Before the onset of the economic crisis in 1997, Indonesia was one of the fastest growing economies in the world. During the three decades before the crisis, the economy had grown at an average of around 7 per cent annually. This rapid growth had generated an unprecedented reduction in poverty within a relatively short period of time. Between 1970 and 1996, absolute poverty fell by around 50 percentage points, accompanied by substantial gains in education and health outcomes.

In mid-1997, however, after nearly a quarter of a century of rapid growth and welfare gains, a currency crisis struck Indonesia and by early 1998 the country was suffering from the combined effects of financial, economic, and political crises. Within one year, the value of the rupiah fell by 85 per cent, domestic prices soared by 78 per cent, nominal food prices increased threefold, and the economy contracted by almost 14 per cent. As the crisis worsened, mass rioting occurred in the capital Jakarta and in a few other major cities, culminating in the May 1998 fall of Soeharto, who had been in power for three decades.

The social impact of the crisis was enormous. By one account, the poverty rate doubled between mid-1997 and the end of 1998, implying that an additional 36 million people were pushed into absolute poverty by the crisis. More than half of the increase in poverty between 1996 and 1999 was due to an increase in chronic poverty, as the proportion of the chronic poor within the total population tripled during this period. Similarly, the vulnerable, that is, non-poor households that have a high probability of falling below the poverty line, tripled in number between 1996 and 1999. The crisis primarily affected the poor and the vulnerable through falling real wages and a large increase in the prices of basic commodities.

To reduce the adverse social impact of the crisis, the Indonesian Government introduced Social Safety Net (Jaring Pengaman Sosial, or JPS) programs aimed at preventing the poor from falling more deeply into poverty and at reducing the exposure of vulnerable households to risks.