[Kajian Post] Commitment

Oleh: Jalu Dibyo Sanwasi | Staff Divisi Kajian Kanopi 2012 | Ilmu Ekonomi 2011

Luigi Zingales, a Robert C. McCormack Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business, recently wrote an article concerning the damaging effect of polices requiring high level of commitments on democracy. His article articulated the influence, both good and bad, that “commitment” policies have on individuals or societies. The obvious benefit of a commitment policy is that it forces the related parties to fully chase a particular goal. For example, an army who is in battle with no escape routes will be more likely to put a better fight all instead of an army with the luxury of various escapes. Keeping that in mind, can economics issues be solved simply by tuning policies to create certain level of commitments?

To certain extent, financial crisis can be attributed to the lack of commitment of several investors. Usually, if not always, when a crisis occurs, the government supplies various institutions with bailout funds. Their incentive is clear, that is to minimize the damage of the crisis on unemployment and on the economy as a whole. Nevertheless, by making funds available, the government is in a way creating an environment where institutions have space for recklessness. They have less reason to be committed towards being less cautious and in turn create a higher chance of causing another financial crisis. Would it be better if governments provide no safety net for institutions? In the short run, the economy will undoubtedly suffer tremendously. However, in the long run investors will be obliged to commit to their actions since the result of poor judgments is severe.

The logic of commitments can also be attributed to free trade. When a country does not embrace free trade, the producers have less incentive to produce the best good possible because competition is less stiff and customers are more guaranteed. Therefore, when countries start opening up their borders for trade, they are in a way imposing commitments upon their producers to create pristine goods. Since competition stiffens, producers will lose customers if they do not create the best goods. In other words, by inscribing commitments, producers are forced to create better goods.

The logic of commitment in free trade, however, assumes that traded goods are goods with added value. What happen if raw goods are traded freely? There is, after all, no added value in raw goods and in turn the existence of commitment among producers do not create better products. To solve for this issue, another form of commitment is needed. For example, the recent endeavors of Hattanomics to restrict the export of several raw materials create commitments on producers to add value to those raw materials. If, by any reason, they are unable to add value to those goods, the consequence is severe; the exporters lose all their income coming from the raw materials.

The power of commitment can certainly create large incentives for anyone to do anything. By imposing commitments with clear consequences, a particular economy can too be directed in a desirable manner. Financial crisis can be avoided by erasing government safety nets from the equation. Of course, other costs and benefits have to be calculated further before creating policies concerning commitments stated previously. On another note,nations can also rely on commitments brought by both free trade and restrictions to increase the quality of their products. As stated previously, commitments can greatly help guide economies on a desirable path.