Trouble over fuel prices again

Fuel prices, especially petrol prices, were increased by around 30% in Indonesia effective Saturday 24 May.  Predictably, a select band of students decided to protest.

It is hard to understand why students are protesting the increases.  Rather, they should be demonstrating in support of them.  Fuel prices in Indonesia are still (after the increase) well below world prices.  On any reasonable economic judgment, prices are still too low.  The political pressure to maintain subsidies for fuel reflects broader populist pressure on the government to “keep prices low”.  These pressures are a subset of broader pressures in favour of price suppression, which do much harm.

People who support price suppression for fuel should consider two things.  First, fuel subsidies cannot really protect ordinary Indonesian citizens from the impact of sharp increases in international oil prices.  In fact, the main impact of price suppression is to change the way that Indonesian citizens bear the cost of increases in international prices.  This is true because if the government suppresses fuel prices by maintaining large subsidies, the government must pay for the subsidies.  But payment for the subsidies, in turn, imposes other costs on ordinary Indonesians.  The government can cover the cost of the subsidies by (1) maintaining higher taxes, or (b) cutting expenditures (on such things as schools and hospitals), or (c) increasing the budget deficit and thus borrowing more (which taxpayers must soon pay for).

The second thing that supporters of high subsidies need to think about is the issue of “Who benefits from the subsidies?”  There is overwhelming evidence that the main benefits of fuel subsidies flow to wealthy people in urban areas.  The great majority of the poor in Indonesia in rural areas receive very little benefit from fuel subsidies.  The sooner the Indonesian government lifts fuel prices even further the better!