Unconditional Cash Transfer Policy in Indonesia

Policy Description

This paper discusses the unconditional cash transfer (UCT) policy which was implemented in Indonesia in 2005, 2008 and 2009 as a package with the fuel subsidy reduction policy. This is an example of targeted social policy with income transfer where economists and scholars, as will be explained later, believe as an effective and efficient way both for economic development as well as social welfare.

Together with debt payment, fuel subsidy takes the most significant proportion of government spending in Indonesia. From 1999 to 2004, the energy subsidy was 8 to 28 per cent of total government expenditures (Yusuf & Resosudarmo 2008, p. 3).

Apart from fiscal concerns, fuel subsidy may also lead to justice issue. More than 70 per cent of the subsidy was enjoyed by the top 40 per cent of citizens, the bottom 40 gets less than 14 per cent (Departemen Sosial 2008b, p. 15). This is because most of the fuel is used for private vehicles.

The approach of the policy was providing cash directly to households without any conditions. Direct cash transfer means that government provides cash rather than service such as free health care. No conditionality means that recipient households can spend the money as they like without any obligation such as to bring their children to school (Cueto 2009, P. 1952).

The Policy Purpose

The main purpose of the policy was to mitigate the impact of fuel price increase, caused by the fuel subsidy reduction, on poverty. This is a case where social policy is to correct the 'diswelfares' that created by economic policy (Hill 2006, p. 7).

The implication at process level is that government must ensure that the poor use the money for purchasing basic necessities or investing in any other productive activities. The poor should not merely save the money. Economic growth and job creation need the increase of aggregate demand which can be achieved through the increase of consumption and investment (Keynes 1936, p. 325).

The implementation implication is a need to ensure that the cash go to right hand, and only the poor get the cash. Cash transfer has been practiced by developed countries where reliable household income data is available, however, in Indonesia, particularly during UCT implementation, this is not the case. Poor households determined by National Bureau of Statistics (BPS), field checked by post office officers and village officers (Departemen Sosial 2008a, pp. 10-31). Without reliable household income data, the BPS officers rely only on physical assessments such as quality of house, or merely on the judgement of village officers. This creates potential for under coverage where some poor households are not identified, and leakage where some ineligible households are included on the recipient list (SMERU 2006, p. 37). If the number of under coverage and leakage is high, the purpose of poverty mitigation will not be achieved.

It is important for the government to classify the 'victims' of the increased fuel price. Those who suffer the most must be prioritized than the rest, and probably receive more cash. In the case of 2005, urban poor had suffered the most because the kerosene price increase 185.7 per cent, which make it the highest compare to gasoline and diesel (Yusuf & Resosudarmo 2008, p. 33). Urban poor rely on kerosene to fuel their stoves for cooking.

The Policy's Synchronisation to Indonesian Social Welfare System

Indonesia cannot fit into three social welfare's regime as identified by Esping-Anderson. The nearest regime might be the conservative where government is responsible to social welfare only when the market fails (residual), which social policy is delivered through targeted (instead of universal) program (Esping-Anderson 1990, pp. 18-29). However, there are 49.2 per cent of Indonesian citizens who do not have any health insurance (Kompas 2010). This means that state is not responsible when the market fails. That is because Indonesian public budget is limited to cover social welfare costs. In 2009, for example, total government revenue was only 16.1 per cent of national Gross Domestic Product (GDP) (Departemen Keuangan n.d., pp. 1-12). Furthermore, social policy in Indonesia is positioned to support economic development (Bappenas 2010, p. II.3-1). In 2009, social expenditures which include health, education, subsidies other than fuel, and social protection were just 6.8 per cent of GDP (Departemen Keuangan n.d., pp. 1-12; Departemen Keuangan 2007). Therefore, government's policy is always to keep tax low and allow people to spend their money for their own welfare. As a result, ratio of tax revenue to GDP was only 9.9 per cent compared to an average of 14.0 per cent among non-OECD countries in Asia (IMF 2008, p. 11). These characteristics match with 'productivist' or East Asian model (Holiday 2000, p. 709; Jacobs 2000, pp. 2-4; Aspalter 2006, p. 297). However, compared to other East Asian countries, Indonesia has the highest corruption rate. The corruption perception index was 2.4 in 2008, in contrast to South Korea, for example, which was 5.6 (Transparency International 2009, pp. 397-400). This makes Indonesian government more difficult to create social welfare.

Indonesian social welfare characteristic calls for a process implication to improve social solidarity and private sector participation on poverty mitigation. In 2005, poor households only received IDR300,000 which was equal to around US$30 (Widjaja 2009, p. 3). That might be sufficient to help the near-poor to improve their purchasing power, but the amount was too small for the poor. Social solidarity will improve the social safety net of the poor. Private sector, through corporate social responsibility, should participate by improving poor people livelihood. For example, they can help to grow small scale and micro entrepreneurs which could create jobs at micro level.

In the long term, as an implementation implication, government must create more jobs in formal sector. In 2006, there was more than 50 per cent of Indonesian worked in informal sector (Hermanto et al. 2010, p. 5), which most of them did not pay income tax. This makes government revenue become small, not only because the low tax, but also because the number of tax payers are small. Government believed that there were about 25 to 30 million more people are eligible to pay taxes out of 6 million that have been registered by 2008 (The Jakarta Post 2008).

