Indonesia | Economics

Soccer and social capital

2010-01-02T11:43:00.000-08:00

So, this winter break, I packed up five books on my vacation and managed to finish (at least) two: Soccernomics and Unanticipated Gains: Origins of Network Inequality in Everyday Life. Both books are very rewarding at different levels.

Soccernomics, true to its title, is about soccer and economics. It also proves to be an engaging read, even for someone like me who pretty much knows very little about the former of the two topics. One of the blurbs from The Guardian calls it "a sort of Freakonomics for soccer". Well, not exactly. In many ways, it is superior than the book it's compared to.

For one, Soccernomics lacks the kind of attention-deficit disorder plaguing Freakonomics. The book is tightly organized around topics that (I'd imagine) soccer fans would be really interested in. An instance: It started with explaining what is going on with the English team which, as shown by their data, is the team with the most loyal fans worldwide (they also go on to show why).

But as the book's title is not "English Soccer", it only lingers a bit on the English before moving on to other topics that illustrate how the tools of economics can be used to understand what is happening in soccer worldwide. They use empirical approaches to show among others, why soccer clubs are probably the worst-managed business on earth, or why game theory can help (or not) goal keepers during penalty-shootouts (and that professional players are brilliant mixed-strategists!). Most of the insights are novel and well-supported by data.

Meanwhile, I picked up Unanticipated Gains: Origins of Network Inequality in Everyday Life because of a recent interest in social capital. Mario Luis Small, a sociologist, examines how the way childcare centers in poor neighborhoods are organized would affect the social ties formed by their members. One form of social capital is social networks that allow individuals access to resources -- such as information, informal support etc -- owned by members of the networks.

If social capitals are important especially for poor people, then understanding how (top-down) institutions may affect their formation might help facilitate policies that would be beneficial to them. Small shows the role of institutional rules (e.g., when parents can pick up their children), and resources (e.g., ties with other organizations) would differentially affect the formation of social ties. The book uses detailed interviews as well as large survey data.

I find the book thoroughly enjoyable, although I need time to process its implications for my own research, or whether some of the findings are "obvious". It presents how these institutions act as a broker of social ties, firstly between its clients (through its institutional rules) as well as with other organizations. The book is organized well, along with a methodological appendix that I definitely have to at least skim.

So, today, a week before the break's end, there are three more to go on my list: This Time is Different, Rational Decisions, and (at the recommendation of the Economist), The Crisis of Islamic Civilization. Oh, well, there's always Summer 2010.

Happy New Year everyone!

The fatal misconception of population control

2009-01-04T15:06:00.000-08:00

For the holiday, I decided to finish Michael Connelly's Fatal Misconception: The Struggle to Control World Population. It's an excellent history of how a hypothesis -- that unchecked, population growth will result in all sorts of problems -- became an ideology that got translated into policies and spun out of control to ruin many lives of women, mostly in developing countries. From the book's concluding chapter:

The great tragedy of population control, the fatal misconception, was to think that one could know other people's interests better than they knew it themselves. But if the idea of planning other people's families is now discredited, this very human tendency is still with us. The essence of population control... was to make rules for other people without having to answer to them. It appealed to the rich and powerful because, with the spread of emancipatory movements and the integration of markets, it began to appear easier and more profitable to control populations than to control territory. That is why opponents were correct in viewing it as another chapter in the unfinished history of imperialism.

The book is full of examples of how good intentions is a poor substitute for good evidence when devising (and scaling up) public policies. Yet, this seems to be the default mode of policy-making -- not only in Indonesia, but also within many international organizations and NGOs. Personally, I find this rather scary.

Roger Ebert: The rational film critic

2008-10-29T18:23:00.000-07:00

preference ▪ movies ▪

Top film critic Roger Ebert understands the necessity of transitivity (and completeness) that makes up a rational preference:

Do the math. If one week you state, "'Mr. Untouchable' makes 'American Gangster' look like a fairy tale," and the next week we say, "American Gangster" was "Goodfellas" for "the next generation," then you must conclude that "Mr. Untouchable" is better than "Goodfellas."

See the rest of Ebert's critiquing rule book here.

Scholes on financial regulation

2008-10-20T15:13:00.001-07:00

economics ▪ policy ▪

From Myron Scholes's opening statement on The Economist's debate on financial regulation with Joseph Stiglitz:

Economic theory suggests that financial innovation must lead to failures. And, in particular, since successful innovations are hard to predict, the infrastructure necessary to support innovation needs to lag the innovations themselves, which increases the probability that controls will be insufficient at times to prevent breakdowns in governance mechanisms. Failures, however, do not lead to the conclusion that re-regulation will succeed in stemming future failures. Or that society will be better off with fewer freedoms. Although governments are able to regulate organisational forms, they are unable to regulate the services provided by competing entities, many yet to be born. Organisational forms change with financial innovations. Although functions of finance remain static and are similar in Africa, Asia, Europe and the United States, their provision is dynamic as entities attempt to profit by providing services at lower cost and greater benefit than competing alternatives.

Thanks to Puspa Amri for the pointer.

On a side note: Rodrik put up a challenge in his blog for anyone to come up with financial innovations that have made us better off, and Steve Wadman took it up. HT: Dani Rodrik.

Clive Crook on the crisis and innovation

2008-10-19T08:52:00.000-07:00

economics ▪ policy ▪

Growth economists will tell you that the key to long term growth is productivity improvement, driven by technical changes and innovations. Economic history suggests that technical changes create boom-and-bust cycles as people adapt to the new technology. One can say that the crisis is a consequence of technical changes and innovations.

So, what of the present crisis? Does it suggest the utter failure of market forces, hence a need for an overall greater regulation in the financial market -- and not just those related to the specific problems at hand? FT's Clive Crook on the crisis' impact on the regulatory regime:

There is a broader point. The financial crisis was indeed a failure of regulation. The system was overwhelmed by innovation. Regulators are going to have to catch up and, you could say, try to hold innovation back. But finance is not a normal industry. The question to ponder is this: in which other industries will curbing innovation - also known as market forces - strike governments or voters, in the US or anywhere else, as a good idea?

Easterly on the wrong lessons from the US crisis

2008-10-05T14:21:00.000-07:00

economics ▪ policy ▪

William Easterly on what not to learn from the crisis, ie., "that development flows from all-knowing states rather than creative individuals". His last two paragraphs:

How much poverty has endured because individual entrepreneurs were shunned in favor of the likes of the $5 billion state-owned Ajaokuta Steel Mill in Nigeria, which never produced a bar of steel? Or because African governments spend their time preparing World Bank-required national Poverty Reduction Strategy Reports instead of freeing space for innovators?

We will never know. But we do know that the free market has a long-run track record of creating prosperity -- even with the occasional crash. The Depression's deceptive intellectual legacy is that development flows from all-knowing states rather than creative individuals. Here's hoping that the backlash to today's crash will not spawn another round of bad economics for the poor.

HT: Marginal Revolution

Concise Encyclopedia of Economics online

2008-10-05T13:49:00.000-07:00

economics ▪ resources ▪

The Concise Encyclopedia of Economics, explaining basic economics concepts, can be accessed here.

On the economics of superstition

2008-10-01T08:01:00.000-07:00

economics ▪ superstition ▪

As part of my economic history class, I was required to do readings (with no symbols and very little graphs). Here is an interesting one, by Vernon Smith, Nobel Laureate in economics. He was talking about the economic principles in the emergence of humankind, and he has the following to say about superstition:

Another example of the hidden economic function of culture is the magical practice of the Naskapi Indians of Labrador, who, when the caribou were scarce and the tribe hungry, resorted to scapulimacy, a divination in which the shoulder blade bone of a caribou was heated by fire until it cracked. As cracks appeared they were interpreted by a diviner in terms of the local geography as caribou trails, one of which the hunter should follow if he was to be successful. All this is commonly interpreted as showing the capacity of Naskapi for belief in magic. But is scapulimacy functional? One function is to sharpen the hunter's concentration, and to impress upon all the need for great dedication. But another effect was to cause the hunter to choose a random route, steering him away from previously successful hunting routes, and preventing the caribou from being sensitized to regularities in hunter behavior. This is precisely the normative argument for using mixed strategies in certain games of conflict. What the Naskapi in effect seem to have discovered was that reading shoulder blades had survival value.

The utility of math

2008-10-01T07:24:00.000-07:00

economics ▪ social sciences ▪

David Colander, reviewing this book, observes:

Economists have a tendency to obfuscate and lose themselves in a maze of equations and statistical tests that often have little intuitive meaning to the researcher, let alone to policymakers. My quest in economics has been to fight against those tendencies in applied policy work. But despite econommists' faults, I have to admit that their medium -- equations and statistical tests -- places a limit on the obfuscation that occurs. Ultimately the equations have to parse. Language -- the medium of sociologists and science scholars -- imposes fewer limits, which makes it easier for them to obfuscate. (JEL, XLVI/3, 78)

...which, I think, explains why it's much easier to do good economics than other social sciences.

Why a high oil price is a good thing...

2008-06-16T18:56:00.000-07:00

economics ▪ policy ▪

Foreign Policy gives five very good reasons.

McLeod on "renewing" the rupiah

2008-06-03T09:43:00.000-07:00

monetary ▪ policy ▪

Ross McLeod argues for dropping some zeros off the Rupiah:

[It] is far easier to eyeball numbers if they consist of three or four digits rather than a dozen or more (and of course many more numbers can be reported in a single table if they are rounded). For the same kinds of reasons, it is highly inconvenient to have to undertake low value transactions in very large nominal amounts.

The argument for introducing another ‘new rupiah’ is compelling. (The present rupiah was itself once new, having been introduced to replace the old one, which had become almost worthless as a result of the hyperinflation of the mid-1960s.) Quite simply, it is grossly inefficient to have to calculate and undertake transactions in the millions, when they could just as easily be done in hundreds or thousands.

I can think of only one counter argument: that the introduction of a new rupiah would be confusing and worrying to many members of the public. No doubt if the transition were not handled carefully, that would be the case. But people are not stupid. Provided high-level government officials explain the rationale for the change carefully and patiently, the general public will understand. Perhaps the most important aspect to stress is that the old currency will be exchangeable for the new at a rate of, say, 1000 for 1, for a reasonably long period of time. It would probably be sensible to introduce new cents at the same time.

I wholly agree.

The newly-published growth report

2008-05-29T09:52:00.000-07:00

growth ▪ policy ▪

The final version of the growth report, published by the Commission on Growth and Development is out and can be downloaded here. I don't have time to read it in full yet, but here is a snippet from this summary on Asia:

Nine of the 13 countries that have been successful in achieving sustained high growth are from Asia: China, Hong Kong (China), Indonesia, Japan, Korea, Malaysia, Singapore, Taiwan (China) and Thailand.
These nine high-growth countries all share common characteristics: engagement with the global economy, macroeconomic stability, high rates of saving and investment, the market allocation of resources, and credible and capable governments.

And here is an interview of Michael Spence, Nobel Laureate and chairman of the commission, on the report.

More on this once I read the report once I pass my core exams.

UPDATE 1: William Easterly doesn't like the report.
UPDATE 2 (6/3/08): Martin Wolf takes on Easterly. (HT: Dani Rodrik).
UPDATE 3 (6/16/08): Dani Rodrik joins the fray.

On writing op-eds

2008-03-02T13:53:00.000-08:00

writing ▪

A set of good advice on what not to do when writing op-eds by Issues in Science and Technology chief editor, Kevin Finneran, amusingly summarized (and "illustrated") by ASU professor Merlyna Lim.

Poverty trap in the US

2008-02-10T08:20:00.000-08:00

policy ▪ poverty ▪

When one hears about poverty trap, the image that comes up usually involve developing countries. It isn't necessarily so. Here is Jeffrey Liebman, Harvard professor (and an adviser to presidential candidate, Barack Obama):

Despite the EITC and child credit, the poverty trap is still very much a reality in the U.S. A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn’t make ends meet any more. I told her I didn’t know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000. I told her that she should first try to find a $35k job closer to home. Also, she apparently can’t fully reverse her decision to take the higher paying job because she can’t get the child care voucher back (the waiting list is several years long she thinks). She is really stuck. She tried taking an additional weekend job, but the combination of losing 30 percent in increased rent and paying for someone to take care of her child meant it didn’t help much either.

The question is what is the policy solution here...

You can read the rest at Jeff Frankel's blog here. It's not easy to design a policy support for the poor -- a means-tested program such as EITC that cuts off benefit at a certain income may create an adverse incentive at the margin for those whose income is around the cut-off point.

HT: Greg Mankiw.

Slightly off topic, I think it's about time Indonesian politicians start to think in a systematic way about policy support for the poor that minimizes the incentive distortions to the broader economy. I think this can be done -- for all its faults, especially as a program designed and implemented in such a short time, the cash transfer program was relatively successful in achieving such an objective. It's high time that we think of such programs, especially given the expected global food price hikes.

Indonesians want more globalization

2008-02-07T16:24:00.000-08:00

indonesia ▪ policy ▪

...according to this survey. Asked the following:

Overall do you think economic globalization, including trade and investment, is growing much too quickly, a bit too quickly, a bit too slowly, or much too slowly?

more than half of the representative respondents in Indonesia think that the current growth of globalization is too slow (39% thinks it's a bit too slowly, another 15% much too slowly). Only 40% think that the current pace of globalization is either a bit or much too fast. Surprised?

HT: Dani Rodrik

stickK's up!

2008-01-17T09:23:00.000-08:00

behaviour ▪ economics ▪

I have just been told that now you can really put a contract out on yourself. stickK.com, which aims to help you live up to your promises to yourself, is now up, running, and receiving contracts.

Islam in Indonesia

2008-01-10T23:08:00.000-08:00

indonesia ▪ religion ▪

The Economist writes this sobering piece on Islam in Indonesia:

In Indonesia, unlike most Muslim countries, the ideological struggle between various forms of Islam is being fought largely by democratic means. The violent and the intolerant are still at the margins and, while the country's steady progress persists, look likely to stay there.

Saiful Mujani, an Indonesian political scientist, could have told you that years ago. From his article (co-authored with Bill Liddle) in the New York Times almost half a decade ago, a year after the Bali bombing:

Surely, with attacks like [the Bali and Marriott Hotel bombing], politically militant Islam is on the rise in Indonesia?

Surprisingly, the answer is no. Survey and election results show that the number of Islamists, Muslims who want an Islamic state, is no more than 15 percent of the total Indonesian Muslim population of 200 million. The remaining 85 percent are moderately or strongly opposed to an Islamic state. Most important and least recognized in the current climate of fear in the non-Muslim world, Islamism as a political ideology appears to be losing ground in Indonesia, not gaining it.

[I was annoyed he didn't get interviewed for the article, but anyway]. Also worth reading, his award-winning dissertation on Indonesian muslims and democratic values. Using Indonesian data and some simple statistics, he provided empirical evidence against hypotheses (most famously made by Samuel Huntington) suggesting that Islam must necessarily be incompatible with democracy. Indonesia seems to have proven them otherwise.

Boudreaux and Cowen on microcredit

2008-01-10T10:08:00.000-08:00

economics ▪ microfinance ▪ policy ▪

Karol Boudreaux and Tyler Cowen ask the following on microcredit:

But can microcredit achieve the massive changes its proponents claim? Is it the solution to poverty in the developing world, or something more modest—a way to empower the poor, particularly poor women, with some control over their lives and their assets?

and conclude that, more often, it's the latter:

Microcredit is making people’s lives better around the world. But for the most part, it is not pulling them out of poverty. It is hard to find entrepreneurs who start with these tiny loans and graduate to run commercial empires...[Microcredit] is important even when it does nothing more than stave off decline.

With microcredit, life becomes more bearable and easier to manage. The improvements may not show up as an explicit return on investment, but the benefits are very real. If a poor family is able to keep a child in school, send someone to a clinic, or build up more secure savings, its well-being improves, if only marginally.

