Indonesia’s shrinking middle class casts a shadow over economic growth | Business and Economics

Medan, Indonesia – Halimah Nasution felt like she had it all.

For years, she and her husband Agus Saputra made a good living renting weddings, graduations and birthdays.

Even after splitting their income among several siblings, the couple in Indonesia’s North Sumatra province earned about 30 million rupiah ($1,917) each month.

Spending about a quarter of their take-home pay each month, the couple was in Indonesia’s middle class, which is officially defined as those with a monthly income between 2 million rupiah ($127) and 9.9 million rupiah ($638).

Then the COVID-19 pandemic hit.

Social events and social gatherings are banned throughout Indonesia.

For a couple who made celebrations their business, the lockdown had a negative impact.

“We lost everything,” Nasution told Al Jazeera.

A few years later, the couple is still going back.

They are among the millions of Indonesians who have slipped out of the Southeast Asian country’s shrinking middle class.

The number of Indonesians considered middle class has dropped from 57.3 million in 2019 to 47.8 million this year, according to data from the Central Bureau of Statistics.

Those considered to be in the “aspirational middle class” increased from 128.85 million to 137.5 million during that period, according to the statistics agency.

Together, these two parts make up about two-thirds of Indonesia’s 277 million people.

Economists say the decline is due to a number of factors, including the aftershocks of COVID-19 and gaps in the country’s social safety net.

Ega Kurnia Yazid, a policy expert with the government-run National Poverty Reduction Acceleration Team, said “several interconnected factors” have contributed to the trend.

“First, [Indonesia’s middle class] they mostly contribute in tax revenue but receive limited social assistance, most of which is provided through formal employment mechanisms such as job security and national health insurance,” Yazid told Al Jazeera.

“Currently, other forms of aid, such as cash transfers and energy subsidies, often have implementation errors and are not delivered effectively to this group.”

Nasution and her husband experienced this lack of support firsthand when their business collapsed.

“We didn’t get any help from the central government when we couldn’t work during the violence and we got some money from our local office to help us buy groceries, but it was only 300,000 rupiah a month. [$19],” he said.

Indonesia’s economy has been growing slowly since the end of the pandemic, with gross domestic product (GDP) growth at around five percent.

But like many of its developing peers, Southeast Asia’s largest economies rely heavily on trade, leaving them exposed to slowing global growth.

“Major trading partners such as the US, China, and Japan are experiencing contraction, as shown by the Purchasing Managers’ Index (PMI), resulting in a decrease in international demand for Indonesian goods,” said Yazid.

“This adds to the strain on the middle class.”

Adinova Fauri, an economist at the Center for Strategic and International Studies (CSIS), said Indonesia’s depressed middle class “reflects deep structural problems, especially the impact of deindustrialization in Indonesia.”

“Manufacturing, which used to attract a lot of workers, can no longer do that. A large part of the workforce has shifted to the service sector, most of which is unorganized and offers low wages and little social security,” Fauri told Al Jazeera.

To remedy this situation, labor conditions and productivity need to be improved, he said.

“We will no longer be able to compete with countries like Vietnam or Bangladesh with only low wages. Instead, we need to strengthen labor conditions and regulations to reach new markets, such as the US, which prioritize better labor standards,” said Fauri.

“Manufacturing is also a serious matter, not only in terms of skills but also the health of workers. We should also learn from other countries by investing in research and development and promoting new strategies to increase productivity.”

The inauguration of President Prabowo Subianto last month as the eighth leader of Indonesia, succeeding Joko Widodo, popularly known as Jokowi, has raised hopes for the economy in other areas.

During his election campaign, Prabowo pledged to achieve 8% GDP growth and end poverty and child stunting by introducing a free day school program.

Meanwhile, Nasution and his family are still picking up the pieces of their broken lives.

After buying a lot of big-ticket items like furniture and stages on credit, she and her husband soon found themselves in financial trouble when the business stalled.

“We sold our car, we sold our property and we foreclosed on our house,” Nasution said. “It died. Our business just completely died.”

Nasution’s husband took the first job he got, a role harvesting oil palm fruits for about 2.8 million rupiah ($179) a month.

Nasution took a job as a cleaner, working from 8am to 1pm six days a week for a monthly salary of 1 million rupiah ($63).

These days, the couple spends a little less than the two million rupiah ($127) threshold that marks entry into the middle class bracket.

“Our life is very different now, and we are not as stable as before. We need money to start the business again, but we cannot save money to do that,” said Nasution. “We will have to buy all the equipment for the teams we had before or rent it.”

“We have enough money to barely survive, but life is full of ups and downs, and I hope things will turn around,” he added.

“I leave it to God for now.”