Expanding the middle class can help Indonesia grow faster and share prosperity more broadly across the population, according to a report released today by the World Bank entitled Aspiring Indonesia – Expanding the Middle Class.
Over the past 15 years, Indonesia has made remarkable progress in reducing poverty which is now below 10 percent. During this period, the country has also witnessed its middle class grow from 7 percent to 20 percent of the population, with 52 million Indonesians currently belonging to this group.
But action is needed to help the aspiring middle class—45 percent of the population, or 115 million people—who are free from poverty but have yet to achieve full economic security. For this group, moving up is just as likely as slipping down, so adopting the right policies to expand the pathway to upward mobility is a crucial frontier in Indonesia’s development.
“Demand from the middle class can drive growth. They are the source of almost half of the total household expenditure of Indonesia and they also invest more in human capital. Having the right policies to expand the size of the middle-class can unlock Indonesia’s development potential and propel the country to high-income status,” said Rolande Pryce, Acting World Bank Country Director for Indonesia.
To help these millions aspiring to join the middle class, Indonesia needs to create more jobs with better pay, backed by a robust system to provide quality education and universal health coverage. This will require improving the business environment and investing in infrastructure. It will also require expanding access to social insurance to protect against health and employment shocks that erode economic gains and prospects for upward mobility for millions aspiring to join the middle class.
“Growing the middle class requires reforms to improve the business environment to create good jobs, investments in the necessary skills and a social protection system which cushions against shocks” said Hassan Zaman, World Bank Regional Director for Equitable Growth, Finance and Institutions.
Strengthening tax policies and administration to increase compliance by those already in the middle class and broadening the tax base to boost new collections from an expanding middle class will be required to finance these needed investments.
The report calls for a new social contract that binds the state and its increasingly prosperous citizens into a mutually beneficial arrangement. By providing higher quality public services, a pathway to upward mobility through better jobs, and economic resilience through stronger social protection, the state will secure continued participation of its citizens in the services it provides. And, by paying their fair share in taxes, the citizens will in turn enable the state to finance these services.
The research for the report was funded by the Australian Government through the Department of Foreign Affairs and Trade.