Prices hiked, time for damage control: Economists

The simultaneous increases in fuel, electricity and telephone charges has triggered popular anger among the middle classes. Many have condemned the government's decision, while many at the same time claim to understand the reasons behind the decision, despite the government's poor approach in explaining the plan in advance. Economist M. Chatib Basri shared his views on the issue with The Jakarta Post's Soeryo Winoto.

Question: From the economic point of view, the government had no other choice but to increase fuel, telephone and electricity charges. Do you think it was wise for the government to announce the increases simultaneously at such a difficult time?

Answer: We are talking about choices. Theoretically, the simultaneous announcements should have a small impact on inflation. But, let's say, if fuel prices rise today, the price of chili will also rise -- regardless of the fact that there is no direct link between them. And after the government announces an increase in electricity charges, the sellers will also hike chili prices. Vendors tend to seek ways to hike the prices of their merchandise.

Simultaneous increases are better. However, public policies always have psychological effects among the people, a point the government seems to have ignored.

The increases in fuel prices and electricity charges were unavoidable. The government's subsidy for fuel totaled Rp 16 trillion (US$1.7 billion), and electricity came in at Rp 3 trillion.

You mean that the increase in telephone charges could be delayed, judging from the fact that telephones are not a basic necessity for low-income bracket people?

Yes, exactly, but not the fuel and electricity prices.

Do you think that there may be a possibility for the government to find a right time? When and how?

The government should have picked the right time for that. But things have happened. The damage is done. There's no need to look back. More important now is how to minimize the damage.

Let's say the government has made a blunder. Do you see that the government still has the opportunity to correct the mistake? And if so, how?

There are some things that we could do within the range. The government should fine-tune tax instruments for short-term response. Value added tax and luxury tax (PPN-BM) could be lowered or abolished to improve the business climate. Can you imagine that bottled tea and Coca Cola are luxury goods in Indonesia (and thus taxable)?

What is saddening to us is that the people are criticizing, protesting against the wrong things. The crucial point is not the increase in fuel prices.

Frankly speaking, fuel prices in Indonesia are lower than those in China, but China's products are cheaper. How come? There must be something wrong here. Value added tax and luxury tax, and a high-cost economy have obviously played significant roles in making our products more expensive than those of China, for example.

Given the fact that poor people will be affected by these policies, I would suggest that a special program be developed to help them. The government can make cheap rice available for the poor. The rice must be of lower quality and worth about Rp 1,000 per kilogram. Good quality rice may be swindled and corrupted by those in charge of distribution. Cheap and lower quality rice does not interest the market. This is one of the ways to control rice distribution through the compensation program.

And I agree with Indah Sukmaningsih's proposal that those reporting irregularities (in the compensation program) should be rewarded (Indah Sukmaningsih is the chairperson of the Indonesian Consumer Protection Foundation -- YLKI).

Through the compensation program, the government will keep poor families' total (food) consumption constant as they will still be able to purchase the (cheap) rice.

The long-term plan is eradicating illegal levies (imposed on businesspeople daily).

What you've said sounds rational and acceptable. Do you think government officials or the decision makers are aware of the rational steps that should be taken to control the damage?

Don't ask me that question. I just have no idea why they've yet to take any prompt and appropriate action (to deal with the 'damage' caused by the utility price hikes). Rationally, they can, but I don't know why they haven't acted yet. The damage is already done. Why don't they just take action to minimize it.

The government said that the ball was in the hands of the House of Representatives, while the House said the ball was in the hands of the government. Such arguments are a blatant mockery of our common sense. Just cut or withdraw the PPN-BM. Just do it. The longer the absence of necessary government action, the more dangerous the situation will be.

So everybody is acting like Pilate?

I'm afraid so.

How do you see the role of the Office of the Coordinating Minister for the Economy in such a situation. Has the minister's office managed to coordinate the other relevant ministries and institutions to limit the damage of the utility price hikes? Things seem to be out of hand.

This is what the government has failed to do: anticipate. I see that the government's economic team has failed to anticipate the possible effects of the utility price hikes. If we talk about socialization of the plan (to increase the prices), then we can simply say that the socialization has been a total failure.

However, the public's reaction (against the price hikes) has been excessive, I'm afraid. Because the increases in fuel prices (this year) are lower than that in 2002. Last year, the price of kerosene (for household use) increased by 50 percent, while there was only a 16 percent hike this year; premium gasoline went up 20.7 percent last year, while it was only 3.4 percent this year; diesel went up by 25 percent this year and by 64 percent last year, and kerosene for industry increased by 67 percent last year and only 39 percent this year. So, I don't think it's the right time for the people to take to the streets to express their anger over the increases in fuel prices. They should have been more angry last year.

The government should have asked everybody to view the problem in a cool manner and promise that such a blunder will never happen again in the future. The government and the people must sit down and talk about the situation in a very cool manner.

What's the worst-case scenario? Will these unpopular government policies affect the targeted national growth?

(From the economic point of view) I don't see the government will turn back the clock. There will not be any serious escalation and the real impact won't affect national growth, which I expect to be still around 3.8 percent. Inflation could be slightly lower as the sources of consumption growth will likely be stable. People will prefer purchasing goods that can be kept for a long time to spending money on other purposes. It would be wiser for you to invest your money in buying a Kijang van, which promises a resale value, than depositing the money at the bank with only 12 percent interest per year.