On Institutional hypothesis of economic growth

There are various hypotheses or theories on the driver of economic growth. The informal one includes geography, culture, and institution. The most well-known among them is institutional hypothesis; proposed mainly by Daron Acemoglu, a professor in MIT Economics Department. In this writing, I want to a little bit discuss on what he said.

Acemoglu said, the quality of institution, such as the property rights protection, rule of law, etc., is the main driver of economic growth. Countries of which institutions are established will have a bigger chance of high economic growth and development. I completely agree with this notion; indeed, it is very easy to spot how weak the institutions in most of developing countries are. Here it comes the more interesting part.

Acemoglu tried to explain why the institutions in various countries are as it is today, i.e. why some countries have better institutions and why some don’t. He concluded, the quality of institutions is largely influenced by the colonials. In countries where the colonials settled, probably due to suitable climate, lower intensity of diseases, etc., the colonials established an institution which sustain good governance; while in countries of which the spread of diseases are quite high or the temperature are not suitable for the (European) colonials, they will tend to establish an extractive institution, i.e. the institution which focus on getting the resources as much as and as quickly as possible from the colonies. I have a little bit issue with this notion.

Implicitly, this notion implies two things. First, the quality of institutions that we are in right now in many developing countries are just as it is; and that we’re just unlucky that the colonial who colonized us were not quite interested to settle in our country. Second, the notion implies the (European) colonial is the main source of good institution, i.e. they know how to manage things well (good governance); while the others don’t. I think, both implications could lead to pessimism and the feeling of inability to change our fate in many developing countries.

Rather than joining the rank of the pessimist, I would rather believe that change is possible. I think it’s not that the (European) colonials were superior that they know to govern well; no. I believe it’s just that because at that moment, until today, they have the knowledge. So yes, the issue here I believe is about knowledge. In the middle ages, around 600 to 1500 A.D., the (European) colonials were in a very dark state; slums, diseases, etc., were everywhere; just like many developing countries today. But then the knowledge were passed on to them from the Muslims. Similarly, the Muslims early on were passed some knowledge from Greek civilization as well. In short, all of these show that what had happened in the past, let it be; we can’t change it; but we have the opportunity to be better, and that opportunity could be (or will only be) unleashed by education. Insyaallah, let’s get those knowledge as much as possible. The mountain of knowledge might be so high that we’re terrified to climb it; but if, we persistently make the effort to climb, insyaallah, we’ll get to the top.

Finally, I would like to conclude with the source of good governance. I could spend pages and pages arguing that Islamic teaching has the most superior set of good governance values. If there are many problems in Muslim majority countries today, it’s because we are the one who do not practice it. The Islamic teaching will just shine as it is. In short, let’s read and understand the Qur’an; let’s read the hadits, as well as the shiroh (Islamic history). We’re at the cover page of the best source of success. Not only in this world, but also in the hereafter, insyaallah. Wallahua’lam.

“See you not how Allah sets forth a parable? – A goodly word as a goodly tree, whose root is firmly fixed, and its branches (reach) to the sky (i.e. very high). Giving its fruit at all times, by the Leave of its Lord and Allah sets forth parables for mankind in order that they may remember.” (QS Ibrahim: 24-25)

“Muhammad (SAW) is the Messenger of Allah, and those who are with him are severe against disbelievers, and merciful among themselves. You see them bowing and falling down prostrate (in prayer), seeking Bounty from Allah and (His) Good Pleasure. The mark of them (i.e. of their Faith) is on their faces (foreheads) from the traces of (their) prostration (during prayers). This is their description in the Taurat (Torah). But their description in the Injeel (Gospel) is like a (sown) seed which sends forth its shoot, then makes it strong, it then becomes thick, and it stands straight on its stem, delighting the sowers that He may enrage the disbelievers with them. Allah has promised those among them who believe (i.e. all those who follow Islamic Monotheism, the religion of Prophet Muhammad SAW till the Day of Resurrection) and do righteous good deeds, forgiveness and a mighty reward (i.e. Paradise).” (QS AL-Fath:29)



The case of Indonesian fuel subsidy

The untargeted fuel subsidy in Indonesia is a very wrong policy; thus should be adjusted to be a targeted one. However, strangely, still, some political parties are opposing this policy change, reflecting the irrational or lack of intellectual-based politics in Indonesia.

