Social Impact of the Regional Financial Crisis

Frank Ching

The Asian Economic Crisis
February 1999

Asia Society

Introduction

A year ago, at a Corporate Conference organized by the Asia Society in Hong Kong, a multinational Eminent Persons Group delivered a report, “Asia at the Crossroads: The Path Ahead.” In that report, the assembled experts concluded that provided the needed changes are put into place, the countries of East and Southeast Asia should emerge from the crisis better positioned to improve the lives of their citizens and to contribute to international stability and prosperity.

However, it pointed out that the necessary reforms will “have very painful social costs.” For example, it said, restoration of currency stability requires at least temporary increases in interest rates, which, along with tighter credit and more expensive imports, “force weaker firms into bankruptcy and threaten otherwise healthy companies. Mass layoffs and sharp increases in unemployment result.” Thus, even while the social impact of the financial crisis thus far has already been huge, it is likely to increase even as the economy recovers; indeed, the price to be paid for economic recovery may be even greater social costs, in terms of unemployment and, potentially, social instability.

No one knows how great the price will be. Indeed, no one knows the price paid thus far. It is astonishing that, 18 months after the onset of the crisis, there is still no agreement among the countries involved to assess its social impact. Much of what is known is anecdotal, gleaned from press reports. As Chia Siow Yue and Shamira Bhanu of the Institute of Southeast Asian Studies, Singapore, say in their background paper, “The Asian Financial Crisis: Human Security Dimensions”: “The lack of reliable and up-to-date information and analysis that serves policymakers well has been lacking in the Asian crisis and remains an area for urgent action.”

Hopefully, the situation will change. On January 8, 1999, the ASEAN Secretariat issued a press release about the Second Meeting of ASEAN Heads of Statistical Offices, held in Bali on January 5-6. According to the release, “The meeting considered the launching of a regional survey on the socioeconomic impact of the financial crisis on ASEAN.” It said that the heads of statistical offices agreed to set up a “primary database network” as a step toward the creation of a common set of statistics for the region.

How do things stand today? In December 1998 the World Bank released a report titled “Global Economic Prospects and the Developing Countries 1998/99: Beyond Financial Crisis,” which said: “Many of the social consequences of the present economic crisis are likely to be protracted. Most countries lack formal mechanisms to protect people from job losses and their consequences, while private savings and informal safety nets may be insufficient to deal with economy-wide shocks. Governments do not have systems in place to adequately track the import of shocks or policy interventions on household welfare or the institutional capacity to deal with mass layoffs (for example, through retraining schemes or massively scaled-up public works programs).”

This economic crisis, unlike previous ones, has not only affected people at the lowest economic levels but has impacted people who were part of the middle and, indeed, the upper economic classes as well. Bankers, stockbrokers, managers, computer engineers, and others who are usually thought of as being relatively well-off have also fallen victim to the crisis. But the biggest impact, no doubt, has been on the millions of nameless, faceless individuals who can generally be described as poor. And those numbers are rising. As one Asian newspaper headline reported in October 1998: “Number of Asian Poor Set to Double.”

But the increase in the number of people living in poverty does not depict the full picture: It reflects soaring joblessness among adults, a rising number of dropouts from school, a reversal of the migration from rural areas to big cities, and, in many cases, an upsurge in crime. Granted, some of these phenomena are observable across all countries in Asia, but they are especially serious among the countries that have been worst hit by the financial crisis.

The crisis has affected virtually all the countries of Southeast Asia, including such affluent societies as Hong Kong and Singapore. But its worst impact has been on Thailand, South Korea, Malaysia, and, last but certainly not least, Indonesia. This essay presents brief discussions on the situation in each of these four countries.

 

Thailand

The media, domestic and foreign, have widely reported the story of Sirivat Voravetvuthikun, a former stocks and property highflier, who was reduced to selling sandwiches to make a living. But his is, in a relative sense, a story of success. The sandwich business has treated him well, and Mr. Sirivat now operates three sandwich counters and employs 28 helpers. Another case is that of Sithisak Kanchanasirirat, a real estate developer whose business went bust and who became a roast-chicken vendor. That business, too, turned out to be a flop, and Mr. Sithisak and his wife turned to selling secondhand clothes, videos, and comic books.

These are some of the real-life stories that illustrate the personal plight of people caught up in the financial crisis. They show that, behind the bland figures released by bureaucrats, there are flesh-and-blood human beings who are really suffering. And, in many instances, their suffering is much worse than those of entrepreneurs whose companies went belly up.

Devaluation of the Thai baht on July 2, 1997, and the subsequent domino effect that event had on Thailand’s neighbors, sparked off the asian financial crisis, which also has become an economic and social crisis, and, in some countries, a political one.

Layoffs, which had been at a trickle earlier in the year, turned into an avalanche. Thousands of office workers lost their jobs after dozens of financial companies suspended operations. Unemployment stood at about a million at the end of 1997. But by mid-1998 the number had doubled. The ministry of labor urged firms to find alternatives to layoffs.

In a reversal of the pattern of previous years, which saw large numbers of people moving from the villages to the cities in search of a better life, many newly unemployed urban workers, unable to sustain themselves in the city, went back to their villages, hoping to eke out a living there. By doing so, they swelled the ranks of those living on the fringes of poverty.

As state revenues declined, the government attempted to trim its expenses. However, there was strong resistance to cuts. Thus, at the end of 1998, when the government decided to reduce bonuses of state enterprise employees by 30 percent in 1999, there was so much resistance from the State Enterprises Employee Confederation that, in the end, only the bonuses of senior executives were cut. Meanwhile, the Finance Ministry had to scrap a voluntary program of graduated cuts in civil servants’ allowances, because most refused to volunteer.

It is not surprising, therefore, that Prime Minister Chuan Leekpai, at a public seminar on January 13, 1999, complained that state agencies had not done enough to reduce their manpower, although they agreed that bureaucratic reforms were necessary. Employees of state enterprises were clearly in a more favored position. The Finance Ministry in January proposed setting up a fund to assist those affected by the privatization of state enterprises. Public enterprises that are to be closed down, sold to the private sector, or turned into joint ventures can borrow from the fund to pay compensation and pensions for their employees.

