The Middle-Class: Rising Confidence

Prof. Firmanzah Indonesia’s economy has had its fair share of ups and downs for over a decade  now. After being hit by the Asian financial crisis in 1998, the economy has by all  measures recovered more rapidly than earlier predicted. While its economic  growth rates in 1999 crashed to melting point levels negative 13%, it has since  then managed to crawl its way out of the morass to stable levels. In fact, in 2011  the economic growth situation took off dramatically, enjoying a staggering rate  of 6,5% in the midst of global and financial crises. In the first semester of 2012, the economic growth rate was 6,3%, the second highest among G20 countries after china.

Indonesia’s economic stability is demonstrated by its steadily increasing GDP per capita, up by more than 200% since 2004 ($1,179) to 2011 ($3,543). This is the main factor behind the country’s rising-middle class. Within ASEAN countries, Indonesia has unique growth model that emphasizes the domestic rather than international export market. Moreover, the government had adopted a “keep buying” policy to promote domestic purchasing power. Low inflation rates, direct-transfer funds the poor and other pro-poor and pro-job policies are some examples of this “keep buying” policy. Despite such progress, the economy still provides ample room to improve in the coming decade.

Although there is no standard definition for the middle-class, some international institutions and thinktanks have provided basic indicators for reference. According to the Asian Development Bank, a middle-income society is defined as those who spend $2 to $10 per person per day. Recently, a McKinsey report defined middle-income as those who spend daily within the range of $2 to $20 per person. Based on these indicators, Indonesia is expected to have more than 135 million defined as middle-income in 2030, up from 45 million in 2012. With this remarkable growth, the new consumer-class will require new products and services, thus creating new demand for secondary and luxury products and services.

The emergence of the middle-class in Indonesia creates an attractive market for a variety of products, ranging for retail and consumers goods to financial services. This group of consumers will also spend a larger proportion of their income on non-basic needs, switching from basic consumption to more expensive, reliable, quality-oriented, lifestyle, entertainment and green products. At the same time, demand for new varieties of financial services will increase as the middle-class expands. There is already significant evidence of an increase in financial services, ranging from credit, insurances and other financial investments.

Once the demand side has grown significantly, the government is set to embark on a pursuit to balance the efficiency of national competitiveness (supply side). By launching the Master Plan for Acceleration and Economic Expansion (MP3EI), the government is on a mission to improve the quality of the supply side. Production facilities efficiency and logistic cost reduction are the locus of acceleration planning of infrastructure development.

The supply side is being accelerated to provide high-quality products needed by the growing demand of the consumer class. As such an ambitious expansion has its budget limitations, the government is now actively promoting and attracting domestic and foreign direct investment to support the acceleration of industrialization and infrastructure development.

With the existing and potential trend of growing middle-class in place, investors are reassured that their products and services can be absorbed by huge domestic demands. And they will see that their investments, anywhere in Indonesia, will be transformed into the projected high economic growth level. In fact, the Indonesia Investment Coordinating Board (BKPM) has reported that both national and international direct investment realization has already reached Rp.229,9 trillion, an increase of around 27% over the same period in 2011.

The unique equilibrium between demand side (middle-class consumption) and supply side improvement (infrastructure and industrialization) is therefore believed to be the source of Indonesia’s sustainable growth. And as it continues to reach higher equilibrium levels, it also raises the confidence of economic actors towards the economy in the future.

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