• Financial Crisis Manual: A Prestigious Work Product or a Desperate Attempt for Finding Clients?

    American law firms never cease to amuse me. After working together with other firms in producing a 40 pages comment to an SEC regulation, now Davis Polk & Wardwell LLP, a very respectable US law firm provides an impressive 279 pages of financial crisis manual. You can read the manual here and its quick summary here. In general, it discusses the current regulatory issues related to the US financial crisis and the effect of such regulations to US financial institutions. I haven't read the manual, but the table of contents shows a very promising product.

    Nevertheless, the most interesting part of this manual is not about the content or the quality of such manual as I am quite sure that the manual has been prepared in a professional manner, but the fact that 21 partners and counsels of Davis Polk are the ones that have prepared this manual. Given the latest news on how US law firms are trying to survive in the crisis, I have no doubt now that the crisis has really affected such law firms.

    While it is true that from time to time law firms publish certain materials for the purpose of marketing and promotion, in normal circumstances, it is hard to believe that a law firm can produce a manual that is very huge and comprehensive, how in the world that they can find a spare time to write the manual? I'm afraid this time I might need to assume that such opportunity exists because of the crisis, i.e. less work, less billable hours, more promotional time.

    Well, I hope that I'm wrong though. Maybe in the United States, it is usual for law firms to issue this kind of manual. After all, they have many resources for doing that.
  • Why the Pure Theory of Law Matters: Understanding the Misunderstood Kelsen (Part 1)

    Okay, I know that this blog is made for common readers, but I guess that writing a subject on legal theory and legal philosophy once in a while wouldn't do much harm. Besides, I cannot resist the temptation of writing this post. While Hans Kelsen is known as a prominent jurist and a worldwide respected legal scholar, he could also hold the first rank of the most misunderstood legal scholars of all time. There are so many critics to his legal theory (known as the "General Theory of Law" and the "Pure Theory of Law") that in some cases, his name and theory are recorded in law text books only for the sake of being criticized. Of course, this doesn't mean that his theory is less regarded than other legal theories since debating and criticizing are very usual in a well educated community. However, I feel that those critics are not the result of a correct understanding of Kelsen's theory. Instead, such critics were made on a false ground, a misunderstanding of Kelsen's real intention when he first declared his theory of law to the public. 

    Personally, after reading Kelsen's book, "The General Theory of Law and State," it is very hard for me to understand the basis of the critics and attacks made toward his theory. In my opinion, Kelsen provides a solid basis for lawyers in understanding the law and its basic characteristics, i.e. law as a norm and as a specific technique for social organization. We'll take a look on these issues further (some will be discussed in Part 2). But, for the appetizer, let us discuss first some basic concepts of the General Theory of Law and the Pure Theory of Law. 

    What is the General Theory of Law and the Pure Theory of Law? 

    In my opinion, nothing can better describe Kelsen's theory of law than Kelsen's own words. Therefore, to ensure that my description of this theory could reflect Kelsen's original thought in the highest manner, I will stay as close as possible with the description made by Kelsen in "The General Theory of Law and State." Expect a little bit of copy and paste here. But don't worry, my personal comments will be made separately below.  

    According to Kelsen, the General Theory of Law is a general theory of positive law and positive law is always the law of a defined community (such as the law of Indonesia, the law of the United States, etc). Kelsen claims that his general theory is made as a result of a comparative analysis of the different positive legal orders, furnishing the fundamental concepts by which the positive law of a definite legal community can be described. Further, the subject matters of a general theory of law is the legal norms, their elements, their interrelation, the legal order as a whole, its structure, the relationship between different legal orders and finally the unity of the law in the plurality of positive legal orders. 

    This kind of theory must derive its concepts exclusively from the contents of positive legal norms and therefore must not be influenced by the motives or intentions of regulators or the interests of the individuals to which they are the subject of such law, unless these motives and interests are manifested in the material produced by the lawmaking process. In other words, the general theory of law is directed at a structural analysis of positive law rather than a psychological or economic explanation of its conditions, or a moral or political evaluation of its ends. 

    Next, what is the Pure Theory of Law? According to Kelsen, the Pure Theory of Law means that such theory is being kept free from all the elements foreign to the specific method of a science whose only purpose is the cognition of law. Further, Kelsen argues that a science has to describe its object as it actually is, not to prescribe how it should be or should not be from the point of view of some specific value judgments. The latter is a problem of politics, and as such, concerns the art of government, an activity directed at values, not an object of science, which is directed at reality. The Pure Theory of Law considers its subject (law) not as a more or less imperfect copy of a transcendental idea. It does not try to comprehend the law as an offspring of justice. It sees the law not as the manifestation of a super human authority, but a specific social technique based on human experiences. Consequently, it seeks the basic of law, i.e. the reason of its validity, not in a meta-juristic principle, but in a juristic hypothesis, i.e. a Basic Norm, to be established by a logical analysis of actual juristic thinking. 

    My Notes on Kelsen's Theory of Law 

    Referring to Kelsen's thought above, I can conclude that a general theory of law focuses only on the structure and content of the law. It analyzes the law as it is and it is neutral, i.e. it does not question and judge the values or ideas contained within a law which is not the concern of a general theory of law. I find this as enlightening, though I understand that some people may find this idea as distasteful, i.e. how can someone claims that a theory of law should be separated from value judgment, the idea of justice, the idea of good? Wouldn't this provide a theoretical support for a despotic ruler to establish laws in accordance with his own wish and interest, without any accountability and any check and balance mechanism? 

    To tell you the truth, the answers are quite easy. First, a theory of law which depends on value judgment to analyze the law's validity will not work simply because it is impossible to determine a value than can be universally accepted by each and every men. As an example, who can perfectly define the term "Justice"? Even the great John Rawls with his magnum opus "A Theory of Justice," a book that has been prepared by him for more than 20 years, can't provide the perfected idea of justice to which every scholars would agree. The question of justice has been asked even by Socrates and Plato more than 2,400 years ago, and yet we have not resolved such question until today. 

