Current debate among the pros and the cons on carbon trading spread out in wide range from the pessimistic to optimistic views, from the full of prejudice to the full of trust opinions. Carbon trading (as part of climate change discussion) supposes not to be a talk among certain groups of people, rather it must be discussed by every single person on earth because we are all contributing to the emission and (potentially) affected by the global warming. Therefore it is important to provide idea about the logical basis of carbon trading so then we can always back to the origin of the idea when we have different views. I would offer two logical bases to understand the carbon trading. All of them based on three assumptions; these are: we agreed that climate change is real and bad, trees or forests are able to remove carbon and other green house gases, and most importantly is that emission reduction is our common objective.
The first logic is the externality. That is the external cost or benefit of any human activity. This is not new for economists but very important to understand by people who had not chance to study economics. Externality can be positive or negative from demand or supply side; it depends on the gap between the private marginal cost/benefit with the social marginal cost/benefit. If the social marginal cost is higher than private marginal cost, we call it negative externality. Positive externality occurs when private marginal benefit is greater than social marginal benefit. For example, when we ride a car for certain distance which make us burn one litre of gasoline, the private marginal cost is exactly the cost of one litre of gasoline (market price), say IDR5,000. The social marginal cost of burning additional one litre of gasoline, however, is the air pollution that contributes to the climate change. The exact cost of the pollution made by one litre of burned gasoline is most likely much more than IDR5,000. Meanwhile, for positive externality, we can take tree growing as an example. If someone grows a tree, his or her marginal benefit is the tree itself, which can be the wood, the fruit or other parts of the tree. The social benefit of having another tree, however, is more than that because the tree removes the carbon emission in the air which contributes on climate change mitigation.
The gap between the private and social marginal benefit/cost is the reason of carbon trading. Those who create negative externality must pay more than his or her private cost (market price of the product i.e. one litre of gasoline). The additional payment must be transferred to the tree growers who create positive externality; this will close the private and social gap. Furthermore, this is an effective market instrument because it provides disincentive to the polluters and, in the same time, offers incentive to the carbon removers.
The second logic is incentive and disincentive on achieving the carbon quota. To make it simple, let say total global emission is 1000 tonnes per year in 2009. All countries agreed to decrease the emission down to 800 tonnes per year by 2010. Let say we agreed to oblige all countries decrease their emission by 20 per cent of their 2009 baseline by the end of 2010, and we only have two countries in the world. For example, County A produced 800 tonnes, while Country B produced 200 tonnes in 2009. This means Country A must lower their emission to 640 tonnes, while Country B is 160 tonnes by 2010. If Country A believes that it cannot lower that much and only commit to 720 tonnes, while Country B plans to decrease more to only produce 80 tonnes by 2010, then total world emission will be 800 tonnes, which means meet the target. However, Country A must pay the additional opportunity cost of Country B for the extra 80 tonnes. At the end, the world creates more social surplus in the short run and, in the same time, invests more for the long run global welfare.
The implementation, however, is not as simple as it is. It needs standards (e.g. of how to measure the emission of different human activities, and how to define the price of carbon), strong willingness to pay for the long run benefit, clear and transparent organization and procedures including who and how to use the money gained from carbon trading, and so on and so forth. It is possible to find the evil when it comes into the detail, however, this should not make us oppose the idea of carbon trading because the idea itself is fair and promising to make our earth better in the future. What we have to do is to move on working in the details and make it transparent to public so then there is no space for the evil to hide its face.
30 June, 2010
Kita Perlu Pagu Anggaran Wilayah, Bukan Dana Aspirasi
Mencermati debat terkait usulan Golkar tentang dana aspirasi, kita perlu mendukung pendapat Presiden yang disampaikan di Istana Cipanas untuk tidak menciptakan jalur baru dalam proses perencanaan dan penganggaran.
Praktek Saat Ini
Usulan Golkar ini bukan hal baru di daerah-daerah, anggota DRPD di beberapa daerah secara tidak resmi memiliki 'hak veto' dalam penganggaran sampai dengan jumlah tertentu. Saat ini ada dua jalur konsultasi perencanaan dan penganggaran, yaitu musyawarah perencanaan pembangunan (Musrenbang) dan penjaringan aspirasi pada masa reses. Jalur pertama cenderung digunakan oleh eksekutif, sedangkan jalur kedua mutlak milik legislatif. Keduanya memiliki tim anggaran atau panitia anggaran yang pada akhir masa perencanaan saling bertemu untuk menyepakati rencana anggaran terakhir yang kemudian disahkan oleh kepala daerah dan DPRD di daerah, atau Presiden dan DPR di pusat.
Dua jalur perencanaan dan penganggaran itu merupakan penyakit berbahaya. Dengan adanya dua jalur itu, yang paling dilemahkan adalah Musrenbang yang justru paling legitimate dari sisi proses karena basisinya adalah kewilayahan bukan kepartaian seperti halnya masa reses. Memang harus diakui bahwa lemahnya Musrenbang bukan hanya karena jalur aspirasi, tetapi juga karena eksekutif tidak memiliki format diskusi yang memadai dalam Musrenbang sehingga usulan-usulan yang keluar dari Musrenbang dipandang tidak berkualitas.
Pagu Anggaran Wilayah
Jika tujuan Golkar adalah keadilan penganggaran dalam kewilayahan, maka yang kita perlukan adalah pagu anggaran wilayah, bukan dana aspirasi. Dalam sistem penganggaran kita saat ini yang kita kenal adalah pagu anggaran sektoral baik itu untuk departemen atau lembaga teknis di pusat maupun Satuan Kerja Pemerintah Daerah (SKPD) di daerah. Kita tidak mengenal pagu anggaran wilayah. Artinya sistem perencanaan dan penganggaran saat ini tidak menyeimbangkan antara pertimbangan sektoral dengan pertimbangan kewilayahan.
Pertimbangan sektoral tanpa kewilayahan akan dapat menciptakan ketimpangan wilayah. Pertimbangan sektoral membantu menjawab pertanyaan 'apa yang harus dilakukan?', tetapi tidak dapat menjawab 'di mana harus dilakukan?'. Pertanyaan kedua hanya dapat dijawah lewat pertimbabngan kewilayahan. Jika sistem kita menyeimbangkan keduanya maka kita dapat menjawab kedua pertanyaan tersebut yang sangat penting dalam perencanaan. Hal itu kemudian dilanjutkan dengan pertanyaan penganggaran 'berapa besar anggaran yang diperlukan?'. Dengan demikian, setelah menjawab pertanyaan ketiga maka kita dapat mensortir kebutuhan anggaran baik per sektor maupun per wilayah, dimana jika kita jumlahkan hasilnya sama yaitu total anggaran pembangunan.
Pagu anggaran wilayah dapat dibuat dengan cara mempertimbangkan variable-variabel penting yang mempengaruhi tinggi rendahnya kebutuhan kegiatan pembangunan. Sebagai contoh, kita bisa mempertimbangkan jumlah penduduk, jumlah penduduk miskin, luas wilayah, indeks ketimpangan infrastruktur dan lain-lain. Pagu juga dapat digunakan sebagai instrument insentif bagi daerah yang efekftif dan efisien menggunakan anggarannya dengan cara membadingkannya dengan capaian-capaian pembangunan misalnya PDRB, jumlah pekerjaan yang diciptakan, jumlah orang miskin yang dientaskan dan lain-lain.
Musrenbang Sebagai Jalur Satu Pintu Untuk Semua Pihak
Pagu anggaran wilayah akan membantu Musrenbang, sebagai mekanisme resmi perencanaan dan penganggaran, dihormati oleh semua pihak. Akan jauh lebih baik lagi jika jalur penjaringan aspirasi digabung dengan Musrenbang dengan cara mengkoordinasikan jadwal Musrenbang dengan jadwal reses. Musrenbang seharusnya menjadi pintu bagi semua pihak untuk bermusyawarah dalam menentukan prioritas pembangunan. Prioritas pembangunan adalah kegitan-kegiatan yang kita percaya memiliki efek multiplier yang paling tinggi dalam peningkatan kesejahteraan masyarakat.
