9 - Post-crisis Social Protection Programs in Indonesia

Summary

INTRODUCTION

In response to the economic crisis of 1997–1998, the Indonesian Government introduced a series of poverty alleviation programs that together constituted the so-called Social Safety Net (JPS). But although the negative effects of the crisis on social welfare began to decline as the economy slowly recovered and macroeconomic stability was restored, the poor and vulnerable still very much needed assistance in the post-crisis period. Most of the components of the JPS programs were retained in the social protection programs that were adopted in and after 2000, although some underwent modifications in design. The JPS program itself was gradually phased out and by 2003 had ceased to exist in its original form.

POST-CRISIS SOCIAL PROTECTION INITIATIVES

Fuel Subsidy Reductions

In the year 2000 policy-makers launched the first phase in a lengthy process of reductions in the subsidy for fuel (gasoline, diesel fuel, and kerosene, known collectively as Bahan Bakar Minyak, BBM). The BBM subsidy, which had been increased in May 1998, had drastically reduced the cost of fuel products relative to international prices. The subsidy was highly regressive in absolute terms, however, as the majority of cumulative benefits accrued to non-poor households. It was only mildly progressive in relative terms in that BBM, particularly kerosene, comprised a slightly larger proportion of total expenditures among poorer households. The first subsidy reduction occurred near the end of 2000 and over the following years the price of BBM was gradually increased, but no government was willing to make adjustments on a scale that would have significantly altered this extremely regressive form of public spending. It was largely for reasons of political expediency that subsequent governments did not substantially reduce the subsidy on kerosene until several years later in the context of more dramatic overall price adjustments.

In October 2000 the Indonesian Government cut the fuel subsidy by approximately 12 per cent. It then reallocated Rp 800 billion in savings to a package of short-term compensatory programs known as PKPS-BBM (Program Kompensasi Pengurangan Subsidi Bahan Bakar Minyak or the Fuel Subsidy Reduction Compensation Program).