    There is also a greater reason why Kelsen made such separation. As noted above, Kelsen defines law as a specific social technique made by men, and that definition, in my opinion, becomes the core of the structure of Kelsen's theory. To cut it short, Kelsen's theory is methodological (which is in accordance with Kelsen's ambition to establish a scientific theory of law). As such, Kelsen's theory deals with the method of establishing and operating the law, not the background of why such law was made on the first place. 

    As a logical consequence of this theory, the existence and validity of the law are no longer attached to morality, justice, religion, history, etc. Rather, a law would be deemed valid if it is created in accordance with the mechanism set out within a legal order/system (Kelsen believes that a law should be established in a coherent legal order/system, i.e. a positive legal order) and derived from a systematic hierarchy of norms, i.e. a law/norm's validity is determined by the validity of the law/norm having a higher level than such norm (this goes on until we reach the hypothetical Basic Norm (Grundnorm) which will be discussed further below). 

    It is also worth to note that while Kelsen makes such separation in his theory, it doesn't mean that he doesn't care about the value judgment of law. He understand that whether you like it or not, every law in this world must be based on certain value and thus such law can be good or bad, just or unjust. We can't deny that fact. However, Kelsen views this value judgment issues as not an issue of legal theory, but more a philosophical question or political science issue and should be answered by philosophers and political scientists. I would add that economists and sociologists would also be helpful in answering these value judgment questions. For clarification purpose, while I do make a differentiation between the General Theory of Law and the Pure Theory of Law, they are actually inseparable, i.e. Kelsen's theory of law is a general legal theory purified from any non legal elements. This concludes Part 1 from my planned 3 Parts of Post. In the second part, we will discuss the concept of Norms and the relationship between the efficacy and validity of the law.
  • Questioning the Claim of an Eternally Just Law: An Overview of the Aceh Qanun

    All right, it has been a while since my last post. I guess I can blame my excessive office workload (made a whopping 64 billable hours last week or more than 12 billable hours a business day) and the Id Mubarak holidays for this blogging non-productive period, eh?

    In today's post, we will discuss a very interesting issue that has been debated for centuries without ever being finally resolved, even until today. Yes, we are talking about the validity of the claim that there is an eternally just law in this world that can be applied in whatever situation and condition, an everlasting law that will prevail over any other laws.

    Now, is this claim valid, i.e. do we, humans, have this kind of law? Sorry to say, but my quick reply would be no. In my opinion, there is no such thing as an eternally just law, because those that are being called just as of now could turn into unjust the next minute. As long as we don't have a single, complete, and universally acceptable definition of the term "justice," we should say goodbye to the concept of an eternally just law.

    However, I am not surprised if many people would disagree with my opinion. We could easily spotted these guys when we are dealing with those who believe in the existence of a perfect God's law that holds supremacy over all kind of man-made laws. Usually, such people also believe that the implementation of the God's law would solve any problem in the society because such law is made by the wisdom and grace of the God that surpass humans' limited capabilities.

    There are many variations of laws that could fall under the category of God-made laws, however it is safe to assume that all religious laws could be considered as God laws (of course in this case, the deity to which we call it God will depend on the respective religions). Among these religious laws, I have no doubt that the Islamic law holds the foremost position due to: (i) its huge coverage (almost all aspects of life, private and public, are being governed by the Islamic laws), (ii) its well-established legal system (though the Islamic legal system does not have a single and united codification of laws which is applicable in each part of this world, it has established a generally acceptable legal sources and methods of legal reasoning), and the most important thing (iii) its wide use in various parts of the world (with modifications here and there).

    Islamic law is indeed interesting. The fact that there are so many ways in implementing this law and the controversies that surround such implementation amuses me. How could this happen? Similar with other types of religious laws, the implementation of Islamic law often falls under the same trap of too much regulating the citizen's private life. Something that I believe is no longer acceptable in this modern world. In addition, as most devoted believers take as granted that the entire body of the Islamic law is derived from God itself, whether through the Koran or through the Sunnah (words, acts, and silent approvals from the Prophet), the Islamic law faces the chronic problem of inflexibility as these people claim that the provisions of the Islamic law cannot be changed in any condition whatsoever (subject to any waiver that is specifically provided under the Islamic law (rukshah)).

    I could agree with the unchanging part if we're talking about the Ibadah aspect of Islamic law, i.e. any acts made as an implementation of the relationship between men and God, such as prayer, (shalat), fasting, and hajj. You can't change the basic rules that there are 5 obligatory shalat times in one day, or that mandatory fasting should be conducted in the Ramadan months. But, it is difficult for me to comprehend if we are also saying that any rules of Islamic law related to the Muamalah aspect, i.e. any private acts of men or any acts made between men, including trading, business, marriage, inheritance, etc, should also be fixed for eternity. The implementation of this kind of law should be made in accordance with the situation and condition of the respective era.

    For me, rather than trying to made up the benefit or secret wisdom of this Muamalah related laws, it would be better to deeply analyze whether such laws are still viable for use. That would be more effective. You would be surprised to see how many books and articles were made to support the rule that daughters can only receive half of the sons' share in receiving inheritance, or why women is better staying at home and don't work. And that is not including the various ridiculous reasons contained within those books and articles. To add the problem, those who are trying to make a proper review of these rules will be most likely deemed as unfaithful, unbelievers whose faith in God should be questioned.

    This brings us to the issue of the Aceh's Qanun. It is truly unfortunate that the Aceh's Qanun, as a part of Islamic law implementation in Indonesia, cannot outshine its counterparts by creating new development that can show some good quality of creativity. Instead, it stays with the mainstream and therefore brings unnecessary problems.

    The Aceh's Qanun is basically a new regulation issued by the Regional Government of Aceh which deals with the penalization of certain acts that are being considered as a crime under the Islamic laws (the one which is specifically adopted by the Regional Government of Aceh since there is no single codification of Islamic laws in this world. See above). For ease of reference, let us call this new regulation as Qanun.