Dengan adanya pagu anggaran wilayah, forum Musrenbang dapat langsung menentukan prioritas karena mereka memiliki tiga informasi penting dalam perencanaan, yaitu: bagaimana keadaan saat ini, apa yang harus dicapai, dan berapa anggaran atau sumberdaa yang dimiliki. Dalam proses Musrenbang saat ini, informasi ketiga tidak diketahui sehingga peserta musyawarah membuat daftar panjang untuk diserahkan kepada pemerintah. Daftar panjang ini sering memusingkan pihak pemerintah sehingga akhirnya pihak pemerintah, lewat Tim Anggaran, membuat daftar sendiri. Ini yang membuat Musrenbang menjadi tidak dihormati lagi.
Penggunaan dana pembangunan akan lebih efektif jika rencananya dihasilkan lewat diskusi yang transparan dalam forum Musrenbang. Dengan semua pihak mengandalkan forum Musrenbang, maka forum ini dapat menjadi media untuk saling beragumentasi dan saling belajar untuk mengetahui intervensi pembangunan yang paling efisien. Yang dimaksud semua pihak di sini termasuk politisi di DPR atau DPRD, birokrat dari departemen, lembaga teknis atau SKPD, wakil-wakil masyarakat terpinggirkan, para pengusaha, organisasi-organisasi sosial masyarakat dan lain-lain. Untuk membuat forum Musrenbang efektif tentu diperlukan pengorganisasian forum yang lebih baik dari yang ada saat ini.
Dana aspirasi hanya akan membuat elit-elit politik menjadi lebih berkuasa tanpa harus berkonsultasi dengan masyarakat di wilayahnya, terutama yang bukan pemilih partainya. Sedangkan pagu anggaran wilayah dan penguatan Musrenbang akan membuat pengambilan keputusan dalam proses perencanaan dan penganggaran lebih transparan dan objektif sehingga akan lebih memperhatikan pertimbangan teknokratis dan sekaligus lebih adil dari sisi kewilayahan. Mau pilih yang mana?.
Praktek Saat Ini
Usulan Golkar ini bukan hal baru di daerah-daerah, anggota DRPD di beberapa daerah secara tidak resmi memiliki 'hak veto' dalam penganggaran sampai dengan jumlah tertentu. Saat ini ada dua jalur konsultasi perencanaan dan penganggaran, yaitu musyawarah perencanaan pembangunan (Musrenbang) dan penjaringan aspirasi pada masa reses. Jalur pertama cenderung digunakan oleh eksekutif, sedangkan jalur kedua mutlak milik legislatif. Keduanya memiliki tim anggaran atau panitia anggaran yang pada akhir masa perencanaan saling bertemu untuk menyepakati rencana anggaran terakhir yang kemudian disahkan oleh kepala daerah dan DPRD di daerah, atau Presiden dan DPR di pusat.
Dua jalur perencanaan dan penganggaran itu merupakan penyakit berbahaya. Dengan adanya dua jalur itu, yang paling dilemahkan adalah Musrenbang yang justru paling legitimate dari sisi proses karena basisinya adalah kewilayahan bukan kepartaian seperti halnya masa reses. Memang harus diakui bahwa lemahnya Musrenbang bukan hanya karena jalur aspirasi, tetapi juga karena eksekutif tidak memiliki format diskusi yang memadai dalam Musrenbang sehingga usulan-usulan yang keluar dari Musrenbang dipandang tidak berkualitas.
Pagu Anggaran Wilayah
Jika tujuan Golkar adalah keadilan penganggaran dalam kewilayahan, maka yang kita perlukan adalah pagu anggaran wilayah, bukan dana aspirasi. Dalam sistem penganggaran kita saat ini yang kita kenal adalah pagu anggaran sektoral baik itu untuk departemen atau lembaga teknis di pusat maupun Satuan Kerja Pemerintah Daerah (SKPD) di daerah. Kita tidak mengenal pagu anggaran wilayah. Artinya sistem perencanaan dan penganggaran saat ini tidak menyeimbangkan antara pertimbangan sektoral dengan pertimbangan kewilayahan.
Pertimbangan sektoral tanpa kewilayahan akan dapat menciptakan ketimpangan wilayah. Pertimbangan sektoral membantu menjawab pertanyaan 'apa yang harus dilakukan?', tetapi tidak dapat menjawab 'di mana harus dilakukan?'. Pertanyaan kedua hanya dapat dijawah lewat pertimbabngan kewilayahan. Jika sistem kita menyeimbangkan keduanya maka kita dapat menjawab kedua pertanyaan tersebut yang sangat penting dalam perencanaan. Hal itu kemudian dilanjutkan dengan pertanyaan penganggaran 'berapa besar anggaran yang diperlukan?'. Dengan demikian, setelah menjawab pertanyaan ketiga maka kita dapat mensortir kebutuhan anggaran baik per sektor maupun per wilayah, dimana jika kita jumlahkan hasilnya sama yaitu total anggaran pembangunan.
Pagu anggaran wilayah dapat dibuat dengan cara mempertimbangkan variable-variabel penting yang mempengaruhi tinggi rendahnya kebutuhan kegiatan pembangunan. Sebagai contoh, kita bisa mempertimbangkan jumlah penduduk, jumlah penduduk miskin, luas wilayah, indeks ketimpangan infrastruktur dan lain-lain. Pagu juga dapat digunakan sebagai instrument insentif bagi daerah yang efekftif dan efisien menggunakan anggarannya dengan cara membadingkannya dengan capaian-capaian pembangunan misalnya PDRB, jumlah pekerjaan yang diciptakan, jumlah orang miskin yang dientaskan dan lain-lain.
Musrenbang Sebagai Jalur Satu Pintu Untuk Semua Pihak
Pagu anggaran wilayah akan membantu Musrenbang, sebagai mekanisme resmi perencanaan dan penganggaran, dihormati oleh semua pihak. Akan jauh lebih baik lagi jika jalur penjaringan aspirasi digabung dengan Musrenbang dengan cara mengkoordinasikan jadwal Musrenbang dengan jadwal reses. Musrenbang seharusnya menjadi pintu bagi semua pihak untuk bermusyawarah dalam menentukan prioritas pembangunan. Prioritas pembangunan adalah kegitan-kegiatan yang kita percaya memiliki efek multiplier yang paling tinggi dalam peningkatan kesejahteraan masyarakat.
Dengan adanya pagu anggaran wilayah, forum Musrenbang dapat langsung menentukan prioritas karena mereka memiliki tiga informasi penting dalam perencanaan, yaitu: bagaimana keadaan saat ini, apa yang harus dicapai, dan berapa anggaran atau sumberdaa yang dimiliki. Dalam proses Musrenbang saat ini, informasi ketiga tidak diketahui sehingga peserta musyawarah membuat daftar panjang untuk diserahkan kepada pemerintah. Daftar panjang ini sering memusingkan pihak pemerintah sehingga akhirnya pihak pemerintah, lewat Tim Anggaran, membuat daftar sendiri. Ini yang membuat Musrenbang menjadi tidak dihormati lagi.
Penggunaan dana pembangunan akan lebih efektif jika rencananya dihasilkan lewat diskusi yang transparan dalam forum Musrenbang. Dengan semua pihak mengandalkan forum Musrenbang, maka forum ini dapat menjadi media untuk saling beragumentasi dan saling belajar untuk mengetahui intervensi pembangunan yang paling efisien. Yang dimaksud semua pihak di sini termasuk politisi di DPR atau DPRD, birokrat dari departemen, lembaga teknis atau SKPD, wakil-wakil masyarakat terpinggirkan, para pengusaha, organisasi-organisasi sosial masyarakat dan lain-lain. Untuk membuat forum Musrenbang efektif tentu diperlukan pengorganisasian forum yang lebih baik dari yang ada saat ini.
Dana aspirasi hanya akan membuat elit-elit politik menjadi lebih berkuasa tanpa harus berkonsultasi dengan masyarakat di wilayahnya, terutama yang bukan pemilih partainya. Sedangkan pagu anggaran wilayah dan penguatan Musrenbang akan membuat pengambilan keputusan dalam proses perencanaan dan penganggaran lebih transparan dan objektif sehingga akan lebih memperhatikan pertimbangan teknokratis dan sekaligus lebih adil dari sisi kewilayahan. Mau pilih yang mana?.
