Wednesday, October 22, 2008

Rudd handout revisited

Pursuant to the last post and the preceding four, I would like to draw attention to the increasing number of commentators agreeing with my position on the Rudd handout package in the cold grey light of dawn.  Shaun Carney wrote in The Age on 22 October 2008 that "the first home owner's grant is a poor piece of policy. It was awful when the Howard government introduced it and it's just as bad now. It distorts prices and quickly benefits vendors and builders ahead of purchasers. And it has little to do with making home buying more equitable. The millionaire's son gets it just as easily as the son of the contract cleaner from St Albans., The problem with these sorts of payments — and the grant is now $21, 000 — is that the longer they remain on the books, the harder its gets for any government to ditch them."

Please follow the following link if you wish to read more: 'Handouts are no substitute for innovation to generate wealth'.

Tuesday, October 21, 2008

A link

I would like to direct readers to the following article from the The Australian's economics editor on Rudd's economic stimulus package:

Thursday, October 16, 2008

Comment on the letter once more

The Australian's online comments editor eventually published the clarification of my letter. I reproduce it in full below. It is similar in substance to the previous post.

I should clarify my position for the benefit of my critics. My biggest criticism of the Rudd plan is the First Home Owners Grant (FHOG). It is a flawed policy that does not increase the accessibility of housing and largely goes to the middle class. My other issue with the FHOG, as with other cash handouts, is that once they are in place it is very difficult to take them away.

As to the cash handouts for pensioners and carers, I have no problem with these groups being given additional assistance. However, I am deeply uncomfortable with that being in the form of cash. Why not increase their fortnightly allowances significantly over the next year? This increase will quickly flow into the economy as they begin to spend on the basis of their anticipated income. However, I do concede that cash to pensioners and carers is a relatively effective way to provide a big boost to consumption in the lead up to Christmas/New Year which will boost consumer confidence.

Also, I would note that the largest investment component of the package was the $157 million for skills development. In the context of a $10 billion package, surely a larger component could have been directed towards such strategic investments?

As I say, my letter was largely targeted at the increased FHOG. I would also stress that I am uncomfortable about Australians paying tax that is then given out as cash lump sums to other Australians rather than being delivered through ongoing Government transfer payments and investments in hard and soft infrastructure.

Wednesday, October 15, 2008

Response to previous post on Rudd's handout plan

I received a number of negative comments on The Australian's online 'Letters Blog' in regards to the letter that constituted the previous blog post. Some of these were particularly unpleasant. It was even suggested that I should not bother coming home to Australia if I held such views. Such opinion, I thought, was a trifle extreme. However, in an effort to clarify my views on the Rudd plan and perhaps to placate the angry commentators I wrote a few paragraphs in response to my detractors and tried to have them published on the 'Letters Blog'. Unfortunately, these were not published. I have attempted to reproduce them here from memory. Although my detractors will never read them, not knowing address of this blog, I feel better that my ideas are fully explained.

My criticism of middle class welfare in the previous post/letter was primarily targeted at Rudd's increase of the First Home Owners Grant (FHOG). There is virtually no doubt that the FHOG increases the price of housing and the demand for credit. A large proportion of the taxes that fund the FHOG go directly into the pockets of property owners with little evidence that housing accessibility/affordability is improved. The increase in the FHOG will serve to maintain/increase house prices. It is not the government's role to artificially prop up prices with tax dollars in a manner that only benefits property owners. Moreover, having increased the level of the FHOG, it is much harder to reduce it to its former level or remove it completely. Cash handouts breed a culture of expectation of government assistance where no such expectation should exist.

I agree that pensioners and carers in Australia get a raw deal. I would find it nigh on impossible to live of the Australian pension at its current level. My criticism of the Rudd policy is that pension/carer's allowance reform was needed rather than a cash handout. Why not increase the fortnightly pension/carer's payments permanently rather than giving a cash handout with no guarantee that the actual level of the pension/carer's payment will increase in the future? Providing a permanent boost to the level of these welfare payments would boost consumption from these groups as a result of their anticipated higher incomes in the future. Such an increase in these payments should have occurred at the time of the last budget.

