Shrinking Indonesian Middle Class: Why Are They Struggling? | Asia's Changing Middle Class | Insight

Indonesia's Shrinking Middle Class: A Deep Dive

Key Concepts:

• Middle Class Definition (Indonesia): Spending between 2.1 million and 10 million rupiah per capita per month (USD 129-613).
• Purchasing Power Decline: Reduced ability of the middle class to buy non-essential goods due to rising prices of essential goods.
• Informal Sector: Jobs lacking labor protections (minimum wage, working hours, leave).
• Mantab (Makan Tabungan): Middle class individuals using savings to survive due to job loss or reduced income.
• Deflation: A decrease in the general price level of goods and services.
• Skills Mismatch: Discrepancy between skills acquired through education and the demands of the labor market.
• Downstreaming: Processing raw commodities domestically to create higher-value industries.
• Incremental Capital Output Ratio (ICOR): Measures investment efficiency; lower scores indicate better efficiency.
• Indonesia Emas (Golden Indonesia): Indonesia's vision to become one of the world's largest economies by 2045.
• Cemas: Anxiety.

1. The Shrinking Middle Class: Scope and Impact

• Decline: Indonesia's middle class shrank from almost 60 million in 2018 to 48.4 million in 2024, a loss of nearly 10 million people.
• Economic Contribution: The middle class, though a fifth of the population, significantly contributes to the Indonesian economy.
• Reduced Spending: Those remaining in the middle class are spending less, indicating a decline in purchasing power.
• Survey Findings: A survey by Inventure revealed that almost half of middle-class workers experienced a decline in purchasing power, with 85% blaming rising prices of essential goods.
• Example: Medy Soemarto: A university graduate working as a ride-hailing driver, earning around 4 million rupiah (USD 245) a month, highlighting the struggle to maintain middle-class status.

2. Causes of the Middle-Class Decline

• Pandemic Impact: The COVID-19 pandemic led to a recession in 2020 (GDP dipped 2.07%), the first contraction since the 1998 Asian Financial Crisis, and a surge in unemployment to over 7%.
• Informal Sector Growth: Many Indonesians turned to the informal sector (59.11% of the workforce in 2023), lacking labor protections.
• Savings Depletion (Mantab): Unemployed middle-class individuals are forced to use their limited savings to survive.
• Low Savings: Average savings in Indonesian bank accounts are around 14 million rupiah, enough to cover only about three months of expenses for someone spending 5 million rupiah per month.
• Example: Dini Winastuti: A freelance television content producer who incurred debt during the pandemic and had to make significant lifestyle changes, including relying on instant noodles as a staple food.

3. Challenges for Young Indonesians

• High Graduate Unemployment: Over 840,000 university graduates are looking for work, with an unemployment rate consistently above 20% within this group.
• Skills Mismatch: A mismatch exists between the skills acquired through education and the demands of the labor market.
• Declining Manufacturing Sector: The manufacturing sector, a significant source of middle-class jobs (27% according to a World Bank report), has been declining since 2019.
• Example: Julian Reihandika: A civil engineering graduate struggling to find a job that matches his skills, highlighting the challenges faced by educated youth.

4. Government Policies and Their Impact

• Industrialization (Downstreaming): The government has sought to boost industrialization by processing raw commodities domestically.
• Nickel Export Ban: A ban on nickel ore exports in 2020 aimed to spur investments in processing plants.
• Impact of Downstreaming: A study in Konawe district showed that while the economy boomed, it did not significantly reduce poverty and unemployment, as processing industries do not absorb as many middle-class jobs as manufacturing.
• Free Meals Program: A USD 28 billion program touted to create work for cooks, couriers, and dishwashers.
• Tax Exemptions for SMEs: Owners of SMEs with a turnover of less than 500 million rupiah a year are exempt from income tax.
• Reversal of VAT Increase: The government reversed a decision to increase the value-added-tax rate to 12%, limiting it to luxury goods.
• Budget Cuts: Budget cuts of around 8% (30 trillion rupiah) are proposed to finance the Free Meals Programme.

5. The Role of Global Factors

• Trade Wars: The global trade war initiated by the US could negatively affect Indonesian exports and investments, impacting job opportunities for the middle class.
• Incremental Capital Output Ratio (ICOR): Indonesia's low productivity, reflected in its ICOR, could see it lose out to its neighbors in attracting investments in high-value manufacturing.

6. Social Safety Nets and Support Systems

• Move On Game On: An organization that helps retrenched professionals find jobs through information exchange, workshops, and counseling.
• Layoffs: In 2024, about 80,000 Indonesians were laid off, with manufacturing, tech, and banking being the worst-hit sectors.
• Impact of Automation and AI: The rise of automation and artificial intelligence is expected to replace more jobs, requiring the middle class to adapt to the new economy.

7. Indonesia Emas and the Future

• Indonesia Emas (Golden Indonesia): Indonesia's vision to become one of the world's largest economies by 2045 depends on reversing the decline of the middle class.
• Student Protests: Student protests against government budget cuts, particularly in education, reflect concerns about the future.
• Need for Good Jobs and Education: Young people demand good jobs and quality education, requiring government policies that support their welfare.

8. Notable Quotes

• Anis Byarwati (Member of Commission 11): Highlights the massive contribution of the Indonesian middle class to the economy, raising alarm bells about its shrinking size.
• Lingga Wastu (Founder of Move On Game On): Explains the organization's mission to help members find jobs by exchanging information and providing support.

9. Conclusion

Indonesia's shrinking middle class presents a significant challenge to its economic aspirations. The pandemic, rising prices, skills mismatches, and a declining manufacturing sector have contributed to this trend. While the government has implemented policies to address the issue, their effectiveness remains uncertain. Reversing this trend requires a focus on creating high-quality jobs, improving education and skills training, and fostering a more competitive manufacturing sector. The future of "Indonesia Emas" hinges on the ability to revitalize and expand its middle class.