10 June, 2010
Unconditional Cash Transfer Policy in Indonesia
Policy Description
This paper discusses the unconditional cash transfer (UCT) policy which was implemented in Indonesia in 2005, 2008 and 2009 as a package with the fuel subsidy reduction policy. This is an example of targeted social policy with income transfer where economists and scholars, as will be explained later, believe as an effective and efficient way both for economic development as well as social welfare.
Together with debt payment, fuel subsidy takes the most significant proportion of government spending in Indonesia. From 1999 to 2004, the energy subsidy was 8 to 28 per cent of total government expenditures (Yusuf & Resosudarmo 2008, p. 3).
Apart from fiscal concerns, fuel subsidy may also lead to justice issue. More than 70 per cent of the subsidy was enjoyed by the top 40 per cent of citizens, the bottom 40 gets less than 14 per cent (Departemen Sosial 2008b, p. 15). This is because most of the fuel is used for private vehicles.
The approach of the policy was providing cash directly to households without any conditions. Direct cash transfer means that government provides cash rather than service such as free health care. No conditionality means that recipient households can spend the money as they like without any obligation such as to bring their children to school (Cueto 2009, P. 1952).
The Policy Purpose
The main purpose of the policy was to mitigate the impact of fuel price increase, caused by the fuel subsidy reduction, on poverty. This is a case where social policy is to correct the 'diswelfares' that created by economic policy (Hill 2006, p. 7).
The implication at process level is that government must ensure that the poor use the money for purchasing basic necessities or investing in any other productive activities. The poor should not merely save the money. Economic growth and job creation need the increase of aggregate demand which can be achieved through the increase of consumption and investment (Keynes 1936, p. 325).
The implementation implication is a need to ensure that the cash go to right hand, and only the poor get the cash. Cash transfer has been practiced by developed countries where reliable household income data is available, however, in Indonesia, particularly during UCT implementation, this is not the case. Poor households determined by National Bureau of Statistics (BPS), field checked by post office officers and village officers (Departemen Sosial 2008a, pp. 10-31). Without reliable household income data, the BPS officers rely only on physical assessments such as quality of house, or merely on the judgement of village officers. This creates potential for under coverage where some poor households are not identified, and leakage where some ineligible households are included on the recipient list (SMERU 2006, p. 37). If the number of under coverage and leakage is high, the purpose of poverty mitigation will not be achieved.
It is important for the government to classify the 'victims' of the increased fuel price. Those who suffer the most must be prioritized than the rest, and probably receive more cash. In the case of 2005, urban poor had suffered the most because the kerosene price increase 185.7 per cent, which make it the highest compare to gasoline and diesel (Yusuf & Resosudarmo 2008, p. 33). Urban poor rely on kerosene to fuel their stoves for cooking.
The Policy's Synchronisation to Indonesian Social Welfare System
Indonesia cannot fit into three social welfare's regime as identified by Esping-Anderson. The nearest regime might be the conservative where government is responsible to social welfare only when the market fails (residual), which social policy is delivered through targeted (instead of universal) program (Esping-Anderson 1990, pp. 18-29). However, there are 49.2 per cent of Indonesian citizens who do not have any health insurance (Kompas 2010). This means that state is not responsible when the market fails. That is because Indonesian public budget is limited to cover social welfare costs. In 2009, for example, total government revenue was only 16.1 per cent of national Gross Domestic Product (GDP) (Departemen Keuangan n.d., pp. 1-12). Furthermore, social policy in Indonesia is positioned to support economic development (Bappenas 2010, p. II.3-1). In 2009, social expenditures which include health, education, subsidies other than fuel, and social protection were just 6.8 per cent of GDP (Departemen Keuangan n.d., pp. 1-12; Departemen Keuangan 2007). Therefore, government's policy is always to keep tax low and allow people to spend their money for their own welfare. As a result, ratio of tax revenue to GDP was only 9.9 per cent compared to an average of 14.0 per cent among non-OECD countries in Asia (IMF 2008, p. 11). These characteristics match with 'productivist' or East Asian model (Holiday 2000, p. 709; Jacobs 2000, pp. 2-4; Aspalter 2006, p. 297). However, compared to other East Asian countries, Indonesia has the highest corruption rate. The corruption perception index was 2.4 in 2008, in contrast to South Korea, for example, which was 5.6 (Transparency International 2009, pp. 397-400). This makes Indonesian government more difficult to create social welfare.
Indonesian social welfare characteristic calls for a process implication to improve social solidarity and private sector participation on poverty mitigation. In 2005, poor households only received IDR300,000 which was equal to around US$30 (Widjaja 2009, p. 3). That might be sufficient to help the near-poor to improve their purchasing power, but the amount was too small for the poor. Social solidarity will improve the social safety net of the poor. Private sector, through corporate social responsibility, should participate by improving poor people livelihood. For example, they can help to grow small scale and micro entrepreneurs which could create jobs at micro level.
In the long term, as an implementation implication, government must create more jobs in formal sector. In 2006, there was more than 50 per cent of Indonesian worked in informal sector (Hermanto et al. 2010, p. 5), which most of them did not pay income tax. This makes government revenue become small, not only because the low tax, but also because the number of tax payers are small. Government believed that there were about 25 to 30 million more people are eligible to pay taxes out of 6 million that have been registered by 2008 (The Jakarta Post 2008).
Key Actors and Their Roles
At political decision level, the key actors were the President with support from the Ministers of Finance, Social Welfare, and Energy. Their roles were to initiate and make a final and official decision of the policy. All of them are politicians with strong interests on political gain. As a process implication, it needs checks and balances procedure on political decision process. Other political interest groups and independent experts must involve in decision making process. Without check and balance, the ruling party in government could be just prioritize the urban poor and neglect the poor households in remote area. By doing so, the ruling party could have political gain from the majority of the poor, and at the same time possible to alleviate poverty. This would satisfy their political interest. The implementation implication is that government must consult public sector and support their UCT policy by scientific evidence; for example, reliable poverty data. This is in line with what Jeremey Bantham called 'expert bureaucracy' (Bessant et al. 2006, p. 15).
At implementation level, the key actors were Ministry of Social Welfare (DEPSOS), BPS, post office, and village officers. The DEPSOS played a central role in the implementation as it is they who manage the UCT budget, prepare the guidelines, coordinate other actors, and presents the accountability report. BPS was important to produce accurate ‘poor household’ list. Post office carried out a significant role by checking accuracy of BPS data, distributing the household poor cards (the card) and undertaking payment. Village officers were, in many cases, the key figures who determined the success and failure of the implementation. That is because the accuracy of ‘poor household’ list depended on them as they help BPS and post office officers on field investigation and data verification. In addition, village officers' role was also important in organizing cash collection in remote areas.
The implementation implication of including DEPSOS is to attain support from the local government for ensuring the performance of village officers. Under decentralization policy, DEPSOS has limitation in controlling implementation at field level. They just can rely on local governments because of decentralization. There are 584 local governments in Indonesia and the leaders not necessarily from the ruling party (Departemen Dalam Negeri 2010). Therefore, they need to have an effective coordinating and communication role. That creates a process implication, that is a need for a detail and clear implementation guidelines which organize all actors. The guideline must be able to help all actors from national to village level to perform their tasks well.
BPS needs additional enumerators due to the limitation of BPS officers. At the moment, number of BPS officers is only half of their need (BPS n.d.). That is still far than enough to conduct survey in around 72,000 villages (Kominfo-Newsroom 2009). If they rely on the village officer, the outcome could be biased because the village officers may have vested interest in selecting his or her relatives or prioritizing his or her ethnic group and neglecting others. However, the increase of the enumerator number is not enough. The process implication to ensure accurate data is a need of transparent and objective mechanism to determine the poor. If the reliable mechanism does not exist, there will be conflict and tension during implementation. This was happened during UCT implementation of 2005 where there were number of protests, threats to BPS and village officers, vandalism to public facilities, and conflict among villagers (Widjaja 2009, p. 12)
The process implication to allow post office to handover the cash is to have additional arrangement helping the poor from remote areas to pick up their cash. Post office branches are only available down to sub-district level. Without a different arrangement for collecting the cash, the value of the cash will be offset by the transport cost. DEPSOS reported that during the first instalment of 2005 eligible households received only 94.1 per cent of the total payment. In the second instalment it was only 89.6 per cent. One cause of the payment deduction was the payment cut did by village officers to cover the transport and fee cost to pick up the cash collectively (Departemen Sosial 2008b, p. 13). Furthermore, the post officers have no specialization on checking the accuracy of poor household list. Therefore, as an implementation implication, they need a special training on field verification.
