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The government has proposed raising the electricity subsidy next year by Rp 790 billion ($76 million) to take into account rising global fuel prices. The 2010 subsidy could amount to Rp 43.25 trillion.

The increase, the director general of electricity and energy utilization said, is due to an estimated 6 percent rise in electricity consumption. While we understand the basic reasoning for the increase, to decrease the burden on the poor, we would argue against the continuing use of subsidies in the electricity sector.

It has been proven that such perverse subsidies do not foster efficiencies and in fact promote waste, as consumers increase their demand, knowing they are paying a fraction of the true cost of production. This leads to a vicious cycle of higher consumption and higher costs borne by the government.

While electricity and other public utilities can be regarded as a common good, subsidies are not in the public interest. The money spent on subsidies can be far better utilized to build infrastructure that, in the case of electricity, would reduce the cost of production and transmission.

Better infrastructure in turn would help businesses reduce costs and thus raise wages and salaries. This creates a virtuous cycle of healthy economic growth, rising incomes and a stronger, more efficient business sector. More important, it promotes a culture of thrift and a sense for not consuming frivolously.

Why is this important? Certain types of subsidies promote the wrong behavior among consumers. They hold back the growth of certain industries and overall economic growth. Indonesia, however, is not alone in providing subsidies. The United States government, as just one example, subsidizes its agricultural sector, a move that has been deemed to be in the public interest.

While certain subsidies are necessary to promote clean energy and new industries, for example, perverse subsidies exert adverse effects on the economy and the environment. Worldwide subsidies in agriculture, fuel, transportation and fisheries are estimated to amount to $1 trillion annually. This means that subsidies play a prime role in the global economy, but they also exert a distortive impact on the global economy.

Rather than asking for an increase in the electricity subsidy, the government should work to consistently lower subsidies and use the savings to invest in infrastructure and education, which offer much better long-term returns for the country. The money could be used to improve the country’s electricity grid and build new power plants that use cleaner fuels such as natural gas.

This is a critical issue for the nation and will determine the kind of economy we have in the future. The opportunity cost for continuing the current electricity subsidies is high, and the matter should be raised during the presidential election campaign.