Fri, 03 Jan 2003

Painful measures

Most analysts are likely to agree on the economic imperative for the increases in the price of fuel, telephone calls and electricity announced by the government on Wednesday. Most politicians also seem to have realized that such painful measures needed to be taken, otherwise the public might have faced supply disruptions. After all, the price increases had the prior approval of the House of Representatives.

But the government should not simply sit back and relax, assuming that the public will simply accept the bitter pills, especially as, within the political context of our emerging democratic system, the House is not yet perceived as the true representative of the people's interests. The public has instead perceived most House members as simply corrupt politicians.

The measures, which will hurt those on low incomes the most, have deeply upset the public's sense of justice, being introduced at the same time as the government decided to release from criminal charges "cooperative large debtors", whom the public see as partly responsible for bankrupting the national economy.

Fuel price increases were widely predicted as a result of the new fuel-pricing policy introduced last January, which floated fuel prices, except those for kerosene, on the international market, using Mid Oil Platts Singapore (MOPS) quotations as a reference. This means that domestic fuel prices are adjustable every month based on MOPS quotations and the rupiah's exchange rate.

As international oil prices have risen markedly due to fears of shortages caused by the U.S. threat to attack Iraq, a major oil producer, the government has consequently increased the oil price range assumed for production costs from US$19 to $26, to $22 to $28.

Consequently, domestic fuel prices have had to increase as well, otherwise the Rp 13.5 trillion allocated for fuel subsidies during the current fiscal year would have been far from sufficient. Another alternative -- maintaining fuel prices at their current levels -- would endanger fiscal sustainability at the expense of macroeconomic stability and hinder efforts to improve efficiency in fuel usage and to diversify the sources of commercial energy.

The same rationale applies to the increases in telephone and electricity prices. The 15 percent hike in telephone rates is the second phase within a total of 45.50 percent price increase planned for 2002 to 2004 to attract new investment in order to expand the telephone network.

Likewise, the 6 percent rise in electricity prices is part of the quarterly increase that has been agreed on by the government and House for the whole fiscal year. Without a price increase, not only would the electricity subsidy far overshoot the Rp 4.05 trillion budgetary appropriation set for the fiscal year; an even more damaging impact would be a power crisis three to four years down the road as no new power generation investment would be commercially feasible.

But, to go back to the basic question: Can the government take it for granted that the public will simply accept the painful measures?

The answer is certainly a resounding no. At a time when increasing numbers of people have been suffering from the economic crisis and when unemployment, already at a potentially explosive level, is likely to rise, the additional burdens are likely to incite public anger through street demonstrations and further embolden the already radical labor movement.

Public acceptance, which is critical to the effectiveness of the measures in achieving their objective, will depend on how the public will perceive the painful policies as fair, necessary and effective.

The government is trying to establish fairness by protecting the poorest segment of the public from the brunt of the higher prices. The government has said it will increase to Rp 4 trillion the budgetary appropriation for helping the poorest families to bear the higher prices. The government has also decided to maintain price subsidies for kerosene, the most-widely used fuel by poor households, and for small electricity users, who account for the majority of the state electricity company's customers.

But the public's sense of fairness also depends on the perception of whether the government is seen to be addressing its full share of the burden by minimizing waste and inefficiency caused by corruption and by behaving and acting out of a genuine sense of urgency and crisis. This is an area where the government's performance is utterly disappointing and its credibility critically low.

The government's extreme lack of sense of urgency within the reform movement and the virtual absence of a sense of crisis within the behavior and lifestyles of most senior officials and political leaders have even prompted the public to think that the policies, which would only add to their suffering, are really not necessary at all.

The government should go all out to convince the public that these painful measures are being taken in the public interest and are based on the principle of equitable burden-sharing. Otherwise the bitter pills could cause a new bout of social unrest at the expense of economic and political stability.