As for the private sector, the government set up a scheme to provide interest-free loans of up to 15,000 baht, to be repaid in five years, as venture capital for setting up small businesses by laid-off workers, farmers, or vendors. But the funds were depleted within months, leaving a long waiting list of applicants.

Another measure adopted by the government to ease the plight of the jobless as 1998 drew to a close was a change in the income tax provisions. Severance pay was made tax-exempt. The provision was made retroactive, so that anyone who lost his job on or after January 1, 1998, would pay no tax on the first 300,000 baht of severance pay. The measure was expected to cost the government 730 million baht in lost revenue.

Those who benefit from this change in the law, of course, are limited to those who receive severance pay. According to Yongyut Chalaemwong, director of the Thailand Development Research Institute, “only 52 percent of laid-off workers received due compensation under the labor law,” while “36 percent did not get a baht of severance pay, and 12 percent received partial compensation.”

Although the government did what it could, it clearly did not possess the resources to adequately ease the plight of victims of the crisis. With nowhere to turn to for help, some workers set up self-help organizations by pooling their resources. A savings club, formed in late 1997, had by the end of 1998 extended 70,000 baht in loans to 47 members. Each member is obliged to contribute between 100 and 500 baht a month, depending on his income, to the fund. The Bangkok Post on December 28, 1998, reported Ms. Chanpen Tetsomboon, treasurer of the fund, as saying: “We have to help ourselves and to help our fellow workers as best we can. There is no use for us to protest in front of the Government House.” Among other things, the fund set up welfare stalls to provide basic necessities, such as rice, soap, and detergent at cheap prices.

Inevitably, however, the government became the focus of protests. Workers on halted dam construction and other projects staged demonstrations outside the Government House. And, as 1999 dawned, the government braced itself for protests from farmers because of the falling prices of key cash crops. One official said a new surge of protests was expected between February and April, when the prices of paddy and tapioca were expected to fall.

A survey by the Friends of Women Foundation, made public at the end of 1998, disclosed that women were particularly hard hit. They were special victims of cutbacks in the textiles and electronics industries, where they constituted 90 percent of the work force. A foundation official said most women did not have savings to fall back on. The survey found that some had found new jobs, often for wages below the legal minimum and in conditions that do not comply with labor standards. Others became street hawkers, selling fruits, desserts, and other foods. Still others became seamstresses or returned to their native villages. A number were turned away by their husbands, who sometimes looked for new wives with more secure jobs.

On a lighter note, the scourge of unemployment affected elephants as well as people. Dozens of elephants in northern Thailand are expected to be laid off in 1999 because of the economic downturn. An official of the Elephant Preservation Center said some of the 200 elephants used by loggers are likely to be abandoned, as their owners find it increasingly expensive to take care of them.

The social impact of the financial crisis on Thailand remains severe. The International Labor Organization (ILO) estimated in April 1998 that 14 percent of the population was poor, compared to less than 10 percent in 1994. The World Bank estimated poverty by the end of 1998 at 23 percent. This suggests that virtually all of the dramatic reduction in poverty achieved since 1981 had been eliminated.

The government amended the Social Security Act to extend coverage-in the event of illness, accidents, child delivery treatment, physical disability, or death-of those rendered unemployed by an additional six months. Previously access to the Social Security Fund, to which employer, employee, and the government all contribute, was suspended after the subscription ceased if, for example, the employee was made redundant.

The law also was changed to make it easier for people to qualify for child welfare and old-age pension schemes. Whereas in the past the law required a person to contribute to the fund for at least 12 consecutive months in order to qualify, the new law required only 12 monthly payments over a 36-month period, making it easier for those rendered jobless to qualify. This new law took effect in December 1998.

The economic downturn took a heavy toll on the young. One estimate put the number of street children aged 3-15 nationwide at 20,000, with 4,000 in Bangkok. NGOs reported an increase in child labor, child prostitution, and child beggars. About 150,000 of a total of a million students had dropped out of school in 1998. The Bangkok metropolitan area introduced a voucher system to support families unable to pay school fees.

As the baht depreciated, the cost of imports soared. This meant that, as far as health care was concerned, imported drugs cost more. The Public Health Ministry unveiled a new health security card project, financed out of an allocation of 1.2 billion baht from the Asian Development Bank (ADB). Cardholders would pay 500 baht per year for coverage for a family of five. They would be entitled to free medical services during the year, though not all diseases are covered by the program.

Another indication of the harsh realities behind the economic figures was a doubling in the number of suicides: Nearly 5,000 people killed themselves in the past year.

Meanwhile, the local business elite continued to oppose legal reforms that would allow foreigners a greater role in the Thai economy. As one Thai commentator, Professor Thitinan Pongsudhirak of Chulalongkorn University wrote, the polarization of the legal reforms battle, which pits foreign investors against entrenched local business interests, is squeezing the Thai people, whose economic well-being rests on the restructuring of their economy.

Of course, Thailand was not left entirely to its own resources to cope with the crisis. In fact, it received considerable aid from the international community, with a $17.2 billion bailout. In 1998 alone, the World Bank approved a $15 million economic management assistance loan to provide technical assistance to improve the government’s capacity to manage Thailand’s economy; a $300 million social investment project to fund job creation for the poor and unemployed through existing labor-intensive government programs; and a $400 million economic and financial adjustment loan to provide balance of payments assistance to help Thailand implement a program for economic recovery.

At times, however, it seemed that there was a mismatch between the aid and what many people wanted. The Thai social fund was meant to create jobs, but most investment projects did not meet the criteria. Paibul Wattanasiritham, president of the Government Savings Bank, said that only 12 out of 836 projects had passed the first round of applications in September 1998. He said that many communities wanted to use the loans as operational funds but were prevented from doing so.

The ADB extended $500 million under the Social Sector Program Loan with a focus on three areas-labor market, social welfare, and health and education.

As of January 1999, Thailand had managed to stabilize the baht, keep commodity prices low, and strengthen its reserves. But mass business closures and a severe contraction in the real estate and industrial sectors showed no signs of abating.

“If we fail in our tasks to address the untold sufferings and miseries arising from the current economic crisis, we are indeed sowing the seeds for future instability,” Foreign Minister Surin Pitsuwan said in a speech in Japan in December 1998. “Rising unemployment, social dislocation, and unrest invite a social implosion that can only lead to total insecurity of the entire region.”

