Four years later, how has the economic crisis affected the poor?

Anne Booth

The debate about the impact of the crisis on poverty and income distribution continues. Let me start by summarising what the available statistics appear to tell us. First, the contraction in Gross Domestic Product which occurred in 1998 was most severe in the non-agricultural sectors of the economy, especially in construction, the financial sector, wholesale and retail trade, non-oil manufacturing and transport. All these sectors registered contractions of more than five per cent. It has also been in these sectors, especially construction and financial services, that employment has fallen most rapidly. Indeed the labour force surveys conducted since 1997 indicate that there has been no net growth in non-agricultural employment between 1997 and 2000.

It is also clear from the national income data that the contraction in investment expenditure was far greater than the contraction in personal consumption expenditure. This indeed was the main reason why the initial impact of the crisis on poverty and living standards was less than predicted in mid-1998. But there can be little doubt that the contraction in non-agricultural output and employment, together with the surge in inflation in the middle months of 1998, had an especially serious effect on the poor, because food prices rose more rapidly than non-food prices. This indeed was what had happened in previous inflationary episodes in Indonesia. Thus while the crisis-induced contraction in GDP might not have affected the incomes of the poor more seriously than those of the better off, the ensuing inflation certainly did.

Similarly, the lessons of previous devaluations in Indonesia are useful in predicting the likely effect of the very substantial rupiah devaluation of 1997-98 on incomes of various categories of producer. There can be no doubt that the devaluation led to a rapid increase in the rupiah prices of a range of agricultural products in the last part of 1997 and early 1998, and that the supply response was positive. The GDP data indicate that output of tree crops grew by more than two per cent between 1997 and 1999, in spite of the lingering effects of the drought. But the rapid inflation of 1998 led to a surge in the cost of living for farmers, and thus an erosion of the effects of the devaluation on relative prices. Because of the magnitude of the inflation, the erosion almost certainly took place more quickly than in past devaluations. In addition, the rupiah began to appreciate in late 1998 and early 1999 (although it fell again in 2000/1). Thus by mid-1999 much of the positive effect of the devaluation on the real incomes of rural producers had been dissipated.

As far as most wage and salary workers were concerned, the effects of the rupiah devaluation and the ensuing inflation were almost wholly negative. Real wages in all sectors of the economy fell steeply in late 1997 and 1998, and appear to have made only a partial recovery since then. Thus it may well be correct to argue that, relative to rural producers of export products, urban dwellers did suffer a greater decline in income especially in the initial phase of the crisis. But given the large increase in the agricultural labour force that has occurred between 1997 and 2000, it is unlikely that there will be a strong upward pressure on agricultural wages for some time to come.

Social security

It is hardly surprising, given the suddenness and severity of the downturn in Indonesia, that the question of enhanced social security should be getting far more attention from independent analysts and policy-makers than at any time over the past three decades. As in many other parts of the Asian region, Indonesian policymakers have in the past voiced their hostility to 'western-style' social security provision which is supposed to destroy entrepreneurial initiative and lead to a culture of welfare dependency. But in reality, given the combination of rapid economic growth, rapid growth of employment opportunities, and a favourable dependency ratio due to the speed of the fertility decline in most parts of the country, policy-makers have not been under pressure from any powerful constituency to concern themselves with comprehensive social security provision. Now with the possibility of slower economic growth, together with the demographic inevitability of a higher proportion of the population moving into the older age groups, issues such as social security, and the provision of 'social safety nets' are suddenly at the forefront of the policy debates in Indonesia.

They are likely to stay there in coming decades. The implementation of the social safety net programmes since 1998, however inadequate the targeting has been, has built up a set of expectations that the government should provide basic goods and services such as food, health and education at prices which all sections of the population can afford. Future Indonesian governments will have to deal with these, and other, expectations. Experience from other countries indicates that it is politically very difficult to remove welfare entitlements once they have been conceded, even if the initial granting of the entitlements was made under conditions of severe economic distress. However reluctantly, future Indonesian governments will have to transform emergency social safety net programmes into more comprehensive social programmes aimed at giving all citizens access to basic needs and services. Thus it is likely that debates over implementation and targeting, far from ending once the economy begins to recover, will intensify.

Does the Indonesian experience of 1997/9 offer any lessons to other countries coping with the aftermath of a severe financial crisis, leading to a substantial decline in real output? Perhaps the most obvious lesson is that such crises can burst out of what might appear to be a clear blue sky with little warning. While preventing a crisis from happening in the first place is obviously the best method of preventing crisis-related social ills, the experience of countries such as Indonesia, Thailand, Malaysia and South Korea in 1997-9 does confirm the view of the economic historian, Raymond Goldsmith, that financial crises are the inevitable 'childhood disease' of capitalism. Governments in other parts of the developing world would do well to realise that being hailed as a 'miracle economy' by leading international development experts does not immunise a country from such diseases. In fact, to the extent that the over-hyping of the economic performance of Indonesia, together with Thailand, Malaysia and South Korea, in a number of publications in the early 1990s bred an attitude among policy-makers in these countries that they were somehow exempt from the risks and dangers that beset other developing economies, the international development establishment, led by the World Bank, has to take some of the blame for the Asian crisis. Policy-makers in other parts of the developing world would do well to ponder these lessons, and make prudent allowance for the fact that such crises will almost certainly affect them at some stage in their evolution into mature capitalist economies.

A second important lesson is that the effects of a severe economic downturn in an economy as large and heterogeneous as Indonesia are very difficult to measure. Most of the initial judgements which were made by a number of agencies and individuals in 1998 have had to be modified as more data have come to hand from different parts of the country. Even four years after the crisis hit, the effects are still working through to millions of households across the country. In addition, different analysts have drawn quite different conclusions from the same body of data about trends in poverty, depending on how the poverty line is estimated.

Indeed, it can reasonably be argued that none of the data sets pressed into service between 1998 and 2001 to estimate the impact of the crisis on poverty, income distribution, and unemployment was entirely suitable for the purpose. Household surveys such as the Susenas by their very nature ignore that part of the population who do not live in registered households. To the extent that numbers of unregistered street dwellers have increased in urban and peri-urban areas since 1997, and to the extent that many of them have expenditures below the official poverty line, they are excluded from the poverty estimates. Other data sets such as the 100-village survey, while useful as far as they go, were deliberately skewed to poorer rural areas and ignore trends not just in urban areas but also in the more developed rural hinterland.

Thus debates about the impact of the crisis on poverty and living standards are likely to continue in Indonesia for some time to come. It will probably be at least a decade before we can draw final conclusions about the effects of the crisis on poverty and welfare, let alone evaluate the efficacy of the various policy measures which have been implemented to alleviate these effects. One can only hope that by then, living standards will have improved for the poorest and most vulnerable groups in Indonesia and the grim years at the end of the twentieth century will be a distant memory.

Professor Anne Booth teaches at the School of Oriental and African Studies (SOAS), University of London. She has written numerous books and articles on the Indonesian economy.