Category Archives: Economic development

Indonesia Research Update #17: Institution, Lies, and Islam by Lury Sofyan

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Although humankind creates institutions as a foundation for human interactions, there are some circumstances where an institution does not perform well in providing adequate control to inhibit or punish unethical behaviour, nor to stimulate or grant the positive. We have seen that institution, in particular in developing countries, is ineffective in curbing corruptions, bribery and other rule violation acts.

When an institution is weak, it produces an “unbinding” law since the value of the law is not internalized into the belief that touches the heart of the individual in the society and applied in day to day behaviour. The weak institution promotes a corrupted political system that does more harms than goods and most of the time allows only elite groups to gain privileged access to valuable information and resources. Mostly this practice compromises market institutions which in turn benefits only the haves, left behind the destitute, and worsen inequality. The haves, later on, support their political networks as payback through money politics and media control to channel propaganda which in turn undermining democracy.

A weak institution also damages state capacity. Government spending does not reach its objective since procurement system is corrupted. Tax morale is degraded. People unwilling to pay tax and the tax authority itself is politically weakened to benefit the haves. Quality of public services becomes poor since the government is running out of the budget. Hard Infrastructure such as roads, terminals, ports, public transportation are remained underdeveloped contributing to high transportation cost, higher price of goods & services, and inflation; making the whole economy inefficient. Soft infrastructure such as educations, health and social security system is also inadequate thus discourage human capital development. These all are hindering country capacity to develop and gain prosperity.

One thing that avoids individual to break the law when institution under-performed, among others, is intrinsic honesty. Since honesty construct trust and trust is a key aspect of sustainable performance of firms, industry and even nations (Cohn, Fehr, & Maréchal, 2014). Most importantly, study shows that country which has high honesty or low-rank PRV (prevalence of rule violation) index is found to be rule obeyed (Gächter & Schulz, 2016). Hence, understanding honesty and lie is important to shape a better institution.

General lie theory suggested 3 different perspectives of lie. First, the lie theory that assumes people are dishonest. This theory is in line with the standard economic theory which perceives people as homo-economicus thus lie when they get benefit out of it (Fischbacher & Heusi, 2008). This theory is also in line with the standard cost-benefit model which perceived people as purely individual who think about them self, calculating for their own benefit, and only care about external rewards (Mazar, Amir, & Ariely, 2008). Second, lie theory that assumes people are honest. People are honest because they avoid guilty feeling if others expectation is violated (Dufwenberg & Gneezy, 2000). Third, there is an increasing support of lie theory that situated in between. This theory argued that there is no sharp difference between full honesty and dishonest, rather than a continuum that spread between this contradicts two ends – suggesting elastic justification (Hsee, 1995, 1996). Mazar et al. (2008) also claimed so-called Self-Concept Maintenance that people are not fully cheating even they have the opportunity to do so. They argued that when people had the ability to cheat, they cheat, but, the magnitude of dishonesty per person is low relative to the possible maximum amount.

When a child born, however, he or she is not inherited with a tendency to lie or honest. It is the surrounding environment that influences people’s belief since people internalize the norms and values of their society (Henrich & Gil-White, 2001). Lie and any other rule violation attitude is contagious; if people live and grow in the area when lie is prevalent, it will affect individual to tend to act lie too. Bad environment crowding out honesty (Frey, 1992; Romaniuc, 2016) and weak institutions and cultural legacies impair individual intrinsic honesty (Gacther & Schultz, 2016). People also react to the unethical behaviour of others, and their reaction depends on the social norms (Gino, Ayal, & Ariely, 2009). When elders do lie, the juvenile will copy and then passes this to future generations as an accepted culture. This fact suggesting a vicious circle effect that keeps institution difficult to move to better equilibrium.

