Sandpile of the Century

Let’s suppose that in early 1997 an analyst had suggested to the governments of Russia, South Korea and Brazil that Thailand’s real estate market posed a systemic risk to their entire economies.  Let’s further suppose that the analyst had gone out on her limb and suggested that if the relatively small Southeast Asian nation began to face a potential market bubble-burst, the three giants should all pump in capital to bail it out in order to save themselves.  It’s not hard to imagine that our hypothetical analyst would’ve become a major laughing stock and even been recommended to seek psychiatric help for delusion.

Russia, South Korea and Brazil were three of the biggest emerging economies in the world at the time. Meanwhile, Thailand’s economy was only about 7 percent that of the three giants combined and its real estate constituted but a fraction of its relatively small economy.  As far as the three giants were concerned, Thailand was neither too big nor too interconnected to fail.  Any reasonable economist or financier at the time would be absolutely certain that Thailand—let alone its real estate market—was not a systemic risk.

Our hypothetical analyst did not, as far as we can tell, exist.  But had she been, she would’ve had the last laugh.  Thailand’s real estate bubble did burst and in an unpredictable chain reaction brought down the entire Southeast Asian economy with it.  The shockwave didn’t stop there; in a few months it destroyed South Korean economy and in a year it imploded Russia’s and pushed Brazil into a crippling economic crisis.

In The Age of the Unthinkable, senior geostrategic advisor Joshua Ramo contended that policy makers, politicians, and economists have been using arcane tools to predict what may or may not happen in today’s world.  They are akin to physicists who try to apply Newtonian physics—a science of certainty—to understand quantum mechanics—a world of probability.

Ramo argued that today’s systems—economic, political, or otherwise—are best described as what physicists refer to as a sandpile model.  The idea is that if you piled sand, grain by grain, until it formed a typical sandpile of a certain size, it would enter a strange “critical” state.  At first take, the sandpile would look like a stable system and you might be tempted to believe that you could predict whether the next single grain of sand would simply make the pile taller or cause an avalanche.  You would be wrong.

As a matter of fact, the sandpile is completely unpredictable.  If you had a thousand identical sandpiles and kept adding one grain of sand at a time on top of each, you would observe that some could hold thousands of grains before the sand started sliding off, some could hold hundreds, some could hold dozens, while others would experience avalanche just by one additional grain.  It is a system so complex that it would be impossible to make absolute predictions.  Such is the difference between Newtonian physics and quantum mechanics—at the quantum level, you can never say, “The particle is here and not there,” you can only say, “The particle has a higher probability of being here than there.”  And such is the difference between the economic system modeled by conventional economics and the actual economic system we are living in.

Unfortunately, it seems that arcane science prevails in Indonesia.  Respectable economists and financiers had claimed with absolute certainty before lawmakers that Bank Century did not pose any systemic risk to Indonesia’s financial sector.  Some gave a clear, black and white assessment that only fifteen banks, and no other, posed systemic risk.  They were absolutely certain—there was no room for unpredictability.   History would beg to differ.  A single grain of sand has caused avalanche plenty of times in this century.

In 1987, an accumulation of small factors—not one was considered a risk—led to a systemic shift that ripped apart the U.S stock market.  It happened again in 1997 in Asia.  And again just last year on a global scale.

Such unpredictability doesn’t stop at the financial sector.  Certainly a small country like Vietnam could never win an all-out war with the mighty United States; it did.  Certainly a small search engine company operating from a small garage could never beat a giant established company like Yahoo; Google did.  Certainly a housewife would never have a fighting chance in a legal battle against a giant hospital chain tens of thousands times as rich as she was; as far as everyone is concerned, Prita has already won.

Now our experts are very confident that Bank Century was neither too big nor too interconnected to fall.  Then again, neither was Thailand’s real estate market in 1997.

It is not our experts’ conclusion that we should be wary about, but rather the degree of certainty they place on the result of their analysis.  They failed to acknowledge that the systems in today’s world are so complex that such absolute prediction is simply ludicrous.  That our lawmakers and their advisers are still under the impression that they can make decisions based on solid predictions is a cause for concern.

Kwik Kian Gie resorted to a crude analogy and called Finance Minister Sri Mulyani a “frog professor;” an allusion to a learned scientist who is detached from the real world.  Yet if we choose to learn from history and sandpiles, one may wonder who the real frog professors are.  Is it those who acknowledge the complexity of today’s systems, adopt the principles of unpredictability in assessing situation, and make a judgment call to take swift action in order to prevent a possible cataclysm; or those who cling on ancient tools and dare to make absolute predictions in today’s world of complex systems?

