Indonesia’s Middle Class Expansion: A Gateway for Manufacturing and Economic Growth
The rise of the middle class in Indonesia is a central aspect of the nation’s socio-economic transformation. In recent years, Indonesia has experienced a substantial decrease in poverty, with the middle class expanding from 7% to 20% of the population over the past 15 years. This growth translates to approximately 52 million Indonesians, though it’s important to note that only a portion of income earners in Indonesia can be classified as holding middle-class jobs with full social benefits and an indefinite-term employment contract.
During the COVID-19 pandemic, the Indonesian government implemented various policies to support the middle class. These included not imposing value-added taxes on houses and cars to boost their purchasing power. This decision positively impacted the sales of affordable houses in 2021 and significantly bolstered the automotive sector. The automotive industry is a major employment and investment source in Indonesia, with wide-ranging effects on the economy.
The government’s strategy to encourage consumption among the middle class and support the vulnerable sectors of this group is key. This includes tax rebates for housing and automotive industries, national discount festivals, and electric vehicle subsidy programs. These initiatives not only stimulate national consumption but also promote environmental sustainability.
A significant symbol of the middle class’s rise and Indonesia’s future is the new high-speed train connection between Jakarta with over 34 million population and Bandung with 8 million population. The 600 capacity high-speed train service offers tickets at around 200,000 Indonesian Rupiah (approximately 13 US dollars), making it an accessible option for a large segment of the population. It aims to cover the 142-kilometer distance between the two cities in around 40 minutes, a significant reduction from the current three-hour journey, reaching a top speed of 350km/h. The railway is built on a double track and electrified, making Indonesia only the second country with the fastest railway network in the world that operates commercially, on par with China. The line’s name “Whoosh” is short for “Waktu Hemat, Operasi Optimal, Sistem Handal,” which in Bahasa Indonesia roughly means “time-saving, optimal operation, reliable system”. There are four stations planned along the route: Halim, Karawang, Walini, Tegal Luar and there are plans for further extensions to Surabaya in East Java, which will cut travelling time from 10 to 3.5 hours. Enhanced transportation options can lead to an increase in disposable income and spending power for the middle class, promoting consumer market growth. By facilitating easier and faster travel, the high-speed rail can also encourage urban development and expansion of middle-class populations in newly accessible areas.
What will propel the growth of the middle class in the future?
The booming electric vehicle (EV) and battery industry in Indonesia is set to be a key driver in strengthening the middle class. The growth of this industry is expected to boost various supplying sectors, such as machinery, electronics, process industries, and services, leading to the creation of numerous job opportunities. The success of the EV industry will hinge on continued government support, advances in technology, and the global market’s response to EVs and associated technologies.
A look at the labor costs of Indonesia shows one of the leading factors supporting of foreign direct investment. The relatively low level of worker labor costs compared to other ASEAN countries shows that the high, remaining potential is untapped into. In 2021, Indonesia’s proportion of manufacturing employment accounted for 14.3% in the country. A growing consumer base and cost-effective labor makes Indonesia a favorable choice for companies looking to expand their manufacturing and production operations in Southeast Asia. While Vietnam and Cambodia offer lower labor costs, Indonesia’s larger consumer market is a significant draw for businesses targeting domestic sales. Compared to Thailand and Malaysia, which have more developed economies and higher labor costs, Indonesia presents a more cost-effective environment for manufacturing. The Philippines shares similarities with Indonesia in terms of population size, but Indonesia’s more stable political environment and progressive economic policies provide a more conducive atmosphere for business expansion.
Clearly, the middle class in Indonesia is on an upward curve, encouraged by government policies, economic development, and the expansion of key industries like EVs and batteries. The Jakarta-Bandung high-speed train, with its affordable ticket prices, stands as a testament to this progress, indicating a promising future for Indonesia’s middle class and overall economic development.
