Price Hike vs Reducing Subsidy: Indonesia’s Fuel Prices Case

5 Alasan Buruh Demo Besar-besaran Tolak Kenaikan Harga BBM


I am not an economist by training. In fact, many of us are not. But as rational actors, we have more often than we thought acted economically. This behavior made us fit into the economic law of supply and demand. Whenever prices are high our demand will be contracted and vice versa; if the prices are low our demand will sore up as the real value of our income become relatively higher. But it only rises as far as inflation would allow it to be. Eventually, most of the times the price and demand will meet at the equilibrium point. This is Economic 101 wherein consumers and producers accept the price as given.

What if the price is not determine entirely by the market system, as the case of oil price in Indonesia? The answer to that, according to my Microeconomic professor at SAIS, Prasana Guru Setupathy, is it depends. Depends on what? There are several other factors like demand’s and supply’s elasticities to which both demand and supply would ‘react’ to the changes in prices. Other factors can be absolutely not economic. Since the price is a public policy, then it is now on the realm of political economy. Another “supply and demand” mechanism is at work here. That is, interest aggregation and subsequent political decision. Within this view, political economic as it may, politics is determined by how transaction between constituents and elected government officials and parliament reach to the political equilibrium.

But, there is no given “price” in politics and this is not an exclusively microeconomic problem; it’s a macro one. If there’s any political currency, that is power. And, above all, power is always relative. The ability to shape public opinion is media’s power in the democracy 2.0 as we know it. Look at the massive protests in Egypt’s Tahrir Square, Turkey’s Taksim’s Square, or Indonesia’s House building recently. From the “look” of it, the”people” do not want an increase in fuel prices or,—another way of saying it is—people do not want the government to reduce the fuel subsidy. The logic is simply economics. If the fuel prices increase, then the transportation cost of goods is increasing, price will hike as well and people’s purchasing power will decrease. With that, so does the labor’s bargaining power with the capital owner. However, that is still a microeconomic answer to a rather macroeconomic problem.

In the macro terms, this is about state’s budget allocated to fuel subsidy. As much as 34.3 percent of Indonesia’s national budget was allocated for fuel subsidy so that the Indonesian people can consume the oil at much below the international market price. Reduction is fuel subsidy can also lessen the impact of international oil prices’ hike to the state’s budget as Indonesia since 2004 is a net importer of oil. As government argues, the reduction in fuel subsidy will also help correct the direction of “benefits” to the poor. It is logically acceptable to say that parts of fuel subsidy also benefitted the rich whose cars and electricity enjoy this fuel subsidy. Meanwhile, the poor who don’t have cars and also those living in the outter islands were hardly benefitted from this “pro-rich” policy. People in Kalimantan, many parts of Sulawesi, Ambon, and Papua have always been buying oil at the prices much higher than the dwellers in Java. So, to some extend, reducing in fuel subsidy is also hopefully a geographical redistribution of wealth as well.

However, the policy and decision to reduce fuel subsidy or, in other perspective, to increase the oil prices, is hardly an independent policy. The success of this policy is conditional. What are the conditions determining the success of this policy? The answer is not-to-the-liking of neoliberal economist who campaign for laissez faire or minimum state’s involvement in the economy. The answer will be more liberal-Keynesian one, in fact, more interventionist than Keynesianism. Still in the macroeconomic realm, the government’s policy to allocate the state’s budget appropriated from previously fuel subsidy is the key. And, since Indonesian macroeconomic performances so greatly influenced by domestic demands (around 60 percent of GDP), responsive policy need to ensure the level of this demand, so that the economy will not contract. In this case, I think that it probably will and we, Indonesians, will probably not going to enjoy high profile six percent economic growth in 2014 fiscal year.

Why is that so? One of the government’s responsive policy subsequent to reduction in fuel subsidy is also dependent on the database of citizens that is unlikely to be comprehensively present. The so called Bantuan Langsung Sementara Masyarakat (unconditional cash transfer) that suppose to offset the impact of increase in fuel prices will most likely stand to the government’s expectations. The reason is that, first, Indonesian people will tend to save during adversity thus demand would still be contracted. Second, the value of cash transfer is relatively small to the impact of oil price hike, rising prices of basic goods, inflation, and exchange rate between rupiah and foreign currencies, especially to the US dollar. Third, according to The Jakarta Post, the reduction in fuel subsidy is relatively small that it rule out government’s argument that fuel subsidy is benefitting the rich because, despite the reduction, it still does benefit the rich as the government argues. Finally, as mentioned in the name of the program, it is merely a “temporary” measure to stabilize domestic demands. What happen afterwards will be, sad to say, the next government’s homework.

On the other hand, I would like to offer another perspective to the problem. This economic problem is no longer simply economics. As far as the politics and public policy is concern, this decision will probably cost the Democrat Party, and its presidential candidate, an election, as long as oposition PDIP stay on the other side.Especially, if PDIP supports popular Jakarta’s governor, Jokowi.  So, it’s good for political dynamics of the Indonesian democracy; hopefully.

One policy option that I would, and many Indonesians also, like to advocate is for the government to improve public transportation system not only in Jakarta, but also throughtout the country. This policy will surely improve Indonesia’s infrastructure, reduce the transportation cost of products, and most importantly, more for Jakartans than others, save so much time. At the same time, Indonesia should and would have to reduce its dependency to oil and non-sustainable energy and look towards a new energy policy. There are plethora untapped potentials in this sector be with geothermal, solar, wind, and hydropower. Once agin, this is fall perfectly as policy option to offset the inevitable contraction of domestic demands, among other policies.

It is time to change our mindset. Indonesia is not an oil rich country as most of us grew up hearing. We are a country blessed with human capital, geothermal, water and maritime resources that we have so far denied. It’s time to accept who we are.  


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