Monday, April 21, 2008

Convergence or Divergence?

(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.

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.

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.

Sunday, April 20, 2008

Sex and The City

Today’s Kompas (Sunday, 20 April 2008) wrote a feature on Dolly, Surabaya’s prostitution complex. Sex and the city in this case is not a TV drama series, it’s a bitter fact and paradox. Sex for sale is definitely not a merit good, that’s why Dolly is literally never legalized, but it has been there for decades. Dealing with the issue, do we need public policy or leave it to the sex market?

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 Indonesia’s city streets: “Sex…Sex…Sex, anyone?” (like street vendors used to shout: “Cang…Kaca..aang”) or in Kompas’ interesting title: “Bos, Mampir Bos!”.

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.

But what about real rock stars who also have very good university degree?-so that they are literally also scholars and have potentials to be university professor? Top of the list must be Brain May, Queen’s founder, guitarist and song writer. He holds PhD in astrophysics. May’s works with and contributions to Queen have been very good, but with PhD on his hands and being an active Visiting Researcher in Imperial College, UK? It’s really amazing. The next should include Tom Morello (guitarist and leader of many innovative bands like Rage Against The Machine, Audioslave, and Axis of Justice). Morello is a Harvard graduate in political science and an outspoken political activist. Some names must also be mentioned. Steve Vai (David Lee Roth Band, Frank Zappa, Alcatrazz, and Whitesnake), folks from Dream Theatre (John Petrucci, John Myung, Jordan Rudess, and Mike Portnoy), and Paul Gilbert (Racer X, Mr.Big). They are all graduates from Berklee College of Music, NY (except Mr. Gilbert who were graduated from Guitar Institute of Technology) and frequently give clinics in their almamater.

Is there any correlation between cognitive ability and the ability to play a musical instrument? Yes, some new researches, like the one of Stanford’s Keith Devlin confirm it. Getting good assignment in either music industry or academia is already difficult. Both worlds are very competitive. Yet, once someone makes it in either industry, he/she must enjoy some privileges, recognition, or enjoyment just like those in the other industry.

Rock stars and professors are both very good substitutes and complementary, as well. Professors can be very well known for their seminal papers, while rock stars can gain fame and respect for their innovative music and amazing techniques.

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?

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.

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.

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.

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.

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.

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.

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”.

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?

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.