Optimizing The Trickle Down Effect Policy (2)

With the ideal scheme, the trickle down effect policy has been placed inappropriately in terms of implementation. Various researches have been done but it fails to reach the true answer. The basic accusation for the flaws in policy seems to lead to an inaccurate subject: Corruption. Yes, corruption is being accused as an antithesis of the policy in which functions to drain the resource that goes trickle up and more to become a paradox in growth. This is a result from an exclusive economic growth which leads to a widening in gap between rich and poor. It is agreeable that corruption would go against all norms, as it will impede development by the dysfunction of a political system or institution in which government officials, political officials or employees seek illegitimate personal gain through actions such as bribery, extortion, cronyism, nepotism, patronage, graft, and embezzlement.

But it is important to note that the above evil description of corruption would be true if the funds from the corruption flows outside from the country, the result would be different if the funds were invested domestically. This goes with the assumption of the trickle down effect idea about domestic investment. In an extreme scale, it can be said that a person who does mega corruption would not make the state runs into bankruptcy as long as they invest the funds within the country since in this way the ideal scheme of trickle down effect would work. Again, this is not a technical justification of corruption since I agree that corruption is a moral crime that should have the most menace compensation. But, the war against corruption in Indonesia still accounts as revolutionary and needs some political consideration. The question is how long the sustainability of economic development could withstand the pressure of political uncertainty? A most widely known word of John Maynard Keynes could be set as a background: “How long is the long run? In the long run we are all dead.”

The optimal solution to barricade the flowing funds in the country from going outside is through system of incentive, good governance is one of the ways. There are four main barriers that impede a sound investment climate in Indonesia: inefficiency in bureaucracy, the lack of labor regulation, the lack of tax incentive and the unprepared infrastructure facilities to support investment activities. The lack of investment is also caused by the high cost economy, the lack of government support to provide stimulus and the lack of bank financing. The government has to pay major role to tackle this problems so that the policy would function effectively.

Optimizing The Trickle Down Effect Policy (1)

The discourse about trickle down effect policy often headed to a social stigma in which proclaims unanimous decision. Every topic about this policy must have lead to an unfair trial. The one who lean towards this policy would be condemned by the post development activists and to be judged inappropriately.

Words contain abusive meaning such as pro status quo and anti poor are becoming day to day activity.

This reaction might be a rational justification since the history has told us about the incapability of the policy to make leverage towards people well being. Instead of creating the distribution of income, the policy creates a large sum of capital accumulation towards an elite group which is widely known as the conglomerates. The fact creates another term of the trickle down effect policy: conglomeration. The term used in political rhetoric to classify economic policies perceived to benefit the wealthy and then "trickle-down" to the middle and lower classes. Efforts to lead people opinion are justifiable as log as it has some basic proof. The efforts would be unjustifiable if it is only based from sentiments.

The ideas derided as "trickle-down economics" are often seen as a major rhetorical variant of "what's good for business and the rich is good for the country." In this form they have been ridiculed by Franklin Delano Roosevelt as "toryism." The economist John Kenneth Galbraith noted that "trickle-down economics" had been tried before in the United States in the 1890s under the name "horse and sparrow theory": "if you feed enough oats to the horse, some will pass through to feed the sparrows." Galbraith claimed that the horse and sparrow theory was partly to blame for the Panic of 1896. In the principle, the policy places the haves as the main class to be considered to accelerate economic growth. The theory states that if the top income earners invest more into the business infrastructure and equity markets, it will in turn lead to more goods at lower prices, and create more jobs for middle and lower class individuals

This scheme operates from a basic idea in which describes that income can be functioned from three main aspects: tax, domestic demand and savings. Income empowerment through tax would accelerate public investment sector. The public investments could have the form as tourism development, social capital stock enrichment (roads, railways, ports, and electricity), agricultural investment (irrigation, consolidation, mechanization) and energy resource development. Investment in these sectors would attract investors to join the development activity due to the complete temptation from the industries in which being supported by advanced facilities that will boost business activities.

