Eliminating subsidies, convincing the public
Eliminating subsidies, convincing the public
David Sumual, Danareksa Research Institute, Jakarta
Hikes in administered prices leading to student
demonstrations, higher transportation fares, higher prices of
consumer goods, and possible labor strikes. This news was making
the headlines at the beginning of 2002. Although political
tensions heightened at the time, the pressure eased as all eyes
focused on the severe flooding that badly hit Jakarta and parts
of Java.
History has now repeated itself in January 2003. This time,
however, Amien Rais and several House factions plan to use their
interpellation rights to get the price hikes annulled. Again,
like in the Indosat case, these politicians have not come forward
with any alternative solutions.
However, such political maneuverings are by no means unusual
since the politicians need bullets to shake the credibility of
their political opponents ahead of the 2004 general election. And
it is worth remembering that the majority of the parliamentarians
had previously agreed to the government's plan to cut subsidies
in the 2003 state budget.
But such political maneuverings can be very dangerous. Fuel
subsidies are a politically sensitive issue especially for urban
inhabitants in Jakarta and Java, as well as middle-income
households and the spoilt industrialists that have long been
accustomed to generous subsidies.
Benefiting from their proximity to the central administration,
they have a strong political bargaining position. The situation
is worsened further by the negative bias of the media, which
seeks to blow up the issue for the sake of attracting readers.
Nevertheless, the complaints are understandable given the
government's half-hearted efforts to eradicate corruption and the
lack of efficiency gains at the state-run oil, telecommunications
and electricity companies -- respectively Pertamina, Telkom and
PLN. The general public feel a sense of injustice with the
government's policy of letting bad conglomerates off the hook,
since there is no guarantee they will not repeat their past
mistakes again in the future.
However, the courage of President Megawati Soekarnoputri to
push through with such a policy is not without calculation.
Security conditions are more conducive now that the government
has clamped down on extreme groups in the wake of the Bali
bombings, the Cabinet has been more cohesive, international
support has been more apparent, and, most importantly, the
military has assumed a greater role in improving the national
security conditions.
Meanwhile, in terms of strategy, the government has also
learnt its lessons. In 2000, the postponement in fuel price hikes
doubled its inflationary impact in that year. First, thanks to
the psychological effect and opportunist traders, the
postponement in hiking the fuel prices in April caused the April-
May inflation rate to reach 1.9 percent.
Yet, when the government finally increased the fuel price in
October by 12 percent on average, the September-October inflation
reached 2.5 percent. As a result, the postponement in the fuel
price hikes pushed the 2000 inflation rate even higher.
Then, in August 2001, the government raised fuel prices by
30 percent, causing August-September inflation to reach 3.8
percent. However, because the government raised the other utility
tariffs at a different time, the effect on year-on-year inflation
was relatively high (12.5 percent in 2001).
In 2002, the government raised fuel prices, telephone tariffs
and electricity rates at the same time by 22 percent, 15 percent
and 6 percent respectively. As a consequence, the January-
February inflation rate reached 3.5 percent. However, the rupiah
appreciation, steady flow of rice imports and good monetary
management by BI meant that the 2002 y-o-y inflation rate was
less than expected at only 10.0 percent.
The Central Bureau of Statistics' social-economic survey shows
that the fuel subsidy tends to have an urban, middle income and
Java bias. As generally known, most Indonesian oil comes from
outside of Java (mostly rural areas), while most of the people
who enjoy the subsidies are those in Java and urban areas.
We also know that those who benefited from Bank
Recapitalization and SBI (monetary stabilization program/higher
interest rates) are middle-income individuals and conglomerates.
Besides helping to reduce the smuggling of fuel, the removal
of fuel subsidies will divert funds from Jakarta to the
relatively underdeveloped regional provinces and also the
underdeveloped oil producer provinces that had been sacrificed
for more than 30 years (for more than 30 years their income went
to urban and middle income groups who mostly live in Jakarta and
urban areas).
Concerns that consumption as the main driver of Indonesian
growth would be hampered are also unreasonable. Private
consumption should not be hurt, since what is happening is
essentially a shift in consumption from Jakarta and Java to other
provinces and to the poor, as well as for education, small
enterprises credit and health.
The government has provided Rp 25 trillion in compensation
funds. And if these compensation funds are audited and supervised
correctly, then the poverty figure, which has been on a downward
trend from 22 percent, and 19 percent to 17 percent, will fall to
just 13 percent next year.
Especially for industrialists, the subsidies have spoilt them
and restricted their creativity. The New Order's intention to
support industries and conglomerates to gain market share by
giving fuel subsidies had failed even before the economic crisis
hit the country. They lost competitiveness to Vietnam, Malaysia,
Thailand and China.
Moreover, we must also consider other Indonesian alternative
abundant energy resources such as coal and gas, since Indonesia
will be a net oil importer in 15 year's time. In addition, a
petroleum subsidy does not support energy conservation efforts.
With the relatively lower oil price, people are not encouraged to
use oil energy wisely.
Therefore, the government must reassure the people that it is
working for their interests at heart, and not the interests of
the powerful and privileged. The extent to which the government
can convince the people that it is willing to take decisive
action on those troublesome conglomerates will calm the people
down. The people are ready to make sacrifices, but it depends on
the government to ensure that justice is done.
