Wednesday, December 20, 2006

Indonesia: when we should worry with water shortage?

by Dewa Wisana

At the end of the year 2006, people begin to mark year 2006 as “The Year of Disasters”. I do not want to list natural disasters that occur in Indonesia during 2006. It’s too heartbreaking to know that even yesterday; there is another earthquake in North Sumatra and expert said it was only the beginning of a series of another earthquake. I send my deepest condolence for my brothers and sisters in Mandailing.

In Jakarta, I start to observe frequent rain every afternoon or evening. To be simple, it’s a sign of rainy seasons definitely. Many people feel so relieve, except for Jakarta’s government since they have to prepare with yearly flood disaster (or could we called it “never-anticipated-disaster”?!). However, I notice that this year rainy seasons has come very late. There is single serious impact due to late rainy season: drought. It impacted on lack of water supply for agricultural sector and household need as well. As we may notice, there’re hectares of paddy crops had failed to harvest as well as several others hectares of land that totally unable to be cultivated because irrigation system could not support water. In household level, they started not the have sufficient water for daily needs. The wells totally dried up, even that they already digging up again up to 15 meters or even more for some cases. It is clearly seen that drought and water shortage becomes serious problem in many part of Indonesia.

Recently, I watch government television advertisement about saving water usage particularly in household level. We should appreciated this policy, although it not enough especially if we notice that demand for clean water will be still raise up as population also still continue to grow. But, are there any other policies that government should do? There are! At least, they have to start to manage environmental condition related with water sources and flows such as rivers, lakes, water fountains, and many more. On the other hand, increasing capacity of water company’s services is a necessity to fulfill household needs. However, had they notice or thinking about this? I guess not!

That is why I asked the question as in the title above: When we should worry with water shortage? If you believe with The Price of Global Warming, I urge many people and stakeholders to starts worried and take actions on this issue.

Or, would you like to wait until there’s nothing we can do except waiting and extinct?

OPEC and partial cartel (part 1)

by The Dreamer

A few days ago, I read an article on the wall street journal newspaper about OPEC. In the article, it said that OPEC will decrease the output in order to rise the oil price, thus the profit of each OPEC member. After reading this statement, there are several question popped up in my mind :

1. Is it true that the additional profit (of individual OPEC members) by decreasing output (thus price of oil will increase) is at least equal to the (additional) profit by just keep the same or increase the level of output of oil ?

Ok, the answer seems to be quite easy (at least for economics student, doesn’t it?). Now let imposed several additional information : this is a partial cartel. It means that this OPEC competes with other producer ( either by Bertrand and Stackelberg). Thus, any action of OPEC will be responded by other non-OPEC member.

With this additional information, is the answer still pretty obvious?.

To make things get complicated, let’s take into account that there are also potential entrant that will entry if the profit of in the industry is at least bigger than the entry and investment cost.

Now tell me, is the answer is still pretty obvious.?

2. This lead into the second question : is it the optimal action of the OPEC?

For this time, let not discuss it too deep. Since we compare two conditions, we need to the either analytical analysis or numerical analysis.

I think, it is quite tough to be answered actually. For examples, an article by Freshman and Pakes. By taking into account the entry and exit condition, full cartel, and the heterogenous firm, the effort to get the optimal level of collusionunder exit and entry behavior needs a looks-easy-yet-complex computation procedure. Taking into account partial collusion, instead of the full collusion will indeed make freshman-pakes approach becomes more complex.

O k. Just leave this matter into the economist in Harvard or Tell Aviv :D. (Pakes from Harvard and Freshman from Tel Aviv University)

Now, I will not debate this thing. Let’s go back and discuss more basic stuff. Why is there a partial cartel? Under certain assumption (especially the homogenous firms and goods assumption) some analytical solutions, show us that (in case of cournot -not bertrand ) profit of the non cartel firms is higher than the profit of cartel member. If this is true,:
1. why do you want to be a cartel member?
2. why don’t the cartel member invite the non-cartel member to join the cartel. If they do this, they will have a full cartel.

What do you think?

On grandma and land reform

by Dewa Wisana

Initially, my “Labor and Human Resources Economics EIE 31005” class discussed about migration theory and somehow relates the issue with poverty. Then, Isya - one of my student - raised a question about land reform as a solution to cope poverty. Since my counter to her argument seems not so satisfied for her (I suspected so), then I invite her to write down again her argument in the form of essay or article. So, here it is. Please welcome this interesting and quite well-written essay of Isya Hanum.

