticipate either the disappointments or the surprises of the experiences of the 1990s.
Should we abandon regression? It's indeed a tool. Like a pencil among many other tools in a carpenter's tool box. An amateur carpenter, someone who thinks that he can saw straigth without a pencil line, may not need a pencil. A professional carpenter, someone who thinks that he never be that good, will always find a pencil helpful in one way or another. Many things a pencil can't do, but a pencil surely can do something.
Wednesday, March 19, 2008
In Front of The Stage: Toto, Skid Row, and Price (Non) Discrimination
From each according to his ability…
Karl Marx
Karl Marx
I’m not sure whether Tommy Pratama from Original Production, an Indonesian promoter who organised Toto concert in Indonesia, is Marxist or an adherent disciple of Microeconomics textbook. One thing for sure, he charged different prices for the Concert. It cost Rp. 350,000; Rp. 250,000; and Rp. 150,000 for VVIP, VIP, and Festival class, respectively. On the other side, Log Zhelebour, who was responsible for Skid Row concert, charged show-goers equally, i.e. Rp. 35,000. Why did they apply different pricing strategy? Apart from Log’s long well-known sacred mission (to make all metal-head happy by giving them world class or good rock ‘n roll show at affordable price), was there any economic reason for him to charge low price?
Many businesses, including show business (remember the saying: there’s no business like show business), price discriminate through customer self-selection. Businesses often use self-selection to induce different groups of consumers to respond differently. By getting consumers to voluntarily self-select into separate groups, businesses can enhance their profits through price discrimination. So, by applying price discrimination strategy, it is possible for producers to extract maximum rent from their consumer. They, however, should do it carefully, since each individual consumer, in principle, will always resist paying more than another. So, how will a producer play this pricing game? First, a producer needs to know whether the market is heterogeneous or homogenous. Next, a producer must identify which customers are the most price sensitive or he/she must devise a mechanism by which price-sensitive customers self-select.
Tommy knows that market for Toto is rather in stratum. It goes across types of people: from music freaks or practicing musicians who want to watch the playing of Steve Lukather and to observe the sound system to beautiful metro sexual people who want to be seen; from those who grew up with Toto music but now they are young or working adults to teenagers who don’t want to miss any show in the town. On the opposite, Skid Row fans are more homogenous. Regardless of their social economic status, they are basically all the same: metal-head people. The range of price sensitivity across consumers of Toto concert is likely much wider than that of Skid Row concert. In addition, in an open door concert like the case of Skid Row show, it is harder to separate entry door or divide space according to different classes of ticket. In short, Tommy has a larger room to price discriminate than Log does.
Log charged low price to induce more people coming. Given the design of the show (more cities and open door), this lower price was offset by higher expected volume of sales. Tommy’s mode price was higher than Log’s uniform price by the factor of ten. But, it was reasonable to expect that Log’s sales volume was at least ten times larger than Tommy’s. So, it is not the case of the sane Tommy versus the insane Log. Log simply took different path and his path was also economic sensible.
Advice to Fellow Consumers
When you’re traveling by airplane, never ask how much a person sitting beside you paid for the airfare. You may feel worse off if he/she paid cheaper than you did. But, if you don’t bother not being a VIP in a rock concert as long as you love the band and its music, just pay for a festival ticket. During the show, you could feel better off than those who paid much higher price. It is often the case the band will ignore all rules of price discrimination. Rock stars don’t like their fans being segregated by the promoter. On stage, they may shout like this: “ C’mon everybody, kick those seats, everybody come closer to me, stand up and shout…let’s rock together”. It was the case of Toto concert. I paid for a festival ticket, but I enjoyed the position of a VVIP ticket holder. I felt so much better off for paying less. Thank you, Steve!
