5DharendraWardhana

Surviving Economic Crisis in LDCs: How Indonesia Protects the Poor Dharendra Wardhana

MSc Economic Development and Policy Analysis University of Nottingham

Chevening Forum 2010 Scholars Self-Organised Event University of Bath 30 April 2010

Presentation Outline • • • •

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

2

Introduction Map of Indonesia India

Thailand Vietnam The Philippines

Cambodia

Sri Lanka

Malaysia

Brunei Darussalam

Singapore Kalimantan Sumatera

Sulawesi

Maluku Papua

Indonesia Jawa Europe

America

Papua New Guinea

Bali

Asia

Africa Brazil

Indonesia Australia

Australia

3

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

Indonesia has made significant progress in reducing poverty 60 50 40

54.2

49.5

47.2 42.3

40.1 33.3

30

48

40.6 35

38.7 37.9 38.4

34

37.3 36.1

39.3 35.1

37.2 34.9

32.5

30

28.6

27.2

26.9

25.9

20

24.2

22.5

21.6 17.4

10

15.1

13.7

23.4

17.5

19.1 18.4

18.2 17.4 16.7 16

11.3

17.8

16.6 15.4 14.15

0 1976 1978 1980 1981 1984 1987 1990 1993 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Poor Population (million)

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

Poor Population (million)

Poverty Incident (%)

Poverty Incident (%)

7

Growth is essential for poverty reduction… but the pattern of growth matters Indonesian growth has reduced poverty dramatically…

Annual Growth, Income of Bottom Quintile

Indonesia, 1967-2002

0.100

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

Year

0.050

0.000 -0.05

0

0.05

0.1

1970 1980 1984 1990 1996 1999 2002

Percentage of National Income shared by Poorest 40%

Gini

Urban

Rural

National

Urban

Rural

National

0.33 0.36 0.32 0.34 0.36 0.32 0.33

0.34 0.31 0.28 0.25 0.27 0.24 0.25

0.35 0.34 0.33 0.32 0.36 0.31 0.33

19.5 18.7 20.6 19.7 19.0 21.5 20.3

19.6 21.2 22.3 24.4 23.2 25.0 25.8

18.6 19.6 20.8 21.3 20.3 21.7 20.9

-0.050 Annual Growth, Average Income Source: World Bank

8

Key challenges remain (1) Vulnerability to poverty is highâ&#x20AC;Ś

9

Key challenges remain (2) Regional Disparities persistedâ&#x20AC;Ś

Java Island

Percentage of Poor in Each Region, 2004 10

Key challenges remain (3) Multidimensional Poverty Remains A Serious Problem 29,30%

Household without access to safe water

52,32%

21,21%

Household without access to sanitation

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

Household with birth attended by traditional paramedics

Non Poor

Poor

Source: SUSENAS 2002 (Household Panel Data)

43,86%

7,86% 20,76%

9,29% 27,89%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

11

Crisis in Indonesia Thousand Barrels per Day

Indonesia's Oil Production and Consumption, 1986-2006 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 1986

Production Consumption 2004: Indonesia becom es a net oil im porte r

1990

1994

Year

1998

2002

2006E

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

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

1997-98

•Energy crisis

2005

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

2008-09 12

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.

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Social Policy to Face 1997 Crisis 1.

2.

3.

4.

5.

6.

7.

8.

Social Safety Net was the main agenda Food security Education Health Energy (fuels and electricity subsidy) Employment Child Protection Total budget of all safety net programs: USD 2.5 billion (1999)

15

Crisis in 2005 â&#x20AC;&#x201C; Oil price increased from USD 40/barrel (2004) to over USD 60/barrel (Aug 2005) â&#x20AC;&#x201C; If no action taken, oil subsidy could have reached 34% of government budget.

16

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

Rp. Trillion (2004 prices)

Problems with Fuel Subsidy

80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Health Spending

Road and Irrigation Education Spending Spending

Fuel Subsidies

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

17

They primarily benefit the nonâ&#x20AC;?poor.

Not very effective towards Indonesiaâ&#x20AC;&#x2122;s poverty reduction targets as a transfer mechanism Problems with Fuel Subsidy Million Rupiah

6,000,000 5,000,000 Kerosene

4,000,000

Gasoline

3,000,000 2,000,000

Gas

1,000,000

Diesel

0 P o o re s t Q uint ile 1

Q 2

Q 3

Q 4

R ic he s t Q uint ile 5

Per Capita Expenditure Quintile

Source: SUSENAS 2003 (Household Panel Data)

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Social Policy to Face 2005 Crisis (1) Reallocation Schemes

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

Social Policy to Face 2005 Crisis (2) Reallocation Schemes

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

Social Policy to Face 2005 Crisis (3) Reallocation Schemes

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.

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Targeting & distribution are the problem

22

(Financial) Crisis in 2007-08 • 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

Social Policy to Face 2007-08 Crisis Social Assistance

Social Insurance Cluster 1 • 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)

Cluster 2 • National Community Empowerment Program **

• Community-based CCT

Cluster 3

Small Business Credit Facility

when economic shock occurs, mostly to severe disabled people and elderly y-based community development program Note: The Government still maintains fuel and other food subsidies.

24

Moving Towards the CCT Conditional 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).

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Moving Towards the CCT Conditions:

Verification:

Targeting: 1.

Local facilitator

2.

Piloting (7 provinces)

3.

Improvement of Proxy Means Testing Model

4.

Education

Focussed on very poor households Benefit payment:

Health

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Moving Towards the CCT 1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

Mexico (Oportunidades & Progresa) Chile (Chile Solidario) Brazil (Bolsa Familia & Bolsa Escola) Colombia (Familias en Acción) Nicaragua (Red de Protección Social) Jamaica Honduras Turkey (Şartlı Nakit Transferi) Bangladesh Pakistan Kenya Malawi South Africa Zambia 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

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.

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Thank you

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Terima Kasih ُ ‫شرکریہ‬ Baie Dankie

Muchas Gracias

谢谢 Teşekkür ederim

Muito Obrigado спасибо Falemnderit

cảm ơn bạn

धन्यवाद

감사합니다

Asante

‫خیلی ممنون‬

Matur Nuwun 30