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

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

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Published by: Rocky Gunung Hasudungan on Mar 19, 2012
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The Impact of the Changes in the Domestic Fuel Price Policy in Indonesiaon Consumer Welfare
 
Academic Adviser: Professor CHEN Kuang-huiPresented by: ROCKY Gunung HasudunganStudent 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 thesupermarket. Some countries need more stock of oil in the winter season, and some peoplein developing countries use it for cooking and also lighting. Thus, a change in supply anddemand, reflected on the price, has great influence on people
s life.The price of oil is not always determined by a market mechanism. A government canintervene in that price. Some regions, such as Europe and Japan, impose high taxes ongasoline; 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 inmany oil producer countries, the Indonesian government has implemented fuel subsidiesand set official prices started in 1967. At present, Indonesian fuel subsidies are applied tofive regulated oil products: gasoline, kerosene, automotive diesel oil, industrial fuel oil, andheavy fuel oil.In mid-2005, when the crude oil price in international market reached around US$ 60per barrel (three times the end-2001 price), the Indonesian government decided to cut thefuel subsidies by increasing official fuel prices about 114% overall in October 2005, since thebudget 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 ahigh year-on-year (YOY) inflation that reached 17.89% in that month (slightly twice YOYinflation in the previous month that was 9.06%). Most households had to deal with bothhigher 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 onconsumer welfare by income (expenditure) class using the concept of CompensatingVariation (CV). Consumption behavior in Indonesia is analyzed by estimating the AlmostIdeal 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 tocalculate elasticities and a percentage change version of CV.From our estimations (see Table 1), we found that the AIDS coefficients are mostlysignificant at the 1% and 5% level showing that the expenditure shares for each commodityare responsive to prices and income, except for
γ
43
 
(=
γ
34
) and
 β 
4
(clothing) are notsignificant. However, one of characteristic roots is positive (but very close to zero), showingthat our AIDS expenditure function is not negative semidefinite. In spite of that result, allvalues 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 thanunity indicating that cereal and other-foods are necessity goods. The estimated own-priceelasticity 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 adverseeffects more on the poor in Indonesia. The poorest group of households, on average, shouldincrease their expenditure by 4.60% (in order to keep their utility unchanged) and therichest, on average, should increase their expenditure by 4.00%.The World Bank argued that fuel subsidies are not only economically inefficient butbiased 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 wrongdirection, those subsidies are still important for the poor and a drastic reduction wouldtorture 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
 
 
1
 
2
 
3
 
4
 
5
 
 R
2
 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
e
i
 
 
ii
 Uncompensated CompensatedCereals -0.134 -1.219 -1.235Other-Foods 0.893 -1.014 -0.605Housing 1.616 -1.811 -1.453Clothing 1.043 -3.068 -3.027Other Non-Foods 1.293 -0.211 -0.003
Figure 1: Compensating variation by household income (expenditure) deciles of periodSeptember 2005 to March 2006
     4 .     6     0     %     4 .     4     6     %     4 .     3     8     %     4 .     3     3     %     4 .     2     8     %     4 .     2     3     %     4 .     1     8     %     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
   C   o   m   p   e   n   s   a   t   i   n   g   V   a   r   i   a   t   i   o   n
Household income deciles

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