Wednesday, March 12, 2008
Behind The Stage: TOTO and Logistics Quality
I was ready about to rock this Wednesday evening (12/3/08) in Toto concert, at Empire Palace, Surabaya. No need to worry about “to do list” until Friday (as I am also planning to act like “Youth Gone Wild” in Skid Row concert the following evening, i.e. Thursday), I have done all homeworks in advance. In short, as in Edane’s song, these two days are “Time to Rock”. What a rock city Surabaya is (Kiss ever wrote song called “Detroit Rock City”, so did Superman is Dead with “Kuta Rock City”. I hope that Boomerang or Power Metal does the same one day). However, some monkey business got me and other hundreds of people disappointed. The band’s equipment was not cleared yet by the Custom Office. It was left stranded somewhere in Sukarno-Hatta Airport. While I don’t know who was the culprit - the promoter, the local event organizer, the logistic partners, the Toto management itself, or the government officials? – This case reminds me on an international annual report so called “Doing Business”.
Overall, the ease of doing business in Indonesia has improved, from rank 133 in 2007 to rank 123 in 2008. In “Trading Across Borders” category, Indonesia actually jumped even higher in the international ladder, from rank 61 in 2007 to rank 41 in 2008. It’s pretty good. Yet, when better is expected, to be good is not good enough. Look at the further detail picture. In terms of monetary costs, it is true that Indonesian cost to export and cost to import (US$ per container) are lower than those in other countries in the region or in the OECD countries. However, in terms of time (days), it takes at least twice longer time for both export and import in Indonesia compared to best practices. So, if you agree that time is money, (time-adjusted) costs for export and import in Indonesia might be actually much higher than they firstly appear. Further, the “Doing Business” report hasn’t take into account more complete logistics indicators like the following (proposed by Hausman, Lee, and Subramanian) :
Overall, the ease of doing business in Indonesia has improved, from rank 133 in 2007 to rank 123 in 2008. In “Trading Across Borders” category, Indonesia actually jumped even higher in the international ladder, from rank 61 in 2007 to rank 41 in 2008. It’s pretty good. Yet, when better is expected, to be good is not good enough. Look at the further detail picture. In terms of monetary costs, it is true that Indonesian cost to export and cost to import (US$ per container) are lower than those in other countries in the region or in the OECD countries. However, in terms of time (days), it takes at least twice longer time for both export and import in Indonesia compared to best practices. So, if you agree that time is money, (time-adjusted) costs for export and import in Indonesia might be actually much higher than they firstly appear. Further, the “Doing Business” report hasn’t take into account more complete logistics indicators like the following (proposed by Hausman, Lee, and Subramanian) :
- Time. Total time for a trade transaction; document processing time; custom clearance; technical control; vessel turnaround.
- Cost. Total cost for a trade transaction; port & terminal charges; document processing; custom clearance cost; inland freight.
- Complexity. Signatures for a trade transaction; number of documents per transaction; percent of containers inspected; level of inspection; criteria for inspection.
- Efficiency. Number of containers loaded per berth hour; port shutdown days; inland transport speed; frequency vessel calls at port.
(Note: while these indicators are originally observed for and derived from trade across borders through seaport, I think they are also applicable for good flows through airport).
So, while various forms of tariff and non-tariff trade barriers are obvious and easier to manage, I think Hummels (2001) was right, time (and also efficiency and complexity) are invisible barriers for trade. It is thus harder to manage and to remove. Private enterprises and government agencies should collaborate to improve logistics performance and to reduce logistics friction in order to foster trade. They, government especially, should let us rock; instead rock us again and again.
Tuesday, March 11, 2008
Why Are Economists Often Right Too?
On the other hands, economists are often right too. Reasons include:
- Economists offer many opinions by which one or more of them can be expected to be, at least partially, true and correct. It ever happened that two economists who say opposite things, Myrdal and Hayek, can share a Nobel Prize. What they say must be worth some truth.
- Economist study many things. Like profession in medicine, profession in economics is also highly specialized. The JEL Classification System identifies 20 economics fields that are also further divided into sub and sub-sub fields. From theory to empirical methods, from monetary economics to labour economics, from health economics to behavioral economics, and from international economics to urban and regional economics. Altogether, the works in these fields must be helpful to find some truths, either by offering answers or, importantly, posing good and challenging questions. Surely it may incur costs. One pundit ever says that “the price of being right is being wrong for a while”. In Samuelson’s famous quote: “Funeral by funeral, theory advances”.
