Editorial: Reallocating subsidies

Mon, 05/26/2008 10:19 AM  |  Opinion

The public acceptance of the 28.7 percent increase in fuel prices which the government announced Friday evening, will hinge on perceptions of how the upcoming economic burdens will be shared, and how well the distribution of income-support for affected families will be managed.

The government must therefore go all-out to convince people (with concrete measures and examples) that its painful fuel policy is really a necessity and is in the public's best interest.

It needs to affirm that the move is based on genuine principles of equitable burden-sharing, otherwise the bitter pills could cause a wave of social unrest at the expense of economic and political stability.

At a time when an increasing number of people have been suffering economic hardships, and when unemployment -- already at a potentially explosive level -- would likely worsen, the additional burdens caused by the price rise look likely to incite public anger.

But the government has made thorough preparations with special social-safety net programs to cushion the impact of the fuel reform on poor people. It has attempted to protect the poor from the brunt of the price increases through the distribution of income support (cash transfers), subsidized rice and educational grants for 19.1 million families (almost 75 million people). The government has also expanded poverty alleviation programs -- with more than Rp 150 trillion (US$16 billion) budgeted for this year alone.

The fuel-price increase may double inflation, to 12 percent throughout this year, which will no doubt hit low and fixed-income earners and the poorest bracket of the community the hardest. But the various forms of income support and massive poverty alleviation programs will help cushion the adverse effects.

The public's sense of fairness will also depend on perceptions of whether the government is taking its full share of the burden by minimizing waste caused by inefficiency and corruption and by truly behaving and acting out of a sense of urgency and crisis.

The strict expenditure guidelines issued by the Finance Minister for senior officials (such as severe restrictions on official travel) will serve to help strengthen the spirit of austerity within the public sector. Such an example would also serve to improve the social and political environment during the implementation of this painful measure.

Favorable public opinion is necessary to smoothen the transition period of the fuel reforms, but the government must also realize that it is not the poor majority but the middle- and top-income earner groups who often dominate public debates. Vested-interest politicians in the House could make a lot of noise, deceiving the public to advance hidden political agendas.

Former presidents and former presidential candidates who have opposed fuel reform -- and who will try to exploit the current situation to increase their popularity in next year's general and presidential elections -- are well advised to note that fuel subsidies have nothing to do with voter support nor a voter backlash.

Just look at how then incumbent president Megawati Soekarnoputri failed miserably in the 2004 presidential elections, even though she had refused to increase fuel prices.

She chose to leave a "fiscal time bomb" for President Susilo Bambang Yudhoyono, who was then forced to defuse it with a cumulative price increase of more than 155 percent in 2005.

Even the common people understand that fuel reforms, however painful, are firmly grounded in sound economic rationale and a sense of justice because the huge fuel subsidies have, so far, been enjoyed by the middle and top-income bracket.

Instead of attacking the Yudhoyono administration, we should commend it for its courageous decision to take on such a bold move, however unpopular it is.

Yudhoyono could choose the easier populist measure, by continuing the wasteful subsidy spending, but this would risk leading the economy into a much more devastating crisis within one to two years.

If opponents to the fuel price increase truly want to help the poor, they should help supervise the implementation of the social-safety net and poverty alleviation programs to ensure that the billions of dollars of additional funds derived from the fuel reform reach their target beneficiaries (poor families).

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