Why is Indonesia's middle class shrinking?

On October 20, Prabowo Subianto will be inaugurated as Indonesia's president. He won an election in February by running a populist campaign that included promises of 8% economic growth while ending poverty and malnutrition. 

In recent decades, the Southeast Asian nation has been a success story, recording rapid growth rates and reducing extreme poverty.

According to research by the World Bank, Indonesia will need to further boost economic expansion and create a "much larger" middle class in order to become a high-income country. 

However, a recent report from Indonesia's Central Bureau of Statistics

(BPS) shows that the number of Indonesians classified as middle class has declined. 

In 2019, BPS data found 57.3 million people belonging to the middle class. But data from March 2024 showed this number coming at 47.8 million people.

Economists say the drop can be attributed to lingering economic effects of the COVID pandemic as well as rising inflation and the tax burden.

The World Bank defines the middle class "as those who enjoy economic security, who are free from worry about monetary poverty, and, as a consequence, are turning their disposable income toward discretionary consumption rather than subsistence."

Middle class under pressure 

The Indonesian middle class plays a crucial role in supporting national economic growth through their spending. Growing this demographic is essential for scaling up economic growth.

However, some Indonesians speaking to DW said they are not particularly enthusiastic about near-term prospects. Rising taxes and various other costs of living are putting pressure on spending power, which has already been weakened by inflation. 

"The middle class is in a dilemma. We are not exactly rich, yet not poor enough to receive subsidies that could benefit us," Dinar, a Jakarta-based worker, told DW. 

Research published in August 2024 by the University of Indonesia's Institute for Economic and Social Research (LPEM-UI) shows that the purchasing power of the middle class, and aspiring middle class, in Indonesia has been decreasing over the past five years.

They now need to allocate more of their budget for food, and are, therefore, spending less on other things.

"Non-food expenditures, such as for durables, health, education, and entertainment, are more indicative of purchasing power and economic well-being," the report said. 

"These expenditures tend to rise with disposable income and are key drivers of economic growth," it added.

"A rising food expenditure share suggests a decline in the purchasing power of the middle class. This erosion of purchasing power is worrisome as it impacts aggregate consumption, a crucial driver of Indonesia's recent economic growth," the report said.

Purchasing power at risk

Besides inflation, an overall global economic slowdown has sparked massive layoffs in Indonesia over the past two years, and Indonesian middle-class workers might see a further reduction in their incomes next year. 

"In the last two years, there have been many mass layoffs because our industry, our manufacturing, is not productive now," Teuku Riefky, one of the authors of the LPEM-UI study, told DW.

"The issue that is perhaps most pressing at the moment for the middle class is that we have not seen any specific programs that are able to target that direction," Riefky added.

Policies that are likely to suppress the purchasing power of the middle class may need to be reconsidered, he said. 

Starting January 1, 2025, the government is planning to increase the value-added tax from 10% to 12%.

Additionally, there will be an increase of fuel and energy prices, as well as increases in monthly premiums for national health insurance and higher commuter rail costs, which will affect millions of Indonesians who rely on this mode of transport daily. 

Asri, a resident of Klaten district in Central Java province, said new activities for her and her children mean potential additional financial burden. 

"It is okay to pay for health insurance, but if it increases, we will need to cut spending elsewhere. The food budget will be the last choice," Asri told DW.  

Middle-income trap?

Bhima Yudhistira, director of the Center of Economic and Law Studies (Celios), a Jakarta-based think tank, told DW that Indonesia was looking at annual GDP growth of below 5%. This is in line with projections for 2024 reported in the LPEM-UI study.

Meanwhile, Indonesia has set an ambitious goalto become a high-income country by 2045. 

"In the long term, Indonesia could be trapped in a middle-income trap. It will be difficult to become a developed country because the number of middle-class individuals continues to decline, leading to an increase in the number of new poor people," he said. 

Algadri Muhammad and Iryanda Mardanuz in Jakarta contributed to this report 

Edited by: Wesley Rahn