Meanwhile from the other side, the increase in income would raise the proportion of domestic demand that would contribute to the economic growth. This functions naturally as we already recognize that consumption is the major supporting actor in promoting economic growth in Indonesia over the last decade or so.

Aside from tax and domestic demand another aspect from the policy scheme is saving. The increase in income would have a positive relationship with an increase in saving due to the increasing proportion of income that can be saved. As a result the funds from the saving could be functioned by the banking system to be channeled for the private investment needs. The increase in private investment will accelerate economic growth through the increase in business activities.

As a conclusion, the transmition mechanism explicitly accounts the merit of the conglomerate in supporting the economic growth. Thus, in a trickle down economics context, the economic growth would increase the total welfare of the people.

In Memoriam: Reform's Activists

Hari ini 10 tahun yang lalu
Tercecer darah dihujam peluru
Tentara bengis merenggut kibaran asa
Pekik tangis menyentak kalbu pertanda tutup usia

Impian di pendamkan selongsong peluru
Idhin sang ustad ingin bergelar Insinyur
Ditanya sang ibu 10 tahun yang lalu
Kapan engkau pulang nak?
Idhin menjawab, akan pulang hari Rabu
Idhin pun pulang tapi sudah terbujur kaku

Elang sang pelukis ingin bergelar arsitek
Ditembak dihalaman gedung
Peluru berlaku algojo
Pengoyak kanvas masa depan

Hendri berujar pada sang kakek
Pantang aku mundur dari garis terdepan
Peluru mengoyak sang komandan
Sapu tangan merah ditinggal untuk sang pacar

Heri bermimpi jadi pengusaha
Proposal ratusan juta sudah di depan mata
Nyawa pun terenggut
Usaha tak pernah terwujud

Hendri merantau hendak menjadi ekonom
Elang bersusah ingin jadi arsitek
Heri bergumam jadi saudagar
Idhin ingin jadi tukang insiyur
Kini arsitek, ekonom, saudagar dan insinyur berkonferensi di liang kubur

Tentara bengis entah siapa yang komando
Merobek, mengoyak, merampas mimpi sang muda

Catatan kuliah, sepatu, pakaian dan topi
Saksi bisu perjuangan
Hidup pun diakhirkan
Oleh sebutir peluru
Hari ini 10 tahun yang lalu

Trade Institutionalization

From the above figure we might say that China is posing a threat to the Japanese Economy by its intense competition. The intensity more or less came from the import substitution strategy in China. With this policy, China eventually learn to produce the imported goods domestically in which threatened the sustainability of the Japanese Economy, or to make it simple: Chinese products are everywhere in Japan! This might lure the Japanese Economy wouldn't it?

With the precedent fact, will the triangular agreement between Japan, Korea and China in the form of EPA (Economic Partnership Agreement) give benefit to Japan?

To answer this question, I made a projection based from series of quarterly data ranging from 1985 to 2004. The variables in the research consist of the Japanese GDP, the Japanese Export to China and the Japanese Export to Korea.

In the case of Korea, there is a positive impact both in the short and the long run. The export to Korea will boost the Japanese GDP in a one way or another for a stable period of time.

What about China then?

In the short run, the Japanese Export to China leads to an overshoot in the Japanese GDP, suggesting that in the long run the Japanese Export to China will loose its significance to the Japanese GDP due to the rapid learning curve of the Chinese production capacity in which eventually leads to a lesser dependency from the Japanese products.

But, it is important to note that the adjustment rate from the equilibrium error ,that concludes the overshoot in the short run, is very small suggesting that the positive effect from the export will last in a considerable time.

The same positive effect is true from the Chinese and the Koreans point of view

Thus, the institutionalization of trade among Japan, Korea and China is a very constructive way to built fundamental growth in the region. This preliminary study serves as a complementary research with regards to the previous one.

Another question might be raised based one the Bhagwati's spaghetti bowl effects. The EPA might serve as a form of Preferential Trade Agreement, which according to him is a stumbling block toward integration. But, as you can see from the EPA, it is initially driven from the GATT and the WTO and it is even moving towards beyond it. So The EPA is not even a PTA because of the uniqueness. So, would you　mind cherish the EPA?