    As stated above, the stipulation of this Qanun is very unfortunate and it really saddens me. Here we are in the 21st century, and yet, we are still clinging to the past, again and again trying to bring personal life choices into the public room. As you will see further below, except for rape, sexual harassment, and gambling, this Qanun mainly deals with humans' private actions. The Qanun makers also show a liking to the use of Arabic terms as all of the criminalized actions are named in Arabic (which is quite odd since the Qanun is intended for Indonesians).

    These are the criminalized actions in the Qanun: (i) drinking alcoholic beverages, (ii) gambling, (iii) male and female being in a closed/hidden room without any marriage relationship and they are not prohibited from marrying each other (khalwat) (please note that these people don't have to do anything to be punished. Simply being together in a closed room would be sufficient to punish them); (iv) male and female making out (including holding hands together, kissing and hugging) without having a marriage relationship (ikhtilath); (v) male and female having sex outside of a marriage relationship (adultery/zina); (vi) performing male-to-male sex, a.k.a gay sex (liwath); (vii) performing female-to-female sex, a.k.a lesbian sex (musahaqah), (viii) harassing sexually, (ix) raping, and (x) accusing other people of performing adultery without having the minimum 4 witnesses as a valid evidence (qadzaf).

    The sanctions for these criminal actions include among others caning, prison, fines in the form of gold and stoning/death penalty for a married person that conduct adultery. Now, I wouldn't discuss why this Qanun can exist under the Indonesian legal system. If you're interested with that subject, I suggest that you should see this nice post here. Instead, I would like to focus on the backgrounds used by the Aceh Regional Government to issue this Qanun including all of its provisions.

    In the elucidation of the Qanun, the Qanun makers claim that the Qanun was made as a response to the need of the Aceh's people to implement the Islamic law in their society since Islamic law has been considered as an inseparable part of the Aceh's culture. Further, they also claim that the Qanun was established on four basic principles which include: (i) the rules shall be derived from the Koran and the Sunnah; (ii) the interpretation of such rules shall be made in accordance with the local needs of Aceh people and in the context of Indonesian legal system; (iii) the implementation of such rules shall be made by taking into consideration the future progress and the needs of the 21st century's Indonesian people who are still in the process of development (which cover modern issues such as protection of human rights, gender equality, and technology development); and (iv) the implementation of such rules shall also be guided by the Islamic legal principles of using the best opinions from various schools (mazhab) and finding and developing better provisions.

    Comparing to the reality of this Qanun, I must admit that the above principles sound very bombastic, if not misleading (especially for the third principle). I don't see any aspect, even the slightest one, that can be used to say that this Qanun has been made in accordance with the above principles. Well, maybe the Qanun corresponds with the first principle, but surely the makers are not paying any attention to the other three principles.

    And to complete the irony, the Qanun makers were also hoping in the Qanun's elucidation that the implementation of this Qanun (in accordance with the above principles) can reflect a law that could bring justice and prosperity to the entire society (rahmatan lil alamin). Nice try and keep dreaming sirs.

    Come on, how can we say that a law that permits a married person to be killed by stoning due to adultery can be considered as a law that brings prosperity? I can agree if the state would like to punish this kind of person (and by the way, we do have this kind of provision in our Penal Code), but killing the person? That's outrageous.

    What make it worse is the fact that the Qanun does not provide any clear mechanism for evidencing the adultery, whereas in the classic Islamic law, an adultery case can only be validly proofed if there are 4 witness who clearly see such act, i.e. a penis is being inserted into a vagina. In fact, it is so hard to implement this rule, that the only known case where a person is being stoned for conducting adultery is a case where a pregnant woman came to the prophet and acknowledged that she has conducted an adultery. The prophet himself has ordered this woman to go home since there is no clear evidence that she has indeed conducted an adultery (even though she is pregnant). But the woman insisted and after more than 2 years of begging to be stoned, she actually got what she wanted, which only happen after she gave birth and taken care her child for some time.

    Why do we still insist of using this rule? On a bigger scale, why do we even consider to use the rules that were established a long time ago and might not be relevant anymore in this era. Maybe, it would be effective in the past to control the society by fear. It is not a secret that 1,400 years ago the arab people were living in a barbaric era. Of course they would need to have a law that can impose fear to them and make them obey such law. But now?

    I would even dare to say that this law is inefficient! Why bother to find people who are being together in a closed room or are making out somewhere and then punish them? Are we trying to deplete our resources to finance these useless acts? Or assuming that an adultery case is validly evidenced, should we stone the convicted to death? Who will bear responsibility for the family left behind? The state by using the money of the tax payer??? This is utterly ridiculous and the Qanun simply doesn't meet the test of a law that can bring global prosperity to the society, well, unless the Qanun makers believe that the prosperity will come since God will bless Aceh and Indonesia for implementing the Qanun. Again, keep dreaming sirs. The real fact is clear, this Qanun brings unnecessary costs and fear to the society.

    I believe that this is the right time for us to bring an end to the claim of an eternally just law. In this modern era, a law or a policy should be made in accordance with the people needs and should be implemented in the most effective and efficient way. A good law shall prevail without much hesitation, but a bad law can only prevail by using force which would be costly. For Islamic law, it would be useful if we start to review the current rules and determine whether such rules would still be applicable. We need to remember that since Koran or Sunnah cannot be changed forever, the law contained within should be flexible and it is our task to make a better interpretation. When man-made laws are wrong, we can always amend them, but we can't amend the content of the Koran and/or Sunnah. The content will always be the same but the implementation should depend on the actual condition. Only by making it flexible that we can ensure the survivability of the Islamic law, or else, I fear that in the future, the Islamic law shall only be regarded as a part of the forgotten history.
  • A Phony Market Oriented Law: Some Critiques on the New Electricity Law

    I have grown tired with the absurdity of some of the laws that have been passed recently by the Indonesian House of Representatives ("DPR"), particularly the laws on film and electricity (thanks to Mova for the link on Electricity Law). I won't make a review on the new Film Law as Rob Baiton has made an excellent summary and review on such law in his post here. So, I'll go with the new Electricity Law instead.

