If it’s not the economy, then what to do?

water pollution

Budi Akmal Djafar’s opinion piece in The Jakarta Post (Sept. 20) entitled “It’s [not] the economy stupid!” intrigued me. I like and support his overall idea that we should not only focus on the size of the pie (or box using his illustration) but also how to share the pie.

But being a mother of a five-year-old boy (and a baby) who is expanding his vocabulary at a pace much faster than the Chinese economy’s growth rate, the word “stupid” is a big no-no in our household.

Sure, as an economist, I know where the term originated from but mentioning that term has a big implication on how we should perceive the existing problems that Indonesia is facing now, as suggested by Budi’s piece.

First, I agree that even a stupid person knows the importance of the second fundamental theorem of welfare economics. That is, that society can attain any efficient outcome by suitable redistribution of resources and free trade. But we all know society most often faces an equity-efficiency trade-off.

Given that income inequality still exists in many countries including Indonesia, we know that “understanding” does not mean knowing how to solve the widening income gap. If you said “better income redistribution”, I would reply “would you be happy to pay more tax?” If you said “help the poor through poverty-reduction programs”, I would reply “how to make effective targeting, how to decide the best timing to allocate the funds, who will supervise the distribution of the funds?”

The Indonesian government must state and act on its poverty-reduction priorities.

Second, do we really need to choose between expansion and equality? Should a better question not be how to achieve inclusive growth? Budi gave an example of how Jakarta is now becoming more polluted raising concerns over the benefits of increased income per capita on our welfare.

But has this issue not been a long-debated topic? The Environmental Kuznets Curve (EKC) suggests an inverted-U relationship between pollution and economic development. Air and water pollution increase with development until the economy reaches a particular range of income per capita.

When income rises beyond that level, pollution starts to decline as people value the environment more highly and better environmental standards and regulations are applied effectively.

The key question is at what income range pollution starts declining. According to Dasgupta, et al., in the Journal of Economic Perspectives (2002), earlier studies suggest a range of US$5,000 to $8,000.

A “revised” estimate by the World Bank in 2000 suggests income per capita level of $2,407 for Indonesia in 1998. We have exceeded this level and should have expected improvement in our environmental management. I think this is what we should worry about.

So, what to do? Well if only stupid people think it is the economy that matters, let us ask smart people what it should be.

I consider myself “average”. But here is what I think might help. In my opinion piece in the Post (July 22, 2011) entitled “Moving beyond the blame game”, I prescribed three generic reasons for our problems: Lack of clarity regarding national priorities, failure to give the right response and low education.

It is the complementary nature of the above three factors and possibly some other factors that can solve most of the issues including dealing with expansion-equality trade offs. For example, having kids taught at school how to minimize plastic bag usage would minimize environmental damage from increased
consumption.

From little things big things happen. But education alone is insufficient to solve the problems. Improved governance is needed. The Indonesian government must state and act on its poverty-reduction priorities, if that even is its priority. For that, we need smart people to figure out the solutions at the practical level as it is certainly not easy to resolve problems in such a big country as Indonesia.

Lastly, let us appreciate what the Indonesian government has done and help it improve the effectiveness of its programs.

This would involve more fruitful discussions between researchers, policy makers, students, industry bodies, etc for which I thank Pak Budi.

*This article was published at the Jakarta Post (25/9/2012). It expresses personal view of Risti Permani.

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Filed under Climate change and environment, Income inequality, Indonesia, Poverty, Review of article

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