petrol subsidy cuts: taming a tricky beast - inside indonesia...2015/05/04 · petrol subsidy cuts:...
Post on 01-Jan-2021
5 Views
Preview:
TRANSCRIPT
May 04, 2015
(/)
Written by Iona Main � Print (/index.php?option=com_content&view=article&id=3193:petrol-subsidy-cuts-taming-a-tricky-be
Hits:
11 times
Tagged under
Editorial (/topics
/6-editorial/tag)
National Politics
(/topics/23-national-
politics/tag)
Economy (/economy
/tag/117-economy)
Economic Policy
(/topics
/122-economic-
Petrol subsidy cuts: Taming aPetrol subsidy cuts: Taming aPetrol subsidy cuts: Taming aPetrol subsidy cuts: Taming atricky beasttricky beasttricky beasttricky beast
Iona MainIona MainIona MainIona 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
A local tradesman transports his equipment through the narrow alleyways of Babakan Ciparay sub-district, Bandung -
Mokstimofeevic
� ○ Home (/) ○ Articles (/articles) ○ Petrol subsidy cuts: Taming a tricky beast
Petrol subsidy cuts: Taming a tricky beast - Inside Indonesia http://www.insideindonesia.org/petrol-subsidy-cuts-taming-a-tricky-bea...
1 of 12 04/05/2015 11:36
policy/tag) 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.
Ibu Aam of Babakan Ciparay sub-district, Bandung -Ibu Aam of Babakan Ciparay sub-district, Bandung -Ibu Aam of Babakan Ciparay sub-district, Bandung -Ibu Aam of Babakan Ciparay sub-district, Bandung -
MokstimofeevicMokstimofeevicMokstimofeevicMokstimofeevic
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,
Petrol subsidy cuts: Taming a tricky beast - Inside Indonesia http://www.insideindonesia.org/petrol-subsidy-cuts-taming-a-tricky-bea...
2 of 12 04/05/2015 11:36
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.
Petrol subsidy cuts: Taming a tricky beast - Inside Indonesia http://www.insideindonesia.org/petrol-subsidy-cuts-taming-a-tricky-bea...
3 of 12 04/05/2015 11:36
Children play with a hawker's stall in Babakan CiparayChildren play with a hawker's stall in Babakan CiparayChildren play with a hawker's stall in Babakan CiparayChildren play with a hawker's stall in Babakan Ciparay
sub-district, Bandung - Mokstimofeevicsub-district, Bandung - Mokstimofeevicsub-district, Bandung - Mokstimofeevicsub-district, Bandung - Mokstimofeevic
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
Petrol subsidy cuts: Taming a tricky beast - Inside Indonesia http://www.insideindonesia.org/petrol-subsidy-cuts-taming-a-tricky-bea...
4 of 12 04/05/2015 11:36
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
Petrol subsidy cuts: Taming a tricky beast - Inside Indonesia http://www.insideindonesia.org/petrol-subsidy-cuts-taming-a-tricky-bea...
5 of 12 04/05/2015 11:36
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 MainIona MainIona MainIona Main recently completed a Commerce/Arts degree at the
University of Sydney, majoring 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.
Related Articles:Related Articles:Related Articles:Related Articles:
A more efficient approach to social welfare?, Written by Dinna
Wisnu and Frans Supiarso: Inside Indonesia 119: Jan-Mar 2015
(/a-more-efficient-approach-to-social-welfare-
2?highlight=WyJzdWJzaWR5Iiwic3Vic2lkeSdzIl0%3D)
Defueling success, Written by Self Rumbewas: Inside Indonesia
107: Jan-Mar 2012 (/defueling-
success?highlight=WyJwZXRyb2wiLCIncGV0cm9sIl0%3D)
Inside Indonesia 120: Apr-Jun 2015Inside Indonesia 120: Apr-Jun 2015Inside Indonesia 120: Apr-Jun 2015Inside Indonesia 120: Apr-Jun 2015
Add commentAdd commentAdd commentAdd comment
Petrol subsidy cuts: Taming a tricky beast - Inside Indonesia http://www.insideindonesia.org/petrol-subsidy-cuts-taming-a-tricky-bea...
6 of 12 04/05/2015 11:36
Name (required)Name (required)Name (required)Name (required) E-mail (required, but will notE-mail (required, but will notE-mail (required, but will notE-mail (required, but will not
display)display)display)display)
Notify me of follow-up comments
RefreshRefreshRefreshRefresh
SendSendSendSend
Petrol subsidy cuts: Taming a tricky beast - Inside Indonesia http://www.insideindonesia.org/petrol-subsidy-cuts-taming-a-tricky-bea...
7 of 12 04/05/2015 11:36
Latest ArticlesLatest ArticlesLatest ArticlesLatest Articles
Petrol subsidy cuts: Taming a tricky beast - Inside Indonesia http://www.insideindonesia.org/petrol-subsidy-cuts-taming-a-tricky-bea...
