Targeted Programs in an Economic Crisis: Empirical Findings from the Experience of Indonesia

Working Paper Lant Pritchett (Kennedy School of Government, Harvard University) Sudarno Sumarto Asep Suryahadi (SMERU Research Institute) Targeted Programs in A paper from the SMERU an Economic Crisis: Research Institute, with support from AusAID and the Ford Empirical Findings Foundation. from the Experience of Indonesia Jakarta, October 2002 The findings, views, and interpretations published in this report are those of the authors and should not be attributed to the SMERU Research Institute or any of the agencies providing financial support to SMERU. For further information, please contact SMERU, Phone: 62-21-336336; Fax: 62-21-330850; E-mail: [email protected] .id; Web: www.smeru.or.id TABLE OF CONTENT Abstract 1 I. Introduction 2 II. The Design and Targeting of the Indonesian Crisis JPS Programs 3 A. Crisis, Impact, and the Launch of the JPS 3 B. Targeting of the JPS Programs: Data Availability 6 C. The JPS Programs and Their De Jure Targeting Design 7 D. Data Sources Used to Examine Targeting: Program Participation and Consumption 11 III. JPS Program Participation Incidence: (Mildly) Progressive, Remarkably Uniform 12 A. Empirical Findings 12 B. Interpretations 15 IV. Dynamic versus Static Participation Incidence: Safety Nets versus Safety Ropes 21 A. Empirical Findings 21 B. Interpretations 24 V. Marginal and Average Incidence in the JPS Programs 26 A. Empirical Findings 26 B. Interpretations 30 VI. De Jure versus De Facto Targeting: Community Influence on Targeting 31 A. Empirical Findings 31 B. Interpretations 36 VII. Conclusion 37 References 38 Appendix 42 i The SMERU Research Institute, October 2002 Targeted Programs in an Economic Crisis: Empirical Findings from the Experience of Indonesia Lant Pritchett Kennedy School of Government, Harvard University Sudarno Sumarto, Asep Suryahadi# SMERU Research Institute Abstract: In response to the economic, natural, and political crisis that enveloped Indonesia from August 1997 (beginning of depreciation) to May 1998 (Soeharto resignation), the new government announced support for a set of “safety net” (JPS) programs in the July 1998 budget. These included: (a) targeted sales of subsidized rice, (b) work creation programs, (c) scholarships to students and block grants to schools, (d) targeted health care subsidies, (e) community block grants. Cross sectional and panel data has been used to examine the targeting of these programs. First, “static participation incidence” (the relationship between program participation and household consumption expenditures) was substantially better than a uniform transfer, but substantially worse than perfect targeting, and remarkably similar for all of the JPS programs. Second, unlike standard static incidence measures, what we define as “dynamic participation incidence” — the relationship between changes in consumption expenditures and program participation — was very different among the JPS programs. The employment creation programs, which relied on self-selection targeting, were much more likely to reach those households experiencing large shocks to their expenditure than programs based on administrative targeting such as subsidized rice sales, scholarships, and health subsidies. Third, larger coverage does not lead to either better or worse targeting: There was no general tendency across the programs for marginal incidence to be above, or below, average incidence. Fourth, the targeting designs of many of the programs were not followed strictly during implementation of the programs. In practice, community and individual characteristics — that were de jure irrelevant — played a role in targeting. In the sales of subsidized rice program, community influence led to the program going to many more than the eligible individuals. In other programs, individual characteristics appear to have influenced targeting. # This paper is a synthesis that draws on multi-year research program of the SMERU Research Institute and the World Bank Office in Jakarta. We draw on papers we have co-authored with Emmanuel Skoufias, Yusuf Suharso, Wenefrida Widyanti and on a large body of quantitative and qualitative work of SMERU as well as collaboration and conversations with Vivi Alatas, Lisa Cameron, Deon Filmer, Ben Olken, and Menno Pradhan. We are grateful to BPS and UNICEF for use of the data. We would like to thank Daniel Perwira for research assistance and Rachael Diprose for editing the manuscript. 