Fuel prices and political business cycles

A few years back when the Indonesian government, on the advice of the World Bank and IMF, decided to make cuts in subsidies for fuel. This caused a lot of resentment, and demonstrations took place in the major cities.

The argument from the defenders of the cut in subsidies was not bad, on my view. Subsidies used to be relatively cheap economically when Indonesia was a great net exporter of oil, and very easy to administer. The effect would be to support infrastructure across the country. Now the subsidies are a lot less cheap.

In addition to subsidies being expensive, there are two main downsides to this policy. From a distributional perspective it is a problem that the more fuel you consume, the higher the subsidy. So the richer you are, the more subsidies you get. From an environmental perspective it is a problem that the relative benefits of investing in less fuel consuming means of transportation have been low.

Together, these two problems go some way toward explaining the huge problems of traffic congestion and pollution in Indonesia.

In the short run it is very hard to do much about it. Cutting the fuel prices has been unpopular in particular, of course, among minibus and pedicab drivers who see part of their income disappearing. The ‘deal’ when cutting the subsidies was allocate funds instead for transfers targetted directly for poor groups, the socalled Bantuan Langsung Tunai. But these funds are allocated mainly for non-working poor, and they are not as easily administered as are subsidies. At the local level, it is of course a hassle who gets the benefits, and who does not.

The government is now rowing back on the issue, re-introducing the subsidies. According to The Jakarta Post, the government’s main argument is to benefit industry and trade.

If nothing else, this move should at least benefit the government in the upcoming elections next year. The theory of political business cycles could not have predicted a more perfect date: If you set aside a little time for a quick legislation process and swift implementation, the first effects should be felt by voters just in time for the elections.

Of relevance here is a recent report on Air Pollution in Mega-cities, which states:

“The pollution in Jakarta consists mostly of substances like Sulphur Dioxide, Carbon Monoxide and dust particles. Seventy per cent of the air-pollution is produced by traffic – private bikes and cars, taxis, buses and trucks.

According to Jakarta’s Regional Environment Management Agency –there were only 53 days with clean air in 2004 – leaving more than 300 days, way above pollution standard. However, according to the pollution standard index, 2004 was an improvement on 2003.”


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A dull file…

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