Maria Monica Wihardja and Chatib Basri – We must get Indonesia's middle-class narrative right to devise appropriate policy responses. While some argue that the middle class has grown, the evidence tells a more sobering story.
Indonesia's middle class is the backbone of its economy whose growth relies mostly on household consumption. The middle class accounted for 38.3 per cent of total household consumption in 2024. They also pay a significant share of all indirect tax revenues and help create jobs as business owners. There has, however, been some debate about whether Indonesia's middle class is shrinking or growing. It is important to get the narrative right.
The Op-Ed by Homi Kharas and Wolfgang Fengler published in Nikkei Asia, titled "No, Indonesia's Middle Class Isn't Shrinking – Here's Why", is an important contribution to the debate about Indonesia's middle class. It refutes Indonesian government data and the growing narratives of a declining middle class since 2018.
Kharas and Fengler's (K-F) analysis concludes that there are 130 million middle- and upper-class Indonesians (or close to half of Indonesians), in stark contrast to the government's figure of 50 million. What accounts for the differences in the estimated size of the middle class in Indonesia?
Investigating this question centres on data and methodology. Due to the proprietary nature of their work, details on how K-F reached their conclusions are not available. K-F claim that their analysis is based on the methodology they developed at World Data Lab to "account for missing spending", which is the gap in household consumption derived from Indonesia's National Social Economic Survey (SUSENAS) and the national account. However, how they recover for missing spending is a key explanation they omit.
The official middle class estimate uses SUSENAS data, which admittedly has limitations, such as the exclusion of top-income individuals in the sampling. Nonetheless, it is a robust survey that represents the vast majority of the population. Indeed, the household consumption calculation in the national account is derived from SUSENAS, which affirms SUSENAS as the primary data reference on consumption.
Another key factor to explain the differences in the estimated size of the middle class is the definition of the middle class itself. There is currently no single definition of the middle class. Counting the middle class is very sensitive to its definition and cutoff points, much like counting the poor. For illustration, using the World Bank's international poverty line for upper-middle-income countries (which Indonesia is part of), Indonesia's poverty rate was 62 per cent in 2023. This contrasts with Indonesia's official poverty rate of just 9.4 per cent in 2023 using the national poverty line.
K-F calculate the middle class using a different definition and cutoff points ($12-120 at 2017 Purchasing Power Parity per capita per day) from Indonesia's Statistical Agency, which follows the World Bank's methodology to classify households as poor, vulnerable, aspiring middle class, middle class, and upper class. The thresholds for these categories are based on multiples of the national poverty line, which are conceptually grounded in the notion of economic security. By this definition, the middle class comprises households that face little economic vulnerability.
Another key difference is that there is no "aspiring middle class" group in K-F's approach, as they classify households fourfold: poor, vulnerable, middle class and upper class. If we combine the aspiring middle class and the middle class, the size of this combined group increased between 2018 and 2023 from 183.8 million to 185.2 million. However, as elaborated in the World Bank's report, the aspiring middle-class group and the middle-class group are different in their consumption growth patterns and characteristics. For example, unlike the lower-class groups, the middle and upper class are the only groups who spend more on non-food items – such as health, education, entertainment, and car ownership – than food items. Other key dividing lines between the middle class and those below are being better educated and having mainly formal wage employment.
Household survey data can be affected by sampling or measurement errors, hence the findings must be dovetailed and corroborated with other evidence. K-F note that the number of registered passenger vehicles has increased steadily since 2018. However, vehicle registration has continuously increased since 1963 (except in 1988 and 2015), and even during Indonesia's worst economic downturns in 1997-1998, passenger car registration grew by 5.0 per cent, and motorcycle registration grew by 7.8 per cent (Figure 1). The quality of vehicle registration data in Indonesia can be affected by multiple factors, including people not de-registering their vehicles even though they don't use or own them anymore.
Figure 1: Vehicle registration has increased since 1963, even during the Asian Financial Crisis 1997-1998 (see original document)
Car and motorcycle sales data are better indicators of people's purchasing power. Between 2018 and 2024, passenger car and motorcycle annual sales remained subdued and have not recovered to pre-pandemic levels. Moreover, non-performing loans (NPLs) for vehicle ownership increased from 1.4 per cent in 2018 to 2.5 per cent by 2024, indicating intensifying financial pressures among households in Indonesia.
Relatedly, financial savings are also drawn down. The monthly growth of third-party funds in savings accounts under IDR100 million has steadily declined since January 2018, from 8.5 per cent to below five per cent in January 2024. The average balance per savings account below IDR100 million dropped by 40 per cent between 2019 and 2024.
Other indicators show the weakening purchasing power of the middle class. For example, the net sales of Unilever Indonesia – the largest Fast Moving Consumer Goods company in Indonesia with a market share of about 35-40 per cent – peaked in 2020, and by 2023 the level was below its 2016 level.
The middle class generally relies on holding good and secure jobs to afford middle class lifestyles, as a World Bank jobs report shows. But the quality of jobs has been deteriorating with the informality rate increasing from 49.5 per cent in 2018 to 51.5 per cent in 2023 (Figure 2), and underemployment increasing from 28.8 per cent in 2018 to 31.0 per cent in 2023.
Figure 2: Net new jobs are increasingly created in the informal sector, reversing the long-term term of formalisation (see original document)
We concur with K-F's statement that sound policy must be grounded in accurate data. But what we see is a picture of an economically distressed population in the middle of the income distribution. While this doesn't necessarily mean the middle class is shrinking – it could simply be stagnating – it's hard to see how it could be expanding.
The state of the middle class is not merely a technical debate, it is also a policy debate. K-F's conclusion could reduce the priority on policies that shore up the middle class. Chile's experience of 2019 shows the potential political backlash from an economically backsliding and increasingly insecure middle class. For now, the Indonesian government should carefully assess the state of household consumption and economic security, and avoid premature pronouncements of success in growing the middle class.
[Maria Monica Wihardja is a Visiting Fellow and co-coordinator of the Media, Technology and Society Programme at ISEAS – Yusof Ishak Institute, and also Adjunct Assistant Professor at the National University of Singapore. In 2017, she worked at the Executive Office of the President of the Republic of Indonesia as a senior advisor to the Deputy Chief Staff in charge of strategic economic issues, where she oversaw the food policy reforms and stunting prevention agenda. Muhamad Chatib Basri is Lecturer at the University of Indonesia and former Minister of Finance of the Republic of Indonesia.]
Source: https://fulcrum.sg/growing-or-shrinking-how-indonesias-middle-class-is-really-doing