Simulating economy-wide models to capture the transition from financial crisis to social crisis: Fid-Bau Portal

Simulating economy-wide models to capture the transition from financial crisis to social crisis

Azis, Iwan J.

Abstract. The transition from Asian financial crisis into employment and income loss is analyzed in details by using a structural path analysis (SPA) and a price endogenous model of computable general equilibrium (CGE) type. Indonesia is taken as a case study. It is revealed that the damage in the real sector has ripple effects on the services sector, reducing the demand for workers of the professional rural and urban category, the growing middle class of the country. In turn, the overall income of most high urban household declines. The depressed manufacturing and construction sector gravely injures the companies' financial position. For some sectors, the indirect transmission of the effects is not insignificant. The large drop of employment in rural professionals suggests that the rural non-farm activities are likely to receive a recession contagion from the urban-based economy. This also implies that there is no alternative outlet in the rural areas for the urban middle class who lost their jobs. Very likely, some of them will end up working in the informal sector. The CGE simulation also suggests that the real wages have declined, especially in the urban areas. The per-capita consumption of all urban workers drops, the largest decline of which is for the urban medium type. In general, therefore, the relative position of the urban sector deteriorates more than that in the rural area. Hence, the country has to be prepared to face a massive increase in urban poverty, a fertile ground for internal conflicts and social discontent.