1 The SMERU Research Institute, October 2002 I. INTRODUCTION Whether as the result of financial/currency crisis (Thailand, Korea, Indonesia 1997; Russia, Ecuador 1998; Brazil 1999; Turkey 2001; Argentina 2002), delayed systemic transformation (the countries of the FSU), or domestic difficulties (Zimbabwe 2001), a large number of countries have experienced macroeconomic crises. The precipitous falls in macroeconomic aggregates are reflected in negative impacts on individuals — both as households’ incomes fall and poverty rises, and as public spending falls reducing available services for the poor.1 An increasingly frequent response to macroeconomic crisis is the attempt to mitigate the worst consequences of these shocks through crisis “safety net” programs.2 Indonesia was no different and launched a series of crisis programs known as the JPS (Jaring Pengaman Sosial) programs. This paper draws on several recent household data sets to present four empirical findings about the targeting of these Indonesian crisis programs.3 Within the extensive literature on the many aspects of targeting and benefit incidence of government programs,4 this paper has three unique features. First, we address the question of the targeting of crisis programs that were created deliberately to address the consequences of a specific economic shock. Second, we are able to use multiple data sources, including a panel data set spanning the crisis, to cross validate findings. Third, we are able to make comparisons across the set of programs. After providing brief background information on the crisis, we describe the targeting design of five major programs: subsidized rice, student scholarships, health care subsidies, employment creation, and community block grants in the next chapter. Each of the following four chapters examines our empirical findings. 1 See Ravallion (2002a) on fiscal incidence of contractions. 2 See Ferreira, Prennushi, and Ravallion (1999). 3 With our focus in the paper on targeting, we do not address other important aspects of program design and evaluation. Design issues such as the match of administrative capacity to program complexity, aligning implementing agency interests to program design, the ease of information dissemination (issues in which economists have no special comparative advantage) are crucial to the success of crisis programs, but these have been addressed elsewhere (e.g. World Bank, 2001). Assessing program impact on household outcomes (consumption, health, school drop-out) depends on the usual difficult issues of identifying the counter-factual (no program) outcome, which requires a separate treatment that both we (Suryahadi et al., 2002) and others (Cameron, 2002 for education; Saadah, Pradhan, and Sparrow, 2000 for health) have addressed elsewhere. 4 Grosh (1994) on administrative aspects, van de Walle and Nead (1995) is a good overview volume on the issue of targeting. The output of the cottage industry calculating benefit incidence and targeting is well reviewed in Coady, Grosh, and Hoddinott (2002). 2 The SMERU Research Institute, October 2002 II. THE DESIGN AND TARGETING OF THE INDONESIAN CRISIS JPS PROGRAMS A. Crisis, Impact, and the Launch of the JPS After nearly thirty years of uninterrupted rapid growth, low inflation, and a stable currency, in August of 1997 Indonesia’s currency began to slide in what at first appeared to be only the spillover from the crisis in Thailand. But by May 1998 the country was suffering from the combined effects of a currency, financial, natural, economic, and political crisis. The currency collapsed in waves, from its pre-crisis level of Rp 2,200 to the dollar in mid 1997 to Rp 5,000 by October, to Rp 6,000 by December, to a free fall in January 1998 (following the almost immediate collapse of the second ill-fated IMF program) which took the currency as low as Rp 17,000 per dollar. The effect of the currency devaluation on the substantial unhedged foreign currency denominated borrowing by both the domestic financial and corporate sectors (on top of underlying structural weaknesses of the sector) created a financial crisis. The fear of widespread banking collapse caused the Central Bank to issue a blanket guarantee of inter-bank loans in January 1998 which, in turn, spurred the money supply to nearly triple between early 1998 and late 1999 (Deuster, 2002). In addition nature was unkind as fires burned out of control in large sections of Sumatra in the fall of 1997 and a drought reduced the primary rice crop. The combination of these impacts caused the economy to contract by an almost unprecedented magnitude — real GDP fell 13.7 percent in 1998 and inflation skyrocketed. The money supply expansion and currency depreciation caused skyrocketing domestic prices particularly for food (since food is a tradable it was more affected by the depreciation — the general inflation rate was 78 percent in 1998 while food prices escalated by 118 percent). All of this, combined with signs of weakness and ill health from Soeharto, led to a political crisis. Student deaths and rioting in the capital Jakarta and several other cities led

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