The Upcoming Financial Crisis... in US?

Germany's market was down 7.4 percent, Japan's 3.9 percent and Britain's 5.5 percent. Hong Kong's Hang Seng index nosedive 8.6%, Tokyo's Nikkei 5.7% and Mumbai's Sensex 12.9%.

Time Magazine call it a worldwide mini-meltdown. George Soros declare it as the the worst market crisis in 60 years

In his book entitled The Return of Depression Economics, Paul Krugman wrote on how bad things could happened to good economy largely due irrational expectation and market psychology.

But can good thing happened (for a while) to a badly managed economy? Let me quote rather lengthily from Krugman’s recent article on New York Times:

“Mexico. Brazil. Argentina. Mexico, again. Thailand. Indonesia. Argentina, again.

And now, the United States.

The story has played itself out time and time again over the past 30 years. Global investors, disappointed with the returns they’re getting, search for alternatives. They think they’ve found what they’re looking for in some country or other, and money rushes in.

But eventually it becomes clear that the investment opportunity wasn’t all it seemed to be, and the money rushes out again, with nasty consequences for the former financial favorite. That’s the story of multiple financial crises in Latin America and Asia. And it’s also the story of the U.S. combined housing and credit bubble. These days, we’re playing the role usually assigned to third-world economies.”

America, you are next!

P.S.

Stiglitz propose a series o policy to stop the downturn here

Teach me international-trade!

(An inquiry on exports versus import)

Honestly, I am really not proficient on international-trade economics. All I grasp about international-trade are that it happens as consequences of open economy-system, gap between domestic supply-demand and international supply-demand, and absolute-competitive advantages. Yet it is really hard for me to answer a grandma test on what is competitive advantage? Thus, my most understanding on this area conceptually only with two related activities: Exports and Imports. However, please let me jot down a bit my international-trade economics homework through this blog.

When analyzing the international trade structures, we simply observed two trends:

1) Growth on export per GDP vis-à-vis import per GDP; and

2) Composition within exports and imports structures themselves.

I have been taught that when analyzing former trends, as for developing countries, there is a strong believes that encouraging export is much better than import. The underlying argument is because imports in developing countries also high. Why? We can argue by looking at types of goods being imported and phases of imports strategies. There are three types of imported goods:

1) Consumptions goods

2) Raw materials and auxiliary goods

3) Capital goods

Firstly, countries will import consumptions goods since they are unable to produce enough consumption goods demanded by domestic markets. In this first phase, countries will apply import substitution policies only if they able to produce the consumption goods. At the second phase, the countries still need to import raw materials and auxiliary goods since it is highly needed by the manufactured industries which producing consumption goods related with the first phase. Finally, at the third phase as the countries need to increase their production capacity and enhanced their production technology, they need to import capital goods to be able to enhance their output and increasing their economies of scale. Obviously, by giving intimate attention at the second and third phase, developing countries’ import growth will be faster than GDP. Thus, to finance the accelerating imports, exports should be growing faster. In a more ‘for-grandma’ words, exports are good while imports are bad. Do you buy this argument or not?

Until last week, I put up with the above arguments. Then, I read Aaron Schiff’s blog titled Down with exports!. Schiff posted about one of Steven Landsburg arguments in Landsburg’s book The Armchair Economist that exports are actually bad while imports are obviously good. How is it so? Using simple illustration, Schiff explained as following:

First imagine you are living on a deserted island and you have to provide everything for yourself (this is like a country with no trade). You can only eat fish that you catch. You’re doing ok by yourself, when one day a helicopter flies overhead and drops you a fish, and then flies off again. This is imports, and it makes you happy. You got a free fish that you didn’t have to catch yourself, so you can either spend the same amount of time catching fish as you usually do and have an extra fish to eat, or you can spend less time fishing and have the same amount of fish as usual. Either way, you’re better off. Then the next day a bunch of pirates show up in a boat and demand some of the fish that you caught, but give you nothing in return. This is exports and it makes you unhappy because you spent time catching those fish and now you can’t eat them yourself, so you either have to go hungry, or spend more time fishing. Either way, you’re worse off.

The same idea applies to countries as a whole. The only good thing about exporting is that it allows us to pay for imports. There’s nothing good about exports per se, as exports without imports would be just like the pirates above. As every first-year econ student knows, every country has some quantity of scarce resources (land, labor, capital, etc). Exports involve sending these scarce resources on ships and airplanes to other countries. Why the heck do you want to do that?! These are the precious resources that your country has to produce things for itself! It’s only good to send these scarce resources elsewhere if it allows you to get some other country’s resources in return as imports. Then the theory of comparative advantage tells us that countries can specialize in producing what they are relatively more efficient at, and both sides can gain.

As Landsburg alludes to, the common belief that exports are good and imports are bad comes from focusing on output-based measures of economic activity and success, such as GDP. In GDP calculations, exports are added and imports are subtracted, so more exports and/or less imports makes GDP go up, which some people think is a good thing. However, return to the deserted island example. Suppose you like to eat three fish per day and it takes you three hours to catch them. Your GDP is three fish per day. Now suppose the pirates come every day and demand two fish. Since you don’t want to starve, you spend five hours per day fishing and catch five fish, so you can still keep eating three fish per day, and “export” the other two. Your GDP went up to five fish per day, but you’re less happy than before — you’re eating the same amount of fish but working harder. So an economy can “grow” by increasing exports while keeping imports unchanged, but this isn’t going to make anyone happier.