I agree: A lot of the benefits of microcredit programs come from the "consumption support" function that allows poorest households to smooth consumption (as well as human-capital investment in their children's education) during bad times. Unfortunately, many still don't appreciate this function of microcredits. One World Bank Jakarta official once told me how he could not convince a forum of local NGOs and donor agencies not to require microloans be used for "productive activities" in a microcredit program they were considering. An instance of policymaker paternalism, perhaps?

RIP: M. Sadli

2008-01-08T18:53:00.000-08:00

economists ▪ indonesia ▪

Last night, M. Sadli, an important Indonesian policy economist dubbed one of the "four men that changed Indonesia" by ANU's Hal Hill passed away. Here is Hill on Sadli's economic commentary (from this article from FEER):

Three key elements have always been present in these commentaries. First, the importance of sound "first principles" in economic policy, whether it be macroeconomics, trade and industry policy or social issues. The second has been keeping a watchful eye on the public-policy debates, the complex, fluid political economy equations, and how they are likely to impinge on outcomes. And third, in debates which have often been parochial and sometimes conspiratorial, Mr. Sadli has always been quick to remind his readership of the international dimensions, ranging from the lessons of other countries in transition from crises to the latest writings in development economics. Mr. Sadli has also straddled business and academe with ease, more effectively than anybody else in Indonesia. As the architect of Indonesia's liberal foreign-investment policies in 1967 and from his tenure as minister for mining in the 1970s, he retains close connections with the international business community, and has played a major role in educating them about Indonesian political economy.

Pak Sadli will be sorely missed.

HT: Arianto Patunru.

To wake you up in the morning

2008-01-07T12:43:00.000-08:00

behaviour ▪ economics ▪

More behavioural economics at work: Along the line of this post, now we have this alarm clock:

Connects via WiFi to your online bank account, and donates YOUR real money to an organization you HATE when you decide to snooze!

HT: Tyler Cowen. This thing seems to be a prank, but it's a cool application of trying to influence behaviours at the margin.

Does poverty kill?

2008-01-06T17:30:00.000-08:00

economics ▪ poverty ▪

A recent NBER paper by Abhijit Banerjee and Esther Duflo:

This paper uses household survey data form several developing countries to investigate whether the poor (defined as those living under $1 or $2 dollars a day at PPP) and the non poor have different mortality rates in old age. We construct a proxy measure of longevity, which is the probability that an adult's mother and father are alive. The non-poor's mothers are more likely to be alive than the poor's mothers. Using panel data set for Indonesia and Vietnam, we also find that older adults are significantly more likely to have died five years later if they are poor. The direction of causality is unclear: the poor may be poor because they are sick (and thus more likely to die), or they could die because they are poor.

For Indonesia, they find that:

[In] all age groups, there is very little difference in death rates between the poor and the extremely poor, but the non-poor are less likely to die than the poor and the extremely poor. This is true both five years out and ten years out, and in both rural and urban areas. In rural areas, depending on the age group and whether we look at five to ten years out, the extremely poor are 1.4 to 5 times more likely to die than those who live between $6 and $10 dollars a day. (p. 14)

They find a similar pattern in the Vietnam data. Though they have not established the direction of causality between poverty and longevity, "[on] balance, we are tempted to interpret the evidence accumulated in this paper as revealing, at least in part, that poverty does kill."

One question, many answers

2008-01-03T16:51:00.000-08:00

edge ▪

Edge's 2008 question:

What have you changed your mind about? Why?

followed by a lot of interesting answers from interesting minds. Naturally, the question reminds me of J.M. Keynes's famous retort: "When the facts change, I change my mind. What do you do, sir?"

A stickky dilemma

2008-01-03T00:58:00.000-08:00

behaviour ▪ economics ▪

If I were to ask this company to help out with my new year resolution, should I:
a) Offer myself or a third-party to verify my compliance?
b) Choose a cause that I like or dislike to receive my money should I balk on my commitment?

Tim Harford, who plans to send his penalty payments to charity, thinks he himself is an honest enough verifier because he will not lie to cheat a cause that he supports. But by choosing cause that he likes, there is an incentive to rationalise away the failure to comply.

Alternatively, I can choose a cause that I dislike. But here, having myself as a verifier probably isn't going to work for the opposite reason -- I can now rationalise away my lying: i.e, to cheat a cause that I hate.

If I were to do this, I'd probably try to maximise my incentive to comply and minimise the incentive to lie by choosing a cause that I dislike and a third-party verifier. Now, all I need is a new year resolution worthy of the hassle.

Restricting modern retailers: Winners and losers

2008-01-02T23:26:00.000-08:00

economics ▪ urban ▪ policy ▪

From last week's Jakarta Post:

The government has issued a regulation to restrict the expansion of modern retailers including supermarkets, hypermarkets and convenience stores, which have been widely criticized for edging out traditional retailers.

Widely criticized for edging out and causing the decline of traditional retailers? Sure -- but are they really the culprit? Not according to this study.

The law apparently will focus on zoning issues. Take Jakarta, for instance. According to one of the ministry's general, in Jakarta, (I presume, new?) hypermarkets can only be opened at the outskirts. This is, indeed, a victory... for Carrefour, Giants, and all others that have managed to establish themselves in Jakarta prior to the regulation (I presume, the local government isn't going to revoke the licenses for existing hypermarkets). Unfortunately, it's bad news for the rest of us, which is very likely to include the very small retailers that the regulation was supposed to protect.

Why? Hypermarkets operate in an oligopoly market. By removing the threat of new entrants, the regulation makes the environment in which the hypermarkets operate more "stable". This has an effect of "softening" the competition amongst existing oligopolies. This softened competition allows oligopolists to increase their profit margins. Hence, I suspect that this regulation will increase the real profits of hypermarkets located in Jakarta.

And, if I am correct, guess from whose pockets will these increased profits come from? The rest of us, obviously. Since many owners of warungs -- street-side vendors -- also purchase their goods from these hypermarkets, they are likely to have to pay more that before. They would pass some of those costs to the consumers, but since goods offered by these small vendors tend to be elastic, this will reduce their overall revenue.

Herein lies the irony: A regulation that is supposed to "protect" smaller retailers (despite evidence showing that the hypermarkets are not the most important culprit in their decline) might end up accelerating their demise. On the other hand, the supposedly "big-and-evil" hypermarkets might actually gain from the whole enterprise. And consumers, which is clearly the largest constituents, will lose out from all this.

Growth policies: No substitute for thinking

2007-12-28T10:42:00.000-08:00

economics ▪ growth ▪ policy ▪

I have just finished reading Chapter 2 of Rodrik's latest book (which is a revised version of this "Growth Diagnostics" paper):

Most well-trained economists would agree that the standard policy reforms included in the Washington Consensus have the potential to be growth-promoting. What the experience of the last 15 years has shown, however, is that the impact of these reforms is heavily dependent on circumstances...We argue in this paper that this calls for an approach to reform that is much more contingent on the economic environment, but one that also avoids an anything goes attitude of nihilism. We show it is possible to develop a unified framework for analyzing and formulating growth strategies that is both operational and based on solid economic reasoning.

The authors then offer a growth diagnostics framework that is summarized by Rodrik here. The paper concludes with the following:

Across-the-board reform packages have often failed to get countries growing again. The method for growth diagnostics we provide in this paper should help target reform on the most binding constraints that impede growth... As our discussion of El Salvador, Brazil, and the Dominican Republic illustrates, each of these circumstances throws out different diagnostic signals. An approach to development that determines the action agenda on the basis of these signals is likely to be considerably more effective than a laundry-list approach with a long list of institutional and governance reforms that may or may not be well targeted on the most binding constraints to growth.

I agree with Rodrik's general message on the context-dependency of growth policies. His offered framework is also useful for policymakers. Yet it is no substitute for thinking by developing countries' economists and policymakers: They need to analyze which of the agenda are particularly relevant to their respective economies. Rodrik puts it best: "The framework does not economize on inputs (the thoughtfulness required to reach decisions), only on outputs (the list of things that we recommend governments should do to get growth going)".

PS: For a somewhat similar exercise for Indonesia (though it doesn't seem to be using this exact framework), see the reports posted here (particularly its Special Focus on Regions reports, on the left sidebar).

PPS: Here is a set of papers commissioned by the Commission on Growth and Development.

PPPS: Charles Kenny offers a review of new evidence on growth in the last six years (his answer: Not very much!). HT: Marginal Revolution.

Arianto Patunru on Indonesia in 2007

2007-12-26T11:10:00.000-08:00

indonesia ▪ policy ▪

Arianto Patunru, an economist and the Deputy Director of the Institute of Economic and Social Research in Indonesia, offers his take on Indonesia in 2007.

My winter-break reading list

2007-12-17T11:34:00.000-08:00

books ▪

Ah... winter break. The time to break from econ-related readings (well, sort of...). So, here is the list of things I plan to read in the next month:

1. Expert Political Judgment: How Good Is It? How Can We Know? Bryan Caplan called it "the best book ever written on political psychology". At any rate, I am always intrigued by predictions by experts (and how often they got it wrong) and, given that this book is based on data collected for more than a decade, it promises to be a powerful analysis.

2. Natural Selection and Social Theory: Selected Papers of Robert Trivers. Trivers is famous for various efforts to link evolutionary explanations to somewhat counterintuitive behaviors, such as parent-offspring conflict and self-deception. The book collects his major papers and Trivers began each paper with a story of how he came up with the idea. The few chapters that I read was fun.

3. The Trouble With Physics: The Rise of String Theory, The Fall of a Science, and What Comes Next. A nice reminder that theorists screw up and without some kind of checks, it can get really bad. Was voted The Economist's book of the year in 2005. (That's how I get the reference in the first place).

4. The Metaphysical Club: A Story of Ideas in America. A history of four American pragmatist thinkers. Personally, I think Indonesian (public) intellectuals need to begin adopting this particularly American brand of philosophy.

5. One Economics, Many Recipes: Globalization, Institutions, and Economic Growth. Okay, fine... Yes, this is an economics book. Looks so interesting with strong reviews, I just can't resist.

Put your money where your resolution is!

2007-12-15T11:22:00.000-08:00

behaviour ▪ economics ▪

The new year is coming; time to "renew" last year's resolution. Now, if this sounds familiar, maybe this company can help you. The company, founded by three economists, helps columnist Tim Harford do sit-ups:

Economists rarely make good forecasts, but let me venture one: most readers of this column will eat and drink heavily over the next two weeks (as will its writer), and many of us will, on January 1, vow to do better in future. Can economics provide a little assistance in coping with this annual ritual?

I think it can, and so do three economists at Yale who’ve been helping me out. Professors Dean Karlan and Ian Ayres (who is also a law professor and the author of Supercrunchers), along with Jordan Goldberg, a business-school student, have a cheque from me for $1,000, about £500.

If I do not do 200 press-ups and 200 sit-ups each week, they’ll start sending my money to a charity, $100 at a time. (I chose the hugely deserving DC Central Kitchen.) They will shortly offer the same dubious privilege to countless others via a new company, Stickk.com – customers name their own pledges, sign pro-forma contracts, and put their cheques in the post.

Sounds like a promising idea (and I love the company's slogan: "Put a contract out on yourself!"). Immediately, though, I thought of a few of my friends who bought gym memberships (charged at the beginning of each month), vowing to exercise regularly, only to flounder and forfeit their memberships. How is this different?

The difference lies in the way the costs are incurred. In the case of the gym membership, the cost is paid in advance. This is what economists call "a sunk cost": Once incurred, it cannot be recovered -- and therefore, as economists would like to advise you, rational individuals should not let it affect their decisions.

Here, however, the cost is only incurred if a person fails to live up to his/her own promise (to himself/herself). Hence, an individual's present decision can still affect the cost. This contract on yourself increases the cost of reneging on your own promises.

Individuals who are likely to register to this service are those "at the margin" -- individuals who (think that they) generally have self-control, but sometimes need a little help. Blatant (but rational) resolution-breakers will not join because they know it's a waste of money. The service has potential.

I see one potential problem and a way to improve the service. First, the problem: enforcement under adverse selection. In order for the system to work, there must be a means to verify that the individual followed through on the contract. Otherwise, we will quickly revert to the status quo. Otherwise, individuals have an incentive to say they did follow through to avoid getting penalized.

My second issue is on the use of the penalty. Harford suggests the penalty will be sent to a charity of his choosing -- i.e., the charity that he likes. The downside to this is that it's easy for individuals to rationalise broken contracts ("Oh, I feel like being charitable this month!"). To remove such delusions about our motives, I propose that the penalty be sent to a cause that the individual dislikes.

PS: Harford is coming up with his second book, The Logic of Life, another attempt to popularise economics following his entertaining The Undercover Economist.

UPDATE: The people at stickK have addressed the issues I mentioned above. Thank you to Jordan Goldberg for the clarification.

An advice for future PhD's

2007-12-12T08:17:00.000-08:00

PhD ▪

Here is a very good advice from a Yale professor, especially when you plan to do work in development (economics?).

HT: Greg Mankiw

Rodrik v. Stiglitz

2007-12-12T07:17:00.000-08:00

development ▪ economists ▪

Dani Rodrik discriminates himself from Nobel Laureate (and, nowadays, an anti-globalization poster boy) Joseph Stiglitz. Give and take, I am broadly in agreement with Rodrik on all four points of contention, i.e., on the global economic system, the role of international organizations, the substance of development policies, and on macroeconomic policy.

An aside, Rodrik's new book, One Economics, Many Recipes is out. I've just ordered my copy, so can't say very much about it (but, hopefully, will do so before the end of winter break). In the meantime, here is a transcription of the Crooked Timber seminar on the book.

Are malnutritioned children doomed forever?

2007-12-11T08:39:00.000-08:00

economics ▪ health ▪ policy ▪

A question a policymaker might ask is whether a person with poor nutritional status when young can recover from the predicament when older. Subha Mani of the University of Southern California (USC) uses the IFLS data to answer this question and come to a heartening conclusion:

[The] dynamic results indicate that there exists catch-up potential in health outcomes, that is, children who suffered from chronic malnutrition during childhood are not likely to remain as undernourished forever. The presence of catch-up potential suggests that focused attempts must be made towards improving nutritional outcomes of children at all ages with special emphasis on the very young.

The disadvantage will still be there. Her model suggests that children with poor nutrition would have had 0.6 less grades of schooling compared to well-nourished ones, but that in the absence of any catch-up effect, the gap would have been four times larger.

You can read the rest of the paper here.

Do supermarkets harm traditional markets?

2007-12-09T22:06:00.000-08:00

economics ▪ urban ▪ policy ▪

Not according to this not-so-new report by SMERU:

This study measures the impact of supermarkets on traditional markets in urban centers in Indonesia quantitatively using difference-in-difference and econometric methods as well as qualitatively using in-depth interviews. The quantitative methods find no statistically significant impact on earnings and profit but a statistically significant impact of supermarkets on the number of employees in traditional markets. The qualitative findings suggest that the decline in traditional markets is mostly caused by internal problems from which supermarkets benefit. Therefore, ensuring the sustainability of traditional markets would require an overhaul of the traditional market management system, enabling them to compete with and survive alongside supermarkets.

Note that the one statistically significant negative impact of supermarkets was to reduce employment in the traditional markets. However, since supermarkets create employment, I wonder whether the net employment impact is positive or negative.

The report looks comprehensive and I think it deserves a wider coverage in the conventional media. I sure wish SMERU has an Indonesian version of it. Who knows, Indonesian journalists might actually take a look at and investigate the (absence of) empirical evidence behind the case against modern markets, instead of just parroting the anecdotal arguments of the traditional-market lobbies.

Data for development researchers

2007-12-03T17:12:00.000-08:00

data ▪ development ▪ economics ▪

For researchers looking for global development data, developmentdata.org provides links to various datasets:

developmentdata.org contains links to developing country data on inequality, trade, aid, education, agriculture, migration, health, FDI, population, governance and debt, and to websites that host and/or catalogue household survey data. The links take you directly to the data you need or to the database or publication that contain the data. For each area, there is a brief data description or list of the variables available. Searchable, general databases that include data for many different variables can be found under databases together with topic-specific databases.

