External Shocks and Poverty: How recession in Europe, Japan, and China affects Indonesian poor

This paper attempts to understand the effect of a recession in Indonesia’s three main trading partners -- Europe, Japan, and China or EJC countries for short—on poverty in Indonesia. Specifically, the paper uses a GTAP model and an INDONESIA-E3 model to examine the impact of a 2 percent decline in GDP (relative to baseline) in the EJC countries on poverty in Indonesia. Results suggest that the impact of such a recession on Indonesia’s GDP through trade-linkages is negative but small. The main reason for this finding has to do with the low dependence of Indonesia on international trade. Results also suggest that the effect of such a recession in the EJC countries on poverty in Indonesia would be negative but small. In Indonesia most of the negative effects of such a recession would be felt by higher income households because they receive a large part of their incomes from the capital and skill-intensive sectors of the economy. Since they are less skilled, the poor are likely to be the first to lose their jobs in the event of an EJC recession. For this reason, the paper urges the Government of Indonesia to consider employment programs to ensure the continued employment of unskilled laborers.