August 23, 2022
JAKARTA – Indonesia can rightly be proud of its economic record, and through the combination of its monetary and fiscal policies, the government of President Joko “Jokowi” Widodo has helped to ensure economic stability and, more importantly, political stability.
Considering the turmoil many countries are going through right now, the US$33.5 billion the government had to shell out might be worth it. But whether this is sustainable for the good of the country is another question.
Bank Indonesia (BI) avoided pressure to raise interest rates as most of the rest of the world, led by the United States, raised theirs. Jokowi has resisted pressure to raise domestic gasoline prices even as global oil prices soar.
Staple food prices are also on the rise amid global food shortages, but remain manageable. Meanwhile, Indonesia has continued to enjoy a trade surplus over the past 26 months.
Inflation is certainly on the rise, but at 4.9% it is relatively low when many countries are in double digits.
President Jokowi touted all these economic achievements in his State of the Nation address on August 16 to boost national confidence.
At the heart of the “Jokowinomics” policy is the control of energy prices, mainly gasoline prices, by injecting more and more public funds into subsidies. This year’s energy subsidy bill stands at 502 trillion rupees ($33.5 billion), or 16% of total government spending in 2022.
President Jokowi has repeatedly stressed that no other country in the world has spent so much to keep energy prices low. He admitted, however, that this was unsustainable and that the government would be forced to raise prices, possibly as early as this week.
Economists, not just neoliberal types, will tell you that subsidizing a product is bad policy for many reasons, including distorting market signals about supply and demand and encouraging inefficient use of the product. There is also the opportunity cost: in this case, the $33.5 billion of public money could have been spent on other programs with broader or greater economic impacts.
But there is a strong political reason why the government continues to ignore economic arguments to keep gasoline prices low, and that goes not just for President Jokowi, but for every other leader before him.
Rising domestic fuel prices carry huge political risks that no president would want to take if he can help it. They were inspired by strongman Soeharto, whose three-decade-long regime crumbled following massive nationwide unrest in 1998, when he raised petrol prices in response to the worsening recession.
Although official figures show the poverty rate has dropped dramatically over the past two decades to single digits, 9.54% still translates to a staggering 26.2 million people living in poverty. . And millions more are only slightly above the poverty line, so they remain vulnerable to falling into poverty at the first sign of an economic downturn, recession or runaway inflation.
So rising fuel prices are always a political hot potato for any president, as it affects millions of lives. If an authoritarian like Soeharto couldn’t do it, what chance is there for the democratically elected presidents who succeeded him?
Although all the presidents agree that the energy subsidy weighs heavily on the state budget and should therefore be phased out, they continue to pass the buck to their successors. President Jokowi began phasing out the fuel subsidy over a few months at the start of his first term in 2014, but that was largely thanks to exceptionally low world oil prices at the time. And as soon as world prices rose, the subsidy resumed.
This is a nation that is so addicted to cheap gasoline that the energy subsidy has been upheld, rightly or wrongly, by every government to avoid political unrest and endorsed by nearly every politician looking for votes .
While most other countries in the world, including those much poorer than Indonesia, are already paying the economic price or even taxing fuel consumption, we continue to spend billions of dollars in energy subsidies to feed this national dependency. Meanwhile, the natural resource curse of oil continues to haunt the country, even though Indonesia ceased to be a net oil exporter more than two decades ago.
One can think of many economic and social programs that deserve funds from the public pot of 35 billion dollars, from funding infrastructure projects to improving the national health system and spending on education or eradication poverty, even spending on President Jokowi’s expensive new capital project in Kalimantan.
Beyond the lost opportunity cost, there are also other costs that are not so apparent. The first is that cheap gasoline discourages the nation from switching to renewable energy sources, which has implications for Indonesia’s carbon reduction commitments.
Will the country’s presidents after 2024 be able to phase out the fuel subsidy, or will they still be haunted by the prospect of political unrest and continue to fuel the nation’s reliance on cheap gasoline? We will have to wait and see.