Putting prices up could be playing with fire

The government has raised fuel prices and electricity billing rates. Economist Kwik Kian Gie discusses social impacts of the price hikes.

Question: Do you think that the fuel and electricity price hikes will provoke a violent response from a people already hard hit by the impact of the monetary crisis?

Kwik: That will depend very much on how cleverly the government can explain the reasons for the price hikes to the people. Minister of Mines and Energy Kuntoro Mangkusubroto, for example, will have to explain over and over again on television about the necessity to reduce subsidies for fuel distribution (of about Rp 16 trillion or US$2 billion) and electricity consumption (about Rp 11 trillion) in 1998/1999, so that the government can spend more funds to subsidize domestic food consumption. Subsidizing food consumption is surely more important than subsidizing fuel and electricity distribution because we cannot live without food.

The government's policy on cross-subsidization, in the setting of both fuel and electricity tariffs, is also sound. Such a policy, therefore, must be acceptable if people are well-informed about it. Under that policy, the government has set the smallest rates of increase in the fuel prices and electricity billing rates.

Q: When the President said last week that he would support the students' demand for political reform, was it not also an attempt to subdue a potentially angry reaction from the people due to these price hikes?

K: No. The political reform offered by the President is different from the reform demanded by students demonstrating over the last few months.

The students are demanding immediate total reform, including the quick replacement of the national leadership, while Soeharto said that planning and formulating political reform can be carried out soon but it can be implemented in 2003. Changing anything decided by the People's Consultative Assembly (MPR) in their March general session, according to Soeharto, is unconstitutional and anyone who is against the Constitution will face sanctions.

Q: Some members of the House of Representatives (DPR) expressed their regret over rises in fuel and electricity prices...

K: That is because they do not understand economic developments comprehensively. By suggesting that fuel prices and electricity tariffs be maintained at levels favorable to the citizens, they seem to be trying to make themselves more popular with the people.

The increases in fuel prices and electricity billing rates are a must. Apart from the fact that the government needs to spare some funds to subsidize food consumption, the increases are also required by the last economic reform agreement between the government and the International Monetary Fund (IMF).

The agreement explicitly stated that the government would gradually increase fuel prices and electricity billing rates in fiscal 1998/1999,

If the government had not raised the fuel and electricity prices, the international community would have accused the government of not being serious in implementing the economic reform.

So, the DPR members should try to understand that the increase in their economic burdens stems from "stagflation" -- a combination of economic stagnancy and high inflation.

The DPR members who have failed to control and supervise the government should also be aware that they have contributed to the current economic crisis, which has been triggered by the huge foreign debts of private corporations, the crumbling of the banking industry, the country's overly high dependence on imports and the seriousness of corruption practices.

Q: How do you describe the impact of the fuel and electricity price hikes on industrial activities?

K: Very bad. Even without the fuel and electricity price rises, a lot of factories have been forced to stop operations and dismiss their workers due to the sharp appreciation of the U.S. dollar against the rupiah, with its value increasing from about Rp 2,340 last July to around Rp 8,000 at present. The energy price increase, therefore, will surely increase the burdens of industrial companies and raise unemployment figures.

Q: Besides the price increases, the government will also soon impose a 5 percent tax on the domestic sale of fuel...

K: Such taxation, which is also required by the IMF-sponsored economic reform, will be good. It is necessary because the funds collected from such a tax will be needed by local administrations, whose revenues will decrease substantially beginning this fiscal year due to the abolition of several levies at local levels. (riz)