Early fears of mass Indonesian poverty “unfounded”, says Bank

15 March 1999

The worst fears of massive increases in poverty in Indonesia are “unfounded” according to a report by the World Bank, which draws on 3 new surveys on the social implications of the financial crisis. The research indicates that many middle-income households have been badly hit but the poorest have not suffered as much as expected, whilst some have gained. The new data show large falls in expenditures and real incomes, but these have varied enormously. Overall the Bank calculates that absolute poverty has increased by about 3% from 11% to between 13.8-14.3%, considerably less than was initially anticipated. These figures may understate the real impact if the inflation rate is understated and households are selling assets and cutting consumption to maintain expenditure on staples. There is also concern that expenditures may not be sustainable in the long-term as households run out of assets and are unable to work more hours.

The crisis has hit urban wage earners particularly hard, due to the impact of the depreciated rupiah, corporate debt, illiquid banks, exorbitant interest rates, exit of foreign investment and lack of trade finance on the formal economy. Those areas less integrated into the formal economy have been less affected. On the whole unemployment rates have not risen by much, as people made redundant in sectors like construction are joining the informal economy and returning to agriculture, and more people are working for lower wages.

Rural areas engaged in export activities and little affected by the drought, such as Maluku which has very high poverty rates, have benefitted from the lower value of the rupiah and from the break up of monopolies, such as the clove marketing monopoly.

School enrollments have fallen by 4-5%, much less than the predicted 24%. There has been a decrease in first-year enrollment rates, indicating that parents may be delaying school starts for younger children whilst letting older ones continue. However, overall decreases in enrollments are larger for secondary level pupils. Data for changes in health indicators are inconclusive but it is clear that usage of public clinics has declined.

The report concludes that geographic targeting will be very important. It may be necessary to distinguish between actions to address poverty and actions to help those suffering from the crisis, responding to the origin of the problem in a particular locality. Attention must be paid to sustaining wage levels, by targeting public works schemes to areas with depressed demand for labour.

Social Impacts of the Indonesian Crisis: New Data and Policy Implications is available from Lant Pritchett,