By: Setyo Budiantoro (Senior Researcher The PRAKARSA, Fellow Lecturer of IDEAS Global Program, Massachusetts Institute of Technology (MIT) and Postgraduate Lecturer, Udayana University)
Indonesia is currently at a crucial crossroads in its economic history. Amidst increasing global uncertainty, our country is faced with a deadly combination that could threaten social and economic stability: rising layoffs and a shrinking middle class.
This phenomenon is not just a statistic; it is a reflection of the fundamental challenges facing our economy. Data shows that in the first half of 2024, more than 32.000 workers lost their jobs, mainly in labor-intensive sectors such as textiles and manufacturing, with the wave of layoffs now also spreading to startup.
These layoffs not only damage the family economy, but also reduce the purchasing power of the community as a whole, which ultimately slows the rate of national economic growth. For the thousands of workers who lost their livelihoods, the impact was immediate and severe, creating deep uncertainty in everyday life.
The weakening of the middle class and its impact
On the other hand, the middle class, which has been the mainstay of domestic consumption, has also experienced a significant decline. In 2019, the number of middle class in Indonesia reached around 57 million people. However, in 2024, this number will shrink to around 47,85 million.
This decline is not just a number; it is a signal that there is a structural problem in our economy. A shrinking middle class means weaker purchasing power, lower domestic consumption, and increased economic vulnerability to external shocks. When the middle class shrinks, a vital pillar of our economic stability is threatened.
Addressing this deadly combination requires a more deliberate and bold strategy. We cannot rely solely on existing policies. Comprehensive measures are needed that address the current problems while building a strong foundation for the future.
One approach that needs to be considered is strengthening the industrial ecosystem that is able to create high-value products by utilizing local resources. However, we must be realistic in determining this strategic focus.
The agricultural sector and natural resource-based products may be a more logical starting point given Indonesia's geographic conditions and resource availability.
However, this is not an instant solution. Building a competitive industry requires time, investment, and strong commitment from various parties. For example, efforts to increase local production in the agricultural sector can help reduce dependence on imports, but this requires consistent policy support and adequate infrastructure development. This is not just a technical step, but a comprehensive effort to strengthen economic resilience.
Steps towards a stronger future
A gradual approach is key to implementing this strategy. Big changes don’t happen overnight, and small, deliberate steps will allow us to learn, adapt, and avoid unwanted upheaval.
Every policy must be rigorously tested and evaluated before being expanded, ensuring that we are taking the right steps toward our long-term goals.
For example, reskilling programs for laid-off workers can be an important first step to ensure they retain skills relevant to the evolving needs of the job market. In doing so, we not only mitigate the immediate impact of layoffs but also prepare the workforce for a more competitive future.
In a broader context, equitable economic development must be the driving force for inclusive growth. Data shows that 60 percent of Indonesia's GDP comes from Java, while regions outside Java, especially Eastern Indonesia, are still lagging behind in terms of infrastructure development and investment.
This inequality must be addressed with policies that encourage redistribution of development throughout Indonesia. Development of transportation infrastructure in strategic areas can open up new market access and encourage regional economic growth. However, this requires careful planning and active involvement not only from the private sector through public-private partnership schemes, but more broadly through the pentahelix. This is not only about equitable development, but also about creating new economic growth potential across the country.
The global challenges we face today require us to be more responsive to the uncertainties that exist. No country is immune to the impacts of commodity price fluctuations, international trade policies, or geopolitical dynamics. Therefore, risk-based strategies must be an integral part of our economic planning. Governments must be prepared for a variety of scenarios, from the most optimistic to the most pessimistic, and have appropriate mitigation strategies.
Diversification of export markets and import sources is also a priority to ensure that we are not dependent on just one or two countries, which could be a source of vulnerability in our economy. In this way, we can strengthen national economic resilience and protect ourselves from external shocks.
Face the future with courage
Amidst all these challenges, Indonesia’s middle class, once a symbol of economic stability and progress, is now facing significant pressure. The decline of the middle class indicates a fundamental problem that must be addressed immediately.
But this is not the end of the story; it is a call to bolder and smarter action. We need to create policies that not only protect but also strengthen the middle class, giving them greater access to finance, retraining, and basic services like health and education.
The middle class is the main driving force of our economy, and keeping them strong means maintaining sustainable economic stability and growth.
However, to achieve all this, deep structural reforms must be at the top of the agenda. We must eradicate corruption, improve bureaucratic efficiency, and build a quality workforce that is able to compete in the global market. The growth we are pursuing is not just about numbers, but about how we build a fairer, more inclusive, and more sustainable future.
Ultimately, this challenge forces us to make a choice: will we take the steps necessary to bring about change, or will we wait until circumstances force us to act?
History has shown that a great nation is a nation that is able to rise from difficulties, not by avoiding them, but by facing them with courage, determination and innovation.
It is time for Indonesia to write a new chapter in its economic history—one filled with opportunity, progress, and hope for all. Let us move forward with the conviction that every step we take will bring us closer to our great ideal: a strong, independent, and competitive Indonesia on the world stage.
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This article was previously published on kompas.com by title “Coping with a Deadly Combination: Layoffs and the Falling Middle Class”. Click to read: kompas.com