Saturday, January 10, 2009

Misplaced supports

I'm sick of KADIN, the Indonesian chamber of commerce. As reported in The Jakarta Post today (10/1/2009), they are now asking further cut in fuel prices to Rp 4,500 for gasoline and Rp 4,300 for diesel. They have also asked for more electricity subsidy. Some of these people have been given privileges not to pay value added tax or import duty.

SBY on the other hand keeps giving room for those rent seekers. Chances are he's gonna do it again to boost up his popularity.

Economic stimulus in this difficult time is justified. The objective is to boost the aggregate demand. The most effective way to do that is to give it to consumers, not producers. Programs like cash transfer is particularly good because it directly goes to the poor, the people with higher marginal propensity to consume (I owe this to a discussion with Chatib Basri yesterday). Others targeting the supply side like tax- or duty exemption and subsidies are less effective, because they require direct channeling to the demand side -- something that does not happen instantaneously, if not at all. Businesses should know, they might be given facilities so as to keep producing. But in this situation, who's gonna buy those stuff?

Addendum: I've been thinking more. In addition to cash transfer to the poor, the government can also stimulate the other income groups, including the non-poor, using payroll tax holidays. In developed countries this would be much easier (virtually everybody is in payroll system), so they don't even need the cash transfer program. But in countries like Indonesia, majority of workers are not in a payroll system -- at least not in a system that allows easy integration of data. This is partly because many are in informal sector -- thanks partly to the rigid labor law.

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