Nonlinear impacts of the Asian financial crisis on income distribution in Indonesia: A financial computable general equilibrium approach

During the Asian financial crisis in the late 1990's, national survey data indicated that income distribution among Indonesian households became increasingly more egalitarian. However, it was unclear whether the distribution of income became more equal because of the crisis, or in spite of the crisis. The direction of causality was unclear because there were other exogenous events occurring at the same time.; This study aims to establish the impact of the Asian financial crisis on the distribution of income as if this crisis were the only exogenous shock that occurred during that period. To that end, we utilized fixed-price multipliers, structural path analysis (SPA) and a computable general equilibrium (CGE) model.; The estimated fixed-price multipliers indicated that it was the elite urban-high households that were hardest hit by the Asian financial crisis. Thus, it appears that indeed the financial crisis had brought about a more egalitarian distribution of income among households,; The fixed price nature of the multipliers and the SPA missed important features of the Asian financial crisis, namely escalating prices fueled by exchange rate depreciation. Therefore, we employed a nonlinear, price endogenous CGE framework as our principal tool of analysis. To our knowledge, this is the first study that combined the production (i.e., “real”) economy with financial markets and assets within a unified CGE framework in order to examine the distributional impact of the financial crisis.; Using our CGE model, we performed simulations in four sequential stages. We found that at every stage of the simulations, the distribution of income consistently improved. The trend towards a more egalitarian income distribution continued even when interest rates rose sharply which, combined with exchange rate depreciation, provided the elite urban-high households with windfall gains. It was because the contraction of factor income forthcoming from the production economy was so severe that the windfall financial gains failed to tilt the distribution of income in favor of the elite households.; A critical element in the distributional outcome was the reallocation of government expenditures towards low-income households. We found that the government's budgetary policies may have provided social safety nets to the poor households while causing the government to lose the support of its most influential political patronage, the urban-high group.