Singapore's Workers' Party keeps surprising with novel ideas. It proposed cutting housing supply on the eve of shortages, it complained about too many budgetary surpluses and now its economist-in-chief, Jamus Lim, is suggesting that a way to solve haze problems is to pay Indonesian farmers not to burn the jungle.
This might be the world's first example of a national lawmaker proposing that a nation willingly sets up an extortion scheme in which it is the victim.
Indonesian farmers must be in awe about the possibilities. It never dawned on them that they could simply have issued an ultimatum to rich Singapore: "pay us or we'll keep burning".
Instead, the proposal came from Singapore itself!
A lecturer in economics, Jamus revels in economic theory and to prop up his proposal he invoked the Coase theorem. In simple terms, it suggests that an issue of external costs (like pollution) affecting one of two parties, can be resolved by an exchange of economic incentives. For example: if a farmer saves $1,000 by clearing his plot of land with fire instead of machinery, but he causes $5,000 in economic damage to us, we could offer him $2000 to stop, and we are both better off.
Now, that's all good and well, but it works only when the two parties are clearly defined and any solution does not influence future behaviour – including the behaviour of other people or companies.
This is where Jamus Lim forgot about a different economic adage, which Charlie Munger, Warren Buffett's right-hand man liked to invoke: you get what you reward for.
Let's consider two Indonesian farmers: one who doesn't burn his plot of land and the other who does. Well, only the latter would qualify for the incentive payment, while the honest one would be left with nothing – that is both bearing higher cost to do his work properly AND no extra benefit.
Obviously, then, the next year every law-abiding farmer, who hadn't been setting fires to bushes creeping onto his land, would start doing so, to become eligible for the payment in the following year – and every year thereafter.
All of a sudden, then, a problem that was limited only to people breaking the law to save a few bucks, would grow to involve thousands of others – including many who had no business burning anything before.
A big problem would get even bigger as a result.
What's more, it's unclear how Jamus would like such a scheme to work in the first place. On the one hand, he says that "the Indonesian government must, of course, be the one that primarily finances and leads this initiative." but, on the other, he admits that "incurring some cost on our part to bring this to pass might well be an acceptable bargain."
So, that obviously risky idea doesn't even come with clearly defined responsibilities and financial burdens.
As usual, the Workers' Party is desperate to present some original ideas, to justify its presence in Parliament. But this sort of a cure may very well be worse than the disease.
