Content
Why economics?
What to look for in writing a policy piece.
Some usual problems according to my experience.
Public Policy Analysis
A Discussion
Krisna Gupta
Center for Indonesian Policy Studies
June 21, 2023
I Made Krisna
Sering dipanggil Imed
Full-time lecturer di Politeknik APP
Part-time lecturer di Universitas Indonesia
Master degree in economics UI/VU
PhD in economics di Australian National University
- thesis tentang industri dan perdagangan di Indonesia.
Associate researcher di Center for Indonesian Policy Studies.
- Policy paper terakhir tentang GVC di industri makanan
Selengkapnya di imedkrisna.github.io
- blog di krisna.or.id
- twitter di @imedkrisna
Your expectation?
Basic assumption
No economics and/or mathematics background.
Some experience in CIPS’ work.
chance is, I can learn from you. So please don’t be shy.
Why Economics
Economics is NOT about (just) money!
Economics is a study of optimization: how to get the best under constraints.
The same with engineers!
We use very similar tools!
Economists are just a bunch of people who use thermodynamics to explain your daily problems!
Increasingly, economics also do empirics!
Theory vs Empirics
Theory: If X leads to Y while Z does not lead to Y, then lets do X.
Does X really lead to Y while Z does not?
The first is the optimization part, the second is the empirical part.
But stil, relationship between Xs & Ys is what interests all economists.
Some questions
How to best tackle climate change?
Is minimum wage good?
Should we ban trade to industrialize?
How to best feed our people?
Should we invest in school or road?
About economics
Some of my blogpost to get a glympse of what economists do:
Naturally, economists often specialize more on issues.
- I’m more on trade, industry, investment. Knows next to nothing about education & welfare program issues.
Why people make choices
The main reason is resources’ scarcity.
resource = anything you use to get what you want.
mainstream resources are money; Given 4k trilyun APBN, what program should we finance?
But other resources are important too: time, people/institutions, inflation.
Opportunity cost
The true cost of something is its possible other uses. Money is the least of our concern.
The cost of having holiday, for example, is the money & time you could otherwise use to join a short course.
The cost of doing an S1:
Go straight to work, get experiences & money
Do other degree
enjoy life
I daresay opportunity cost is the core concept of economics!
Thinking at the margin
The principle of opportunity cost leads to a marginal thinking
understand the status quo, then think if it can be (marginally) improved.
e.g., say you have 2 hours to spent on work or play. how to divide?
depends: when’s the work deadline?
if you work for another 30 minutes, would that help with work?
Specialization & trade
During your daily time, you make decisions on allocating how much time to study and to cook, among other things.
Since you will die if you don’t eat, you can’t allocate 0 hour to cook.
On the other hand, there are those who are very good cook and will cook for you for a little money.
In this case, it may be better if you spend 0 hour to cook, and order food from these chefs.
Trade is the reason why I can study economics: I don’t have to study how to be a doctor. I will just go to the hospital if I need a medical service.
One family economy
Picture this: your household decided to be independent1, and you print your own currency.
To fulfill your “country” needs, you need to choose: swasembada or trade.
Swasembada: you make everything yourselves with everything you have: food, education, healthcare (internet is counted as import!)
Trade: things you normally do right now: you focus on your trade, “sell” them outside, and “import” the rest!
SPecialization & trade
Extending to firm level:
Why build our own office suit if we can buy microsoft office?
Why build our own server if there’s AWS, Biznet, others?
Easily extending this to country level:
- Japan’s capital & labor are mobilized to make cars cuz they get less if they plant palm oil.
Remember: export is beneficial because we can import from the revenue!
Typical problem
Most policy makers & policy analysts are stumble in the trade argument because they often forgot about resource constraints and opportunity cost.
- leads to a macro-policy which aims at increasing everything.
our land, workforce, APBN, etc are limited.
Even if you have a lot of resources, for example, the extra money could be better spent to grow one thing.
Political context
There is almost no policy that’s not biased: benefits some sub-population while hurts others.
Agriculture Imports hurts farmers while helps consumers and industrialists.
Scholarships benefit smart individuals & high-skilled industries.
All subsidies benefit targeted groups at the expense of taxpayers.
Economists often focuses on generalization and leaning toward policies that improves aggregate welfare
Equilibrium
When there is an incentive to do something, there will be more and more people exploit it.
As more people do it, the incentive decreases to a point where it is not worth it anymore.
examples:
City becomes more crowded (and costly to live in).
Countries’ economic growth reduced after they get rich.
Movement towards equilibrium, however, varies.
- short run vs long run,individual vs aggregate.
Conclusion
Main principles: scarcity, opportunity cost, marginal thinking, & equilibrium.
Economics gets much more complicated that this.
The principle, however, remains the same (more or less)
Discussion
Consider a country called Kuvukiland which has 2 industries: wheat and bread, and 3 classes of people: consumers, farmers who work in the wheat industry, and bakers who work in the bread industry. Consumers eat only bread & all wheat goes to bakers. Technology is simple: 1 bushel of wheat -> 1 loaf of bread. Price bread = price wheat.