Since I am not a proficient international-trade economist, Schiff's illustration somehow takes away my agreement on previous argument that exports are good while imports are bad. If any of you feels that Schiff’s arguments are not make sense, could you teach me again about international-trade economics?

KaFE Depok is on Top Ten Blogger Indonesia 2007

After long year end holiday and a series of harpitnas (hari kejepit nasional), it feel so hard to grind the mind and pressed the keyboard again for a witty post on this blog.

After all, we are have been educated in Western Europe that even though has high productivity but used to shorter working days (click here for comparison) than the Anglo-Saxon and East Asia counterparts.

There is no wake up call like an undue honor and recognition.

Fatih Syuhud, one of the most senior and respected Indonesian blogger, has listed KaFE Depok as Top Ten Blogger Indonesia 2007. He put us on number seven and wrote that we, "even in a blog posting … writes seriously with many citations, making blog-articles worth an academic paper”

As we wrote on the profile, KaFE Depok is a place for "ser-san" discussion. We see simplicity, but with hard theories and data behind, as a worthy aim since many economic issue seem to be made more complex than what it is. Democracy and good policy required good understanding of economics.... And of course we tried to have fun while doing it.

Rizal Siddik, our senior in FEUI and blogosphere, put it best in his Jakarta Post article (click here),“Almost every opinion widely held by the public and spoken fluently by most newsmakers has not been carefully made and is often against what elementary economics teaches…. We need more public education in economics to fight economic illiteracy.”

Looking back to our blogger of the week honor last April, let me quote Fatih Syuhud’s note on us, "I feel even happier to see that Kafe Depok understands very well the "art" of blogging. The art of interactivity and show of humility. Academicians used to be dubbed as the "ivory tower" who used to expect accolade and standing ovation from the bottom without any need to reach out to them”

May we continue to learn the art of blogging.

Simple assessment of new emissions tests

My concern with this issue started after I read a news titled "Motorists to pay for emissions tests". At the end of the article, one university student raise his opinion as

"I agree that emissions tests are important, but I don't want to pay 100 percent of the fees if I have to just clean up my exhaust because my carbon emission's too high. It would be too much"

That statement is clear shown that the Governor have not yet realize what is the "costs" of emissions tests. In this case, I mean the following costs after emissions tests. I believe, Mr. Governor only concern that emissions tests will force people to be more cautious with their vehicle's emissions and or the tests could generate revenue. Actually, Mr. Governor must concern several aspects not only "enforcement" and "revenue" factors.

There are three aspects that he might be consider before applying - supposed to be - environmental policy: 1) cost efficiency, 2) administrative and practical feasibility, and 3) fairness in the distribution of costs and benefits. Lets assess Mr. Governor policy with the three aspects mentioned.

Cost efficiency: The emissions test pay policy may be cost-efficient policy in terms of the basic idea of the test it self. By conducting the single-uniform test for all kind of vehicle, we could recognize how many vehicle contribute pollution and then we can set an exact target of how much pollution need to be reduce and in which way. Theoretically, the tests itself could be used to calculate marginal abatement cost from each polluter (vehicle users). However, in terms of calculating abatement costs, the fact that there are more than 9 million people living in Jakarta, plus 3 million additional people around the peripheral area, it will be very difficult to identify the marginal cost of abatement from each vehicle. In short, the test might be an efficient way just to know the total pollution produced by registered or voluntarily vehicle tested, but not so efficient for reducing pollutions. Moreover, the fee for emissions tests itself is possibly quite affordable for most of vehicle users. But, if the owner have to service and conduct special maintenance for their vehicle to reduce the emissions due to the emissions tests results it will not efficient at all for the owner. This argument will be related with distribution of fairness that will be discuss later.

Administrative and practical feasibility: This policy is obviously feasible to conduct. However, the lack of proper and efficient system in administration may be results to low monitoring, low enforcement, and potential corruption. Administering "lots of" vehicle is the critical issues here. When the administration transfer the decision of whether a vehicle is required to be overhauled or not due to high emissions to a particular repair shop, it requires high degree of monitoring and enforcement. Maintaining the credibility and capability of selected repair shops is another critical issue of monitoring and enforcement on selected testing agent. With a huge number of vehicles in Jakarta, this policy is administratively becoming very sensitive to conduct. It will need intensive monitoring system, sophisticated enforcement (especially for private owners), and special bureau to supervise the selected testing agents.

Fairness in the distribution of costs and benefits: There are three groups of economic agents that involved in the selected policy, the vehicle owner, the testing agents, and local administration. For the local administration the policy seems very inexpensive at all. For the vehicle owner, the testing only is not that so expensive - should be. But, potential additional cost for engine maintenance to meet the requirements must be very significantly unfair. How can we identify by how far our cars need to be repair to meet the requirements? In this case, the testing agents is the first economic agents that possibly gain benefit from this policy. While the local administration gain benefits in terms of targeted lower pollution (we can debate on this later), and testing agents benefited from testing fee and additional services costs that might be occurs; the vehicle owners is the only entity that face the uncertainty and should be cover the costs. It is obvious that small firms and company in transportation sectors will be suffering most from this policy because they have to face huge overhauled engine of their vehicle fleets to meet the emissions standards.