Mind the Gap; A Review on Fossil-Fuel Subsidy Reform and Social Welfare in Indonesia

Abstract

Fossil-fuel subsidies have been a major burden on the Indonesian economy for the last 10 years and any attempt to reform the subsidy has been opposed by members of the public. This study reviews the literature on the nature of fossil-fuel subsidies and their impact on the Indonesian economy. It aims to identify the various strategies that have been developed to reform the subsidy and to identify research gaps that may be filled by future studies. The proponents of fuel subsidies argue that subsidies will support economic growth, poverty reduction and promote energy security, however, evidence from various studies, which have been conducted in Indonesia, suggest otherwise. Studies in the down stream oil sub-sector have been conducted quite extensively, however, substantial research gap was found for upstream and middle stream oil sub-sectors.

Keywords: fossil-fuel subsidy, misallocation of resources, income inequality, reallocation of the subsidy, literature review

JEL Classification: C91, D03, D12, Q48