    The Current Nature of Indonesian Electricity Business

    Now, before we go forward with the review, we need to understand the nature of electricity business in Indonesia. First of all, in Indonesia, and probably in the majority parts of the world, electricity has been considered as a public utility, which means that it is also a political commodity. I'll discuss further below on the implication of electricity status as a political commodity.

    As you might be aware, there is only one electricity provider in Indonesia, PT PLN (Persero) ("PLN"), an Indonesian state owned company, that has been deemed by the Government to provide public service obligation in the electricity sector. As a public service company, PLN has the first priority to establish electricity business in Indonesia and may receive Government supports in order to run its business, including to receive subsidies to replace any costs of PLN for performing such public task.

    Under the old Electricity Law (Law No. 15/1985) and its implementing regulations, the electricity business is actually opened to private enterprises, and to certain extent these companies can also directly sell and distribute their electricity to end consumers. However in practice, most private enterprises sell their electricity to PLN and then PLN shall sell and distribute such electricity power to the people. Arguably, this is not efficient for business purposes, but as will be discussed further, I tend to believe that this is the best option in Indonesia, at least until we have a better solution.

    Issues on Electricity Price

    Historically, the electricity price is always determined by the Government, which makes sense when we considering the nature of electricity as a political commodity. Since politicians need to maintain their votes, most of them would try to make the electricity price as low as possible by all necessary means, even if such means are not economically viable. What is the easiest option for the Government then? Subsidizing the electricity price. It causes a considerable amount of pressures to our Stated Budget, but hey, who cares as long as the people is happy, right?

    Who is the main victim of this policy? PLN. For years PLN has been operating in loss, not because they are not efficient but because they cannot sell their electricity in accordance with the market price or at least a price that can cover their basic costs. Though I understand that now some type of industries must purchase electricity from PLN on a market based price, the majority of ordinary citizen like us pay the subsidized price of electricity.

    The other victims of this policy are of course private enterprises. As long as there is a subsidy, market price wouldn't work, and thus there are not many incentives for private enterprises to enter into this business. Even worse, there is also a price control for selling electricity to the end consumers. So, the least thing that they could do is to sell electricity to PLN and hoping for a better price which is of course still higher than the subsidized price.

    Review on the New Electricity Law: The Government Misunderstanding of The Market

    At a first glance, it seems that the new Electricity Law is a market oriented law. The law unbundles the electricity industry by separating electricity business into electricity generation, transmission, distribution, and sale businesses, and opens the opportunities for regional companies and private enterprises to enter directly into the electricity business in certain territories of Indonesia (provided that PLN doesn't have the capacity to establish and run an electricity business in such territories). So, under the new Electricity Law, private enterprises can now sell their electricity to end consumers. Seems a very market oriented law to me, but is it true? Now, before people go to the Constitutional Court and wasting their time asking the Court to deem this Law as unconstitutional due to its market oriented policy, I suggest that those people should look further into this new Law and compare it with the old one, so that they can realize that this Law is indeed one of the greatest blunders of all time.

    Yes, all of the concepts provided in the new Electricity Law has been already regulated in the old Electricity Law and its implementing regulations. If there is an actual change, that must be the fact that the new Eletricity Law combines the concepts in the old Electricity Law and its implementing regulations into one Law, and yeah now the new Electricity Law opens the possibility of local governments to join the mess. Good job, DPR, good job.

    Further, apart from the introduction of regional government in determining the price of electricity, there is no change to provisions on electricity price control. Articles 33, 34 and 35 of the new Electricity Law clearly state that any electricity generating business license holders cannot sell their electricity to the consumers without having secured approvals from the Government or local government. The law does state that the price of electricity should be based on healthy market practice, but what the use of having this provision if in the end the price should be approved first by the Government or local governments?

    In my opinion, the above articles render this new Electricity Law to become useless if not bring unnecessary problem. The reason why we open a business to the market force is to let business players compete and create competitive prices that benefit the consumers. But that wouldn't happen if the prices are still being controlled! As long as the politicians care about their votes in the next election, who would willingly let the electricity price goes to the market? They all know already that the current price of electricity is lower than the actual market price.

    In other words, there would be no incentives for business players to enter into electricity business and start directly selling their electricity to consumers if they cannot enforce market price. The only way that this policy will work is if the Government/local governments subsidize the price of electricity generated by private enterprises in order to cover their costs. However, this will create additional paper work and in overall would not be efficient.

    I bet that the private enterprises would rather stick to the old ways, i.e. they sell their electricity on a market price basis to PLN (theoretically it's not a truly market price, but it is still the best option) and then PLN will sell such electricity to the people in subsidized price. Everyone would be happy and the Government will not have to be bothered by dealing with entities other than PLN with respect of subsidy.

    Some Thoughts on Indonesian Electricity Business
    I think this is the time for the Government to be consistent in issuing its policies. The Government can't expect that private enterprises would be amused by this mumbo jumbo government-market synchronized regulation. It doesn't create harmony, it creates discord! If we want to stick with market oriented policy, we would need to let it work based on market principles, the price should not be fixed anymore and the most efficient company will emerge as the winner from the competition.

    But come on, can we do that? I'm not sure that we can quickly change our policy after having so many years running the electricity business as we have it today. That would be suicidal. In my mind, rather than creating a fake opening of business opportunities, the Government should focus on helping PLN to become a more efficient company, which means that PLN can reduce the costs of its electricity generating, cutting its actual price and therefore would enable the Government to reduce the subsidy in the long run. How can the Government help? Well, some have been done such as the Fast Track program where the Government acts as a guarantor for PLN's financial obligations for establishing coal fired power plants. The Government can also provide tax incentives to PLN or build new infrastructures to be injected to PLN's equity as a payment in kind. Of course this will cause the Government to bear additional costs in the short run (since they will also need to pay the subsidy), but in the long run, if PLN can improve its efficiency, all of us, including the Government, would receive the benefit. I would love to see the implementation of market principles in the electricity sector, but now is not the right time.