The Change Drivers
The combination of oil price, government budget stability, and number of poor households will determine whether or whether not the UCT policy will be implemented again in the future. This indicates that the government must monitor all those variables. However, in the long term, government has to decrease the poverty at the level where public budget able to support the poor. In the case of fuel price subsidy, number of poor must be decreased significantly before government eliminate all fuel subsidies.
An election and other short term political interest could initiate the UCT policy because it can increase the popularity of the ruling party on poor people. This was the suspicion of the opposition parties when the UCT policy was enacted in 2009. This is not happened in Indonesia only, the conditional cash transfer policy in Mexico and Brazil were also used for political gain (Sewall 2008, p. 175). This creates a process implication to balance the power during decision making process as discussed previously. For long term purpose, the implementation implication is a need to improve the political awareness, particularly among poor people, so they aware that any kind of subsidy come from public budget, not from the politicians' pocket.
Availability of reliable socioeconomic data on individual citizens will increase the use of the cash transfer policy regardless of whether it is conditional or unconditional. Reliable data makes it easy to do eligibility testing. It may improve effectiveness of any social policy with targeting approach. Apart from several issues as discussed previously, The World Bank concludes that the UCT of 2005 was successful to mitigate the poverty (World Bank 2006, p. x). Cash transfer approach, as contrast to service provision approach such as free health care, is more effective to mitigate the short term impact of the increased fuel price (Yusuf & Resosudarmo 2008, p. 45). The conditional cash transfer in Mexico and Brazil was successful to alleviate poverty in the short term, with potential for sustainable impact in the long term (Sewall 2008, p. 185). Moreover, economists have proved that income transfer will create more economic surplus than subsidy (Frank et al. 2009, pp. 181-182). The wider use of (un)conditional cash transfer approach in social policy create a process implication; that is to strengthen the eligibility testing system which include a need of reliable data and information technology as well as a well-trained assessors and analysts. This also calls for an implementation implication where government must educate the recipients on how to use the cash in order to support the policy objective.
References
Aspalter, C 2006, 'The East Asian welfare model', International Journal of Social Welfare, vol. 15, pp. 290-301.
Bappenas, see Ministry of National Development Planning.
Bessant, J, Watts, R, Dalton T & Smyth, P 2006, Talking policy: how social policy is made, Allen & Unwin, Sydney.
BPS, see National Statistics Bureau.
Cueto, S 2009, 'Conditional cash-transfer programmes in developing countries', The Lancet, vol. 374, pp. 1952-1953.
Departemen Dalam Negeri 2010, Basis data Depdagri (Database of Ministry of Home Affairs), Ministry of Home Affairs of Republic of Indonesia, Jakarta, viewed 30 May 2010,
.
Departemen Keuangan 2007, Data APBD tahun 2007 (Local government budget plan year 2007), Ministry of Finance of Republic of Indonesia, Jakarta, viewed 31 May 2010,
.
—— n.d., Data pokok APBN 2005-2010 (Data base of national government budget plan of 2005-2010), Ministry of Finance of Republic of Indonesia, Jakarta.
Departemen Sosial 2008a, Petunjuk teknis penyaluran bantuan langsung tunai untuk rumah tangga sasaran (Technical guidance of unconditional cash transfer for targeted households), Ministry of Social Welfare of Republic of Indonesia, Jakarta.
Departemen Sosial 2008b, Efektifitas bantuan langsung tunai 2008 (Effectiveness of unconditional cash transfer of 2008), Ministry of Social Welfare of Republic of Indonesia, Jakarta.
Esping-Anderson, G 1990, The three worlds of welfare capitalism, Princeton University Press, Princeton NJ.
Frank, RH, Sarah, J & Bernanke, BS 2009, Principles of microeconomics, 2nd edn, McGraw-Hill Australia, North Ryde.
Hermanto, B, Ali, AZ, Derina, R, Agus, AA & Wibowo, SS 2010, 'Revitalising social security via growth in the micro insurance industry', Policy Briefs 11, Australia Indonesia Governance Research Partnership, Crawford School of Economic and Government, ANU College of Asia and the Pacific, The Australian National University, Canberra.
Hill, M 2006, Social policy in in the modern world: a comparative text, Blackwell, Malden, MA.
Holliday, I 2000, ‘Productivist welfare capitalism: social policy in East Asia’, Political Studies, vol. 48, pp. 706-723.
IMF 2008, 'Tax administration reform and fiscal adjustment: the case of Indonesia (2001-07)', IMF Working Paper WP/08/129, International Monetary Fund, viewed 4 June 2010,
.
Jacobs, D 2000, 'Low public expenditures on social welfare: do East Asian countries have secret?', International Journal of Social Welfare, vol. 9, pp. 2-16.
Keynes, JM 1936, The general theory of employment interest and money, Macmillan and Co, London.
Kominfo-Newsroom 2009, 'Menkominfo: tahun 2010 seluruh desa di Indonesia terkoneksi' (Minister of Communication and Information: all villages in Indonesia are connected by 2010), Kominfo-Newsroom, viewed 2 June 2010,
Kompas 2010, 'Baru 50,8 persen masyarakat punya jaminan kesehatan' (It is only 50.8 per cent of people with health insurance), Kompas.com, viewed 3 June 2010,
.
Ministry of National Development Planning 2010, Lampiran peraturan Presiden Republik Indonesia nomor 5 tahun 2010 tentang rencana pembangunan jangka menenangah nasional (RPJMN) tahun 2010-1014 (National medium development plan 2010-2014 appendix), Ministry of National Development Planning (Bappenas), Jakarta.
National Statistics Bureau n.d., 'Rencana strategis' (Strategic plan), Indonesian National Bureau of Statistics, Jakarta, viewed 3 June 2010, .
Sewall, RG 2008, 'Conditional cash transfer programs in Latin America', SAIS Review, vol. 28, no. 2, pp. 175-187.
SMERU 2006, 'Kajian cepat pelaksanaan subsidi langsung tunai tahun 2005 di Indonesia: studi kasus di Provinsi DKI Jakarta' (Rapid assessment of unconditional cash transfer implementation of 2005 in Indonesia: a case study in the Province of DKI Jakarta), SMERU Research Report 361.05/DDC 21, SMERU Research Institute, Jakarta.
The Jakarta Post 2008, 'Tax office aims boost number taxpayers', TheJakartaPost.com, viewed 4 June 2010,
.
Transparency International 2009, Global corruption report 2009, Transparency International, Berlin, viewed 29 May 2010,
.
Widjaja, M 2009, 'An economic and social review on Indonesian direct cash transfer program to poor families year 2005', paper presented to Association for Public Policy Analysis and Management International Conference, Singapore, 7-9 January.
World Bank 2006, 'Making the new Indonesia work for the poor: overview', The World Bank, Jakarta, viewed 30 May 2010,
.
Yusuf, AA & Resosudarmo, BP 2008, 'Mitigating distributional impact of fuel pricing reform: the Indonesian experience', ASEAN Economic Bulletin, vol. 25, no. 1, pp. 32–47.
This paper discusses the unconditional cash transfer (UCT) policy which was implemented in Indonesia in 2005, 2008 and 2009 as a package with the fuel subsidy reduction policy. This is an example of targeted social policy with income transfer where economists and scholars, as will be explained later, believe as an effective and efficient way both for economic development as well as social welfare.
Together with debt payment, fuel subsidy takes the most significant proportion of government spending in Indonesia. From 1999 to 2004, the energy subsidy was 8 to 28 per cent of total government expenditures (Yusuf & Resosudarmo 2008, p. 3).
Apart from fiscal concerns, fuel subsidy may also lead to justice issue. More than 70 per cent of the subsidy was enjoyed by the top 40 per cent of citizens, the bottom 40 gets less than 14 per cent (Departemen Sosial 2008b, p. 15). This is because most of the fuel is used for private vehicles.
The approach of the policy was providing cash directly to households without any conditions. Direct cash transfer means that government provides cash rather than service such as free health care. No conditionality means that recipient households can spend the money as they like without any obligation such as to bring their children to school (Cueto 2009, P. 1952).