I like her style of writing, and especially her last question “So, where’s the devil Sir?” I guess I will make this kind of invitation again for my other lecture, and selectively published them so the student will have motivation and continue the culture of “free-academic-speech” (read: mimbar bebas!).


Dear Sir,

Someday I would like to introduce you to the Ratman family. Ratman is the eldest of 9 sibilings, his parents came straight from somewhere near central Java. They live not 2 kilometers from my house. Ratman family Sir, is in the garbage business. Their property?a humble shack just beside a dumpster that amazingly (almost magically) fits 11 people (and ironically they are neighbors to an elite private school). This is a question that keeps popping in my head: If the Ratman family get a piece of land back home from the land reform policy how would it be wrong? And if the rest 24.8 million poor people in rural areas and 14.3 million poor people in urban areas get a piece of asset that they could not have/ afford otherwise, wouldn’t they be better off and then wouldn’t they be a valuable economic force? Sir, my grandma would ask the same thing.

So then I orchestrated a simple plan in my mind. First and foremost, whose land to be given away??? There is an 8.15 million hectare empty land [1] (14 times the size of Singapore), that is possible for crop growing and free of ownership. Done ! =).

And now if I were Ratman, who’s finally got a land from the government, I have two choices: trade the land for fast cash, or take the whole family and move out of Jakarta to cultivate the land. Now being the government again, of course I’d want Ratman to go home and cultivate the land, so all I need to do is create a set of law that is strong enough to impede Ratman from selling his new land land immediately.

Now, to cultivate the land Ratman Labor, Machineries, Fertilizers, etc. And how could he afford them? Loan sharks are available and easy. But as the government I have an obligation to save Ratman from loan sharks (or death by loan sharks) by bridging the gap between demand for capital and supply of capital. Thus access to capital must be made easier, collateral need not be obligatory, monthly installments should be moderate and interest should be lower than conventional banks (like Grameen Bank).

After attaining capital, Ratman needs machinery to be more productive (it turns out that his parents, 8 siblings, and 2 cows as a manual tractor is not enough). Again market mechanism could not help Ratman to afford/ buy tractors (just like it could not help ratman afford land). So again I have to make access to agriculture machinery easier. I guess through soft loan, subsidies or grant. I have never noticed the echo of “mechanical agriculture” in Indonesia Sir, or is it just me? I know US has done it a century ago though, and India too, like in the 60s or so. With more land cultivated and more machines in agricultural sector, national agriculture productivity can be boosted. I believe mechanized agriculture is impossible without land reform, because fixed land and more machines means many “buruh tani” will be out of job.

The story goes, now Ratman’s land is very productive, but his village is so remote that only 1 purchaser can afford to access Ratman’s location, moreover Ratman has no access to the bigger market. New problem arises: that purchaser has too much power to set price. Ratman has no choice then, he and his friends would have to sell their bountiful crops to this one guy, with a bad price. To prevent this, I have to make market more accessible to Ratman and his friends. First, build road, bridge, port or airport: infrastructure! Second, when national demand is fulfilled, I have to make foreign market accessible to Ratman and his friends. Lobby foreign countries to lower trade barriers for our agricultural commodities.

That Sir, is my simplistic view on land reform policy. I believe that it could not work alone, definitely should be followed with policies that make capital, machinery, and market more accessible to those who get the land. Only then can it be effective and it can be a rural pull-factor because it reduces rural-urban income disparity and thus will reduce rural-urban migration. It can reduce poverty, it can reduce unemployment. Although the 8.15 million hectare is projected for only 4 million families, it can alleviate the prosperity of 12 million poor people (assuming 1 family= 3 people), not bad.
So where’s the devil Sir?

best regards.

Isya Hanum

[1] Tempo Magazine, 4-10 December: p.46

Saturday, December 09, 2006

Poor farmers: credit access and social capital

by Berly

The Physiocrat school from France in 18th century put supremacy on land. Even though recent economic research suggest innovation as the engine of growth, Quesnay and his heirs have many strong points. Indonesia certainly can learn from land reform conducted in China (communist) and South Korea (non-communist) which provide strong foundation and more equality for future growth.

The land reform process needs an honest, comprehensive and scientific assessment (both on whose land, which land and for who), restriction on selling the distributed land for medium period and government credibility that this will be a one time measure (otherwise resources will be spend to get more land and to defend land). I had a long discussion with a Fisipol- UGM lecturer doing post-doc in U of Amsterdam and sadly those conditions are far from fulfilled in Indonesia. Furthermore, results of recent land reform in Indonesia have been rather unsatisfactory (most recipients sell their newly acquired land shortly).

