Saturday, November 05, 2005

confused politicians

Media Indonesia on-line 4 Nov '05 reported that Amien Rais and Soetardjo (both are high profile politicians) thought that direct cash transfer would not educate the poor, have caused horizontal tension, and wrong. They also concluded that fuel price increase have worsen people's misery and therefore, in the name of the people, government should: (i) stop the cash transfer programme and (ii) bring fuel prices to the original level.

What they observe about peoples' misery may be right. In a short-term, except oil companies, who gains from higher fuel price anyway. But they are wrong about the long-term economic effect of fuel price increase . They are confusing the idea of direct cash transfer with results from its practical implementation.

There are solid reasons to increase fuel price which I will not bother to elaborate further (please visit Aco's other blog site on this issue). My point here is that resources are stuck in the short term and therefore price will only adjust upward causing temporary inflation. But forcing to bring the oil price to originial level will be more disastrous as deficit would soar, attack on currency would gone wild, and would certainly kill any debate on alternative energy (let alone conserving energy).

On cash transfer programme, my first take on this is that it is a pure compensation program, not an education program. It is based on a simple static economic reasoning (see ca$h and carry) to address adverse income shocks. The real wage decreases after price increase and one would not able to consume the same amount of goods from the same amount of working hours. Thus cash transfer compensates for the drop in income i.e. negative income effect as economist would say.

Second, compensation program through cash transfer does not solve poverty. The key link between compensation program and poverty alleviation lies with the ability of the program to gear poor people's incentive to break out from of poverty by improving their: education, work, and health. Many countries have done the so called conditional cash transfer (Mexico, Brazil). Their cash transfer are conditioned upon poor household taking action to participate in education or work programme. For example, cash support is given if poor household: sends kids too school; perform healthy life-style; or do wage earning work.

Thus real challenges for us and our often confused politicians are to (i) fix the implementation of the current cash transfer and (ii) come up with bright ideas on conditional cash transfer.

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