The Second Parchment

On Economics, Finance, Politics and Music

Indonesia’s Fuel Hike: Eliminating Arbitrage?

The discussion about the impending rise of fuel price as the government schedules on removing subsidies for fuel has turned into a fiery political debate in every part of Indonesia. Despite President Yudhoyono’s coalition not unanimously approving of this proposed policy (I saw supporters of Partai Keadilan Sejahtara demonstrating earlier this afternoon), the probability of it happening is so high that markets have reacted, adjusting to expectations. Just today, Rupiah significantly depreciated against the USD. The price of a dollar reached more than Rp. 10,000, which happened for the first time since 2009 as the world slowly recovers from the 2008 financial meltdown.

Our recently-appointed Finance Minister, Dr. Chatib Basri, commented that the government’s decision to revoke the subsidy will bring about a positive outcome. Most people and economists supporting the government base their support on a classic argument: they argue that subsidies should be channeled towards productive long-run sectors (technology, health, education). But Dr. Basri takes a different angle. Quoting from an interview by the Jakarta Globe, Dr. Basri commented that:

“The biggest deficit in our trade balance is from oil and gas imports,” Chatib said at the State Palace on Wednesday. “If the price increases, the price disparity between the domestic and international fuel price will narrow.”

To elaborate further, Dr. Basri, as paraphrased by the interviewer, said that “the government’s plan to raise the price of subsidized fuel would cut the amount of oil and gas smuggled out of the country.” In the article, the Ministry of Energy and Mineral Resources confirms that Indonesia has indeed been a recurrent victim of rampant fuel smuggling. Subsidized fuel is comparatively less expensive in Indonesia compared to other Southeast Asian countries that those knowing how to circumvent the procedures of Indonesia’s customs have taken advantage of such significant disparity in price. Buy low in Indonesia, sell high overseas. Assuming that all types of transportation costs are removed, this act of fuel smuggling is a form of arbitrage in the fuel market.

However, I believe that price differences between Indonesia’s and foreign fuel markets shouldn’t be a problem if there exists a strong and strict regulative framework within Indonesia’s customs. The argument that the government should let the price of fuel increase so as to eliminate arbitrage opportunities isn’t compelling enough. While it’s very clear that Dr. Basri, one of Indonesia’s esteemed economists, is not advocating for this argument, some important government officials actually are. A solution to Indonesia’s problem in catching profit-making arbitrageurs shouldn’t be raising the cost of fuel. It should be anything other than that i.e. stronger enforcement of export-import laws, better oversight and controlling or cargos.

Regardless, the price of fuel is rising soon. Like it or not, it’s happening, and any Indonesian consumer irrespective of their level of wealth, in the short run, wouldn’t be happy with things getting more expensive. While I believe that taxpayers’ money should be directed at productive sectors (just like most people do), it still somewhat saddens me that an hour ago I was asked to pay for an extra 20% to buy a bottle of a drink I’m currently addicted to. Oh well—what can you do.


Reid Hoffman’s Advice

Hoffman’s presentation is one of the most simplistic, direct, yet substantive presentations I’ve ever seen. This one focuses on what sort of skills college graduates should hone and what actions to take to be a step ahead in the advancement of their careers.

I particularly find his third point appealing: to take intellectual risks. Unlike most self-proclaimed career gurus out there, Hoffman emphasizes that taking risks is important as long as its negative repercussions (which emerge in a worse-case scenario) don’t severely impact on one’s main career path.

On Regressions

What sort of new hobby do economics students who just completed an econometrics class acquire? Regressing. Some of my friends and I will nearly finish our econometrics class, and it has somewhat become our new hobby (sometimes, if assignments are not due the day after) to find variables and data, open Stata, and regress. It’s just fun to see how sometimes variables that aren’t intuitively correlated are statistically significant in a 5% level, using proper regression methods and techniques.

Like this time series regression. Who ever thought that 99% of variation in the S&P 500 is explained by butter production in Bangladesh?


Respected economists don’t always argue via working papers or mathematical models. Remember the drama between Professor Rogoff & Stiglitz in 2002? These are my favorite lines.

“The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.”

“If only you had crossed over 19th Street from the Bank to the Fund a little more often, Joe, maybe things would have turned out differently.”

Read the full open letter here.

Gender Equality in Indonesia’s Military Academy


37 years after the United States Military Academy at West Point started admitting female cadets as their students, The Republic of Indonesia’s Military Academy at Magelang recently announced that it will start accepting female cadets–known as tarunis–for this year’s applicants (equivalent to members of the Class of 2017).

