Delphi: Nothing in Excess

Is there any correlation between the government policy and the economic performance? The answer is yes, but the policy is not alone. Sometimes the other factor such as “external shock” or “unexpected events” could affect the performance more than the policy. One of the good paper to describe this phenomenon is “U.S. Monetary Policy During the 1990s” by Mankiw (2001) described this condition as “Good Luck”, as shown below.

“…. US monetary policy during the 1990s, comparing it to policy during the previous several decades. It reaches four broad conclusions. First, the macroeconomic performance of the 1990s was exceptional, especially if judged by the volatility of growth, unemployment, and inflation. Second, much of the good performance was due to good luck arising from the supply-side of the economy: Food and energy prices were well behaved, and productivity growth experienced an unexpected acceleration. Third, monetary policymakers deserve some of the credit by making interest rates more responsive to inflation than was the case in previous periods. Fourth, although the 1990s can be viewed as an example of successful discretionary policy, Fed policymakers may have been engaged in “covert inflation targeting” at a rate of about 3 percent. The avoidance of an explicit policy rule, however, means that future policymakers inherit only a limited legacy…”

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So now, most countries need good luck, especially Indonesia to escape from this current economic crisis.

If I were the government economist, I will considered this quotation from P.J.O’rourke “Eat the Rich” is just a joke:

Songs of the (Government) Economic Advisers:
“Kill the poor,
Eat the rich,
Screw every other son-of-a-bitch.”

Only a fool would dispute over forms of government (Alexander Pope). History has a good word to say for all of them and for government in general. Since men love freedom, and the freedom of individuals in society requires some regulation of conduct, the first condition of freedom is its limitation; make it absolute and it dies in chaos. So the prime task of government is establishing order [Durant, The Lessons of History, 1968]. Democracy, like the other form, is just the way in changing the ruler from the “lazy aristocrats or boring rulers” to the “wealthy and smart one”. Nothing else. So, dear people, never expect anything from any changing if don’t have any role in the changing!

Krugman (1991) in “Geography and Trade” argue that there are three reasons why it is important to start doing economic geography: first, the location of economic activity within countries is an important subject in its own right; second, the lines between international economics and regional economics are becoming blurred in some important cases, for example the establishment of EU in Western Europe; and third, intellectual and empirical laboratory that it provides such as increasing return and imperfect competition.

After seeing fathers-in-law, companions, and all his kinsmen standing in the ranks of the two armies, Arjuna was overcome with great compassion and sorrowfully spoke these words: O Krishna, seeing my kinsmen standing with a desire to fight, my limbs fail and my mouth becomes dry. My body quivers and my hairs stand on end. (1.27-29)

The bow slips from my hand, and my skin intensely burns. My head turns, I am unable to stand steady, and O Krishna, I see bad omens. I see no use of killing my kinsmen in battle. (1.30-31)

I desire neither victory, nor pleasure nor kingdom, O Krishna. What is the use of the kingdom, or enjoyment, or even life, O Krishna? Because all those  for whom we desire kingdom, enjoyments, and pleasures  are standing here for the battle, giving up their lives. (1.32-33)

I do not wish to kill my teachers, uncles, sons, grandfathers, maternal uncles, fathers-in-law, grandsons, brothers-in-law, and other relatives who are about to kill us, even for the sovereignty of the three worlds, let alone for this earthly kingdom, O Krishna. (1.34-35)

O Lord Krishna, what pleasure shall we find in killing our cousin brothers? Upon killing these felons we shall incur sin only. (1.36)

Therefore, we should not kill our cousin brothers. How can we be happy after killing our relatives, O Krishna? (1.37)

Though they are blinded by greed, and do not see evil in the destruction of the family, or sin in being treacherous to friends. Why should not we, who clearly see evil in the destruction of the family, think about turning away from this sin, O Krishna? (1.38-39)

Source: Bhagavad gita  

One of the most debatable topics about globalization is the relation between the trade liberalization and environmental problems. B.R.Copeland and M.S.Taylor (2003) in “Trade and Environment: Theory and Evidence” noted that for the last ten years environmentalists and trade policy community have squared off over the environmental consequences of liberalized trade; this was fueled by negotiation over NAFTA and GATT, both of which occurred at a time when concerns over global warming, species extinction, and industrial pollution were rising. The debate intensified with the creation of the WTO and proposals for future rounds of trade negotiation. There are two questions of the book are addressed: first, how does the increase in economic activity induced by international trade affect the environment? Second, how does the environmental policy affect a nation’s trade pattern?. Please read the book for the answers, but my purpose in this blog is trying to show one of the Indonesia’s studies that probably could explain the relation between the international and inter-regional trade and the environment. Syamsu Alam (2007), in his dissertation at Hasanuddin University, shows his findings on “Conversion Pattern and Benefit Value of Candlenut People Forest in Kabupaten Maros, Sulawesi Selatan”. As the increasing of the some commodities price, during the last ten years relative to the candlenut caused by international and inter-regional trade (such as kakao for export; and tomato for inter-regional between South Sulawesi-Eastern Part of Kalimantan), there are a massive conversion from the Candlenut People Forest into three patterns [Please remember Samuelson Theorem].