Aisha Rihana Hastiadi

Lahirlah sudah ke dunia

Seorang anak manusia

Aisha Rihana Hastiadi

Demikianlah orangtuamu memberi nama

Anak ku itu

Lahir di negeri yang tengah gontai

Lahir di tanah serampang

Lahir di negeri penggunjing

Anak ku itu

Lahir ditengah kegalauan

Lahir ditengah keterpurukan

Lahir ditengah kaum yang bejat

Kerisauan dan kegalauan menjadi sebuah pemakluman

Risau karena dunia bertambah bejat

Galau karena dunia mulai didominasi syahwat manusia

Syahwat kekuasaan, Syahwat penindasan, Syahwat berutang

Sungguh berat bebanmu nak

Berat akibat bangsa yang salah urus

Berat akibat bangsa yang termarjinalkan

Berat akibat bangsa yang terlampau banyak berutang

Duniamu kini nak

Berbeda dengan dahulu

Dahulu bugil adalah porno

Kini bugil adalah karya seni

Tak rela ku sampaikan cerita

Cerita kejamnya dunia

Cerita beratnya hidup di dunia

Beban kini berada di pundakmu nak

Karena engkau adalah sebuah pengharapan

Harapan akan masa depan cerah

Harapan akan sebuah kebangkitan

Aisha

Memegang asa

Melantun rasa

Menyemai jiwa

Voters Optimalization; A Game Theoritic Approach

A colleague of mine placed a political phenomenon into an economic framework here. Well, I think it was a nice one which makes me want have one in this blog. My emphasize is on the Optimal Voters achievement using the game theory model.

I simplify the case into a two party competition case. In this simulation, each of the parties face three possible options in which describes political preferences to a candidate in order to win the election. The options are; pairing with Incumbents, (Inc), Celebrities (Cel) or Military figure (Mil)

Here is the table:

		Party II
		Inc	Cel	Mil
Party I	Inc	1,0	0,1	1,0
	Cel	1,0	?	1,0
	Mil	0,1	0,1	?

I place this simulation in a complete vacuum in which assumes the parties do not communicate to each other. Party I is a dominant party in which has a bigger voter base than party II the mediocre one. I base the simulation from the precedent elections which have taken place throughout the country, ranging from municipalities to provinces. Moreover, I assume that all of the party representatives in the election are newcomers, leaving the partner into the above mentioned variables

If party I choose to pair up with incumbent, the party would most likely win the election (1,o) unless party II choose celebrity to be a partner (0,1). If party I pair up with celebrity, they will win the election while leaving party II behind since the odds will be on the dominant side. What about the question mark then? I will explain it at the end of this post.

And here is the interesting part, pairing up with a military figure would then justified as a winning ticket, well then, it serves only in a mythical manner. A party that choose a military figure will only sit on the loosing side.

So, what about the question marks? The question marks will only presence if both parties choose celebrity vis a vis military figure. In this situation, the winner would be the party in which their political engine works the most. A cadre based party like Justice and Prosperity Party (PKS) would undoubtedly have their benefits and would go against all odds.

Please Welcome: Mr Boediono

The prolonged process has come into end when the parliament members were in accord for Boediono to replace Burhanudin Abdullah as the new Governor of Bank of Indonesia (BI). Boediono seemed to please the parliament with all the answers he gave in the fit and proper test forum.

Yes, I think the parliament has made a right decision. Despite his shortcomings, he seems to be the most suited person to fill the job. He even matches the criteria from this guy. But, hey try not to be cocky sir since you have a very difficult task ahead; stabilizing the inflation rate while at the same time creating sustainable economic growth.

Judging from his track record, I bet he will do tight monetary policy instead of a loose one. Well, try not to be hustled Sir! Your overseas colleague, Ben Bernanke, has had his day when he did it without proper judgments. Please Sir, do not betray our trust.

Bewildering Projection

Indonesia may face a slowdown in the forthcoming years. The global turbulence is considered to be the major culprit. The ADB projection as described here has clearly made the confirmation. But it seems that the government had their own projection. I still don't get it, how did they come up with such result?

