Darkening outlook: Indonesia’s shrinking middle class threatens the ambitions of high-income nations

KARAWANG (Indonesia), Sept 12 – Rahmat Hidayat lost his job when the shoe factory he worked for closed last year in the industrial city of Karawang in West Java, Indonesia.

The 44-year-old now earns less than half of what he used to make selling grilled meatballs. Unable to pay for his wife’s diabetes medication, Rahmat chooses herbs to make a tonic.

Like Rahmat, millions of working middle-class Indonesians have been impoverished, largely due to a surge in layoffs and a drop in the number of job opportunities since the pandemic.

This trend bodes ill for the prospects of Southeast Asia’s largest economy (household consumption accounts for more than half of gross domestic product), as does the widely held investment thesis that an expanding middle class will fuel Indonesia’s ambitions of becoming a high-income nation. by 2045.

It also poses a challenge to the incoming administration of President Prabowo Subianto, who won February’s election in a landslide on promises to boost economic growth and create 19 million jobs. Prabowo takes office on October 20.

“Boosting the economy to grow with weak consumption is difficult,” said Mohammad Faisal, an economist at the Jakarta-based Center for Economic Reform.

The government classifies those who spend between US$132 (RM572) and US$643 a month as middle class, according to World Bank criteria. This group is key to economic growth as their spending accounts for nearly 40 percent of private consumption and more than 80 percent when combined with the aspiring middle class, which spends between $57 and $132.

The size of the middle class, however, fell from 21.5 percent of the total population in 2019 to 17.1 percent in 2024, according to official data released last month.

Although Indonesia’s economy has rebounded after the pandemic, with growth of around 5 percent a year from 2022 amid generally low inflation, this shrinking middle class is likely to put pressure on future growth as the government will have to deal with with lower tax revenues. and possibly more subsidies, said Jahen Rezki, an analyst at the University of Indonesia.

“In the long run, if the middle class shrinks, it will certainly be a big burden on the state,” he said.

Great state spending

One of the main reasons for the disappearance of the middle class is the changing job market.

Much of the foreign investment coming to Indonesia has gone into industries such as mining, which are becoming less labor-intensive as more cutting-edge technology is deployed.

In addition, increased competition from lower-cost destinations such as China, especially in the textile sector, has squeezed factories, leading to layoffs that the textile association said were the worst in a decade.

Prabowo’s brother and adviser, Hashim Djojohadikusumo, said the incoming government will help the middle class by creating millions of new jobs through projects such as the $28 billion free meals program and the construction of millions of homes.

“We want to create many small, medium and micro-entrepreneurs, for example through our housing program. We want to build 3 million houses, in villages and cities. That is creating a middle class,” he told Reuters recently.

However, what the next government will be able to spend on welfare schemes may be limited, especially next year when a large amount of public debt is due to mature, said Teguh Yudo Wicaksono, an economist at Universiti Islam Internasional Indonesia.

For former factory worker Rahmat, the best help the government can give is a handout he can use to expand his food business, as it’s getting harder and harder to find work.

His wife Fatimah said that her children often ask for their favorite spicy meat dish, but she can only afford to feed them eggs with instant noodles most of the time.

“I could only tell my children to wait until father gets his fair compensation from the factory, we will cook delicious food again,” he said. – Reuters