Economic tea-leaves

2007-12-02T09:35:00.000-08:00

economics ▪ policy ▪

Paul Krugman on interpreters of US economic statistics:

The truth is that I often feel that people interpreting economic data are taking a kind of Rorschach ink blot test — what they’re seeing is more of a random pattern than anything else, and their interpretation of that pattern is telling you more about their personal demons than it is about what’s really happening in the economy

And right now that’s utterly true. Since there are now data telling you more or less whatever you want to hear, you’re free to believe whatever you want.

The same can be said of interpreters of national poverty statistics, especially when they ignore simple statistical features such as standard deviations (see here and here).

Two books on poverty

2007-11-24T10:05:00.000-08:00

books ▪ economics ▪ poverty ▪

Thanksgiving weekend gave me a short break away from my microeconomics problem sets. So, I picked up Understanding Poverty, a collection of articles edited by Banerjee, Benabou and Mukherjee which I bought a few months back on a good friend's recommendation. I am not usually fond of anthologies, but this is no usual anthology. This one is a gem!

The articles are written by development-economics superstars, from Banerjee, Duflo, Eswaran and Kotwal, Laffont, Morduch, Tirole, etc. -- you name it. None of the articles has any equation. Yet in the background... , one can almost picture economic models underlying each of these articles. I find it a great read as somebody interested in both the theoretical and policy aspects of development. Highly recommended! I will share some of them once I have time.

Another good book on the subject on my shelf is The Bottom Billion by Oxford economist Paul Collier. I've read patches of it, and they look good. I just need to find time to read it in one go. In the winter break, perhaps...

Update: Here is a review of Understanding Poverty by New York Times's Nicholas Kristof.

FP: Why we trade

2007-11-17T09:54:00.000-08:00

economics ▪ trade ▪

Once in a while, it's nice to get reminded for the reason we trade. From Foreign Policy:

The logic of “exports, good—imports, bad” seems straightforward at first—after all, when a factory closes because of foreign competition, there seem to be fewer jobs than there otherwise would be. Don’t imports cause factories to close? Don’t exports build factories?

But is the logic really so clear? As a thought experiment, take what would seem to be the ideal situation for a mercantilist. Suppose we only export and import nothing. The ultimate trade surplus. So we work and use raw materials and effort and creativity to produce stuff for others without getting anything in return. There’s another name for that. It’s called slavery. How can a country get rich working for others?

PS: I am back in school, which partly explains the sparse update. Hopefully, I can update slightly more frequently once things get back to "normal" -- whenever that may be.

A not-to-be-missed seminar on corruption

2007-03-16T02:12:00.000-07:00

economics ▪ seminar ▪

If you're in Jakarta at the time and interested in the economics of corruption, then a seminar not to be missed:

Center for Strategic and International Studies (CSIS)
with Komisi Pemberantasan Korupsi (KPK) and
The World Bank
are pleased to invite you to a public lecture on

Understanding Corruption:
Lessons from the Latest Research

by

Dr. Abhijit Banerjee
Ford Foundation International Professor of Economics and
Director of the Jameel Poverty Action Lab,
Massachusetts Institute of Technology

Wednesday, March 21, 2007
14:00 – 16:00
Center for Strategic and International Studies
Jalan Tanah Abang III/27 Jakarta

Dr. Banerjee is a Director at the Jameel Poverty Action Lab at the Massachusetts Institute of Technology, a pioneering research organization that works with governments, NGOs, and international organizations around the world to evaluate and improve the effectiveness of development programs using randomized experiments. The Lab has received widespread attention from scholars in the United States, and its research findings have been described in The Economist, New York Times, Wall Street Journal, and other leading publications. On this occasion, Dr. Banerjee will offer an introduction to the latest research conducted by the Poverty Action Lab, with an emphasis on their recent work investigating the roots of corruption and evaluating the effectiveness of specific counter-corruption strategies.

Update: Prof Banerjee is unable to attend. Benjamin Olken of Harvard will present instead.

RSVP:
Widdi (62-21- 3865532-35 ext. 425)
Dinni (62-21- 52993000 ext. 3198) (p.dinni@gmail.com)

Poverty analysis as a partial equilibrium exercise

2007-01-17T02:05:00.000-08:00

economics ▪ policy ▪

Rasyad Parinduri argues here that Figure 1 of this article (shown below), to quote him, "cannot tell us 'how sensitive the poverty rate is to increases in the poverty line'" because it doesn't plot the poverty rate against the poverty line. I'll try to explain here why he's wrong by drawing an analogy to the supply-demand curve familiar to most undergraduate economics student.

[PS: My apology to those not familiar with the demand and supply curves since this post may be a bit arcane.]
But first, what are demand and supply curves? A demand curve simply traces the number of people willing to pay for a certain good at a certain price. The supply curve, on the other hand, traces the number of people willing to produce a certain good given a certain price paid for it. Both supply and demand curves trace two variables: the number of people and the price observed (for one, the buying price; for another, the selling price). This is Microeconomics 101.

The graph above are supply and demand curves. The point at which the two curves intersect is what we call the equilibrium (price-quantity) point. Given the population's demand and supply curves, this equilibrium point describes the price and quantity at which goods are actually traded in a competitive market. Shifts in the either curve can change this equilibrium point (or the actual price/quantity-exchanged observed in the market).

How is the poverty graph analogous to the supply-demand graph? First, the axes. The poverty graph plots the number of people against the expenditure level. It is actually almost like a supply-demand graph with former variable analogous to quantity; the latter, price; and the axes reversed (that is, instead of having Q(uantity) on the x-axis, the "quantity" in the poverty graph is now on the y-axis -- and vice versa).

Second, the curves. The way I draw it, the green curve (an expenditure cumulative distribution function or cdf) traces the number of people whose income are below the expenditure level shown on the x-axis. At a higher the expenditure level, the number of people below this income increases. I'll call this "the expenditure distribution curve" and it's behaviour is a bit like the supply curve.

Now, the poverty line is a bit tricky -- it's not exactly analogous to the demand curve. The poverty line is that expenditure level where people subsist. For simplicity, most analyses draw the poverty line as a straight vertical line, but in reality, it probably isn't. Depending on one's characteristics (geographical location, choice of food, even biological metabolisms), this level (converted into expenditure levels) may differ for each individual. The actual poverty line is not smooth, but the (fitted) curve is likely to be almost vertical will definitely cut the expenditure distribution curve. In a way, the poverty line is analogous an administered producer price in the supply-demand context.

So, the curves aren't really analogous to the supply-demand curves (since there is no analogy to the demand curve). But what is important is the fact that the actual poverty rate that we observe comes from the intersection of these two curves, just like the actual price/quantity combination we observe comes from the intersection of the supply and demand curves. Each individual curve does not have adequate information to tell us about the actual poverty rate, just like the supply curve (or the demand curve) alone cannot tell us the actual price we will observe in the market. I thing, this is the point that Rasyad missed.

Supply-demand graphs are used all the time to explain the sensitivity of equilibrium quantity to changes in administered prices in a partial equilibrium sense -- that is, under the assumption that the change in the administered price did not change the behaviour of the supply curve (what economists call "ceteris paribus"). It is exactly in this ceteris paribus manner that the above poverty graph should be used to elaborate the effect of the change in poverty line to the poverty rate.

A report on the World Bank you don't want to miss...

2007-01-12T02:57:00.000-08:00

economics ▪ policy ▪

This week's Economist ran a story on a study done by a group of top academic economists, commissioned by the World Bank, to inspect the quality of (mostly) development research at the World Bank.

The inspectors liked a lot of what they found. But they said the Knowledge Bank was too often guilty of breaching prudential limits. Its leaders have staked out bold positions on some of the biggest questions in development without enough intellectual capital to back them up.

I haven't read the full report yet (which you can find here), but reading some of the individual thematic evaluations (which can be found here) is definitely an entertainment... One inspector made the following comment on one of the World Bank's "research project":

The only output in this research project is a training manual “which summarizes ways in which culture and poverty reduction activities harmonize and intersect”...

I am not an expert in this area whatsoever. However, I am somewhat suspicious that (1) this qualifies as research (there are no data beyond anecdotes, no original theory, and the literature review is at a very basic level), (2) I would trust the assertions made in the manual, and (3) the training manual would be that useful if it were to be used to train anyone.

(1) May not be a problem to the extent this is an output of the research group that serves the rest of the Bank.
(2) Is a more serious issue. The training manual reads as if it just echoes an ideology. Beyond the anecdotes, there is no mention of any evaluation of the usefulness of any of this in getting projects to work. For example we are just told that “Manfred Max-Neef., a Chilean professor and activist, together with his associates, developed a matrix of human need” and that the matrix has been used in several countries.
(3) The description of the various methods is so abstract that I do not think anybody, even if they were convinced, could just start following instruction in the manual and get a PRA, or any other method, going. It is lacking the concrete details and instruction that one would need to really put these things to work.

I don't mean to say this exemplifies the overall quality of World Bank's research projects—in fact, it's probably more of the exception than the rule. It's quoted here for its sheer entertainment value.

Thirteen economists of the future

2007-01-12T02:21:00.000-08:00

economics ▪ economists ▪

An article in New York Times by David Leonhardt on 13 economists of the future:

So before this year’s conference, I did an informal poll of about 20 senior economists around the country and asked a single question: who are the young (untenured) economists doing work that is both highly respected among experts and relevant to the rest of us? Who, in other words, is the future of economics?

Thirteen names came up more than once, and I’m sure a scientific survey would have produced a longer list. As it is, though, the list is incredibly diverse...

Note in this diversity one Benjamin Olken whose does work on corruption in Indonesia.

Thanks, as is often, to Greg Mankiw's pointer. These "rising stars" are a subset of excellent economists who did technically sound and practically useful studies. I'm sure there are more "rising stars" out there who are doing only the former. (Those doing the latter only, unfortunately, are not usually associated with the term "rising stars" amongst economists).

Key to health? More education...

2007-01-03T20:06:00.000-08:00

economics ▪ health ▪

An interesting NYT article on the link between health and education. An excerpt:

In every country, there is an average life span for the nation as a whole and there are average life spans for different subsets, based on race, geography, education and even churchgoing.

But the questions for researchers... are why? And what really matters?

The answers...have been a surprise. The one social factor that researchers agree is consistently linked to longer lives in every country where it has been studied is education. It is more important than race; it obliterates any effects of income...

[According to a research by Dr. Lleras-Muney,] life expectancy at age 35 was extended by as much as one and a half years simply by going to school for one extra year.

Thanks to Greg Mankiw for the pointer.

Now, if only the use of our education budget can increase the number of children in school...

JP End-of-Year Edition: Evidence, policy, and political will

2006-12-31T03:55:00.000-08:00

policy ▪ poverty ▪

(Jakarta Post, 29 December 2006) The poverty rate increased last year. It will increase again next year without the political will to do what it takes to prevent it.

From February 2005 to March 2006, the poverty rate increased from 16.0 to 17.8 percent. There are now 39.1 million poor people, four million (or 11 percent) more than the previous year. This was the first increase after the crisis. The question is, why and how to prevent it from happening again?

To answer the “why”, we need to examine the evidence, the data. The “how” – the policy – follows from the evidence (hence the term “evidence-based policy”). The next step is the political process. Alas, it is the hardest: Despite politicians’ claims, there isn’t really a strong interest group to promote the interests of the poor. The poor stand to lose out from the political process.

The current administration needs to be more decisive in playing this role, especially since it promised to cut poverty rate by more than half to 8.2 percent by 2009. The government cannot focus just on medium- and long-term programs – it also needs to address short-term concerns of the poor. After all, two years to 2009 don’t exactly count as medium or long-term.

But we are getting ahead of ourselves. Let’s start with the first question: Why did poverty increase last year?

We are what we consume
Figure 1 provides our first clue. By plotting the poverty rate against the poverty line we can see how sensitive the poverty rate is to increases in the poverty line. The poverty line is defined as the per-capita expenditure needed to purchase the set of goods considered to be the minimum needed to subsist. In 2006 BPS, the central statistics agency, set it at Rp.152,847 per person per month, which gives us a poverty rate of 17.8 percent (left axis) or equal to 39.1 million people (right axis).

What this figure shows is that Indonesia’s poverty rate is sensitive to poverty-line movements. A slight increase goes a long way: a 10-percent increase from the current poverty line will result in a 30% increase in the number of poor to 50.8 million people (i.e., a 23.1% poverty rate).

Fact #1: Indonesia’s poor is very vulnerable to poverty line changes.

Meanwhile, poverty lines are mainly driven by price inflations – more specifically, the price inflations of goods consumed by poor (and near-poor) households. Notice the phrase in italic. Hence, the poverty line will not increase if, for instance, an accident in the sky pushed airlines’ insurance premium up, spiking the prices of airfares (because the poor rarely, if ever, fly) – unless, of course, these flights happen to transport goods that make up a large share of poor households’ consumption.

So, what are these goods? Table 1 shows the expenditure of Indonesian households. Food expenditure makes up for more than half of poor (and near-poor) households’ consumption. Within it, rice takes up almost a quarter of total expenditure, making it the most important single-item commodity for the poor.

Thus, we arrive at Fact #2: The poverty line is more responsive to the price inflations of food, particularly rice, than those of non-food commodities.

Going back to the original question: Why did the poverty rate increase last year? The highly-visible fuel-subsidy cut policy was often blamed for this. However, as suggested World Bank’s (2006) recent poverty report, this is a blame misdirected: the subsidy-cut triggered a targeted cash transfer program, whose value for individual households is equivalent to 14 percent of their expenditure. Overall, the program adequately compensated the direct effect of the subsidy cuts to the poor.

Instead, it argues that the 33 percent increase in rice prices – almost double that of the general price inflation – between February 2005 and March 2006 was the main cause of the increase in the poverty rate. I find this convincing. Based on Fact #2, rice prices is the likely culprit driving the increase in the poverty line, which itself is the likely cause of the poverty rate increase.

Getting to the “how”

Managing a stable, and preferably low, inflation on goods consumed by poor households is therefore important to reduce poverty. But careful readers would notice from Figure 1 that it’s not the only means to reduce poverty. Figure 2 shows two other means to the same end: first, shift the whole curve to the right; and second, reshape of the curve so that its left tail is thinner. Or, in words, the two means are economic growth and redistribution.

And yet, the debate focuses only on the poverty line – which is, essentially, what the rice price debate is all about. Why?

In explaining last year’s poverty rate increase, here is why: Last year’s growth at 5.6 percent was rather good by previous years’ standard, and the targeted cash transfers after the October fuel-subsidy cut was the kind of redistribution to make the left tail thinner. So, on those two fronts, the policies were already in the right direction. But not on keeping the poverty line low.

In this sense, one can say that the rice price-inflation “masterminded” last year’s increase in the poverty rate. Unfortunately, this fact is buried under the surrounding political controversy with critics seemingly more interested in shooting the messenger instead of scrutinizing the message. Consequently, the poor continue to pay the price as rice prices continue to rise.

At this point, figuring out the “how” isn’t the most difficult problem. There are many suggestions – from improving the rice market structure to opening rice imports with some tariffs, both to allow more stable rice prices. The problem now is that of political will: Are politicians willing to take the necessary steps of communicating the evidence behind these policies and, when push comes to shove, going ahead with them for the sake of the poor?

Looking ahead

Will the poverty rate increase next year? Let’s briefly examine the three channels through which policy can immediately affect the poverty rate.

On growth, it is expected to remain moderate (by East Asian standard) at around 5.8-6.3 percent. This will shift the curve to the right. Meanwhile, the government’s new anti-poverty program, “The National Program for Community Empowerment,” will try to further shift the curve. Alas, this is likely to happen only in medium- to long-term.