However, I concede that if you want to give provide a big kick to pre-Christmas consumption in an economic downturn, five billion dollars to carers and pensioners will be highly effective. This is because these groups already spend a high proportion of their income on consumer products and, in all likelihood, the cash that they receive will be used directly for consumption rather than being put to other uses or savings. This should provide an important boost to consumer confidence. I am more comfortable with this part of the Rudd package than the FHOG increase. Having said this, I remain deeply uncomfortable about taxes being collected only to be given away in cash rather than being spent on infrastructure, government services or ongoing welfare payments.

Finally, I was disappointed by by the fact that, in the context of a $10 billion package, the largest component not being disbursed in cash was $157 million for skills development. Surely, in a package as large as this, the Government could have done a little better on human capital and infrastructure development. Some large and much needed infrastructure projects coupled with spending on education and skills in the billions would have been good additions to the overall package.

I hope this explains my views more clearly. I should also note that economic policy at a time of economic downturn is a highly contestable area. I understand and welcome differences of opinion on the subject.

Cash handouts are rarely the best way to boost GDP

The following letter was published in The Australian on 15 October 2008. I reproduce it here for your enjoyment.

I find it troubling that successive Australian governments are happy to squander budget surpluses on middle-class welfare. In the midst of the global financial crisis, the Rudd Government is extremely fortunate to have a forecast $21 billion surplus that can be used, if it is needed, to mitigate the impact of the downturn. Rather than using this money for strategic, well-targeted pump-priming investments, the Government has decided the best policy is to maintain the previous government’s flawed approach of providing cash handouts to particular sections of the community.

Take Rudd’s decision to triple the First Home Owner’s Grant from $7000 to $21,000 for newly constructed homes and to double it to $14,000 for all other properties. There is widespread agreement among the economically literate that the First Home Owner’s Grant merely serves to increase the price of property rather than make property ownership more accessible. If a large proportion of property purchasers are all given a sum of money by the government, it follows that demand/prices will increase. Not only does it increase prices, but it stimulates demand for credit in a global credit market that is already constrained. Is this well targeted policy in the midst of the crisis?

Although injecting any money into an economy will boost GDP, it’s better to inject money in such a way that boosts GDP by the maximum amount possible. Cash handouts are rarely the best way to achieve this. I had hoped that the financial crisis would spur Kevin Rudd to accelerate the economic reform agenda and make necessary investments in Australia’s overstretched infrastructure. I have been disappointed by our Prime Minister once more.

Friday, September 19, 2008

Sarah Palin continued

To provide some vindication for my previous position on the appropriateness of the choice of Sarah Palin, I would like to highlight the results of the latest New York Times/CBS News Poll. According to a report in the Melbourne Age ('Palin effect losing its momentum', 19/09/08), "the poll suggested that Mrs Palin's selection has, to date, helped Senator McCain only among Republican base voters; there was no evidence of significantly increased support for him among female voters in general. Before the conventions, Senator McCain led Senator Obama among white women, 44% to 37%. White women are now evenly divided between senators McCain and Obama."

These figures would suggest that my previous predictions on Palin being unable to mobilise the centre are being realised.

Tuesday, September 16, 2008

Moving forward

Following the election of an avowed republican (Malcolm Turnbull) to the leadership of the Liberal Party of Australia, it is hoped that Australia can move quickly to cut her remaining ties with the British crown.

It is an anachronism that a modern prosperous nation in the Asia-Pacific region has a British head of state who has the power to act against the Australian "national interest". I would highlight frequent statements by the heir to the Australian/British crown in support of the European Common Agricultural Policy as direct evidence of Australia's/Britain's royal family acting against Australian interests. It is time for this to end.

As the leaders of Australia's largest political parties are both republicans, Australia should now move expeditiously through the necessary series of consultations, plebiscites and referendums that will be required to finally establish Australia's complete independence.

Brendan Nelson

An edited version of this letter appeared in The Australian on 17 September 2008. I reproduce the full version here for your reading pleasure.

I am not in the habit of praising members of the Liberal Party of Australia. However, I shall make an exception today: I would like to express admiration for the way that Brendan Nelson managed the leadership of the Liberal Party for the short time that he held the position.