An edited version of this article is featured in The Jakarta Globe

 

Top in Agenda: Political Downsizing

This article is written by a guest writer, Taufik Ramadhan Indrakesuma.  He represented Indonesia in the 2005 World Schools Debating Championship, just graduated from University of Indonesia’s Faculty of Economics, and is now pursuing his master degree at Lee Kwan Yu School of Public Policy, National University of Singapore.

A good political system is characterized by its effectiveness and efficiency. A good political system is able to accommodate the needs of the citizens effectively, with plenty of channels to voice their views and aspirations. It should also avoid having too many people and too much bureaucracy, so that work can be done efficiently.

Finally, it should be relatively easy for ordinary citizens to understand and process all the information, so that political awareness won’t be too hard to achieve. However, the sad part about the Indonesian political system is that it doesn’t seem to fulfill any of these.

When examining the Indonesian political system, one word that always seems to come to mind is oversized. Whether it’s the central parliament with over 600 members, all of the provincial and municipal parliaments, the 44 political parties in the parliamentary elections, or even the massive pieces of paper used in the most recent elections as ballot sheets, Indonesia’s political system is so large and convoluted that it can cause confusion to even the relatively well-versed.

Aside from that, there have been several size-related problems within the system. So, judging by recent occurrences in the past few years, it seems that size does matter in politics, just not in the way that our legislators had hoped.

First, our provincial and municipal parliaments, which were brought on by the decentralization policy, have not exactly been the most productive. Simply put, these parliaments are often idle.

Take, for example, the DKI Jakarta provincial parliament with its 75 members. A quick look at their website will reveal that from mid-2004 until the end of 2007, there have only been a grand total of four laws passed.

Although it’s understandable that parliaments don’t need to churn out hundreds or even tens of laws per year, what becomes rather difficult to understand is why we need to employ 75 people to do it.

This becomes especially problematic when we consider that these people only deal with provincial-scale laws, as there are many overstuffed municipal parliaments dealing with laws for individual cities and municipalities (usually even fewer laws than the provincial parliaments).

In short, overstuffed provincial and municipal parliaments are not efficient, they are wasteful.

Second, our central parliament has also been a massive waste of resources. Although the central parliament has been more productive than its provincial and municipal counterparts, there remains a significant problem for this parliament: attendance. Parliament attendance rosters show a ridiculously large absentee ratio, sometimes even up to 30 percent.

In fact, this 30 percent absentee figure seems to be understated, because press accounts over the years have shown that many members sign the attendance rosters, and then disappear from the session moments afterwards.

This causes huge negative repercussions: quorums are not met for some parliament commissions; sessions get delayed or adjourned due to low attendance; and, most importantly, the voices of the constituents go unheard, simply because the representative was busy elsewhere.

The worst part: they just increased their numbers from 678 to 692 for the latest electoral period. Considering the excessively high salary paid to these people, it seems like a complete waste of money to pay for a bunch of absentees.

Finally, the incident still fresh in our memories: the election that almost didn’t happen on time. With 44 political parties and hundreds of politicians running for office, the ballot sheets were a complete logistical nightmare.

Add to this the sheer magnitude of the information on parties and candidates that needed to be processed by voters that do not have proper access to this information (as a quick trip to any party website can prove), and the end result is a system that does not work.

Many voters declined to vote, and many of those who showed up ended up not casting votes anyway. All of this happened simply because there was no way to properly decide who to vote for.

So, what’s the solution to the current challenges we face? In a word: downsizing. The Indonesian government and political system needs to rid itself of the excess weight it is currently carrying.

By trimming the numbers, many benefits can be attained. Smaller central parliaments lead to higher levels of competition, because candidates fight for fewer seats.

This means that absentee members of parliament are less likely to be reelected, because they will get out competed, and the newly elected or reelected members will think twice before skipping parliament sessions, due to fear of losing their spot in the future.

Smaller regional and municipal parliaments lead to massive savings on the payrolls, with minimal setbacks to the work. Having less parties in the election will make things easier logistically, and will also make it easier for voters to make up their minds.

This notion will most likely be received with significant resistance. Shrinking the size of parliaments will bring about the paranoia of the centralist and authoritarian days of old, while more restrictions for parties attempting to qualify for the elections will provoke outcries of large-party hegemony.

And, to be fair, these outcries are not completely unjustified, albeit rather exaggerated.

Smaller parliaments may, to some extent, hinder the productivity and the power of the legislative branch (though not necessarily). Smaller elections would close the channels for new, small parties to participate and try their luck at the elections, although they probably won’t get enough votes anyway, much like what happened to around 20 parties that participated in the election back in April.

However, even if we take into account these benefits, they are surely outweighed by the political convolution as well as the amount of money wasted on this overstuffed system.

So, in the end, it seems rather clear that elections with hundreds of candidates spending their fortunes on uninformative posters, as well as parliaments full of empty chairs and idle members, are things we can do without.

This article is featured in The Jakarta Post