David Sumual, Danareksa Research Institute, Jakarta
Hikes in administered prices leading to student
demonstrations, higher transportation fares, higher prices of
consumer goods, and possible labor strikes. This news was making
the headlines at the beginning of 2002. Although political
tensions heightened at the time, the pressure eased as all eyes
focused on the severe flooding that badly hit Jakarta and parts
of Java.
History has now repeated itself in January 2003. This time,
however, Amien Rais and several House factions plan to use their
interpellation rights to get the price hikes annulled. Again,
like in the Indosat case, these politicians have not come forward
with any alternative solutions.
However, such political maneuverings are by no means unusual
since the politicians need bullets to shake the credibility of
their political opponents ahead of the 2004 general election. And
it is worth remembering that the majority of the parliamentarians
had previously agreed to the government's plan to cut subsidies
in the 2003 state budget.
But such political maneuverings can be very dangerous. Fuel
subsidies are a politically sensitive issue especially for urban
inhabitants in Jakarta and Java, as well as middle-income
households and the spoilt industrialists that have long been
accustomed to generous subsidies.
Benefiting from their proximity to the central administration,
they have a strong political bargaining position. The situation
is worsened further by the negative bias of the media, which
seeks to blow up the issue for the sake of attracting readers.
Nevertheless, the complaints are understandable given the
government's half-hearted efforts to eradicate corruption and the
lack of efficiency gains at the state-run oil, telecommunications
and electricity companies -- respectively Pertamina, Telkom and
PLN. The general public feel a sense of injustice with the
government's policy of letting bad conglomerates off the hook,
since there is no guarantee they will not repeat their past
mistakes again in the future.
However, the courage of President Megawati Soekarnoputri to
push through with such a policy is not without calculation.
Security conditions are more conducive now that the government
has clamped down on extreme groups in the wake of the Bali
bombings, the Cabinet has been more cohesive, international
support has been more apparent, and, most importantly, the
military has assumed a greater role in improving the national
security conditions.
Meanwhile, in terms of strategy, the government has also
learnt its lessons. In 2000, the postponement in fuel price hikes
doubled its inflationary impact in that year. First, thanks to
the psychological effect and opportunist traders, the
postponement in hiking the fuel prices in April caused the April-
May inflation rate to reach 1.9 percent.
Yet, when the government finally increased the fuel price in
October by 12 percent on average, the September-October inflation
reached 2.5 percent. As a result, the postponement in the fuel
price hikes pushed the 2000 inflation rate even higher.
Then, in August 2001, the government raised fuel prices by
30 percent, causing August-September inflation to reach 3.8
percent. However, because the government raised the other utility
tariffs at a different time, the effect on year-on-year inflation
was relatively high (12.5 percent in 2001).
In 2002, the government raised fuel prices, telephone tariffs
and electricity rates at the same time by 22 percent, 15 percent
and 6 percent respectively. As a consequence, the January-
February inflation rate reached 3.5 percent. However, the rupiah
appreciation, steady flow of rice imports and good monetary
management by BI meant that the 2002 y-o-y inflation rate was
less than expected at only 10.0 percent.
The Central Bureau of Statistics' social-economic survey shows
that the fuel subsidy tends to have an urban, middle income and
Java bias. As generally known, most Indonesian oil comes from
outside of Java (mostly rural areas), while most of the people
who enjoy the subsidies are those in Java and urban areas.
We also know that those who benefited from Bank
Recapitalization and SBI (monetary stabilization program/higher
interest rates) are middle-income individuals and conglomerates.
Besides helping to reduce the smuggling of fuel, the removal
of fuel subsidies will divert funds from Jakarta to the
relatively underdeveloped regional provinces and also the
underdeveloped oil producer provinces that had been sacrificed
for more than 30 years (for more than 30 years their income went
to urban and middle income groups who mostly live in Jakarta and
urban areas).
Concerns that consumption as the main driver of Indonesian
growth would be hampered are also unreasonable. Private
consumption should not be hurt, since what is happening is
essentially a shift in consumption from Jakarta and Java to other
provinces and to the poor, as well as for education, small
enterprises credit and health.
The government has provided Rp 25 trillion in compensation
funds. And if these compensation funds are audited and supervised
correctly, then the poverty figure, which has been on a downward
trend from 22 percent, and 19 percent to 17 percent, will fall to
just 13 percent next year.
Especially for industrialists, the subsidies have spoilt them
and restricted their creativity. The New Order's intention to
support industries and conglomerates to gain market share by
giving fuel subsidies had failed even before the economic crisis
hit the country. They lost competitiveness to Vietnam, Malaysia,
Thailand and China.
Moreover, we must also consider other Indonesian alternative
abundant energy resources such as coal and gas, since Indonesia
will be a net oil importer in 15 year's time. In addition, a
petroleum subsidy does not support energy conservation efforts.
With the relatively lower oil price, people are not encouraged to
use oil energy wisely.
Therefore, the government must reassure the people that it is
working for their interests at heart, and not the interests of
the powerful and privileged. The extent to which the government
can convince the people that it is willing to take decisive
action on those troublesome conglomerates will calm the people
down. The people are ready to make sacrifices, but it depends on
the government to ensure that justice is done.