Key Actors and Their Roles

At political decision level, the key actors were the President with support from the Ministers of Finance, Social Welfare, and Energy. Their roles were to initiate and make a final and official decision of the policy. All of them are politicians with strong interests on political gain. As a process implication, it needs checks and balances procedure on political decision process. Other political interest groups and independent experts must involve in decision making process. Without check and balance, the ruling party in government could be just prioritize the urban poor and neglect the poor households in remote area. By doing so, the ruling party could have political gain from the majority of the poor, and at the same time possible to alleviate poverty. This would satisfy their political interest. The implementation implication is that government must consult public sector and support their UCT policy by scientific evidence; for example, reliable poverty data. This is in line with what Jeremey Bantham called 'expert bureaucracy' (Bessant et al. 2006, p. 15).

At implementation level, the key actors were Ministry of Social Welfare (DEPSOS), BPS, post office, and village officers. The DEPSOS played a central role in the implementation as it is they who manage the UCT budget, prepare the guidelines, coordinate other actors, and presents the accountability report. BPS was important to produce accurate ‘poor household’ list. Post office carried out a significant role by checking accuracy of BPS data, distributing the household poor cards (the card) and undertaking payment. Village officers were, in many cases, the key figures who determined the success and failure of the implementation. That is because the accuracy of ‘poor household’ list depended on them as they help BPS and post office officers on field investigation and data verification. In addition, village officers' role was also important in organizing cash collection in remote areas.

The implementation implication of including DEPSOS is to attain support from the local government for ensuring the performance of village officers. Under decentralization policy, DEPSOS has limitation in controlling implementation at field level. They just can rely on local governments because of decentralization. There are 584 local governments in Indonesia and the leaders not necessarily from the ruling party (Departemen Dalam Negeri 2010). Therefore, they need to have an effective coordinating and communication role. That creates a process implication, that is a need for a detail and clear implementation guidelines which organize all actors. The guideline must be able to help all actors from national to village level to perform their tasks well.

BPS needs additional enumerators due to the limitation of BPS officers. At the moment, number of BPS officers is only half of their need (BPS n.d.). That is still far than enough to conduct survey in around 72,000 villages (Kominfo-Newsroom 2009). If they rely on the village officer, the outcome could be biased because the village officers may have vested interest in selecting his or her relatives or prioritizing his or her ethnic group and neglecting others. However, the increase of the enumerator number is not enough. The process implication to ensure accurate data is a need of transparent and objective mechanism to determine the poor. If the reliable mechanism does not exist, there will be conflict and tension during implementation. This was happened during UCT implementation of 2005 where there were number of protests, threats to BPS and village officers, vandalism to public facilities, and conflict among villagers (Widjaja 2009, p. 12)

The process implication to allow post office to handover the cash is to have additional arrangement helping the poor from remote areas to pick up their cash. Post office branches are only available down to sub-district level. Without a different arrangement for collecting the cash, the value of the cash will be offset by the transport cost. DEPSOS reported that during the first instalment of 2005 eligible households received only 94.1 per cent of the total payment. In the second instalment it was only 89.6 per cent. One cause of the payment deduction was the payment cut did by village officers to cover the transport and fee cost to pick up the cash collectively (Departemen Sosial 2008b, p. 13). Furthermore, the post officers have no specialization on checking the accuracy of poor household list. Therefore, as an implementation implication, they need a special training on field verification.

The Change Drivers

The combination of oil price, government budget stability, and number of poor households will determine whether or whether not the UCT policy will be implemented again in the future. This indicates that the government must monitor all those variables. However, in the long term, government has to decrease the poverty at the level where public budget able to support the poor. In the case of fuel price subsidy, number of poor must be decreased significantly before government eliminate all fuel subsidies.

An election and other short term political interest could initiate the UCT policy because it can increase the popularity of the ruling party on poor people. This was the suspicion of the opposition parties when the UCT policy was enacted in 2009. This is not happened in Indonesia only, the conditional cash transfer policy in Mexico and Brazil were also used for political gain (Sewall 2008, p. 175). This creates a process implication to balance the power during decision making process as discussed previously. For long term purpose, the implementation implication is a need to improve the political awareness, particularly among poor people, so they aware that any kind of subsidy come from public budget, not from the politicians' pocket.

Availability of reliable socioeconomic data on individual citizens will increase the use of the cash transfer policy regardless of whether it is conditional or unconditional. Reliable data makes it easy to do eligibility testing. It may improve effectiveness of any social policy with targeting approach. Apart from several issues as discussed previously, The World Bank concludes that the UCT of 2005 was successful to mitigate the poverty (World Bank 2006, p. x). Cash transfer approach, as contrast to service provision approach such as free health care, is more effective to mitigate the short term impact of the increased fuel price (Yusuf & Resosudarmo 2008, p. 45). The conditional cash transfer in Mexico and Brazil was successful to alleviate poverty in the short term, with potential for sustainable impact in the long term (Sewall 2008, p. 185). Moreover, economists have proved that income transfer will create more economic surplus than subsidy (Frank et al. 2009, pp. 181-182). The wider use of (un)conditional cash transfer approach in social policy create a process implication; that is to strengthen the eligibility testing system which include a need of reliable data and information technology as well as a well-trained assessors and analysts. This also calls for an implementation implication where government must educate the recipients on how to use the cash in order to support the policy objective.


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