Dr Nelson was handed the poisoned chalice of the leadership of a defeated and demoralised party that was suffering a hangover from the malign influence of John Howard. His political opponent was enjoying an opulent electoral honeymoon. Nelson was elected to the leadership as an interim option who would be disposed of by his own party at some point in the near future. Right from the very start, challengers to his position were licking their lips hungrily as they waited impatiently to pick at his political carcass and claim the dubious spoils of Liberal leadership.

In this challenging environment, Nelson managed to forge a small degree of party unity and was able to score a few relatively effective political points on some of the government's sillier schemes, such as Fuel Watch. Most importantly, however, Nelson seemed to maintain his good humour and civility throughout his tenure.

At the end of the day Nelson failed to damage the credibility of the government in the eyes of a star struck electorate. However, I ask myself, "Would anyone else have done better given the circumstances?" I conclude that the answer to this question is "no" and it would have been highly unlikely that any other leader would have maintained such decorum as Dr Nelson in the process. It is for these reasons that I give polite applause to Dr Nelson as his term as Liberal leader comes to an end.

Wednesday, September 10, 2008

Sarah Palin

Much has been made of the perception among Republicans that Sarah Palin, the prospective Vice President, is being targeted by the liberal left media because she is a woman. I would argue, to the contrary, that Sarah Palin is targeted by the liberal left media because she is a retrogressive conservative who thinks the role of the state should extend to the bedroom. I think that the vituperation from the liberal left would have been equally intense had McCain chosen a similarly retrogressive man.

It is a great shame that John McCain was talked out of selecting a more moderate candidate such as Joe Lieberman. From a strategic stand point, such a choice would seem to be more appropriate given Lieberman's ability to attract disillusioned Hillary Clinton voters. It should be remembered that the Republican party, in the immediate post-Bush era, will have more of a problem mobilising the centre rather than the right. As it is, I am sure that the Hillary supporters who may have considered voting for McCain are now quickly bracing themselves to support Barack Obama.

As a soft supporter of an Obama presidency, I am comfortable with the choice of Palin for the ticket. Although I would like to have been able to say that there were four quality candidates on the combined Democratic Republican tickets, I can now only say that there are three. I am hopeful that this small disappointment will only enhance the chances for Obama's success come November.

Tuesday, August 26, 2008

Israel's Gaza incursion won't save its soldier

The following letter appeared in The Age on 30 June 2006. Again, this follows the new commitment to reproducing previously published works.

Israel's military incursion into Gaza in response to the kidnapping of Corporal Gilad Shalit is an ill judged action without hope of achieving its objectives. Israeli military sources claim the sole objective of the mission is the safe return of the captured soldier. To achieve this they have deployed significant armoured units in Gaza and conducted air strikes on Palestinian infrastructure. While such tactics indicate the strength of Israeli resolve, it is highly unlikely that they will achieve their objective. In the event that they discover the location of the missing man, he will almost certainly die alongside his Palestinian captors. A diplomatic approach with international involvement would be a preferable alternative to the current military action, with far greater prospects for success. Moreover, such an approach would avoid the terror and hardship that is a product of Israeli incursions into the occupied territories.

Rudd backs flawed policy with repudiation of McClelland

I have decided to publish some of my writings that have previously been published in other media. The following letter appeared in The Australian on 10 October 2007.

I find it deeply distressing that Kevin Rudd so quickly criticised the comments of his foreign affairs spokesman on the issue of capital punishment.

Robert McClelland was right to stress the importance of Australian opposition to capital punishment in all instances, including when it is applied to terrorists ("Save Bali bombers: Labor", 9/10). The death penalty is a barbarous act that cannot be condoned by a civilised society in the 21st century.

It’s hypocritical to actively seek clemency for all Australians facing capital punishment while supporting the death penalty for certain foreigners. The Howard Government has adopted this approach and it has hindered efforts to save the lives of Australians facing the death penalty overseas. Foreign governments correctly highlight the inconsistency in our position. Rudd’s repudiation of McClelland’s comments represents bipartisan support for this flawed policy.

A bipartisan retreat from the previously held policy of unequivocally opposing the death penalty is damaging to Australia’s image as a protector of human rights in the international arena. I’m sure that Dietrich Bonhoeffer, one of Rudd’s personal heroes, would share this view if he were alive today.