In this very moment, the only question left is the role of religion. How is the role of religion in preventing rule violation act? Does religion prevent people from breaking the rule such as corruptions and bribery? Does religion promote positive social norm such as: keep promises, don’t cheat, do queue, and don’t tell lies? Unfortunately, PRV index shows that religious countries in particular Moslem majority country such as Indonesia, Malaysia, Kenya, Guatemala, Tanzania, Maroco, and so forth have higher rule violation act (higher PRV rank) than less religious country.

More research must be done to understand this. However, learning from the history of Islam, it suggested contrasting phenomena. Historically, Islam gave an external shock to bad institutions at that time and bring the era of darkness to brightness. Islam promoted the value of humankind as the basis of economic, politic and social institution. For example, before the ritual of 5 times prayer and fasting took place, honesty became one of the first fundamental things that Prophet Muhammad S.A.W delivered to Arabian society. His positive attitude became an effective preach of Islam religion and brought him to become a model of a truthful, honest, trustworthy person; the “Al-Amin”. Honesty and trust is lubricant of any transactions and contracts.   Prophet Muhammad S.A.W had shown us an example that honesty had brought him to become a successful trader and respected political leader.

While incorporating Sariah study in above the line system such as financial syariah, political syariah, etc. is important, emphasizing the act of honesty and other positive values are crucial since honesty is the fundamental driven of positive behaviour that works below the line in whatever system human live. A study in asset market experiment (Smith, Suchanek, & Williams, 1988 – and its variances) gives a perfect example that dealing only with market institutions – such as excluding interest in the market – in fact, do not omit the incident of price bubbles. Individuals still racing up to trade in the market even the market price is higher than fundamental value showing the animal spirit forcing individual to gain profit as much as possible.

In Quran, the word “honest” appears 64 times, while “lie” 4 times. This two words represent good and bad and have become the root of all human decision making. Supposedly, it shapes individual belief to do something good, it prevents individual to cheat, avoid corruption and bribery. How this honesty in Islam is internalized and rooted in every Moslem behaviour is an important issue that must be tackled and, in my opinion, it must be the centre of Indonesia cultural transformation. Honesty shall underpin every decision in the economy, politics, and social life. In that way, honesty will promote cooperation, stimulate trade, boost economic growth and shape better institution for better prosperity.

If we can generalize rule compliance model by Allingham & Sandmo (1972) – and its variances – besides role model and law enforcement, education perhaps is the key to stimulate honesty. However, it is a challenge to design an educational based system that could effectively influence day to day behaviour and does not stop at school curricula, good grades, and formality perspectives only.

 

References

Allingham, M. G., & Sandmo, A. (1972). Income tax evasion: A theoretical analysis. Journal of Public Economics, 1 (3-4), 323-338.

Cohn, A., Fehr, E., & Maréchal, M. A. (2014). Business culture and dishonesty in the banking industry. Nature, 516. https://doi.org/10.1038/nature13977

Dufwenberg, M., & Gneezy, U. (2000). Measuring Beliefs in an Experimental Lost Wallet Game. Games and Economic Behavior, 30, 163–182. https://doi.org/10.1006rgame.1999.0715

Fischbacher, U., & Heusi, F. (2008). Learning and Peer Effects Lies in Disguise An experimental study on cheating. Research Paper Series Thurgau Institute of Economics and Department of Economics at, 40.

Frey, B. S. (1992). Tertium Datur: Pricing, Regulating, and Intrinic Motivation. Kyklos, 45 (2), 161–184.

Gächter, S., & Schulz, J. F. (2016). Intrinsic honesty and the prevalence of rule violations across societies. Nature, 531(7595), 1–11. https://doi.org/10.1038/nature17160

Gino, F., Ayal, S., & Ariely, D. (2009). Contagion and Differentiation in Unethical Behavior. Psychological Science, 20(3), 393–398. https://doi.org/10.1111/j.1467-9280.2009.02306.x

Hsee, C. K. (1995). Elastic justification: How tempting but task irrelevant factors influence decisions. Organizational Behavior and Human Decision Processes, 62, 330–337.