Well if I try to expel my logic, things would be clearer then. It is more like a political target instead of economic one.

Media Published Article

This is the Indonesian version from the previous post entitled "Governing the Market's Expectation" You can see the original post in republika

Menatap Kinerja Perekonomian

Oleh :

Fithra Faisal Hastiadi

Staf Pengajar FE Universitas Indonesia Kandidat Master dari School of Media and Governance Keio University Japan

Tak terasa kita sudah menjejak dalam triwulan pertama 2008. Singkat memang dalam ukuran waktu, tetapi sudah banyak frame cerita yang membuat publik banyak menahan napasnya. Bayangan akan adanya sebuah krisis lanjutan menjadi momok yang terus bergelayut dalam benak sebagai konsekuensi dari rentetan peristiwa negatif yang terus mengakrabi dunia.

Krisis subprime mortgage di Amerika Serikat yang kemudian dilengkapi dengan krisis minyak dan beberapa komoditas utama dunia telah bertindak sebagai katalis pembentuk kelimbungan. Dengan fakta yang demikian, sebuah gambaran suram yang bertajukkan krisis ekonomi tentu sangat berpotensi membentuk ekspektasi negatif dari pasar.

Ini sebuah hal yang jika dibiarkan berlarut-larut akan mensahihkan ekspektasi yang terbentuk. Gerakan sigap dari pemerintah merupakan sebuah syarat untuk mengatasi kelimbungan. Sebuah peranan institusional yang kemudian dicukupkan dengan komunikasi dan kerja sama yang efektif dengan para stakeholder lainnya, seperti Bank Indonesia, DPR, dan juga pelaku pasar.

Gejolak pendorong stagnasi

Mengerutnya kapasitas ekonomi dunia yang dikomandoi oleh tertahannya laju perekonomian Amerika Serikat dan juga naiknya harga-harga komoditas utama dunia, seperti minyak dan juga produk-produk pertanian, tak pelak telah menyeret perekonomian Indonesia menuju tren yang negatif. Tanda-tanda kemerosotan sudah dapat dilihat dari tren turunnya konsumsi masyarakat sebagai konsekuensi dari tergerusnya daya beli.

Fragmen ini akan menjadi wajar tatkala pergerakan struktur ekonomi domestik berjalan selaras dengan lingkup tren dunia, menjadi hal yang tidak wajar jika yang berlaku adalah sebaliknya. Coba tengok saja nilai rupiah. Di tengah kampanye positif The Fed yang memangkas suku bunganya hingga menyentuh level 2,25 persen, rupiah sepertinya masih enggan untuk beranjak dari level Rp 9.100 per dolar AS.

Ini sebuah anomali yang aneh mengingat rentang suku bunga antara BI rate dan Fed rate sudah sedemikian lebar. Hal ini seharusnya menjadi insentif bagi para pemodal, setidaknya jangka pendek, untuk kembali mengguyur pasar Indonesia dengan arus capital inflow yang masif. Hal ini pada gilirannya diharapkan mengungkit nilai rupiah ke level yang lebih tinggi.

Apa pasal? Kata kuncinya adalah ekspektasi dengan pasar masih memiliki ekspektasi yang negatif terhadap rupiah. Sebuah cerita lama terpaksa dikuak kembali, permasalahan mengenai decoupling effect yang terjadi antara sektor riil dan finansial yang belum terpecahkan hingga kini.

Kenyataan ini berkontribusi terhadap lemahnya fundamental perekonomian Indonesia sehingga wajar saja bila pasar masih belum memberikan kepercayaan secara penuh. Satu hal yang patut kita perhatikan adalah alasan investor untuk berinvestasi di Indonesia. Selain karena fundamental ekonomi yang kuat, adalah ekspektasi mereka mengenai potensi keuntungan yang besar. Gap antara harga saham dan kinerja emiten yang cukup besar sebenarnya bisa diartikan bahwa pelaku pasar mengekspektasikan bahwa adanya peningkatan kinerja emiten pada masa mendatang sehingga mereka bisa mendapatkan keuntungan yang stabil pada masa mendatang.