 

South Korea

Perhaps the most poignant indication of the social impact of the financial crisis on South Korea was an item in the South China Morning Post on January 16, 1999. It said that the South Korean government had decided to lift restrictions on the adoption of Korean babies by foreigners because of an alarming surge in the number of abandoned children. The paper quoted a Korean official as saying that the cap of about 2,000 adoptions a year would be lifted but only temporarily. It was estimated that in the first six months of 1998 about 5,000 children were left at orphanages because their parents could not afford to take care of them.

Before the financial crisis hit South Korea in late 1997, the country had enjoyed a long period of low unemployment. In fact, in 1995-96, the jobless rate hovered in the 2 percentage range, a level that economists consider close to full employment. The work force is highly educated, since almost 95 percent of the population has attended secondary school.

However, as of November 1998, the official unemployment rate stood at 7.3 percent, with 1.5 million people out of work, more than three times the level in November 1997. The actual numbers may be substantially higher because, as has been pointed out by the Korean Labor and Society Institute, even those who work as little as one hour a week are counted among the employed.

Restructuring of the chaebol, South Korea’s conglomerates, put many senior executives out of work. One such example is Suk Sang Roh, a former vice president of the Sammi Group in South Korea, a chaebol gone bust. A BBC documentary, “East and West,” narrated by former Hong Kong governor Chris Patten, shows him enthusiastically working as a trainee waiter. But, of course, the vast majority of Koreans who have lost their jobs worked not for big chaebol, but for small and medium-sized enterprises.

Unlike the crisis-hit countries of Southeast Asia, in Korea the social crisis is primarily one of unemployment, not poverty. In order to ameliorate the unemployment problem, over 50 percent of companies imposed a freeze on new recruitment rather than simply resort to layoffs, while 17 percent have used early retirement, and 14 percent reduced working hours.

The million people newly unemployed represents 8.2 percent of all households. Average household consumption is likely to have declined by about 15 percent. The ILO has estimated that as many as 12 percent of South Koreans may have been reduced to poverty in 1998.

A survey of early May 1998 found that only 41 percent of new college graduates had found jobs. One taken seven months later suggests that the outlook for 1999 may be even more grim, as 75 percent of manufacturers planned to freeze hiring. Sun Han Seung of the Korea Labor Institute estimates that, of 260,000 people who will enter the labor market in 1999, “only 50,000 will be able to land jobs.”

The deep recession that struck South Korea has reversed the migration pattern of recent years, with people from the countryside streaming into big cities in search of work. But, with city jobs disappearing, many city dwellers are returning to their native villages, hoping to make a living from farming. In 1998 a record 6,200 families abandoned the cities to seek a better life in the countryside. According to the South China Morning Post of January 18, the exodus peaked last April, when 1,429 households made this drastic move. More than half the migrants took up rice farming. Since April the pace has slowed somewhat but is still double that before the economic crisis.

Despite the expectation of a business recovery from the early part of 1999, restructuring on the part of conglomerates and the planned sales of the Korea First Bank and Seoul Bank are likely to throw several hundred thousand people out of work.

Lee Kap Yong, head of the Korean Confederation of Trade Unions, and several leaders of the umbrella labor group, one of the nation’s two labor representative bodies with about 650,000 members, staged a hunger strike to protest the government-led unilateral reform of the economy. “The purpose of my hunger strike is to demand the government to drop its unilateral reform drive because it imposes pains only on workers,” the Korea Herald of December 16, 1998, quoted Lee as saying.

The IMF predicts that South Korea’s unemployment rate will rise to 8 percent in 1999, while the Federation of Korean Industries puts the figure at 7.8 percent. And the ILO forecasts that the jobless rate will remain high through the latter half of 1999 and 60 percent of those laid off will barely be able to sustain their families’ livelihood for more than a single year.

In a sign of the strength of organized labor in South Korea, the government has agreed to allow unemployed workers to join trade unions. The justice ministry is believed to have opposed this measure on the ground that unemployed members of trade unions may pose a threat to social stability. But the labor ministry went along with the plan, while deferring implementation to the year 2000.

Toward the end of 1998, a number of labor unions pledged not to stage strikes in 1999. The Ministry of Labor Affairs said in December that an increasing number of unions had declared that they would not stage any strikes in the new year. For example, in the southeastern port city of Pusan, trade unions of four companies declared 1999 as “the year of no strikes and disputes.”

In a resolution adopted by labor and management on November 21, Kae-kwang’s member union pledged that it will not stage strikes and will do their best to boost productivity. In return, management promised that it would make all efforts not to lay off workers and repay them fairly for their labor. The gesture by labor is indicative of a major turnaround in relations with management, one that will put aside old conflicts and differences to help overcome the economic crisis.

Many companies went out of business and were unable to pay their workers. According to the Ministry of Labor Affairs, over 100,000 workers were still owed money by their companies by the end of 1998. More than 3,000 companies were in arrears. The government was said to be putting pressure on companies to pay back wages by launching probes into the hidden wealth of owners or holding them legally responsible for their actions.

Unlike the crisis-stricken countries in Southeast Asia, South Korea has an unemployment benefit scheme, with Social Security requirements stipulating compulsory coverage as long as an enterprise employs five or more workers. However, this still leaves well over 40 percent of Korean employees unprotected. Moreover, even for the portion of the work force covered, the benefits are often far from adequate. Because of rising unemployment, the government decided to extend the coverage of unemployment insurance to all work sites regardless of the number of employees, beginning in September 1998. This meant an increase of recipients of unemployment benefits from 6.3 to 8.6 million.

Meanwhile, a report by a group of charity workers in Taejon said that homelessness had become a serious social issue, not only in Seoul, but also in major provincial cities.

Media reports suggest that massive relief projects undertaken by the central and provincial governments to help the unemployed may be of little benefit. The Korea Herald, in an article published December 2, 1998, reported that “most of the relief programs, including training classes, are failing because they are conducted in a haphazard manner.”

