Indonesia’s Dwindling Middle Class Darkens Economic Outlook, According to Reuters

By Stefanno Sulaiman

KARAWANG, Indonesia – Rahmat Hidayat lost his job when the shoe factory he worked at closed last year in the industrial town of Karawang in West Java, Indonesia. Now, the 44-year-old earns less than half of his previous salary by selling grilled meatballs. Unable to afford his wife’s diabetes medication, Rahmat has taken to foraging for herbs to create a homemade tonic.

Like Rahmat, millions of working to middle-class Indonesians have seen their financial situations worsen, primarily due to rising layoffs and a decline in job opportunities following the pandemic. This trend poses serious challenges for Southeast Asia’s largest economy, where household consumption constitutes over half of the gross domestic product. The situation undermines the long-held belief that a growing middle class will fuel Indonesia’s aspirations to become a high-income nation by 2045.

The incoming administration of President Prabowo Subianto faces significant hurdles as it assumes leadership after a decisive election victory in February, during which he pledged to stimulate economic growth and generate 19 million jobs. He officially takes office on October 20.

"Pushing the economy to grow higher with weak consumption is difficult," remarked Mohammad Faisal, an economist with the Center of Reform on Economics in Jakarta.

According to government classifications based on World Bank criteria, those who spend between $132 and $643 a month are deemed middle class. This demographic is vital for economic growth, contributing nearly 40% of private consumption, which rises to over 80% when considering those aspiring to be middle class—spending between $57 and $132.

However, official data indicates that the size of the middle class has shrunk from 21.5% of the total population in 2019 to 17.1% in 2024. Despite a post-pandemic economic rebound with annual growth exceeding 5% since 2022 amid relatively low inflation, this decline in the middle class threatens to constrain future growth as the government may face dwindling tax revenues and potential increases in subsidies.

"In the long run, if the middle class dwindles, it will certainly be a burden for the state," said Jahen Rezki, an analyst from the University of Indonesia.

SIGNIFICANT STATE SPENDING

One of the major factors contributing to the decline of the middle class is the changing labor market. Much of the foreign investment in Indonesia has been directed toward less labor-intensive industries like mining, driven by advancements in technology. Additionally, increased competition from lower-cost countries, particularly in the textile sector, has pressured local factories, resulting in what the textile association describes as the worst layoffs in a decade.

Hashim Djojohadikusumo, an adviser to Prabowo, stated that the incoming government aims to support the middle class by creating millions of new jobs through initiatives such as a $28 billion free meals program and the construction of millions of homes. "We want to foster small, medium, and micro entrepreneurs, particularly through our housing program, which plans to build three million housing units in villages and cities to help create a middle class," he explained.

However, experts caution that the government’s ability to implement welfare programs may be constrained, especially in the coming year when significant government debt is set to mature.

For Rahmat, the most beneficial assistance from the government would be financial aid to help expand his food business, given the increasing difficulty of finding stable employment. His wife, Fatimah, adds that their children often request their favorite spicy meat dish, but all she can typically provide are instant noodles with eggs.

"I can only tell my kids to please wait until dad receives his fair compensation from the factory; we will cook a delicious meal again," she said.