# **3. Some documented cases**

# _Indonesia_

Here an important and well-documented case is the Indonesian crisis of 1997-9. Detailed analysis of household surveys taken just before, during and after the crisis displays graphically how living standards fall across the board, but tells a more mixed story about relative effects (Frankenberg et al, 1998, Strauss et al. 2004 – see Annex 1). The indicators are that, while absolute poverty rates soared from perhaps 15 percent of the population to 33 percent, the (relative) distribution of income became less unequal.<sup>11</sup> Also, remarkably, three years after the crisis hit, absolute poverty rates had dropped back below their pre-crisis levels.

Is the Indonesian case representative? Because of the nature of the data collected, the channels of influence from financial firm failure to poverty are hidden. Huge changes in relative prices, and some deterioration in the quality (and increase in the relative price) of public health services are the proximate causes of changes in poverty and inequality as measured in the Indonesian household data. These relative price changes were closely linked with the very large exchange rate movements that characterized the Indonesian crisis. Food prices in particular adjusted more and faster than other prices. In addition, there were widespread business failures and civic disturbances. Other financial crises have not been associated with as much macroeconomic and political turmoil and with such sharp changes in relative prices. This is the first reason for skepticism about how readily one can generalize from the Indonesian experience.

But in addition, it is well established that large macroeconomic adjustments can be associated with relative price changes that actually benefit large segments of the poor population (Ferreira et al. 1999, Manuelyan-Atinc and Walton, 1998). The contrast between Latin American and African adjustments in the 1980s is often mentioned: the increase in producer prices for small African farmers resulting from real devaluations in several countries helped improve income inequality there, whereas Latin America experienced deteriorating income inequality.<sup>12</sup> Third, the endogenous economic mechanisms for adjusting to shocks differ from country to country. For example, Behrman et al. (2000) show that labor market adjustment in the 1997-8 Thai crisis involved considerable increases in involuntary unemployment but no decline in real wage rates and no evidence of the increased employment that happened at

> 11Note, however, that, in contrast to the before-and-after comparison of measured inequality, the microsimulation model of Robilliard et al. (2002) implies that the pattern of price and wage changes, credit crunch, etc., of the Indonesian crisis would have increased inequality slightly (discussed further in the Annex).

12Lustig (2000) shows that widening inequalities were seen in 15 of the 20 macroeconomic crises which she studies from Latin America 1980-95. In a provocative and not unrelated analysis, Behrman et al. (2001) argue that financial liberalization contributed to the worsening of income distribution in Latin America in the 1990s. They regress the Gini, and the log-difference between the mean income of the top decile (or of the median income), and the mean income of the bottom 30 percent on a number of measures of policy, including an index of financial liberalization, as well as measures of inflation, macroeconomic volatility and the real exchange rate. The financial liberalization index, from Morley et al. (1999), is based on whether or not there were controls on deposit and lending rates, and on the ratio of reserves to deposits in the banking system.

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