I quote his dissertation below (Alam, 2007):

“There are 3 HKR (Hutan Kemiri Rakyat=Candlenut People Forest) conversions from HKR into farming: conversion into non permanent cultivation, permanent cultivation, and kakao estate. All kind of conversions shows that the benefit value from the income and land rent of conversions, which are received by farmers directly, are higher than the income and land rent from HKR. In contrast, the indirect benefit (intangible benefit), which are not received by farmers, are higher compared with the direct benefit (tangible benefit). The tangible benefits that affect most of the conversion HKR are the HKR income and conversion income. While the intangible benefits do not have influences on the HKR conversion. The increasing of income from HKR will decrease percentage of conversion, whereas the increasing of income from HKR conversion will increase the percentage of conversion. The land rent differential or the difference between the income from HKR and from its conversion is the main factor that affect the farmers to convert from HKR into its conversion. The other factor that determine the conversions are size of land ownership, household resource, population density, and accessibility. The small of size of land owned by farmers, low population density, and higher accessibility will increase the HKR conversion. However, the restriction of the right of the farmer on HKR will reduce conversion, but this will decrease the income of HKR caused by the restriction of the land”.

He also proposes the ways in facing the problems, in Alam (2007):

“In order to undertake the conversion of HKR, it is needed the incentive policy such as the increasing of HKR income through the farmer’s right for state land forest cultivation (management right), subsidy for HKR regeneration, and payment for their environment services compensation. It is also needed disincentive policy such as tax policy on conversion production and also suspending of management right license if the farmer were converting the HKR. The concept of sustainable management of HKR that support conversion prevention is integrating forest area management with the people forest business and other rural sectors.” Through this blog I want to say Congratulation on his promotion that I attended in Makassar, June 20th 2007. I noticed that he did working hard on doing his dissertation, sometimes he had to stay day and night for doing this work. Hopefully this work will get attention for saving environment that becomes the place that we are living together….. Again, Congratulation Brother!

The Rise and The Fall of Great Powers: Economic Change and Military Conflict from 1500-2000 by Paul Kennedy (1989) tried to predict the future of world politics patterns by having a great explanation on the world history on the economy and the military conflicts about 500 years (1500-2000). He implied three main points: first, there will be a shift both shares of total world product and total world military spending, from five largest concentration of the strength to many more nations in a gradual process. Secondly, the global productive balances between these five have already begun to tilt in certain direction: away from US and USSR (Russia now), away also from EEC (EC now), to Japan and China. Thirdly, there is still bipolar between USSR and US [this already proven wrong, it seems US dominant over USSR/Russia]. Japan probably one day will change its policy to become active in military after no longer preserve its interests simply as “trading state” [let see this trend in the future]. West Germany [Germany Now] and China will avoid an excessive investment in military spending in order to enhancing their economic growth [???]. Even though this book has been proven wrong some prophecy; however, it still has a great explanation that probably could be proven in the future.

One of the books from the 1990’s that shape the mind of economists and policy makers was “The Age of Diminished Expectations” by Krugman (1995). He started his books by explaining three kinds of writing economics: Greek-letter, up and down, and airport. Greek-letter is a formal language from Professor to his students (most of his works based on this), up and down is the business pages on the newspapers or what we could get on TV, while airport is the language of the best seller economics books. This book probably could be included into both the second and the third.

Through this book, He was trying to figure out the problems of the US economy in the 1990s from productivity, income distribution, unemployment, trade deficit, inflation, health care, budget deficit, global finance, and American Prospect. After finishing read this book, suddenly I realized that this book is a kind of popular reading from his best seller book “International Economics: Theory and Policy”, the book that I use for teaching International economics. One of his opinion that part of the debatable issues in US was US trade deficit. His opinion about this problem based on his AA, DD, and XX curve model in his book as a rival of the IS-LM curve model. Please read his “International Economics: Theory and Policy” first for a better understanding of the content of this book.

This book is quite intriguing in giving understanding of free trade: “The Choice: Fables of Free Trade and Protectionism”,Roberts, Russell (2001), gives us a better explanation in a very gentle way about the debate around free trade. The sub title that is very interesting is “Self-sufficiency Is the Road to Poverty”. I quote some part of it.

………………………………………………………………………………………….

“But, Dave, if America became so poor because imports are banned, why did not people get rid of the laws that keep out foreign goods? Could not people see they were getting poorer?

“Sure, but people were scared. They did not blame protectionism for their poverty. When economist proposed reopening America to the world, people worried about their jobs. What would replace the jobs they already had, if foreigners were allowed to compete?…”

“But you argue that other jobs will arise to replace them”

“People could not see that. Not only did they fear the transition between the old world and the new, they could not imagine the computer chip, portable computer or pharmaceuticals yet to be discovered to fight disease. There were no industries like that even to imagine. People were content to hold on to what they had.”