If one of the main benefit on enlarging the land possession is the access to credit market lets focus on the credit market it self. The assumption of no credit constraint is one of neo-classical economics most un-applicable preconditions. That’s why Muhammad Yunus and his Grameen Bank justly deserve his Nobel Peace Prize (I would add the Nobel Economic Prize as well) for opening up credit access to poor people.

The late M. Hatta returned to Indonesia after watching admirably the cooperative system in Europe that increase collective bargaining power of farmer, get rid of wasteful middle man and sell the product directly to consumer. The cooperative employ capital (instead of the other way around) to build vast network of suppliers, processing plant and end-point shops. (for farmer cooperative on Tuscany click here).

Why this is not happening in Indonesia despite heavy constitutional mandate? One line of argument (beside low education level) put the blame on low trust/social capital (read Putnam and Fukuyama) among Indonesian farmer that inhibit them to pool resources for common good, low recognition for property right (many farmers still don’t have the ownership certificate of their land) and low credit access.

Let’s prioritize on the farmers. BPS Report for February 2006 show that 44, 47 % of Indonesian workforce are in agricultural sectors. But the trend in developed countries is a decreasing tendency then to stable around 5 % of population while increasing the efficiently of agricultural production. Some researches (sorry I forget the authors’ name) found that very few Indonesian farmers want their children to be farmers. So why not honour their wishes and improve out education so their children have multitude of choices of occupation in the future.

Friday, December 08, 2006

A Game Theoritic Analysis of Polygyny

by Berly

We will discuss the current hot topic in Indonesia (Hollywood already has a TV series onthe topic since early this year) in economics context. I will employ game theory as tool of analysis since it involves strategic interaction and the payoff depend on other people’s response. (for quick review click here)

The etymologically correct term is polygyny since polygamy is the case with multiple spouses for both genders (the term for one woman with many husband is polyandry).

Let lay out the assumptions. I assume common knowledge (structure and payoff) and reveal preference (the husband will tell truthfully whether he wants poliginy and the wife will tell truthfully whether she accept it or not).

I don’t know how to draw the game tree in blogspot so verbal description should do.

It is a two stage game where on the first stage the husband decides whether to do polygyny and tell his wife. I will only discuss the case of husband with poligyny inclination since otherwise nothing happened and the couple stay monogamous. On the second stage the wife decide whether to accept her husband intention to do polygyny or not.

For husband the preference in descending order is polygyny, monogamiy (with first wife) and divorce first wife to marry the incoming woman (before receiving complains, this condition not apply to all men/husbands). I will discuss the wife's preference a bit later.

Since the husband strictly prefer polygyny to divorcing the first wife to marry the incoming woman then the first wife could threat for divorce if she don’t want poligyny. The husband cancels his intention and they stay monogamous.

Why this is not always the case? The threat is not credible if the husband know the first wife’s preference is (in descending order) monogamous, polygyny & divorce. Meaning the husband know the wife in the end will choose to accept the second marriage than get divorce and be a widow.

The financial struggle of non-working women to get new job after long unemployed is an uphill struggle. There is also problem of society looking down on widows and the difficulty to get new husband after divorce.

First wife everywhere! You can, paradoxically, prevent your husband (if he has the inclination) from conducting polygyny by credibly demonstrating your willingness to divorce him.

So get a good job with decent salary, keep the social network (in case you need better job/ husband) and staybeautiful. You will keep your husband of yourself as long as you want him (caveat, if the assumptions used above are applicable in your case).

More economics of polygyny by our Anglo-Saxon friends here (I also recommend this and this movie for weekend).

Wednesday, December 06, 2006

poor farmers: access to land

In responding to Peter Timmer in Jakarta Post (here) and recent discussion in kafe depok, I would comment on the point on the lack of agriculture land. Since the debate of rice economy mainly discusses who should play a role in food policy, the market or the state? Let step aside from it and look back to farmer’s household having tiny plot of land. What is wrong with that? It is argued that small plot brings lower yield regardless the productivity probably be higher with advance investment. It is true though. But this is not the farmers’ fault having small plot of land.

(read more here)

to conclude, if we want to improve the welfare of the poor farmers but they do have tiny plot, why dont we give them the land for doing farming?