Surviving Economic Crisis in LDCs:

How Indonesia Protects the Poor

Dharendra WardhanaMSc Economic Development and Policy

AnalysisUniversity of Nottingham

Chevening Forum 2010Scholars Self-Organised Event

University of Bath30 April 2010

Presentation Outline

• Introduction• Crisis in Indonesia• How we dealt with the crisis• Challenges and opportunities

2

Introduction

3

Australia

Indonesia

The PhilippinesVietnam

India

Africa

Thailand

Brazil

Europe

Indonesia

Australia

Sri Lanka

KalimantanSumatera

Jawa

PapuaSulawesi

Malaysia

Singapore

America

Asia

Papua New Guinea

Cambodia

Brunei Darussalam

Map of Indonesia

Maluku

Bali

Stylised Facts

• Income / capita (2008): USD 2,271 • Economic growth (2008): 6.1%• Indonesia had graduated into the group of Lower Middle ‐

Income Countries (2009)• Member of G-20• Largest market and economy in South East Asia region• Largest Muslim-populated country• 3rd biggest democratic country (after US & India) 4

Macro vs Micro ?

Socio-economic Indicators• Population (2009): 229 million (60% live in Java)• Population growth (2008): 1.3%• Unemployment (2008): 8.1%• Poverty index (2009): 14.2%• Maternal mortality (2007): 228/100.000 live birth• Child mortality (2007): 34/1000 live birth• Malnutrition on children < 5 (2007): 18.4 per 100.000• Access to water (2008): 54.1%• Access to sanitation (2008): 73.9%• Disparity (in Gini Coefficient): 36.69

6

7

Indonesia has made significant progress in reducing poverty

34 32.5

47.242.3 40.6

25.927.230

35

54.2

22.5

34.937.239.3

35.136.137.338.437.938.7

4849.5

17.5

11.3

40.1

33.328.6

26.9

21.617.4

15.1 13.7

24.223.4

19.1 18.4 18.2 17.4 16.7 16 17.8 16.615.4

14.15

0

10

20

30

40

50

60

1976 1978 1980 1981 1984 1987 1990 1993 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Poor Population (million) Poor Population (million) Poverty Incident (%) Poverty Incident (%)

Source: Statistics Indonesia (www.bps.go.id)

8

Growth is essential for poverty reduction… but the pattern of growth matters

Indonesian growth has reduced poverty dramatically…

Indonesia, 1967-2002

-0.050

0.000

0.050

0.100

-0.05 0 0.05 0.1

Annual Growth, Average Income

Ann

ual G

row

th, I

ncom

e of

Bot

tom

Q

uint

ile

…yet there has been remarkably little change in the income distribution

Year Gini Percentage of National Income shared by Poorest 40%

Urban Rural National Urban Rural National

1970 0.33 0.34 0.35 19.5 19.6 18.6 1980 0.36 0.31 0.34 18.7 21.2 19.6 1984 0.32 0.28 0.33 20.6 22.3 20.8 1990 0.34 0.25 0.32 19.7 24.4 21.3 1996 0.36 0.27 0.36 19.0 23.2 20.3 1999 0.32 0.24 0.31 21.5 25.0 21.7 2002 0.33 0.25 0.33 20.3 25.8 20.9

Source: World Bank

9

Key challenges remain (1)

Vulnerability to poverty is high…

10

Key challenges remain (2)Regional Disparities persisted…

Java Island

Percentage of Poor in Each Region, 2004

29,30%

52,32%

21,21%

43,86%

7,86%

20,76%

9,29%

27,89%

Household without access to safe water

Household without access to sanitation

Household with children aged 12-15 not enrolled in junior high school

Household with birth attended by traditional paramedics

Multidimensional Poverty Remains A Serious ProblemMultidimensional Poverty Remains A Serious Problem

0.0%0.0% 10.0%10.0% 20.0%20.0% 30.0%30.0% 40.0%40.0% 50.0%50.0% 60.0%60.0%Source: SUSENAS 2002 (Household Panel Data)

Key challenges remain (3)

Non PoorNon Poor PoorPoor

11

Crisis in Indonesia

12

1997-98 2005 2008-09

•Monetary crisis•“Financial contagion” effect•Political & social turmoil

•Energy crisis •Financial crisis (credit crunch)•Oil price remained high

Indonesia's Oil Production and Consumption, 1986-2006

0200400600800

1,0001,2001,4001,6001,800

1986 1990 1994 1998 2002 2006EYear

Thou

sand

Bar

rels

per

Day

Source: EIA International Energy Annual ; Short-Term Energy Outlook

Consumption

Production

2004: Indonesia becomes a net oil importer

Crisis in 1997-1998

• Exchange Rate: USD 1 = Rp2,350 (July 1997) USD 1 = Rp16,800 (January 1998)

• Inflation rate: 11.1% to 78.0%

• Economic growth: 5.8% to -13.5%

• Income per capita: USD1,184 to USD485

• Foreign debt: 24% GDP (1996) to 97% GDP (1999)

• Interest rate: 14% to 72%

• Poverty rate: 17.3% (1996) to 23.4% (1999)

13

The Government Response

• Improve and enforce monetary and fiscal policies (include central and local financial distribution).

• Legal and regulatory reform, e.g., procurement of public goods, business ethics and fair competition, anti-corruption law, public attorney, supreme court.

• Political reform (constitutional amendments, presidential and parliamentary laws, military and police forces, local autonomy).

• The National Government decentralised political, administrative and financial authorities to local government. A new democratic country was reborn.