- Economists have notion of sunk costs and opportunity costs. These notions have created some innovations, such as: EVA (Economic Value Added). In examining companies’ healthiness, the EVA approach has some advantages than standard financial ratios.
- Many fields are compatible with or have been inherent part of economics. To name a few, these include psychology, sociology, mathematics, physics, computer, biology, geography, and statistics. Gravity model in international economics comes from physics. The concept of agglomeration economies combines some notions from geography and sociology. Mathematics and statistics make possible for economics to quantify even the most abstract notions, so people can manage things better. Is’ it that right that one can’t manage well something that he/she can’t measure? With many allies in scientific world, economists' quest for truth is becoming easier.
- One of economists’ genuine talents is their ability to model the real world’s complexity. Supply-demand curve, indifferent curve, and Edgeworth Box are simple but powerful tools. People like Krugman are so good in modeling and understanding how things basically work in both mathematical and verbal, without being verbose, languages (Think of his seminal technical paper on increasing returns to scale or of his funny baby sitting coop analogy in explaining recession). Without basic understanding on how things actually work, we may go into wrong direction.
Why Are Economists Often Wrong?
“We can get it wrong some of the time. I think, non-economists get it wrong a lot more often than economists. But, this isn’t a precise game. There are gonna be a number of occasions in the future that we will get things wrong too”
- Nicholas Stern (World Bank Chief Economist 2000-2003), in an interview with John Pilger
- Nicholas Stern (World Bank Chief Economist 2000-2003), in an interview with John Pilger
(The New Rulers of The World, 2001)
You may ever wonder why economists, many of them have had very good trainings and amazing academic background, are sometimes nothing more than fortune teller without crystal ball (if there were such thing). Some cynical observers or an economist-phobia may even say that economist is a person who makes a living by producing bad prediction: telling worriedly that something gloomy will happen, but it actually does not; promising that a particular policy will bring about some good impacts, but most people are becoming worse-off. Why do economists sometimes get it wrong? Here is a list of some possible reasons.
First, Positive vs. Normative Economic Analysis. Positive economic analysis seeks to explain the economic phenomena that are observed, while normative economic analysis deals with what “should” be done. Considering political acceptability, normative analysis may recommend something different from what is proposed by positive analysis, quite often, in the expense of economic efficiency or even social desirability. Also sometimes, economists easily surrender to popular beliefs. Remember the case of Asian Miracles and the debate whether these are due to, what Krugman calls, “inspiration or perspiration”? Alwyn Young are among the very few who is brave enough to present hard facts against the popular views. Yet, it took quite sometime for his works to get attention.
Second, Self-Interests. Like members of any other professions, economists themselves are actors whose self-interests or sometimes working to serve vested interests and change their views accordingly. It relates to the first reason. Several examples are available. A formerly independent university-based economist once said that subsidy removal will boost inflation. However, right after he’s hired by government as an expert staff, he estimated that inflationary effects of fuel-subsidy removal would only be tiny. Laura Tyson, an economic professor at Haas Business School, UC Berkeley and the first female Dean at London Business School, surely used to preach about the virtue of free market and trade liberalization in class, but she was widely criticized by her fellow economists for being harsh protectionist when she served in the Clinton administration as Chair(wo)man of the President’s Council of Economic Advisers. Gregory Mankiw, one of best economists, a Harvard professor and text-book writer, used to criticize Bushonomics (supply-side beliefs, etc.), but turned to be the defender during his assignment as Bush’s Chief Economist.
Third, Over-Simplifying. Market-framework is useful benchmark for economic analysis. Yet, it has inherent limitations, including market failures and the absence of transaction costs in the framework. Also, economists tend to focus on objective, choices, and constraints of individual actors. In reality, peer-effects, bandwagon effects, demonstration effects, neighborhood effects or other forms of interdependencies among actors or spillovers between adjacent places often matter. In addition, it is also the case of “old ideas die hard”, adopting particular theory without sufficient examination on different context and time frame. For example, one may simply refer to Philips Curve in proposing deficit spending or higher interest rates to lower unemployment rates. Yet, it may not work in some places. Instead, the action could lead to stagflation. Careful analysis should recognize that Philips Curve is more a historical relationship between inflation and unemployment than a model with solid underlying theoretical foundation. Dealing with unemployment goes beyond monetary and fiscal policy.
