Debunking the Activists on Gasoline Subsidy

On Gasoline Subsidy

The usual argument used by activists is that gasoline subsidies are basically for the poor. On the contrary, most of the benefits of fuel subsidies in Indonesia go to commercial users and wealthier households. In addition to the fiscal burden and risks of the fuel subsidy system, there is also a concern that the current fuel subsidies do not assist the poorer segments of the population who are most in need of such support. I've argued elsewhere that fuel subsidies bring more dead weight loss since wealthy households (who consequently consume more fuel) will be subsidized more. In fact, according to the February 2009 Survei Sosial Ekonomi Nasional (SUSENAS, National Household Socioeconomic Survey), 40% of the direct benefits to households from gasoline subsidies go to the richest ten percent of households, and less than 1 percent to the bottom 10%. A breakdown of the household component of gasoline consumption by socio-economic group indicates that the top half of households accounted for 84% of gasoline consumption, with the highest consumption decile alone accounting for almost 40%. In contrast, the bottom 50 percent of consumers accounted for just 16% of total household fuel consumption, with the poorest decile accounting for less than 1%. Figure below.

Source: World Bank's Indonesia Economic Quarterly, April 2012

In addition to that, a detailed examination of reported fuel consumption in the household survey indicates that around two-thirds of poor and near poor households do not consume any gasoline whatsoever, and the likelihood of consuming gasoline and the actual quantity consumed rises sharply at higher income levels. Figure below.

Source: World Bank's Indonesia Economic Quarterly, April 2012

To put it in terms of a household’s budget, fuel subsidies are estimated to transfer a car owner who consumes 50 liters of gasoline a week (200 liters a month) IDR 1,115,000 per month (based on the difference between the economic price of fuel and the price of subsidized fuel as of March 2012). This is in contrast with the average motorcycle user who consumes 5 liters a week (20 liters a month, according to SUSENAS, 2009) and only receives a transfer of IDR 111,000 per month from the fuel subsidy scheme. Over a year, this equates to these wealthier households which use a car receiving a transfer of IDR 13,382,000 – 10 times more than the average motorcycle user which receives IDR 1,338,240 and many times the indirect benefits from subsidized fuel that may be received from those households without a car or motorbike.

If we continue subsidizing fuel, assuming oil prices of USD 120 per barrel, the World Bank estimates that Indonesia’s budget deficit in 2012 could move up to 3.1 percent of GDP. If oil prices stay high and the fuel price adjustment is implemented in the third quarter of 2012 the World Bank projects a deficit of 2.5 percent of GDP, compared with a revised Budget deficit level of 2.2 percent (with an oil price assumption of USD 105 per barrel.) Note that the revised budget includes the option of a IDR 1,500 fuel price increase provided the ICP price is, on average, over a six month period, 15% above the revised budget assumption of USD 105 per barrel.

On Inflation

Let's compare the potential inflation in 2012 with the previous fuel price increases of 2005 and 2008. However, this exercise still has its limitations due the considerably different inflation contexts and macroeconomic backdrop. For instace, in 2005 the rising cost of market price for fuel was close to 3 times the subsidized pump price of IDR 1,800 per liter that Indonesian’s were paying, thus government increased the price by 150% within 5 months. This shock is starkly different to the 33 percent increase in fuel prices in 2008 and the potential 2012 increase. In 2008, unrelated to fuel price increases, food price inflation had reached 16 percent in April (the month before fuel prices increased) due to rice and cooking oil shortages. This meant headline inflation was already 7.4% before the fuel price increase and food inflation continuing to build. In contrast to this, in 2012 inflation was at a two year low of 3.6% in February (less than half the level of 2008) and food inflation was at an eight-year low of 2.9%. Not to mention, with the 2008 global economic downturn, most of the downward movement in economic indicators in 2008 occurred not in response to the fuel price increases in mid-2008, but to the global financial crisis in late 2008. In 2012, economic activity has been robust at 6.5% in each of the previous four quarters and, while there remain risks to the outlook from the ongoing fragility of international markets and weakening of external demand, it is expected that growth will remain above 6% for the year.