Meanwhile, if the government goes ahead with its plan to end the targeted cash transfer scheme without a comparable replacement then, predictably, a lot of people will drop to the left side of the curve. Whether growth can compensate this drop remains an open question. Finally, so far the government has not been able to control the rice price-inflation. If this continues, the poverty line will rise accordingly.

Policy can actually prevent this increase in poverty. The evidence is there, and so are the policy prescriptions. What remains to be seen is whether the will is there. Because if it is not then, once more, we shall see the poor paying the price of the politicians’ indifference – just like last year.

Update: Rasyad Parinduri blogged this article, commenting specifically on Figure 1. In the post's comments, I tried to clarify the meaning of the graph.

The economics of broadcasting

2006-12-09T17:09:00.000-08:00

economics ▪ broadcast ▪

An economist friend, Aco, once complained of Minister of Information Sofyan Djalil's decision to limit the number of television stations, calling Djalil's assertion that intense competition would reduce program quality illogical.

I was skeptical of Aco's assertion. Last week's Financial Times, John Kay explains the economics of broadcasting. As I suspected, Djalil's argument wasn't so illogical after all.

PS: There is also this NBER Paper on the topic which, near the end, points out that "It is common to hear that the proliferation in the US television market has led in a decline in programming quality". Unfortunately, the paper offers neither support nor rebuttal of this casual observation.

On giving recommendations

2006-12-08T01:39:00.000-08:00

network ▪ sociology ▪

Case One: Just yesterday, my boss asked me to recommend a good survey institution. I have before heard another friend, a survey expert that I trust, mentioning the name of a firm. That was the name that I suggested without qualification.

But she had conflicting information regarding the quality of this firm. Instinctively, I wanted to defend my recommendation, even though I really didn't have too much information about the survey firm. I quickly realized this and told her that, honestly, I didn't really know much of this firm.

Case Two: A few months ago, I was asked to recommend a friend to do a certain job. I know a friend who qualified, but I know him too well that I had to offer some qualifications about his competence. It didn't come out right the first time, so I had to qualify my qualifications.

I must have sounded more confident when recommending a firm that I do not know than when recommending a friend that I do know rather well. If the person asking is not critical, it is likely that s/he would have hired the firm in Case One, and not my friend in Case Two. This is just an example of what is called the strength of weak ties - a hypothesis proposed by sociologist Mark Granovetter.

Granovetter argued that an individual person tend to get access to job opportunities through their "weak ties", namely others with whom this individual have only casual relations - "acquaintances" instead of "close friends". The idea is that "[acquaintances], as compared to close friends, are more prone to move in different circles than oneself" so that they can offer a greater set of information compared to close friends.

I have my own spur-of-the-moment take on this. Another possibility of why weak ties work better in providing employment information is that weak times make us assume very little about our acquaintance - about his/her fit in the job offered, etc. When honest people are asked about something, especially from their supervisors, they have the incentive to give out the best information that they have.

When the information they have is nothing more than "it's a good (person/firm)", that's the information that gets transmitted. But when there is more information than that, one tends to want to include that information - and often that information is "noisy" from one's interpretation of the recomendee's characteristics. This might have resulted in the exclusion of some possible matching opportunities.

Anyway, I recommend Granovetter's paper. Unlike economists, most sociologists can write and their writings are, relative to economists', much more readable and enjoyable.

PS: As I was browsing Weakties's blog, I found this entry which tempts me to buy this book.

The World Bank report you don't want to miss...

2006-12-08T00:52:00.000-08:00

economics ▪ poverty ▪

It's thick, it's heavy (my arm was sore as I was reading it), but it's definitely worth having — if not always for reading. Yes, I am talking about the World Bank's Making the New Indonesia Work for the Poor (beware dial-up subscribers, this is a 12MB file). Those wanting a comprehensive look at poverty in Indonesia should definitely download this file or, if you really like its candy-coloured cover, request a copy from the World Bank Jakarta Office.

The report is comprehensive, methodologically rigorous (often to the point of unreadability), and is not afraid to make controversial proposals. Definitely a good reference — especially since I am sure that none like it is likely to come out in Indonesia in the years to come.

Less thick but equally worth reading are the Making Services Work for the Poor report and its Case Studies companion (to which I contribute).

On polygamy

2006-12-04T03:14:00.000-08:00

economics ▪ household ▪

Much fuss was made over Aa Gym's second marriage last weekend. Aa Gym, for those who do not know him, is a famous Indonesian Muslim preacher. As usual, the second (or third, or fourth) marriages of public figures always generate controversies (at least in the small corner of my office).

But, really, what's wrong with polygamy if no coercion is involved and the all related parties are informed of the decision? Gary Becker and Richard Posner, two University of Chicago economists, recently has an interesting discourse on this.

Here is Becker:

The claim that polygyny is unfair to women is strange since polygyny increases the demand for women as spouses in the same way that polyandry would increase the demand for men. If men were to take multiple wives, that increases the overall competition for women compared to a situation where each man can have at most one wife. This argument against polygyny is like arguing that a way to increase the economic prospects of minorities is to place an upper bound on how many members of these groups a company can employ...

My argument for polygamy is one of principle to bring out certain fascinating issues. For, in fact, polygyny would be rare in modern societies even if fully allowed. Polygyny was popular in the past when men valued having many children. That is no longer the case, since few couples want more than three children, a number that usually can be easily attained with a single wife. So the main motivation for polygyny has vanished with the arrival of the knowledge economy where fathers as well as mothers now want a small number of educated children rather than many ill-educated offspring. Note that polygyny is rare even in those Muslim countries that allow it, such as Iran.

I conclude with two questions. Why the strong opposition to polygyny if it would be so rare? If modern women are at least as capable as men in deciding whom to marry, why does polygyny continue to be dubbed a "barbarous" practice?

And here is Posner's argument against:

As more and more men attempted to become polygamists, the "price" they would have to pay for a wife would rise, so polygamy would be a distinctly minority institution. But it would not necessarily be trivial in size or harmless in its social consequences, which would be likely to exceed those of homosexual marriage. Polygamy is banned in most advanced societies and flourishes chiefly in backward ones, particularly in Africa. This is some evidence against legalizing it.

On the origin of preference

2006-11-04T18:19:00.000-08:00

science ▪ preference ▪

This entry comes straight out of this debate in cafesalemba on preferences in economics.

There, Roby posed a simple, but provocative, question: Where do preferences come from? It initiated a series of multi-disciplinary hypotheses on the origin of preference, which I find interesting.

I have suggested Roby to re-start this discussion in his blog, but he hasn't yet. So, let me.

Here are some of the exchanges that have started there (I have only clipped comments relevant to this question on the origin of preference):

roby said...

I know this is a simple-minded question, but I'm wondering how you guys would answer it

where are these preferences coming from?

Aco said...

Roby, you mean the information about his preference? From observation, or by asking him directly. Please see this again. We get information either via revealed preference (RP) or stated preference (SP).

roby said...

no - i mean how come, say, i have the preference for apples not oranges? why do i prefer indonesian food?

in short, it's not about how observers know the preferences of individual, but about how the individuals themselves acquire preferences in the first place.

Arya (that's me!) said...

Roby,
Economics can't answer your question about the origin of preferences. I think you should ask evolutionary biologists for that.

roby said...

arya - that questions is one of the reasons i dropped out from the econ program (i just realized i have that mas-collel book, we used that book when i took the micro class here years ago). i think the answer to that question is less related to the brain than to the social structure. but that's another issue.

Aco said...

Roby, Arya's right. I can't answer your question. Sorry. (But if it were an exam, I would have written this on my paper for a partial credit: preference comes from the fact that choices are constrained)

treespotter said...

and well, roby, preferences come from needs. very simple.

roby said...

treespotter - your explanation is ok. however, it is still problematic. first, i don't think it can explain (in non-trivial way) the variation in preferences. i need to eat, and i prefer pempek. so you still need to explain why pempek, not ketoprak. of course you can say you need pempek, but i don't really know what that means.
so it's not clear how need translates to preferences

on the other hand, the need explanation has a stint of functionality argument which is problematic because of its post-factum nature; you can explain anything away by need, so it's not really helpful.

i tend to aggree with aco, preference arises from constraint. or, in my lingo, structure; although structure can enable *and* constraint.

Arya said...

Roby,
Also, we should take up this topic on the origin of preferences in your blog (BTW, which one is it? It seems, you keep changing it). Yeah, you're right, I should have added "sociologists" on people to ask on it. ;-)

tirta said...

roby - preferences come from the brain, from the interaction of complex neural networks yet to be discovered. put simply, from neuroscience. structures or constraints are fine, but bear in mind that it is people who often 'choose' their structure and constraints, so the social explanation is indeed a tautology.

Everyone not involved in the original discussion, feel free to join in. I do wish we have evolutionary biologists (or psychologists) here ― so, if any of you know any who might be interested, perhaps invite him or her to join as well.

Update (11/6): In the comments, Roby mentioned a Pepsi-vs-Coke neurological study. Tirta kindly provided me with this link to the study.

Economic instincts and "do-it-yourself economics"

2006-11-04T17:03:00.000-08:00

economics ▪ policy ▪

Can people derive economic principles from their everyday lives? Yes ― but many of them would be wrong. Nonetheless, many people, particularly politicians, untrained in economics very often feel qualified to make economic pronouncements. John Kay, in The Truth About Markets (in the States, it's called Culture and Prosperity) observes:

The theme of [David] Henderson's [1985 BBC Reith Lectures] ― born of frustration with economic pronouncements of politicians ― was what he called 'DIY economics': the false propositions which people who have not studied economics know instinctively are true... Anyone who claimed expertise in 'practical physics' derived from their experience of driving a car or boarding an aeroplane would immediately reveal themselves as a fool. It is a measure of the failure of the economists to persuade the public of the value of what they do that there are no such reactions to those who claim practical knowledge to economics. There is almost no DIY dentistry, little DIY history or law, rather more DIY medicine. There is much DIY economics.

An example of this do-it-yourself (DIY) economics is well-captured by Steven Landsburg in his excellent little book, Armchair Economist. Landsburg likes to clip New York Times's letters to the editor that betray economic sense. One such a letter was by one Ronald Breslow, a chemistry professor at Columbia University and winner of the National Medal of Science.... Breslow argues that the government can increase spending in one sector ― related to his work as a scientist ― with little effect to the overall economy.

Of course this is nonsense: Everyone who has taken an intro to economics course (and actually sit in it throughout) knows this. Government money spent supporting research cannot be spent elsewhere ― in a similar way that money spent to subsidize domestic fuels cannot be spent to build schools or public clinics. There is no such thing as a free lunch.

To make his point, Landsburg takes an analogy from physics: To say what Breslow said ― that free lunch is possible ― is tantamount to saying that, in defiance of the laws of physics, it is possible to create a perpetual motion machine ― a machine that can move without being supplied with energy. But here is the irony:

If I, as an economist, were to design a perpetual motion machine, the New York Times would probably consult an expert (such as Professor Breslow) before treating my proposal with respect. When Professor Breslow, as an eminent physical scientist, designs a free lunch, the Times takes it at face value. In other words, the Times recognizes that assertions about chemistry or physics should be disciplined by some fundamental understanding of the subject, but it fails to recognize that the same is true of economics. That failure is a symptom of a widespread economic illiteracy that makes me sad and angry.

Me too. What makes me angrier still is that, in Indonesia, not only non-economists employed this type of 'practical economics'. Some people with economics training ― Kwik Kian Gie being one famous example ― do so with ease. People like them seem to think that they can subvert basic economic principles.

They cannot. But still, thanks to the uncritical print media, people believe them. Why? Because, although DIY economics is wrong, it feels right. But why does it feel right? That's a topic for another day. But here's a hint: Even though an economy consists of individuals, an individual's experience is a poor proxy of the economy's.

High school, quality TV, and the teaching of economics

2006-11-04T03:01:00.000-08:00

economics ▪ policy ▪

A pair of entries from Greg Mankiw's blog got me thinking. In this entry, one high-school student began a short e-mail to Mankiw as follows:

Hi Dr. Mankiw,

I'm a high school senior from Montclair, NJ, an avid reader of your blog (and textbook), and generally, a big fan of economics...

and went on to ask of the best way to choose an undergraduate economics program. The second one is from an undergraduate student taking Mankiw's intro to econonomics course:

I just was watching some West Wing in my room and they were talking about protecting pharmaceutical patents. The one guy says "Those pills cost them four cents a unit to make..." and the other guy says "You know that's not true! The second pill costs them four cents, the first pill costs them four hundred million dollars!" Just thought it was cool that I understood why this was and I wouldn't have a few weeks ago.

I envy economics education for the general public in the United States, where all types of medias are available (in abundance) to provide economics education. If a high school student can claim to be "an avid reader of [Greg Mankiw's] blog" and a highly-popular TV show can allude to the (proper) economics of pharmaceutical researches, is it any wonder that the quality if policy debate there is so much better?

When I graduated from one of the better high schools in Jakarta..., I understood economics as "a science of money", particularly with relations to businesses and governments. My high-school education led me to believe that economics was mainly about all those things ― interest rates, exchange rates, and what have you ― that mattered mainly for people with money. As a left-leaning teenager, I took no interest in such a thing.

It took a while before some serious economists set me straight: Modern economics ― particularly, modern microeconomics ― is not mainly a science of money, nor a science of "organizing one's household" (as, I remember, was taught in my first year of high school). It is a science of decision-making ― and hence, about behaviour ― founded on the assumption of rationality, and epitomized in Steven Landsburg's little dictum, "people respond to incentive".

I think most Indonesians still believe what I used to believe about economics. I recently had a discussion with a reader of my blog who respected economic models but objected to its use to analyze behaviours. Having seen this as a typical role of much of modern economics, I was puzzled by the objection. But after reflecting on my own experiences, I begin to see why. This is indeed what was (and, I believe, still is) being taught.

There is, hence, a case to be made for more general economics education. In the United States, there is the National Council on Economic Education which promotes "economic literacy with students and their teachers". That's one way. Another would be for economists to write more ― preferably in Indonesian ― in mainstream medias (newspapers, magazines), as well as non-mainstream medias (blogs, mailing lists).

Meanwhile, for all of you still led astray by your high-school economics teachers, here is a little quote from David Friedman's Hidden Order:

Economics is that way of understanding behavior that starts from the assumption that individuals have objectives and tend to choose the correct way to achieve them

For those who followed this debate in cafesalemba, the last part of the quote describes what economists mean by "rationality".

How liberal are you?

2006-10-29T04:38:00.000-08:00

miscellaneous ▪

How liberal are you politically? Well, go check it out here, in the world's smallest political quiz.

The red dot above is me. Got the link from Greg Mankiw's ever-resourceful blog.

On Malaysian capital control

2006-10-29T04:11:00.000-08:00

economics ▪ finance ▪ quotes ▪

From Frederic Mishkin's new book on financial globalization, a commentary on the efficacy of the Malaysian capital control to fend off the Asian crisis:

Paul Krugman, Dani Rodrik, and Joseph Stiglitz have taken the position that Malaysia performed better than other East Asian countries after the crisis, suggesting that Malaysia's capital controls did help lessen the severity of the crisis. I take a different position, one that I believe is more consistent with the facts. That Malaysia was in a far better position than other East Asian countries at the onset of its troubles explains why its crisis was less severe. Before the crisis, Malaysia had a smaller lending boom and a smaller problem with nonperforming loans because its central bank did a much better job of supervising the banking system than did the central banks in other crisis countries. Instead, it was the anti-market policies and statements of the Mahathir government that caused the Malaysian crisis to be as severe as it was. The primary impact of the Malaysian capital controls was to give the government greater scope to assist politically connected firms and to engage in cronyism. The fact that politically connected firms saw a relative rise in their stock market value when the capital controls were imposed supports the negative impact of these controls.

Sounds about right to me ― especially the latter part!

By the way, Mishkin's book gives a compelling case for accelerating (the right kind of) financial liberalization in developing countries. Definitely worth reading for developing country economists and policymakers alike.

Does pornography encourage rape?