Priorities are given to high school students with previous background or experience in military and semi-military trainings, such as graduates of my high school, Taruna Nusantara SHS, and former members of Indonesia’s national flag hoisting team.

Unlike the case at West Point whereby the decision was mainly based on the passage of the Equal Right Amendments in 1972, there seems to be no particular recent regulatory reform in Indonesia that preceded this historical decision. It was formalized after members affiliated with the Indonesian military consensually deemed the promotion of gender equality within the military academy as important. Quoting a paraphrase from Major General Istu Hari Subagio regarding the decision, “the acceptance of female cadets [to the academy] is a realization of the Indonesia’s military’s effort to achieve gender equality. They will be educated together with the male cadets (tarunas), at the same place, with the same academic courses.”

Irrelevant side note: the U.S. is also currently dealing with an issue related to equality—marriage equality. Listen to the SCOTUS’ oral argument of Windsor v. United States here. Download the transcript of the hearing here.

Roubini at NYU


Professor Nouriel Roubini is in town! (Yes, this Roubini). A group of us just had a two-hour lunch with him. Our discussion mainly revolved around the global economy and international trade, both his areas of expertise, but he also touched on several current domestic economic issues. His talk wasn’t really highlighted by value judgments (academics are often very careful about the opinions they assert, which I value very highly). He did, however, made some statements that I think are interesting: a) China should consider lowering its 40-50% savings rate, despite him acknowledging that this behavior has been partially stimulated by the ‘fear’ that the Chinese future will be dominated by the elderly not qualified for employment opportunities that boost the Chinese economy, b) there is a decline of hegemonic political power within the G-7 countries, and the global economy has been shaped by the G-20 countries instead, c) there would have been a massive collateral damage had the U.S. government not provided extra liquidity to its failing banks in 2007-2008, d) current U.S. zero-bound interest rate policy has caused a spillover over other monetary policies pursued in other countries.

He briefly talked about the Euro crisis, and I was curious as to his opinion on the European Central Bank’s role in the eurozone. Unlike the Bank of Japan and the Federal Reserve, the ECB has no privilege or prerogative to conduct quantitative easings (QEs) to lower spreads with respect to the German bunds. The Lisbon Treaty regulates this. I asked his opinion on this, considering that spreads in 7 eurozone countries have been very large over the past 3-4 years. This is a paraphrased, simplified version of what he said:

“The monetary policy objective in the Eurozone is discrepant from that of Japan or the United States. In the United States, the Federal Reserve is constitutionally mandated to focus on improving the following two variables: price stability in unemployment rates. The ECB has no similar mandate; in fact, it places a small emphasis on the latter variable. It aims to maintain price stability within the eurozone more than reducing unemployment rates of its member countries.”

I guess this makes sense—no German citizens would like to see their price of commodities being volatile in exchange for more Greek college graduates having higher level of employment (is this true?). QEs sometimes involve fiscal transfers as well, which is highly unpopular among constituents. This extrapolation is very tenuous though, one can argue that this is true if there’s actually relevant supporting polls on this particular issue.

Now, if we take Professor Roubini’s statement as granted, we can conjecture what will the ECB’s Taylor Rule look like. Since the ECB focuses on price stability more than unemployment, the parameter assigned to the former variable is expected to be much greater compared to the coefficient assigned to the latter variable. This would be an exciting econometrics project for anybody out there interested in monetary economics.

Update: Yesterday’s FT article (March 5th) indirectly corroborated Professor Roubini’s comment on ECB’s main role. “…the ECB has no formal role in managing unemployment. Its one purpose in life is to guarantee price stability by keeping inflation “close to, but below” 2 per cent over a deliberately unspecified medium term.”

Falling to Pieces


Jakarta Globe opines that Indonesia’s ruling party is crumbling. The Democratic Party (Partai Demokrat), the political platform that drove President Yudhoyono to his seat of presidency, is no longer perceived as a party characterized by its corruption-free members and robust internal structure. The once-esteemed Chairman Urbaningrum recently stepped down as he allegedly partook in corrupt Hambalang activities, party member Edhie Yudhoyono (President Yudhoyono’s son) resigned from his house of representative seat to focus on mending the party’s internal affairs, former treasurer Nazaruddin was sentenced to seven years of imprisonment on account of a corruption case, Yudhoyono’s right hand, former Minister Malarangeng, devolved his ministerial power to the self-professed tech expert Roy Suryo. There are numerous corruption cases pertaining to the Democratic Party not mentioned in this post. Too many. Dozens of them over the past six months.

