Tag Archives: energy subsidies

Fulfilling the ‘Indonesian Dream’

Photo: State Dept./Erik A. Kurniawan

Photo: State Dept./Erik A. Kurniawan

Last month, Joko Widodo, commonly known as “Jokowi”, helped mark a move towards the consolidation of the world’s third largest democracy by winning the 2014 Indonesian presidential election.  A former furniture maker turned politician, Jokowi’s win represents a shift away from the country’s political and military elite, which has traditionally dominated the post.  Jokowi himself has compared the victory to fulfillig the ‘Indonesian dream’ by stating “now, it’s quite similar to America, yeah?  There is the American dream, and here we have the Indonesian dream”.

However, many commentators predict that Jokowi’s tenure will be marked by a number of economic as well as political challenges.  For instance,  in the first quarter of this year Indonesia’s economic growth fell to 5.2%,  representing a new four year low.  Despite being South East Asia’s largest economy, Indonesia has struggled with a host of issues that have hampered economic growth, such as high levels of corruption, a dependence on natural resources and strained public finances, amongst others.

Many in particular have highlighted the high level of energy subsidies as a potential sticking point during Jokowi’s presidency.  Energy subsidies currently represent 16% of government expenditure and 4% of total GDP.  Government spending on subsidising energy prices is three times more than the allocation for infrastructure (roads, water, electricity and irrigation networks), and three times the level of government spending on health.  This has led a study by World Bank to conclude that Indonesia’s energy subsidies crowd out investment into other crucial areas of the economy.

This is something I find hard to disagree with.  After visiting Indonesia earlier this year, I saw first hand the country’s need for infrastructure spending – if you have ever been stuck of one Jakarta’s infamous traffic jams you too will understand this fully.  But it is not just new roads that are required.  As this article in the Jakarta Post points out, the country’s infrastructure suffers from a myriad of problems, ranging from frequent blackouts to poor internet connections.  As a result, Indonesia’s overall level of infrastructure ranks 82nd out of 144 countries in the World Economic Forum’s most recent Global Competitiveness Report .

In addition, infrastructure spending still remains under its pre-Asian financial crisis levels. With a lack of investment in infrastructure projects, some have argued that foreign companies have been deterred from making investments in the country.  Moreover, others have stated that the drag placed upon growth by poor infrastructure could lead to Indonesia falling victim to the middle income trap.  Freeing up public funds away from energy subsidies could thus have major long term economic benefits.

However, in a country where 100 million people live on less than $2 a day, past decisions to cut fuel subsidies have been met with violent protests.  For instance, only last year a decision by the government to raise petrol prices sparked demonstrations and clashes between police and protesters outside parliament.  Cutting fuel subsidies even contributed to the final ousting of the former dictator Suharto, who had been in power for more than 30 years.  Jokowi therefore faces somewhat of a policy dilemma.

Nonetheless, even if Jokowi reduces Indonesia’s energy subsidies it remains to be seen whether the country has the institutional capacity to deliver the key investments that are needed.  Corruption is a major issue in Indonesia and funds earmarked for projects are frequently eaten away by local officials and ministries.  The success of Jokowi’s tenure will therefore not be determined by solving short term issues such as energy subsidies, but by combating more systematic issues that hinder Indonesia’s long term growth, namely its weak institutions and corruption.

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