Civic groups have taken advantage of the economic crisis to push their social agenda. Kim Yong Hwan, executive director of the planning bureau of the Citizens Coalition for Economic Justice, was quoted in the Korea Herald of December 4, 1998, as saying the economic situation has made it necessary for the government to “listen to civic groups.”

The economic downturn has also led to a drastic rise in crime. The total number of prison inmates across the nation rose beyond 70,000, exceeding the facilities’ combined capacity by 31.8 percent, the justice ministry disclosed in December 1998.

In what may be a sign of a serious deterioration in health care, a 48-year-old woman in Seoul was diagnosed in December with diphtheria, a highly contagious disease that has not appeared in Korea in 11 years. The health insurance system covers less than 50 percent of hospital costs.

In the aftermath of the currency crisis, Korea’s budget deficit is expected to snowball by more than $16.5 billion a year until 2002, posing serious stumbling blocks to economic growth, the Bank of Korea said on December 25. It estimated that the national debt will rise from 47.1 trillion won in 1997 to 73.3 trillion won ($60.6 billion) this year and to 160.2 trillion won ($132.6 billion) in 2002.

The economic downturn impacted cultural life as well. People are spending more time at home watching television rather than engaging in activities that require spending money, such as buying books, going to the movies, or attending art exhibitions. This was disclosed in late December in a Ministry of Culture and Tourism survey. It said the average amount spent on leisure or cultural activities per household was 109,000 won, a decrease of 33.5 percent from the same period in 1997.

The Korea Development Institute in December revised upward its growth forecast for the Korean economy to 2.2 percent next year, while warning that the country’s financial crisis has yet to end. The state-funded think tank forecast 0.8 percent growth in the first half of the year and 3.3 percent in the second, a stark contrast to 1998’s projected 5.9 percent decline.

 

Malaysia

During the second half of 1997, Malaysia was plunged into the worst currency crisis it had ever experienced. A year later, in September 1998, Prime Minister Mahathir shocked many people in the West when he imposed sweeping controls on the country’s currency to protect the economy from further damage by the Asian financial crisis.

In addition, in December, Malaysia imposed price controls for 25 essential commodities. It was explained that the move was aimed at ensuring adequate supplies at reasonable prices for the holiday season, and that controls would be lifted in mid-March.

Though Malaysia turned its back on the IMF, with its rigid requirements for reform, Malaysia welcomed aid from other quarters, particularly Japan. In fact, in January Mahathir complained at the slowness with which the Japanese were making money available, saying that the economic crisis could well be over before the Japanese funds could be spent.

While official figures are not yet available, experts believe that the Malaysian economy contracted by about 6.6 percent in 1998. This contrasts with the country’s economic performance in the previous decade, when annual growth of 8 percent was almost taken for granted.

The sudden-and severe-economic downturn resulted in an increase in unemployment. Before the onset of the financial crisis, Malaysia suffered from a labor shortage, which was ameliorated to some extent by the presence of well over a million migrant workers.

Despite earlier predictions of dramatically rising unemployment figures, the Human Resources Ministry reported in January 1999 that only 84,073 workers had been laid off in 1998. It predicted that retrenchment figures would be even lower in 1999. The relatively healthy state of the employment situation was reflected by the government’s decision to allow the recruitment of hundreds of thousands of new foreign workers.

Human Resources Minister Lim Ah Lek said that almost 80 percent of those who had lost their jobs had found new employment. He added that the RM51.5 billion trade surplus registered in the first 11 months of 1998 showed that the economy was improving.

As for the public sector, ministers accepted a 10 percent pay cut, while the salary of senior civil servants was slashed by 10 percent. Salary increases for higher categories of civil servants were frozen.

The extent to which the nation’s poverty worsened as a result of the financial crisis is difficult to ascertain. There were reports of elderly parents being abandoned or physically abused by their children. National Unity and Social Development Minister Paduka Zaleha Ismail said members of the public should inform the Welfare Services Department if they came across such cases, and victims would be cared for. But she also emphasized the need for families to stay together.

According to a report in the New Straits Times, the minister said the government allocated between 6 million to 8 million ringgit a year to assist the poor and such allocations would continue, despite the state of the economy.

The UMNO Youth announced in early 1999 that it would restructure Yayasan Gerakbakti Kebangsaan, a foundation for fighting poverty. Datuk Hishamuddin Tun Hussein, the acting head, said poverty eradication programs were carried out on an ad hoc basis by different agencies and that there was a lack of follow-up to check their effectiveness.

The World Bank, in a report on “Poverty in East Asia Before and After the Crisis,” estimated that the number of poor people in Malaysia had dropped from 2.1 million in 1975 to 900,000 in 1995, which accounted for 4.3 percent of the population. Malaysia had, by comparison, the smallest percentage of poor people of nine countries in East Asia, not including Japan.

Chia Siow Yue and Shamira Bhanu, in their background paper on the human security dimensions of the Asian financial crisis, said that “official statistics show 3.7 percent of urban households as poor, based on the poverty line of RM425.” However, they point out that academics have argued a standard poverty line for both urban and rural areas is unrealistic and that the urban poverty line should be set much higher, at RM750. Using this higher base line, 23 percent of urban households would be considered poor. And, while there are programs to alleviate rural poverty, there are no specific programs targeted at urban poverty.

The poor, and the not so poor, also have to contend with the rising price of food, since much of the food content is imported. The price of cooking oil is subsidized. Unlike some other countries, such as Indonesia, there did not appear to be an increase in crime as a result of the economic downturn. In fact, Kuala Lumpur’s police reported a drop in serious crimes and violence-related offenses and crimes involving property.

As for health care, Malaysia’s record was enviable for East Asia, with life expectancy at 71.8 years. But, as a result of the economic crisis, budgets had to be trimmed, including that of the Ministry of Health, which was cut by 12 percent. Even before the cuts, the health budget, at 3.4 percent of Gross Domestic Product (GDP), was only half that recommended by the World Health Organization.

Private health care, therefore, played an important role. But with the drop in household income and the inevitable rise in the cost of imported medicine resulting from the depreciation of the ringgit, private medicine is being priced beyond the reach of many Malaysians.

