the impact of the changes in the domestic fuel price policy in indonesia on consumer welfare...

8/2/2019 The Impact of the Changes in the Domestic Fuel Price Policy in Indonesia on Consumer Welfare (Resume)

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The Impact of the Changes in the Domestic Fuel Price Policy in Indonesia

on Consumer Welfare

Academic Adviser: Professor CHEN Kuang-hui

Presented by: ROCKY Gunung Hasudungan

Student ID: 086i407i

Master Thesis Resume

Oil plays an important role in the world. People use it in many aspects of daily life,

from cars, trains, and planes; to industry; to the farms that supply our food at the

supermarket. Some countries need more stock of oil in the winter season, and some people

in developing countries use it for cooking and also lighting. Thus, a change in supply and

demand, reflected on the price, has great influence on peoples life.

The price of oil is not always determined by a market mechanism. A government can

intervene in that price. Some regions, such as Europe and Japan, impose high taxes on

gasoline; others, such as Saudi Arabia and Venezuela, highly subsidize it. Recently, 12% of

world population has enjoyed fuel subsidies that are given by 24 oil rich countries. Like in

many oil producer countries, the Indonesian government has implemented fuel subsidies

and set official prices started in 1967. At present, Indonesian fuel subsidies are applied to

five regulated oil products: gasoline, kerosene, automotive diesel oil, industrial fuel oil, and

heavy fuel oil.

In mid-2005, when the crude oil price in international market reached around US$ 60

per barrel (three times the end-2001 price), the Indonesian government decided to cut the

fuel subsidies by increasing official fuel prices about 114% overall in October 2005, since the

budget allocation for fuel subsidies almost 20% of total expenditures (in 2006, the portion of

budget for fuel subsidies reduced significantly to less than 10% of total expenditures).

However, those huge fuel price increases in October 2005 became a trigger for a

high year-on-year (YOY) inflation that reached 17.89% in that month (slightly twice YOY

inflation in the previous month that was 9.06%). Most households had to deal with both

higher fuel prices and more expensive of basic goods prices.


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In this study, we analyze the impact of fuel subsidy cut policies in Indonesia on

consumer welfare by income (expenditure) class using the concept of Compensating

Variation (CV). Consumption behavior in Indonesia is analyzed by estimating the Almost

Ideal Demand System (AIDS) model from household expenditure survey and CPI data for2000 to 2006 by categorizing five groups of commodities: cereals, other foods, housing,

clothing and other non-foods. The parameter estimates of the AIDS model were used to

calculate elasticities and a percentage change version of CV.

From our estimations (see Table 1), we found that the AIDS coefficients are mostly

significant at the 1% and 5% level showing that the expenditure shares for each commodity

are responsive to prices and income, except for 43 (=34) and 4 (clothing) are notsignificant. However, one of characteristic roots is positive (but very close to zero), showing

that our AIDS expenditure function is not negative semidefinite. In spite of that result, all

values of Marshallian and Hicksian own-elasticities are negative (see the Table 2).

From Table 2, we can see that income elasticities for food commodities are less than

unity indicating that cereal and other-foods are necessity goods. The estimated own-price

elasticity for clothing is very elastic while other non-foods is close to inelastic.

From Figure 1, we can see that the reduction of fuel subsidies can have adverse

effects more on the poor in Indonesia. The poorest group of households, on average, should

increase their expenditure by 4.60% (in order to keep their utility unchanged) and the

richest, on average, should increase their expenditure by 4.00%.

The World Bank argued that fuel subsidies are not only economically inefficient but

biased toward the rich because their fuel consumption is bigger than the poor. Hence,

although the fuel subsidies are economically inefficient and seem to go in the wrong

direction, those subsidies are still important for the poor and a drastic reduction would

torture the poor. According to our analysis, however, the poor suffer more because prices of

a lot of goods are affected by the fuel prices.


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Table 1: Parameter estimates for the AIDS model

Commodity i 1 2 3 4 5 R2

Cereals 0.12021 c -0.04268** 0.03199** 0.17939** 0.01253** -0.18124 c -0.13628** 0.2174(0.00783) (0.00520) (0.00970) (0.00322) - (0.00848)

Other Foods 0.45791 c 0.03199** -0.02874** -0.02127* -0.00781* 0.02583 c -0.04903** 0.0222(0.00520) (0.01023) (0.00968) (0.00203) - (0.01228)

Housing 0.22169 c 0.17939** -0.02127* -0.14948** 0.02378 -0.03242 c 0.13653** 0.1377(0.00970) (0.00968) (0.03645) (0.01520) - (0.01311)

Clothing 0.03977 c 0.01253** -0.00781** 0.02378 -0.08220** 0.05369 c 0.00173 0.0505(0.00322) (0.00203) (0.01520) (0.01084) - (0.00242)

Other Non-Foods 0.16042 c -0.18124 c 0.02583 c -0.03242 c 0.05369 c 0.13414 c 0.04704 c -

Note:

(Heteroskedasticity-Robust SE in parentheses)c

Calculated

*Significant at 5% level

**Significant at 1% level

Table 2: Total expenditure and own-price elasticities

Commodity eiii

Uncompensated Compensated

Cereals -0.134 -1.219 -1.235

Other-Foods 0.893 -1.014 -0.605

Housing 1.616 -1.811 -1.453

Clothing 1.043 -3.068 -3.027

Other Non-Foods 1.293 -0.211 -0.003

Figure 1: Compensating variation by household income (expenditure) deciles of period

September 2005 to March 2006

4.6

0%

4.4

6%

4.3

8%

4.3

3%

4.2

8%

4.2

3%

4.18%

4.1

3

%

4.0

8%

4.0

0%

3.90%

4.00%

4.10%

4.20%

4.30%

4.40%

4.50%

4.60%

4.70%

4.80%

1 2 3 4 5 6 7 8 9 10

Compensa

tingVariation

Household income deciles


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H A L A M A N P E N G E S A H A N

T e s i s i n d i a j u k a n o l e hN a m a R o c k y G u n u n g H a s u d u n g a nN P 0 7 0 6 1 7 8 2 6 4P r o g r a m S t u d y P a s c a s a r j a n a I l m u E k o n o m iJ u d u l T e s i s T H I M P A C T O F T H E C H A N G E S I T H D O M E S T I C

F U E L P R I C E P O L I C Y I I N D O N E S I A O C O N S U M E RW E L F A R E

T e l a h b e r h a s i l d i p e r t a h a n k a n d h a d a p a n D e w a n P e n g u j i d a d i t e r i m a s e b a g a i b a g i a np e r s y a r a t a n y a n g d i p e r l u k a n u n t u k m e m p e r o l e h g e l a r M a g i s t e r S a i n s E k o n o m i p a d aP r o g r a m S t u d i I l m u E k o n o m i F a k u l t a s E k o n o m i , U n i v e r s i t a s I n d o n e s i a .

D E W A N P E N G U J I

P e m b i m b i n g T e s i s P r o f . C h e n K u a n g - h u i

P e n g u j i T e s i s P r o f . H i r o s h i O h t a

P e n g u j i T e s i s A s s o c i a t e P r o f . K o j i K a w a b a t a

K e t u a P r o g r a m S t u d i P r o f . N a c h r o w i D j N a c h r o w i , P h . D

D i t e t a p k a n d

T a n g g a l

K o b e , J e p a n g

S e p t e m b e r , 2 0 0 9

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