Two years after the regional financial upheaval, the Indonesian economy is slowly regaining its footing. But the recovery is tentative and many painful tasks lie ahead. In the first of a two-part special report, The Straits Times looks at the controversial issue of fuel and food subsidies and the millions more who are still mired in poverty.

Marianne Kearney, Jakarta – Mr Kaslim, a part-time becak driver and farmer, has just started to feel the effects of Indonesia's economic upturn. Two years ago his half-day of becak driving around Cijulang, a small rural town in West Java, earned him only 8,000 rupiah to 10,000 rupiah (S$1.70 to S$2) a day.

At the time, the cost of staple foods had more than doubled and his earnings were not enough to feed his family of six. He was lucky because at least he did not have to pay exorbitant prices for rice, and any extra rice he harvested could be traded for other food items such as eggs or chicken.

Now, however, he does not have to barter trade his rice. The becak business is picking up – in the last six months he has earned almost twice as much as two years ago and the cost of some daily necessities, such as cooking oil and noodles, has come down.

Although he is still struggling to pay his sons' school fees, his monthly earnings from driving a becak are still more than that of a local school teacher.

Government employees are also seeing a small rise in their salaries, although the increases go mainly towards paying for daily necessities.

Ms Titik, who works in a government human-resources department in central Sumatra, says her wage increase from 300,000 rupiah to 400,000 rupiah a month early last year was still mostly spent on food.

Although her monthly salary is higher than that of a teacher in Java (165,000 rupiah), Ms Titik says the cost of food in Sumatra is higher than in Java, and so her family has cut down on luxuries such as meat and cigarettes. This month, however, employees such as Ms Titik will receive a wage rise of 100,000 rupiah.

Other workers have not been so lucky. While workers in textile factories, furniture-making or mining have also seen their wages increase in the last year, feeding a family on these wages would still be difficult. A typical factory worker in Jakarta now earns about 280,000 rupiah a month whereas in 1998 the monthly pay was about 230,000 rupiah.

Mr Kaslim and Ms Titik, like millions of other Indonesians, have seen their living standards improve at least a little over the last six months as the cost of basic foods stabilised, their wages rose and the Indonesian currency settled in at around 8,000 rupiah to US$1.

The figures, though modest, are a huge turnaround from mid-1998, when the rupiah hit a low of 15,000 to US$1 and the prices of staples shot up 120 per cent, raising the threat of food riots and mass starvation.

United Nations economist Iyanatul Islam estimates that in the last year about 15 million of the 92 million who were living below the poverty line in 1998, have successfully climbed above the mark. The government Department of Statistics, however, claims a far bigger figure of almost 40 million people.

The government has achieved this more positive picture of declining poverty levels mainly by setting minimal living standards for the poor at a lower level than that of Mr Iyanatul. The government says that there are now 38 million people living in poverty against Mr Iyanatul's 70-odd million.

Now, as many Indonesians see a modest improvement in the standard of living, the government is pushing through a number of controversial price increases, aimed at creating more efficient local industries as part of its agreement with the International Monetary Fund.

The most controversial of these is the fuel-price hike. Back in May 1998 when the then Suharto government raised fuel prices by 70 per cent, riots erupted all over the country, contributing to his eventual downfall.

Earlier this month, students again threatened to mobilise themselves for massive demonstrations if the government went ahead with the proposed hikes.

The government backed down but critics say that it should not have because the main beneficiaries of the current fuel subsidies are mainly the well-off.

"It's a problem of political communication. Why don't the ministers explain to the people that if we delay the hikes too long we will pay more," says Mr Johannes Kristiadi from the Centre for Strategic Studies.

The fuel subsidies, say economists such as Mr Iyanatul, consume billions of dollars of government money and end up helping the middle class and upper class run their cars and factories cheaply while basic services such as health and education starve for funds.

The daily expenditures for rural people such Mr Kaslim, who does not own a motorbike, and uses public transport occasionally, will only be affected marginally by the price hikes.

People living in the cities will be more affected, says Mr Iyanatul, with the cost of goods rising slightly. The main effect on urban dwellers will be the rising cost of public transport. Economists say these hikes are fair as public-transport costs have not risen over the last two years and will need to rise in order to keep those companies in business.

The cost of electricity has also been kept low artificially, costing the government millions of dollars in subsidies, while major companies and the middle and upper class reap the benefits, they say. The recently introduced electricity hike of 30 per cent will not be passed on to the poor who consume only small amounts of electricity.

But one of the most contentious subsidies, that many economists argue could definitely swell the ranks of the poor, is that for local rice farmers. Although the government has so far resisted pressure to remove tariffs on cheaper overseas rice, it is under pressure to do so.

International organisations, such as the World Bank, say removing tariffs on imported rice, by reducing the cost of Indonesia's main staple food, will reduce poverty levels significantly.

"If Indonesia wants to support farmers it should do so not through tariffs, or through subsidies but infrastructure," says Mr Bert Hofman, a senior World Bank economist.

One study done by Development Alternatives Incorporated, which is funded partly by the US Agency for International Development (Usaid), found that the lower the tariffs, the less poor people there would be; a zero tariff would bring 14 million people above the poverty line, whereas a 25 per cent tariff would bring 4 million people above the poverty line.

Mr H. S. Dillon, an economist from the government's Economic Council rejects these figures as nonsense. While agreeing that lower rice prices help, he argues that zero or very low rice tariffs will wipe out farmers who make up most of the population.

"You have 80 per cent of the population who has not gone beyond primary school. Where else will they find employment? They can't enter the high-tech work force," he says, pointing out that 20 million of Indonesia's 210 million people are rice farmers.

Thus, Dr Dillon argues, agricultural subsidies would be the government's most effective social safety net for keeping Indonesians above the poverty line. Abolishing the rice tariff, it is argued, would drastically increase the number of poor people.

One of the reasons the numbers of those poor jumped so dramatically during the height of the economic crisis was that so many people were hovering just above it that even small increases in the cost of basic foods send millions into poverty.

And it is these millions, still hovering just above the poverty line, that the government should be targeting to ensure that they rise above it further, says Dr Pande Raja Silalahi from the Centre for Strategic Studies.

He agrees that government policies to curb rampant inflation and stabilise the rupiah have helped improve average living standards but accuses the Wahid government of doing nothing to reduce the long-term causes of poverty or create more jobs. "The government keeping inflation low is a different story from people living below the poverty line," he said.

The World Bank too is cautious in its assessments of whether Indonesian standards of living will continue to see improvement. One of its studies estimates that as many as half of all Indonesians could still be living very close to the poverty line, and they have a 50 per cent chance of slipping below it in the next three years.

How the poverty line was calculated

Both the government and the United Nations economist, Mr Iyanatul Islam, arrived at the poverty line by calculating the cost of 52 standard commodities which allows a minimum of 2,100 calories per day.

Mr Iyanatul argues that the government's calculation underestimates the cost of basic goods in rural areas which, therefore, underestimates the number of poor in rural areas.

He says the government's poverty line also underestimates the consumption of basic non-edible goods such as cooking implements, and believes that more allowance should be made for the purchase of household items.

(The difference between the two poverty lines is not much – government's estimates the basic income at 77,386 rupiah (S$16) per month while Mr Iyantul sets it at 97,074 rupiah per month. However because of the low incomes, this small change adds a large number to the number of poor.)

Other economists have also challenged the Indonesian government's estimates of the costs of goods, concluding that poverty levels before and after the crisis were a lot higher.