Authors: Dwinanda Ardhi Swasono, KCL and Nopriyanto Hady Suhanda, University of Bristol

The Indonesian Finance Minister, Sri Mulyani Indrawati, believes that Indonesia’s economy will continue to recover and be safe from recession in 2023.

Coffee shop in Jakarta, Indonesia, 3 July 2021 (Photo: Reuters/Ajeng Dinar Ulfiana).

Coffee shop in Jakarta, Indonesia, 3 July 2021 (Photo: Reuters/Ajeng Dinar Ulfiana).

According to the National Statistics Agency, Indonesia’s economic growth in 2022 was 5.31 per cent, surpassing the 5.2 per cent target. The growth was largely driven by strong domestic consumption — with an increase of 4.48 per cent — and international trade, which recorded a trade surplus over 31 consecutive months and a 14.93 per cent growth in exports.

Indonesia’s robust performance indicates that economic policy responses to the COVID-19 pandemic were successful. One factor which played a role in Indonesia’s success is a rising middle class with purchasing power. Middle class consumption has supported Indonesia’s economy for a long time, including during the pandemic.

According to the World Bank, people with daily expenditures between US$7.75–US$38 are classified as middle-class. This group of 52 million Indonesians is sometimes called the concrete middle class.

Another group is the aspiring middle class or people who spend between US$3.3–US$7.75 per day. Around 115 million Indonesians in this category are no longer living in poverty but still need economic security. Focusing on strengthening and expanding the size of the concrete middle class is crucial under the economic recovery agenda.

During COVID-19 lockdowns and social distancing campaigns, the government implemented several policies targeted at the middle class to sustain aggregate consumption.

For instance, the social restrictions meant people did not spend much outside their homes and had more savings to spend on other things. The government decided not to impose a value-added tax on houses and cars to optimise the purchasing power of the middle class and boost confidence. Tax rebates triggered the middle class with more savings to spend on discounted commodities. This policy affected the sales of affordable houses in 2021, which increased despite the 2022 downturn.

According to Coordinating Minister for Economic Affairs Airlangga Hartarto, ‘the property sector has a multiplier effect, both in terms of forward-linkage and backward-linkage on 174 industrial sub-sectors either directly or indirectly’. The property industry, which contributed to 13.6 per cent of GDP in 2020, also directly employs up to 8.5 million people.

In 2021 and 2022, the Association of Indonesia Automotive Industries reported that almost one million cars were sold — a significant increase from just over 500,000 units sold in 2020. This indicates that the policy had succeeded. Boosting the automotive sector is crucial as it is a significant source of employment and investment which has multiplier effects on the economy.

In the recovery agenda, the government must focus on encouraging the consumption of concrete middle-class groups, while supporting the vulnerable middle class. For the middle and upper middle-class groups, the government may consider continuing policies that boost domestic consumption and create multiplier effects on the economy.

The promotion of consumption should support the tourism and creative economy sectors. Minister of Tourism and Creative Economy Sandiaga Uno’s proposal to make confining days national holidays in 2023 could potentially help to drive the tourism and hospitality sectors amid economic recovery.

The World Travel and Tourism Council indicates that tourism contributed 5.2 per cent to Indonesia’s GDP in 2019. In 2017, the industry created 12.7 million jobs, representing 10.5 per cent of total national employment.

To maintain domestic demand and strengthen household consumption, the government should implement policies that increase Indonesians’ purchasing power, such as tax policy rebates for housing and automotive industries, national discount festivals and electric vehicle subsidy programs. These will not only contribute to national consumption but also be better for the environment. This is important as annual household consumption makes up over half of Indonesia’s GDP and is the source of growth from the expenditure side.

Maintaining economic recovery momentum is also crucial. In 2023, uncertainties such as inflation, global recession and geopolitical tension continue to haunt many countries. These challenges need to be anticipated.

In controlling inflation, synergistic efforts by the government and central bank are needed to implement policies through various innovation programs. Their burden-sharing scheme to finance state deficits in response to the pandemic and difficult economic situations is challenging, but it can be used as a good lesson learned.

For the vulnerable or aspiring middle-class population, the government must focus on solving more structural problems. Creating higher-paying formal sector jobs is an example of a challenge that needs to be addressed. Increasing jobs in the formal sector will give middle-class workers more protection through stability and access to health insurance benefits.

The government might also encourage small and medium enterprises to enter the formal economy by providing assistance and incentives. They may continue to provide cash transfers, training, education, health facilities and other support to help them to become more resilient. In the long term, it is essential to undertake policies focusing on redistributing future incomes while closing the inequality gap.

Dwinanda Ardhi Swasono is a PhD student in the International Development Department at King’s College London.

Nopriyanto Hady Suhanda is a Master’s student in Public Policy at the University of Bristol.