The Policy Purpose
The main purpose of the policy was to mitigate the impact of fuel price increase, caused by the fuel subsidy reduction, on poverty. This is a case where social policy is to correct the 'diswelfares' that created by economic policy (Hill 2006, p. 7).
The implication at process level is that government must ensure that the poor use the money for purchasing basic necessities or investing in any other productive activities. The poor should not merely save the money. Economic growth and job creation need the increase of aggregate demand which can be achieved through the increase of consumption and investment (Keynes 1936, p. 325).
The implementation implication is a need to ensure that the cash go to right hand, and only the poor get the cash. Cash transfer has been practiced by developed countries where reliable household income data is available, however, in Indonesia, particularly during UCT implementation, this is not the case. Poor households determined by National Bureau of Statistics (BPS), field checked by post office officers and village officers (Departemen Sosial 2008a, pp. 10-31). Without reliable household income data, the BPS officers rely only on physical assessments such as quality of house, or merely on the judgement of village officers. This creates potential for under coverage where some poor households are not identified, and leakage where some ineligible households are included on the recipient list (SMERU 2006, p. 37). If the number of under coverage and leakage is high, the purpose of poverty mitigation will not be achieved.
It is important for the government to classify the 'victims' of the increased fuel price. Those who suffer the most must be prioritized than the rest, and probably receive more cash. In the case of 2005, urban poor had suffered the most because the kerosene price increase 185.7 per cent, which make it the highest compare to gasoline and diesel (Yusuf & Resosudarmo 2008, p. 33). Urban poor rely on kerosene to fuel their stoves for cooking.
The Policy's Synchronisation to Indonesian Social Welfare System
Indonesia cannot fit into three social welfare's regime as identified by Esping-Anderson. The nearest regime might be the conservative where government is responsible to social welfare only when the market fails (residual), which social policy is delivered through targeted (instead of universal) program (Esping-Anderson 1990, pp. 18-29). However, there are 49.2 per cent of Indonesian citizens who do not have any health insurance (Kompas 2010). This means that state is not responsible when the market fails. That is because Indonesian public budget is limited to cover social welfare costs. In 2009, for example, total government revenue was only 16.1 per cent of national Gross Domestic Product (GDP) (Departemen Keuangan n.d., pp. 1-12). Furthermore, social policy in Indonesia is positioned to support economic development (Bappenas 2010, p. II.3-1). In 2009, social expenditures which include health, education, subsidies other than fuel, and social protection were just 6.8 per cent of GDP (Departemen Keuangan n.d., pp. 1-12; Departemen Keuangan 2007). Therefore, government's policy is always to keep tax low and allow people to spend their money for their own welfare. As a result, ratio of tax revenue to GDP was only 9.9 per cent compared to an average of 14.0 per cent among non-OECD countries in Asia (IMF 2008, p. 11). These characteristics match with 'productivist' or East Asian model (Holiday 2000, p. 709; Jacobs 2000, pp. 2-4; Aspalter 2006, p. 297). However, compared to other East Asian countries, Indonesia has the highest corruption rate. The corruption perception index was 2.4 in 2008, in contrast to South Korea, for example, which was 5.6 (Transparency International 2009, pp. 397-400). This makes Indonesian government more difficult to create social welfare.
Indonesian social welfare characteristic calls for a process implication to improve social solidarity and private sector participation on poverty mitigation. In 2005, poor households only received IDR300,000 which was equal to around US$30 (Widjaja 2009, p. 3). That might be sufficient to help the near-poor to improve their purchasing power, but the amount was too small for the poor. Social solidarity will improve the social safety net of the poor. Private sector, through corporate social responsibility, should participate by improving poor people livelihood. For example, they can help to grow small scale and micro entrepreneurs which could create jobs at micro level.
In the long term, as an implementation implication, government must create more jobs in formal sector. In 2006, there was more than 50 per cent of Indonesian worked in informal sector (Hermanto et al. 2010, p. 5), which most of them did not pay income tax. This makes government revenue become small, not only because the low tax, but also because the number of tax payers are small. Government believed that there were about 25 to 30 million more people are eligible to pay taxes out of 6 million that have been registered by 2008 (The Jakarta Post 2008).
Key Actors and Their Roles
At political decision level, the key actors were the President with support from the Ministers of Finance, Social Welfare, and Energy. Their roles were to initiate and make a final and official decision of the policy. All of them are politicians with strong interests on political gain. As a process implication, it needs checks and balances procedure on political decision process. Other political interest groups and independent experts must involve in decision making process. Without check and balance, the ruling party in government could be just prioritize the urban poor and neglect the poor households in remote area. By doing so, the ruling party could have political gain from the majority of the poor, and at the same time possible to alleviate poverty. This would satisfy their political interest. The implementation implication is that government must consult public sector and support their UCT policy by scientific evidence; for example, reliable poverty data. This is in line with what Jeremey Bantham called 'expert bureaucracy' (Bessant et al. 2006, p. 15).
At implementation level, the key actors were Ministry of Social Welfare (DEPSOS), BPS, post office, and village officers. The DEPSOS played a central role in the implementation as it is they who manage the UCT budget, prepare the guidelines, coordinate other actors, and presents the accountability report. BPS was important to produce accurate ‘poor household’ list. Post office carried out a significant role by checking accuracy of BPS data, distributing the household poor cards (the card) and undertaking payment. Village officers were, in many cases, the key figures who determined the success and failure of the implementation. That is because the accuracy of ‘poor household’ list depended on them as they help BPS and post office officers on field investigation and data verification. In addition, village officers' role was also important in organizing cash collection in remote areas.
The implementation implication of including DEPSOS is to attain support from the local government for ensuring the performance of village officers. Under decentralization policy, DEPSOS has limitation in controlling implementation at field level. They just can rely on local governments because of decentralization. There are 584 local governments in Indonesia and the leaders not necessarily from the ruling party (Departemen Dalam Negeri 2010). Therefore, they need to have an effective coordinating and communication role. That creates a process implication, that is a need for a detail and clear implementation guidelines which organize all actors. The guideline must be able to help all actors from national to village level to perform their tasks well.
BPS needs additional enumerators due to the limitation of BPS officers. At the moment, number of BPS officers is only half of their need (BPS n.d.). That is still far than enough to conduct survey in around 72,000 villages (Kominfo-Newsroom 2009). If they rely on the village officer, the outcome could be biased because the village officers may have vested interest in selecting his or her relatives or prioritizing his or her ethnic group and neglecting others. However, the increase of the enumerator number is not enough. The process implication to ensure accurate data is a need of transparent and objective mechanism to determine the poor. If the reliable mechanism does not exist, there will be conflict and tension during implementation. This was happened during UCT implementation of 2005 where there were number of protests, threats to BPS and village officers, vandalism to public facilities, and conflict among villagers (Widjaja 2009, p. 12)
The process implication to allow post office to handover the cash is to have additional arrangement helping the poor from remote areas to pick up their cash. Post office branches are only available down to sub-district level. Without a different arrangement for collecting the cash, the value of the cash will be offset by the transport cost. DEPSOS reported that during the first instalment of 2005 eligible households received only 94.1 per cent of the total payment. In the second instalment it was only 89.6 per cent. One cause of the payment deduction was the payment cut did by village officers to cover the transport and fee cost to pick up the cash collectively (Departemen Sosial 2008b, p. 13). Furthermore, the post officers have no specialization on checking the accuracy of poor household list. Therefore, as an implementation implication, they need a special training on field verification.
The Change Drivers
The combination of oil price, government budget stability, and number of poor households will determine whether or whether not the UCT policy will be implemented again in the future. This indicates that the government must monitor all those variables. However, in the long term, government has to decrease the poverty at the level where public budget able to support the poor. In the case of fuel price subsidy, number of poor must be decreased significantly before government eliminate all fuel subsidies.
An election and other short term political interest could initiate the UCT policy because it can increase the popularity of the ruling party on poor people. This was the suspicion of the opposition parties when the UCT policy was enacted in 2009. This is not happened in Indonesia only, the conditional cash transfer policy in Mexico and Brazil were also used for political gain (Sewall 2008, p. 175). This creates a process implication to balance the power during decision making process as discussed previously. For long term purpose, the implementation implication is a need to improve the political awareness, particularly among poor people, so they aware that any kind of subsidy come from public budget, not from the politicians' pocket.
