Is Indonesia’s Middle Class Collapsing?

The Indonesian middle class, long considered as the backbone of the nation's economy, is facing mounting challenges. While this group has historically driven consumption in key sectors like food, healthcare, and education, there are signs that its stability may be at risk. Hence, a critical question to ask: ‘Is Indonesia's middle class collapsing?’

This question was raised by Prof. Arif Anshory Yusuf, an economics expert from Universitas Padjajaran, during an EconInsight session held by the Faculty of Economics and Business at UIII on November 21, 2024. His talk explored whether Indonesia’s middle class— those who earn between IDR 2.3 million and IDR 8.2 million per month—is actually thriving or unnoticeably collapsing.

As a rationale of the question, Prof. Yusuf explained that while middle-class households demonstrate resilience with low poverty risks, their consumption patterns, particularly in urban cities like Jakarta, reveal vulnerabilities, including limited access to affordable housing and susceptibility to economic shocks. He presented compelling data illustrating the long-term trends in Indonesia’s middle class, while criticizing Indonesia's poverty measurement.

In this regard, Prof. Yusuf elaborated Indonesia's poverty measurement used an outdated standard. The poverty line, last revised in 1998, has not kept pace with the country's rapid economic growth. Over the past 26 years, Indonesia’s per capita income has increased sevenfold, but the poverty threshold has remained low, comparable to those of the world’s poorest nations. For instance, Malaysia updated its poverty line in 2018 after 13 years, nearly doubling the threshold to better reflect its citizens’ living standards.

He then argued that if Indonesia were to adopt a similar recalibration—say, increasing the poverty line by 50%—the poverty rate would tell a very different story. Recent data shows that when calculated against a higher poverty line, akin to Timor Leste’s, the poverty rate rises significantly, with 33.3% of Indonesians falling into poverty in 2024 compared to 29.9% in 2019.

“During 2019-2024, the middle class decreased from 57.3 million people (21.4%) to 47.8 million people (17.1%). At the same period, poverty increased from 80.1 million people (29.9%) to 92.9 million people (33.3%),” Prof. Yusuf said. This indicates that the increase in poverty in the last five year is accompanied by a decline in the middle class.

In making sense of the phenomenon, Prof. Yusuf mentioned the term “immiserizing growth” that is the condition in which positive economic growth is accompanied by the increasing poverty incidence, as well as "middle-class squeeze," where rising costs in housing, healthcare, and education outpace income growth.

To address this, he proposed immediate policy options that prioritize redistributive measures to ensure economic growth benefits all segments of society. This includes revising the outdated poverty line, striking a balance between raising minimum wages and maintaining the competitiveness of labor-intensive industries, creating subsidies, and avoid or postpone contractionary measures.

The presentation by Prof. Arif Anshory Yusuf was part of EconInsight, a flagship event series organized by the Faculty of Economics and Business at UIII to foster critical dialogue on pressing economic issues that shape Indonesia and beyond. The sessions bring together leading experts, policymakers, academics, and students to explore contemporary challenges through in-depth presentations and discussions.

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