Conclusions

The study of the link between macroeconomic policy and poverty is held in relatively low esteem by mainstream economists. The issue was considered relevant only in the early stages of development. As most countries began to reach a higher level of welfare, the topic was disparaged as outdated. The renewed interest in the issue was triggered by, among other things, the poverty impact of the macroeconomic policy response to the crisis that spread across the globe during the 1990s. To the extent that the effectiveness of the macroeconomic policy response to the Asian financial crisis remains debatable, Asia continues to hold the world record for the largest number of people living in absolute poverty (about 600 million people, using the US$1-a-day-poverty line), and that, in recent years, income inequality throughout the region has risen, this study can be viewed as an attempt to push further the renewed interest on the subject and to make the subject more imperative for policymaking in Asia.

The starting point is to look at the precise slope of the AS and AD curves. Most East Asian economies exhibit textbook shapes of AD and AS curves. This is clearly true in Thailand and Indonesia, the two countries used as case studies in this paper. However, the AS curve in both countries are relatively flat and have become flatter since the crisis. The trend of their AD curves is the opposite. This clearly suggests that after the crisis, a positive AD shock would have been more effective in stimulating non-inflationary growth. To the extent that incomes of the poor and the poverty line—the two variables used in the income poverty measure—are directly and indirectly affected by the output growth and general price level, respectively, a CFGE model was used to point out the specific mechanisms by which the effect of macroeconomic policy shock on poverty can be derived.

It was revealed from the model simulations that the results cannot be generalized. A positive fiscal shock tends to reduce poverty in Thailand but not in Indonesia, although the results in Indonesia could also be poverty-reducing if the composition of government expenditure was made more pro-poor. On the other hand, a positive monetary shock in Thailand is not favorable for reducing the number of poor households since the poverty line is sensitive to the increase of prices but the incomes of the poor are less responsive to output growth. The effect of monetary expansion in Indonesia is influenced by the price elasticity of wages: given a low elasticity, a positive monetary shock will reduce poverty, but if the elasticity is high a positive monetary shock will increase poverty.

The impact of a policy shock on income inequality is more influenced by what happens in the financial sector. An expansionary policy can raise the earnings of financial asset holders (higher income households) more than the increase of incomes of the poor. This is found to be the case in Indonesia but not in Thailand. Thus, the structure of the economy clearly sets the outcome of the policy shock apart.

In sum, the mechanisms by which macroeconomic policy affects poverty are too complex to be generalized. Advocating growth alone is insufficient and focusing on only macroeconomic stability is far from adequate. As the simulations in this study have shown, the effects of macroeconomic policy shocks on the poverty line and incomes of the poor hold the keys to the problem; and such effects can vary according to the types of policy, the structure of the economy, the price elasticity of wages, and the mechanisms through which the financial sector is linked with prices and household income.

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Comment(s)

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1. Ruly
   (posted 11 July 2008 / 02:08:15 PM)
   
   This paper gives me a new insight about the real condition of my country economy, and how the authority (government) had applied many conventional economic policies, which is not suitable for Indonesian economy that has different characters and conditions from the west, the origin of these conventional policies..
   
   Furthermore, I was very lucky because the author presented this paper in my class as a guess lecturer about 2 months ago. For the first time after 1.5 years studying economics, a lot of my "unanswered" questions being answered, and I even didn't have to ask..