Availability of reliable socioeconomic data on individual citizens will increase the use of the cash transfer policy regardless of whether it is conditional or unconditional. Reliable data makes it easy to do eligibility testing. It may improve effectiveness of any social policy with targeting approach. Apart from several issues as discussed previously, The World Bank concludes that the UCT of 2005 was successful to mitigate the poverty (World Bank 2006, p. x). Cash transfer approach, as contrast to service provision approach such as free health care, is more effective to mitigate the short term impact of the increased fuel price (Yusuf & Resosudarmo 2008, p. 45). The conditional cash transfer in Mexico and Brazil was successful to alleviate poverty in the short term, with potential for sustainable impact in the long term (Sewall 2008, p. 185). Moreover, economists have proved that income transfer will create more economic surplus than subsidy (Frank et al. 2009, pp. 181-182). The wider use of (un)conditional cash transfer approach in social policy create a process implication; that is to strengthen the eligibility testing system which include a need of reliable data and information technology as well as a well-trained assessors and analysts. This also calls for an implementation implication where government must educate the recipients on how to use the cash in order to support the policy objective.
References
Aspalter, C 2006, 'The East Asian welfare model', International Journal of Social Welfare, vol. 15, pp. 290-301.
Bappenas, see Ministry of National Development Planning.
Bessant, J, Watts, R, Dalton T & Smyth, P 2006, Talking policy: how social policy is made, Allen & Unwin, Sydney.
BPS, see National Statistics Bureau.
Cueto, S 2009, 'Conditional cash-transfer programmes in developing countries', The Lancet, vol. 374, pp. 1952-1953.
Departemen Dalam Negeri 2010, Basis data Depdagri (Database of Ministry of Home Affairs), Ministry of Home Affairs of Republic of Indonesia, Jakarta, viewed 30 May 2010,
Departemen Keuangan 2007, Data APBD tahun 2007 (Local government budget plan year 2007), Ministry of Finance of Republic of Indonesia, Jakarta, viewed 31 May 2010,
—— n.d., Data pokok APBN 2005-2010 (Data base of national government budget plan of 2005-2010), Ministry of Finance of Republic of Indonesia, Jakarta.
Departemen Sosial 2008a, Petunjuk teknis penyaluran bantuan langsung tunai untuk rumah tangga sasaran (Technical guidance of unconditional cash transfer for targeted households), Ministry of Social Welfare of Republic of Indonesia, Jakarta.
Departemen Sosial 2008b, Efektifitas bantuan langsung tunai 2008 (Effectiveness of unconditional cash transfer of 2008), Ministry of Social Welfare of Republic of Indonesia, Jakarta.
Esping-Anderson, G 1990, The three worlds of welfare capitalism, Princeton University Press, Princeton NJ.
Frank, RH, Sarah, J & Bernanke, BS 2009, Principles of microeconomics, 2nd edn, McGraw-Hill Australia, North Ryde.
Hermanto, B, Ali, AZ, Derina, R, Agus, AA & Wibowo, SS 2010, 'Revitalising social security via growth in the micro insurance industry', Policy Briefs 11, Australia Indonesia Governance Research Partnership, Crawford School of Economic and Government, ANU College of Asia and the Pacific, The Australian National University, Canberra.
Hill, M 2006, Social policy in in the modern world: a comparative text, Blackwell, Malden, MA.
Holliday, I 2000, ‘Productivist welfare capitalism: social policy in East Asia’, Political Studies, vol. 48, pp. 706-723.
IMF 2008, 'Tax administration reform and fiscal adjustment: the case of Indonesia (2001-07)', IMF Working Paper WP/08/129, International Monetary Fund, viewed 4 June 2010,
Jacobs, D 2000, 'Low public expenditures on social welfare: do East Asian countries have secret?', International Journal of Social Welfare, vol. 9, pp. 2-16.
Keynes, JM 1936, The general theory of employment interest and money, Macmillan and Co, London.
Kominfo-Newsroom 2009, 'Menkominfo: tahun 2010 seluruh desa di Indonesia terkoneksi' (Minister of Communication and Information: all villages in Indonesia are connected by 2010), Kominfo-Newsroom, viewed 2 June 2010,
Kompas 2010, 'Baru 50,8 persen masyarakat punya jaminan kesehatan' (It is only 50.8 per cent of people with health insurance), Kompas.com, viewed 3 June 2010,
Ministry of National Development Planning 2010, Lampiran peraturan Presiden Republik Indonesia nomor 5 tahun 2010 tentang rencana pembangunan jangka menenangah nasional (RPJMN) tahun 2010-1014 (National medium development plan 2010-2014 appendix), Ministry of National Development Planning (Bappenas), Jakarta.
National Statistics Bureau n.d., 'Rencana strategis' (Strategic plan), Indonesian National Bureau of Statistics, Jakarta, viewed 3 June 2010,
Sewall, RG 2008, 'Conditional cash transfer programs in Latin America', SAIS Review, vol. 28, no. 2, pp. 175-187.
SMERU 2006, 'Kajian cepat pelaksanaan subsidi langsung tunai tahun 2005 di Indonesia: studi kasus di Provinsi DKI Jakarta' (Rapid assessment of unconditional cash transfer implementation of 2005 in Indonesia: a case study in the Province of DKI Jakarta), SMERU Research Report 361.05/DDC 21, SMERU Research Institute, Jakarta.
The Jakarta Post 2008, 'Tax office aims boost number taxpayers', TheJakartaPost.com, viewed 4 June 2010,
Transparency International 2009, Global corruption report 2009, Transparency International, Berlin, viewed 29 May 2010,
Widjaja, M 2009, 'An economic and social review on Indonesian direct cash transfer program to poor families year 2005', paper presented to Association for Public Policy Analysis and Management International Conference, Singapore, 7-9 January.
World Bank 2006, 'Making the new Indonesia work for the poor: overview', The World Bank, Jakarta, viewed 30 May 2010,
Yusuf, AA & Resosudarmo, BP 2008, 'Mitigating distributional impact of fuel pricing reform: the Indonesian experience', ASEAN Economic Bulletin, vol. 25, no. 1, pp. 32–47.
What has been the effect of the Global Financial Crisis upon thinking about the role of the state?
Introduction
A global financial crisis, hereafter called GFC, is a crisis related to liquidity of financial institutions and/or the volatility of the value of money, which happens in one or more countries and affect other countries. The role the state plays in global financial market, in regard to the concern of preventing and resolving the GFC, has been the focus of ongoing debate among economists and policy makers. For the purpose of this essay, state will be defined as a nation-state and international trustee. Nation-state includes government and 'the lender of last resort', while international trustee includes international institutions such as the World Bank and International Monetary Fund (IMF). This essay will argue that GFC has led to a shift in thinking and calls for measures to strengthen the role of the state.
Comparing Theories: Middle Way is Necessary
Economists and policy makers have different view on the role of the state in regard to financial market and GFC. This paper limits the discussion into three groups; these are the Left (Marxist), the Middle (Keynesian), and the Right (Neoliberalists). The last two groups can be identified as liberal, which have been dominating the debate since great depression of 1930s. Marxists believe that the state must do full-control to economic development as well as capital. They argue that credit, means of production, and means of communication (and transport) must be centralized under the state (Marxist n.d.). On the other hand, the liberals (both Keynesian and Neoliberal) believe in the power of the free-market especially in terms of allocating scarce resources. However, they disagree on how far the state should intervene in the market. F.A.Hayek, as the central figure of Neoliberal beside Milton Freidman, argued that the advances or growth or progress could be achieved mainly because of 'spontaneous forces' from free market, therefore the state control must be limited (Hayek 1960, p. 38). On the other hand, John Maynard Keynes, although he was a liberalist and free-trade believer, argued that the spontaneous process through laissez faire will create instability; therefore the state must play an active role in certain circumstances on economy (Keynes 1936) [1].
