By Iona Main
Indonesia’s contentious 2014 presidential election may now be a distant
memory, but post-victory, Joko Widodo, or Jokowi, has moved swiftly to
enact key policies. One such policy, the one on which he and rival
candidate, Prabowo Subianto, could agree, is that Indonesia’s fuel
subsidy scheme could not continue in its previous state.
Until
recently, Indonesia’s decades-old fuel subsidy policy was so expensive
that it almost defied belief. It consumed a staggering 20 per cent of
total government expenditure in 2013. With that year’s total subsidy
bill topping a cool A$21.1 billion, Indonesia’s treasury was forced to
‘borrow’ from the 2014 budget just to make ends meet. Indonesia has been
a net oil importer since 2003, making the subsidy policy a difficult
beast to control: whenever volatile world oil prices rose, the
Indonesian government was forced to foot an increasingly pricey subsidy
bill. Domestic fuel consumption in Indonesia has also been growing
exponentially as the middle-class replace motorbikes with cars, and the
sheer volumes involved meant even a small uptick in world oil prices
could have spelt catastrophe for Indonesia’s best-laid budgetary plans.
There
is no perfect moment to wrench away a benefit many Indonesians once
regarded as a birthright. However, the declining oil prices of early
2015 brought about favourable conditions for managing the side effects
of the subsidy cut, such as inflation. And one might say Jokowi has
chosen a good time to make his move.
There is a broadening public awareness in Indonesia that petrol
subsidies have been an expensive and ineffective welfare measure. A
subsidy’s benefits are primarily enjoyed by those who use it most, which
in this case are wealthy private vehicle owners. Poor Indonesian
families can rarely afford to own any kind of motorised transport,
meaning they derive very limited benefit from subsidised petrol. In
general, subsidies are a poor long-term policy tool, as they lead to
distortions in the market, and in Indonesia’s case, they became a
redundant form of middle-class welfare. Any advantages Indonesia’s
economy may have ever reaped from cheap domestic petrol came to be
outweighed by the enormous hole they made in the country’s national
budget over the course of many years.
Winding back the subsidy
scheme is much easier said than done. In 2014, PDIP economic advisor Sri
Adiningsih proposed raising petrol prices by Rp.1500 (A$0.15) per litre
per year to gradually wean Indonesians off the subsidy, but Jokowi has
apparently favoured a more ruthless approach. Within weeks of his
inauguration in November 2014, he instigated a small subsidy cut, and
then abolished the scheme entirely as of 1 January 2015. Exceptions have
been provided for diesel, which is still subsidised, for fuel used by
public transport vehicles and the nation’s many fishermen.
Generally
speaking, the main economic impact of petrol subsidy cuts is inflation,
which spikes sharply as petrol prices increase. In the long run,
inflation will readjust to normal levels, but the interim period can be
acutely painful for poor families. Often, prices are revised upwards and
never come back down. In Bandung, West Java, the fare for a minibus
ride across town rose by up to 40 per cent after subsidy cuts in June
2013, despite the actual per-passenger cost of this service on a normal
day having increased by less than 15 per cent. The social impact of
subsidy cuts is also felt most heavily by the poor, who enjoyed little
benefit from it to begin with and who may struggle to meet the cost of
basic necessities. Almost no Indonesian household below the poverty line
possesses savings, leaving these families with nowhere to turn. In the
Babakan Ciparay sub-district of Bandung, anecdotal evidence suggests
that many households dealt with higher prices by reducing already low
levels of household consumption. One woman, Ibu Sita Aisa, now walks to
the market in order to save the Rp.1000 fare and says many others do the
same. For families already on the margins, these are heavy costs to
bear.
Past measures taken by the Indonesian government to soften the blow of
petrol subsidy cuts on the country’s poorest citizens have met with
dubious success. Former president Susilo Bambang Yudhoyono made several
attempts to rein in subsidy spending by raising prices in 2005, 2008 and
2013. Each time, the subsidy cuts were accompanied by a compensation
package, most recently known as the Unconditional Cash Transfer Program
(BLSM), intended to lessen the impact on poor households. Early problems
with the compensation program included poor management, the widespread
misappropriation of funds and the inclusion of a large number of
non-poor households on recipient lists. This latter problem is known as
‘inclusion error’ and in 2005, it fuelled public fury due to perceived
inequity, as communities felt resentful of wealthier households who
received compensation money.
