Subsidizing the rich<\/p>\n
Indonesian presidents after Soeharto are likely to have learned
\none important lesson from the former dictator: Don't slip on the
\noil. Politically, oil is indeed a slippery commodity for
\nIndonesia. Every president since Soeharto has had to think twice
\nbefore taking any decision to raise fuel prices, as every time a
\ngovernment increases them, there is almost certainly going to be
\na public backlash.<\/p>\n
Megawati Soekarnoputri knew that well, and used oil to fire up
\nher reelection bid this year, by keeping domestic fuel prices
\nconstant amid soaring international oil prices. Despite what was
\narguably a highly irresponsible policy, there was no helping her
\nreelection bid, and now there is also a hefty burden on the new
\ngovernment, in the form of Rp 45 trillion (US$6 billion) in extra
\ncosts for the additional fuel subsidies for this year alone.<\/p>\n
The current administration has no choice but to increase fuel
\nprices to reduce the subsidies. There are a number of reasons for
\nwhy reducing fuel subsidies is far more urgent now than ever
\nbefore. In the past, high crude oil prices used to be a good news
\nwhen the country was a net oil exporter. High prices meant a
\nwindfall profit for the country. Now this situation has changed
\nand this year for the first time the country has become a net
\nimporter of oil.<\/p>\n
In the past, before Indonesia decentralized its finances, all
\nproceeds from oil and gas went to the national government,
\nhowever, now, the government has to share 15 percent of non-tax
\nrevenues from oil and 30 percent from gas with the regions where
\noil and gas resources are located. However, in terms of spending,
\nthe central government bears all the costs for subsidizing the
\nfuel. For the government, maintaining fuel prices at the current
\nlevel is increasingly unsustainable -- according to Vice
\nPresident Jusuf Kalla it is burdening the state with costs of up
\nto Rp 10 trillion a month in subsidies, depending on
\ninternational oil prices.<\/p>\n
Even if prices were not as bad as they are now and Indonesian
\nagain became a net exporter of fuel, it is still not wise to keep
\nIndonesian fuel prices so low compared to those in the region. As
\na comparison, gasoline that the Indonesian government retails at
\nabout US 20 cents a liter, sells at 85 cents in Singapore and 53
\ncents in Thailand. Like all subsidies, this low-price policy is
\nsubject to abuse.<\/p>\n
As often reported, subsidies in Indonesia have frequently
\nfailed to help their intended target: the poor. Many subsidies
\nend up benefiting the more affluent groups in society because of
\ntheir stronger political and purchasing power or simply because
\nof corruption.<\/p>\n
Fuel subsidies are glaring examples of where subsidies end up
\nbenefiting high-income groups although the original justification
\nfor their existence was to assist the poor. Subsidies for auto
\ndiesel and gasoline fuel mostly benefit car owners, whose incomes
\nare in the top 10 percent bracket of Indonesians. Even subsidies
\nfor kerosene, a main cooking fuel, end up benefiting relatively
\nhigh-income groups most, as according to the World Bank report
\nPoverty Reduction in Indonesia: Constructing a New Strategy,
\n2001, the poor consumed only 20 percent of the subsidized
\nkerosene sold.<\/p>\n
The other downside to fuel subsidies is the widespread fuel
\nsmuggling to neighboring countries and the excessive domestic use
\nof fuels resulting in higher pollution. If domestic prices are
\nset at similar levels with those in the neighboring countries --
\nsmuggling would stop and consumers would use fuel more
\neconomically.<\/p>\n
Worse still, the increasing burden of subsidies left unchecked
\nwill eventually increase public debt, already at high levels. And
\nallowing public debt to increase will only eat into the
\ngovernment's budget to finance programs for the poor.<\/p>\n
It is clear now that fuel subsidies cannot be justified on any
\ngrounds, except politically. So, rather than subsidizing the
\nrich, encouraging smuggling, creating pollution, and building up
\npublic debt as a result of fuel subsidies, why not abolish such
\nsubsidies altogether. However, cutting subsidies is not an easy
\ntask as they benefit groups that often have political clout.<\/p>\n
What the government needs to consider now is how to chose the
\ntiming of the subsidy reductions and prepare targeted
\ncompensation programs for the poor, especially who are definitely
\nlikely to suffer from an increased prices of fuel.<\/p>\n
The government also needs to consult with Bank Indonesia about
\nhow to implement the price increases in order to mitigate adverse
\ninflationary affects.<\/p>\n
Most importantly, the government needs to put out a message
\ndebunking the myth that fuel subsidies end up benefiting the
\npoor.<\/p>",
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"sponsor": "Okusi Associates",
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