Putting prices up could be playing with fire

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)