  • The Indonesian Cigarettes Chronicles: A Quick Review on the Latest Constitutional Court's Decision

    Today, the Constitutional Court issues its decision on the Judicial Review of Article 46 Paragraph 3 (c) of Law No. 32/2002 on Broadcasting ("Broadcasting Law") which basically deals on the constitutionality of the provision of a Law that allow cigarettes advertisement in broadcasting media. You can see the complete 306 pages decision here. The constitutional claim was made by among others the National Committee of Child Protection and the Child Protection Agency of West Java.

    From my quick reading of the decision, I can conclude that the main target of this claim is to banish all type of cigarettes advertisement in Indonesian broadcasting media by claiming that the above provision of the Broadcasting Law is contravening with Article 28B paragraph (2) (the right of each child to live, grow, and develop, and to earn protection from violence and discrimination), Article 28A (the right of each person to live and maintain its life), Article 28C paragraph (1) (the right of each person to develop himself through satisfaction of basic needs) and Article 28F (the right of each person to communicate and obtain information to develop himself and his society) of the 1945 Constitution.

    In its decision (by 5 to 4 vote, which means that it is a very close decision), the Constitutional Court rejects such claim entirely based on the following reasons: (i) cigarettes industry is still a legal and valid industry in Indonesia and therefore has the same right with other industries to promote and make advertisement on its business activities; (ii) there is already a strict regulation on cigarettes advertisement in Indonesia and therefore, if there is a violation to such regulation, such violation must be handled through the mechanism stated by the relevant regulation, i.e. it is not an issue on the constitutionality of the disputed provision, rather an issue on the implementation of a regulation; (iii) it is not clearly evidenced that there is a causality between cigarettes advertisement and the inability of a person to develop himself and his life; and (iv) even if cigarettes advertisement in broadcasting media is deemed unconstitutional and therefore must be banned, it won't affect the ability of the cigarettes company to use other media and mechanism to promote cigarettes and therefore it would not be effective to deemed such provision as unconstitutional and it wouldn't be fair to the cigarettes industry, i.e. why are they being prohibited to advertise in the broadcasting media only?

    How about the dissenting opinion? It's quite simple, they discuss the danger of cigarettes and their bad effect to the youth and also the fact that while the advertisement of any other addictive substance is prohibited in the broadcasting media, the advertisement of cigarettes (which could definitely be considered as an addictive substance) is not prohibited as long as the advertisement does not involve any visualization of cigarettes. Therefore, in their opinion, advertisement of the cigarettes in the broadcasting media should be deemed unconstitutional and should be prohibited.

    I tend to support the Constitutional Court official decision. However, before I discuss my reasons to support the decision, let me tell you that I'm not a fan of cigarettes, in fact, I hate them. I can't breath normally when cigarettes are all around, they cause bad odors and will definitely ruin your health. I guess everyone knows that, after all each cigarettes advertisement contains a warning on the danger of smoking and its negative effect to human's health.

    So why do I support the Constitutional Court decision? Simply because from legal point of view their analysis is correct. If the Government declares that an industry is legal to be established and operated in Indonesia, why prohibit such Industry to develop its business here, including making advertisements through various broadcasting medias? Such advertisement prohibition would be nonsense and it would be better if from the first place the Government banned the entire cigarettes industry in entirety. Further, it is also correct that rather than arguing the constitutionality of the advertisement of cigarettes in broadcasting media, it would be better to focus on enforcing the regulation on cigarettes advertising. You know, there are already many regulations in Indonesia which deal with the danger of cigarettes and the proper advertising mechanism for cigarettes. Why don't we improve these regulations instead?

    Though I would love to see the banning of cigarettes in Indonesia, we need to look at a bigger picture here, as long as the benefit of having cigarettes industry in Indonesia is higher than the costs of having such industry, there would never be an end to the Indonesian cigarettes industry. The case becomes more difficult since the benefit of having the industry is easier to calculate, i.e. the amount of Government income from cigarettes duty and levies, the huge income of most of the cigarettes companies, and the amount of worker which are involved in this industry, compared to the costs of having such industry, i.e. bad development for the youth and public health which is very hard to calculate.

    If we really want to prevent people from smoking in Indonesia, I would suggest that rather than prohibiting the development of the business which may also negatively affect the whole economy, we should build an industry which can provide the substitution of cigarettes in a more efficient way and can be easily accessed by all people, such as chewing gum or therapic medicines. If the Government really cares with the quality of life of its citizens, it can encourage the development of this cigarettes substitution industry by providing some incentives such as tax cut, subsidy, easier licensing, etc. Of course continuing education for the people on the danger of smoking would be always needed.

    We can also use one of the most famous legal principle, i.e. people must be responsible for the externalities of their acts, or in a less complicated way, if you cause loss to other people, you need to be responsible to such loss and pay the damages. To certain extent, this has been reflected in our current regulation on cigarettes, i.e. this industry pays a huge amount of money to the Government in the form of tax and duties in order to run their business. Further discussion can be made on what kind of policy that need to be established in order to implement this principle.

    In the end, our goal here is to replace the cigarettes industry through several stages in order to ensure that the transition would be smooth and would not adversely affect our economy. Remember, there are many stakeholders in this industry, and there is no easy answer when dealing with cigarettes industry. Let us hope that we can find a better solution in the future.
  • On Why the Negative List Should Stay Away from Publicly Listed Companies

    Let me start this article by explaining the basic concept of the Negative List. It is a regulation issued by the President of the Republic of Indonesia stipulating the area of business which are opened (with certain requirements) or closed to foreign investment in Indonesia. The main reason for Indonesia in having this Negative List is to close or limit any foreign investments in industries which: (i) are being prohibited in Indonesia, such as gambling; (ii) are being considered as strategic for the interest of Indonesia; and (iii) are being reserved for small to mid scale business players.

    In short, except for point (i), the Negative List can be considered as a protection mechanism imposed by the Government of Indonesia. Is it good? I must admit that I'm not a huge supporter of the Negative List, as I don't believe that restriction of ownership would be effective to protect the what so called interest of the people of Indonesia.

