By John McBeth, The Straits Times, 11 Apr 2012
A FEW weeks ago, it took me just 25 minutes to drive through rush-hour traffic from my home in South Jakarta to a dinner date at a downtown hotel. The return journey, which usually takes an hour or more at that time of the night, wasn't much longer.
Jakarta hasn't seen a week like it for years. The lull in the city's stifling traffic congestion was one small silver lining resulting from the threat of violent street protests over the government's ill-fated fuel price increase.
And perhaps a lesson as well. With attendance at offices and schools seemingly unaffected, the sudden paucity of cars raised intriguing questions about how many aimless trips Indonesians make each day, thanks to subsidised low-octane benzine.
Most car owners are blissfully unaware that six hand-wringing years after becoming a net oil importer, Indonesia still has the fifth lowest petrol price in the world - less than even Saudi Arabia.
Opposition parties claim to be concerned about the impact on the poor. But the bottom 30 per cent would have been cushioned by a hefty safety-net allocation. Recent Asian Development Bank research shows 10 per cent of high-end households use more than 40 per cent of subsidised fuel.
The subsidy cuts were projected to represent a saving of 53 trillion rupiah (S$7.3 billion). About 18 trillion rupiah was earmarked for additional infrastructure projects to support the current growth rate of 6.5 per cent.
Economic coordinating minister Hatta Rajasa, whose own presidential ambitions made him a reluctant supporter of the price increase, claims infrastructure plans won't be affected because they will instead be financed through public-private cooperation.
The trouble with statements like that is that the Indonesian public, protected from the vagaries of the world market, remains ignorant of the fact that there is always a cost to not reducing subsidies.
In the days leading up to the March 30 vote, officials said most of the bickering in the coalition centred on concerns that President Susilo Bambang Yudhoyono's Democrat Party would get all the credit for the 25.6 trillion rupiah that was to be distributed to the nation's poorest.
Initially, the payments of 150,000 rupiah a household were to be made over nine months, using the graft-free post office distribution scheme that has managed to tamp down public reaction previously.
A FEW weeks ago, it took me just 25 minutes to drive through rush-hour traffic from my home in South Jakarta to a dinner date at a downtown hotel. The return journey, which usually takes an hour or more at that time of the night, wasn't much longer.
Jakarta hasn't seen a week like it for years. The lull in the city's stifling traffic congestion was one small silver lining resulting from the threat of violent street protests over the government's ill-fated fuel price increase.
And perhaps a lesson as well. With attendance at offices and schools seemingly unaffected, the sudden paucity of cars raised intriguing questions about how many aimless trips Indonesians make each day, thanks to subsidised low-octane benzine.
Most car owners are blissfully unaware that six hand-wringing years after becoming a net oil importer, Indonesia still has the fifth lowest petrol price in the world - less than even Saudi Arabia.
Opposition parties claim to be concerned about the impact on the poor. But the bottom 30 per cent would have been cushioned by a hefty safety-net allocation. Recent Asian Development Bank research shows 10 per cent of high-end households use more than 40 per cent of subsidised fuel.
The subsidy cuts were projected to represent a saving of 53 trillion rupiah (S$7.3 billion). About 18 trillion rupiah was earmarked for additional infrastructure projects to support the current growth rate of 6.5 per cent.
Economic coordinating minister Hatta Rajasa, whose own presidential ambitions made him a reluctant supporter of the price increase, claims infrastructure plans won't be affected because they will instead be financed through public-private cooperation.
The trouble with statements like that is that the Indonesian public, protected from the vagaries of the world market, remains ignorant of the fact that there is always a cost to not reducing subsidies.
In the days leading up to the March 30 vote, officials said most of the bickering in the coalition centred on concerns that President Susilo Bambang Yudhoyono's Democrat Party would get all the credit for the 25.6 trillion rupiah that was to be distributed to the nation's poorest.
Initially, the payments of 150,000 rupiah a household were to be made over nine months, using the graft-free post office distribution scheme that has managed to tamp down public reaction previously.
Similar cash transfers had gone to 19 million households during fuel price hikes in 2005 and 2008 to ease the impact of food and transport cost increases.
This time, as support for the fuel increase wavered within the ruling coalition, officials reduced the term to six months and agreed to channel eight trillion rupiah in savings into what was seen as a more politically equitable village infrastructure scheme.
There was also an additional 590 billion rupiah for the Family Hope programme, to be administered by Social Affairs Minister Salim Segaf Al Jufri, one of three members of Cabinet from the rebellious Justice and Prosperity Party (PKS).
In the end, however, the issue returned to the loaded one of the fuel price itself. PKS simply refused to go along with the increase - and now looks like it is being bundled out of the ruling coalition in retribution.
The Golkar Party, because of its size and the influence of its leader Aburizal Bakrie, got a free card from everyone - the media included - by suggesting an alternative scheme that allows for an increase if the oil price rises by an average of 15 per cent over six months.
The trouble is that even with a trigger mechanism, there are still no guarantees. Politics could intervene again, and there is also a possible legal pitfall presented by a recent constitutional court ruling on the market-based pricing of petrol. Meanwhile, the poor are reeling as prices have risen in anticipation of the fuel increase.
Then there is human nature. As economists point out, with per capita income nudging US$3,500 (S$4,400), boosting the price of subsidised fuel from 4,500 rupiah a litre to 6,000 rupiah was not going to make a lot of difference to the budgets of the newly affluent middle class.
