CORE Indonesia economist Muhammad Faisal said the decreasing number of middle class members could have an impact on weakening the country's economy, considering that their number reaches 60 percent of Indonesia's total population.
If this majority class declines, Faisal said, the level of household consumption which is one of the mainstays of the national economy will be affected. Based on existing data, he explained, the average growth in household consumption has reached 4.9 percent, or lower than the pre-COVID-19 pandemic period, which was around five percent.
“If that happens, economic growth cannot increase because 56 percent of our economy comes from household consumption. So if the government plans, for example, next year to have economic growth of 5.2-5.6 percent, that's difficult. Moreover, Mr. Prabowo plans to target up to 8 percent, that's even more difficult,” said Faisal when talking to VOA.
Faisal explained that the decline in the number of middle-class people was due to the impact of the COVID-19 pandemic which had not fully recovered. The government's national economic recovery (PEN) program which ends in 2022 still leaves many problems.
This, according to him, can be seen from the many people who have changed direction by working in the informal sector which cannot necessarily compensate for their income when working in the formal sector. In terms of numbers, said Faisal, people who work full time are fewer than people who work part time.
“And that is confirmed by the real wage rate which grew very, very thinly in the first semester of 2024, only growing by 0.7 percent, even though economic growth is five percent, but the average increase in real wages is 0.7 percent. In 2023, it was even minus. Real wages are nominal wages that are corrected for inflation, so that means that in nominal terms there may be an increase but the increase is only thin, compared to inflation, the increase in inflation is still higher,” he explained.
In order to overcome this problem, he said, the government needs to provide “social assistance” for the middle class. Unlike social assistance for the poor, the government is considered to need to distribute productive social assistance for the middle class, such as creating more jobs.
“If there is to be social assistance, it should be productive social assistance, not like distributing money to the poor. For example, there is a labor-intensive project, those who are not working are asked to work, to join the project, whether it is building embankments, irrigation, or rejuvenating agriculture, plantations, but then they are given money. It is the same as being given money, but if social assistance for the poor is for consumption, this is for production, and it is increased,” he said.
In addition, subsidies for the middle class also need to be expanded. However, Faisal reminded that these subsidies must always be on target.
“The point is to ensure that those in the lower middle class continue to receive subsidies. So there are subsidies, labor-intensive jobs including those who work in the micro or small business sector also need to be given incentives so that their businesses can grow. The incentives are not only financing, but more importantly, access to the domestic market in particular. And this means there must be synchronization, harmonization with trade policies for example. This is related. So there are many policies that are cross-sectoral in nature, which if orchestrated can strengthen the middle class,” he said.
In line with Faisal, the General Chairperson of the Indonesian Employers' Association (Apindo) Shinta Kamdani said that job creation is one of the keys to helping the middle class recover.
Shinta emphasized that job creation is not only the task of the large industrial sector, but also the MSME sector.
“There is indeed a decline in the middle class. So there are actually several aspects that have been seen for some time now, and indeed during this time we have to think about how or what stimulus we can do to be able to increase (the number of) the middle class. We see the key is from job creation, especially since we can not only rely on industry but also on MSMEs. So one of the drivers to increase the middle class is to empower MSMEs too,” said Shinta.
To maximize the MSME sector in absorbing labor, according to Shinta, the government needs to provide various incentives, not only in terms of financing and taxes, but also the creation of a good business climate.
“The stimulus is not just about taxes, ease of doing business for example. We always talk about the cost of doing business. Currently, Indonesia is competing with other countries where other countries are more competitive than us, whether in terms of cost, energy and logistics costs, this is part of ease of doing business too,” he explained.
Previously, the Central Statistics Agency (BPS) reported that the number of middle-class people in Indonesia was recorded at 47.85 million people in 2024. This number is down compared to 2019 which reached 57.33 million people. (gi/ab)