2006-10-23T21:03:00.000-07:00

economics ▪ crime ▪

The answer to the above question is ― suprise, suprise! ― No. In fact, access to pornography is associated with a drop in rape incidences. An abstract from this paper:

The arrival of the internet caused a large decline in both the pecuniary and non-pecuniary costs of accessing pornography. Using state-level panel data from 1998-2003, I find that the arrival of the internet was associated with a reduction in rape incidence... Moreover, when I disaggregate the rape data by offender age, I find that the effect of the internet on rape is concentrated among those for whom the internet-induced fall in the non-pecuniary price of pornography was the largest –
men ages 15-19, who typically live with their parents. These results, which suggest that pornography and rape are substitutes, are in contrast with most previous literature...

Thanks to David Friedman for the pointer.

Just to be clear, the paper shows a negative correlation, which is very different from a causation. In other words, the paper did not argue that increased access to pornography via the internet reduced incidences of rape. On the other hand, it clearly rejected the claim that increased access to pornography increased incidences of rape.

Does it mean that the same will be true in Indonesia? Well, maybe not. People respond to incentives. One disincentive against rape is law enforcement. It is plausible that differences in the levels of enforcement create different relationships between rape and pornography. It may well be that, when enforcement against rape is weak, pornography may become complements, instead of substitutes to rape. Additionally, cultural differences ― which is another for of incentives ― might alter the result.

However, absent empirical evidence, neither generalizations about the correlation between pornography and rape in Indonesia can be justified ― although this paper's findings puts the proponents of the anti-pornography law at a (slight) disadvantage.

Update (11/1): Steven Landsburg reviews the study in Slate. Thanks to treespotter for the pointer (especially since he doesn't really agree with it)

On the economics of charity

2006-10-16T03:41:00.000-07:00

economics ▪ charity ▪

I once made my case against giving to beggars implicitly suggesting that, for the most part, our gift was mainly to make ourselves feel good. Well, last week, Tim Harford in his Undercover Economist article described briefly how a recent research supported this suggestion:

...If people really were altruistic, there would be much less volunteering.

This isn't some silly tautology. If these do-gooders really were motivated by the desire to do good, they would be doing something different. It would almost always be more effective to volunteer less, work overtime, and give more. A Dutch banker can pay for a lot of soup-kitchen chefs and servers with a couple of hours' worth of his salary, but that wouldn't provide the same feel-good buzz as ladling out stew himself, would it?

In fact, the closer you look at charitable giving, the less charitable it appears to be. A recent experiment by John List, an economist at the University of Chicago, and a team of colleagues, showed that donations are less than magnanimous after all. Using controlled trials to compare different methods of door-to-door fund-raising, professor List's team discovered that it was much more effective to raise funds by selling lottery tickets than it was to raise funds by asking for money. This hardly suggests a world populated by altruists seeking to do the maximum good with their charitable cash.

More effective still was simply to make sure that the fund-raisers were attractive white girls rather than a dowdier assortment of males and females representing all shapes, races, and sizes. This dramatically increased the average contribution, because many more men decided to give money. Altruism?

But there is more... In my blog against giving to beggars, I ended up arguing:

To really help the poor, you really have to want to help the poor – there is no such thing as a free lunch. Which is to say, instead of exchanging guilt with Rp.5,000 a day, perhaps save those Rp.5,000 and each month, give it to an organization that can channel your money to the poor in an accountable manner.

Guess what? This Steven Landsburg article (which I didn't know exist until it was pointed out by Harford) pointed out why the above strategy is a better charity strategy. More precisely, Landsburg suggested why charity diversification is, well, selfish...:

I think I know [why people diversify their charity]. You give to charity because you care about the recipients, or you give to charity because it makes you feel good to give. If you care about the recipients, you'll pick the worthiest and "bullet" (concentrate) your efforts. But if you care about your own sense of satisfaction, you'll enjoy pointing to 10 different charities and saying, "I gave to all those!"

Economists can be a party-pooper sometimes. But, hey, at least, they are honest.

Update (17/10): But why, oh why, do we give? Last week's The Economist elaborated the neurology of charity and why it feels good to give.

Financial development is good for the poor

2006-10-16T01:08:00.000-07:00

economics ▪ finance ▪

The development of the formal financial sector is widely thought to be a pro-rich policy. Only financial sector innovations specifically developed for the poor, such as the one developed by M. Yunus, are beneficial for the poor. Well, think again!

The following is from a paper by Thorsten Beck, Asli Demirguc-Kunt, and Ross Levine:

Financial development disproportionately boosts the income growth of the poorest quintile and reduces income inequality. About half of the impact of financial development on the poor results from faster average growth and the other half results from reductions in income inequality. Furthermore, financial development is associated with a drop in the fraction of the population living on less that $1 a day, a result which holds when conditioning on average growth. These results emphasize the importance of the financial system for helping the poor.

This and this are the two books I am currently reading that made me a believer.

The two 2006 Nobel Prizes in Economics

2006-10-13T21:23:00.000-07:00

economics ▪ nobel prize ▪

To my delight, this year, the Nobel Prize committee acknowledged two contributions in economics. We found out the first, Edmund Phelps, early last week. By the end of the week, the second one was announced. It's for Bangladeshi Muhammad Yunus, shared with the poor's bank that he founded, Grameen Bank. This second Nobel is in the form of the Nobel Peace Prize.

I think this is a well-deserved prize. For all his work's brilliance, Yunus will never get a Nobel Prize in economics... because, instead of dabbling in theory, he went for the practical.

He, and many financial economists, knew the theory — that the barrier to opening access to financing for the poor is the high monitoring cost from the so-called "principal-agent problem". But nobody thought of using the watchful eyes of fellow poor borrowers to solve this problem. His solution — made concrete in his microfinancing scheme to tightly-knit women-managed groups (instead of individuals) — allowed the poor to access the opportunity to better their lives.

I think it was quite a stretch for the Committee to select Yunus for the Nobel Peace Prize, but nonetheless it brings me joy. This decision signals the Committee's acknowledgment, not only of Yunus's significant contribution to poverty alleviation, but also of the fact that peace is more than just the absence of war.

PS: While we are talking about financial innovation, I've just acquired two books on financial market liberalization and development: Mishkin's The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich and Rajan and Zingales's Saving Capitalism from the Capitalists.

Reading them, I am becoming more and more convinced that financial sector development is key to poverty alleviation, and that careful but accelerated financial liberalization is urgent. Here is why, from Mishkin:

[The] only way for poor countries to get rich is for them to provide incentives for capital (including capital devoted to health care and education) to be supplied to its most productive uses.

Update: Here is an article from M. Yunus on why microfinance, courtesy of Greg Mankiw.

Update (17/10): Apparently, it's not the first time the Nobel Peace Prize committee stretched its definition of "peace", with odder winners in the past.

On writing well

2006-10-08T23:47:00.000-07:00

writing ▪

This blog is as much about economics as it is about writing economics that can be understood by the general public. That's why I really appreciate this set of advice from Greg Mankiw on clear writing. The two that I like (and need to remind myself over and over again) are: "Avoid jargon. Any word you don’t read regularly in a newspaper is suspect" and "Put details and digressions in footnotes. Then delete the footnotes".

I also second his recommendation to "[buy] a copy of Strunk and White’s Elements of Style. Also, William Zinsser’s On Writing Well. Read them—again and again and again." They are truly the classics on clear and concise writing.

Is software piracy bad for Indonesia?

2006-10-06T02:57:00.000-07:00

economics ▪ intellectual property ▪

Here are two quotes that might give some insights into the trade-offs of intellectual property rights (IPR) policies. First, from the Jakarta Post:

"Using pirated software means depriving emerging software entrepreneurs of their right to grow and develop their businesses," said Microsoft Indonesia director Irwan Tirtariyadi at a piracy discussion in Jakarta on Tuesday.

Irwan argued that purchasing pirated software instead of more expensive genuine programs only helped to decrease opportunities for other software companies to compete in the market, particularly Indonesian developers.

"Basically, piracy decapitates competition. Hence, nobody will profit from it," Irwan said.

Another, from the Economist on the factor that has limited productivity increases in some rich countries:

Why does [Information Technology (IT)] matter so much? The greatest impact of advances in IT, notes Mr Nicoletti, has come since the mid-1990s. Countries with policies preventing their diffusion lost out. And because IT can boost productivity in many industries, its effects (or the absence of them) were felt across the economy. “Policies that prevent the spreading out of this technology”, he says, “are damaging precisely because of its general application.”

Strict enforcement of anti-(software)-piracy law is exactly the kind of policies that prevent the diffusion of IT to the greatest number of people, especially young people, in Indonesia. The claim of Irwan, the Microsoft man, that "nobody will profit" from piracy is simply wrong.

It doesn't mean that piracy will, in equilibrium, always be good for Indonesia. So, we need to think about its costs and benefits.

Here are some of its costs: The potential growth of local software producers. I think this is only partly true: Large scale software industries will surely fail to grow without a strong local IPR protection for softwares. But small and medium ones will survive, mainly by receiving outsourced work from countries with a mature software industry.

The benefits? First, productivity for the overall local services industry from the use of pirated software. The loss of this productivity from strong anti-piracy enforcements will be costly, mainly for small-to-medium local services enterprises and, at least in the short term, the cost will be huge.

The second benefit is to Indonesia's human capital. Enforcement of anti-piracy policies will reduce the extent to which schools and universities can introduce IT to their curriculum (or, at least, reduce the number of software available to use), and the extent to which parents can provide their children with brain-stimulating software -- limiting the kind of diffusion described in the Economist article. I think this will inflict a large medium-to-long-term cost to the Indonesian economy.

The bottom line? Without empirical evidence, it's hard to say. But were I to decide, I'd keep those Mangga Dua and Ambassador-Mall vendors alive...

A begging strike

2006-09-26T23:40:00.000-07:00

poverty ▪

It's Ramadan. It's that month where each good deed will be rewarded abundantly in heaven. So, those who believe try to do as many good deeds as they can — among others, by giving alms to beggars.

Now, here's a paradox: In such a circumstance, who's realy doing the good deeds — those with money to give, or those willing to accept those gifts? Here is an interesting experience of KLR that she shared in this comment:

Now to put a spin on things, while I was in India, I experienced a Begging Strike. I'm not sure what the occasion was - but on this particular day, nearing Diwali festival, when people often give alms to the poor in order to build up good karma, one city's begging population went on strike. I saw locals trying to hand the poor money, and they refused to accept it - thereby, for that day, refusing the donor the potential for good karma earnings.

Which of the two parties deserves heavenly rewards, then?

Adjustable individuals

2006-09-22T22:36:00.000-07:00

economics ▪ quotes ▪

A quote from a recent acquisition for my library:

The fundamental mistake is in taking the patterns we observe around us as facts of nature. They are not; they are the result of rational individuals adjusting to a particular set of constraints... Change the constraints and, given a little time to adjust, the patterns change.

That's from David Friedman, son of Milton Friedman. Somehow, I have a feeling I'll be referring to this post often in future.

Ramadan is here...

2006-09-22T22:35:00.000-07:00

...and along with it, the seasonal migration of beggars into Jakarta. So, it's perhaps the appropriate time to refer you to this old post. Here is a snippet:

So, here is the lesson: To help the poor, you should restrain from giving to ensure that the total amounts of your gifts is so low that (a) it discourages the use of children; and (b) it discourages organised begging. Of course, this is not the only lesson. Another lesson is this: To really help the poor, you really have to want to help the poor – there is no such thing as a free lunch.

New ideas in social sciences

2006-09-21T21:45:00.000-07:00

science ▪

Tirta, a psychologist, comments on my reference to "Judith Rich Harris's excellent The Nurture Assumption" in this post here:

an aside from psychology, the excellency of rich harris' "the nurture assumption" is still debatable, especially in the academic world of developmental psychology... take home message: distangling peer-effect from genetic and parental influence is far from easy -- so perhaps this would ring a caution bell to economists too...

Amen to that! Outside of the narrowly-focused experiment approach, economists face similar difficulties in disentangling the effects of policies or shocks on the working of economies. From John Kay's recent FT column:

It will rarely, if ever, be the case in economics that an old account of the world will be shown to be simply wrong, like the medieval account of planetary motion, or the phlogiston theory of heat. Empirical tests in social sciences are never decisive, as they sometimes are in natural sciences. Nor are new explanations of economic affairs ever so compelling that they exclude all others.

That is why economists will never encounter the smug certainties that Archimedes, Galileo, Einstein and Watson must have felt. They have the different excitement of piecing together partial explanations of a world whose variety and perpetual change mean that it will never be amenable to universal explanation.

However, progress in scientific discovery in social sciences is not founded solely on having final proofs. Much of the excitement lies is the proposing of interesting hypotheses that use new evidence or reinterpret old ones to question some of the old explanations of social phenomena and human behaviours. That's why I still think Harris's book remains an excellent one, despite (or is it because of?) the said controversy.

A job opening

2006-09-21T02:19:00.000-07:00

jobs ▪

I had the strangest request today from a friend at SMERU, a research institute doing very good work on poverty. He wanted me to post these job openings here.

If you're reading this straight from my blog (instead from forwarded e-mails), think of what this means: A person in SMERU perceives that you, readers of this blog, potentially have the qualities that fit their profile.

So, if you're interested, please do give SMERU a call. I'd say, you might have a fairly good chance of getting in.

The bet is on...

2006-09-20T03:01:00.000-07:00

economics ▪

...for potential Noble Prize winners in economics, as forecast by Thompson Scientific.

Peer effects at work

2006-09-17T21:09:00.000-07:00

economics ▪

Discussions of peer effects keep coming back here. I started with this post on research excellence, followed by this post on scholarship allocation.

Then, this morning, I found Greg Mankiw reviewing two recent findings on peer effects. Two separate studies reviewed found that: a) a person works harder when he has hard-working peers; and b) exposure to older peers and relatively less supervision have deleterious consequences to sixth-graders. These results question the assumption of the uncorelatedness of utility functions held by most economists.

With regards to child-rearing, the topic is discussed in Judith Rich Harris's excellent The Nurture Assumption. Meanwhile on the national scene, the recent controversial policy on creating an industrial estate (reported here and here in Kompas) is, in essence, an effort to bank on peer effects at firm levels (also known as agglomeration).

Like Mankiw said, peer effects is a hot research topic. Doctorate candidates looking for research topics, take heed!

Update (9/20): Muli questions my depiction of the industrial estate policy as an example of peer effects here. I think he is right -- it is an example of banking on the economies of scale (both are examples of increasing returns).

The economics of scholarship allocation (3 of 3)

2006-09-16T22:18:00.001-07:00

public economics ▪ policy ▪

It's been a while, so let's begin with a recap.

In Part One, I argued that the two principles guiding the allocation of public investments should be used to guide the allocation of publicly-funded scholarships: First, invest in activities with the highest social returns; and second, do not crowd out private investments.

Meanwhile, in Part Two, I described the two rules of thumb used to get around the problem of defining "social returns". These are, first, finding investments with high multiplier effects; and second, bias the allocation towards groups or regions that have the least number of educated people. I then illustrate how, in practice, these rules of thumb had been used to good effect in allocating Inpres elementary schools in Indonesia.

But there is a catch: The second rule-of-thumb, which seems to have worked well in allocating public investments in basic education, may not be good enough in allocating higher education scholarships. Why? Here's a clue: It has something to do with this post.

Before going into why this second rule doesn't work, let's begin by examining why it does.

One can think of education – or “human capital” in economic-speak – as inputs to production processes that generates the aforementioned social returns within a particular “economic unit”. An economic unit is usually defined as firms, but a tightly-knit community where its members’ economic activities are highly interdependent can also be considered as one.

Besides education, physical capital and manpower play equally important roles as inputs to production processes. We can call these three broad types of inputs “factors of production”. Combined together, these factors of production determine an economic unit’s output.

Now, for most goods, one thing that we know about these production factors is that less is more: The scarcest production factor usually is the most valuable. In turn, increasing this production factor usually bring the highest increase in productivity.

