May 27, 2024 Last Updated 6:09 AM, May 21, 2024

This complex crisis

Published: Sep 12, 2007

John Maxwell

The crisis that began in late 1997 is the single most devastating blow to the Indonesian economy in the last thirty years. Its origins lie squarely in the formal, modern sector. There was the sudden collapse in the rupiah, the large number of banks made insolvent by non-performing loans, the flight of foreign investment, and - after the events of May 1998 - the flight of domestic Chinese-Indonesian capital. Many large corporations closed or sized down, especially those with significant short-term dollar debt. As a result, this crisis has a strong urban focus.

The social impacts of this crisis have been neither uniform nor homogenous across the archipelago. Urban areas have borne the brunt of it. In addition, the whole of Java has been severely affected, since here there is a close relationship between the modern economy of the cities and life in the adjacent hinterlands.

In other parts of the archipelago the impact has been more variable. In those provinces remote from the modern economy of the metropolitan centres, the social impacts appear to have been negligible. Ironically, the depreciating rupiah has resulted in windfall profits and a sharp rise in export earnings from cash crops such as pepper and cocoa, or from fish and prawns. This has been the case in many parts of Sumatra and Sulawesi, where people are happy that Krismon (‘krisis moneter’) occurred and want it to continue. Sales of motorcycles, televisions and refrigerators are up in these areas.

Other pockets of the outer islands, poor before the crisis, have experienced significant hardship, but this may have had more to do with the 1997-98 El Nino-related drought (especially in West and East Nusa Tenggara), or with environmental degradation (fires and land clearing operations in Central and East Kalimantan).

So the crisis had grave impacts in some parts but not in others. It has not been as all embracing or as utterly devastating as some of the earliest reports would have us believe.

Some initial reports about the impact on poverty levels have proved to be without foundation. One forecast bandied about in the press last year suggested that by the end of 1998 nearly 50% of the population, about 100 million Indonesians, would sink below the poverty line. The most reliable recent poverty estimates, from the Central Bureau of Statistics (based on a December 1998 10,000-person sample), confirm the picture obtained from other data sources dating from the latter part of 1998. Poverty may have at most doubled from its pre-crisis levels of 11% to around 20% at the worst point in the crisis in August-September 1998.

At that time, the price of rice and other basic commodities had shot up alarmingly. Fortunately prices were not maintained at those catastrophic levels for more than a short period. Of course there is room for debate about where one should draw any poverty line, and this has been debated extensively in the past. But what is important to understand here is the extent to which poverty has increased from its pre-crisis levels.

Both ends

One of the most serious social impacts over the last eighteen months has been changes in employment. This has involved Indonesians from both ends of the social scale, as both middle class and working class people have been affected by job losses.

The financial meltdown caused many such losses in banks, the corporate sector and services. These have affected the more affluent sections of society in urban areas like Jakarta. The middle classes have benefitted from three decades of economic growth. They have become accustomed to better housing, access to luxury goods and services. They expect their children to enjoy a superior education. Suddenly, some now find themselves facing an uncertain future and having to make severe adjustments to their life-style. Many are bewildered and emotionally unprepared for a long period of austerity.

At the same time, the crisis has had a drastic impact on manufacturing and construction. Over the last two decades these sectors have expanded rapidly, providing jobs for thousands and thousands who flocked into the urban centres. Throughout 1998 large numbers of these businesses reduced their workforce to skeleton levels or closed completely. Almost all are located in urban and peri-urban areas such as Jabotabek (Jakarta-Bogor-Tangerang-Bekasi), Bandung, and Surabaya.

The textiles, electronics, footwear and automotive industries have all suffered serious contraction, which may have affected up to 50% of the pre-crisis workforce. The hardest hit sector has been building and construction, where it has been estimated that around 75% of the jobs have disappeared. Visitors to Jakarta are struck by the number of abandoned high-rise construction sites that dot the landscape. Eighteen months ago employing thousands of busy workers, today they are silent piles of rusting steel and concrete formwork.

In contrast to certain predictions a year ago, it should be noted that despite these extensive job losses there has been no significant rise in the level of open unemployment. This is evident from figures released by the Central Bureau of Statistics in its latest labour force survey (the August 1998 Sakernas data). However this comes as no surprise for, unlike developed countries such as Australia, a national system of social security benefits does not exist in Indonesia. There is no incentive to register as unemployed. Moreover, the poor simply cannot afford to remain jobless. They must find some form of income to survive.

What has happened to those workers who have lost their jobs in the factories and construction sites? The ways in which these retrenched workers have coped is a complex story. It depends to a large extent on the sub-sector where they were employed and the circumstances of their retrenchment. Most who were employed as permanent workers received severance pay. The amount varied according to seniority and length of employment. A small number received sufficiently large sums to consider establishing their own small enterprises. Others deposited a portion in the bank to avail themselves of the prevailing high interest rates. But for most the sums were too small to be anything more than a temporary stopgap.

Retrenched workers who were the sole or primary breadwinners have been forced to look for any work they could find. Some have found jobs in the informal sector: petty trading, a food stall, or working as ojek (motorbike taxi) drivers. Others have tried to find work as agricultural labourers. There is debate about the capacity of the agricultural sector to provide employment for those returning to rural areas from the cities. Many returnees do not possess the essential skills or the social connections to obtain such work. Others now consider weeding and hoeing as demeaning work and have no desire to participate.

A very high percentage of factory workers in the textile and footwear industry are female. Many are young, unmarried or recently married with young children. Many of these women have returned to live with their families.

Those retrenched from the building and construction sector have undoubtedly experienced the most severe hardship. Traditionally, sub-contractors and foremen have drawn skilled and unskilled labourers from rural Java. Men come to the city for the duration of the project as day hire. These workers did not receive severance pay when they were dismissed and are now looking for any work they can find until the sector revives.

Child health

Anyone affected by the crisis, especially those from the poorest sections of society who have suffered a substantial reduction in their incomes, face a range of difficult issues. Price rises have forced many to spend a greater proportion of their income on basic foodstuffs. Some are cutting back on food intake, while others are reducing the quality of what they consume. Some hard hit have been reduced to selling possessions.

There is strong evidence in poor urban communities of a decline in maternal and child health. Despite urgent attempts to prevent children dropping out of school, survey data point to a decline in school enrolments, especially among those children from poor families making the transition from primary to junior secondary school.

The government’s response has been to introduce a raft of Social Safety Net (SSN) programs to provide emergency assistance to those in greatest need. These address particular problem areas: nutrition, health, education, and job creation. The best of these programs have indeed achieved a degree of success in reaching the poor - although not necessarily the poorest. But all SSN programs have also struggled to resolve the difficult problem of how to produce accurate targetting and how to ensure that the assistance is actually delivered to those to whom it is intended. Unfortunately some programs have been poorly conceived from the outset, with inadequate planning and shoddy implementation, leading to angry protests from community groups and activists.

The road to recovery may yet be long and painful, especially given the political uncertainties. The social impacts of Indonesia’s predicament will continue to demand the attention of both government and external agencies for a considerable period.

John Maxwell ( is the co-ordinator of SMERU, a unit monitoring the social impact of the Indonesian economic crisis. It is funded by AusAID and supported by several other international agencies. The views expressed in this article are those of the author and should not be attributed to SMERU or any of the agencies supporting its activities.

Inside Indonesia 60: Oct-Dec 1999

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