Lack of awareness is guiding policy

The following article was published in The Jakarta Post on 28 August 2008. Unfortunately, in their wisdom, the editorial staff changed my original headline to one that was grammatically incorrect. I have reproduced the original article for your reading pleasure.

Last week, a senior official in the Ministry of Finance made comments to the media on the government’s tobacco excise policy (The Jakarta Post, 20 August 2008). His comments highlighted the lack of awareness that persists in Indonesia regarding tobacco, even among the educated elite.

The official explained that the government might refrain from increasing tobacco excise in the next year. He was concerned that an increase in cigarette excise “would hurt the cigarette industry and risk the jobs of its millions of workers.”

The official also said that “cigarettes which are harmful to human health are perhaps those that are illegal or those that have high levels of nicotine. Branded cigarettes have less nicotine.” The implication of this statement is that cigarettes with low levels of nicotine or those that are legally purchased are not harmful to human health.

Within two days of these comments being made, the Demography Institute at the University of Indonesia released a report entitled Tobacco Economics in Indonesia. This report comprehensively rebutted the government’s stance on tobacco excise policy.

Contrary to the Ministry of Finance’s assertion, there are not millions of Indonesians at risk of losing their jobs if tobacco excise was increased. The report found that tobacco manufacturing ranks number 48 out of 66 sectors in terms of its contribution to total employment in Indonesia. Less than 1 per cent of the labour force is employed in tobacco manufacturing.

Modelling undertaken as part of the report suggested that an increase in tobacco excise would negatively impact on employment in this relatively minor sector. However, this impact would not be such that millions of jobs are jeopardised. In fact, as consumption expenditure is diverted from tobacco as a result of the excise increase, other economic sectors are stimulated. The report concluded that a doubling of tobacco excise would likely increase overall employment in Indonesia by 281,035 jobs as a result of growth in industry sectors other than tobacco.

In addition to this, the report found that less than two percent of Indonesian farmers are engaged in tobacco cultivation. Of these farmers, the majority have diversified holdings and cultivate crops in addition to tobacco. This provides them with the requisite equipment and expertise to substitute their tobacco crops with other produce. With rapidly rising global prices for agricultural commodities, the burden of such substitution for an individual farmer is considerably reduced. The overall burden of a tobacco excise increase on the agricultural sector is, therefore, small.

It needs to be remembered, of course, that an increase in tobacco excise will not wipe out a whole industry. The higher price will lower consumption of tobacco. This will have impacts on the tobacco manufacturing and cultivation sector but will not destroy them or lead to widespread unemployment. Cigarettes will still be produced and consumed in Indonesia regardless of the excise policy.

The report found that the overall economic benefits of a tobacco excise increase, when all factors were considered, were positive. Moreover, the report concluded that an increase in excise would increase government revenue and decrease tobacco consumption. From the perspective of the Ministry of Finance, this would seem to be ideal. A judicious increase in tobacco excise to control consumption in the near future would be an excellent policy reform.

Aside from the economics, the official’s comment on the impacts of branded cigarettes on human health is perhaps a greater cause for concern. It indicated that, even within the higher echelons of Indonesian government, there are still many people who are unaware of the realities of tobacco consumption. Despite a growing global awareness of the dangers of smoking, many Indonesians remain ignorant of the fact that smoking has huge negative health consequences.

All forms of smoking tobacco negatively impact on physical fitness and increase vulnerability to an array of health risks. The evidence suggests that the health impacts of smoking low nicotine (the so-called “mild”) cigarettes, high nicotine cigarettes, branded cigarettes, illegal cigarettes or of smoking tobacco in other ways are the same. Any of these methods of consuming tobacco greatly increase the incidence of cancer, heart disease, impotence, and health problems with unborn children. Given the very high number of smokers in Indonesia, these health problems are imposing significant costs on the government, economy and society as a whole.

Widespread ignorance of the dangers of tobacco is a key hindrance to meaningful policy reform. If senior policy makers are unaware or apathetic to the risks of tobacco, it would seem likely that policy related to smoking is being formulated in the absence of full information. Moreover, there will be limited impetus to increase awareness of these risks among ordinary Indonesians.

