Wednesday, May 16, 2007

Just an Added Thought on Institutions

Firstly, I owed Berly for this brief essay, because while trying to answer his question, I end up with this too-long-comment-reply, of which was a good-productive thing though. And so here we are.

A complete institutional structure consists of three parts: Formal rules, Informal rules and Characteristics of rule enforcement. In my humble opinion, the main problem now is within the first one (Although I also believe there are several significant problems with the two other parts, but let me just emphasize in the first in this case) .

The general function of the formal rules is to enhance transactions on political and economic markets. In democracy (such as Indonesia right now), the exchange on political markets determine the economic rules. So then inefficiency in political markets will bring inefficiency in property rights, and inefficiency in the latter will eventually lead to socially inefficient organizations, increasing costs in transactions and then reducing the probability of mutually beneficial exchange through specialization within the economic markets. I think this is the updated problem in a newly-democratized Indonesia.

There is a very high transaction costs on political markets, because of little transparency of the political processes, little competitions among them, and the last important thing, is that we do not have the constitutions that brings the self-interested politicians in line with the creation of this efficient formal-economic institutions. A quite similar conditions also hold for Thailand and the Philippines, where military-feudal-based political interventions are still used up till now.

Let's then have an example for the latter point:
Right now the Assembly is busy drafting a bill on political parties, which includes one of the controversial articles regarding the possibility of Party Owned Enterprises. (What is this crap???!!)* Personally (again) I think this is an outrage.

Politicians are also always being self-interested and utility-maximizing agents. If constitutions do not align with the people sovereignty, politicians will not promote their economic interest in the course of pursuing their private goals. So it’s a necessity to restrict politicians constitutionally (Hayek). And that's what we’re lacking off. And as a now-democratic-state, it's remarkable that up till this point there are no efforts to propose such draft of constitutions. Well, this emphasized one of my points before of why institutions in Indonesia are still very weak, and hopefully this also can answer the question from Berly’s comment. Or maybe I shall make some essays discussing more about these institutional-constitutional frameworks later on. Happy Christi Himmelfahrt** holiday, and let me finish this essay with a quotation from Boediono, of which I quoted from one of Prof. Hal Hill paper: “‘Beware of possible disharmony between politics and economics.. Never take economic stability for granted... Institutions and governance should receive the highest priority in the overall strategy” (Boediono, 2005, p. 323, on lessons learnt)

* Please kindly ignore this author’s self-comment
** The ascension day of Jesus Christ in German words

Tuesday, May 15, 2007

A Brief Institutional Analysis of The Cabinet Reshuffle

„....creation of new rules does not in itself immediately produce new stable forms of behaviour… while rules can change overnight; individual responses will be much more complex and slow to adapt.”

These quotations from Douglas C. North, a profound institutional economist, were the first thing that came out of my mind when I heard that the President finally announced his cabinet reshuffle. So what’s exactly this quotation mean? And what are the relations with the Cabinet reshuffle? Well, we shall proceed then, and I hope I can briefly explain my intentions.

So here it comes. I believe that
institutions in Indonesia are still weak. And so what is institution anyway? In this sense, let me once more, quoted from North. He clearly point out that institution is the rules of the game. Institutions are humanly devised constraints that structure human interaction, or moves of the game. It’s the circumstances that make self-interested-homo-oeconomicus constrained with bounded rationality chooses their optimum pay-offs. In this part, let me generalize and simplified institutions as regulations, so that I meant that regulations in Indonesia are still very weak. In developed countries, each regulation is a prime and clear signal to the market or individuals, more than the person who is (politically) in charge, endorsed or made the regulations. But in Indonesia, it’s vice versa, as people seem more interested in who’s in charge. And I’m not going to blame them, because that’s how it works. New minister, new regulations, and that’s all what they believe for the truth. And if it’s true, so what’s the fuss about reshuffling? New regulations will bring new complex frameworks of social interactions associated with more uncertainties. And in the sense of institutional economics, this will eventually lead to higher transaction costs in the expense of economic performance and growth. And this is what the quotation is all about (and for the sake of the readers I shall not write it again).