By 2013, the pendulum had swung too
far in the other direction, with independent Jakarta think-tank SMERU
declaring ‘exclusion error’– the exclusion of legitimately poor
households from recipient lists – to be too high. This issue is
significant, as it illustrates one of the major challenges in providing
social welfare payments in Indonesia – the administrative nightmare of
ensuring accurate targeting and recipient lists. Sample studies from
2013 showed that a large number of poor families received no
compensation whatsoever, but that this was largely due to inaccurate,
out-of-date or non-existent household income data rather than the
misappropriation of funds. While updating this information is a mammoth
undertaking, its benefits would increase the effectiveness of the other
social welfare programs Jokowi has instigated: the Indonesia Health
Card, Indonesia Smart Card and Family Welfare Fund. These programs show
Jokowi’s commitment to the country’s poor is more than just lip service,
although the jury is still out on how successfully these programs are
being implemented and what the next steps might be.
While
feedback on the 2015 distribution of compensation payments is not yet
clear, outcomes for households which were granted compensation in 2013
are likely to be a good indicator of what we can expect. Research by
SMERU indicates that the poverty rate for households that received the
BLSM payment actually decreased slightly after the subsidy cut,
illustrating that the payment was effective in reducing the short-term
impact on poor households. On the other hand, non-recipient households
that live below the poverty line (namely those who were victims of
‘exclusion error’) suffered deeply. Realistically, there are a very
small number of households that the BLSM payment allows to rise above
the poverty line. However, it is still clear that the payment enables
recipients to stave off the immediate negative income effects of the
subsidy cut, and ensure their family’s wellbeing in the short run at
least.
Whether or not poor Indonesians receive the BLSM payment,
economists still predict that they will benefit most from subsidy cuts
in the long run for two key reasons. First, the Indonesian government
will have money to spend on more beneficial projects – in the order of
Rp.200 trillion (A$20 billion) this year alone, according to Finance
Minister, Bambang Brodjonerogo. In 2014, government spending on petrol
subsidies was close to ten times that on healthcare, despite the fact
that Indonesia still has one of the highest maternal mortality rates in
Asia and struggles to care for a quickly growing population. With fuel
subsidies almost entirely a thing of the past, Jokowi faces a genuine
opportunity to invest in worthwhile policies and programs. Redirecting
spending to projects such as healthcare, community infrastructure and
education will deliver tangible and near-immediate benefits to the
entire population, including those at the lower end of the wealth
spectrum.
Secondly, the poor may reap long-term benefits because
the subsidy cuts will better position Indonesia for future economic
growth. Although Indonesia has been doing relatively well in this area,
government and institutional inefficiencies have made Indonesia less
competitive than its neighbours, so Indonesian growth is lower than it
could be. The elimination of the petrol subsidy scheme will plug a
sizeable hole in Indonesia’s national budget. Furthermore, if the
savings are managed properly, the country’s economy has the potential to
flourish. Subsidy cuts in the past have not been dramatic enough to
noticeably change the course of Indonesia’s economic growth, but it is
possible that this time will be different. A World Bank study has found
that almost 80 per cent of the improvement in the incomes of poor
households in 118 countries worldwide can be attributed to economic
growth rather than the redistribution of incaomes (through cash
payments, social welfare programs and the like). This doesn’t render
targeted compensation programs redundant – it merely highlights that
while they are important in reducing short-term welfare impacts on the
poor, the economic long term is where the greatest progress in poverty
reduction can be achieved.
Iona majored in Economics, Indonesian Studies and International Business.
She completed two semesters of study in Yogyakarta and Bandung as part
of the ACICIS program in 2013 and wrote a thesis on the topic of petrol
subsidy cuts and their impact on poverty in Indonesia. Iona's article originally appeared in Inside Indonesia.
No comments:
Post a Comment