This leads to an intolerable situation in which saturation advertising of tobacco products, nicotine addiction and social pressure are often the only factors guiding tobacco consumption choices. Full information on the risks does not feature in the individual’s consumption equation. This is one hurdle, among many others, that will have to be overcome if Indonesia is to curb its addiction to tobacco.

The writer is an advocacy consultant to the Indonesian Consumers’ Organisation (YLKI).

Monday, July 14, 2008

The Government should increase the tax on tobacco

The following article appeared on the opinion pages of The Jakarta Post on 02 July 2008. I reproduce the original for your reading pleasure.

Indonesia is addicted to smoking. Cigarette advertisements dot the skyline and clog the airwaves. If you go to a concert or a sporting event, it is likely that the cost of your ticket will be subsidised by a tobacco company. Over 63 per cent of Indonesian men over the age of 15 are smokers. Almost 5 per cent of the world’s smokers come from Indonesia even though Indonesia’s population makes up only 3.5 per cent of the global total. In 2005, it was estimated that Indonesians consumed nearly 200 billion cigarettes. In short, the tobacco industry is pervasive and tobacco consumption has reached epidemic proportions.

Despite clear evidence that high levels of smoking are a burden on a society’s health and well being, the Indonesian Government has failed to take any meaningful action to address the smoking epidemic and its associated problems. Indonesia is the only country in East Asia not to have ratified the World Health Organisation’s Framework Convention on Tobacco Control. Tobacco taxes in Indonesia are the lowest in South East Asia while there are few limits on the sale, consumption or advertising of tobacco products. Other countries in the region, having realised the malign influence of tobacco, are actively discouraging its consumption. Indonesia, the tobacco control “rogue state”, is being left behind.

The key reason for Indonesian government non-interventionism is because policy thinking in this country is captive to the idea that the tobacco industry is of greater benefit to the economy than tobacco control measures. The Government, it seems, is of the view that the increasing restrictions on the tobacco industry would harm the economy by reducing the valuable flow of taxation revenue from tobacco consumption.

The Government’s position is in stark contrast to mainstream and credible economic opinion on the issue of tobacco control. Most serious economic analyses of tobacco conclude that well targeted tobacco control measures are, in fact, good for an economy and government revenue.

A good way to look at the issue of smoking in an economic manner is to consider whether all of the costs of tobacco consumption are incorporated in the price paid by the smoker for tobacco related products.

When a smoker consumes a packet of cigarettes, for example, he damages the health of the people around him as they inhale his second hand smoke. The same smoker also increases the chance of damaging his own health and suffering an untimely death. Consequently, his contribution to society and the economy is reduced. When a poor smoker spends a disproportionate amount of his income on cigarettes he reduces his family’s ability to pay for education and food. Who bears the burden of all these additional costs? Although the smoker bears some of them as a result of his decision to smoke, these examples highlight the fact that there are significant costs imposed on others without their consent as a result of his decision.

Estimates from the World Health Organisation and others suggest that these negative impacts of tobacco consumption far outweigh the positive benefits of the tobacco industry. There is a significant cost to society resulting from increased healthcare and economic costs resulting from morbidity and mortality as well as the forgone opportunities resulting from consumption expenditure on tobacco.

The low price that Indonesians currently pay for cigarettes fails to capture the cost of all of these negative social impacts that are caused by the consumption of tobacco even with 22 per cent of the price flowing to government coffers. In economic terms, such a situation is called a “negative externality”: the “external” or social costs of consumption are not accounted for in the price of a good.

If there are negative externalities resulting from consumption or production of a good, it is now widely accepted that government intervention in the market may be an appropriate response. Happily, in the case of tobacco, there is an extremely powerful public policy intervention avalaible that makes economic sense, should be effective at reducing consumption and can be used to offset the social costs of that consumption. The intervention is simply to raise tobacco taxes.

Estimates, again from the World Health Organisation and others, suggest that if tobacco taxes are raised by ten per cent then consumption of tobacco falls by around eight per cent. This means that revenue from tobacco taxation is actually increased even though consumption falls. The ill effects from smoking are reduced from this reduction in consumption and the government has additional money in the bank to combat the negative social impacts resulting from the activities of the remaining smokers.