On the education front, the fall in the value of the ringgit meant that many families can go longer afford to send their children abroad for higher education. There is anecdotal evidence that a number of those already enrolled in universities abroad have had to drop out. The government is encouraging students to stay in Malaysia for advanced studies, but Malaysian universities simply do not have the capacity to absorb them all. In 1998, 64 percent of students applying for university places were turned down. To its credit, the government, despite the economic crisis, continued its campaign to make 11 years of education available to all Malaysians.

The outlook for 1999 seems hopeful. A poll of economists taken in January 1999 said they expected the economic downturn to bottom out in 1999. They estimated that there would be virtually no growth during the year, but that in itself would be a great advance on the substantial contraction of the economy in 1998.

 

Indonesia

“Indonesia is in deep crisis,” the World Bank reported in July 1998. “A country that achieved decades of rapid growth, stability and poverty reduction, is now near economic collapse. . . . No country in recent history, let alone one the size of Indonesia, has ever suffered such a dramatic reversal of fortune.”

The contrast between pre-1997 Indonesia and the country today is indeed stark. As Peter McCawley of the University of Queensland has said: “Never before in human history did the real living standards of so many millions of poor people rise so quickly for such a sustained period. This is surely an event of great economic significance on our planet. Nowhere has the crisis hit harder than in Indonesia.”

In Indonesia, as in other crisis-stricken countries, it is difficult to get precise data. Unemployment was estimated at 5 percent, or 4.5 million people, in 1996, before the crisis struck. Two years later, in 1998, official government estimates put the number of unemployed at 20 million.

Precise figures are not available, but it seems likely that millions of workers lost their jobs in the first few months of 1998, including hundreds of thousands of people in the construction industry. The sharp rise in the jobless rate was followed shortly afterward by rising disorder, in the form of robberies and violence, reflecting a desperation born of poverty.

The number of impoverished people skyrocketed. This is because millions of people who had climbed out of poverty during the boom years fell back under the poverty line. Indonesia estimated that 11.3 percent of its people lived below the poverty line in early 1996. The World Bank put the number at around 10.1 percent in 1997, before the crisis. According to the World Bank, negative growth of 12 percent was likely to raise the percentage of those living in poverty to 14.1 percent, or about 29 million people.

However, in August 1998, when President Habibie delivered a state speech, Indonesia’s Central Board of Statistics released data indicating that, by mid-1998, the proportion of the population below the poverty line had probably jumped to 39.9 percent, or 79.4 million people.

To keep things in perspective, the poverty line drawn by the Indonesian government was extremely low: 55 U.S. cents a day for urban areas, and 40 U.S. cents a day for rural areas. That is to say, many people surviving on less than $1 a day were defined as not poor.

The ILO’s figure for the poor in mid-1998 was 37 percent, or 75 million people, not far from the Central Board of Statistics figure. But it predicted that the situation would dramatically deteriorate, with the numbers rising to 100 million, or 48 percent of the population, by the end of 1998. It forecast that further price rises would push 140 million people, or 66 percent of the population, below the poverty line in 1999. This, the ILO said, will result in “poverty levels not seen since the 1960s.”

Thus, the social impact of the economic crisis on Indonesia is huge. Many millions of people, who were already quite poor before the crisis, are having to cope with a severe drop in their standard of living.

Just how is this affecting people on the personal level? The pages of the Jakarta Post provide many pathetic stories. There is the case of Dengsi, a 27-year-old who graduated from a senior economic high school and used to work in a rattan furniture store in South Sulawesi, earning enough to support himself, his wife, and their two children. Now, he works as a laborer in a chocolate manufacturing factory and takes home a daily allowance of Rp5,000-7,000, less than $1. His income is enough for him to buy one kilogram of rice a day as well as salted fish and vegetables for his family. “I am still lucky to find this job, although I work only four days a week,” the Jakarta Post quoted him as saying. “We have to swallow our pride and tighten our belts.”

Dengsi is already better off than Sarweni, wife of a motorcycle-taxi driver and mother of three, who lives in a Jakarta slum. She says having meals twice a day is a miracle. There are times when she and her husband eat just once a day, to provide food for their children. “There is no need to complain,” she says. “I just accept the situation.”

So desperate are the poor and hungry that hundreds of them have taken over golf courses, planting crops such as cassava and corn. In many provinces, they have raided shrimp ponds. In the Gunungkidul area, one of the poorest places in central Java, hundreds of families cannot afford to buy anything anymore, including tap water.

Because of the economic downturn, many men who had gone to the cities to work have returned to Gunungkidul. But, while in the past the men returned with food and presents, this time they returned penniless and without prospects.

The Indonesian government has attempted to do what it can to help relieve the suffering of its people. It has set aside Rp18 trillion ($2.4 billion) to carry out social safety net programs for 1998-99. The National Development Planning Board (NDPB) has allocated funds to create jobs and to provide adequate food stocks. The program is intended to provide needy people with easy access to education, medication, and other public facilities.

Mar’ie Muhammad, a respected former minister of finance, has been appointed to chair the NDPB. Professor Mubyarto of Yogyakarta’s University of Gadjah Mada, explained that the social safety net would be prioritized to support victims of the crisis, including the newly unemployed, poor communities, students, traders, and farmers.

In July 1998 State Minister of Food and Horticulture, A. M. Saefuddin, said about 7.3 million crisis-hit families would receive subsidized medium-quality rice, with each family expected to receive at least 20 kilograms. By January 1999 he was quoted as reporting during a cabinet meeting that he was thinking of “enlarging the special market operation to areas not yet registered, especially targeting poor urban families.”

But there were signs that the government’s social safety net program was not performing well. Mar’ie Muhammad, whose job was to monitor disbursements, said the change of the disbursement system in September 1998 from a centralized to a block grant system, under which provincial administrations are given managerial responsibility over the aid, caused a slowdown in disbursement. It is possible that press reports claiming that international aid to Indonesia’s poor had been diverted by government officials caused some officials to be overly cautious.

“The officials are too careful and are afraid of making mistakes,” he said at a media briefing on January 13, 1999. “They don’t want to go on the offensive, but would rather stay back on defense. They’re playing negative football.”