As a result, the three groups share different view in financial market and GFC. Marxists believe that financial (capital) market must be fully controlled by the state in order to maximize the benefit for the proletarians. This is because Marxists believe that state is an instrument of 'political domination with specific effects on the class struggle' (Jessop 1990, p. 28). By contrast, Neoliberalists believe that the state must limit its intervention to monetary policy. One important part in monetary policy is to control the rate of interest indirectly through managing the supply of money, buying or selling securities, and increasing or decreasing the quantity of reserves available to banks (Friedman 1960, pp. 30-35)[2]. On responding to GFC, instead of prioritizing the demand side, Neoliberalists recommend securing the supply side by lending to firms early and freely (Friedman 1963, p. 407)[3]. Neoliberalists do not like fiscal policy because it is costly, and they believe it is not an effective way to resolve a crisis. Neoliberalists also believe that unemployment during a crisis will only happen in the short term; in the long term those who lose their job will return to the workforce although they will get lower wages. This means there will always be a full-employment level of output to meet the Long Run Aggregate Supply Curve (LRSS)[4] as long as there are no disturbances to the free-market; for example, minimum wages or demands from trade unions. Keynesians, on the other hand, believe that intervention in monetary policy alone will not be enough to promote aggregate demand and aggregate supply. Therefore, unemployment would be permanent in the long term without direct state intervention. This means deeper recession. Keynes argued that the state must act on more than monetary policy by actively stimulating aggregate demand and aggregate supply with focus on fiscal policy. He also argued that the state budget not necessarily balanced. During crisis the deficit budget is needed to allow state intervention through fiscal policy, while during conducive economy the state can make surplus because few state interventions are needed (Keynes 1936)[5].
It can be argued that the Keynesian theory is more plausible. All decisions about resource allocation cannot be given to the state as suggested by Marxists. Giving all resource allocation decisions to the state will make the state a super power which will lead to an increase in corruption. Furthermore, whoever is in charge of managing that super-power state will not be able to control all the complex relationships associated with resource allocation even if their intentions are good. This is simply because of the 'bounded rationality' which is the limitation of human being in dealing with complex environment (Simon 1991, p. 132). On the other hand, all economic development and recession recovery cannot be left to the market's 'invisible hand'[6] as argued by Neoloberalists. In the long term, the free-market combined with laissez faire will not be efficient for the whole society. For example, free market will leave incapable people out of market which will lead them in extreme poverty and create high divergence[7]. The divergence and poverty will trigger social disorder which could be ended with the collapse of the entire social and economic system. A middle way is necessary because the society can get benefit from the efficiency of free-market but in the same time the state play an active role to prevent instability as well as to improve the capability of the "losers".
The Keynesian will also work better in financial market compare to Marxists and Neoliberalism. The centralization of 'financialisation' to the state will make 'financial market' not efficient. There will be many potential buyers (investors) who cannot participate in the market because the supply will be limited, while potential sellers (firms) cannot supply the market because of the monopoly by the state. By contrast, the Neoliberal who emphasis more on the long term will not satisfy those people who are concerned only with short term problems during crisis. If the state relies only on monetary policy and increases the supply of money to decrease interest rates, it may increase consumption and investment (as components in aggregate demand); however, the change may be slower than the impact of fiscal policy. Leaving the market with low aggregate demand and low employment will trigger social and political crisis which will lead to a deeper economic recession. By adopting Keynesian theory, the financial crisis can be recovered relatively quickly because the intervention is mainly on the demand side through fiscal policy supported by appropriate monetary policy (particularly to ensure the balance of aggregate supply in response to the progress of aggregate demand). The increase of aggregate demand will lead to increases in employment and economic output. The cost of fiscal policy can be financed by the state's saving gained during economic surplus. However, the increase of aggregate demand toward the full-employment level of output will create inflation (Bruno & Sachs 1985, pp. 26-29), this is why fiscal policy must be balanced by monetary policy which would help to increase the aggregate supply to mitigate the inflation in the short term during crisis recovery.
Key Measures to Strengthen the Role of the State
In addition to fiscal and monetary policy, the state must take an active role in ensuring the free and accurate information for financial market actors, particularly the 'Main Street' group[8]. Hayek argued that an important component in individual liberty is 'knowledge'. Any individual will use their 'knowledge' to make the best decision for his or her self, and no one (including the state) knows what is best for them (Hayek 1960, p. 95). Efficiency in free-market is based on the assumption that all market actors are 'well-informed' (Frank et al. 2009, p. 150)[9]. The information asymmetry has caused GFC[10]. For example, in the case of Enron crisis in 2001 and the subprime crisis that started in 2007, even with the role of independent auditors, the U.S. government failed to uncover the truth and sufficient information for investors (BBC News 2002; Fooks 2003, pp. 21-22; Randle 2010). As a result, investors have low trust in the information given out by corporate executives and brokerage firms (Fooks 2003, p. 23). This will reduce number of investors in the market, particularly of those who are committed for medium or long term investment. What will remains are mostly 'gambler' investors who are only interested on a high gain from short term investment which could trigger crisis. Free and accurate information for all market actors will only be possible if the state play an active role because information is a public interest, therefore it cannot be given to the market or private sector.
The state can avoid the bubble in asset price by providing "reference price" information as addition to the free and truth information. Reference price reflects the 'real' value of the asset. For the stock price, the reference could relate to information about return on equity (RoE) and return of asset (RoA); for property the reference could be inflation rate. This information could be shown side by side with market price on an information board. Investors will be then alerted to possible bubble when there is a significant gap between market and reference price.
In the context of globalization, the state must apply capital control policy. Capital control aims to protect the country from the volatility caused by large in and out flows of money in a relatively short time. According to Keynesian theory, capital control can help to control the marginal efficiency of capital. The state must ensure that the marginal efficiency is not lower than the interest rate in order to prevent the high fluctuation of marginal efficiency (Keynes 1936, pp. 135-137). One of the causes of Asian crisis was that the Japanese, European and North American banks withdraw their money in short time, not only from Thailand, but also from other Asian countries. The money was then used to increase lending to Latin America and Eastern Europe which then prevented the crisis spread to other regions (Allen & Gale 2007, pp. 260-261). Malaysia reacted to crises by applying capital control policy through lowering interest rates and applying an exit tax. As a result, they suffered less and recovered quickly compared to neighboring countries (Stiglitz 2002, pp. 93; 124-125)[11]. With capital control, the state can prevent an excess supply of capital which in Asian crisis became the cause of bubble (Stiglitz 2002, p. 101). A bubble can happen when an excess supply of capital combined with a progressive advertising campaign of one corporate or brokerage firm leads to concentration of large amounts of capital in few assets (Harman 2009, pp. 152-153). This will inflate the price of those particular assets thus creating a bubble price. This was the case in the Asian Crisis and also during subprime crisis in the U.S. (Gowan 2009, pp. 17-21). These demonstrate that capital control policy will prevent one country from suffering a financial crisis and also prevent the contagion effect with the result that a crisis in one country will be relatively easy to keep localized. Moreover, capital control also helps a country to utilize the capital for the most productive purposes which will increase economic output and create employment.
In order to strengthen the role of the state, support is needed from international trustee, particularly IMF and the World Bank. They role is important, not only as the international lender of last resort, but also to ensure and promote the stability of global financial market. The focus of financial market stabilization is to prevent the worldwide financial market from 'gambling investment' (created by firm, broker, and investor speculators) by promoting a better regulations that provides incentive for the real investors; that is investors who expect to gain from the firms' profit or the real value of the asset rather than from the 'artificial' price of the stocks or asset. The basic idea is to bring back the function of financial market as instrument to support investments, where firms can collect cheap funds and investors have opportunity to make their surplus more productive than just make a bank deposit. Therefore, international trustee must promote regulations to prevent the practice of alternative investments such as the hedge funds. Another necessary role in global level to create stabilization is the GFC early warning system (Reinhart & Rogoff 2009, pp. 277-278). The system must be able to detect any crisis symptoms so then international trustee and nation-states can react quickly to fix the issues. One practical example is to monitor the bubble in financial market.
Although state intervention is important, it must be carried out in a proper and careful way. For example, during great depression of 1930s and stagflation of 1970s, many economists debated the role of the lender of last resort[12]. Some scholars, such as Freidman, argued that monetary policy taken by the lender of last resort who reduced the money supply was the cause of the great depression. That was because the officers in charge were incapable to handle the situation (Freidman 1963, pp. 354-363) [13]. Moreover, the challenge to make balance interventions on demand and supply clearly need capable policy makers. Therefore, it is very important to have highly capable decision makers in the lender of last resort and also in the Ministry of Finance[14]. People in those positions must be neutral from politics but possess high integrity, capability and knowledge in managing monetary and fiscal policy. In other words, the strengthening of the role of the state must be supported by good and capable government.
