By raising the prices of subsidised fuel by more than 30 per cent, Indonesian President Joko Widodo has dealt a decisive blow to a parasitic economic culture fuelled by price subsidies.
It is obvious how injurious that culture is from telling facts: The country's fuel subsidy bill accounts for about a fifth of total government spending, is equivalent to around 3 per cent of the gross domestic product, and is higher than Indonesia's annual infrastructure spending.
An argument could have been made for the subsidies, nevertheless, had they helped the poor. Instead, they have fuelled the consumerist habits of the middle class, particularly vehicle owners. The government's move should save it more than US$8 billion (S$10.4 billion) next year. In the words of one economist, the money expended on subsidies can now be used to "build schools for the young and hospitals for the old, rather than being burned in engines of cars idling in traffic jams".
For a start, the government has announced the provision of social protection measures for low-income families that will cushion the fuel-price hike, maintain purchasing power, and contribute to the momentum of a productive economy. Street protests in the immediate aftermath of the subsidy cut, and rising inflation in the short term, should not sway Mr Joko from pursuing those long-term economic goals.
The move by the new government exemplifies the economic possibilities created by the entrenchment of democracy in Indonesia. Although middle-class voters helped to elevate Mr Joko to the presidency, his approach to subsidies has made it clear that he rules for the whole of Indonesia and not merely for one segment of the population, no matter how economically powerful and politically vocal it might be.
In that spirit, he has justified his strategy with a concrete reminder that the savings will go towards funding Indonesia's infrastructure, education and health needs. These massive and waiting needs require the attention of a leader who is popular enough across the nation to resist populist pressures from one economic constituency. This, President Joko has shown himself to be. His success has been helped by his record. He has shown himself not to be an establishment insider. Instead, his credibility stems from his own reputation for integrity and decisiveness.
It is these qualities that he will need to display as he moves against other ills of the Indonesian system, particularly the inefficiency and corruption of the bureaucracy. A good start has been made, and early in the President's term to boot. Sustaining the effort is the difficult part.
This article was first published on Nov 22, 2014.
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