Fuel subsidies in Indonesia serve only short-term political interests

Harya Setyaka, Jakarta

Oil to Indonesia has multiple obscene facets. It is arguably a curse in disguise. It was nurtured to serve as an appalling instrument of regime maintenance. Debates over whether or not fuel should be subsidized are actually rooted in our inadequate understanding of this most controversial fluid.

We have long agreed that, due to its exhaustible nature, oil should not be taken for granted as a main source of energy. Since the seemingly irreversible industrial revolution -- alongside the unfinished project of modernization -- energy has taken over from land as a determining factor of production. Due to its transportability and combustion properties, oil has replaced coal as the main source of energy -- especially in transportation -- since the 19th century. Modern economic development has been dependent on oil ever since.

Soeharto learned the lesson from his predecessor Sukarno well. He must not let the people go hungry, for what ever reason, and the best way to do this was to keep oil prices low. And he did just that. In doing so, he provided the incentive for even more rapid urbanization. More and more Indonesians became dependent on oil.

The low portion of state revenue from tax provided no incentive for Soeharto and his cronies to really create a people- driven economic development strategy. There is no representation without taxation. Economic development and social mobility was meant only for bureaucrats. The situation was worsened since defense spending was financed by oil money, and people did not have representation in the military and police. That was how Soeharto maintained his regime.

Intellectuals had no option but ennoble Soeharto with their policy-based knowledge. History and news was written in favor of Soeharto. Social mobility was only available to those who acquiesced. The economy was run by the privileged few. The same thing happened in the Arab-Muslim world.

What Indonesia faces now is a product of three decades of this false pampering policy. Soeharto kept people from starvation by using oil subsidies -- not labor productivity, which at the hand of the undeserving, gets smuggled. Law enforcers, not financed by taxation, feel that they don't owe anything to the people. This illegal business is only possible if the price of subsidized oil is lower than world prices, especially neighboring Singapore and Malaysia.

Cheap oil for transportation tends to make transportation systems inefficient, since there is little incentive to promote sustainable practices. Urban areas sprawl, depriving land for agriculture, which in turn increases the distance from the market and induces huge dependency on transportation. Major urban roads are congested since the economy is largely dependent on motorized private transportation. We have not even considered the direct environmental damage. My point is; subsidized oil is being burned unnecessarily every single day.

The choke on oil will continue as long as China booms. The manufacturing booms in Japan, Europe and North America also caused oil crises in the 1970s. This crisis is nothing new, and was actually quite predictable. This time, Indonesians -- and not only the government -- need to learn the lesson. The tuition fee is too expensive to fail this subject.

We don't need to go back to square one. It is more important to have a complete understanding of the modernization process, modern economic development strategy, and the nature of oil and energy. We shouldn't just naively replicate the wealth of the West without understanding the context within which this wealth was created.

To be modern vis-a-vis traditional does not just mean getting a nose job. It is to adapt to a mind-set which should liberate society from stagnation. People should be enabled to be socially mobile. Modernization comes from the social contract where a citizen pays taxes to the state to educate themselves and their fellow citizens so that he/she can live in an educated society. The same thing applies for health. It is desirable to live in a healthy society.

In this way, society has an ability to appreciate democratic civility and not be easily fooled by the speeches of demagogues and other totalitarians. This includes paternalistic religious institutions, yet another curse on this nation. Social contracts as such will be very important to us, especially if we insist on keeping the state monopoly over oil.

Along with education and public health, the state should provide decent paying jobs. There is a lot of potential we could mobilize to create wealth. We should participate in global trade as soon as we figure out how we are going to fit into the global division of labor. This is our homework. Another way is to allow foreign direct investment. Foot-loose industries desire efficient global supply chain networks that rely on infrastructure thresholds. The state should cleverly strategize in this field.

This may hurt local companies who have not been efficient, but to a larger extent, this will create jobs. An educated and healthy citizen would have access to decent paying jobs. True nationality should not be exercised by blocking job opportunities for the benefit of underperforming local companies.

Finally, it is imperative to understand that oil will not be able to satisfy greed, only our need. We should not wait until oil runs dry on us. Oil should be taxed heavily to fund research into alternative and sustainable energy. Lifting the subsidy will at least promote a more efficient spatial structure and sustainable transportation system, and in turn lower oil consumption.

We need a sustainable energy strategic plan, and a fiscal space to finance it. Subsidizing oil is only feeding dependencies in our burgeoning economy. This is not at all sustainable. The notion of "compensation" for the oil subsidy is truly a public fallacy. This will only affirm the "right" to subsidized oil, which is not true. Modern economic development should be based on dignified human capital, not cheap oil.

The oil subsidy has done much long-term, perhaps irrecoverable, damage just to service short-term political interests. We should in fact focus on state investment in education and public health. Human capital investment enables more access to social mobility and lessens dependency on oil.

These efforts will truly enable Indonesia to lift the curse of oil.

The writer is a researcher at the Urban and Regional Development Institute (URDI) and can be reached at harya@urdi.org.