Luck is behind Jokowi’s subsidy gamble in Indonesia

Luck is behind Jokowi’s subsidy gamble in Indonesia

President of Indonesia Joko Widodo recently cut fuel subsidies. Thanks to falling global oil prices, Indonesians have actually seen a drop in prices at the pump, and thus have not resisted this policy change. Riding this wave of bold policy making and good fortune, President Widodo plans to redirect funds to infrastructure development projects.

In a bold move, President of Indonesia Joko Widodo (or Jokowi as he is popularly known) slashed national fuel subsidies in November 2014 by 33.6%. Freeing state finances from the burden of providing cheap fuel reaffirmed the new leadership’s commitment to structural reform.

Yet, as the price hike reverberated through the economy, anxious commentators were surprised by the lack of popular uproar that usually follows such sudden changes. Why the tame opposition? And were the fears of popular backslash justified?

History rhymes

The subject of fuel subsidies carries heavy emotional baggage for Indonesians. Long-time dictator and supreme alchemist of the country’s 30-year steady growth General Suharto built the legitimacy of his ‘New Order’ doctrine on a promise of prosperity and economic progress.

Lowering fuel prices was an easy way of ingratiating himself with the public. Subsidies provided affordable fuel (bought at standard rates on the international market) to power small-scale businesses and poorer homes and acted as a buffer against global price fluctuations. Subsidies did empower consumers but progressively weakened state coffers, already notorious for being leaky and corrupt.

When the storm of the Asian Financial Crisis hit Indonesia’s shores in 1997, few would have predicted the outcome. The crisis blew mayhem across the ‘rising tigers’ of East and Southeast Asia. Indonesia lost 13.5% of its GDP in 1998. In less than one year, inflation rose over 60% and the rupiah lost 30% of its value.

Suharto was suddenly cornered into humiliating negotiations with international financial institutions and forced to open his opaque national accounts to scrutiny. The intricate web of patronage and nepotism emerged, cementing a gray image of murky politics far from that of the dynamic and strong economy the regime purported it to be abroad.

Suharto’s iron-fist rule liquefied with astonishing speed. He was convinced until the last day he would outlast the passing storm, and was stuck in disbelief as events unfolded.

The climax occurred in May 1998. Urged by events, Suharto scrapped fuel subsidies entirely in a last-ditch attempt to appease international creditors and rebalance the government’s budget. Prices at the pump soared 70% overnight, fomenting an immediate public opinion backlash. Politically weak and unable to rely on the fidelity of his inner circle, he lost control of the streets and the army.

Over the course of one evening, the delicate ethnic and religious balance that held together the world’s most populous Muslim country fell apart. Mounting anger against the ruling elite led to finger pointing, singling out the powerful Chinese Christian minority with close ties to the establishment. The riots that ensued traumatized the capital and left over 1,000 dead in Jakarta alone. Most of the victims were from the Chinese community.

An interim government headed by B.J. Habibie, the former vice-president, was formed, bringing to an abrupt end decades of military rule. Subsidies were reinstated soon after the regime’s downfall and the topic, akin to Pandora’s vase, carefully shelved away from public discourse.

For many years, the public continued to associate fuel subsidies with the turmoil of 1998.

Newcomer’s luck and falling oil prices

Swimming against conventional wisdom and in distinct contrast with his predecessors, Jokowi challenged this troublesome legacy with relative ease and minimum fuss. Slaughtering the sacred cow of subsidies added value to his electoral promises. Detractors and opponents were taken aback as the ‘inexperienced son of a cabinet maker’ outmaneuvered them in deal making and negotiation. But why was opposition to removing subsidies so tame?

Luck may be one answer. Indonesia is a net importer of oil. Just prior to the subsidy cut in October 2014, Indonesia averaged a production of 820,000 barrels per day, a little over half of national demand. The rest needs to be bought on international markets. The 50% reduction in world oil prices provided an unforeseen advantage to Jokowi, who was incredibly able to simultaneously slash subsidies and reduce the price of oil at the pump.

The recent fall of the rupiah, which dropped to 1998 levels, may mean it will be more expensive for Indonesia to purchase oil abroad in the near future. But for now, the public has yet to feel the bite of the subsidy decrease and consequently the President’s popularity remains high. Yet, it will be the corner-shop keepers and the humble cabinet makers themselves who will eventually bear the brunt of the price hike once the oil markets recover. Politically, their support is vital as they form the backbone of Jokowi’s electoral constituency.

Nevertheless, reformers have reasons to be optimistic. Passing such significant legislation early in his term may suggest the president is willing to get his hands dirty and tackle other sources of malaise. Recently, he turned his guns against illegal fishing by foreign vessels. He has pledged support for public works, including upgrading 240 ports, building 30 dams and improving vital infrastructure across the archipelago.

As oil subsidies accounted in 2014 for 13% percent of government expenditure, his subsidy cut has provided him with about $10 billion in savings in the 2015 budget. He now has the money to carry out a credible modernization programme.

The challenge will be to consistently channel newly available funds in the long-term into badly needed projects for public utility: infrastructure, education and health. No easy task for a country of 17,000 islands and a notoriously cranky bureaucracy. But Jokowi’s government has proven it can be effective in overcoming obstacles. And lucky when it tries.

Categories: Asia Pacific, Economics

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