This last thing is quite intuitive. Just think of that time when your high priority assignment was stuck in the legal department because it’s overstretched. Didn’t you wish that the firm had added more people in legal so that the office can “work better”? At the same time, it wouldn’t make sense to add an extra department whose outputs highly depend on the legal department without expanding the latter.

This is exactly the reason why this second rule-of-thumb works for allocating basic education investments. If we think of Indonesia’s regions (provinces or districts) as economic units, the strategy of putting basic education investments in regions with lowest levels of per-capita education is optimal.

But I argue that this works less well with allocating higher-education scholarships, particularly the (highly-specialized) doctorate scholarships. I describe a variant of this problem in this post, but here, I’ll try to connect it directly with the problem of scholarship allocation.

As critical readers might notice, while it may be intuitive, the assertion that “the scarcest production factor is the most valuable” only applies for production processes whose productivity depends on the interactions of all three types of factors, i.e., human capital, physical capital, and labour. This describes most manufacturing processes, in which case, investment in the relatively scarce production factor is most optimal.

However, if the output can mostly depend on the interaction within one factor of production only (say, human capital only), than investing in just that one factor (and not the scarcest of them) is most optimal. This phenomenon is known among economists as “increasing returns to scale”.

This explains why the second rule-of-thumb is not a good guide in allocating PhD scholarships. How? Think of the main “outputs” of PhDs. Two that merit publicly-funded scholarships are teaching and research. A critical feature of both of these activities is that the quality of their outputs depends a lot on more human capital in similar study areas.

A PhD graduate in biochemistry working as a teacher-researcher is likely to produce more outputs working around PhDs in biochemistry than around PhDs in political science, and vice versa. Hence, two PhDs in biochemistry generate more social returns than two PhDs, one in biochemistry and another in political science. In other words, there is an increasing return to scale in higher-education investments.

What’s the implication? Abstracting from politically-motivated decisions, the sense that I got from the way (Fulbright) doctorate scholarships are allocated is that the selection committee still utilised the second rule-of-thumb in its allocation decision. That is, not only does it prioritise “backward” regions, it also seems to prioritise subjects that Indonesia has the least number of PhDs in.

I think this is not an optimal strategy. This strategy is only optimal for subjects that have immediate practical relevance (i.e., those that allow linkages with the private sector). For more research-oriented ones, increasing-return plays a significant role and hence, choosing candidates in “scarcest” subjects might give sub-optimal social returns.

Instead, a better strategy might be to choose candidates in subjects where there are quite a number of research-oriented (and teaching-oriented) PhDs already – such as, umm… I don’t know, economics, perhaps?

Data or devolution?

2006-09-14T21:33:00.000-07:00

policy ▪ poverty ▪

Peter Gardiner in yesterday's Jakarta Post:

[In] looking at poverty we need to move beyond simply looking at income or expenditure to ask just "why" poor people are poor. Like a doctor, we need to be able to "diagnose" poverty to look at its underlying causes and consequences and to use this to design appropriate interventions. Solutions will vary by region, and even within regions among different communities...

We should also ask "where are they located" geographically, defined either in terms of administrative areas (important for different levels of program administration) or in terms of ecological or cultural zones that help link people to the physical and social environment within which they live. Together these provide a framework for mapping poverty and for analyzing the constructs of poverty within particular areas or locations.

Pro-poor budgeting and program design should be a cornerstone of poverty policy at all levels.

This will all be extremely data dependent and, as many have already noted, will require regular production of credible and reliable statistics at increasing levels of detail.

I wholly agree with the diagnosis. However, I'm not sure who Gardiner meant by this "we" (as in "we need to be able to 'diagnose' poverty "). If he believes that "[solutions] will vary by region, and even within regions among different communities", then the "we" should mostly refer to local communities -- not some analysts examining household data in Jakarta.

If this is so, then, instead of the "regular production of credible and reliable statistics", the emphasis should be in more devolution of power (e.g., via the community-driven development approach) backed by central funding to allow communities to diagnose and solve their own poverty problems.

Trade is good for Indonesia...

2006-09-14T03:34:00.000-07:00

trade ▪

Why? Because God meant it to be...

The food security nonsense

2006-09-13T04:05:00.000-07:00

economics ▪ rice ▪

Here is an old nonsense used by the rice-farming lobbies to fight off rice imports: That food security requires Indonesians to produce more than they consume, and hence, Indonesian rice farmers should be "empowered" (read: protected) and provided with incentives to keep them planting more rice.

It's nonsense because there is a very loose link (if any) between food security and food production. Singapore does not produce any rice. Yet most of them get better deals than Indonesians, since they can buy their (imported) rice at a cheaper price than most Indonesians.

Why is this true? Here is how Amartya Sen began his famous book on famines:

Starvation is the characteristic of some people not having enough food to eat. It is not the characteristic of there being not enough food to eat. While the latter can be a cause of the former, it is but one of many possible causes.

It is, therefore, wrong to pretend that there is a link between rice production and food security! To the extent that all Indonesians can have enough to eat, Indonesia is food secure. In fact, there are many countries that produce lots of food but are food-insecure (North Korea is a case in point). On the other hand, many non-food-producing countries are food-secure. Just look at how much rice Jakartans produce (and how food-secure they are).

Hence, we need more sensibility in the whole food security debate. As a start, we need a better (and more proper) measure of food security. Economist Haryo Aswicahyono, in a private discussion, had a brilliant idea: Why not use the share of food on total expenditure as the indicator -- the point being, the smaller this share, the more food-secure a household is.

Now, that is a simple but very powerful indicator to detect problems of food security in the various regions in Indonesia. There are, of course, other similarly useful indicators such as malnutrition rate. At any rate, it is these indicators, instead of rice production, that should direct the debate on food security.

Globalization's losers: Some points of view

2006-09-13T00:13:00.000-07:00

economics ▪ policy ▪

The Financial Times recently opened a virtual forum (read: a blog) to allow invited guests to comment on a particular policy issue. One is hosted by Martin Wolf, and a most recent session was entitled We must act to share the gains with globalisation’s losers:

Globalisation remains the great economic story of our era. It is also the great political story. The big question remains how likely is a reversal of our era’s move towards a more integrated global economy. History suggests, alas, that the onward march towards integration is not inevitable: economics may propose, but politics dispose.

This was the issue raised by Ben Bernanke, chairman of the Federal Reserve, in his address to this year’s annual economic symposium organised by the Federal Reserve bank of Kansas City at Jackson Hole, Wyoming. At the end of a brief overview of the history of economic integration, Mr Bernanke argued that “the social and political opposition to openness can be strong. Although this opposition has many sources... much of it arises because changes in the patterns of production are likely to threaten the livelihoods of some workers and the profits of some firms, even when these changes lead to greater productivity and output overall”. The need, he suggests, is to ensure that the benefits of integration are sufficiently widely shared.

Mr Bernanke concentrates, implicitly, on the politics of the high-income countries; and, second, he devotes attention to trade in goods and services. He is right to do so. The US and Europe remain the core of the global economy. Equally, nothing is more politically sensitive than trade.

The comments from policy-oriented economists are excellent, though I particularly like Paul Seabright's (on opening up migration) and Edmund Phelps's (on a particular type of redistribution policy). Meanwhile, Andrew Smithers's comment give a good heads-up on the problem of global macroeconomic imbalances.

A free book!

2006-09-12T05:51:00.000-07:00

books ▪ economics ▪

I love free books. So, I'm happy when I found out there is one here (it's not really free -- you still have to pay for paper, ink, and internet connections. Well, some of you, that is...!). Entitled Against Intellectual Monopoly, it's about intellectual property rights:

It is common to argue that intellectual property in the form of copyright and patent is necessary for the innovation and creation of ideas and inventions such as machines, drugs, computer software, books, music, literature and movies. In fact intellectual property is not like ordinary property at all, but constitutes a government grant of a costly and dangerous private monopoly over ideas. We show through theory and example that intellectual monopoly is not neccesary for innovation and as a practical matter is damaging to growth, prosperity and liberty.

Here, Greg Mankiw dares one of the authors to put his arguments into practice, and he refused (though this comment by Guan Yang has a nice explanation for it). For an older (and also free) book with a similar argument, see Free Culture by Lawrence Lessig.

The big cost of small costs

2006-09-10T03:50:00.000-07:00

economics ▪ development ▪

Dewi Susanti, a good friend, is an architect, lecturer, and a student of public-space use -- but I don't think she'd ever think of herself as an amateur economist. The following quote, however, suggests that, in her unguarded moments, she might be thinking like one (though she would probably vehemently deny it). In this blog entry, she was talking about the costs from random blocks on Jakarta's roads...:

If the last shortcut I take now is closed off, it means that I would have to take more than 3 kilometer detour to travel the same distance. That detour would have added a total of 6 kilometer to my original round-trip route, additional cost for gas at around Rp.2.700,-, and additional 15-20 minutes every day. This is equal to 30 kilometer, Rp. 13.500,-, and 75-100 minutes every week. 120 kilometer, Rp.54.000,-, and 300-400 minutes every month.

This personal cost captures the big loss of Jakarta’s population in general. The Study on Integrated Transportation Master Plan (SITRAMP) funded by Japan International Cooperation Agency (JICA) estimated Jakarta’s traffic congestion caused the region to suffer annual economic loss in the amount of Rp.3,000 billion (US$ 315.7 million) for vehicle operating costs and Rp.2,500 billion (US$ 263.1 million) for travel time.

I think this big cost of small costs can also explain why there is often a gap between a person's comparative perspective of living standard in (the capital of) a poor country vis-a-vis the poor country's income. He or she may feel that his/her quality of life is only marginally worse than those living in the capitals of developed countries -- a little bit less reliable utility services, a little bit more traffic jam and so on. However, the total, these inconveniences might add up to a significant loss to the economy reflected in the poor countries' much lower income.

By the way, if you're interested in a bit of economic theory, macroeconomists used this insight to explain the economic cost of inflation from what he called menu costs. This Wikipedia entry has a summary on it, and this is a reference to Gregory Mankiw's paper on it. (paper downloadable for those with JSTOR access only!)

Misery loves (to compare with) company

2006-09-10T00:13:00.000-07:00

economics ▪ happiness ▪

Earlier this morning, I and my wife went to Carrefour unaware that today was one of those 20-percent-off-if-you-have-a-certain-credit-card day. When I found out, two things flashed in my mind: (1) Great, 20% off!; and (2) Crap, the queueing! And yes, we got both: 20% off plus a 40-minute-plus queueing at the register.

But the queueing, it happened, didn't feel too bad. Why? Because on Friday, a person with a purchase similar to mine shared his experience of arriving at a hyper-market at 7PM, to leave at 4AM in the morning for a 25 percent discount. Every time we felt ourselves getting bored waiting in line, my mantra was, "Well, at least we don't have to leave at 4AM...!"

Most people would find nothing odd with this picture. People derive happiness from other people's joy (or misery). In his enjoyable Stumbling on Happiness, psychologist Daniel Gilbert put out some facts about people's psychological tendency to compare...:

The facts are these: (a) value is determined by the comparison of one thing with another; (b) there is more than one kind of comparison we can make in any given instance; and (c) we may value something more highly when we make one kind of comparison than when we make a different kind of comparisons.

The thing is economists don't usually think of people this way -- at least, not in their economic models. For economists, people derive their happiness (or, in economic-speak, "utility") from their own private consumption of goods, and not from other people's.

It is not that economists don't realize this tendency to derive one's utility by comparison -- either through shared joy, compassion, envy, or spite. It's just that, in most cases, economists feel that they can understand enough of economic behaviour without the added complexity of correlated utilities. Many think that these correlated utilities shouldn't matter for policy.

Well, many, but not all. That's why, there is current a debate in the blogosphere on the merit of this psychological tendency to compare on government policy. The debate was begun by Berkeley economist J. Bradford DeLong here, and then taken up by various economists here and here, and then responded by DeLong here, with several rejoinders here and here. No consensus is likely to come out, though the debate itself is worth following.

PS: I know I promised Part 3 of this and this post this week. I'll try to do it before the end of next week, yes?

Dealing with public provider absenteeism

2006-09-07T21:45:00.000-07:00

economics ▪ development ▪

Absenteeism of public service providers in education and health facilities has often been cited to be a serious problem in developing countries. A recent paper by Abhijit Banerjee and Esther Duflo of MIT's Poverty Action Lab document what is known about the effectiveness of various strategies to control such absenteeisms from policy experiments done in India and Africa.

One effective strategy that I find interesting is the requirement that teachers take pictures of themselves and their students using tamper-proof cameras coupled with bonuses for teachers with high attendance. In regions in Indonesia where absenteeism is a serious problem, this is worth a try.

From the paper's abstract:

This paper brings together evidence from a number of randomized experiments designed to address the problem of absence of teachers and health providers in developing countries. The goal is to see what, if any, lessons we can draw from them. Our tentative conclusion is that these service providers are willing to respond even to quite moderate incentives. The constraint seems to be in getting the incentives implemented: participants in the system, including both supervisors and beneficiaries, seem unwilling or unable do so. This suggests that, at this stage, fighting absence will either require incentives implemented from outside the system or a large enough boost to demand that the beneficiaries are willing to assume some degree of control. The long-run benefits might be large if these interventions help to break the vicious cycle of low performance and low expectations.

Research excellence and the O-ring theory

2006-09-06T06:06:00.000-07:00

economics ▪ policy ▪

Yesterday afternoon, I had lunch with Roby Muhammad. For those of you who don't know who he is, Roby is a member of a small but growing number of quantitative sociologists. For the past few years, he has been doing cutting edge research on network behaviour with Duncan Watts (of six-degree fame) at Columbia University.

Anyway, after a brief chitchat, Roby told me he would like to see in Indonesia something akin to Stanford's Institute of Advanced Studies, to allow young, brilliant researchers to do basic (theoretical) research. He couldn't understand why no such institute existed in Indonesia. "It isn't that difficult. Three or four (likeminded) people can hang out and discuss together -- that would have been enough."

He asked my opinon on it. So, I told him of Michael Kremer's O-ring theory of development.

The O-ring is the malfunctioning seal ring that caused the explosion the the space shuttle Challenger in 1986. It didn't matter that the rest of shuttle was in perfect working order: one malfunctioning component was enough. It suggests that high-quality parts would be useless when paired with low-quality ones.

Michael Kremer used this example to illustrate a development problem: Brilliant workers (or scientists) prefer to work with other brilliant workers because by doing so, they are guaranteed the high payoffs of their high-quality skills.

There are two reasons why this is so. First, this arrangement averts highly skilled workers from O-ring-type accidents. Second, highly-skilled workers gained from their interactions with other similarly skilled workers -- the so-called "spillover effects". These gains are reflected in a collective payoff that are much higher than the sum of its parts.

As the result, there is what economists called "pooling equilibriums" where high-quality workers "agglomerate" with other high-quality workers, leaving low-quality workers together with similarly low-quality workers. Kremer used this to explain various stylized facts about rich and poor countries, and why incomes are diverging between the richest and poorest countries. But this theory can also be explain Roby's conundrum.

Roby took for granted the ease of which he could do theoretical modelling in the United States. I could imagine him and several of his colleagues, on a Friday afternoon, sitting in a coffee-shop scribbling out some new theory on a piece of napkin, say, of the network behaviour of an epidemic. The day ended well when a satisfactory model was developed, and the whole thing felt so easy. After all, what was needed was a pencil (or pen) and a piece of paper.

But Roby missed out on the fact that, right there and then, at Columbia University, he was probably sitting with people that are amongst the best in their fields. That's why getting to top graduate programs is so damn difficult. Administrators of those programs understand clearly this idea of positive spillovers amongst smart and highly-skilled people in an academic environment.

So, will dumping loads of money to create an institute that employs and draws the best of Indonesian social researchers solve the problem?

