On the election, part 2

What are the populist, vote getting policies then? Take fuel. SBY is, I think, the first president of RI that cuts gasoline price. And by tomorrow, he will have done that three times in a row. Yes, the world crude oil price has been free falling, from about 150 dpb to less than 40 today. So yes, a redux in domestic price of gasoline is in order. But don't forget that the price has been supported by subsidy almost all the time. So it is not really a normal price cut. Now the price is set at Rp 4,500 subsidy-free. But the govt says that it guarantees that, should the world price go up, the domestic price will not go beyond Rp 6,000. This is politically smart. But might be economically harmful given the random walk nature of the crude price (see my post also on the fallacy of 'harga keekonomian').

While gasoline is conditionally subsidy-free, other energy sources like kerosene and diesel still enjoy big subsidies. But most saddening is the fate of PLN, the state-owned electricity company. This company is an all time loss maker. The reason is simple: they have to sell their product below the production costs. Two years ago PLN introduced a more market oriented approach: businesses that operate in peak hours should pay double. Fair enough. But even with that, the price is still below the cost. For example, a business with 30 MVA that operates between 6pm to 10pm should pay Rp 880/KWH. In normal times it only pays half of that. The production cost, on the other hand, is Rp 1,300/KWH. Now, the government just announced that the penalty rate is cut from double to 1.5. Meaning, the business in our example should pay only Rp 660/KWH should they opt for peak hours. Yes, due to lower oil price, the production cost should be lower, too. But the best PLN can go is Rp 900. See?

If you want more examples, we have LPG, fertilizers, etc. Not to mention the privileges given to selected business sectors to be exempted from value added tax and import duty. And don't forget the political gestures. When SBY cut the fuel subsidy in 2005, and therefore effectively increased the domestic price, it was obvious that he didn't want to take the center stage. Now, to announce the price reduction, a populist move, he did it himself. What does that show? You tell me.

Two caveats. First, yes, it's great to see prices are down and hence affordable. But many of them are superficial, on the back of big subsidies. In the longer run, somebody, we, have to pay for all that. Second, yes, in this time of crisis, stimulus is needed. But it would be far more effective to target the consumers rather than those selected producers. The interesting question would be why the government bows more to the one with smaller multiplier effect? Here comes the politics. Businesses are stronger lobbiers than any group of consumers, let alone individuals, especially the poor.