8 of 12 04/05/2015 11:36
Petrol subsidy cuts: Taming a tricky beast (/petrol-subsidy-cuts-taming-a-tricky-
beast-2)
May 03, 2015 - Iona Main
Petrol subsidy
cuts: Taming a
tricky beast
(/petrol-subsidy-cuts-taming-a-tricky-beast-2)
Petrol subsidies have gone, but at what cost to Indonesia’s poor?
What are your true colours?: A conversation (/what-are-your-true-colours-
a-conversation)
Apr 26, 2015 - Delita Sartika
(/what-are-your-true-colours-a-conversation)
A brief conversation between strangers provokes thoughts on Australia–Indonesia
relations Essays and Fiction is a new series of writing in Inside Indonesia that aims to
give voice to more personal stories about...
Engaging young Indonesians in politics and the case of WikiDPR (/engaging-
young-indonesians-in-politics-and-the-case-of-wikidpr)
Apr 20, 2015 - Michael Hatherell
(/engaging-young-indonesians-in-politics-and-the-case-of-wikidpr)
A new volunteer movement is shining a light on Indonesia’s parliament and its
representatives
Interview: Oppenheimer on The Look of Silence (/interview-oppenheimer-on-the-
look-of-silence)
Mar 22, 2015 - Jess Melvin
Petrol subsidy cuts: Taming a tricky beast - Inside Indonesia http://www.insideindonesia.org/petrol-subsidy-cuts-taming-a-tricky-bea...
9 of 12 04/05/2015 11:36
Subscribe to Inside IndonesiaSubscribe to Inside IndonesiaSubscribe to Inside IndonesiaSubscribe to Inside Indonesia
Receive Inside Indonesia's latest articles and quarterly editions in your inbox.
Email Address ****
First Name ****
Subscribe
Lontar Modern IndonesiaLontar Modern IndonesiaLontar Modern IndonesiaLontar Modern Indonesia
(/lontar-modern-indonesia-series/tag/141/1)
A selection of stories from the Indonesian classics and modern writers, periodically
published free for Inside Indonesia readers, courtesy of Lontar
(http://www.lontar.org/)
Readers said:Readers said:Readers said:Readers said:
A woman’s placeA woman’s placeA woman’s placeA woman’s place
Fatimah - 29 Apr
Farhan, a single, 26-year-old mechanical engineering student in Jakarta, Rini, a
22-year-old, female architecture student in Makassar interesting that ...
Petrol subsidy cuts: Taming a tricky beast - Inside Indonesia http://www.insideindonesia.org/petrol-subsidy-cuts-taming-a-tricky-bea...
10 of 12 04/05/2015 11:36
Engaging young Indonesians in politics and the case of WikiDPREngaging young Indonesians in politics and the case of WikiDPREngaging young Indonesians in politics and the case of WikiDPREngaging young Indonesians in politics and the case of WikiDPR
Levriana Yustriani - 21 Apr
WikiDPR is one of many citizen-driven initiatives emerged around Indonesia 2014
General Elections. Others such AyoVote, Pantau Pemilu, Pemilu Bersih ...
Making their wayMaking their wayMaking their wayMaking their way
v neelakantan - 14 Apr
Interesting piece.
Making their wayMaking their wayMaking their wayMaking their way
Antony - 14 Apr
Another issue is the appalling pay that professional receive. Indonesian's are
increasingly obsessed with qualification attainment and many families ...
30th Anniversary Book30th Anniversary Book30th Anniversary Book30th Anniversary Book
Have you bought your copy of Inside Indonesia's 30th Anniversary book yet?Have you bought your copy of Inside Indonesia's 30th Anniversary book yet?Have you bought your copy of Inside Indonesia's 30th Anniversary book yet?Have you bought your copy of Inside Indonesia's 30th Anniversary book yet?
The book features 30 of the judges' favourite images from the 2013 Inside Indonesia
Photography Competition.
Preview the book here (http://bit.ly/1cqpxMp) and order your copy (AUD$35.00 plus
postage) by emailing us at admin@insideindonesia.org
(mailto:admin@insideindonesia.org)
Petrol subsidy cuts: Taming a tricky beast - Inside Indonesia http://www.insideindonesia.org/petrol-subsidy-cuts-taming-a-tricky-bea...
11 of 12 04/05/2015 11:36
© Copyright Indonesian Resources and Information Program (IRIP) 1983 - 2015. All rights reserved.HomeHomeHomeHome ( ( ( (////)))) About (/about-inside-indonesia) Contribute (/donate) Editions (/editions)
Topics (/topics/tags) Fiction & Essays (/fiction-essays/tag/140/1) Reviews (/reviews/tag/4/1)
Petrol subsidy cuts: Taming a tricky beast - Inside Indonesia http://www.insideindonesia.org/petrol-subsidy-cuts-taming-a-tricky-bea...
12 of 12 04/05/2015 11:36
top related