Taking the previous considerations in projecting 2012's inflation, here's the figure:

Source: World Bank's Indonesia Economic Quarterly, April 2012

It's still lower than those occured in previous price increase.

On Cash Transfer

It's also oftenly argued that cash transfer like BLT (Bantuan Langsung Tunai or direct cash assistance) or BLSM (Bantuan Langsung Sementara Masyarakat or temporary community direct assistance) is not good for poor people as it will create dependancy or so. But let's examine the data.

Current proposal form government was a cash transfer to be distributed to 18.5 million poor households (the poorest 30% of households) of IDR 150,000 per month for 9 months with a total budget of IDR 25.6 trillion. The second compensating program, to assist those indirectly affected by rises in transportation costs, due to the higher fuel price was an increased subsidy for public transport (public service obligation) economy class (passenger and goods) with an estimated cost of IDR 5 trillion for 9 months.

Using BLT as projection for BLSM (I won't cover the effectiveness for other social assistances like education/BSM, health/Jamkesmas, and the others, as it will be too broad, maybe next time,) here are the results:

1. BLT was delivered when it was most needed and allowed households to continue spending regularly. The transfer levels (of IDR 100,000 per household per month) added 10-15% of expenditures and lasted long enough (12 months in 2005/6 and 9 months in 2008/9) for households to adjust spending patterns to new relative prices, especially at times when at the time when fuel prices were increasing fastest. Household expenditure was protected for BLT households, especially in regions where local economies were weakest and not generating noticeable community-wide growth, while communities with more BLT recipients (whether economically strong or weak) saw increased consumption gains for non-BLT households. BLT households removed their children from labor at increased rates while overall health service utilization also increased more for BLT than non-BLT households. In 2008/9, when a BLT payment coincided with due dates for school enrollment and registration fees, households with BLT reported using it to pay these fees and keep their children in school.



2. BLT helped households find work and did not create dependency. In fact, households who received BLT were more likely (by a significant margin) to find new jobs than households without BLT. And there was no difference between non-BLT and BLT households in the rate at which they left or were dismissed from jobs. In other words, BLT was responsible for a net increase in employment. Here's the figure:

Source: World Bank's Indonesia Economic Quarterly, December 2010

Overall, the targeting of Indonesia’s social assistance programs, as measured by coverage of the poor, is pro-poor and in line with international benchmarks. Less than half of the poorest and most vulnerable 40% of households receive BLT and Jamkesmas.

However, there are some caveats. The larger programs – BLT, Raskin, Jamkesmas, BSM – spend too little on administration and support operations and weak socialization and resulting of the lack of accountability. All programs suffer from inadequate socialization guidelines, leading to reduced program transparency and legitimacy and heightened potential for corruption. Monitoring and evaluation, complaint resolution mechanisms, and budget execution are all underdeveloped. All programs have descriptions (in regulations and manuals) of program monitoring arrangements and some details regarding the content of monitoring procedures and reports. However, program monitoring and reporting is most often carried out by local-level implementers and delegated with very little financial support, technical support, or systems for quality control. Knowledge on eligibility rules, program objectives, and beneficiary rights and responsibilities is usually spread thinly among beneficiaries, eligible households, communities, and local-level program implementers. Therefore, bottom-up monitoring of the targeting and benefit distribution process is limited while intra-community jealousy and misunderstanding are often high. SA programs – with the exception of the pilot Kemensos (Kementerian Sosial, Ministry of Social Affairs) cash transfers – do not include an explicit facilitation or outreach process. This limits beneficiaries’ effective access and leads to increased capture by those already familiar with the services offered, especially for Jamkesmas and BSM.

Hope it helps to debunk some of those self-proclaimed "pro poor" activists' arguments.