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Poverty

How are poor people around the world being affected by rising fuel prices? In the context of globalisation, poverty researchers are increasingly required to interpret the implications of international economic changes on local population groups. The Poverty and Economic Policy Network has recently brought out one such study on Indonesia, which examines trends in macroeconomic indicators, agricultural productivity and income distribution during 2000-2008 in the context of rising fuel prices. 

Indonesia’s budget deficit – caused primarily by the purchase of fuel supplies on the international market – had become unsustainable by 2000. Global exchange rate fluctuations resulting in the appreciation of the US dollar against the Indonesian Rupee further increased the value of debt repayments. In response, the government introduced a series of fiscal measures which included a reduction in fuel subsidies. As a result, fuel prices were raised by 12% in 2000, by 30% in 2001 and by 29% in 2005.

Not surprisingly, Indonesia’s budget deficit has fallen since 2000. However, the resulting rise in the price of fuel and fuel-based products and services has also had less positive effects. The study develops a computable general equilibrium model to find:

• a remarkable decrease in the Indonesian real GDP in 2005 and 2006 with only marginal improvements ever since 
• a significant reduction in domestic consumption as a result of decreased purchasing power
• increases in the poverty headcount among low income groups in urban and rural areas and particularly among rural households owning less than 0.5 hectares of land
• more unexpectedly, no corresponding increase in inequality within or between households among the different income groups
  

In terms of policy recommendations, the paper suggests that the government begin to provide the worst-affected groups with income support in the form of health, education and food subsidies. Since the rural poor tend to have access to a wider range of fuel alternatives for lighting and cooking purposes, it also proposes that income support be made available to urban low-income groups even though the poverty effect has been comparatively less severe in urban areas. A further way of improving poor people’s quality of life in the medium-run is by improving their access to low-cost transportation and infrastructure services and markets. In the long run, however, Indonesia has no option but to begin exploring for locally-available energy sources. Amongst others, the alternatives currently appear to include solar, wind and agriculture-based energy produced from cassava and palm oil.

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