Muhammad’s deputy, Gunawan Sumodiningrat, said only about 30 percent of the aid package had been disbursed, and that the monitoring team had found no evidence of graft in the aid program, “but the disbursement and utilization rate is very low.” He explained that the low utilization rate was due to the inability of officials and residents in the districts and villages to decide what their needs were. “The aid will only be disbursed if the people are ready [with a proposal] so that it will be clear where the money will go and how much money will be needed. We don’t want any overspending.”

Coordinating Minister for People’s Welfare and Poverty Eradication Haryono Suyono denied significant problems in distributing aid to crisis-stricken communities, which amounted to Rp17.79 trillion for 1998-99. “The provincial administrations were given a greater freedom to administer the funds based on their areas’ special needs,” he explained. This, he said, created confusion among officials, who needed to adjust. “A newly attained freedom to determine projects in accordance to local needs is not so easy to handle, it requires a change in mentality, as they were so used to being only yes men,” he said.

However, there were clearly serious problems in the government’s administration of its program to assist the poor and destitute. This was made evident when it emerged that Japanese rice destined for Indonesia’s starving people had not been distributed. It turned out that only a fraction of the 550,000 tons of rice shipped from Japan had actually been distributed, with most of it sitting in government warehouses.

“Tokyo’s enquiries have been met, unfortunately, by responses that are not only unsatisfactory but at times have come across as arrogant,” the Jakarta Post editorialized. “Minister of Trade and Industry Rahardi Ramelan contends the Japanese rice is of a high grade the poor cannot afford. Or, put in other words, the rice is too good for Indonesia’s needy. He argues that releasing the Japanese rice in the market at lower than market prices would undermine the market itself. If we follow Rahardi’s line of argument, then there is only one way out of this dilemma that addresses the problems of all concerned: Send the rice back to Japan, with a fitting thank-you note.”

Despite the obvious problems of unemployment and poverty in Indonesia, there are signs that the food situation is not that desperate. Jorge Garcia-Garcia, at an Indonesian crisis meeting held at Australian National University in late November 1998, concluded that “Indonesia has had aggregate food security in 1998 and should have aggregate food security in 1999.” He pointed out that the poverty levels being talked about in the press and among some organizations “grossly exaggerated the effects of the crisis on poverty.”

The decline in food production, he said, had not “decreased food security seriously because the country has imported sufficient amounts of rice, soybean, wheat, and other foodstuffs.” Moreover, Indonesia should not have a food security problem in 1999 because the 1998 drought is over. But he added that “there is the danger that insufficient supplies of fertilizers of good quality might prevent a faster recovery of agricultural production than expected.”

He also questions ILO estimates that put the number of poor people in 1999 at almost 140 million. He points out that, despite a fall of approximately 16-17 percent in per capita GDP, “that income is still 3-6 percent higher than in 1993.” While the decline is a big setback, it is not enough to make 40-70 percent of the population poor. “Income levels required for that incidence of poverty would resemble more that of Indonesia in the late 1960s or early 1970s, rather than early 1990s.”

Another note of optimism was struck by Chris Manning, at the same ANU meeting. He said that small-scale industry had been able to adapt much more quickly to the new environment than larger, more technically advanced and debt-ridden segments of industry. This segment of the economy, he said, has remained vibrant and has absorbed a considered number of people who had lost their jobs.

The conference itself published an overview on the Indonesian economic crisis, in which it stated: “The social impact of the crisis has been great in terms of falling real wages and incomes, greater unemployment and poverty. However, recent analysis suggests that initial estimates of the damage have been overly pessimistic. Increased poverty is serious but not an insurmountable problem, and some regions outside of Java, notably Sulawesi and Sumatra, have enjoyed export booms and better socioeconomic conditions than those of Java. These are important and welcome signs. They suggest that there is potential and a basis for economic recovery of Indonesia. At the same time, we must not become overly optimistic that the turnaround will continue without considerable further policy effort. Large risks and potential fluctuations in economic conditions still lie ahead.”

Ironically, one economic sector that benefited from the unrest was the insurance business. The Jakarta Post reported on January 8, 1999, that many insurers “cannot keep up with growing demand for extensive damage insurance coverage amid growing violence and worries over continued social unrest.”

The director of the reinsurance division of the Insurance Council of Indonesia, Frans Sabusilawane, acknowledged the increased demand for insurance policies covering social unrest since the May riots. “Demand is higher than supply,” he said. He added that many insurers had rejected applicants from areas highly vulnerable to unrest.

The sudden deterioration in the country’s situation, coupled with domestic political uncertainties, has exacerbated social tensions. There have been examples of seemingly mindless violence with minor incidents escalating into street violence.

For example, the Jakarta Post reported in early December that thousands of people in the central Java town of Blora went on a rampage because of a shortage of fertilizer, leaving at least six people badly injured and dozens of shops and cars damaged.

And, in early January, hundreds of youths were involved in a street brawl along Jalan Matraman in East Jakarta, which left dozens of people injured. Stones were thrown, and at least two police motorcycles were burned by the angry mob. A police officer said that the violence stemmed from a seemingly insignificant clash between rival groups of high school students.

Similarly, in an incident that occurred only a few days earlier, hundreds of people attacked vehicles and extorted money from motorists in north Jakarta after they were barred from stripping construction materials from a deserted auto assembly plant. The people, most of whom were scavengers and used-goods vendors, became enraged after security officers prevented them from collecting steel and other construction materials and vented their anger on passing vehicles.

Sabar Sianturi, chief of the Ministry of Manpower’s Jakarta office, said that growing numbers of the unemployed, coupled with the continued arrival of migrants, would cause formidable problems unless the city administration took immediate action. “On the one hand, the number of jobless is expected to continue to rise, while on the other hand more and more people from other cities and islands will continue to come here in search of a livelihood,” he said. “The situation is like a ticking time bomb. It could explode at any time over the coming months.”

Things were so bad that, even during Ramadan, when Muslims are supposed to fast and control their emotions, there were outbursts of violence throughout the country.

Aris Ananta of the University of Indonesia’s Insitute of Demography depicted the situation starkly when he said that the number of people living below the poverty line would decrease over the next five years “simply because they are wiped out by death.”

