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Indonesia’s dwindling middle class seen dimming economic outlook 

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KARAWANG, Indonesia – Rahmat Hidayat used to work at a shoe factory in Karawang, Indonesia’s West Java, until it closed down last year. Since then, he has been struggling to make ends meet by selling grilled meatballs. His income has drastically decreased, making it difficult for him to afford his wife’s diabetes medication. In an effort to save money, Rahmat now picks herbs to make a tonic instead.

Sadly, Rahmat’s story is not unique. Millions of working and middle-class Indonesians have been pushed into poverty due to the increase in layoffs and the lack of job opportunities during the pandemic.

This trend is worrisome for Southeast Asia’s biggest economy, as household consumption makes up more than half of the country’s GDP. It also challenges Indonesia’s goal of becoming a high-income nation by 2045, which heavily relies on a growing middle class.

The situation also poses a challenge for the new administration of President Prabowo Subianto, who won the February election by a landslide on promises to boost economic growth and create 19 million jobs. Prabowo will take office on October 20th.

Economist Mohammad Faisal from the Jakarta-based Center of Reform on Economics believes that “pushing the economy to grow higher with weak consumption is difficult.”

According to the government’s classification, those who spend between $132 to $643 a month are considered middle class, based on World Bank criteria. This group plays a crucial role in economic growth as their spending accounts for nearly 40% of private consumption. However, due to the current economic situation, the size of the middle class has dropped from 21.5% of the total population in 2019 to 17.1% in 2024, according to official data released last month.

Despite the country’s economic bounce-back post-pandemic, with an average growth rate of over 5% since 2022 and low inflation, the shrinking middle class is likely to put pressure on future growth. The government will have to cope with lower tax revenues and possibly provide more subsidies, said Jahen Rezki, an analyst from the University of Indonesia.

He further adds that “in the long run, if the middle class continues to dwindle, it will undoubtedly be a significant burden for the state.”

One of the main reasons for the decline of the middle class is the changing labor market. A considerable portion of the foreign investment in Indonesia has focused on industries such as mining, which are becoming less labor-intensive due to the implementation of advanced technology.

Moreover, competition from lower-cost destinations like China, especially in the textile sector, has led to factory closures and mass layoffs, making it difficult for workers like Rahmat to find employment.

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

“We want to create a lot of small, medium, and micro-entrepreneurs, for example, through our housing program. We plan to build 3 million units of houses in both villages and cities to create a thriving middle class,” he told Reuters recently.

However, the next government’s ability to spend on welfare schemes may be limited, especially next year, when a significant amount of government debt is set to mature, said Teguh Yudo Wicaksono, an economist at Islam Internasional Indonesia University.

For former factory worker Rahmat, the best help the government can offer is a handout that he can use to expand his food business, as finding a job has become increasingly challenging. His wife, Fatimah, shares that their children often ask for their favorite spicy meat dish, but they can only afford to provide them with instant noodles and eggs most of the time.

She adds, “I can only tell my children to wait until their father receives fair compensation from the factory, and then we can cook a delicious meal again.”

In conclusion, the declining middle class in Indonesia is not just a concern for individual families like Rahmat’s, but it also poses a significant threat to the country’s economic growth and its ambition to become a high-income nation. It is crucial for the incoming government to prioritize creating quality job opportunities and providing support for struggling families to ensure a thriving middle class and a prosperous Indonesia.

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