Hsee, C. K. (1996). Elastic justification: How unjustifiable factors influence judgments. Organizational Behavior and Human Decision Processes, 66, 122–129.

Henrich, J., & Gil-White, F. J. (2001). The evolution of prestige: Freely conferred deference as a mechanism for enhancing the benefits of cultural transmission. Evolution and Human Behavior. https://doi.org/10.1016/S1090-5138(00)00071-4

Mazar, N., Amir, O., & Ariely, D. (2008). Dishonesty of Honest People: a theory of self-concept maintenance. J. Mark. Res, 45, 633–644.

Romaniuc, R. (2016). Intrinsic motivation in economics: A history. Journal of Behavioral and Experimental Economics, 10(0), 1–9. https://doi.org/10.1016/j.socec.2016.10.002

Smith, V. L., Suchanek, G. L., & Williams, A. W. (1988). Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets. Econometrica, 56(5): 1119–1151.

 

 

Lury Sofyan is currently doing a Doctoral Program in Behavioral Economics at University of Nottingham.

He is a staff at Ministry of Finance Republic Indonesia.

His research interests are related to institution & behavior, inequality, and taxation.

Contact him at c4rbon7@gmail.com

 

Indonesia Research Update is an initiative by GoLive Indonesia that aims to promote and disseminate knowledge and information obtained through research completed by Indonesian students outside of Indonesia.

We sincerely thank Lury and wish the best for his future endeavours in career and life.

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Special Interview: Dr Chatib Basri on Indonesia – Australia relations

Dr Chatib Basri, former Minister of Finance in the Second United Indonesia Cabinet, shares with GoLive Indonesia his views on Indonesia – Australia relations.

 

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Indonesian Trade Minister Thomas Lembong’s Public Lecture at Monash University, March 2016

Indonesia’s Trade Minister H.E. Mr. Thomas Lembong visited Australia last week and did a Public Lecture at Monash University on Modern Economic Partnership Through Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA).

For those that didn’t get a chance to attend the session, here’s the recording of his public lecture and Q&A session.

Public lecture

 

Q&A Session

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IRD2014, SA-based Indonesian researchers’ contribution to policy discussions

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GoLive Indonesia and Indonesian Student Association South Australia chapter (PPIA-SA) co-organised the 2014 Indonesian Research Day on Wednesday, 23 April 2014. The event was attended by more than 50 participants from three universities in South Australia, namely the University of Adelaide, University of South Australia and Flinders University.

Professor Christopher Findlay, Dean of Faculty of Professions at University of Adelaide, in his keynote speech on the Australia-Indonesia bilateral relationships reinforced three principles needed to improve bilateral relationships between the two countries, namely economic integration, ‘no-surprise’ policy and consultations and respect.

The President of PPIA-SA, Mr Dias Satria, also a PhD candidate at University of Adelaide, expressed his confidence that with the support from various organisations in SA this event will be held annually.

For GoLive Indonesia, this is the third event that the project has co-organised following succesful PhD conference in Canberra  partnering with Indonesia Synergy in November 2013 and early career researcher conference at Bogor Agricultural University in March 2014 collaborating with InterCafe.

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The 2014 IPB-GoLive Indonesia Conference to promote Indonesian development agenda

Group photo at the end of the conference

Group photo at the end of the conference

GoLive Indonesia collaborating with Bogor Agricultural University organised the 2014 IPB-GoLive Indonesia conference “Driving change through research on the Indonesian development agenda” on 14 March 2014. The conference presented a keynote speech by Dr Iman Sugema, a senior researcher at INTERCAFE and five outstanding early career researchers from IPB. Dr Nunung Nuryartono, Director of INTERCAFE, officially opened the conference. This is the second conference that GoLive Indonesia has organised outside Adelaide. The first conference was held in Canberra collaborating with Indonesia Synergy.

Dr Nunung Nuryartono in his opening speech highlighted the potentials that Indonesian young researchers have to promote the Indonesian development agenda. He also hoped that the event could be continued in the future.