To evaluate whether tax increase is an appropriate policy two further issues should be considered. The first of these is whether the tax increase is “regressive” or, in other words, has a greater impact on the poor than on the rest of society. There is no doubt that the poor are less able to absorb the costs of tobacco tax increases. However, because of this, it is the poor that are estimated to reduce their consumption more than the middle class in response to a tax increase. In fact, many estimates suggest that the poor, unlike the middle class, will reduce their consumption by a larger factor than the tax increase. If this is the case, a lower proportion of their income is spent on tobacco than before the tax was imposed. Therefore, the effect of the tax increase is likely to be “progressive”. The wealthier strata of society will bear a greater burden of the tax increase.

The tax increase could, therefore, offset some of the social impacts of tobacco used in poor communities and frees consumption expenditure in those communities for more positive purposes. Meanwhile, the government is collecting additional revenue that can be used to deliver social welfare programmes to these same communities.

The government may be concerned about the negative economic consequences of a contracting tobacco industry. Again, economic analysis suggests that the overall impact of a tax increase on industry would be far outweighed by the benefits of reduced consumption. Studies suggest that, although some tobacco farmers would be effected by increased taxes, it would be no more pronounced than if a price/demand fluctuation occurred for any other agricultural commodity. Moreover, with rising food prices, other agricultural products become more attractive alternative crops for farmers currently farming tobacco.

On the manufacturing side, although taxes would likely see a fall in cigarette production, this is unlikely to lead to significant job losses. Meanwhile, the long term economic benfits of more productive healthy workers would likely increase opportunities, investment and growth. This would help offset the costs of any tobacco manufacturing downturn.

The message is simple. Increasing tobacco taxes should increase revenue, reduce tobacco consumption, diminish negative social impacts of tobacco consumption and improve overall economic outcomes. It would also go some way to reducing Indonesia’s status as the international pariah on tobacco control with some of the lowest tobacco taxes in the world. It would be an even more effective policy approach if it were implemented alongside other anti-smoking policies such as advertising restrictions, smoke free areas and education campaigns.

The writer is an advocacy consultant to the Indonesian Consumers’ Organisation (YLKI).

Mitigating the impact of the fuel prices increase

A heavily and, in parts, incorrectly edited version of the following article appeared on the opinion pages of The Jakarta Post on 27 May 2008. It was later cited at on 28 May 2008. I reproduce an unedited version for your reading pleasure.

On Friday, the Indonesian Government raised the price of petrol (BBM) by 28.7 per cent. International prices for oil have risen sharply over the last few years and maintaining a constant low price for petrol is a drain on the nation’s coffers. The economic and social consequences of the decision are significant. Obviously, the price of transportation will increase. Subsequently, the price of goods and services that rely on transport will also increase. This will include many of the essential goods and services that Indonesia’s poor struggle to afford even at today’s prices. The impact, therefore, will be particularly severe among the socially disadvantaged in Indonesia.

Despite this negative impact, the decision to increase fuel prices is appropriate, equitable and inevitable. The reality is that it is the wealthier strata of Indonesia’s society that uses more fuel and fuel dependent goods than Indonesia’s poor. Consequently, the subsidy, as it is currently structured, is of greater advantage to the rich than the poor. It seems ridiculous that a country with so many people that are socially disadvantaged is diverting money that could be used for development, health, education and the delivery of core government services towards a subsidy that benefits the wealthy. Undoubtedly, a better use for the money would be to enact policies that aim to improve the lot of Indonesia’s poor.

A further issue with the fuel subsidy is that its level is dependent on world oil prices. Each year, the Government commits an uncertain (but always large) amount of its budget to the subsidy. The resources required to maintain the subsidy fluctuate each year as a result of factors totally beyond the Government’s control. There are very few governments in the world that would be willing to have a large part of their fiscal policy determined by world oil prices. The pursuit of such a policy is economically negligent and the decision to remove the subsidy on this basis should also be applauded. Other policies, that provide greater certainty and control in the use of the Government’s money, can be better targeted at achieving strategically advantageous policy outcomes.