Well, not quite. You see, I believe that most of the times, Roby (and other researchers studying in the United States) managed to solve their problems on their own. But on those rare days when they got stuck -- say, in figuring out why a particular equation cannot be solved -- they can easily visit their colleagues elsewhere, say in the Math department, to help them out.

Similarly, when they need data to be collected or statistically analyzed, it's relatively easy to find highly-skilled data collectors (and, mind you, you need a special skill to collect data properly) and analysts at Columbia University. And that's only at Columbia -- there are still Harvard, MIT, Yale, etc. Meanwhile, I dare anyone to name just one graduate program in Indonesia that can claim it only admits the best and brightest students.

This goes back to the O-ring problem. One underappreciated fact about world-class researches is that most are actually results of collective enterprises, whether the principal authors realize them or not. Unless all of the high-quality parts are there, it's not possible to come up with a Challenger that can touch the moon.

So, does this mean that there is no hope for a world-class Indonesian "Institute of Advanced Studies"? Realistically, not in the next five (or even ten?) years. But now that we have identified the problems (and it isn't just about money!), we can start trying to think of ways to get around of them. If you have any idea, please do pitch in.

Update (9/10): This post on Greg Mankiw's blog suggests an implication of this phenomenon.

A book on the box

2006-09-05T01:31:00.000-07:00

a book ▪

Just got The Box shipped in by Amazon. It's a story about containers, without which, to quote The Economist "there would be no globalisation". I'll tell you all about it once I'm done with it.

It's official: The 2006 poverty rate is ...

2006-09-01T02:48:00.000-07:00

policy ▪ poverty ▪

Just to give a heads-up on the controversial poverty rate: The Central Body of Statistics (BPS) has just announced that the March 2006 poverty rate is 17.75%. This was an increase from 15.97% in February 2005.

This announcement is unlikely to stop the controversy ignited by some Indonesia Bangkit economists..., who accused the government of meddling into the calculation of the 2006 poverty rate. These economists claimed that their calculation pointed to a poverty rate close to 22% in 2006, mainly due to the impact of the 126% increase in domestic fuel prices (on average) in October 2005.

Personally, I didn't (and still don't) buy these claims. My back-of-the-envelope calculation here in Nalar Ekonomi (in Indonesian) suggested that the unconditional cash transfer (UCT) of Rp.100,000 per household (or, on average, about Rp.25,000 per person) would cushion the impact of the October fuel-price increase on poor households' consumption.

The economics of scholarship allocation (2 of 23)

2006-08-31T04:41:00.000-07:00

public economics ▪ policy ▪

In this previous post, I argued that one could think of publicly-funded scholarships as public investments. Hence, just like public investments, publicly-funded scholarships should be allocated to maximise social benefits. How? In the case of public investments, this requires policy makers to do two things. First, prioritize activities with the highest social returns. Second, avoid crowding out “private investments”.

How do these translate into scholarship allocation policies? Quite easily for basic education; not so for higher education.

I’ll take the road most travelled and begin with the easier bit.

But first, what are social benefits? I briefly alluded to this before as “the benefits that accrue to society”. A related concept is private benefit, which is the benefit enjoyed by a particular individual from an activity.

Here is an example: You know the streetlight that you installed in front of your house? It reduces the likelihood that a burglar can pick your front door’s lock without being spotted. That’s the streetlight’s private benefit for you.

But that’s not the only benefit from the streetlight. Together with other streetlights in front of your neighbours’ houses, they make the street safer and more comfortable for strangers who pass by. The social benefit includes the benefits provided to you and to others that pass safely and comfortably by in front of your house

In this case, the private benefit of giving a scholarship is the welfare increase of the particular individual receiving the scholarship. The most obvious, and measurable, form of such a welfare increase is the individual’s increased income (obviously, there are others). Meanwhile, the social benefits are the said private benefit plus benefits received by others due to that person’s “improved human capital”.

However, calculating social benefits is no easy thing. A particular sticking point is on how wide a net should be cast in defining “the others” whose benefits we include in the calculation. This is related to the question of the mechanism by which a particular scholarship translates into social benefits. Having to allocate the scholarships before the fact complicates the calculation even more.

One way around this problem is by creating rules of thumb. Two rules of thumb are often used: First, put the scholarships on “investments” with the highest multiplier effects; Second, make the allocation biased towards regions whose share of educated people is low. In addition, there is the second rule of public investments, namely to avoid crowding out private investments.

These rules of thumb will generally work for basic education. The first rule implies that “scholarships” should be given to activities that would expand education the fastest. When primary schools are mostly unavailable, building them – rather than giving individuals “scholarships” to go to school elsewhere – would be the most efficient way. The second rule implies that the focus should be to build in areas where there are the least number of schools.

Indeed, both were done by Suharto with his Inpres school program of the 1970s. In this paper, Esther Duflo of MIT evaluated the long term impact of this program and found it to be a worthy investment, even when the benefits were narrowly defined as increased wages alone.

These are good enough rules of thumb to allocate scholarships for basic education. However, the rules – particularly the second rule of thumb – might have to be modified when we talk about allocating higher-education scholarships. Here, the rules get a little messier. More on this in the next post.*

*Yes, I know. I too thought this would have been a two-part post. I’ll try to finish up with the trilogy's finale next week.

A primer in international negotiations

2006-08-30T03:50:00.000-07:00

economics ▪ foreign policy ▪

If you are a fan of John Perkins's Confessions of an Economic Hit Man, and you find the US foreign policy despicable, you'll definitely love this piece of research by two economists.

We find that a country’s U.S. aid increases by 59 percent and its U.N. aid by 8 percent when it rotates onto the council. This effect increases during years in which key diplomatic events take place (when members’ votes should be especially valuable) and the timing of the effect closely tracks a country’s election to, and exit from, the council. Finally, the U.N. results appear to be driven by UNICEF, an organization over which the United States has historically exerted great control.

Of course, the difference between being a conspiracy theorist and an economist is the standard of evidence used. Can we then say that economists are simply econometric-minded conspiracy theorists? I thank the Freakonomics blog for the lead.

And all the while, this paper says that UN diplomats (often from poorer countries that don't pay their parking tickets come from culturally corrupt countries. Wonder if the authors include US diplomats in their sample...

Off the shelf: Economic history and development

2006-08-29T08:39:00.000-07:00

book reviews ▪ economics ▪ Off the shelf

Yes, I know. I promised the second part of this post this week, but I haven't gotten around to finishing it. Meanwhile, nothing of interest on the policy front (oh, except this neverending debate on rice import policy. But I've brushed on it here, and if that's still not enough, there are more here and here, both in Indonesian).

So instead, let me share with you some books on economic history and development from my bookshelf. Links to Amazon are provided.

Let's begin with economic history. I haven't read a whole lot on economic history, but I like David Landes's The Wealth and Poverty of Nations a lot. Landes's book tried to answer a question similar to that of Jared Diamond's international bestseller, Guns, Germs, and Steel of why some countries are poor, and other rich.

However, Landes took an a slightly different route. Instead of focusing on several dominant factors, he went wide and deep, both in terms of hypotheses and geographical coverage. I find it an engrossing reading. Its depth and breadth is exceptional, though I find Landes is a little light on the East Asian story outside that of Japan and China.

Still on economic history, Benjamin Friedman's recent book, The Moral Consequences of Economic Growth, is an interesting read. He argued that Weberian link between ethics and capitalism was actually a two-way street: Not only ethics caused growth, but vice versa was also true. Taking evidence from history, Friedman isn't always convincing, but the argument is clearly worth making. And the book worth reading.

As an economist, Friedman's argument tempts me. But even if Friedman is wrong, the case of economic growth is not lost. William Easterly's excellent, excellent first book The Elusive Quest for Growth made a forceful argument – backed by theory, empirical evidence, and an emphatic eye for poor countries' plight – for growth. Alas, he suggests that growth is elusive. There is no silver bullet to kill the beast that dragged African countries' growth down.

This conviction was one reason why he was so angry with what he found to be naivete in Jeffrey Sachs's The End of Poverty. That anger is reflected in his second book, The White Man's Burden, where he argued that Western aid would amount to nothing unless they were channelled in the manner that took accountability and local conditions seriously. His arguments are convincing, but I miss the cool, emphatic tone of The Elusive Quest.

In the development circle, the Sachs vs. Easterly argument, in particular with regards to the value of increased aid, was quite intense. The focus is, as always, on Africa. Sachs argued that Africa wasn't mainly poor because of corruption and bad governance, but because of "poverty traps" due to bad geography and climate. Easterly, in academic papers and his second book, refuted that argument.

I found the support for Easterly's argument not in a book on economic theory, but in Martin Meredith's The Fate of Africa, a tome on 50 years of African independence. Reading it, it's hard to not see (elite?) corruption and bad governance (with their effects on violent conflicts) as the bane for poor Africans.

Abstracting slightly, there is Amartya Sen's guide to the philosophical and economic foundations of welfare economics, Development as Freedom. I used to take this book for granted, but I feel I need to reassess it after reading pragmatist Hilary Putnam's The Collapse of the Fact/Value Dichotomy and Other Essays. But first, I need to find it from my mess of a "bookshelf".

On Indonesia, two books stand alone in its deep coverage of Indonesian economic policy history. Hal Hill's The Indonesian Economy provided good reference on Indonesian economic history covering the period of 1966 to 2000 (from the beginning of the New Order to the early part of the crisis period).

Meanwhile, for labour specialists, Chris Manning's Indonesian Labour in Transition gives an excellent overview of the Indonesian labour market. But damn, look at that price!

The president to make poverty history?

2006-08-28T06:48:00.000-07:00

miscellaneous ▪

Jeffrey Sachs wrote a book offering a panacea to end absolute poverty in the world, and now some people want to make him the president of the United States. No, seriously! Harvard macroeconomist, Gregory Mankiw, suggests what his administration would look like here, who's in and who's out.

If he ever become the president, would he really make poverty history? Methinks not (see this (in Indonesian), this, and this).

Between Tsunami and Katrina

2006-08-24T06:40:00.000-07:00

miscellaneous ▪ policy ▪

My newsfeed pointed me to this news on New Orleans a year after Katrina. So I wondered: What did BBC write about Aceh one year on? A quick search on the BBC site, and I found this news. See the difference in tone? And all this, despite the Americans' advantage of not having to broker a peace deal in the region while dealing with reconstruction.

Though to be fair, we did get lots of help, including from the Americans. But most of all, intense public scrutiny (from within and without) was key to the progress in Aceh reconstruction – in part due to internationally-brokered peace accord in Aceh.

Update (8/25): The Economist on Katrina's and Tsunami's first anniversary.

One good reason

2006-08-23T06:15:00.000-07:00

comic ▪

This is one good reason why I'm promoting this introductory economics textbook. (PS: I thank one of the comic's target for the pointer to it.)

Should we ban cigarette advertisements?

2006-08-22T06:00:00.000-07:00

economics ▪ policy ▪

Why do businesses advertise? To increase demand. So, if a particular industry is selling something whose consumption society would like to discourage – say, cigarettes – then banning such an industry to advertise is a good way to go. So for anti-tobacco lobby, the way to go is to ban cigarette advertisement. But what if many studies show that increased cigarette advertisements have little or no effect on demand?

Assuming that studies did show that advertisements have little effect on demand, Harold Winter (a non-smoker!) suggests a contrarian argument against banning cigarette advertisements. From his fun little book, Trade-Offs...:

[Those studies] who argue that cigarette advertising does not affect the demand for cigarettes have the burden of confronting a troubling question: Why do cigarette companies spend hundreds of millions of dollars on advertising?...

[Perhaps] cigarette advertising has a different purpose than enhancing the demand for cigarettes. Even if the overall demand for cigarettes is unaffected by advertising, tobacco companies may use advertising as a weapon in brand warfare… Advertising may be used to fight for market share, even if the size of the overall market is stable or declining over time.

Which leads him to this conclusion:

Ironically, if it is the case that all cigarette advertising is for brand warfare, a total ban on cigarette advertising may be beneficial to the tobacco industry. If advertising simply maintains the status quo in market shares, it is ultimately ineffective and the tobacco companies would save a lot of money by not advertising. But this wouldn’t last for long because each brand would have an incentive to start a big advertising campaign against its rivals. If advertising is banned, however, the government in effect allows the tobacco industry to eliminate wasteful advertising…”

Interesting, isn’t it? However, before making a hypothesis into policy (or use it to support the relaxation of advertising rules for cigarette firms), it’s quite important that we check that cigarette advertisements did not affect demand in Indonesia. Looking at the way firms advertise here, some show brand warfare tendencies, others demand expansion. Overall, however, it wasn't clear that the cigarette companies' aim is mainly that of brand warfare.

Economics is full of counterintuitive hypotheses such as this one – many of them, unfortunately, are dead wrong. To harness them into useful policies requires careful testing and evaluation.

What's wrong with the poverty data?

2006-08-21T19:27:00.000-07:00

nalar ekonomi ▪

Here is my commentary (in Indonesian) on today's hot topic in the Indonesian print media: the problem with the poverty data.

Update (8/23): Another commentary here (also in Indonesian)

The economics of scholarship allocation (1 of 2)

2006-08-21T04:45:00.000-07:00

public economics ▪ policy ▪

Two weeks ago, the news arrived. Weeks after getting an interview – along with six other applicants – for the Fulbright Doctorate Scholarship, I was told I didn’t make it. I was disappointed. Naturally, such a refusal creates a need for closure, often through efforts to rationalize it. The typical culprit is the interview itself: there is the temptation to replay it in one’s head over and over again, trying to figure out which answer was the stinker (and yes, I have done this many times already throughout the week!).

But in addition to suspending me in time, forcing me to perpetually relive the interview moments, the news sparked an interest in a more general question about the allocation of scholarships that are funded by public money. As my experience has shown, a scholarship is a scarce commodity. The question, then, is how does one allocate this commodity in the “best” way possible?

A concept tightly connected to this question is maximization. Doing something “in the best way possible” is tantamount to doing it in a way that (is expected to) maximises the outcome with respect to a certain objective (or set of objectives). That's why the above question is actually incomplete. Tasked to allocate a good “in the best way possible”, one should immediately ask: “best with respect to what (set of) objective(s)”?

So, to what objective should one allocate publicly-funded scholarships? Principally, one should see publicly-funded scholarships as public investments. As such, its objective should be identical to that of public investments, namely to maximise the benefits that accrue to society (or “social benefits”), both in terms of direct and multiplier effects.

How do public investments achieve this objective? First, the tautology: to maximise social benefits, invest in activities that give the highest social returns. In an ideal world, this amounts to listing all possible investments, sorting them in a descending order from the one with the highest return. Once the list is there, we start investing in the activity at the top of the list and then go down the list until we ran out of money.

However, there is the second principle: Do not crowd out private investments. That is, don’t invest in activities that the private sector is willing to finance. Going back to the list above, if we want to maximise social benefits, we need to maximise the number of activities that are funded. To do that, public money should be channelled to investments that are not wanted by private investments.

(A digression: This second principle is often ignored because many people are unwilling to acknowledge that it is not the state’s comparative advantage to generate income by running companies, managing risks, and be entrepreneurial. On this, I think on this we need to keep the eye on the ball: The objective of public investments – and public activities generally – should be to maximise social benefits, not public income.)

These two principles should generally be adequate to guide the allocation of publicly-funded scholarships. However, although they look simple on paper, in practice they can be quite complicated. A lot of these difficulties have to do with our limited knowledge of the social returns to human capital investments. Some time this (or next) week, I’ll discuss in the second part some of these complexities and complications (and their relation to Fulbright committee’s decision on whom to give its scholarships to).

Make textbooks free. Advertise

2006-08-19T04:20:00.000-07:00

education ▪ ideas ▪

Textbooks are expensive. Here is an idea to push the prices of textbooks down: Open up those pages for advertisements.

Textbook prices are soaring into the hundreds of dollars, but in some courses this fall, students won't pay a dime. The catch: Their textbooks will have ads for companies including FedEx Kinko's and Pura Vida coffee.