In Indonesia, new ministers could (eventually) mean new regulations, and if they are not in the footsteps of the old ones, they are a step back. We can obviously saw the disputes about regulations among the ministers not so long ago. And replacing the ministers is not the answer. I’m sure that we will see more to come. And this is what will happen if reshuffling is only a case of political adjustments. Reshuffling is OK, but regulations, if they were agreed for common sake, let’s say of those which normatively maximize social welfare, should be kept intact.

And so let’s go back to the general analysis of institutions. In the case of newly-democratized Indonesia, it is important to recognize that economic development alone will never adequate and should always be paired with institutional development and awareness. In general, modernization is defined as process of improving the capability of a nation’s institutions to meet increasing and different demands. And thus a modern nation is one in which the institutions are able to meet or adequately handle the increasing and different demands made on them. Growth in economic development is change, and change is inherently “destabilizing”, especially in the era of globalization where domestic issues and international challenges can no more be separated. Altogether, there is one important future challenge for Indonesia; on how can it adopt changes due to socio-political pressures needed for a successful economic development, and thus learn that institutions do matter.

Monday, May 07, 2007

Can Money Buy Happiness?

Ah, one of the oldest philosophical problems and many fine movies have made this topic so alive (The Little Poor Rich Girl by Shirley Temple come immediately)

If money buys happiness then it worth to go through all the hard work to get money. If not, then why so many people continue to spend most of their time to get money which has little effect on happiness.

There has been numerous studies (click here for wide array of it) on happiness and income. Easterlin is one of the earliest economist to go through happiness data (from self declare dataset) and found paradox of happiness. People with same amount of money tend to be happier in poor country, but happiness don’t increase over time with economic growth. Is it possible that it is relative income having more impact to happiness instead of absolute income?

A global study of Sexual Attitudes and Behaviours by Pfizer in 2002 seems to be an odd way to study the relation but please bear with me for a while. It has more than 27 000 respondents from 28 countries with fascinating questions. (yup, sometime I have too much available time)

Three of them will be used in this mini study (How happy have you been with your life in the past year? How physically pleasurable did you find your relationship with your partner to be in the past year? How would you rate your overall health?) The numbers are in percentage of population stating they in moderate/good/very good (answer 3-5 in a scale of 5). Quite interesting to know that Indonesian has the highest number (98%) for question number two with Japan as the lowest (57 %).

I pair the data set with average income per capita of each country for that year, adjusted for cost of living or as purchasing power parity (PPP) in economic jargon so it is comparable across countries. Then I set up a log liner regression model with happiness as dependant variable and income, health and physical relationship as independent variable.

Before going to the result, some caveats need to be address (especially for economists and econometricians out there). There are some issue on subjective data, not that subjects intentionally being untruthful but they may have recalled problem. Some studies found that when asked about the past subjects tend to put emphasis on the extreme than average. Furthermore, I only got the average percentage of each question not the complete panel so the result is not as robust as when I can get the income of all participants. But as Donald Rumsfeld would say, you do regression with the data you have and not the data you want (hey, this is not my PhD dissertation).

I found that income has no effect what so ever on happiness (P value = 0.4472). On the other hand, health is has significant effect. (P value = 0.0140) and one percent increase of population that satisfied with their health correspond to 21,4 % increase in happiness. What about the last variable? The significant level jump to the roof (P value = 0.0001) and one percent increase in population satisfied with their physical relationship correspond to 39.58 % in happiness.

Hmm.. More study certainly is needed. If government want to increase people’s welfare, should it put more emphasis on *ahem* quality of life aspects than the usual investment/productivity/industrialization? So if you have been feeling unhappy lately despite all the material achievement, relax a bit and listen to the old tune by Rolling Stones:

I can't get no satisfaction

I can't get no satisfaction

'Cause I try and I try and I try and I try

I can't get no, I can't get no