Fourth, Being Political or Ideological. Many analysts for whatever reasons try hard to maintain some ideological or political label. They are more worried on their status as “member of the family” than on the rigor quality of the analysis. Because of this attitude, they became more a politician than an economist: trying to convince people to believe something that they themselves do not. They are blind to see that there are various models of successful development; there are both cases of success and failure in privatization. While there is a lot of (seemingly) conflicting school of thoughts, these schools reach intellectual agreement in a number of issues. Are Austrian School and Chicago School Foes or Friends? Many great economists will say that they are both foes and friends. Friedman refers to Keynes when he was asked who is another great economist after Smith, Ricardo, and Schumpeter. Friedman also once said that there is no such thing as left-economics or right-economics, there is only either good or bad economics.
Fifth, Being Abusive. Many economists do well in empirical works, but others intentionally or, worse, unintentionally abuse empirical methods. Many simply use a time-series model to forecast for “infinite” time, regardless of the size of the sample used to build up the model. For the sake of a mere statistical exercise, it is just fine, but it is meaningless in economic sense. Prediction is hard, especially when it comes to the future.
Nevertheless, even though economists often make mistakes, they are still useful in one way or another and economics is highly regarded in scientific world. Nobel Prize for economics, so far the only field in social sciences that has Nobel, is apparent evidence.
First, Positive vs. Normative Economic Analysis. Positive economic analysis seeks to explain the economic phenomena that are observed, while normative economic analysis deals with what “should” be done. Considering political acceptability, normative analysis may recommend something different from what is proposed by positive analysis, quite often, in the expense of economic efficiency or even social desirability. Also sometimes, economists easily surrender to popular beliefs. Remember the case of Asian Miracles and the debate whether these are due to, what Krugman calls, “inspiration or perspiration”? Alwyn Young are among the very few who is brave enough to present hard facts against the popular views. Yet, it took quite sometime for his works to get attention.
Second, Self-Interests. Like members of any other professions, economists themselves are actors whose self-interests or sometimes working to serve vested interests and change their views accordingly. It relates to the first reason. Several examples are available. A formerly independent university-based economist once said that subsidy removal will boost inflation. However, right after he’s hired by government as an expert staff, he estimated that inflationary effects of fuel-subsidy removal would only be tiny. Laura Tyson, an economic professor at Haas Business School, UC Berkeley and the first female Dean at London Business School, surely used to preach about the virtue of free market and trade liberalization in class, but she was widely criticized by her fellow economists for being harsh protectionist when she served in the Clinton administration as Chair(wo)man of the President’s Council of Economic Advisers. Gregory Mankiw, one of best economists, a Harvard professor and text-book writer, used to criticize Bushonomics (supply-side beliefs, etc.), but turned to be the defender during his assignment as Bush’s Chief Economist.
Third, Over-Simplifying. Market-framework is useful benchmark for economic analysis. Yet, it has inherent limitations, including market failures and the absence of transaction costs in the framework. Also, economists tend to focus on objective, choices, and constraints of individual actors. In reality, peer-effects, bandwagon effects, demonstration effects, neighborhood effects or other forms of interdependencies among actors or spillovers between adjacent places often matter. In addition, it is also the case of “old ideas die hard”, adopting particular theory without sufficient examination on different context and time frame. For example, one may simply refer to Philips Curve in proposing deficit spending or higher interest rates to lower unemployment rates. Yet, it may not work in some places. Instead, the action could lead to stagflation. Careful analysis should recognize that Philips Curve is more a historical relationship between inflation and unemployment than a model with solid underlying theoretical foundation. Dealing with unemployment goes beyond monetary and fiscal policy.
