Mitigating the Social Costs of the Asian Crisis

• Author: IMF Staff
• Position: This article was prepared by staff of the Expenditure Policy Division of the IMF's Fiscal Affairs Department

A preliminary analysis of the impact of the Asian crisis shows that poverty could increase significantly in Indonesia, Korea, and Thailand. These countries' IMF-supported programs incorporate many measures to mitigate the effects of the crisis. But if the crisis deepens, additional policy options will need to be considered.

THE SIMILARITIES in the economic problems currently besetting Indonesia, Korea, and Thailand conceal significant differences in social conditions in the three countries. Before the onset of the Asian crisis a little over a year ago, Indonesia had a larger number of poor people (22 million, compared with 7 million in Korea and 8 million in Thailand) in absolute terms, but the percentage of the total population living below the poverty line was smaller in Indonesia than in the other two countries. This is partly because Indonesia's poverty line is set lower-it is about 5 percent of Korea's poverty line and less than 40 percent of Thailand's, in U.S. dollar terms-which reflects differences in the cost of living and social norms. Social indicators show that, before the crisis, Korea and Thailand had made more progress in such areas as health and education than Indonesia, which has the lowest life expectancy of the three (Korea has the highest) and the highest infant mortality and adult illiteracy rates (Korea's are the lowest).

The crisis and the poor

The Asian crisis will affect households through a variety of channels-sharp exchange rate depreciation, financial sector collapse, corporate bankruptcy, changes in rates of return on assets, and monetary tightening. Although most households will be hurt, those working in the export and agricultural sectors may benefit from higher prices for their products.

The economic crisis and the adjustment programs now being implemented in Indonesia, Korea, and Thailand are likely to hurt low-income households primarily through price increases and the loss of jobs. Prices are rising in all three countries as a result of large exchange rate depreciations and increases in public tariffs and indirect taxes. Consumer price inflation in Korea has been relatively subdued, despite the steep drop in the won's value, reflecting falling domestic demand and the absence of wage pressures. In Indonesia, however, consumer price inflation was 46.5 percent in the first six months of 1998, and food prices jumped 35 percent in the first quarter of 1998. In Thailand, food prices have gone up 7 percent since the crisis began. Layoffs are further reducing the real incomes of households. As the number of corporate bankruptcies climbed in Korea, the unemployment rate reached 7.0 percent, on a seasonally adjusted basis, in May 1998, compared with 5.9 percent in February 1998 and 3.4 percent in March 1997.

The short-term, first-round effect of the economic crisis on the poor and vulnerable can be estimated by using data on expenditures of households, broken down by income group, and on increases in prices and unemployment for 1998. The analysis is tentative, however, because it is unclear to what extent the amount of purchasing power lost as a result of inflation will be offset by nominal wage increases or...