Social stability in 1999 remains in doubt, especially since students from Java, Lampung, and Bali pledged in the first week of the new year that they would continue to use demonstrations as a way to maintain pressure on the government. In a statement released to mark the beginning of the new year, 18 student groups under the Front of Indonesian Youth Struggle also defended charges of growing radicalization in the student movement, saying any such trend was in response to the government’s clumsy handling of student protests and its unwillingness to take heed of the demonstrators’ demands.

“Student demonstrations are our way of making our stand and demands known to the government,” student spokesman Jumiba told reporters. The response by the government and the armed forces has been “very insulting” he said.

The crime rate surged by 10 percent in 1998. The police reported that they had shot and killed 90 suspected criminals during the year, wounding an additional 101, in Jakarta alone. According to National Police Chief Lt. Gen. Roesmanhadi, “The greater incidence of crimes this year is closely related to the prolonged economic crisis and the social and political tension here.” As the Jakarta Post editorialized on January 2: “With poverty rapidly rising, more and more people are resorting to crime as a matter of survival. These past few weeks we have heard reports of highways holdups, targeting trucks carrying food supplies destined for urban centers. Some warehouses storing food stocks have been looted.”

Other areas where the economic crisis exacted high social costs were health care and education. Health care standards were not high even before the crisis. Minister of Health Farid Anfasa Moeloek reported many people in 19 provinces were suffering from iodine deficiency. In two provinces there were many people who suffered from an acute lack of iodine.

The minister said that, every year, 20,000 women die of aseptic labor, bleeding, and poisoning during pregnancy as the result of poor nutritional intake, which is 50 times worse than in other ASEAN countries. The mortality rate, Moeloek said, is “equivalent to a jumbo jet full of expectant mothers crashing every week.”

Malnutrition is a serious problem, among adults as well as children. During the first half of 1998, there were numerous reports of sharp increases in the prices of medicines and of hospitals running short of supplies. In the Indramayu area in West Java, thousands of women dropped out of the family planning program due to the high prices of contraceptives.

Women, in fact, were particular victims of the increased economic and psychological pressure, with more cases of domestic violence reported. Rita Serena Kolibonso, executive director of the crisis center Mitra Perempuan, said there were 104 new cases of abuse of women in greater Jakarta in 1998. She said economic difficulties “give a husband justification to pick on or hit his wife.”

Inevitably, poorer families withdrew their children from school because they could no longer pay tuition. The Indonesian government’s own estimates are that in 1998-99, in the absence of special measures, the number of dropouts from primary school might double to 1.65 million, while dropouts from junior secondary schools could increase to 1.11 million. Education Minister Juwono Sudarsono spelled out the dire consequences of such developments when he said: “The long-term implications will be a lost generation, deprived of the opportunity to sustain its educational proficiency.”

The Jakarta Post reported in early 1999 that, as a result of the economic crisis, about 2.5 million students dropped out of schools and universities in 1998. The education minister said that, alarming though the numbers were, some consolation could be taken in the fact that they were below projections that up to 8 million children might drop out of school. “The high public awareness of the need for education and parents’ strong will have helped keep down the number of school dropouts,” he said. The government allotted Rp190.5 billion for operational support for educational activities under its social safety net program.

On January 6, President Habibie unveiled the 1999-2000 state budget for the fiscal year beginning in April. It was devised for the extraordinary conditions of worsening fortunes of the business sector and depressed global oil prices. The budget, which assumes zero economic growth and an inflation rate of 17 percent, relies heavily on foreign loans because prices of oil, Indonesia’s traditional revenue earner, are projected to remain low. Subsidies and other forms of assistance are maintained to help the public and the banking sector survive.

“We realize the economy has not yet recovered, it’s still far from a normal condition,” the president told the House of Representatives. “With zero growth, it means that we still can’t expect increasing opportunities for employment, but at least we have to maintain the current employment so it does not decrease.” The budget was balanced at Rp218.2 trillion, 83 percent of the 1998-99 budget in terms of rupiah.

The budget was generally well received. The Jakarta Post, in an editorial January 6, declared: “In all fairness, the new budget contains massive provisions for various social safety net programs. These programs are needed to provide relief to those worst affected by the economic crisis. The government is also forging ahead with its attempt to promote the concept of a people’s economy by providing massive subsidies to interest rates on over a dozen loan schemes devised to help small and medium-sized enterprises and cooperatives.”

Indonesia explained that the World Bank and ADB would be the primary sources of external financing to balance the budget. “We’ll rely on our traditional multilateral and bilateral lenders. And we’ll struggle for what is already definite, particularly from the World Bank and the Asian Development Bank,” said NDPB chairman Boediono two days after the budget speech.

Indonesia’s prolonged economic and political crisis shows no signs of ending. Minister of Manpower, Fahmi Idris, said in December that the government would fight to reduce the unemployment rate to “between 10 and 15 million from the current 20 million.” But some observers predicted that labor conditions would worsen in 1999 because of continued dismissals by troubled companies and an additional 5 million people expected to enter the job market. One labor spokesman compared the high unemployment rate to a ticking time bomb.

The long-term solution, of course, is for the Indonesian economy to recover. After all, the rise in income, health care, and educational standards in the decades before 1997 stemmed from the economic boom. But it is important while adopting steps to revive the economy to keep in mind the social impact on the people who may have to suffer as a result. It is tragic but true that the situation cannot be improved as quickly as it deteriorated.

There is an urgent need for the government to establish a nationwide system of social safety nets. The government announced in September 1998 that a national social safety net system would be developed. This would include a food security program, a labor-intensive public works program, and a program to protect access to health and educational facilities. On the success of these programs hangs the survival and health of millions of Indonesians.

 

Responses to the Crisis

Multilateral, regional, and subregional bodies, as well as the governments concerned, have all acted in response to the crisis. The international community has provided funding, massive in some cases. Aid has also been forthcoming at a bilateral level, most notably, from Japan.

The international lending agencies have, almost without exception, been supportive of the crisis-stricken nations of East Asia. The World Bank, which in 1993 had coined the term “the Asian miracle” to describe what was going on in the region, dubbed the crisis “the biggest setback for poverty reduction in East Asia for several decades.” It praised the record of the East Asian countries in the decades leading up to the crisis. “Consistently high rates of economic growth have been translated into quantifiable welfare improvements, primarily because growth has largely been inclusive-the poor have shared the benefits.”