Indonesia became net importer of crude oil since 2004, at the first year of the current President’s administration. Since then, the difference between oil production and consumption has widen, reaching 300,000 barrel or around 36 million liters per day in 2012 (US EIA, 2013).

The cause is easy to guess, that is surge in the number of motor vehicle due to increasing economic activity. Indonesian passenger cars has grown around 12% annually since 2004 reaching 10 million cars in 2011; while the motorcycle has grown even higher, at 17% per year, reaching 70 million units in 2011.

The amount of subsidy in Indonesia is enormous. It was around 14 billion US$ (Rp 137 trillion) in 2012 or around 10% of total government revenue. As of 2010, there are 46% of Indonesian or around 111 million people live below US$ 2 (PPP) per day. If we use all of these subsidy money in 2012 alone, then 59 million people will be out of poverty instantly, almost half of the current level*. To put it in another context, this Rp137 trillion is almost twice of ministry of education budget; seven times of agriculture ministry’s budget; or almost 20 times of fisheries ministry budget. The amount is unbelievably huge (every year).

In short, we need a game change here. (The current scheme of) Subsidy is bad for our economic development, bad for our environment, and bad for our mentality (dependent on subsidy). The subsidy should be a targeted one. By using government’s data that around 12% of Indonesian live under national poverty line, that is around 30 million people or 7.5 million household. By giving every household Rp100,000 every month (a very huge amount compared to previous cash transfer) as the compensation of subsidy removal, than it equals to only nine trillion Rupiah, or merely 6% of subsidy budget in 2012.

The time has come to Indonesia’s politics to be  more rational. The current political party should feel ashamed to our founding fathers and to all of heroes who sacrificed their life, family, wealth, and everything they had so that this country can gain independence and become a prosperous one. The Indonesian voters should also be more rational in choosing party which is taking ‘a make sense’ policy. I guess this is the job of us, the educated Indonesian to teach our people to be a rational voter. Wallahu’alam bisshawab.


Note: *) By using a very conservative assumption, that is all of these people will receive $2*365 or $730 (PPP) per year.

Economics and its discontent

Just recently listened to a lecture by one of my favorite economist, Professor Jefferey Sachs, on economics and theology. There are  couples of interesting reflections that he delivered.

First, the issue nowadays is between morale and material pursuits. Not long ago, he said, economics study was taught under the moral or philosophy subject. Yet, since the 19th century, I guess since the start of industrial revolution, the moral side has been abandoned. As the result, many of our problem nowadays is not on economics  issue (such as optimization), rather, it’s a morale question. He took an example of the difficulty of a senior health organization officials in securing financial support from the white  house for a global health project. The fund raising has been very very difficult even though the amount is only 1% of 1% of US economy, or equivalent to what Pentagon spend everyday.

Second, he cited Easterlin paradox, that is a paradox between happiness and material well-being. Professor Easterlin found that even though the wealth of american since 1950 to 1980 has increased, their (reported) happiness has remained unchanged. Thus this puts deep question on the material pursuit that we’re on.

Lastly, he cited how the material pursuit of human being has destroyed the nature at unprecedented level; and this destruction has brought considerable change to our lives, yet people aren’t care about it.