    Up until today, it is generally assumed that the Negative List is not applicable for publicly listed companies. The Negative List is not quite clear on this issue, but at least Law No. 25/2007 on Capital Investment ("Investment Law") states that the provisions of the Investment Law are not applicable for any indirect or portfolio investments, whereas the majority of Indonesian legal scholars interpret that indirect or portfolio investments refer to investment in the capital market, i.e. in publicly listed companies. Therefore, as a logical consequence of this interpretation, the Negative List (in its capacity as one of the implementing regulations of the Investment Law) should not be applicable to publicly listed companies.

    However, recently I've heard a shocking news, i.e. there are some discussions within Government officials that the Negative List will be revised in order to cover publicly listed companies. If such plan is executed, foreign investment limitations will also be applied to publicly listed companies. Clearly, I oppose this plan and my reasons shall be further discussed below.

    First of all, how can the Government limits foreign ownership in the shares of publicly listed companies? Those shares are listed on the Indonesia Stock Exchange and are effectively being traded (at least most of them). Some of the most active shares are even being traded by each second. While it is possible to control the sale of shares in an Initial Public Offering, it is almost impossible, if not entirely impossible, for someone to control or limit parties in purchasing the shares of a publicly listed company in the secondary market, unless such purchase is considered as a change of control, i.e. takeover.

    Even if it is somehow possible to limit the foreign ownership in the secondary market, any attempt to maintain such limitation would be mostly inefficient since it will require a great monitoring mechanism. Under the current technology, such mechanism would be very costly. You want to supervise all transactions and then impose a system which will limit the purchase of shares by foreigners if certain thresholds have been satisfied? And then you want the monitoring system to operate on per second basis? I say, tough luck.

    A possible restriction mechanism that can be applied is by limiting the amount of shares that can be offered to the public. However, this is not recommended because such restriction may negatively affect the liquidity of the shares of such company and as a result of which, the public may suffer unnecessary losses.

    Second, an attempt to limit foreign investments in the capital market might cause a turbulence within the capital market. I understand that some people might regard this risk as a theoretical risk rather than an actual risk, but I wouldn't be too confident if I were them. Like or not, in most of the time, capital market is driven by fear and greed. Announcing to the public that foreign investment limitations will be applied to publicly listed companies is a very good way to cause unnecessary fear within market players. And believe me, the imaginations are unlimited, foreign investors may think that the market condition is not conducive anymore, some of them will think that their investments will be reduced or they will be forced to divest their shares, etc. In any case, it wouldn't be good for most of the time!

    Third, with respect to foreign investments, most Indonesian regulations do not differentiate the ultimate ownership of foreign entities who made investment in Indonesia, i.e. whether the ultimate owners of such foreign entities are truly foreigners or Indonesians. You may be aware that many Indonesian business entities use foreign companies as their investment vehicle in the capital market, which is mainly done for tax purposes.

    As a result of the above policy, any investment made by foreign entities in Indonesia will be considered as foreign investments regardless of the ultimate ownership of such entities. Applying this limitation to publicly listed companies would be counterproductive because it may also jeopardize the interest of Indonesians who made their investments through foreign entities.

    In addition, as stated above, is having an ownership restriction would be an effective way to protect the interest of the Indonesian people? By all means, capital investment, whether made by foreign or domestic entities should be good for the development. If we want to have the full benefit of such investment, forget about the ownership, or at least put it as the last issue to be considered. The most important issue that we need to achieve through foreign investments is how we can actually "force" those foreign investors to transfer their knowledge to their Indonesian counterparts and how these foreign investments will contribute to the greater good of the society, i.e. creating job opportunities and establishing infrastructure for stronger industry in Indonesia. Shares ownership would be useless if the Indonesian counterparts are not capable to conduct the business as they will end up as puppets of the foreign investors. Surely, this is not something that we want.

    Now, if the Government insists that this new regulation will be applied, I will suggest that: (i) the limitation will only be applied to publicly listed companies established after the enactment of such regulation, so all publicly listed companies prior to the enactment will be exempted and their shares are free from any foreign ownership limitations; (ii) the limitation (if any) should only be applied to foreign investors who clearly control the relevant publicly listed companies (under the current Bapepam-LK regulation, a party will be deemed as a controller of a publicly listed company if it owns at least 50% of the shares of such company).

    My advice to the Government, stop trying to make politically correct acts, you won the election with a considerable support from the voters, so please focus on making the best policy available rather than trying to look like a populist government which is a shame.

  • Ketchup Economics and The Problem of Valuation

    Here is a long and nice article on the current macroeconomics issue by Paul Krugman. I must admit that I share the same view for some of his thoughts, particularly with respect to the misuse of economic models to explain the world and the argument that the market is perfectly efficient and can always maintain that condition. For further discussion, you can see my post here on the issues of Capitalism. To cut it short, I never believe that someone can explain how the market works through some sophisticated mathematical equations and models. Of course you need to make some calculation in economics, but don't expect that everything will work perfectly in accordance with the calculation, there are too many factors which are affecting the economics performance. Now, let us move to today's main theme. What exactly is Ketchup Economics? According to Mr. Krugman, this is related to the assets valuation method use by finance economists in determining whether asset prices are reasonable, i.e. they don't ask whether asset prices made sense because of its real-world fundamentals like earnings, but whether asset prices made sense given other asset prices. Using Larry Summers' parable, the simplified version would be as follows: The "ketchup economists" have shown that two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup, therefore they conclude from this fact that the ketchup market is perfectly efficient. Got the message? Using the Ketchup Economists logic of thinking, the fact that the prices of certain assets are going considerably up or down in certain periods should not be questioned as long as the prices of other similar assets are going up or down together. Without a doubt, this is dangerous. But how can we blame them for making this kind of assessment? If we take the assumption that the market is truly efficient, it is useless to make a price valuation based on the fundamental aspects of the assets, since it is the market force, the supply and demand mechanism, that will determine the exact value of those assets. Let me clarify first, while I do believe the concept of Invisible Hand, i.e. the best way to let the economy moves is by letting the force of supply and demand works automatically, I also believe that the market is not always efficient, there would always be a case where the amount of the supply or demand is too high or too low. There are many factors that can affect such amount of supply and demand, and I can assure you that not all of those reasons were made on a reasonable basis. Sometimes people are being in a state of high optimism and are willing to take more risks and then the economy moves forward, in other times people are being too pessimistic and then we're going through a recession. Then, what could be done? To be honest, I don't know yet. Many professional economists have tried to solve the problem, but no one has ever succeeded, so I don't think that I can provide the perfect solution. However, since most victims of the current crisis are major financial institutions, I would suggest that a better supervision mechanism should be implemented by the Government in the near future. We would also need certain regulations that will encourage financial institutions to have a better assessment on their business and investment risks and to ensure that they can always maintain a prudent approach with their risk management. I was quite surprised with the collapse of some major financial institutions back in 2008, it is just ridiculous that from all the possible companies to collapse, those who should actually be the most prudent companies are the ones who were proven not prudent and therefore collapsed firstly. In addition, since most of the major financial institutions are relying on rating companies in determining their risk of investment, it would also be helpful if the Government can start to have a meaningful discussion with major rating companies concerning their rating standards in order to create a better and more prudent rating mechanism. Further elaboration on this idea will surely be needed in the future.
  • A Short Defense on Lawyers Work