Dengan kata lain proses decoupling antara sektor riil dan finansial tidak semata-mata dinisbatkan sebagai aksi gelembung spekulatif. Akan tetapi, lebih ke arah aksi gelembung rasional (rational economic bubble).

Investor cenderung mengekspektasikan kebangkitan sektor riil untuk menopang keberlangsungan dari sektor finansial. Akan menjadi masalah yang besar jika ekspektasi ini tidak dapat dipenuhi oleh para pembuat kebijakan. Sedihnya, hal dasar inilah yang kemudian absen dari struktur perekonomian nasional.

Pembentukan ekspektasi semakin terpuruk menuju titik nadir dengan berlarut-larutnya kasus penyidikan Bantuan Likuiditas Bank Indonesia (BLBI) yang melibatkan para pejabat di Bank Indonesia (BI). Kredibilitas dalam kasus ini menjadi taruhannya, sebuah pertaruhan yang teramat riskan mengingat faktor kredibilitas ini berfungsi sebagai simbol penggerak pasar.

Solusi jangka panjang

Upaya untuk mengembalikan perekonomian Indonesia ke dalam jalurnya bukannya tidak pernah dilakukan. Akan tetapi, belum secara efektif dilaksanakan. Prinsip di balik penyusunan kerangka kerja makroekonomi yang baik dan benar adalah kredibilitas, fleksibilitas, dan legitimasi politik.

Peraturan dapat memunculkan kredibilitas jika peraturan itu merupakan sebuah peraturan yang sudah dikenal luas dan dipahami oleh masyarakat. Dengan adanya kredibilitas, maka akan menjadi lebih mudah untuk mengatasi gejolak ekonomi dengan instrumen kebijakan yang diberlakukan oleh otoritas ekonomi.

Kredibilitas juga dapat menjadi lebih baik ketika terdapat kerangka kerja yang transparan dan accountable yang pada akhirnya dapat memperkuat legitimasi politik. Kebijakan yang baik muncul apabila pembuat kebijakan dan institusi pembuat kebijakan mempunyai kemampuan untuk secara cepat bereaksi terhadap terjadinya gejolak ekonomi yang tidak terduga.

Pembuat kebijakan yang kredibel adalah pembuat kebijakan yang dalam membuat kebijakannya memperhatikan faktor transparansi kebijakan. Dengan tingginya tingkat transparansi kebijakan, maka gejolak ekonomi yang terjadi akan dengan mudah ditanggulangi.

Tanpa adanya transparansi, kebijakan mengenai target ekonomi dan peraturan fiskal menjadi tidak berguna karena publik tidak dapat membandingkan antara target dan realisasi. Dengan demikian, dapat memicu terjadinya ketidakseimbangan dalam perekonomian. Pada praktiknya, transparansi ini diwujudkan oleh pembuat kebijakan dengan memublikasikan analisis mengenai prospek ekonomi masa depan dan juga analisis kebijakan ekonomi yang telah dibuat pada periode sebelumnya.

Akuntabilitas menjadi suatu pendukung yang penting terhadap terwujudnya transparansi. Dengan adanya akuntabilitas kebijakan, maka dengan sendirinya akan muncul legitimasi politik yang kuat. Lebih lanjut, legitimasi politik menjadi penting karena kebijakan-kebijakan yang dibuat harus merefleksikan sebuah konsensus nasional. Kondisi balance of power dan juga tanggung jawab yang ada, pada akhirnya dapat mengurangi dampak buruk dari kurang terkoordinasinya kebijakan.

Ikhtisar:

- Kebangkitan sektor riil akan menopang keberlangsungan sektor finansial. - Ada gejala aneh pada perekonomian Indonesia dibanding tren global.

Do Not Cut The BI Rate!

There are two opposing sides regarding the issue of BI rate. The first group views that the BI rate has to be cut in order to stimulate people’s consumption in which could lead to a more sound and sustainable economic growth. On the other hand, the other group sees that the BI rate has to be maintained in its present condition or even leverage it in to a higher rate so that it could guard the Rupiah’s value since. Moreover, they also believe that the muscular value of Rupiah could have a positive contribution to the target of inflation in 2008. As for me, in a normal situation I would rather sided with the first party but upon seeing what has happened now in the global financial crisis, I prefer to team up with the later.

