Biting the bullet<\/p>\n
We should commend President Susilo Bambang Yudhoyono's
\ndetermination to make the unpopular-but-necessary decision to
\nforge ahead and increase fuel prices. The increases will enable
\nthe government to allocate a larger share of resources to poverty
\nalleviation and improve public services and other basic
\ninfrastructure in the country.<\/p>\n
However, the effectiveness of this reform measure, which
\nshould have been taken by then-president Megawati Soekarnoputri
\nin January last year, depends very much on leadership. It has
\nnothing to do with popular legitimacy, as Megawati's failure to
\nget reelected last September has convincingly proven.<\/p>\n
But mishandling the policy, which removes the subsidies that
\naffect the middle- and upper-income groups to help the poor,
\ncould still trigger massive street demonstrations and cause a
\nsocial and political backlash at the expense of macroeconomic
\nstability. The potential damage of such a backlash should not be
\nbelittled, given the lack of a nationwide, well-coordinated
\ncampaign to explain to the general public why prices will go up.<\/p>\n
The government is right in arguing that it no longer requires
\napproval from the House of Representatives to raise domestic fuel
\nprices because the 2005 state budget, which was approved by the
\nHouse late last year, allocates only Rp 19 trillion (US$2.1
\nbillion) for the fuel subsidies, compared to an estimated actual
\nneed of almost Rp 60 trillion. Even this estimate is considered
\nby many analysts to be conservative because the $35 a barrel
\naverage crude oil price used as the basis for the fuel prices
\ncould end up averaging at about $40 a barrel for the whole year.<\/p>\n
Most analysts have concluded from the empirical evidence of
\nthe fuel price hikes between 2000 and 2003 that if future hikes
\nare well managed they would not cause inflation to spiral out of
\ncontrol. They estimate that an average 30 percent price increase
\nwould cause inflation to increase by only between 1 and 1.2
\npercentage points, bringing up inflation for the whole year to
\nabout 7 percent.<\/p>\n
Business leaders have estimated that a 30 percent rise in fuel
\nprices would increase the production costs of goods and services,
\nincluding transportation by 15-20 percent.<\/p>\n
But all these assumptions about the moderate impact of higher
\nfuel prices depend on the government's ability to sell the
\nincreases to the public; on people's perceptions of the fairness
\nof the increase and of whether the government is acting out of a
\nreal sense of urgency and crisis.<\/p>\n
Unfortunately, the government has done little to explain the
\nincreases and win over the public.<\/p>\n
It seems to have wrongly assumed that since most of the fuel
\nsubsidies have always been enjoyed by the middle- and top-income
\nsegments of society that it needed only the understanding and
\nsupport of the common people for the move. But the government
\nshould realize that within the political scheme of things here it
\nis not the poor majority but the middle- and top-income groups
\nthat dominate the public opinion-making process. It is also
\nbusinesspeople who could sabotage the reform policy through
\nspeculative measures. Vested-interest politicians in the House
\ncould make a lot of noise, confusing the issue to advance their
\nhidden political agenda.<\/p>\n
The House has insisted that it would support higher fuel
\nprices if the government can guarantee that all the compensation
\nfunds for the poor reach their target beneficiaries, if the
\ninflationary impact is well controlled and if the government
\nworks to stop waste and inefficiencies in fuel distribution.<\/p>\n
While these requirements are important ones, they cannot be
\nfulfilled overnight. It is therefore unreasonable for the House
\nto impose these demands as the main preconditions of support of a
\nbadly-needed reform that has so long been postponed.<\/p>\n
The government should indeed work harder to enlighten House
\nleaders, university students, the media and other opinion leaders
\nabout the wider scope of the changes.<\/p>\n
However, most important is for the government to improve
\ninter-ministerial coordination to ensure that the compensation
\nfunds accrued from the rise in fuel prices reach their target
\nbeneficiaries, that the supplies of essential commodities remain
\nadequate and their distribution remains smooth to prevent
\nexcessive price increases. All this would be necessary to prevent
\nan excessively panicky reaction of the market.<\/p>\n
More concerted efforts to prevent the waste and inefficiency
\ncaused by corruption -- bringing high-profile graft suspects to
\ncourt within the next few weeks, for example -- would convey a
\nclear message that the government was acting out of a real sense
\nof urgency and crisis.<\/p>\n
Increasing fuel prices are always likely to cause some
\nprotests and demonstrations but such rallies are likely to be
\nshort-lived if the government goes all out to ensure a smooth
\nintroduction.<\/p>",
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