    I'm quite shocked with this piece of letter, especially because it was published in the New York Times. What's wrong with being a highly paid lawyer? Is it that bad to work as a lawyer in the United States? How come the shortage of job with high salaries is good for the development of law graduates? And, the most important question is, how on earth can someone made a claim like this: "as the jobs with large salaries disappear, law students will draw on the thoughtfulness, intelligence and perseverance that got them into law school in the first place in order to find employment that they actually find rewarding."

    Is he trying to say that having a career as a lawyer would cause law graduates to lose their thoughtfulness, intelligence and perseverance??? Pardon me sir, but among many types of career that can be pursued by a law graduate, I find that being a lawyer provides the biggest opportunity for a law graduate to maintain and increase their thoughtfulness, intelligence and perseverance. It goes without saying that a good lawyer must combine all of those three qualities in order to survive in their job.

    Any law firm who truly cares about the quality of their work and talents would be most probably establish a system which will ensure that all of their lawyers are able to maintain those three qualities. These include proper distribution of work, work review mechanism, and systematic training program. Why I believe that those three qualities will be maintained and increased by becoming a lawyer? See some examples below:
    • If you want to train a lawyer's perseverance, throw him into a very boring due diligence exercise. It's very important, but everyone knows that it's an administrative paper work. Those who can survive the hellish due diligence exercise will not doubt have a perseverance of a true knight.

    • If you want to train a lawyer's thoughtfulness, throw him into various negotiation meetings with clients and their counter parts. The first experience will always be scary, but it will definitely train his ability to think and act carefully, as he will have to respond to on-the-spot questions and he will need to understand his clients needs and translate those needs into commercially acceptable legal terms. He will also learn to act in a professional manner all the time to ensure that he can gain trust from both sides.

    • If you want to train a lawyer's intelligence, throw him into structuring a complex transaction or make him do some advisory works. That would done the job easily.
    And come on, how can someone says that having a job with less salary is good? No sir, that's not good at all. You ask people to be happy with less salary? You're saying that dreaming a career in a big paid law firm is not worthy to be pursued? My suggestion, if you want to cheer up these poor law graduates about their prospective careers, find a better reason next time.
  • On Becoming a Libertarian Paternalist: Designing Better Policies for the Society (Part 2)

    In my post dated 26 August 2009, we have discussed the basic concepts of Libertarian Paternalism, introduction to better policy making, and examples of human errors with respect to daily economic activities. Today, we will discuss some useful guidelines in making better policies and how to implement such guidelines in actual life.

    The Six Guidelines of Better Policy Making

    According to Thaler and Sunstein, there are 6 basic guidelines for better policy making:
    • Expect Error;
    • Defaults;
    • Understand Mappings;
    • Give Feedback;
    • Structure Complex Choices; and
    • Incentives.
    Each will be further discussed below:

    1. Expect Error

    I guess this is the first guideline to be considered by policy makers. Since most men make mistakes, a good policy will consider such fact and will ensure that the mistakes can be fixed in the easiest way.

    What is the actual implication of this guideline? While governments or private institutions can try their best to design a good policy, they must be aware on the possible failures due to human errors and must ensure that the system will be able to sustain and fix such problem. There are many examples for this problem, but let me show a very interesting case as provided by Thaler and Sunstein, that is the case of birth control pills. Some of you might be aware that in one month, most women will take birth control pills for about three consecutive weeks and then stop for one week (due to the menstruation period). Many women have difficulties to adopt to this system and some of them may forget to take their pills in accordance with the required schedule. So what the companies do with this condition? They provide 28 pills in 28 containers, each having a specific number from 1 to 28. However, pills in containers no. 22 till 28 are only placebos made for the sake of compliance by human users, and thus they don't have any effect whatsoever. Interesting isn't it?

    2. Default
    The "Default" guideline is made due to the fact that most people will take the options which require the least effort, or in other word, people would instinctively take the easiest route in doing something (seems familiar?). In our daily life, the "Default" option represents an option that, if the chooser does not do anything, will cause most people to end with such option, whether the option itself is good or bad. The case will be stronger if there is any suggestion (explicit or implicit) on such "Default" option, i.e. people will most likely take such option without much hesitation.

    In reality, we can't avoid this "Default" problem. Governments and private options in many cases need to provide "Default" option, such as the default choice of menu in a fine-dining restaurant or the default choice for investment policies in your pension funds. Now, since the "Default" option is very powerful, it would be best to ensure that any "Default" option is made for the benefit of the people. How can we do this?

    There are two possible ways. First, we can design that each "Default" option requires an active approval from the relevant user. This means that a "Default" option will only be applied once it has been approved by the user. However, in several cases, some people ended up with having no benefit simply because they are too lazy to activate their own "Default" option.