Two or three years ago, the first choice which is to cut the BI rate, seems to be a very rational choice to be made. With the impoverishment of people’s purchasing power as a consequence from a high level of inflation rate, cutting the BI rate was considered to be effective according to some pundits. But, at that time, the central bank was very eager to cut its rate in order to cope with the high level of inflation rate. A choice which then was proven to be wrong since it was only made things worse. It is true that the interest rate has functioned as a tool to control inflation, but it was important to be noted that the high level of inflation in 2005 was caused by the major shrinkage in the production capacity. In other word, the inflationary episode was caused by the cost push inflation characteristics.

On the other hand, the Inflation targeting framework from which the central bank holds on to, will only work in a situation in which the inflation is caused by the demand pull inflation characteristic. Thus, the result can be easily guessed, the people’s purchasing power was even more devastated while leaving the real economic sector into a major slump and near to death condition.

The collapse of the real economic sector at that time could be seen through the described data. Take a look at the data; the growth of manufacturing industries has only grown to 7.9 percents in 2004 and 5.9 percents in 2005 which was below the average target of 8.59 percents per year. Thus, the major concern came from the decreasing trend of growth. On the other hand, on the labor absorbency side, in the year of 2004, the manufacturing sector only absorbs 13 thousands worker, which was below the average target of 528 thousands worker per year.

Another example was the garment industries; this sector has a major decreasing trend as a consequence of the high energy cost, the selling price of the garment products was steadily decreasing around 5 up to 10 percents a year while the operational cost was also steadily increasing around 10 percents a year. Not to mention the companies that could not grasp the international market opportunities as a consequence of the lacking of working capital. Electronic industries could also be seen as another example; this sector could no longer stay in the business not only because of the decrease in the people’s purchasing power but also because it could not compete with the cheap imported products.

Alas, the condition in two or three years ago was very much different with the present. The option to cut the BI rate is no longer considered to be an effective choice. The central bank must not always go along with the fed policy. The massive cutting which was applied by the fed to its interest rate is considered to be an emergency policy coping with the global imbalance in the financial sector. To take the same procedure like the fed is very risky since the rupiah had a very grim history in coping with this kind of stuff. Amid the storm in the financial sector, the weak fundamental factors that constitute the Rupiah’s value have to be taken into account.

There will be a basic problem arising from the policy to raise the BI rate which is the target of economic growth. A problem that is objectively raised since the high level of interest rate could impede the consumption rate which would only hamper the phase of economic growth. Employing the global financial crises variable, I made a simulation that try to seek the relationship between the interest rate, the exchange rate and also the economic growth. This simulation used a vector auto regression technique which was developed by Christopher Sims in 1980.

In this simulation I found that every policy attempting to increase the interest rate was proved to have a negative impact to the economic growth. But this impact would not prolong, it only took one quarter of a year. For the forthcoming periods, the Rupiah’s appreciation, as an output from the rise in interest rate, would give positive contribution to the economic growth. This contribution eventually could be more than just to offset the negative impact which was initially taken place in the first period since it has bigger coefficient factor to contribute the economic growth. One thing to be noted, this sequence of condition is only true if and only if the interest rate leverage is below 1 percentage point

The mechanism is quite rational; the increasing level of interest rate would impede not only the aggregate demand but also the export projection. These factors would obstruct the phase of economic growth in the first quarter. But in the following periods, along with the Rupiah’s appreciation, the aggregate demand would be more than doubled since the effect of imported inflation was gradually diminished. On the other side, the export growth had also had the retrieving trend. This is Based on the fact that more than a half of export products have a massive dependency from the import components so that the Rupiah’s appreciation would lead to decrease in the cost of production. These factors would undoubtedly underwrite the economic growth for the forthcoming periods.

To wrap things up, I would say that the previous mistake should be considered as a factor to comprise the future policy. Furthermore, the policy makers should have enough credibility to diminish all of the mistakes that have been done before. With credibility, any economic turbulence could be easily tackled with the given policy instruments.