In order to counteract the impacts of the petrol price rise the Government has proposed a direct cash transfer (BLT) to Indonesia’s poor. While this policy should be welcomed, it cannot be seen as anything more than a short-term and, in the fullness of time, meaningless gesture. The BLT will provide immediate assistance to poor people affected by the price rise. However, in the face of rising prices for every day goods and services, the reality is that this assistance will soon be forgotten.

Therefore, it becomes extremely important for the Government to develop strategic policies for the use of its financial windfall resulting from the subsidy reduction. Amidst the hype surrounding the decision to increase prices, the long-term policy options have been infrequently discussed in policy circles and the media. Positive impacts from the decision to increase petrol prices are totally dependent on the policies that can now be pursued by the Government as a result of its substantially improved financial position.

There will be a variety of opinions as to the most appropriate policy application for the Government’s additional resources. Of course any government decision regarding resource allocation is contestable. However, it seems that there are a number of options for the use of the financial windfall that are relatively uncontroversial and will accrue substantial long-term benefits.

Perhaps the most important strategic use of additional money is a substantial investment in public education. In the long-term, all Indonesians will realise benefits accruing from investments in education. Time and time again such expenditure has been shown to have undeniably positive impacts on living standards, particularly among the socially disadvantaged.

As part of an expanded education programme, the Government should consider investments in the tertiary education sector. Indonesia’s universities suffer from underinvestment and inefficiency. Yogyakarta alone has countless universities and higher education institutions. Undoubtedly some resources could be used to rationalise these innumerable organisations to ensure that universities offer greater quality rather than quantity. A significant emphasis should be placed on the improvement of teacher and medical training. Investments in these areas will assist the Government in the delivery of better quality social programmes in the future.

The Government also should take steps to improve social assistance directly targeted at Indonesia’s poor. Rather than direct cash transfers, this assistance should be focussed on improving access to essential services through investments in hard and soft infrastructure. This assistance should include housing assistance where necessary as well as improved access to healthcare and clean water. Rural development programmes that improve access to efficient and sustainable farming technologies should also be expanded. Such programmes have the effect of reducing the already significant pressure on food prices. The windfall from the subsidy, through investment in such strategic programmes, should be sufficient to provide a limited social safety net for Indonesia’s poorest.

There are several other issues that should be considered by the Government as it prepares to reduce the fuel subsidy. One important consideration is the best structure, from an economic perspective, for the subsidy reductions. Should the subsidy reduction occur in the form of a large reduction, as occurred in 2005, or should the government consider a staged subsidy reduction over an extended period of time? Given that inflation is already high and is under increasing pressure as a result of higher food prices among other things, it may be better to articulate a plan for a staged reduction in the fuel subsidy. One-off subsidy reductions, such as the 28.7 per cent increase, have a relatively large inflationary impact when compared with smaller staged reductions in the subsidies that give individuals and businesses more time to adjust to changing conditions. The staged approach, while having the same policy effect, may mitigate the impact on Indonesia’s poor.

A final issue that requires consideration is whether the Government has the best institutional arrangements in place to maximise Indonesia’s domestic oil production and, thus, contribute to lower global oil prices. Indonesia has significant oil reserves that are not being exploited because the Government policies provide minimal incentive for exploration. The Government should consider reforming tax and bureaucratic structures that currently deter investment. As part of such reforms, the Government should consider reforming the inefficient behemoth that is Pertamina. Pertamina should have to adhere to best practice corporate governance and compete with other oil companies in order to drive the most efficient exploitation and distribution of Indonesia’s oil resource. The Pertamina stranglehold of Indonesia’s oil industry promotes inefficiency and poor service standards. The monopoly should be broken in favour of well-regulated competition that maximises business efficiency, consumer welfare and government revenue.

In conclusion, it is important for the Government to think strategically about the policy issues surround fuel subsidy. It should not squander an opportunity for meaningful reform with a focus only on direct cash transfers and other short-term measures.

The writer is an advocacy consultant to the Indonesian Consumers' Organisation (YLKI).

Friday, April 11, 2008

The Audacity of Hope

I have finished reading Barack Obama’s most recent book The Audacity of Hope. In his book, Obama set outs his vision for a more just and tolerant US and how that might be achieved. The book is extraordinarily well written and is testament to Obama’s rhetorical ability.

