When it comes to describing Indonesia's economic trajectory since the recovery from the Asian Financial Crisis, it's been a case of 'pick your own narrative'. Indonesia has supplied the storylines for either being an exemplar of the rise of the Global South in the global economy and middle-income dynamism, or a poster child of the middle-income trap.

Now, as accumulated economic and institutional problems are colliding with unfavourable global conditions, there are growing questions about whether the steady growth of living standards – the reward of over two decades of stability and progress bookended by the Asian Financial Crisis and the COVID-19 pandemic – has come to an end.

In the wake of the recovery from the Asian Financial Crisis, Indonesia emerged not only with surprisingly vibrant democratic institutions, it also had much stronger economic institutions than those that had created the conditions for economic catastrophe in 1997-98. The legacies of the Asian Financial Crisis were more than institutional reforms: they left deep psychological scars on a generation of policymakers, who to this day are wary of Indonesia once again losing the confidence of international financial markets.

The concrete reforms of the immediate post-Asian Financial Crisis years – including much better financial sector regulation, central bank independence and strict fiscal guardrails – gave Indonesia a solid foundation of macroeconomic management to take advantage of the post-crisis recovery of the 2000s and ride a consumption-driven wave of growth buoyed by the commodities boom of the early 2000s.

Commodity revenues propped up state coffers and domestic consumption generated steady headline growth despite Indonesia's increasing marginality in global value chains. These dynamics also reduced the urgency for governments to push the difficult reforms, from fixing a persistently underperforming education system to improving an investment climate afflicted by weak rule of law and a fickle bureaucracy.

The flip side of a declining contribution of the manufacturing sector to employment, productivity and GDP and relative detachment from global manufacturing supply chains has been, in the eyes of many in the political class, stability and insulation from global turbulence. Indeed, many Indonesian politicians are in the habit of spruiking Indonesia's relative lack of integration into the global economy – compared to Southeast Asian peers like Vietnam and Thailand – as a national asset.

For years, these shortcomings could be papered over by a high contribution of domestic consumption to GDP and favourable international trends that sustained strong global demand for its commodities as well as the increasing ability of the government to finance expansions in the social safety net and generous subsidies.

But since the onset of the COVID-19 pandemic, or even before, the effective middle class has been shrinking. Rising living costs, weak wage growth and limited access to secure formal-sector jobs are squeezing households' spending power – a big problem in an economy so reliant on domestic consumption for its growth.

This week's lead article by Liam Gammon highlights the links between these worrisome economic trends and the protests that swept across Indonesian cities in late August 2025, and how those protests are prompting new questions about the legitimacy of a political settlement deeply dependent on delivering rising living standards across the country for its stability.

As Gammon writes, the August unrest was a product 'of the deeply illiberal democracy that emerged during the presidency of Joko Widodo and is being consolidated under President Prabowo Subianto'. The 'rubber stamp' parliament that does the bidding of a president ensures that 'the street' has become 'a key arena on which civil society contests the fruits of the legislative processes that they were increasingly frozen out of'. The ostensible trigger for the wave of protest that began on 25 August – and which escalated after a police vehicle ran over a motorcycle online taxi driver, killing him – was parliamentarians' tin-eared decision to award themselves a US$3000 per month housing allowance, many times more than the typical monthly earnings for an informal-sector worker, 10 times the minimum wage in Jakarta and 20 times the minimum wage in the poorer regions.

Yet insiders in Jakarta testify that Prabowo is oblivious to the depth of Indonesia's economic malaise and confident of the effectiveness of his political patronage, and that his state-first economic policies, heavy on channelling resources to agrarian and rural development, will have a New Deal-like effect in putting people to work and boosting prosperity in less-developed areas.

Equalising the geographic spread of development and stimulating poor rural areas is a noble goal – but Prabowo needs to pay attention to the problems of the cities and industrial hubs, where times are tough for the higher-productivity services and manufacturing industries that will generate the wealth to pay for Prabowo's equalising agenda.

In response to the protests, Prabowo has made policy concessions very narrowly targeted to the ostensible triggers of the protests, cancelling the new parliamentary perks, banning parliamentarians' junkets, and promising a thorough investigation into the death of the motorcycle online taxi driver.

He has yet to indicate, however, that he grasps either the scale or the causes of increasing dissatisfaction with the economic conditions over which he presides. The downward mobility felt by an increasing number of Indonesians is particularly acute among the young, whose support was central in generating a landslide victory for President Prabowo in the 2024 elections.

They in particular want to know what Prabowo is going to do to solve the economic problems that are biting them now.

Source: https://eastasiaforum.org/2025/09/08/indonesian-protests-a-wake-up-call-on-policy-complacency