Despite their generosity, international lending agencies, such as the World Bank and the IMF, have come in for some severe criticism for their handling of the crisis. A typical example is an editorial that appeared in the South China Morning Post on October 20, 1998:

“In handing out inflexible recipes for economic recovery, the World Bank and the IMF are also guilty of inflicting suffering on the most powerless sections of these communities. . . . In Indonesia, 17 million families are surviving on handfuls of rice, some cassava and dry biscuits. Their worry is survival, not rental charges or interest rates. A society has the wrong set of priorities when it puts economic targets before the well-being of its children.”

As for regional bodies, the APEC forum, which met in Manila last November, was urged by the Philippines, acting as host, to draw up social safety nets or concrete programs on social reform to help the poor “cross over to a decent life despite the financial crisis that has swept through the region.” Secretary JosÈ Pardo of the Department of Trade and Industry said: “The financial crisis highlighted the need for social reform. We hope APEC member economies, especially the more affluent ones, will help us.”

After the meeting, a joint statement was issued that said: “Ministers expressed concern that the financial crisis with its associated contagion effects has had serious socioeconomic implications on growth, employment, and poverty levels in members’ economies. Ministers tasked senior officials to intensify APEC’s efforts to address the social impacts of the crisis as a high priority.”

APEC also announced an “action program on skills development,” whose object was to contribute toward sustainable growth and equitable development while reducing economic disparities and improving the social well-being of the people through skills upgrading. It listed four target areas: upgrading the industrial skills base, spawning new entrepreneurs, enhancing technology skills for the new millennium, and strengthening institutional infrastructure to facilitate trade and investment liberalization.

ASEAN, which groups nine Southeast Asian countries, announced on October 30, 1998, that an “action plan on social safety nets” had been adopted by the region’s senior government officials responsible for rural development and poverty eradication.

In addition to assessing and monitoring the social impact of the crisis and identifying the needs of the disadvantaged and vulnerable, the action plan provides for improvement in the effectiveness and delivery of economic and social services. A public awareness campaign on the social impact of the crisis would also be held.

The action plan is to be implemented by a new body, the ASEAN Task Force on Social Safety Nets, whose job is to ensure a concerted regional response to the fallout caused by the crisis. It will focus on poverty issues, the development of rural areas, and the problems faced by rural people. With the help of technical experts, the task force is to work out a regional scheme with various forms of social protection to cushion the impact of the crisis on the vulnerable and disadvantaged in ASEAN. It will also function as a forum for the mobilization of resources from international aid agencies, ASEAN’s dialogue partners, and the private sector.

 

Lessons to Be Learned

What lessons can be learned from the crisis? What is plain is that social safety nets were neglected in most Southeast Asian nations before the crisis. What they need to do now is to create such nets. They will be of value now and in the future.

Eddy Lee, the ILO’s director of analysis and reports, points out that the great majority of the newly unemployed are not casual laborers, migrants, or farmers, but “workers in modern factories and enterprises” that were behind the Asian economic miracle. “The wonder now is that during those years of growth almost no formal provision was made for these workers in the event of a downturn,” he said in The Asian Wall Street Journal on December 2, 1998.

In an op-ed page piece titled “Weaving Asia’s Social Safety Net,” he declared: “Asia needs a strategy for social stabilization as much as financial stabilization. Among the range of options, the emergency provision of unemployment insurance is probably the single most affordable, relevant, and appropriate measure to help Asians come to terms with the crisis.”

As to the cost of providing such a safety net, Lee wrote: “In the Republic of Korea, the only crisis-affected country to provide unemployment insurance, the contribution rate is 0.6 percent of payroll, shared equally by employers and workers. That figure may need to be adjusted upward in light of the current labor-force contraction, but there is little in the Korean experience since 1995 (the year the scheme was introduced) to suggest that unemployment insurance drives up labor costs or reduces incentives to work.”

In fact, he pointed out, “a study undertaken by the ILO examined what the required contribution rate would have been in Korea, Thailand, and Indonesia had these countries introduced unemployment insurance in 1991, six years before the crisis. The striking result of the study is that an average required contribution rate of between 0.3 percent to 0.4 percent of payroll from 1991 to 2000 would have been sufficient to provide all insured job losers over this period, with 12 months of benefits, even during the current crisis.”

Of course, unemployment is but one facet of the social impact of the financial crisis. But unemployment is often followed by poverty, and that by malnutrition and sickness. Women may not be able to afford birth control pills, with imaginable consequences of additional unplanned children, with the parents finding it harder and harder to make ends meet. In addition, those thrown out of work without the safety net of unemployment insurance often have to pull their children out of school. To this must be added a likely rise in crime.

James Wolfensohn, president of the World Bank, agrees that what is needed today, in the wake of the crisis, is a framework that not only deals with the progress in structural reforms necessary for long-term growth, but “one that includes the human and social accounting, that deals with the environment, that deals with the status of women, rural development, indigenous people, progress in infrastructure and so on.”

With the dawning of 1999, with East Asia poised on the edge of the 21st century, talk of recovery is in the air. This was typified by a cautious statement issued by 25 Asian and European financial ministers in Frankfurt on January 17 that said: “In the view of the ministers, some signs of recovery are expected in the current year, and in the medium term the efforts undertaken by the Asian countries will lay the foundations for regaining steady growth.”

Thai Finance Minister Tarrin Nimmanhaeminda said the country had managed to stabilize the baht, rebuild foreign reserves, and lower interest and inflation rates. The recession, he said, showed signs of bottoming out. In Malaysia Prime Minister Mahathir said he was confident the recession would be over by the end of the year.

In Korea, the central bank’s projection for GDP growth in 1999 was 1 percent to 3.2 percent. In fact, the South Korean economy was doing so well that it even revived fears of another bubble developing. The numbers emanating from Indonesia were sobering, but less depressing than previously: The economy shrank 13.68 percent in 1998, less than the 15 percent predicted by the government.

It is only a matter of time before the countries of East Asia recover. And, when they do, they will have to absorb the lessons of the last two years, for which they have paid in blood, sweat, and tears. No country in the future can afford to ignore the fashioning of a social safety net for its workers, even as it rebuilds the economy, which now lies in tatters.