    The other way is to design the best possible policy that can be made by the government or private institutions and then such policy will be made as the default option, whereas any people who don't agree with such option will always be free to opt out. Take as an example your computer's download system. All major software company requires the user to actively choose whether they want to download a file or not for each downloading session as a default option, instead of the automatic downloading system. Why? Simply because downloading a file automatically might be dangerous (e.g. causing computer virus attack) and you'll need to properly asses such risk whenever you are trying to download a file. Simple, but important. And in each case, you can always change the setting (of course, if your administrator permits you to do that).

    3. Understand Mapping
    The third guideline deals with the fact that most people will have some difficulties when they are facing complex choices. A good policy will provide some mapping mechanism to its users, enable them to review the possible options in an easier manner and will allow them to choose the best option for them. In other words, we're talking about better disclosure to the public.

    Now, let me ask you some simple questions, do you really understand the actual costs for using your credit card ? Or how to calculate your telephone bills? I bet that most of us wouldn't even know.

    That's why we need a regulation which would require companies to have better disclosure system. The implementation of the "Understand Mapping" guideline should be cheap and will maintain the basic freedom of choice for consumers. It would also be good for the business because it can increase fair competition without having to use excessive litigation method (such as the use of Anti Monopoly and Unfair Competition Commission) or forced price control.

    As an example, let us see the telecommunication industry. Imagine that the Government now requires each telecommunication provider to provide all relevant information related to the costs of their services and to provide a simple costs comparison with other providers. The information should also be easy to be obtained by all consumer. With this kind of policy, we would have a better understanding on the actual costs for using telecommunication services and can easily spot the best provider which would satisfy our needs. Each telecommunication company will also have better incentives to increase their business efficiency and to optimize their services due to this information disclosure system. Wouldn't that be nice?

    4. Give Feedback
    It goes without saying that a good policy will be able to provide a feedback to the user, whether they have done well, or were actually making mistakes. A nice example provided by Thaler and Sunstein is our internal computer system that warns us before our computer battery completely runs out.

    Based on this guideline, I also have an idea where there is an integrated system to supervise the use of credit cards by each person. We know that each credit card has its own limit. However, in many cases, rather than acting as a limiter for people in using credit cards, such limit encourages people to spend their credit cards up to its maximum limit, and in some other cases, people tend to obtain many credit cards to increase their total credit cards limit. All of these are totally wrong.

    Now, by using this integrated system, the banks would know how many credit cards are owned by a person, including each of their limits. Whenever certain amount of the combination of the limits have been reached (which should be in accordance with the credit worthiness of the user), all of the credit cards wouldn't be available for use. We have this supervision system for banking loan and credits application, why not for credit cards? We can help many people by using this kind of system. Remember, having many credit cards doesn't mean that you're becoming richer.

    5. Structure Complex Choices
    Actually, this guideline is deeply related to Guideline no. 3. When people are facing complex choices, they tend to simplify the choice. That's why a good policy maker will structure its policies to be easily understood and choosed by the user. One of the most useful methods that is being widely used is the "Collaborative Filtering."

    Don't be afraid with the name, since it's basically a public review system and the internet really helps the development of this method. As an example, when you want to buy a law textbook and you have many choices but don't have enough time to read all of the available books, what would you do? You'll ask other people's opinion right? In the world wide web, you can simply search the title using Goggle or Yahoo and then you can see whether any people have made a review on such book. It is easy, cheap, and in most cases would be helpful for us in making an efficient decision.

    6. Incentives
    This is my favorite guideline and has been discussed various times in my other posts. It's very simple, people respond to incentives, they actually calculate the costs and benefits of everything, though maybe not as complex as a professional would be. Therefore, a good policy should always calculate the best incentive to be used in order to make such policy can be effectively applied.

    Some legal scholars claim that currently most regulations are no longer effective to bind the people and therefore they are questioning the efficacy of the law itself. If only these people understand the basic nature of men, they would not say such a thing. You can't expect people to follow the law if you don't provide a suitable incentives for them. If you think that people will act according to a law only because of morality or religious reasons, I suggest that you need to reevaluate again your idea, or I'm afraid you will be frustrated.

    I wouldn't provide any examples for this guideline as I believe you have seen many in my previous posts and I assure you that you will see more in my future posts.
    Concluding Remarks

    I hope this article can enlighten you on how the government and private institutions should design a policy which would maximize the benefit for the people without minimum cost to the people's freedom of choice. I personally agree with most of this Libertarian Paternalism movement, but I need to put some qualification here. What matter most to me is finding the most effective policy in improving people's live, so when the circumstances show that preserving free choice would not be efficient, some other methods would be needed. This is especially relevant when we're dealing with major criminal acts, such as terrorism, money laundering, and corruption. Of course it would be really nice to reduce these criminal acts by using positive incentives, but don't put too much faith on that.

  • The Protection of Criminal Suspects in Law and Economics Perspective

    Forthcoming in Jurnal Teropong Edisi RUU KUHAP 2015 | 23 Pages | Posted: 10 May 2015 | Date Written: April 28, 2015

    Public Choice Theory and its Application in Indonesian Legislation System

    24 Pages | Posted: 8 Oct 2012 | Last revised: 8 Nov 2014 | Date Written: October 8, 2012

    Special Purpose Vehicle in Law and Economics Perspective

    Forthcoming in Journal of Indonesia Corruption Watch, 'Pemberantasan Kejahatan Korupsi dan Pencucian Uang yang Dilakukan Korporasi di Sektor Kehutanan', 2013 | 15 Pages | Posted: 22 Aug 2013 | Date Written: August 18, 2013

    Legal Positivism and Law and Economics -- A Defense

    Third Indonesian National Conference of Legal Philosophy, 27-28 August 2013 | 17 Pages | Posted: 22 Aug 2013 | Last revised: 3 Sep 2013 | Date Written: August 22, 2013

    Economic Analysis of Rape Crime: An Introduction

    Jurnal Hukum Jentera Vol 22, No 7 (2012) Januari-April | 14 Pages | Posted: 12 Nov 2011 | Last revised: 8 Oct 2012 | Date Written: May 7, 2012


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