Fourth, Being Political or Ideological. Many analysts for whatever reasons try hard to maintain some ideological or political label. They are more worried on their status as “member of the family” than on the rigor quality of the analysis. Because of this attitude, they became more a politician than an economist: trying to convince people to believe something that they themselves do not. They are blind to see that there are various models of successful development; there are both cases of success and failure in privatization. While there is a lot of (seemingly) conflicting school of thoughts, these schools reach intellectual agreement in a number of issues. Are Austrian School and Chicago School Foes or Friends? Many great economists will say that they are both foes and friends. Friedman refers to Keynes when he was asked who is another great economist after Smith, Ricardo, and Schumpeter. Friedman also once said that there is no such thing as left-economics or right-economics, there is only either good or bad economics.
Fifth, Being Abusive. Many economists do well in empirical works, but others intentionally or, worse, unintentionally abuse empirical methods. Many simply use a time-series model to forecast for “infinite” time, regardless of the size of the sample used to build up the model. For the sake of a mere statistical exercise, it is just fine, but it is meaningless in economic sense. Prediction is hard, especially when it comes to the future.
Nevertheless, even though economists often make mistakes, they are still useful in one way or another and economics is highly regarded in scientific world. Nobel Prize for economics, so far the only field in social sciences that has Nobel, is apparent evidence.
Monday, March 10, 2008
Why Politicians are Richer Than Professors
Postulate 1: knowledge is power
Postulate 2: time is money
Further, everyone who has graduated high school knows that
work : time = power (1)
Taking into account the two postulates, we can re-arrange equation (1), as follows:
work : money = knowledge (2)
Solving for money, we'll get:
work : knowledge = money (3)
Thus, as knowledge approaches zero, money approaches infinity, regardless of the work done.
Conclusion:
The less you know, the more money you make, as long as you talk much, like those all most politicians. However, since talk is cheap, supply exceeds demand.
Postulate 2: time is money
Further, everyone who has graduated high school knows that
work : time = power (1)
Taking into account the two postulates, we can re-arrange equation (1), as follows:
work : money = knowledge (2)
Solving for money, we'll get:
work : knowledge = money (3)
Thus, as knowledge approaches zero, money approaches infinity, regardless of the work done.
Conclusion:
The less you know, the more money you make, as long as you talk much, like those all most politicians. However, since talk is cheap, supply exceeds demand.
Thursday, March 6, 2008
Guitarists Hall of Fame...and Shame
Surely the list below is not exhaustive, way too many to mention. Nor does it imply ranking.
A. Guitar players whose playing, signature sounds, and attitudes shot through my heart.
- Eddie Van Halen (Van Halen). He is a complete package. It often happens that a guitar virtuoso fails to write song as a whole song, not only deadly on the solo part, or a good song writer is just an average guitar player. Eddie has best of both worlds.
- Akira Takasaki (Loudness). I was in the junior high school’s first year, hanging around with a friend in a music store next to Bratang Bus Terminal, Surabaya. We’re interested in a cassette with a Japanese sunrise on the cover, labeled “Loudness. Thunder in the East”. We had no idea about it, so we asked the shop attendance to play it for us (Dated back at that time, you are allowed to do so). It only took the first bar of Takasaki’s riffs (later we knew that the song was Crazy Nights) to blow our faces away. We went home with wide grin and with Loudness in our shorts’ pocket.
- Jimi Hendrix. He doesn’t play guitars, he’s making love to guitars. Guitars are his alter ego, guitars are the extension of his personality. His long screaming licks on Purple Haze makes you fly, his bluesy riffs on Hear My Train Comin’ (accoustic version) make you feel like crying.
- Stevie Ray Vaughn. He has mojo in his guitars. It’s like that he’s doing a voodoo ritual on stage. His playing steals your soul.
- Randy Rhoads (Ozzy Osbourne). Small guitar player with BIG talent, sound, melody, and learning attitude. When every other members are on party after the show, he used to stay in hotel room doing self-evaluation on his playing. On the road during the tour, he used to find local classic guitar teacher to sharpen his techniques, even though it often ends up that it was him who eventually gives lessons to the invited instructor. With Randy on guitar works, Diary of A Mad Man and Blizzard of Oz are widely acclaimed as Ozzy’s solo career masterpieces.
