Will fuel price increases add the number of poor?

The Jakarta Post, Jakarta

Life is not so sweet for a small cottage industry producing caramelized snacks in Kemanggisan Pulo, West Jakarta, since the fuel price hikes.

"Our production has decreased because the increased fuel prices have inflated the prices of raw materials for our products," factory owner Emen Suhaimin said.

Even before the increases took effect, raw materials such as corn, rice and sugar were already on the rise, Emen said.

With a budget of Rp 500,000 per day, the small business used to produce around 2,000 packets of snacks worth Rp 500 each. Now, with the same budget, Emen says he produces only half that volume.

There were now frequent kerosene shortages following the increase in keronsene prices for commercial users, which had led to big businesses buying up all the supplies. As his small business uses kerosene, Emen says he now has to frequently stop production.

Emen has 10 employees, five of them working in the factory and five others assigned to distribute the snacks.

"Now, sometimes our sales are equal to our costs. We are making no profit," he said,

Emen says he will have no option but to lay off some of his workers should his business further deteriorate.

However, analysts disagree about whether the increases in the fuel price will result in the increase in the number of poor people in the country.

Recently, two research institutes, the Institute for Economic and Social Research (LPEM-FEUI) and the Institute for Development of Economy and Finance (Indef), debated the impact of the fuel price hike on the poverty index -- the ratio of the poor to the total population.

This data showed the poverty index now stood at 16.25 percent, meaning there were some 37 million poor out of a total of 220 million Indonesians.

Under the World Bank's definition, a person is considered poor if they earn less than US$1 a day.

LPEM-FEUI said in its research said if the distribution of the fuel compensation fund did not miss its target, the program would decrease the poverty index down to 13.82 percent.

A more conservative scenario, which took into account the possibility of a small amount of the funds being wrongly targeted, indicated the program would still result in a decrease in the poverty index to 14.53 percent.

The decrease would mean that as the government channeled all of the budgeted Rp 17.8 trillion of compensation there would be at least five million people taken out of poverty.

"We are currently using detailed calculations on how much commodity prices would be affected by fuel (prices) hike and how much this would affect the poor," LPEM-FEUI director Mohamad Ikhsan told The Jakarta Post.

As a direct consequence of the increases, businesses are likely to increase prices for their products to balance their rising production costs.

The research was based the data collected by the Central Statistics Agency (BPS) during the economic survey in 2002.

However, Indef, which used BPS data gathered during a 2004 social and economic survey, has come to a different conclusion.

Assuming that the hike would raise inflation to 12.5 percent, Indef said the fuel price increases would increase the poverty index to 18.61 percent, an increase of four million poor.

"We are taking into account the fact that last year only 25 percent of health funds reached their targets, not to mention other compensation schemes," Indef director Aviliani said.

Indef's report showed that last year, only 25.9 percent of rice for the poor reached its target, 26.53 percent for health services, 35 percent for scholarships and 9.89 percent for soft loans for small and medium enterprises.

"The bottom line is, if the government uses a similar scheme this year, the fund will not be effective." Creating real job opportunities would be the best way to increase the welfare of the poor, she said.

Both groups, meanwhile, urged the government to closely observe the channeling of the fund.

"Developing an independent community of information services to help oversee the use of the fund might help," Ikhsan said.

Aviliani said the government should not rely only on district officers to report who was entitled to the funds because the method would only benefit those close to the bureaucracy.

Creating a more transparent and reliable mechanism to deliver compensation funds would be the government's next biggest task, he said. 003