Democracy

Economy

Education

Development

Global Issues

Research

A wrong prescription or a wrong direction?

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

 

The great thing in this world is not so much where you stand, as in what direction you are moving.  Oliver Wendell Holmes (1809 - 1894)

01/13/03

While the mass people continue to protest the government’s policy to reduce its subsidies on, which means higher prices of, vital goods, the government continues to defend its policy. On Sunday, Jan 12, 2002, President Megawati Soekarnoputri defended her government's decision to raise fuel and utility prices in the country.

"This is the best choice. There is no other choice. I chose this unpopular decision but I am sure that in the long run, this decision can improve the state of the nation," she said at a rally of thousands of flag-waving supporters of her party as reported by Associated Press.

Surprisingly, this is the first time, as far as we know, that Mrs. Megawati used a term of “long run” in connection with economic policy. But does she really mean it? Or to be more precise, does she really know what she meant about “the long run”?

I am not going to focus on Mrs. Megawati as I have often argued that while Megawati is the president, her capability to comprehend economic policy and national development strategy is rather limited. Instead, these two crucial issues should be handled and clearly communicated by the right agent which in my view is the coordinating ministry of economic and finance, Mr. Dorodjatun Kuntjoro-Jakti.

But let’s assume for the moment that it is Mrs. Megawati that wants, due to the pressure from the public, to convey the message or to defend its government’s policy publicly. Obviously, her statements have been already well prepared and crafted by her aides, including her top economic aides in the Cabinet. Therefore, it is not wrong to assume that, one way or another, Mrs. Megawati’s statements are the same as those of her top’s economic aides.

The government is not an agent which never makes mistakes. In fact, as it has been the case, the governments in many countries often implemented wrong policies in the past. Given this fact, it is rational and completely reasonable to analyze the recent government’s policy objectively. Before presenting the right policies that the Indonesian government should undertake, it is important to highlight the Mrs. Megawati’s statements here and directly question them and provide brief alternatives to her statements.

First, “This is the best choice”. What Mrs. Megawati means is that the government’s policy to reduce its subsidies on vital goods is the best choice. But choices on policies depend upon the objective. The government’s objective here is to reduce its deficit which implies two alternatives: Either to reduce its spending or to increase its revenues. Fortunately, there is another alternative that is to be more discipline in spending and more aggressive in acquiring its revenues.  We propose the alternative here: Tax and Expenditure Reforms, Instead of Subsidy Reduction.

Sometimes the government’s officials, such as Mr. Djatun, argued that the objective of the policy is to stimulate the economy and thus promote a higher economic growth. Perhaps, the logic is that redistribution - taking away some money from the middle and upper class people (reducing the subsidies) and redistributing the money to other people (the poor) will promote growth. But how the government will redistribute the money is unclear yet. One thing is clear that the redistribution will not be in the form of a lump-sum transfer.  Instead, it will be in the form of government’s projects to help the poor and etc.

Already Coordinating Minister for People's Welfare Jusuf Kalla, in a very general term, said that the Ministry of Finance was ready to disburse a total of Rp 4.43 trillion (around US$497 million) to finance the government's programs targeting the poor.

Mr. Kalla said that this year the government would expand the coverage of the programs, from the distribution of cheap rice to the provision of funds for the development of small businesses. The programs would be administered by 12 state institutions.  The Development Finance Comptroller (BPKP) would audit the use of the funds twice a year.

This suggests that the more money in the hands of the government, the more of it will be corrupted by the corrupt bureaucrats and the top government’s officials. A BPKP report in September last year was laughable as it reported that the impropriety rate of similar programs was less than 1 percent of the total Rp 2.85 trillion in compensation funds during the first semester (or amount to 22 billion rupiah). The audit result of the second semester would be revealed in March. Last year, the government disbursed money, drawn from the reduced fuel subsidies, in April through June.  If that is true, Indonesia would be a free-corruption country where in fact the country is one of the most corrupt ones on the planet. By just imagining that 12 state institutions will administer the government’s programs, the impropriety rate would likely be at least 12% as each institution would impropriate at least 1% of the funds.

In addition, there are two other major issues.  First, since the development expenditures (26,5 trillion rupiah) is less than the total expenditures on subsidy, the allocations of these “extra cash” will be very important. To which sectors will the money be channeled? Are they channeled more on productive or consumptive purposes? Secondly, how will the government ensure an impropriety rate of less than 1%? So far, the government has not been able to produce a clear and honest mechanism to ensure such low rate except rhetoric and unverifiable reports from the government’s agent.

The second statement from President Megawati was “I chose this unpopular decision but I am sure that in the long run, this decision can improve the state of the nation.” Suddenly, the government found a new jargon in their vocabulary, something that the nation actually has been waiting for years. It is this third statement that opens a more interesting debate which is the subject of the next section.

Table

Government expenditures in 2002 (billion rupiah)

Source: Ministry of Finance

 Your comment

Back to top