- Jake E. Lee (Ozzy Osbourne, Badlands). He’s the one who succesfully fits Randy’s shoes after Randy died on the airplane crash accident. His work with Ozzy, Bark at the Moon and The Ultimate Sins, brought him to the elite league. Later with his own band, Badlands who produced three albums, he showed how to beautifully blend heavy metal and blues.
- Zakk Wylde (Ozzy Osbourne, Pride & Glory, Black Label Society). He was 21 when picked by Ozzy himself among hundreds of guitarists. Already infamous Brad Gillis of Night Ranger was among the few short-listed candidates. It’s a big jump from playing in a bar band to coming along with Ozzy. But Zakk didn’t care. He’s fearless.
- Yngwie Malmsteen (Steeler, Alcatraz, Self-title band). The grand daddy of neo-classical rock and shredding guitar playing. Faster than the speed of light.
- Steve Vai (Frank Zappa, Alcatraz, David Lee Roth Band, Whitesnake, Self-title band). Unbelievable techniques and sounds. A Berklee graduate. A Grammy nominee for rock instrumental. With Joe Satriani, he’s the founder of G3.
- John Sykes (Tygers of Pantang, Thin Lizzy, Whitesnake, Blue Murder, Self-title band). Master of vibrato. His work with Whitesnake, 1987 album, will always be heavy metal anthem of all the time. Either storming solo on Still of the Night or vibrating solo on Is This Love will squeeze your heart.
- George Lycnh (Dokken, Lynch Mob). Hot and groovy riffs that peel your face and twist your feet, hot licks that scream like demon.
- Nuno Bettencourt (Extreme, Mourning Widows). Hot and dangerous, clean, fast, and funky. Together with Vernon Reid of Living Colour, he’s regarded as the creator of funk-metal.
- Greg Howe. He can shred and play neo-classical (listen to his works with Vitalij Kuprij, a keyboard virtuoso), he can play contemporary heavy metal (listen to his self-title band, Howe). Hey, he can play fusion and jazz too (listen to his work with Tetsuo Sakurai, a former Casiopea’s bassist and listen to his collaboration with Victor Wooten and Dennis Chambers).
And off course, the trio living legends. Enuf said:
- Ritchie Blackmore (Deep Purple, Rainbow, Blackmore’s Night)
- Jimmy Page (Led Zeppelin)
- Brian May (Queen)
- Ritchie Blackmore (Deep Purple, Rainbow, Blackmore’s Night)
- Jimmy Page (Led Zeppelin)
- Brian May (Queen)
B. Criminally underrated guitarists I favor
- Warren DeMartini (Ratt)
- Adrian Vandenberg (Vandenberg, Whitesnake, Manic Eden)
- Blues Saraceno (solo artist, Poison).
- Mick Mars (Motley Crue)
C. Bassist who stands equally with the frontman or the axeman (because of his T=technique, SW=song writing, BL=band leadership, A=all of the three)
- Billy Sheehan (David Lee Roth Band, Mr.Big, Steve Vai Band) (T)
- Steve Harris (Iron Maiden) (A).
- Nikki Sixx (Motley Crue) (SW, BL).
- Rachel Bolan (Skid Row) (SW, BL).
- Geddy Lee (Rush) (A).
- Rudy Sarzo (Quiet Riot, Ozzy, Whitesnake, Manic Eden) (A).
