A Growing Pain: An Experimental Approach to Discover the Most Acceptable Strategy for Lifting Fuel Subsidy Scheme in Indonesia

Abstract

Fuel subsidy has been the biggest quandaries in Indonesian economy, as it has been creating a huge opportunity costs to the economy. The subsidy is implemented to a consumer good (i.e. fuels) as oppose to targeted recipients, creating distortion in the efficient resource allocation. It was estimated about 70% of the subsidy were received by 40% of top income households (World Bank, 2007). Although the budget plan for the subsidy in 2011 was Rp129.7 trillion or 10% of the GoI annual budget, the actual subsidy was Rp160.7 trillion (13.3% of the GoI annual budget).Indeed, no individual prefers to lose the subsidy that has been received for many years, however the Government of Indonesia (GoI) cannot maintain the subsidy policy on fuel price any longer without creating extra budgetary burden. This study use experimental approach to seek the most acceptable exit strategy of eliminating fuel subsidy scheme in Indonesia based on households' perspective. 335 subjects participated in the experiment, ranging from those who do not own motor vehicle, those who have motor cycle(s) and those who have car(s). During the experiment, subjects were given several pair-wise choices and chose the most acceptable policy from each pair-wise policy choices. The results show that the combination of gradual elimination and earmarked reallocation scheme were the most desirable. Subject with very low and low-income background tend to be more receptive for sudden elimination of the subsidy in comparison to their counterpart from medium and high-income backgrounds.

Empirical analysis of fuel price and subsidy reform in Nigeria

“…This is because the incentives resulting from the changes will attract a more efficient allocation of resources. Pradiptyo and Sahadewo (2012) used experimental method to ascertain the best exit strategy of fuel subsidy reform in Indonesia. The results indicate that the most appropriate strategy for eliminating fuel subsidy is the combination of gradual subsidy removal and earmarked reallocation scheme.…”

On the Complexity of Eliminating Fuel Subsidy in Indonesia: A Behavioral Approach

“…Each individual, however, is going to have different attitude toward the elimination of fuel subsidy. Similarly, individuals may have 3 See Pradiptyo and Sahadewo (2012) for the discussion regarding distortionary effect of fuel subsidy. different attitude when they face negative prospects.…”

“…Owing to this difficulty, the preference theory based on the concept of strength preference is not preferable (Fishburn, 1988;Farquhar and Keller, 1988). 9 Results of the survey summarized using AHP are shown in Pradiptyo and Sahadewo (2012).…”