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stupid subsidies and the poor make the Indonesia government confuse

IT HAS become something of a ritual in Indonesia: the panicky stockpiling of cheap petrol ahead of a mooted price rise. Fuel prices here are not dictated by the vagaries of the world price - they are dictated by the government, which subsidises them heavily to keep them affordable.

But the cost to the national budget of subsidies on both oil and coal is huge. About 15 per cent of the government's entire budget - or $US20 billion ($A18.5 billion) - is spent just to maintain low prices. It's more than the combined health and education budgets, says Australian National University economist Hal Hill, and when the world oil price increases, the cost to the national budget also jumps.

So, last week, Energy and Mineral Resources Minister Jero Wacik announced a plan to increase prices in April by up to 33 per cent. Yesterday, as a crowd protested outside, he met legislators of the House of Representatives, whom he must convince to vote for it.

In Jakarta, one of the most polluted and traffic-snarled cities in the world, drivers pay just A46¢ per litre for petrol. This policy would increase it to about A62¢. It's the third proposed price rise in six months. In December, at budget time, and again in January the government planned an increase but decided to exempt motorbikes, to protect poorer commuters.

However, strong public pressure forced it to pull back even from that policy. Politicians are wary of public anger on this issue. A big fuel price rise in 1998 was one of the triggers that saw the dictator Suharto overthrown. The latest iteration of the policy has seen the stockmarket plunge amid fears it will drive Indonesia's inflation rate above 5.5 per cent this year.

In a poor country, inflation means economic pressure for tens of millions as price rises inevitably flow through to the cost of rice. The Minister for State-owned Enterprises, Dahlan Iskan, conceded that point, saying: ''We haven't found [a solution] yet, but we will.'' But it's a diabolical problem. The subsidy primarily benefits rich car drivers and owners of airconditioners and keeping it high means Indonesia has less for the health, education and infrastructure that south-east Asia's largest economy is so short of. ''If Indonesia wants to improve its social indicators, it needs to get rid of fuel subsidies,'' said Professor Hill.

The Indonesian Consumers Protection Foundation agrees. Its head, Sudaryatmo, said subsidies would ''create a burden on the … budget, then very slow economic growth, before poverty eventually arrives''. He said the government should have ''a long-term policy to bring fuel subsidies to zero'', adding: ''It's always been an ad hoc policy. If it was long-term policy, the people could anticipate it.'' Residents, meanwhile, stock up on cheap fuel while they can.

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