As an economist wanna be, I think this reflection should be well-noted. Professor Sach has the credibility to make such reflection, as he is one the greatest economists at the moment. It is somehow sad for Professor Sach and the people alike to finally come to this sort of conclusion, something that Muslim has taken it for granted. As a muslim, we has been taught that life in this world shouldn’t be based on material pursuit. We’ve been taught that we have to protect and sustain the nature, rather than to destroy it. We have been taught to spend zakat, charity, waqaf and other forms of givings to reduce poverty and inequality. But I guess it’s easier to say rather than practiced. We know that material pursuit, destruction on nature, inequality among people are bad things. Yet, we’re still on the blind eye to pursue it. I believe this is the test that Allah specifically designed for us who live in 21st century, when the temptation to worldly life is just irresistible.

This, I believe, should be reflected in Indonesia’s economy. We’re currently maybe in the most booming period of our country economy. I believe we should stop and ask, is this really what we want? Is destroying nature, exposing our lives to endless material pursuit, and widening inequality the one that we really want?

Prof Sach ended his speech by stressing that economics is (and should) not (be) a pure science. It should be combined with morale philosophy again. I wish he will get hidayah soon and understand that the true morale guidance can only be found in Islam, the final cut of Ibrahamic religion. May we’re not included in those who know the truth but do nothing to follow it.

You can watch the complete lecture here (it starts on around minute 45).

Economic Series (2): Asian Financial Crisis 1997 and a bit of Reflection

Asian Financial Crisis 1997 has left many impacts to Indonesia. Its impacts range from  the current political order, current economic system, culture, and many others. Unfortunately, this important episode in Indonesian history is not really well understood by many Indonesian youth, including me, until recently, when I take a class on Asian Financial Market at the University of Tokyo. Since the main target for this writing is Indonesian youth, I’ll use Bahasa Indonesia.

Banyak di antara kita yang tidak terlalu paham dengan apa yang sebenarnya terjadi saat krisis keuangan tahun 1997. Ada yang memahaminya sebagai serangan spekulasi, ada yang bilang merupakan bank run, ada yang hanya tahu bahwa Indonesia dibuat lemah oleh IMF, dan yang pasti, ada yang tidak tahu apa pun sampai sekarang. Saya akan coba sedikit jelaskan dan mengambil beberapa pelajaran dari episode crisis ini.

Krisis keuangan tahun 1997 ini berawal dari serangan spekulatif atas mata uang Bath Thailand. Serangan spekulatif ini pun sebenarnya bukan tanpa alasan mengapa Thailand yang dipilih; mengapa bukan Indonesia, bukan Malaysia, dst. Sejak tahun 1994, Thailand mengalami perlambatan pada kinerja ekspornya. Sejak tahun 1994, nilai import Thailand jauh lebih besar dari pada nilai ekspornya. Ekonom menyebut hal ini dengan current account deficit. Salah satu penjelasan mengapa terjadi perlambatan pada ekspor Thailand pada tahun 1994 adalah karena Cina mendevaluasi mata uang nya pada tahun tersebut sehingga ekspor Cina menjadi lebih murah dibanding Thailand dan negara lainnya.

Pada saat yang sama, modal asing yang masuk ke Thailand tetap positif, dengan persentase terhadap GDP yang jauh lebih besar dibandingkan current account deficit. Hal ini pun berdampak sedikit tricky pada sebagian analisis. Current account yang negatif bila dijumlahkan dengan capital account yang positif, namun lebih besar, menunjukkan seolah-olah Thailand is fine, Thailand is ok. Namun sebenarnya tidak demikian.

Kemudian George Soros and his friends came, speculative attack pun diluncurkan pada Thai Bath di swap market, pada April 1997. Pada Juli 1997, Bank sentral Thailand (Bank of Thailand/BoT) menyadari bahwa tekanan spekulasi ini terlalu kuat dan tahu bahwa saat transaksi swat direalisasikan, BoT akan kehabisan cadangan devisanya. Pada akhirnya BoT pun mendevaluasi mata uangnya sekitar 20%. Thailand akhirnya meminta bantuan finansial pada IMF. Thailand resmi masuk menjadi ‘pasien’ IMF sejak Agustus 1997.

