Fuel politics

Fuel politics

One could read many things into the government's decision to
delay the raising of domestic fuel prices. Skeptics
would accuse President Abdurrahman Wahid of resorting to
populism. Others would see this as common sense. Whatever
interpretation we use, it is clear that political considerations
have prevailed once again, even though the economic
considerations for hiking prices are so compelling.

The government said the decision to delay the hikes was taken
because the political situation was not conducive. Labor
demonstrations in some big cities in Indonesia this past week
were originally held to protest against the government's policy
with regard to severance or compensation payments, but some
expanded into violent protests over the planned 30 percent
average increases in fuel prices, starting on June 15.

We could extend this argument and link it with the fact that
the People's Consultative Assembly (MPR) is planning to hold a
special session on Aug. 1 to begin an impeachment process against
President Abdurrahman. At a time when his popularity is at such a
low ebb, now would be the worst moment for him to implement
unpopular measures like increasing fuel prices.

If history is any indication, such a measure would amount to
political suicide. President Soeharto's powerful regime collapsed
in May 1998, barely a month after he tried to increase fuel
prices. When he retracted the policy, the damage had already been
done and the protests turned into uncontrollable, violent
unrests. That, and the massive student protests against his
regime, forced Soeharto to resign.

There is no doubt that fuel prices must rise sooner or later.
Current prices, which are well below world levels, are
indefensible, without bankrupting the government or the nation.

The government said the cost of subsidizing fuel, originally
estimated at Rp 41.3 trillion (US$3.75 billion at current prices)
in the budget year ending Dec. 31, could soar to over Rp 70
trillion because of a combination of rising world oil prices and
falling rupiah exchange rate since January.

With the government hard pressed for money, it was forced to
review its budget spending, and the fuel subsidy became an
obvious target for the axe. The House of Representatives, which
had blocked some of the government's economic programs in the
past, endorsed with ease the proposal to increase fuel prices.
Ultimately, however, it is the government, especially President
Abdurrahman, that would have to carry the political risks.

It is not so much the timing, but the reason given, that is so
very wrong about the government's decision to hike fuel prices.

The way the proposal was pushed through the House left the
impression that the increase was authorized because the
government was running out of money. The soaring cost of the fuel
subsidy resulted not so much from the increase in world oil
prices, but from the fall in the value of the rupiah.

The public would therefore perceive the fuel price hikes as
resulting from the government's failure to defend the rupiah's
value. In other words, they would feel they were being penalized
for the incompetence of this government.

It would have been much more palatable had the government
hammered the point home that fuel subsidies should be phased out
because they have led not only to gross inefficiency in the use
of scarce resources, but also because they had caused massive
inequality. Since this is an across-the-board subsidy, the
largest users of fuel are the chief beneficiaries. These include
industrialists and the wealthier members of society. This is
essentially a subsidy for the rich by the poor, which is morally
as well as economically indefensible.

Putting the timing factor aside, any plan to raise fuel prices
in the future should send the message that it is being done in
the name of efficiency and equality, and never, as the case with
the current plan, to plug the government's budget deficit.

Unfortunately for this administration, however, efficiency has
never been part of its vocabulary. For the government to argue
that fuel prices are being increased in the name of efficiency,
it must lead the way in striving for the most efficient use of
scarce budgets, especially at a time of deep economic crisis.

This week is a classic example. On the same week that the
government was planning to increase fuel prices, which would mean
more hardship for the people, aides to the President announced
his plan for another one of his extravagant foreign trips, to
Australia and the United States. It would be hard to find a
government that is more insensitive than that.