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Why did Megawati choose unpopular and bad options? 

Elwin Tobing

Management is doing things right; leadership is doing the right things. Peter Drucker.

01/04/03

So, once again, finally Indonesian people have to face it. 

Under Presidential Decree No.9/2002, the floor purchasing price of rice is raised to Rp2,790 a kg from Rp2,470 a kg.  The floor price of dry unhusked rice to Rp1,725 (around 19.4 US cents) a kg from Rp1,519 a kg previously.  Fuel price hikes of up to 22 percent, effective as of Thursday, Jan 2, 2003, were announced Wednesday.  Also announced, an average six percent increase in electricity tariffs and an average 15 percent rise in telephone rates.

The price of premium gasoline was set at Rp 1,810 (about 20 U.S. cents) per liter from Rp 1,750, while automotive diesel climbed to Rp 1,890 from Rp 1,550.  The ceiling price of premium gasoline was raised to Rp 2,100 per liter from Rp 1,750 in 2002. The floor price, the lowest prices can drop, was set at Rp 1,650 from Rp 1,450.

The floor and ceiling prices for automotive diesel were set higher at Rp 1,650 and Rp 2,100 respectively. Floor and ceiling prices for industrial diesel, bunker oil and kerosene for industry were respectively set at Rp 1,600 and Rp 2,050; Rp 1,150 and Rp 1,600; Rp 1,800 and Rp 2,200.

The government also increased the price of kerosene, a commodity widely used by low-income people, Rp 700 per liter from Rp 600.

Already these increases sparked controversy. Economist Didik J. Rachbini said the government had unfairly shifted the burden of the economic crisis to the people, who had been unable to raise their incomes because the government had failed to spur economic growth.  The Indonesian Consumer Foundation (YLKI) said it will create serious economic hardship for the people and urged Indonesians to protest. While economist Muhamad Ikhsan said that the increased prices were inevitable, as they had been postponed several times.

In reality, it is the low income people who will suffer the most from an increase in the prices as it will undoubtedly further trigger an increase in the inflation rate.  As reported by the Central Statistics Agency (BPS) on Thursday, Jan 02, 2003, the inflation rate in 2002 reached 10.03 percent, up from the government's single digit target of 9 percent. The Agency’s chief Sudarti Soerbakti said that the quarterly increase in electricity rates during the year had been the primary contributor of the higher inflation.  The below table shows changes in prices of several categories of goods from November 2002 to December 2002.

Minister of Finance Boediono was reported saying that in order to prevent a high inflation rate, the government would move to avoid a sharp increase in food prices.  But since the prices of rice, the prices of energy and transportation and communication costs are increased, it is likely that the government will have difficulties in avoiding a significant increase in food prices. 

All these increases are intended to reduce the deficits in the government budget. (According to Anggito Abimanyu, the Minister’s staff, the government will well realize its budget deficit target of 2.5 per cent of Gross Domestic Product. But part of the reason is because the government is still holding some of its expenses).  While the motive to increase the prices may be reasonable, the government is lack of a coherent economic plan and a clear communication to the people.  An economic plan would include the ways the government to finance its budget and their consequences to the nation. For instances, are the increases in prices temporary burden for people to achieve a much more important goal: An economic stability? Or is this just an one-time mechanism which will be recurred again one year or two years down the road while the fundamentals of the economy remain wobbly?

The answer is just like what Minister Boediono said that is in order to prevent a higher inflation, the government would move to avoid a sharp increase in food prices which by the way: How? In another word, we solve one problem by another problem. It means that we really never solve any problem. Instead, we just move from one problem to another one.

If the real reason is the deficit in the government budget, then there are several ways to overcome it. The simplest one is by using an accounting principle: Balance the expenditures and the revenues. While adjusting (decreasing) the expenditures often causes controversy (such as reducing the government’s subsidies), boosting revenues will be less controversy, except a tax increase. The government has been trying to raise its revenues including by selling government’s assets. But is it still possible to raise its revenues by reforming the tax system or increase the amount of the tax that is really collected. It is commonly believed that the percentage of the collected tax that is out of the government’s hand is not small. Corrupt bureaucrats and unethical business people sometimes make closed-door deals in order to avoid paying the real amount of tax.

Graph

Government revenues from taxes, 1990-2002 (the figures for the year of 2002 is from the 2002 Government Budget Plan)

Source: The Ministry of Finance. Thanks for Almizan who provided me the data.