Then the story continue to Indonesia. Pada saat itu kondisi makroekonomi Indonesia berada dalam keadaan yang sangat baik. Namun untuk berjaga-jaga, pemerintah Indonesia pun meminta IMF untuk juga memberi bantuan pada Indonesia. Ada yang mengatakan juga bahwa sebagian teknokrat (ekonom) Indonesia pada waktu itu meresa bahwa itulah saat yang tepat untuk ‘mereformasi’ ekonomi Indonesia, dari yang didominasi oleh perusahaan negara dan keluarga Soeharto menjadi ekonomi yang lebih ‘liberal’.

Sebagai pra-syarat masuk ke program IMF, IMF meminta pemerintah Indonesia untuk menutup sejumlah bank yang dinilai berkinerja buruk, sekitar 16 bank kalau tidak salah. Nonetheless, apa yang mereka (ekonom) perkirakan ternyata tidak tepat, atau mungkin terlalu meng-underestimate impact penutupan bank tersebut. Setelah bank-bank tersebut ditutup, masyarakat pun menjadi panik. Karena tidak ada penjelasan yang jelas dari pemerintah mengapa bank-bank tersebut ditutup, masyarakat takut bahwa mungkin bank yang lainnya juga akan segera ditutup. Di sinilah bermula bank run dan capital flight di Indonesia. Maryarakat beramai-ramai ingin mengambil uangnya di bank (tentu saja bank tidak punya persedian uang yang cukup karena tabungan masyarakat itu disalurkan pada kreditor), orang-orang pun juga segera mengalihkan uangnya ke US Dollar atau mata uang lainnya yang dianggap aman.

From here, krisis pun menjadi semakin buruk di Indonesia. Nilai tukar pun ‘ambruk’ dari sekitar Rp2.500 per US Dollar menjadi Rp16.000 per US Dollar. Banyak perusahaan yang bangkrut, pengangguran meningkat, inflasi, dll. Hal ini pun diperburuk oleh ‘resep’ IMF yang sangat salah dalam membantu ekonomi Indonesia. The rest of the story, we know it, president Soeharto pun mundur dari jabatannya. Indonesia pun masuk ke era reformasi yang ditandai oleh demokrasi.

Sebagai refleksi, ada beberap hal yang cukup menarik menurut saya. Pertama, peristiwa ini menunjukkan bahwa masyarakat Indonesia is a strong-persevere society. masyarakat Indonesia berhasil melalui hal yang cukup drastis dan turbulent tersebut. The fact that saat ini Indonesia masih utuh dan perekonomiannya tumbuh dengan pesat, menunjukkan bahwa bangsa Indonesia mampu bangkit dengan cepat dan beradaptasi dengan kondisi baru. Kedua, meskipun Indonesia mengalami saat yang pahit pada 1997 sampai awal 2000-an, saat ini Indonesia sudah menjadi negara yang demokratis. Meskipun demokrasi juga memiliki cukup banyak kelemahan, namun sekarang kita bisa dengan lebih bebas mempraktekkan agama kita, termasuk agama islam. Da’wah berkembang dengan pesat, jumlah muslimah yang menggunakan kerudung dengan baik semakin bertambah, dll. Kita pun juga bisa menyampaikan kritik kita pada pemerintah, sesuatu yang sebelumnya tidak bisa dilakukan. Ketiga, semua reform yang Indonesia lakukan pada saat krisis tersebut telah membantu Indonesia menjadi negara yang manajemen ekonomi nya jauh lebih baik sehingga tidak terlalu terpengaruh oleh krisis tahun 2008 yang lalu dan juga krisis hutang euro zone saat ini.