President Yudhoyono, in an effort to rescue the party he established, visited Mecca to seek spiritual guidance. “I have been asking God for help and assistance so that our beloved party can be immediately released from the difficult tests we have been facing these days.” He further added, “I hope you follow my lead in praying to God so that He can immediately find a solution that is proper, wise and dignified.”

With all of these happening, undecided Indonesian voters who lean towards the Democratic Party might shift their focus on other emerging parties involved in the upcoming elections. Members of Partai Demokrat should take concrete actions to restore the party’s public image.

Indonesia’s Economy: Short Update

Indonesia’s economy is growing at a rapid rate, as predicted by IMF’s, World Bank’s, and McKinsey’s reports. Last year it expanded by 6.23%. Unlike other economies in South East Asia, Indonesia’s economy is not export-driven; exports only account for approximately a quarter of the country’s total income. The growth was mainly attributable to strong and robust domestic consumption.

A Short Note on the U.S.’ Quantitative Easing

I feel the urgency to write this post after I watched this misleading animated clip on the Federal Reserve’s quantitative easing policy. I think most economics students or current affairs aficionados can refute nearly most of the things mentioned in the clip, but I’d like to point out one good thing about Chairman Bernanke’s successful in his pursuit of purchasing what most of us would consider junk assets.

Read this post from the Economist. The Fed’s large-scale asset purchases have been profitable so far. Secretary Geithner literally received a total of $89 billion dollars in profits from the subprime assets the Fed’s purchased after QE1, QE2, and QE3. Chairman Bernanke did use Americans’ tax revenues and did utilize it capacity to print money in the beginning, but in the end, the citizens’ money have been incrementally restored.

Anti-Feds, the two fluffy bears in the clip included, would then argue that the Fed’s money printing would lead to inflation. Printing money means inflation, they’d say, disregarding the fact that the U.S. economy’s money velocity has shown a negative trend and that its GDP growth has demonstrated a positive trajectory since the 2008 financial crisis. But as shown from the graph below (quarterly), The Fed’s quantitative easing policies have not, and will not, lead to a Zimbabwean inflation that most anti-Fed zealots have claimed.


Though one can argue that mild inflation is bad, it has some positive features as well. Borrowing becomes cheaper as debt becomes less valuable as prices are expected to increase. One’s debt decreases in real terms. One last thing. It’s widely known that quantitative easings lower interest rates on selective assets (an important feature that’s not mentioned at all in the clip). Take a look at this graph showing how real investments have increased post-2008.

I acknowledge that in elaborating my arguments above I might have oversimplified some data. Furthermore, I haven’t actually done proper academic research on this. But in general, one can be positive about the Fed’s unconventional monetary policy. The unjustifiable detestation towards the Fed and Chairman Bernanke is often fueled by irrational preconceived notions and a strict adherence to an anti-government ideology. If we really want to learn or refuse to be indoctrinated, I personally think that we should refrain from committing this error.

Update: The NYTimes recently reports that the U.S. economy contracted in late 2012. This had nothing to do with the Fed’s action though. It’s mainly attributable to the significant decrease in military spending. 

The Euro Debt Graph


If anyone ever asked me about my favorite graph in economics, I would show them the graph above. My professors once said that the graph is aesthetically beautiful (look at the convergence between 1999 and 2008) but what makes it very special is the amount of information contained in just one graph.

Some have tried to explain what exactly caused the convergence. There’s a lot of economic theories being offered, but I find one particular hypothesis convincing. It’s simply carry-trading. Not the typical currency carry-trading, but government bond (10-year maturity) carry-trading. Private investors in 1999 saw the expected accession of Greece to the Eurozone as a form of risk-minimization: they believed that Greek bonds would just be as valuable as Germany’s risk-free bonds. Since Greece’s interest rates were way higher than Germany’s interest rates, they borrowed money from Germany (with low cost since Germany’s interest rates were comparatively lower than those of Greece) and invest in Greek bonds (with higher return since Greece’s interest rates were comparatively higher than those of Germany). The free market then did it job pretty miraculously: the high demand for Greek bonds increased their price and lowered their yields. Take a look at what happened in 2001-2002. At this point, those who carry-traded since 1999 must have earned tons of money. This act of carry-trading persisted until 2008, when Lehman collapsed, credit rating agencies downgraded Greece, and investors started seeing Greek bonds to be riskier than other bonds in the Eurozone.

The consequence? Private investors started panicking (a legitimate panic, not an irrational one), and each country started having its own interest rate trajectory. In 2012, Greek bonds were perceived as extremely unpredictable in its return to debt investments (notice the double-digit government bond yields), while Germany’s bonds maintained its stability. No wonder why Christine Lagarde wasn’t happy.