In my recent article in YaleGlobal on June 7, I sought to bring a wider audience to the issue of fuel subsidies and ownership of those resources.
Ownership is a fundamental point to maintain in the ongoing debate about the subsidy.
All the resource-rich countries noted in that article (Nigeria, India, Indonesia) have significant similar issues with unemployment, underemployment, endemic poverty, corruption, and large, young, unskilled populations.
Consider some foundational concepts. First, the problem of closed systems. Dr. Peter Senge at MIT has made his mark on the fallacy of pursuing failed systems ad nauseum.
If the system is designed badly, or is obsolete, even the best players in that system, playing their best game, can only produce the outputs the system allows by design.
In other words, sub-standard outcomes are assured. Inside of that, changes in one part of the system for the better (such as a value added tax on exports), can and often do lead to deficient outcome (capital flight) or even a breakdown of the entire system later on.
Second, many are now trying to make changes inside the old system to enact a better output of the entire one.
As mentioned above, the system can only produce what it has been designed for (the weakest link in the chain conundrum). A system largely designed to serve pre-1945 colonial interests.
The previous examples highlight the conundrum facing Indonesia and many resource rich developing countries regarding fuel subsidies and a weak resource policy in
general.
Article 33 of the 1945 Constitution clearly states that the resources are for the benefit of its people.
The article was written after a long history of colonial extraction (arguably, the Portuguese, then the Dutch) in Indonesia.
The core tenet of Article 33 is to empower all Indonesians to take control of their resources. This is a de facto ownership issue, other states such as Malaysia, China, and Bolivia also take similar approach.
Still others, like India, have not realized the fungibility of their resources. For example, India strictly attaches their fuel subsidy regime to oil imports, yet they have significant coal reserves that go to export, enriching investors, despite crushing poverty and a fuel subsidy debt load.
Yet, the current fallacy is that the way the investment regimes in Indonesia (and other developing countries) are designed, with PSC’s in oil and CoW’s (central) and KP’s (regional) for mining, the stewardship issue of the resources for all Indonesians will always be compromised.
These investment systems are heavy on finance and weak on human development — a system
that serves special groups well (both domestic and foreign investors), to the exclusion of the populations needs.
Despite the Article 33, Indonesia is still pursuing a 19th century investment regime into the 21st century. I note here that the new “value added” export restrictions by 2014 for example, on Indonesia’s raw minerals still do not highlight human capital development, but rather, tariffs, fines and more financial penalties that leave the core issues of how to create value added products (through people, not fines) wanting.
The North-South problem then becomes self reinforcing, or should we say, the system becomes self
reinforcing. It will not change by itself; it can’t.
As previously written, certain countries now take a strategic view of their resources, and by extension, a nuanced ownership ideal for their people’s benefit. Norway, Australia, and the UK attach considerable social and employment outcomes to their resources.
Australia for example, does not allow mining concessions unless attached to localization (to fill
all organizational positions from floor-sweeper to executive) or technology transfer initiatives (such
as conveyors and new smelting techniques).
Note that the strategic view is on long term development, not merely financial returns.
If the system is designed badly, or is obsolete, even the best players in that system can only produce the outputs the system allows by design.
We now tackle the issue of the fuel subsidy. The orthodox position is that “bad” fuel subsidies must “go”. Recently, economist Stephen Hanke (Johns Hopkins University, Washington, DC) has come to Jakarta to preach on the value of eliminating the fuel subsidy. He is not apprised of the real situation most people in Indonesia face.
Further, Hanke was consulting with Indonesia in 1998 on behalf of the IMF for fuel price increases. Dr. Hanke should consider a “stand back” regarding both fuel subsidies and fuel price increases.
Hanke is a conservative economist. His view is that the market can solve all ills. The 2008 economic crisis shed doubt on this position. In a very transparent and level playing investment field, this could possibly be true, but Indonesia is not a transparent and level playing field.
While the fuel subsidy may benefit the middle class, it is also a critical factor in helping the poorest in Indonesia go about their daily lives and economic activity.
Removing it (as the Jakarta demonstrations have shown) may impact on them the most.
A 2009 IEA (International Energy Agency) and OPEC (Organization of Petroleum Exporting Countries) study has also confirmed of a drop-off of GDP activity of up to 3.4 percent in the first 5 years of a fuel subsidies removal, with attendant addition of 2.3 percent unemployment and price increases.
Then economic activity “should” pick up it economic conditions are ripe and there is financial transparency. The “should” is a leap of faith for many Indonesians trying to eke out a daily subsistence living (less than US$2 a day).
In other words, without follow on reforms, removing the subsidy will have a demonstrable change for many people via higher unemployment and inflation.
These are very big “ifs” for a country like Indonesia that has significant underemployment issues and overdependence on fossil fuel exports, not to mention a high perception on the World Bank corruption index.
But even deeper than this is the fact that under Article 33, the fuel subsidy is still their tangible
ownership claim. Even if it does benefit a majority of middle class and rich also, then what other claim can be fostered on the oil, gas, and coal, not to mention iron ore, and gold resources that lie in situ (in the ground)?
The unrest caused in anticipation of the fuel subsidy removal is understood. This has also played out in Nigeria, India, Bangladesh, when subsidies were under threat of removal.
The citizens are not convinced that taking away the fuel subsidy will benefit them at all under the design of a colonial system that has changed in letter, but not in real substance.
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just because we are darker or muslim, we should not own our own resources...????