On the whole, I agree with Obama’s views and overall vision for his country. For example, I think his call for a more strategic and multilateral approach to foreign policy in the twenty first century is welcome. He also articulates clear and practical ideas on improving US tertiary education and how the ailing, costly and inequitable US health system might be reformed. Obama, despite his relative inexperience in Federal politics, has clearly thought about these issues in some depth.

Obama also articulates a positive role for Christianity in politics, society and Nation. Importantly, he sees the Church as having a significant role to play in reducing disadvantage and social exclusion rather than in reducing individual choice and enforcing so called “moral values”. These views are similar in substance to those expressed by Kevin Rudd in his highly publicised essay in Australia’s The Monthly magazine. They are welcome given the increased penetration in US public life of conservative Christianity under the Bush administration.

There are, however, a few ideas on which I have to take issue with Obama. In his book, Obama emphasises the importance of reducing the US’s dependence on foreign oil and the requirement for a more muscular response to climate change. His most significant policy idea to address both of these issues is to promote the use of ethanol based E85 fuel for transportation. E85 is manufactured from ethanol derived from maize and when combusted has lower greenhouse gas emissions than petrol. There are significant environmental and economic arguments against an ethanol based approach to reducing oil dependence and tackling the problems associated with climate change. The environmental costs of the agricultural activity required to produce E85 are substantial and efforts to promote the fuel in the US are often seen as a further way to subsidise the US’s relatively inefficient agricultural sector. Additionally, the production of E85 is often at the expense of food production. Consequently, food prices increase due to greater scarcity and food self-sufficiency decreases. This has the perverse impact of increasing dependence on food, rather than oil, imports.  Mr Obama, I think, will have to look at different and more sustainable approaches to the reduction of greenhouse gas emissions from the transportation sector.  

I have further problems with Obama’s approach to trade policy. Despite Obama’s view that, on the whole, he believes in market free markets, he also often laments the impact of a globalised market place on US manufacturing. His views on this issue suggest that he may harbour some protectionist tendencies for short-term policy gain rather than a willingness to implement the politically more difficult course of a strategic structural adjustment programme. At any rate, he fails in his book to articulate the form that any structural adjustment programme should take. Some of his policy positions in the presidential primary race have reinforced my fears of his latent protectionist tendencies.

Some other problems that I have with Obama’s views relate to Indonesia. Obama talks in some detail about Indonesia as a precursor to his chapter on foreign policy. He has some authority to talk on issues associated with Indonesia having spent several of his formative years in the country. Obama paints a picture of Wahhabist institutions dotting the countryside and “‘vice squads’ attacking churches, nightclubs, casinos and brothels”. I would argue that, despite a significant increase in Islamist tendencies since the fall of Suharto’s New Order regime, this picture is inaccurate. The majority of Indonesians Muslims are tolerant and committed to the pluralism embodied in the Country’s foundation ideology, Pancasila. Moreover, Islam remains a fairly weak political force in the country as evidenced by the performance of Islamic political parties in the 2004 general elections.

I also take issue with Obama’s belief that capital punishment can be justified. Despite the fact that Obama strongly criticises the death penalty in the US as it is currently applied, he goes on to say that “there are some crimes…so heinous, so beyond the pale, that the community is justified in expressing the full measure of its outrage by meeting out the ultimate punishment.” While Mr Obama is entitled to this point of view, I would argue that there are absolutely no crimes that can justify the cost on society of taking the perpetrators life in cold blood. As I wrote in a letter published in The Australian on 10 October 2007 “the death penalty is a barbarous act that cannot be condoned by a civilised society in the 21st century.” The chances of a miscarriage of justice, the brutality of the act itself and the impacts on those who carry out the punishment are all strong arguments against the US’s continued use of the death penalty.

Having read his book, I have further solidified my view that Obama remains the best of the three presidential candidates on offer. The views expressed in his book are well thought out, frankly presented and reflect a positive vision for the US.

It is interesting to note that Mr Obama’s priest, the Reverend Jeremiah Wright, provided the inspiration for the book’s title. Given the recent controversy surrounding Wright’s views on race and Obama’s forced public repudiation of Wright’s more extreme positions, I wonder whether Mr Obama regrets his choice of title.