Dr Iman Sugema in the keynote speech identified a challenge faced by Indonesian researchers, that is to publish at reputable international academic journals. He hoped that this conference can inspire early career researchers to contribute to policy discussions in Indonesia as suggested by the conference’s theme and would be followed-up by a program to facilitate joint-working papers writing between IPB and the University of Adelaide researchers.

The first invited speaker, Dr Amzul Rifin, who completed his PhD at Tokyo University, presented his research on the impacts of export tax policy on cocoa farmers and supply chains.  He concluded that there is no change in marketing channel due to the implementation of export tax. Dr Rifin, concluded that with the export tax, margin of exporters decreased because of increased competition in obtaining cocoa beans from farmers.

Dr Muhammad Najib, also a Tokyo University graduate, presented his research on rural development and food processing SMEs in Indonesia. The SMEs contribute to more than a half of the total GDP. Food processing industries have potentials in Indonesia but they are facing challenges including limited supply of raw materials, knowledge about marketing and access to capital. Support for SMEs is needed as its development will contribute to rural development.

Dr Jaenal Effendi presented his work on the role of Islamic microfinance in poverty alleviation and environmental awareness in Pasuruan, East Java, Indonesia. Dr Effendi highligted positive effects of microfinance institutions on reducing poverty and a potential role of Islamic microfinance institutions in promoting environmental awareness.

Dr Sahara gave a presentation on “the transformation of modern food retailers in Indonesia: opportunities and challenges for smallholder farmers”. The Indonesian agricultural sector is denominated by the presence of smallholders, those who have land less than 0.5 ha. Using the chili sector as a case study, Dr Sahara identified challenges facing farmers participate in modern channels including education (which can affect innovation), distance to road and storage facilities. Opportunities from supermarket channel participation include higher prices, more access to inputs and higher per capita incomes.

Dr Eka Puspitawati presented her research on “patterns, determinants and effects of farmers’ participation in the modern channels: a case of Indonesia potato farmers”. Dr Puspitawati suggested that the government should improve access to infrastructure, input production and credits to assist farmers entering into modern channels.

GoLive Indonesia is grateful to the support that IPB especially the INTERCAFE staff Dr Nunung Nuryartono and Dr Lukytawati Anggraeni Putra and the financial support provided by the Australia Indonesia Institute at the DFAT. Both IPB and GoLive Indonesia hope that the conference can be continued in the future.

 

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2013 Food Security Regional Dialogue-Medan: Inter-economy perspectives of food security scenarios

As part of promotion of evidence-based policy making, decision makers and researchers have applied a wide range of modelling to evaluate the effectiveness of food security programs. One widely applied model is a multi-country computable general equilibrium model or known as the GTAP.  Anna Strutt (University of Waikato) and Signe Nelgen (University of Adelaide) shared their work entitled “Food security scenarios for the Asia Pacific – inter-sectoral and inter-economy perspectives”.

Anna Strutt (University of Waikato)

Anna Strutt (University of Waikato)

Strutt and Nelgen’s study focuses on CIPTTV countries, namely China, Indonesia, Philippines, Chinese Taipei and Viet Nam aiming to capture the impact of potential policy changes and other external shocks. The study uses an economy-wide framework using a computable general equilibrium model, a global trade model GTAP. Some important features of the modelling include: attention is given to the structural detail of the economy and inter-relationships between sectors; Prices and quantities are determined simultaneously with markets usually are assumed to clear; Incomes are endogenously determined; There is optimising behaviour by consumers and producers, with prices inducing adjustment. The CGE model imposes constraints e.g. availability of factors of production.

The GTAP model and the latest available GTAP version 8.1 data base with a base year of 2007 for 134 countries/regions and 57 sectors are used. Aggregation is implemented to derive 25 sectors and 28 regions in the study. The data are first projected to 2015. Agricultural distortions by Anderson and Valenzuela (2008) are updated and mapped to the GTAP sectors. Bilateral preferences from the GTAP database are maintained. To better capture food security aspects, the study augments the GTAP with food nutrition data using kilocalories per day per person.

