INDONESIA faces serious challenges with the increasingly fragile middle class, which has long been considered the main pillar of the national economy. In the last five years, the size of the middle class has continued to shrink significantly, placing Indonesia’s economic future in a vulnerable condition.
Director of the Next Policy Study Institute, Yusuf Wibisono, believes that a strong middle class is very important to push Indonesia to achieve high-income country status.
“The experience of countries that have escaped the middle income trap shows that a large and strong middle class is the most important foundation for a developed country. However, in the last 5 years, Indonesia’s middle class has actually become increasingly fragile and smaller,” he said, quoted in a written statement, Monday ( 10/14).
The latest data shows that in March 2023, the number of Indonesia’s middle class will only reach 52.1 million people, shrinking from 60.8 million people in 2018. This reflects a significant decline of 8.7 million people in the five-year period.
This decline also has the impact of reducing the contribution of the middle class to domestic consumption, where their share of consumption fell from 45.6 percent in 2018 to only 40.3 percent in 2023.
“The middle class is the engine of economic growth, with strong purchasing power and an important role in driving consumption. If the middle class continues to decline, this will have a negative impact on our economy as a whole,” said Yusuf.
One of the main causes of the decline of the middle class is the decline in employment in the formal sector. The decline of the middle class to a lower economic class is largely related to the decreasing role of the formal sector as a source of livelihood for the middle class population.
“The middle class has a high dependence on the formal sector, especially large and medium companies, as providers of employment opportunities with high income levels,” said Yusuf.
In March 2018, as many as 16.8 million people or 55.8 percent of middle class workers had employment status as employees/employees/laborers. In March 2023, this figure will drop to 13.8 million people or 52.8 percent.
As the role of the formal sector in providing employment falls, the middle class population is experiencing a collapse. The middle class population aged 18 – 64 years fell from 30.2 million people in March 2018 to 26.1 million people in March 2023.
The pandemic has also accelerated this shift. Many middle-class workers are forced to accept jobs with lower incomes, or even move to the informal sector, resulting in a decline in purchasing power and consumption.
In the last five years, the dynamics of Indonesian society’s economic mobility have shown two main patterns. First, is the pattern of economic revival which is dominated by the poor. Yusuf explained that between 2018 and 2023, the number of poor people will decrease by 1.9 million people.
“Without economic mobility, the number of poor people in March 2023 should have reached 22.4 million people. However, thanks to economic mobility, the actual number of poor people was recorded at only 19.5 million people. Around 2.9 million poor people were promoted to become vulnerable to poverty during this period,” said Yusuf.
The second pattern is the pattern of economic decline, which is dominated by the middle class. Yusuf said that by March 2023, the number of middle class people should reach 63.7 million if there is no downward mobility. But in reality, only 52.1 million people remain.
“We estimate that 11.6 million middle class residents have fallen to prospective middle class status between 2018 and 2023, showing a very worrying downward trend,” he added.
To overcome this problem, Yusuf emphasized that providing social assistance (bansos) is not a long-term solution. It is crucial for the government to immediately protect the manufacturing industry from collapse and encourage the development of industries that will create widespread employment, such as labor-intensive industries, creative industries and tourism.
“Reindustrialization is the key, not downstreaming. Mining downstreaming is a capital-intensive industry which has proven to absorb minimal workforce. The contribution of downstreaming in providing quality employment opportunities for the middle class is limited,” concluded Yusuf. (Mir/M-4)
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