Prices hiked, time for damage control: Economists

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.