Signe Nelgen (University of Adelaide) to explain about agricultural distortions dataset

Signe Nelgen (University of Adelaide) to explain about agricultural distortions dataset

Five scenarios are being simulated for the CIPTTV region: 1) improved agricultural productivity (land consolidation may lead to a 5 per cent increase in TFP in land-using sectors; 2) increased rice self-sufficiency through increasing tariffs imposed on imports from all regions thus eliminating 99 per cent of rice imports; 3) Combination of 1) and 2); 4) increased rice self-sufficiency and retaliatory tariffs from a key rice exporter; and 5) natural disaster harming land productivity which is assumed to lead to a 5 per cent reduction in land productivity in the region.

The study concludes that policies to promote self-sufficiency through the use of protectionist trade policies such as tariff may lead to a worsening of key food security indicators such as household food consumption. But if agricultural productivity improvements are part of the policy mix, the impacts will be less severe. However, retaliatory trade policies are likely to worsen conditions.

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2013 Food Security Regional Dialogue-Medan: The Quiet Revolution in Staple Food Value Chains in Asia

Professor Tom Reardon of Michigan State University has lead research in the past 10 years on staple food value chains in China, Bangladesh, India, Indonesia, Philippines and Viet Nam where nearly 10,000 farmers and supply chain actors being surveyed. He gave a presentation over the Skype on Day 2 of the 2013 Food Security Regional Dialogue, Medan.

Modern supermarket in Medan, Indonesia

On eve of Green Revolution, there has been debate in these countries on development to choose the following. First is a large-farm development path where supporters saying large estate farms mean fast development. Moreover, there are no good technologies for small farm and small farms wont adapt new technologies.

The second is small farm development path where supporters saying Green Revolution provides technology that makes small farmers as or more productive than large estate farms.  Also, small farm path fits land scarce, labour abundant situation.

All six countries adopted small farm development path starting with the Green Revolution in the 1970s now have massive investments in rural infrastructure. But what progress have they made in small farm modernisation and in developing supply chains from small farms to domestic market (95 per cent of the food market in Asia), especially the rapidly growing cities (urban areas are 75 per cent of food market in Asia).

Tom’s project found some surprising findings. Small farms are rapidly becoming small businesses who sell 70-90 per cent of output such as rice farms in India, China, Vietnam and Bangladesh. They are very responsive to the improved contacts. There has also been rapid intensification of small farms where they shifted into high use of new varieties, purchased seed, fertiliser, pesticide and herbicide. Some examples include shrimp and mangoes in Indonesia where they use new commercial varieties and high use of inputs.

Tom’s project also observed rapid mechanisation of small farming. There was rapid shift to high use of farm machinery to free labour from grain farming to higher income activities (horticulture, rural non-farm jobs). Rapid diversification of small farms was also observed where small farms ‘climbed the value ladder’ shifting from rice/wheat into vegetables, fruits, fish, livestock, dairy,etc and providing them 4-8 times earnings; or shifting from low-quality to high-quality rice with 50-100 per cent higher returns as in Vietnam and China.

Tom’s project also reported ‘quiet revolution’ in food supply chains. It was mainly grassroot revolution by small/medium enterprises and driven by private sector (not government intervention).  There was rapid spread of ‘cold storages’ and  modernisation of wholesale markets and traders and rice mills. Spread of supermarkets in all six countries was also significant. This all supply chain development is important because it forms 50-70 per cent of food costs to consumers.

The role of the government has been extremely important. In all six countries except grain in Indonesia, government role in direct intervention is very small. There was minimal role in input supply and crop marketing. The role of government in enabling farmers and grass-roots private sector was very large. This includes agricultural research (eg seed varieties), investments in roads, ports, electricity grids, permitting cell phone expansion and promotion of information and extension.

*This summary was written by Risti Permani (University of Adelaide) and may be subject to her personal interpretation of the presentation.

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