With no trade, farmers produce 8 ton wheat at P=7000. With trade, Kuvukiland can import with international prices at P=6000, demand rises to 10 ton, but at that price, farmers only produce 6 ton. 4 ton are imported.
Discuss: is trade better? Who benefits? If there’s a ballot, who will vote for free trade?
Writing a policy paper
This is not a writing drill. Everybody has their own style.
However, there are some things that you may want to have in your writing.
Don’t forget to keep the principle in our previous learning in your mind while doing this.
Public Policy Principle
We often write something theoretical (like this for example) but also something more empirics (like this for example)
Well, in reality, it is not so useful differentiating the two. We often just mix them.
However, you can see the pattern of these works are somewhat similar:
Does policy X really leads to outcome Y?
Is there a better way to get Y? Maybe policy Z is actually better than X?
What to look for?
When we write about policy, aim for these things:
Problem definition
Policy targets
Policy assessments
Assess alternative options
Problem definition
Why the regulation is needed? The reason often boils down to the presence of market failure, inefficient prior regulations, or new targets.
Find this in a “menimbang” part, sometimes at “pasal 2”, but sometimes in the media.
Some regulations try to tackle more than one problem, so list them accordingly.
Your paper may or may not contain regulation, but the problem definition is a must-have.
See if these problems can be translated into policy targets.
Policy targets
If you write on a particular policy, first you must tell readers what it is and how does it work.
You must state boldly what it tries to achieve, then you must focus these targets.
Identify whether you can relatively easily inspect those targets.
Identify which target the government say it has been achieved, and check whether it’s true.
If you’re not studying a particular policy, then state these targets in your policy recommendations.
Policy target
contoh di Perpres 32/2022 tentang Neraca Komoditas
Policy assessment
The assessment part usually straightforward. See if you can argue or find data on it.
make sure you understand the mechanism from the policy to the result.
e.g. how CPO exports (the policy) leads to lower domestic prices?
If you know the mechanism, it is easier to find the gap:
- CPO exports failed amid wrong assumption: \(P\downarrow \Rightarrow Q\downarrow\)
Assess qualitatively if finding hard data is not easy.
- find evidence like recordings/article of government agents’ speech/inverview, news articles, government reports, etc.
as long as you focus on the policy \(\rightarrow\) target mechanism, should be fine.
Check/offer alternatives
Try to hypothesize policy alternatives, and see if it would have worked better!
Always remember the context around the policy!
No policy IS a policy!
You can try to look for papers or studies on similar policy under different context (usually policies in different countries).
Approach with Cost-Benefit!
Think of cost as not just money.opportunity cost guys!
Benefit also lies beyond money.
Usual problems
Target is often not realistic / too broad. (e.g., Free Trade Agreement -> higher exports)
Correlation is not the same as causation:
reverse causality (X causes Y or Y causes X).
spurious correlation (X & Y moves together \(\neq\) one cause another).
no counterfactual (Try to theorize the counterfactual or better yet use causal inference techniques)
Short-termism / overestimation.
Usual problems
You must also think in a power balance / political context (vested interests):
Which class / part of populations gets the benefit? Which one bear the cost?
Who would help your advocation, who will block it?
Almost all policy is about “keberpihakan”
“Government” is a really broad term. In truth, they’re vastly different between & within Ministries/Agencies: interests, KPI, qualities, party, etc.
- their cooperation can’t be taken for granted.
Usual problems
The consequence of a target is often unclear for policy makers.
- Blocking milk imports -> dwarves manufacturing growth (well this is partly vested interests)
The consequence of a target may be worth it
Maybe its okay to be poor as long as we can call ourselves agriculture nation?
A grand mosque maybe more important than good schools?
We assess, but it’s political decision in the end.
Usual problems
Context matter heavily, especially institutional capacity.
In developed countries, subsidies work well because almost everyone has bank accounts.
Finance is less of a problem in developed countries.
Corruption. I don’t have to say more.
Governments often didn’t know what’s a reform mean.
We often needs to be creative because we face different constraints compared to other countries.
- liberalization dominates policy advice in a country with a bad government.
Some more tips
Be aware of your own biases
If all you have is a hammer, everything looks like a nail.
Try your best to keep your mind open, listen to as many vantage points as you can.
“adding things” problem.
- more budget! More words/pages! More regulations!
Again, always keep power balance & political games in mind.
Bottom line
Look for the actual problems & the policy targets
Assess for alternatives & look for typical cause of why a policy fails (or potentially fails)
Use hard data if you can, assess qualitatively if you can’t.
Remember to understand the political context behind every policy.
Exercise
- Can you identify those points in the policy analysis must-haves? Use whatever policy paper/brief you’re familiar with or use this piece
Last slide
Thanks for your participations!
If you’re interested learning more on basic economics, check out my course for Universitas Petra’s undergrad program here
My policy part is taken mostly from World Bank’s RIA analysis which can be downloaded here