Sebagai penutup, menurut saya, there must be a reason mengapa Allah menetapkan bahwa Indonesia harus mengalami krisis tahun 1997 yang lalu. Sebagaiman yang disebutkan dalam Qur’an bahwa bersama kesulitan akan ada kemudahan, dan juga dalam budaya China bahwa krisis itu berarti ancaman dan peluang, kita harus manfaatkan kesempatan yang kita miliki sekarang untuk membuat Indonesia menjadi lebih baik. Yes, it seems that korupsi semakin banyak di Indonesia, but again, tak ada yang bisa merubahnya kecuali dengan usaha kita sendiri dan dengan izin Allah.

So, let’s prepare ourselves, mari kita berusaha menjadi orang makin baik dari hari ke hari, menjadi muslim yang bermanfaat bagi orang sekitar, sehingga Allah pun semakin ridha dengan kita. Semoga bermanfaat. Salam.

Economic Series (1): Official Development Assistance Policy

Since my background is economics, I thought it might be beneficial for me and others if sometime I write about an economic topic. I will start with a topic on ODA. Hope it’s going to be beneficial.

ODA, or Official Development Aid, in a simple term, it means assistance that a country (called donor country) gives to other countries (called recipient countries) in promoting recipient countries’ development. The assistance could be a grant, low cost debt, technical assistance or training, debt relief, humanitarian aid, or even contribution to international development entities, such as United Nations.

In the past 30 years, at least, the biggest donor countries in the world are USA and Japan. Nonetheless, the characteristic of their ODA is quite different. US usually gives ODAs in the form of social infrastructure, such as programs to improve education level, health, and related thing in targeted country; while Japan’s ODA has been more in the form of infrastructure development. I will focus more on Japan’s ODA.

There are many reasons which explain Japan’s ODA policy; I will try to explain some of them. First, Japanese government and Japanese society at large, believe that development is the result of self-help and industrialization policy, where government’s role is quite significant. I believe this is caused by their experience of which Japan managed to be developed, not by huge Foreign Direct Investment (FDI) as in the case of Korea and China, but more on the ability to improve their technological capability by investing more in education. Secondly, Japan also wants to get benefit from ODA that it gave to developing countries. This brings me to my next point about the ‘hidden agenda’ of ODA.

Usually, Japan will give ODA to countries which can benefit it economically, for example by making Japanese companies have a better infrastructure in recipient country. For example, if there are some Japanese companies operate in rural area of Vietnam, maybe because of the availability of resources, etc., and it is quite far away from the city or the port. then Japanese government will be very willing to give to cheap loan to Vietnam to build road from where Japanese companies operate to the city to the port. In this situation, Japanese as a whole will gain quite a lot. Government will receive interest on loan that it gives (usually the interest rate will be higher than Japan’s domestic interest rate), Japanese companies will also get benefit from a better infrastructure in Vietnam. Furthermore, a sad side, usually the companies which will get the contracts to build the road are usually also Japanese companies. So Japan really get high benefit from this ODA.

Is this something wrong? Is this exploitation? Yes it seems that both sides are happy, Japanese government and companies get profit, Vietnamese also get a better infrastructure. Nonetheless, I would think that the benefit that Vietnam get will be higher if their own national companies can get the road project, so that there will be additional (multiplier) impact to Vietnamese economy. In addition, sometimes that aid that developed country give is a tied aid, where the project should be carried out by the donor country. In this aspect, usually the project cost is not efficient, which give higher burden to the recipient country.

Lastly, developed countries are very keen to continue with this model. Even Japanese government give subsidy or loan for its corporation to take part in this system. In addition, whenever an ‘isolated country’ open-up their economy, such as China in 1980s, Vietnam, and now Myanmar, many countries are rushing into these new ‘open-up’ countries to get more project. To conclude, now maybe we can see that there is no such free gift or sincere help nowadays. Policy makers, mainly in developing countries, should be cautious and mindful that decision or policies that they take should be really base on cost and benefit analysis so that their citizen will not be disadvantaged. That’s all, wallahua’lam.