Eliminating subsidies, convincing the public<\/p>\n
David Sumual, Danareksa Research Institute, Jakarta<\/p>\n
Hikes in administered prices leading to student
\ndemonstrations, higher transportation fares, higher prices of
\nconsumer goods, and possible labor strikes. This news was making
\nthe headlines at the beginning of 2002. Although political
\ntensions heightened at the time, the pressure eased as all eyes
\nfocused on the severe flooding that badly hit Jakarta and parts
\nof Java.<\/p>\n
History has now repeated itself in January 2003. This time,
\nhowever, Amien Rais and several House factions plan to use their
\ninterpellation rights to get the price hikes annulled. Again,
\nlike in the Indosat case, these politicians have not come forward
\nwith any alternative solutions.<\/p>\n
However, such political maneuverings are by no means unusual
\nsince the politicians need bullets to shake the credibility of
\ntheir political opponents ahead of the 2004 general election. And
\nit is worth remembering that the majority of the parliamentarians
\nhad previously agreed to the government's plan to cut subsidies
\nin the 2003 state budget.<\/p>\n
But such political maneuverings can be very dangerous. Fuel
\nsubsidies are a politically sensitive issue especially for urban
\ninhabitants in Jakarta and Java, as well as middle-income
\nhouseholds and the spoilt industrialists that have long been
\naccustomed to generous subsidies.<\/p>\n
Benefiting from their proximity to the central administration,
\nthey have a strong political bargaining position. The situation
\nis worsened further by the negative bias of the media, which
\nseeks to blow up the issue for the sake of attracting readers.<\/p>\n
Nevertheless, the complaints are understandable given the
\ngovernment's half-hearted efforts to eradicate corruption and the
\nlack of efficiency gains at the state-run oil, telecommunications
\nand electricity companies -- respectively Pertamina, Telkom and
\nPLN. The general public feel a sense of injustice with the
\ngovernment's policy of letting bad conglomerates off the hook,
\nsince there is no guarantee they will not repeat their past
\nmistakes again in the future.<\/p>\n
However, the courage of President Megawati Soekarnoputri to
\npush through with such a policy is not without calculation.
\nSecurity conditions are more conducive now that the government
\nhas clamped down on extreme groups in the wake of the Bali
\nbombings, the Cabinet has been more cohesive, international
\nsupport has been more apparent, and, most importantly, the
\nmilitary has assumed a greater role in improving the national
\nsecurity conditions.<\/p>\n
Meanwhile, in terms of strategy, the government has also
\nlearnt its lessons. In 2000, the postponement in fuel price hikes
\ndoubled its inflationary impact in that year. First, thanks to
\nthe psychological effect and opportunist traders, the
\npostponement in hiking the fuel prices in April caused the April-
\nMay inflation rate to reach 1.9 percent.<\/p>\n
Yet, when the government finally increased the fuel price in
\nOctober by 12 percent on average, the September-October inflation
\nreached 2.5 percent. As a result, the postponement in the fuel
\nprice hikes pushed the 2000 inflation rate even higher.<\/p>\n
Then, in August 2001, the government raised fuel prices by
\n30 percent, causing August-September inflation to reach 3.8
\npercent. However, because the government raised the other utility
\ntariffs at a different time, the effect on year-on-year inflation
\nwas relatively high (12.5 percent in 2001).<\/p>\n
In 2002, the government raised fuel prices, telephone tariffs
\nand electricity rates at the same time by 22 percent, 15 percent
\nand 6 percent respectively. As a consequence, the January-
\nFebruary inflation rate reached 3.5 percent. However, the rupiah
\nappreciation, steady flow of rice imports and good monetary
\nmanagement by BI meant that the 2002 y-o-y inflation rate was
\nless than expected at only 10.0 percent.<\/p>\n
The Central Bureau of Statistics' social-economic survey shows
\nthat the fuel subsidy tends to have an urban, middle income and
\nJava bias. As generally known, most Indonesian oil comes from
\noutside of Java (mostly rural areas), while most of the people
\nwho enjoy the subsidies are those in Java and urban areas.<\/p>\n
We also know that those who benefited from Bank
\nRecapitalization and SBI (monetary stabilization program\/higher
\ninterest rates) are middle-income individuals and conglomerates.<\/p>\n
Besides helping to reduce the smuggling of fuel, the removal
\nof fuel subsidies will divert funds from Jakarta to the
\nrelatively underdeveloped regional provinces and also the
\nunderdeveloped oil producer provinces that had been sacrificed
\nfor more than 30 years (for more than 30 years their income went
\nto urban and middle income groups who mostly live in Jakarta and
\nurban areas).<\/p>\n
Concerns that consumption as the main driver of Indonesian
\ngrowth would be hampered are also unreasonable. Private
\nconsumption should not be hurt, since what is happening is
\nessentially a shift in consumption from Jakarta and Java to other
\nprovinces and to the poor, as well as for education, small
\nenterprises credit and health.<\/p>\n
The government has provided Rp 25 trillion in compensation
\nfunds. And if these compensation funds are audited and supervised
\ncorrectly, then the poverty figure, which has been on a downward
\ntrend from 22 percent, and 19 percent to 17 percent, will fall to
\njust 13 percent next year.<\/p>\n
Especially for industrialists, the subsidies have spoilt them
\nand restricted their creativity. The New Order's intention to
\nsupport industries and conglomerates to gain market share by
\ngiving fuel subsidies had failed even before the economic crisis
\nhit the country. They lost competitiveness to Vietnam, Malaysia,
\nThailand and China.<\/p>\n
Moreover, we must also consider other Indonesian alternative
\nabundant energy resources such as coal and gas, since Indonesia
\nwill be a net oil importer in 15 year's time. In addition, a
\npetroleum subsidy does not support energy conservation efforts.
\nWith the relatively lower oil price, people are not encouraged to
\nuse oil energy wisely.<\/p>\n
Therefore, the government must reassure the people that it is
\nworking for their interests at heart, and not the interests of
\nthe powerful and privileged. The extent to which the government
\ncan convince the people that it is willing to take decisive
\naction on those troublesome conglomerates will calm the people
\ndown. The people are ready to make sacrifices, but it depends on
\nthe government to ensure that justice is done.<\/p>",
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