Subsidy vs welfare

The government's social safety net programs are not all that different from the welfare payments which many governments in developed countries give their needy citizens. The objective is certainly the same -- to provide financial assistance to the poor -- although the way they are administered are different.

Social safety net programs, or JPS as the fund is called by its Indonesian acronym, are a recent phenomenon in this country. They were introduced in late 1997 when the nation was struck by a severe economic crisis, the worst in over three decades. They have been quite successful in shielding the growing ranks of poor people from the ravages of the economic crisis.

As Indonesia slowly emerges from the economic crisis, the government has stated that the social safety net programs will be retained. If in the past most of the JPS money came from foreign aid, particularly the World Bank, in the future all of the money must be raised locally, that is through the taxation system. It appears that, with little public debate, we are witnessing a rudimentary form of a welfare state evolving in Indonesia.

The JPS programs differ significantly from earlier government subsidy programs in that they are more target-specific. Since they are essentially direct cash assistance, they are proving to be far more effective in helping the poor. Earlier subsidy programs in contrast were aimed at making selected goods affordable, such as rice and fuel, to all the people. While they were well intended, the rice and fuel subsidies have many shortcomings that raise questions about their effectiveness, and their fairness.

The fuel subsidy, for example, has severely distorted the domestic markets to the point that unknown quantities of cheap Indonesian fuel have been smuggled abroad. This across-the-board subsidy also means that most of the benefits have been enjoyed by the wealthy, who use far more fuel than the poor. Since taxpayers will eventually have to pay the subsidy bill, Indonesia's poor have actually been subsidizing the wealthy and the eventual buyers of the smuggled fuels. To argue that subsidizing fuel helps Indonesian exporters compete abroad is tantamount to saying that we should be subsidizing foreign buyers. Viewed from any angle, the current fuel subsidy program is indefensible.

Yet, in spite of a compelling argument to phase out the fuel subsidy, which is costing at least US$3 billion in the 2000 fiscal year, the government has always found it politically difficult to raise domestic fuel prices because of powerful opposition. Last month, the government was forced to abort its plan to hike fuel prices at the eleventh hour when it became apparent that it was not ready to administer either the coupon or cash subsidy system to shield the poor from the impacts of the increase.

The plan to increase fuel prices is still in the pipeline, supposedly waiting for a more opportune time. But the switch to subsidizing the people who are in need from subsidizing the commodity is a major departure from traditional subsidy schemes.

No government can ever be free from its obligation to assist the poor. The increasingly competitive nature of the global economy is bound to put even more strain on the government to aid segments of society. The only question that remains is what is the most effective and efficient way of extending the subsidy.

The welfare systems in Europe and the United States may have earned a bad reputation because they have been widely abused, but they still offer the best, and probably most efficient method in assisting the poor, especially when compared to the alternatives.

Indonesia may be a long way away from becoming a welfare state, but the JPS programs and the new form of fuel subsidy both signify a move in that direction. It even makes economical sense to administer one single subsidy program, rather than run separate programs to help the poor people buy rice, fuel, education for their children and other commodities and services.

There is only one big catch with implementing a modern welfare system in Indonesia. To be fully effective, it requires an efficient and clean bureaucracy to administer the programs and to collect the taxes. A public debate on turning Indonesia into a full-fledged welfare state could well give the extra reason and pressure to reform the bureaucracy quickly.