- Randy Coven (Ark) (A)
- Tony Franklin (Blue Murder) (A)
- Robert Plant
- Ian Gillian
- Dave Coverdale
- Freddie Mercury
- Ronnie James Dio
- Jorn Lande
- Rob Lamothe
- Geoff Tate
- Joe Lynn Turner
- Chriss Cornell
- David Lee Roth
- Sammy Hagar
- Ray Gillens
- Axl W. Rose
- Sebastian Bach
- Gary Cherone
- Rob Halford
- Bruce Dickinson
- Jeff Scott Soto
- Don Dokken
- Edi Kemput (Grass Rock)
- Totok Tewel (El Pamas)
- Eet Sjahranie (Cynomadeus, Edane, God Bless)
- Ian Antono (God Bless, Gong 2000)
- Rama Satria (Jacque Matte)
- Fadlil Iswahyudi (Phytagoras, AIC (Arek ITS Cuk) Band)
- Odink Nasution (Cockpit)
- Andra Ramadhan (Dewa, Andra and the Backbones)
- Abdee (Slank)
- Ridho (Slank)
- Pay (Slank, BIP)
- Eros Chandra (Sheila on 7)
- Bujana (Gigi, Trisum)
- Donny Suhendra (Krakatau)
- Tohpati (Trisum, Simak Dialog, solo artist)
- Iwan Hasan (Discus)
- Balawan (Trisum, solo artist)
- John Paul Ivan (Boomerang, U9)
- Baron (Gigi, solo artist)
- Coki (Netral)
- Piyu (Padi)
- Moldy (Radja)
- Peterpan’s guitarists (I don’t know their names)
Wednesday, March 5, 2008
Paris Hilton Effect
It's not uncommon if someone/something is getting (more) famous of being famous, getting richer of being rich. Let's call it Paris Hilton effect, if you will (Well, Fans of Dian Sastro may prefer to use terms Dian Sastro effect, intead).
Such tendency was keenly observed by Sherwin Rosen in his seminal paper, "The Economics of Superstars", published in American Economic Review on December 1981, even when Ms. Hilton was only ten months old. Superstars here may include individuals who work as actress, musician, athletes, academics/scientist, and other professions or may include institutions, organisations, or business entities. Rosen explains why few people earn much share of the pie and dominate the field in which they engage. The superstars do it either by charging higher prices, though their (actual) talents might be only marginal to the next best performers, or, selling more services/products due to the increasing demands for (perceived) "superstars". Princeton's economist, Alan B. Krueger notes that "the top 5% of revenue generators took in 62% of concert revenue in 1982 and 84% in 2003", as demand for "superstar" performers increased"("The economics of real superstars: the market for rock concerts in the material world", NBER Paper, April 12, 2004).
However, I think, the definition of superstars is sometimes hardly obvious or at least, more exact in some fields but is not in other fields. Leave alone the role of crafted campaign to make someone to be superstar. No one will refute that Rolling Stones, Pink Floyd, and U2 are superstars in music; Sharapova, Beckham, and Rossi are the rulers in the sport world; and no more than five people including Paul Krugman are the top in international trade theories. But, how we can explain that Radja or Peterpan sells more concerts than the real deal ones like Edane, Discus, Simak-Dialog?; how we can explain a popular commentator is cited more frequently by the media and dominates public seminars (which means money) than a serious scientist rigorously dealing with particular issue? Krugman (1994: 8) once said, "neither Robert Lucas, without question the most influential economist theorist of the 1970s, nor Paul Romer, arguably the most influential theorists of the 1980s, has ever appeared on any public affairs program".
After all, we're now talking about the market aspect of the superstars, not merely the virtuosity or the technical expertise of them. Popularity or income may go hand in hand with virtousity, but quite often, they don't. At least, economists, like Rosen, have been working to explain either economic sense or non-sense. In what category does Paris Hilton belong to? We may need not to care about it. Raise your glass and cheers: Long legs, Paris!
Famous (and smart) Womanizer
I'm talking about Milton Friedman, Thorstein Veblen, and James Bond. Friedman is short, the other two are tall. Bond is just a fiction character, the other two are the real deal in economic thoughts. Friedman and Veblen are both genius economists, but the former has earned himself a Nobel Prize. No matter how you draw the graph (x and y as tall and short, fiction or real, Nobel laureate or not), the three are in the same indifference curve of being famous and smart womanizer. Wait, really the same? Well, if you'd like to do the rank, perhaps, Bond's curve is highest, Veblen ranks two, and Friedman follows.
Who Am I?
I'm just a normal jerk
who happens to love
economics and social sciences, guitars, and family.
As long as my brain and fingers work
who happens to love
economics and social sciences, guitars, and family.
As long as my brain and fingers work
(and there're no bastards around)...
...I'm Cool !!!
...I'm Cool !!!
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