Impacts of the Indonesian Economic Crisis: Price Changes and the Poor

Urban households were affected more adversely than the rural ones and the increase in the cost of living was smaller the richer a household was.

In January 1998, Indonesia was rocked by a major financial crisis. Between December 1996 and January 1998, the Rupiah plummeted from 2400 to the dollar to 16,000 to the dollar. The price index for food rose as much in January 1998 as it had for the six prior months combined. As a result of this financial crisis, prices for a wide range of goods increased dramatically. In Impacts of the Indonesian Economic Crisis: Price Changes and the Poor (NBER Working Paper No. 7194), authors James Levinsohn, Jed Friedman, and Steven Berry ask whether those price increases disproportionately affected poor households.

In this case, the authors find that the very poor appear to be the most vulnerable to price increases. This runs counter to some arguments which suggest that the very poor are so destitute that they are in effect insulated from international economic shocks. Among the very poor in Indonesia, the urban poor fared worst. Rural poor were able to buffer the price increases with household agricultural production. The authors stress the differences among price increases; price changes for narrowly defined products varied tremendously depending on where in Indonesia a household lived.

For their analysis, the authors matched Indonesian data on price changes with data on household consumption from a nationally representative source. From that, they calculated household specific cost-of-living increases. These household specific cost-of-living indexes were then correlated with whether the household was rural or urban, where the household lived, household size, and income. Among the stronger findings are that the urban households were affected more adversely than the rural ones and that the increase in the cost of living was smaller the richer a household was. The authors urge using their findings with restraint, though, since other crises -- such as huge forest fires and a persistent drought -- affected the Indonesian economy at the same time and may have independently resulted in price increases. Nonetheless, the authors paint a picture in which the very poor, and especially the urban poor, in Indonesia faced disproportionately large price increases for the baskets of products consumed.

-- Lester A. Picker