External Shocks and Poverty: How Recession in Europe, Japan, and China Affects the Indonesian Poor (2015)
This paper analyzes the effect of a recession in Europe, Japan, and China on the poverty in Indonesia. We use the GTAP model and the INDONESIA-E3 model to examine the impact of a 2 percent GDP decline in these three countries on the poverty in Indonesia. The results suggest a negative impact on Indonesia’s GDP, mainly through the trade-linkages but with a small magnitude. The main reason for this finding has to do with the low dependency of Indonesia on international trade. The shock also slightly increases the poverty in Indonesia with a small magnitude. Across the household types, the negative effects of these recession goes mainly to higher income households since large part of their incomes comes from the capital and skill-intensive sectors. The poor household types are likely to be the first to lose their jobs in the event of this recession, since they are less skilled. These findings urge the Indonesian government to lunch employment programs to ensure the employment continuity for these unskilled laborers in the anticipation of a global recession particularly originating from these three countries.
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The political authority of President Joko Widodo (Jokowi) was bolstered in the third quarter of 2015 by a cabinet reshuffle, his coalition’s gaining a parliamentary majority, and several foreign-policy developments. Indonesia’s request to rejoin OPEC, for example, after having left in 2008, seemed more about international relations than oil prices, while official visits to the Middle East and the United States allowed Jokowi to project his presidency on the international stage. He still faces resistance from within his own party, however.
Jokowi’s politically bold reshuffle of economic ministers in August soon yielded a range of policy announcements. In September and October, his government introduced its first substantial set of reforms—a number of economic policy packages intended, among other things, to attract investment and stimulate domestic demand. If even half of these policies are put in place, the impact on Indonesia’s economy should be tangible.
Few countries have escaped the effects of falling global commodity prices and China’s growth slowdown. At 4.7%, year on year, in the third quarter Indonesia’s rate of economic growth again fell short of the government’s target. Slowing growth and a negative outlook have lowered market expectations and weakened the rupiah, which is also burdened by the large outstanding external debt held by corporate borrowers. Indonesia’s real effective exchange rate has recently begun to depreciate, however, which may stimulate exports. Growth prospects will also improve if the substantial increase in capital and infrastructure spending allocated in the state budget is realised.
Against this backdrop, we focus on what has happened to poverty and inequality in Indonesia since Jokowi took office. The distributional impacts of the current macroeconomic climate are likely to be hardest felt by the poor. Indonesia is well known for its record on poverty reduction, but between September 2014 and March 2015 the share of the population in poverty increased, even though economic growth was close to 5.0%. Slowing growth, rising food prices, the falling real wages of farmers, and the delayed disbursement of fuel-price compensation all had an effect. Such impacts may be mitigated in the medium term by Jokowi’s budget reallocations to infrastructure, if realised, and his expansion of social spending.
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