The graph above provides an interesting fact. The total income tax almost doubled from the year of 2000 to 2001. The value-added tax also increased sharply, from 35 to 56 trillions rupiah. While the government sets the target around the same rate of increase in the value-added tax for the year 2002, the target of income tax for the year 2002 is somewhat modest.

On the expenditure side, the real problem is not the amount, but the percentage of the expenditures which is really allocated to their intended purposes. It is also widely believed that only about 60% of the government’s development budget is really allocated to its planned purposes. The remaining 40% goes to the corrupts bureaucrats and other parties which are involved in the government’s projects.

Instead of choosing the unpopular option – reducing the subsidies -, the Megawati’s government should focus on increasing the collection rate of tax (the percentage of the collected tax that goes to the government) and reducing the government money that goes to personal pockets (increasing the “expenditure rate”). Is it possible to have a collection rate of 90% and an “expenditure rate” of 90%? These two agendas, of course, will be more reasonable to be included in a clear and coherent economic recovery and development plan because they are also dealing with other front-runner issue: The eradication of corruption.

When one thinks of that way, then the President Megawati’s controversial decree that rules out criminal charges against former bank owners who have finally settled their huge debts to the state, as reported in media on Thursday, Jan 02, 2003, is totally outrageous.

Megawati instructed financial authorities to issue letters of "release and discharge" for the businessmen who have repaid their debts which will effectively clear the debtors from any criminal liability.  The decision to issue the release and discharge letters was part of a scheme agreed with the International Monetary Fund, which is coordinating a US$5 billion economic recovery program for Indonesia.  IBRA chairman Syarifuddin Temenggung would issue discharge letters for five former bank owners who have settled their debts to IBRA. They include IBRA's largest debtor the Salim Group, which had a total debt of Rp 52 trillion ($ 5.8 billion). The other four are Ibrahim Risjad (Bank Risjad Salim Internasional), Sudwikatmono (Bank Surya), Liem Hendra (Bank Budi Internasional) and The Ning King (Bank Baja Internasional).

How exactly and how much exactly these debtors paid their debts are remained mystery to the public.  But what public that do know is the government debts keep amounting as a result of the bad practices of these business people. Again, Megawati chose an unpopular and bad option.

Nevertheless, the President, in her New Year's Eve message broadcast nationwide from the resort island of Bali on Tuesday night (Dec 31, 2002), was right when she defended the record of her 18-month administration on security issues. For instances, the government has ended religious violence in the Maluku islands and the Central Sulawesi town of Poso, where thousands of people were killed in ethnic and religious clashes.  It also has reached a peace deal signed in Geneva on Dec. 9 with the separatist Free Aceh Movement (GAM) that has been fighting for an independent Islamic state since 1976.

But on other two crucial issues economic revival and corruption, the Megawati’s government still has much work to do. Although she cited the government's success in developing the economy such as, "During the year 2002 we have been able to further stabilize the rupiah exchange rate, lower the bank benchmark rate, and prevent the fluctuation of prices, particularly basic commodities," the public expect more than a short term stabilization.

What the public that really wants to know are: What is the government agenda in combating the endemic corruption and what is the government plan to revive and develop the economy. The public will never understand why the House of Representatives Speaker Akbar Tanjung and Bank Indonesia Governor Sjahril Sabirin, despite the fact that the two were convicted in graft scandals, are still not jailed.  The public will never understand why selling the government’s assets to foreigners is good and why discharging and releasing bad businessmen is .

More than a year ago, when Megawati replaced Abdurrahman Wahid, she enjoyed considerable popularity.  She was viewed to have empathy with the grassroots who were a major force behind her win in the 1999 elections. But now many Indonesians doubt whether she really stands for the people who are supposed to be helped.  With major corruption and the economy still weak and uncertain, many doubt that.

Ironically, at this time Megawati is still the best of many bad candidates for the national leader that we have at our disposal.  The only thing that has to be done is to select the right people to work with her to minimize corruption and to bring prosperity to people (if the former US secretary of the treasury Paul O’Neill and former Chief of Council Economic Adviser Larry Lindsey chose (or forced) to resign because of their incapability of handling economic issues, why did none of the Megawati’s aides choose to do so despite their incapability?). So, it is not surprising when Megawati announced unpopular and bad policies as she is being surrounded by the wrong aides.

And, on the other front which is equally important is to elect the right representatives in the House. This is an agenda where people can actively participate and could also determine the course of the nation’s future.

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