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A growing pain: an experimental approach to discover the most acceptable strategy for lifting fuel subsidy scheme in Indonesia

Pradiptyo, Rimawan and Sahadewo, Gumilang Aryo (2012): A growing pain: an experimental approach to discover the most acceptable strategy for lifting fuel subsidy scheme in Indonesia.

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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.

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