Then there is human nature. As economists point out, with per capita income nudging US$3,500 (S$4,400), boosting the price of subsidised fuel from 4,500 rupiah a litre to 6,000 rupiah was not going to make a lot of difference to the budgets of the newly affluent middle class.
Instead, with high-octane fuel now double the price, more drivers are expected to make the small engine adjustment that will allow them to switch to the subsidised premium grade, rather than cut back on unnecessary travel.
That will only add dangerously to the total energy subsidy bill of 230.7 trillion rupiah budgeted for this year and threaten to push the deficit beyond the legal limit of 3 per cent of gross domestic product.
Many car owners currently using subsidised fuel can't even bring themselves to fork out 15,000 rupiah to hire a 'jockey' to get around the three-in-one carpool regulation in force on main thoroughfares during rush hour.
Instead they use unregulated streets, such as Jalan Rasuna Said, which is so congested in the early evening it takes more than an hour - and nearly three times the petrol - to get from downtown to the first major intersection.
Like the subsidies, other false economies have their price too.
Like the subsidies, other false economies have their price too.
Avoiding the fuel subsidy trap
Editorial, The Straits Times, 5 Apr 2012
SUBSIDIES distort, both the economy and the polity. Economically, they often end up benefiting undeserving sections of the population; politically, once granted, they are almost impossible to reverse. The failure last week of Indonesia's plans to reduce fuel subsidies dramatises this unhealthy logic. Those subsidies - amounting to about US$14 billion (S$17.5 billion), or 11 per cent of its budget last year - exceeded state spending on education and health combined. Unconscionably, the middle class enjoyed around 90 per cent of the subsidy.
However, in spite of rising oil prices which forced the government to rethink its policy, Jakarta failed to reduce the drain on the national exchequer because of violent street protests and a lack of parliamentary support for a 33 per cent rise in fuel prices. Taiwan, where the administration is not facing any major elections in the next four years, found a moment of political opportunity to end its fuel aid and raise petrol prices by 10 per cent this week. However, popular opposition to subsidy cuts is a global phenomenon. Demonstrations forced the Nigerian government to relent on a pruning of the fuel subsidy in January, much as in Jordan last year.
Of course, subsidies help the poor. Hence it is perfectly legitimate for governments to use them to serve the most vulnerable parts of society. However, this concern is misdirected when the better-off benefit from the state's largesse, contributing to soaring bills that siphon off funds needed for health, education and infrastructure. When this happens, subsidies actually create more inequity. They hurt the very communities they were meant to help because it is the poor who are most in need of access to better education and health. At a broader level, subsidised fuel undermines efforts to conserve energy. Studies have shown that American motorists, who have grown used to decades of low fuel prices, drive more and use more fuel on average than their European counterparts.
Thankfully, Singaporeans have adjusted themselves to a different system. Market forces, which are the most efficient way of allocating economic resources, are allowed to work largely unfettered. Certain safeguards are in place. For example, regular adjustments made to petrol prices and electricity bills avoid sudden and nasty price shocks. Also, subsidies are graduated and targeted closely, as with the utilities rebate scheme for households in which those living in smaller flats receive more. Recent events should alert Singaporeans to the pitfalls of the fuel subsidy trap that others are trying to break out of.
Editorial, The Straits Times, 5 Apr 2012
SUBSIDIES distort, both the economy and the polity. Economically, they often end up benefiting undeserving sections of the population; politically, once granted, they are almost impossible to reverse. The failure last week of Indonesia's plans to reduce fuel subsidies dramatises this unhealthy logic. Those subsidies - amounting to about US$14 billion (S$17.5 billion), or 11 per cent of its budget last year - exceeded state spending on education and health combined. Unconscionably, the middle class enjoyed around 90 per cent of the subsidy.
However, in spite of rising oil prices which forced the government to rethink its policy, Jakarta failed to reduce the drain on the national exchequer because of violent street protests and a lack of parliamentary support for a 33 per cent rise in fuel prices. Taiwan, where the administration is not facing any major elections in the next four years, found a moment of political opportunity to end its fuel aid and raise petrol prices by 10 per cent this week. However, popular opposition to subsidy cuts is a global phenomenon. Demonstrations forced the Nigerian government to relent on a pruning of the fuel subsidy in January, much as in Jordan last year.
Of course, subsidies help the poor. Hence it is perfectly legitimate for governments to use them to serve the most vulnerable parts of society. However, this concern is misdirected when the better-off benefit from the state's largesse, contributing to soaring bills that siphon off funds needed for health, education and infrastructure. When this happens, subsidies actually create more inequity. They hurt the very communities they were meant to help because it is the poor who are most in need of access to better education and health. At a broader level, subsidised fuel undermines efforts to conserve energy. Studies have shown that American motorists, who have grown used to decades of low fuel prices, drive more and use more fuel on average than their European counterparts.
Thankfully, Singaporeans have adjusted themselves to a different system. Market forces, which are the most efficient way of allocating economic resources, are allowed to work largely unfettered. Certain safeguards are in place. For example, regular adjustments made to petrol prices and electricity bills avoid sudden and nasty price shocks. Also, subsidies are graduated and targeted closely, as with the utilities rebate scheme for households in which those living in smaller flats receive more. Recent events should alert Singaporeans to the pitfalls of the fuel subsidy trap that others are trying to break out of.
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