Monday, December 10, 2007

They don't have it there.... come here, just don't tell anyone

I said it was a semantical gesture to save the President's face. The only logical solution is to increase the price. Gradually? Fine, if the social costs would turn out high (the downside of gradual increase is that inflation expectation may kick in faster and might as well be self-fulfilling).

But imposing multi price system like this would just create black markets, as Faisal Basri pointed out here.

For non-Indonesian readers, here's the story:

The Indonesian government has been very concerned with the stubborn high oil price. It will give a very heavy burden on the budget as the government still heavily subsidize fuel. In 2005 the government had similar situation and rightly decided to make a big cut on the subsidy and hence increased the prices. That policy was blamed for general inflation hike and increase in the poverty (some observers, including yours truly, however applauded the decision and argued that the decision has brought positive effects to the economy and that the poverty increase was also exacerbated by rice import ban).

And public strong reaction against subsidy removal turns out to be one big nightmare to the president. Especially in this election mood. So one day, he announced that no matter what, fuel prices would not be increased. That's when the TNT was planted.

But that expensive world oil price means heavy budget burden is not a myth. So there needs to be something done. But because the president has reached the verdict, other measures should be found. And here they are: Private cars will not be eligible for subsidized fuel; only motorbikes, public transportation vehicles, and (hold your breath) government vehicles are allowed to buy subsidized fuel.

What a nice opportunity for black market.

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