Indonesia's middle class for decades has proven to be a key driver of economic growth. Unfortunately, in the last five years, the number of Indonesia's middle class has been shrinking. Acceleration policies, even social protection, are needed to prevent the middle class from continuing to decline.
Various World Bank reports say that a large middle class leads to higher domestic consumption, as the middle class has a highermarginal propensity to consume than the rich and has a larger income than the poor.
"Expanding the size of the middle class is critical for Indonesia to unlock its development potential and propel the country towards high-income status."(Aspiring Indonesia: Expanding the Middle Class. World Bank, 2020)
Investment in human capital is key to acquiring the skills needed and to increasing productivity.
In order for Indonesia's middle class to grow, according to the World Bank, there is some homework that the government must do.
First, improving education and health services and quality. Investing in human capital is key to acquiring the skills needed for decent work and income, and to increasing productivity that accelerates economic growth.
Second, improve taxation policies and administration, so that the government will be able to raise funds from the growing middle class to build infrastructure. The existence of infrastructure is important for productivity improvement.
The definition of the middle class, according to the World Bank, is a group of people with expenditure (as a proxy for income) in the range of 3.5-17 times above the poverty line.
However, the economic shock caused by the pandemic has reduced the size of Indonesia's middle class. If before the pandemic the number of Indonesia's middle class was 57.33 million people (2019) or 21.45%, in 2024 the number dropped to 47.85 million people or 17.13%.
The middle class, with its high expenditure due to rising inflation, is living in a condition that is far from prosperous. With fewer jobs due to layoffs, their income has become mediocre as they are then only able to work in the informal sector.
Because the income is mediocre, the solution is to cut back on spending or reduce unnecessary needs. In addition, the ability to save is limited. In fact, the phenomenon of "mantab" aka eating savings emerged.
The condition of Indonesia's less prosperous middle class was recorded in the Business World Universe Survey conducted by the SUAR Team recently. According to the interviewees, the majority of whom came from the business world, the Indonesian middle class is not yet prosperous due to low purchasing power (44.8%) and limited savings conditions (24.1%). This group also still finds it difficult to get a job in the formal sector and a decent income (89.5%).
The middle class is not classified as poor. However, if there is an economic shock, they will fall into poverty.
As middle-class citizens, they do not receive adequate social protection. They do not receive social assistance because they are not poor. However, some economists suggest that the middle class, especially the lower middle class or aspiring middle class, also receive social protection. They are not classified as poor. However, in the event of an economic shock, they will fall into poverty. Therefore, it is necessary to formulate social protection instruments that are suitable for the middle class.
Survey respondents were unanimous in stating that the government needs to expand the scope of social protection to target not only the poor, but also the middle class. This was stated by the majority (86.8%) of respondents.
This is partly based on the consideration that the middle class can prosper, at least not falling into poverty (30.3%). The main reason is that the existence of a middle class will encourage economic growth (42.2%) - especially through consumption and job creation. In addition, there is also a reason for the principle of fairness.
A small number of interviewees stated that the middle class does not need social protection, because they believe that the middle class is an independent group. The existing social protection programs are sufficient for the targeted group, namely the poor.
The formulation of the right instrument for the middle class does need to be considered. This is because the existence of the middle class not only has economic implications, but also socio-political ones. If the condition of this middle class group is neglected, it will have socio-political implications in the future.
The middle class with a high level of education and income is more critical and willing to voice their aspirations to the government.
The reason is that as a growing middle class - generally a population with a high level of education and income - they are more critical and willing to voice their aspirations to the government. As a critical group, they will demand better quality of public services, justice and governance.
The aspirations of the middle class will continue to rise. They will not only talk about "needs", but also about "wants" and aspirations for a better life. That is why the government cannot only focus on the poor, but also the middle class. This includes social protection.