Conclusion
More participatory role of the state is important, not only for the recovery, but also to prevent GFC. Information asymmetry has caused the bubble which lead to crisis in the past. This information asymmetry has violated the fundamental assumption of liberalism that all market actors must have equal information. However, free flow supply of information is not enough. A stronger role by the state is needed to ensure honest and accurate information, including reference price information, and basic skills are available to small investors to enable them to make use of information for their best decision. The state, particularly those in developing countries, must apply capital control policy to avoid volatility and bubble price in financial market as well as to ensure that capital is mostly used for real investment rather than just another form of gambling. The role of international trustee is important to ensure stabilization of global financial market through promotion a better regulations and facilitating an early warning system. Too much state intervention will create inefficiency whereas, too little will create many losers and divergence and make the crisis stay longer. Therefore, the middle way would be the best solution. However, the middle way needs highly capable and honest persons in fiscal and monetary authority. In short, the middle way needs good governance.
References
Allen, F & Gale, D 2007, Understanding financial crisis, Oxford University Press, New York.
Bagehot, W 1873, Lombard street: a description of the money market, Henry S. King and Co., London.
BBC News 2002, 'Enron auditor fined $500,000', BBC News World Edition, viewed 16 May 16 2010
<http://news.bbc.co.uk/2/hi/business/2334761.stm>.
Bruno, M & Sachs, J 1985, Economics of worldwide stagflation, Harvard University Press, Cambridge, Mass.
De Walle, NV 2004, 'The economic correlates of state failure: taxes, foreign aid, and policies', in R Rotberg (eds), When state fail: causes and consequences, Princeton University Press, Princeton, pp. 94-115.
Fooks, G 2003, 'Auditors and the permissive society: market failure, globalisation and financial regulation in the U.S.', Risk Management, vol. 5, no. 2, pp. 17-26.
Frank, RH, Sarah, J & Bernanke, BS 2009, Principles of microeconomics, 2nd edn, McGraw-Hill Australia, North Ryde.
Friedman, M 1960, A program for monetary stability, Fordham University Press, New York.
Friedman, M 1963, A monetary history of the United States, 1867-1960, Princeton University Press, Princeton.
George, S 2000, 'A short history of neoliberalism: twenty years of elite economics and emerging opportunities for structural change', in W Bello, N Bullard, & K Malhora (eds), Global finance: new thinking on regulating speculative capital markets, Zed Books, London, pp. 27-41.
Gowan, P 2009, 'Crisis in the hinterland: consequences of the New Wall Street System', New Left Review, vol. 55, pp. 5-29.
Harman, C 2009, Zombie capitalism: global crisis and the relevance of Marx, Bookmarks Publications, London.
Hayek, FA 1960, The constitution of liberty, University of Chicago Press, Chicago.
Jessop, B 1990, State theory: putting capitalist state in their place, Polity Press, Cambridge.
Keynes, JM 1936, The General Theory of Employment Interest and Money, Macmillan and Co, London.
Khor, M 2000, 'Why capital control and international debt restructuring mechanisms are necessary to prevent and manage financial crises', in W Bello, N Bullard & K Malhora (eds), Global finance: new thinking on regulating speculative capital markets, Zed Books, London, pp. 140-158.
Kindleberger, CP 1996, Manias, panics and crashes: a history of financial crisis, 3rd edn, John Wiley & Sons, Toronto.
Marxist n.d., 'Manifesto of the Communist Party 1848: chapter II', Marxist.org, viewed 18 May 2010,
Phelps, ES 1968, 'Money-wage dynamics and labor-market equilibrium', The Journal of Political Economy, vol. 76, no. 4, pp. 678-711.
Phillips, AW 1958, 'The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861-1957', Economica, vol. 25, no. 100, pp. 283-299.
Polanyi, K 1944, The great transformation, Rinehart & Company, New York.
Randle, J 2010, 'US regulators charge Goldman Sachs with Fraud', www1.voanews.com, viewed 16 May 2010
Reinhart, CM & Rogoff, KS 2009, This time is different: eight centuries of financial folly, Princeton University Press, Princeton.
Simon, HA 1991, 'Bounded rationality and organizational learning', Organization Science, vol. 2, no. 1, pp. 125-134.
Snodgrass, DR 2004, 'The economic correlates of state failure: taxes, foreign aid, and policies', in R Rotberg (eds), When state fail: causes and consequences, Princeton University Press, Princeton, pp. 256-268.
Stiglitz, J 2002, Globalization and its discontents, Allen Lane: The Penguin Press, London.
Tucker, P 2009, 'The repertoire of official sector interventions in the financial system: last resort lending, market-making, and capital', paper presented to the Bank of Japan 2009 International Conference: Financial System and Monetary Policy Implementation, Tokyo, 27-28 May 2009.
[1] In the "General Theory", Keynes declared that he was 'brought up' in and influenced by 'classical economists'. However, "The General Theory" was made to 'contrast' his arguments with classical economists (Keynes 1936, p. 3). See page 333-335 about free trade, and page 217-210 and 268-269 about price and marginal efficiency of capital in regard to instability.
[2] This is why they also called as "Monetarist".
[3] This is what we now call "bailout". This approach follows Bagehot dictum, see more in "Lombard street" (Bagehot 1873), also in Tucker (2009, p. 8). More about bailout policy can be seen in "A short history of neoliberalism: twenty years of elite economics and emerging opportunities for structural change (George 2000, pp. 27-41).
[4] LRSS also called Non-Accelerating Inflation Rate of Unemployment (NAIRU). NAIRU curve is vertical at full-employment level output which means in the long run there will be no trade-off between unemployment and inflation (Phelps 1968, pp. 704-705). NAIRU is further development of Philips curve which the name after the inventor Alban William Philips who study the relation between unemployment and the rate of change of money wages in the
[5] This conclusion come from page 25-29; 98; 134-136; 164; 219-221; 236; 318-320. Fiscal policy aims to increase aggregate demand through increasing government spending and tax cuts (particularly income tax) which expected to increase consumption.
[6] Invisible hand is a term introduced by Adam Smith and refers to the two functions of price, rationing and allocating function. Both are related to the basic of economic science which is allocating scarce resources (Frank et al. 2009, p. 233)
[7] The losers or incapable people are not necessarily because they are lazy, it can be also a result of illness, age, pregnancy, perceived failure or simply because of economic circumstances (George 2000, pp. 31-32)
[8] The "Main Street" group, as a contrast to Wall Street, is referred to investors (particularly individual and household investors) who invest their money in stock exchange or property by using financial services such as banks or other financial institutions.
[9] After Asian crisis, the constitution of Thailand guarantee information for citizen through 'right to know' policy which include information in financial market (Stiglitz 2002, pp. 131-132)
[10]Information asymmetry is referred to situation where sellers and buyers do not have equal information. In this case, the Wall Street dominates information while the Main Street has not sufficient information. This means the Wall Street, who is mainly the seller, is price setter, not price taker. This violates the basic assumption of "perfect competition" (Frank et al. 2009, p. 150).
[11] More observation about Malaysia's capital control can be learned from "Why capital control and international debt restructuring mechanisms are necessary to prevent and manage financial crises" (Khor 2000, pp. 140-158)
[12] The lender of last resort function aims to ensure the solvability and liquidity of banks. During crisis they lend money to the banks with low solvability and liquidity. To do this function, in many countries, they need back up from government, particularly the Ministry of Finance. Ministry of Finance is usually the one who responsible for fiscal policy that must be well coordinated with monetary policy taken by the lender of last resort.
[13] Other comprehensive study on global financial crises argues that, although the failure of the lender of last resort was recognized, but without that function the depression would stay longer (Kindleberger, p. 190). Polanyi argued that the cause of great depression of 1930s was the absent of the state intervention (1944, pp. 73;201;249)
[14] Similar to this argument can be found in "When state fail: causes and consequences", particularly in chapter written by Snodgrass (pp. 256-268), and De Walle (pp. 94-115).
Subscribe to:
Posts (Atom)
