Diagram on the Fuel Subsidies Debate

Here’s my quick note on the back-and-forth debate regarding the fuel subsidies:

My fellow wonk friend Taufik wrote an article questioning those who are against the policy, whether they are only looking at the short-term welfare effects by keeping the low fuel prices. Agreeing with Taufik, the economics are clear here, scrapping fuel subsidies is the way to go. However, the political aspects remains to be tricky.

A caveat, the diagram above is a simplification of the real world situation in Indonesia. It is easy for policymakers to sit on the pedestal and argue that in the long-run we are maximizing welfare by removing the unsustainable subsidies. The truth is, the visibility of how welfare and equity are achieved really depends on where that money is being spent elsewhere, and how fast it can reach to the disadvantaged groups of society.

Therefore, those of you who are in disagreement, I would say that it is better to scrutinize the government more on Indonesia’s social welfare programs that targets better for the poor and investment on the public transport system – as the welfare effects are greater for society.

Take note, however, the government will not be winning any trust points with the citizens if they don’t prioritize correctly – such as establishing the anti-pornography task force over dealing with corruption.

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2 thoughts on “Diagram on the Fuel Subsidies Debate”

  1. If pornography is illegal in Indonesia, one would not know it from walking around Glodok. There, in plain view you can find porn videos aplenty for sale. If pornography is illegal in Indonesia, I would not know if from the number of times that Indonesians have asked me whether I have any.

    Don’t hold your breath that the fuel subsidies will stick. SBY raised the price of fuel before, only to reduce it once again. In other words, the price increase may not be politically sustainable.

  2. Rationally speaking, it is more beneficial to reduce or scrap fuel subsidy. But the mindset of majority Indonesian people keep preventing this to be a feasible action (politically). Therefore, every plan to reduce subsidy produce an immediate impact, first to the political climate (some people have already started to talk about ‘Tritura’), and next to the economy (price of goods skyrocketing in a timely fashion). If the the number of people who can accept the rational base of the policy are larger than the people who try to find short-term-welfare, then I think it would be the time government can reduce fuel subsidy without worrying about the impact it brings to the political climate.
    It would be interesting to analyze it from a public choice perspective. As for now, yearly amount of fuel subsidy expenditure (and the yearly quota of subsidized-fuel) can be categorized as commons, as each use of the subsidy will decrease the amount in the ‘yearly pool’. What about an institutional analysis on this one?

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