Generally, the model requires a strong regulatory frameworks. One visitor in the Freakonomics blog (where I first came across the article) is worried of the influence of advertisers on the textbooks' contents. This is a legitimate concern, taking lessons from how much television programs are driven by advertisements in Indonesia.

What this model — whereby textbooks are offered for free, to be paid by advertisers —offers, however, is an interesting way to shift price negotiations away from between schools and publishers, to between publishers and advertisers. As such, school administrators can be somewhat isolated from the temptation of commercialisation. Details would need to be sorted out, though, to minimise negative side effects.

The politics of microfinance

2006-08-18T04:33:00.000-07:00

economics ▪ microfinance ▪

Small is beautiful; big is a threat. One would think that nobody would ever see microfinance institutions — providers of micro-credits to poor consumers, widely perceived as the solution to their credit-constraint problem — this way. But apparently, the State Government of Andhra Pradesh did.

[It] came as a shock earlier this year when the government of Andhra Pradesh, the Indian state where microcredit has spread fastest, accused some leading microfinance institutions (MFIs) of behaving no better than old-style usurers. The lenders say they are being defamed, in a row that raises questions about their future in the state.

The dispute centres on one poor rural district, Krishna. Some women were reported to have killed themselves because they could not repay the MFIs...

Viswanatha Prasad of Bellwether, a fund that finances microcredit-providers, blames “indiscriminate expansion”. The MFIs were flush with money, partly because commercial banks saw them as a good vehicle for lending to rural areas. Some microcredit lenders were charging interest rates on the full amount of a loan, rather than the declining balance, and some borrowers were bullied and humiliated. Aggressive competition and a failure to share information meant some people were in hock to numerous lenders. That is what seems to have led to the suicides.

The case suggests a need to be more sober about the strengths and weaknesses of MFIs. There might be something out of it that regulators in Bank Indonesia can learn to strengthen regulations for microfinance institutions.

At the same time, the case also exemplifies an aspect in the politics of microfinance — where being small is beautiful, and being big, a threat. In this case, however, it wasn't clear that the State Government, who had argued for the closing of some of the MFIs, was a neutral party to the whole affair. Tyler Cowen, a professor of economics at George Mason University, who recently visited some of the MFIs in India, wrote in the New York Times:

Near Hyderabad, in the state of Andhra Pradesh, political opposition to microfinance has begun. State officials have fed negative stories to the media. They charge that microfinance debts have driven some people to ruin or perhaps suicide. They call Spandana’s programs “coercive” and “barbaric.” They question whether the “community pressure” behind repayment is sometimes too severe.

He then argued that:

The motives behind this campaign are twofold. The state is not a neutral umpire but rather has its own “self-help group” banking model, which lends at the micro level. Spandana and some of the other private microfinance groups are unwelcome competition. More generally, opposition to money lending has been frequent in the history of both India and the West. Not every loan will have a positive outcome, and it is easy to focus on the victims. Not all Indians have accepted the future of their country as an open commercial society with winners and losers.

This more general motive related to the general opposition to money lending, is also pertinent in Indonesia. Indonesians have the term "lintah darat" — blood-sucker — for traditional moneylenders. It is plausible that, without proper regulations, MFIs could eventually be seen as blood-suckers as they covered a broader set of poor customers and had to hedge greater risks. After all, if one thinks about it, MFIs and moneylenders aren't conceptually that different. In fact, one World Bank economist thinks that the idea to "co-opt moneylenders into the formal system” makes sense.

There is, I think, a third reason why people would turn their back on MFIs once they became big. People often have this idealistic notion that one should not make money (or, at least, too much money) from serving the poor — even if the poor's welfare is greatly improved by the service. As shown in India (and elsewhere), MFIs can become highly profitable when managed well. That is why, I usually recommend this book to anyone interested in poverty reduction (it's also available in Indonesian).

When academics go ballistic

2006-08-16T23:11:00.000-07:00

miscellaneous ▪

My friend once wrote: "Criticism is an integral part of scholarly culture." One feature of any culture (including, it seems, the scholarly one), however, is a propensity to war. Two days, two stories of scholarly battles getting out of hand: one, brought upon by (or is it to? -- you decide!) James Heckman, Noble-Prize economist (for the other side's point of view, click here then scroll down to the Sociological Methodology journal) and another to Steven Levitt, author of the immensely popular Freakonomics

As they say in Indonesia, "Ekonom juga manusia...!" (Economists are human too...)

Happiness and money

2006-08-15T07:01:00.000-07:00

miscellaneous ▪ philosophy ▪

A new toy's always fun. Here's another catch from Project Syndicate by ethicist Peter Singer on Happiness, Money and Giving it Away (with a discussion on why governments like measuring per-capita income):

Would you be happier if you were richer? Many people believe that they would be. But research conducted over many years suggests that greater wealth implies greater happiness only at quite low levels of income.

See the rest of Singer's article here

Subsidizing employment

2006-08-15T06:19:00.000-07:00

economics ▪ policy ▪

Wanna fight unemployment? Here is an idea from Edmund Phelps to do it:

The best remedy [to the pathologies of a high level of unemployment] is a subsidy for low-wage employment, paid to employers for every full-time low-wage worker they hire and calibrated to the employee’s wage cost to the firm. The higher the wage cost, the lower the subsidy, until it has tapered off to zero.... With such wage subsidies, competitive forces would cause employers to hire more workers, and the resulting fall in unemployment would cause most of the subsidy to be paid out as direct or indirect labor compensation. People could benefit from the subsidy only by engaging in productive work – that is, a job that employers deem worth paying something for.

This is to say that the government provides incentives to firms for employing low-skilled workers. Economists usually don't like the distorting effects of subsidies unless market imperfections can be shown (sometimes, even after). So, Phelps argues:

[The deprivation of low-skilled workers] in turn generates high social costs, including crime, violence, and dependency. The latter pathologies then become a weapon in the populist attack on free enterprise, which Western countries require for economic dynamism – and thus prosperity. So those who are included and benefit by free enterprise, yet are burdened by the social costs of exclusion, should all be willing to pay something to remedy these conditions.

A subsidy to preserve the market. An alluring idea, indeed.

Skimming through Google, I found at least two countries – Canada and New Zealand – that had applied this scheme. Unfortunately, with present institutional gaps (particularly, the absence of a good system to track the poor unemployed), it might be difficult to apply this scheme to Indonesia. Still, an idea to keep for the future.

Project Syndicate

2006-08-15T05:02:00.000-07:00

miscellaneous ▪ resources ▪

Project Syndicate is nothing new, but I've just recently found it. It has not only a good choice of commentaries, but a series of opinion pieces grouped in themes such as The Frontiers of Growth and Worldly Philosophers. Definitely worth adding to your Favorites list

A reason not to vote Faisal governor

2006-08-13T18:58:00.000-07:00

nalar ekonomi ▪

Here is a reason not to vote Faisal Basri as the Governor of Jakarta.

Don't give us cheap (high-quality) papers. We're rich, you know...

2006-08-13T18:17:00.000-07:00

economics ▪ policy ▪

By imposing an anti-dumping measure on Indonesian paper products, the US Department of Commerce is saying: "Please don't sell us quality goods at a cheap price; we'd like our consumers to pay more for the same goods (whisper: as long as they are made in the Great US of A)!". Anti-dumping policies are (supposedly) enforced against "predatory foreign firms", but the above applications are total nonsense, as pointed out by these and this economists from both sides of the Pacific.

A case against giving

2006-08-13T04:39:00.000-07:00

economics ▪ policy ▪

This post challenged my long-held practice, to wit, never to give to street beggars. More precisely, it challenged me to lay out the assumptions and processes that led me to hold the practice. So, here they are.

As typical with (almost?) all economic arguments, this one has to do with incentives. Although I believe that money isn’t the only incentive influencing a person’s decision to beg (or not to beg), for argument sake, let’s limit our discussion to the financial incentive. For the beggars, this money isn’t free: Beggars have to spend time to obtain money.

Assuming that beggars maximises monetary incentives, a person that decides to take up begging as a job must have weighed their options and decided that begging is the employment with the highest return per unit time given circumstances (i.e., education, existing minimum wage for unskilled labour, and so on). The higher the return, the higher the number of people choosing begging over other types of employment. If you don't believe me, see this article.

Since, for the most part, beggars do not affect others in a negative way – and, often, they even improve others’ welfare by allowing people to substitute their sense of guilt for being unable to help the poor with Rp.5,000 a day – begging is as legitimate a job as any other. It is comparable even to the entertainment industry, which offers nothing more than some subjective amusements that are often of very little value (think of how “valuable” the many infotainment or reality shows really are!).

So, in the same way that I do not wish to support trashy entertainment (by, for instance, sending in those premium SMSs), I do not wish to encourage people to choose begging as an employment. At this stage, it reflects a simple preference: I prefer that begging be reserved for those with no other means of employment; others should try to sharpen their other skills and work elsewhere. I try to do this by minimizing the monetary incentives that beggars can receive at any given day.

But if that’s it, then my reason is simply a matter of preference. However, there is another reason why I think it’s wrong to give to beggars: It encourages the use of children for begging, which reduces the children's time for studying. The more one gives, especially to children, the more likely that these children will spend their time (or be used for) begging instead of studying.

But what about poverty? Didn’t most beggars do it because they are so poor? I am sure that some of them did – but as I said, as the return to begging increases, more people will try to enter into the job market. In fact, the return is quite high: A study mentioned in this article suggested that the gross revenue from begging could be up to Rp.150,000 per day or, assuming a 10-hour work day, about Rp.2,500 per 10 minutes – a quite reasonable estimate for a busy Jakarta intersection. As a comparison, a skilled carpenter gets paid around Rp.50,000 to Rp.100,000 net a day.

With such a high return in an underground economy (where security is an important issue), I have little trouble believing that there must be efforts to organize beggars to avoid continuous conflicts, provide security, or even arrange the “supply” of beggars (particularly from outside of Jakarta). Call these organizations what you want: “mafia”, “preman” or what have you, but they serve a purpose in such a lucrative market.

This is just a hypothesis supported by anecdotal evidence – but a reasonable one at it. If true, however, it is likely that those people doing the begging will only a very small cut from their efforts. This is quite common in organizations that operate in an underground economy (or even in the formal economy): the higher you are in the organizational pyramid, the cut that you received increased geometrically. Freakonomics offered a lucid example in the drug-dealing industry (taken from this paper); anyone reading stories about migrant workers and their organizations will easily reach a similar conclusion.

Again, what about poverty? My concern is that, by ensuring such a high return, we encourage organized begging. Organized begging tends to crowd out the real urban poor that our alms were supposed to help – which is to say, it significantly reduces the amount that actually trickles down to the poor families that, given circumstances, really have no other alternatives to begging. Instead, the money goes to people who were “imported” from outside Jakarta (and those who organised the imports) for the purpose of collecting money in exchange for less guilt for the rich.

So, here is the lesson: To help the poor, you should restrain from giving to ensure that the total amounts of your gifts is so low that (a) it discourages the use of children; and (b) it discourages organised begging. Of course, this is not the only lesson. Another lesson is this: To really help the poor, you really have to want to help the poor – there is no such thing as a free lunch. Which is to say, instead of exchanging guilt with Rp.5,000 a day, perhaps save those Rp.5,000 and each month, give it to an organization that can channel your money to the poor in an accountable manner. I’m sure they are better at helping the poor than those beggar organizations.

Is Indonesia the 137th most corrupt in the world?

2006-08-11T16:21:00.000-07:00

corruption ▪ economics ▪

According to business people surveyed (documented in Transparency International's 2005 Corruption Perception Index), we are. But how accurate is this? Ben Olken's recently published NBER working paper, based on his village road corruption research, shed a light on the issue:

I find that villagers’ beliefs do contain information about corruption... in the road project, and that villagers are sophisticated enough to distinguish between corruption in the road project and other types of corruption in the village. The magnitude of their information, however, is small..., in part because officials hide corruption where it is hardest for villagers to detect. This may limit the effectiveness of grass-roots monitoring of local officials. I also find evidence of systematic biases in corruption beliefs, particularly when examining the relationship between corruption and variables correlated with trust.... For example, ethnically heterogeneous villages have higher perceived corruption levels but lower actual levels of missing expenditures.

Perception index matters for anti-corruption politics, but needs to be taken with a grain of salt.

One concrete way to fight corruption

2006-08-11T07:55:00.000-07:00

corruption ▪ policy ▪

Here is an example of how international bureaucrats can help in the fight against corruption on the ground. From the Guardian.

The traffic officers must have licked their lips when they saw the easy pickings approaching - a luxury grey Toyota Land Cruiser with United Nations number-plates. In time-honoured fashion, one of the officers stepped into the road on the outskirts of Nairobi, flagged down the vehicle, informed the driver that he had been speeding and confiscated his licence and car keys. The driver and passenger would be free to go only if they paid bail of £22 and kitu kidogo, "a little something" of £7.

There was only one problem. The passenger was Colin Bruce, the head of the World Bank in Kenya... and an outspoken critic of the corruption that continues to bedevil the country. Mr Bruce denied that his car was travelling over the 50mph speed limit and asked the officers to produce evidence.

When they refused and threatened to tow the vehicle way, Mr Bruce used his mobile to call Aaron Ringera, the head of the Kenya Anti-Corruption Commission. A team rushed to the scene and ordered the officers to return the licence and car keys. Several other motorists who had refused to pay "bail" were also given their keys back.

A good example for the rest of us. Taufikurrahman Ruki's mobile number, anyone?

To gossip or to watch gossip

2006-08-09T08:01:00.000-07:00

economics ▪ policy ▪

Nahldatul Ulama (NU) declared gossip shows to be a vice because they exposed others’ personal failings to public scrutiny, something that is prohibited in Islam. But Wanti, a housewife interviewed by The Jakarta Post disagrees: Her watching of gossip shows, she argues, reduces time for actual gossiping with neighbours. The question is, were this edict enforceable, would it increase “gossiping with neighbours”?

The answer is a probably yes. No, this is not a mere hypothesis. A study by Ben Olken of Harvard University provides an empirical evidence to support such an answer. But before we discuss Olken’s findings, let’s ask this: What is the most extreme way to enforce this edict? Ban television. Guess what: It’s been done in Indonesia. Not deliberately, of course, but by virtue of poor television-signal reception due to geography.

So, Olken used variations in the strength of television signals in East and Central Java to investigate whether poorer signal reception results in less social activities. Here are his findings:

I find that better signal reception, which is associated with more time spent watching television and listening to radio, is associated with substantially lower levels of participation in social activities and with lower self-reported measures of trust. I find particularly strong effects on participation in local government activities, as well on participation in informal savings groups.

So, Wanti’s probably right: More gossip shows, less gossiping. However, gossiping with neighbours might not be all bad: When done within reason, this activity can increase social capital by increasing trust between neighbours. Pity, it's unlikely to be enforceable. From Wanti again:

I heard that they are going to make it (watching gossip shows) haram (sinful)…I don't care. If I feel like watching them, then I will…What's wrong with it anyway? It's just news.

Those damned Berkeley mafia

2006-08-09T00:44:00.000-07:00

economics ▪ policy ▪

Last week, a friend – a Berkeley alumni – sent a plea to a Berkeley alumni mailing list, asking senior Berkeley alumni to "defend" the almamater from recent attacks on the "Berkeley Mafia". To console, I sent him this link.

A new look

2006-08-08T21:38:00.000-07:00

Thanks to a poor dial-up connection, Blogger failed to save my template midway during an experiment with embedding Google Reader, ruining it. I should have heeded one of the the first lessons of policymaking: Do pilots before implementing "the real thing". Should have tried the embedding in my temporary blog first.

But, I guess it's a blessing in disguise, as it allows me to revamp the blog's look. Hope you like it.

Indonesian no more...

2006-08-07T08:44:00.000-07:00

I've decided to stop writing my blogs in Indonesian here. In this blog space, that is. I am in the process of copying (not moving) my Indonesian entries to here. That's also the space in which my future Indonesian entries will reside.