14

Social Policy to Face 1997 Crisis1. Social Safety Net was the main agenda2. Food security3. Education4. Health5. Energy (fuels and electricity subsidy)6. Employment7. Child Protection8. Total budget of all safety net programs: USD 2.5 billion (1999)

15

– Oil price increased from USD 40/barrel (2004) to over USD 60/barrel (Aug 2005)

– If no action taken, oil subsidy could have reached 34% of government budget.

16

Crisis in 2005

Fuel subsidies take funding away from pro-poor development sectors…

Problems with Fuel Subsidy

Source: APBN 2004 and APBDI+II realized budgets for 2003 consolidated.

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Health Spending Road and I rrigationSpending

Education Spending Fuel Subsidies

Rp. T

rilli

on (

2004

pri

ces)

2004 Budget

17

18

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

PoorestQuintile 1

Q 2 Q 3 Q 4 RichestQuintile 5

Diesel

Gas

Gasoline

Kerosene

Per Capita Expenditure Quintile

Million Rupiah

They primarily benefit the non-poor.Not very effective towards Indonesia’s poverty reduction targets

as a transfer mechanismProblems with Fuel Subsidy

Source: SUSENAS 2003 (Household Panel Data)

Reallocation Schemes

Social Policy to Face 2005 Crisis (1)

Operational Aid for Schools(brand name: Bantuan Operasional Sekolah):• Giving bloc grants to participating public and private schools

at the primary and junior secondary school levels. • The objective of the program is to provide aid to schools in

order to reduce the student’s contribution, but also allow the school to maintain the quality of educational services to the community.

• The size of the grant to schools is based on enrollment and school level.

• The planned 2005 budget for the program is Rp6.3 trillion (USD 0.68 billion)

19

Reallocation Schemes

Social Policy to Face 2005 Crisis (2)

Basic Health Care and Health Insurance for the Poor(brand name: Askeskin/Jamkesmas):• The objective is to increase access and health service quality

to all people in particular to the poor so as to achieve better health outcomes.

• The program is designed to cover: – Free of charge health services at Puskesmas (public health

clinics) for everyone and; – Free in-patient treatment at Third Class hospitals for the

poor.• The planned 2005 budget for the program is Rp3.9 trillion

(USD 0.42 billion)20

Unconditional Cash Transfer (brand name: Bantuan Langsung Tunai): • The GOI implemented UCT program for poor and near-poor

families to compensate them for inflationary effects of the fuel price increase.– Unconditional cash transfer to cover 19.1 million

households.• Each beneficiary family will receive Rp100.000 (~USD10) per

month, paid quarterly, beginning this month.• The budget for the programs is Rp22 trillion (USD2.4 billion).• Currently, the biggest cash transfer program in the world.

Reallocation Schemes

Social Policy to Face 2005 Crisis (3)

21

Targeting & distribution are the problem

22

• Financial crisis did not hurt Indonesian much, yet indirectly affected poor.

• Trust in financial/banking sector remained high but disinvestment and job loss are inevitable.

• Due to instability of world oil prices, the Government decided to further reduce oil subsidy (approaching 30% of 2008 budget).

• Domestic oil prices rose by 30%.

23

(Financial) Crisis in 2007-08

Social Policy to Face 2007-08 Crisis

24

Social Insurance

•Pension for civil servants.

•Pension for military & police.

•Health insurance.•Employment-related insurance.

•Health “insurance” for the poor.

•School operational assistance.

•Subsidised rice.•Unconditional Cash Transfer.*

•Conditional Cash Transfer (CCT)

Social Assistance

• National Community EmpowermentProgram **

•Community-based CCT

Small BusinessCredit Facility

Cluster 1 Cluster 2 Cluster 3

* Applicable when economic shock occurs, mostly to severe disabled people and elderly** Participatory-based community development program

Note: The Government still maintains fuel and other food subsidies.

Moving Towards the CCTConditional Cash Transfer(brand name: Program Keluarga Harapan):• Social cash transfer with some conditionalities to the poorest

households who have expecting or lactating mothers and or children between 0-15 years old.

• CCT is designed to achieve compulsory basic education (9 schooling years) and some MDGs targets without ruining other programs.

• Budget: Rp1.1 trillion (USD 0.12 billion).

25

Moving Towards the CCT

Targeting:

1. Local facilitator

2. Piloting (7 provinces)

3. Improvement of

Proxy Means Testing Model

4. Focussed on very poor households

Conditions:

Education

Health

Verification:

Benefit payment:

26

Moving Towards the CCT1. Mexico (Oportunidades & Progresa)2. Chile (Chile Solidario)3. Brazil (Bolsa Familia & Bolsa Escola)4. Colombia (Familias en Acción)5. Nicaragua (Red de Protección Social)6. Jamaica7. Honduras8. Turkey (Şartlı Nakit Transferi)9. Bangladesh10. Pakistan11. Kenya12. Malawi13. South Africa14. Zambia15. USA (Opportunity NYC) 27

Common Objectives of CCT Reducing current poverty and inequality

• Via cash transfers to the poor – income effect• Redistribution and relief role

Reducing future poverty and inequality • By linking transfers to incentives for investments in human capital (via

health/education conditionalities) – price effect• Insurance effect

Changing paradigm among the poor towards the health and education

Reducing child labor Improving service quality (force the local government and

sector to provide services to the poor – demand vs supply)28

29

Challenges and Opportunities• Bumpy road:

Vested interest. Too much political interference.

• Coordination problems: In executing communication strategy. In supply side provision, both at the central and local levels.

• Room for Improvement: Corporate Social Responsibility. Networking.

Thank you

30

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