Changing petrol price politics in Malaysia and Indonesia?

Last week I promised to write more on fuel price politics in this region. High oil prices are forcing governments that had been subsidising motor fuel to think again. The hole in their budgets is just too big. Leakage from smuggling has been growing too as price differences with neighbouring countries have grown.

Auto-dependent development fuelled by fuel subsidies in Malaysia

Malaysia - struggling to change the politics of fuel pricing
Last Tuesday Malaysia announced its largest ever single increase in petrol prices. It raised petrol prices by 19 per cent, diesel by 23 per cent and LPG by 21 per cent. This still leaves a considerable subsidy at today's oil prices. According to the announcements last week, if it were not subsidised petrol would be 28 per cent more expensive than the new price and diesel 25 per cent more.

Malaysia fixes its motor fuel prices with the result that unless world oil prices are low, Malaysian petrol is subsidised. Malaysia has been raising petrol prices, step by step over the last two years, while making some concessions in the face of squeals of protest - for example, by lowering or capping some other motoring costs, such as the tolls on expressways.

The protests this time have been louder, which I guess is to be expected given the size of the price rises. But I also notice more voices being raised in support of the change. The government has said that a large chunk of the money saved from petrol subsidies will be used to improve public transport. This seems like smart politics but does not seem to be enough. From what I see in the Malaysian press it has been met with some scepticism. {and I hope to write more on Malaysian public transport soon.}

It will be interesting to watch how this plays out. Will the experience encourage the government that the political cost has not been too great or will the political pain be enough to deter further reform to fuel pricing?

Indonesia's surprising success - but a long way still to go

Here Indonesia's example is worth noting. They have also been struggling to reduce budget-destroying fuel subsidies in the face of huge protests that have shaken Indonesian governments in the past (most dramatically in 1998). Yet the current government under President SB Yudhoyono has persisted with its phased elimination of fuel subsidies.

The latest rounds of price increases in 2005 were more significant than Malaysia's. In October 2005 Indonesia raised its fuel prices by 126%! This came after a rise of (on average) 29% in March 2005. Amazingly, these price hikes proceeded without TOO much trouble (relatively speaking).

The key to success? It seems to have been the explicit effort (however imperfect) to cushion the immediate blow to the poor by giving direct cash payments to poor households. In addition, there has been strong effort to raise awareness that fuel price subsidies are extremely regressive - that they are in fact not helping the poor but are benefiting the wealthy, big business and smugglers.

It seems the politics of fuel prices in Indonesia may be changing. There is still a very long way to go but something has changed. Protests have happened but have not destabilised the country.

My view on fuel prices?

I don't see any good reason to subsidise motor fuel. On average, the richer you are, the more benefit you get from such a subsidy, since the rich tend to own more vehicles, their vehicles tend to be larger, and they tend to drive them further. In fact, there are good arguments for taxing fuel rather steeply (as just one of a range of pricing measures to internalise the unpaid costs of motoring).

If you think fuel subsidies help the poor you are mistaken. Don't believe me? Then look here regarding the Malaysian subsidies, or here for arguments for eliminating Indonesia's subsidies.

HOWEVER, it is also true that any sudden change in prices, and its impact on other prices, will tend to hurt the poor in the short term. This pain is real and can be severe.

Political success in raising these prices further will depend on cushioning the blow. The help to the poor needs to be real and it should be well targeted to those who really need it.

As much as I like public transport, Malaysia's promise to improve public transport is not well targeted enough at helping those who need help most. Indonesia's cash payments look much better on this score. Maybe this is why Indonesia seems to be doing better than Malaysia at changing the political dynamic of fuel prices.