The Paradox is Striking 
Indonesia continues to post around 5% annual economic growth, maintain low headline unemployment, and enjoy commodity windfalls from nickel, coal, and palm oil. Yet millions of households increasingly feel poorer, more vulnerable, and less secure. 

Shopping malls remain crowded, luxury consumption still thrives, but the economic ladder beneath the aspiring middle class is quietly collapsing.

Indonesia’s middle class has shrunk by more than 13 million people since its peak. In 2018, roughly 60 million Indonesians belonged to the middle class; by 2025, the number had fallen below 47 million. For a country long celebrated as Southeast Asia’s next economic giant, this is not merely a statistical anomaly. It is a warning siren.

The Problem is Systematic and Structural
The Indonesian economy has been growing without producing enough high-quality formal jobs. Manufacturing, historically the backbone of middle-class expansion across East Asia, has steadily weakened. Manufacturing contributed nearly 32% of GDP in 2002; by 2025, the share had fallen to around 19%. This is premature deindustrialization in real time.

Countries become prosperous not simply by exporting raw materials, but by moving workers into productive industries that generate stable wages, technological upgrading, and broad-based consumption. South Korea, China, and Vietnam all understood this lesson. Indonesia, however, increasingly risks becoming trapped between a commodity economy and a low-productivity services economy.

The consequences are visible everywhere. University graduates drive ride-hailing motorcycles. Informal employment expands faster than formal-sector opportunities. Young Indonesians work longer hours yet struggle to afford housing, education, and healthcare. Consumption growth among the middle class has slowed below the national average. 

This erosion matters because the middle class is not merely a consumer bloc; it is the foundation of economic and political stability. Middle-income households finance domestic demand, generate tax revenues, invest in education, and sustain democratic institutions. When the middle class weakens, societies become more polarized between a wealthy elite and a vulnerable majority.

Indonesia’s policymakers often point to microenterprises (MSMEs) as the backbone of the economy. But most small firms remain trapped in low-productivity activities with limited scalability. A nation cannot industrialize through food stalls and online resellers alone. Sustainable prosperity requires medium and large-scale industries capable of absorbing labor at rising productivity levels.

Moreover, the transition toward a digital economy, while necessary, is not sufficient. Digital platforms can improve efficiency, but they cannot fully substitute for an industrial base that creates mass employment. Even Indonesia’s celebrated downstream nickel strategy remains highly capital-intensive, generating export revenues without proportionate labor absorption.

External pressures are worsening the situation. Global fragmentation, rising protectionism, and geopolitical tensions are reshaping supply chains. Higher oil prices and interest rates, the Russia-Ukraine war, escalating US-Israeli aggression against Iran, and El Niño-driven food-price shocks have severely squeezed household purchasing power across emerging markets. 

At the same time, Indonesia faces fiercer competition from Bangladesh, India, Vietnam, and Malaysia in attracting manufacturing investment. As global companies diversify away from China, Indonesia should have been a prime destination. Instead, inconsistent regulations, high logistics costs, and regulatory uncertainty have often deterred investors.

The irony is that Indonesia possesses extraordinary advantages: a young population, abundant natural resources, strategic geography, and a large domestic market. But demographics alone do not guarantee prosperity. Without productive jobs, a demographic dividend can quickly become a demographic burden.

The Solution Requires a Strategic Shift
The solution requires a strategic shift. Indonesia must redirect public spending away from ultra-populist programs toward productivity-enhancing investments. The Makan Bergisi Gratis (MBG) program should be drastically scaled back to a maximum of Rp8 trillion and targeted only at those most in need, pending a proper feasibility review. Unnecessary overseas travel should be cut, while the rushed Koperasi Desa Merah Putih (KDMP) initiative should be halted. Danantara, meanwhile, must focus on restructuring state-owned enterprises rather than crowding out private-sector dynamism. Higher growth and sustainable development require not bigger state intervention but a more strategic and capable state.

Simultaneously, Indonesia must rebuild its manufacturing competitiveness through regulatory simplification, infrastructure modernization, and investment in human capital. Labor-intensive manufacturing—textiles, electronics assembly, machinery, and automotive supply chains—still matters. The fashionable belief that countries can skip industrialization and leap directly into an advanced services- and digital-based economy is increasingly economically contestable.

At the same time, social protection systems must evolve to support vulnerable middle-income households, not only the poor. A family that falls from middle-class status into precarity may no longer qualify for assistance, yet remains economically fragile. Preventing downward mobility is just as important as reducing poverty.

Most importantly, policymakers must recognize that GDP growth alone is no longer an adequate measure of success. An economy can grow while its middle class shrinks. It can export more nickel while young graduates lose hope. It can attract capital while ordinary citizens feel increasingly excluded from prosperity.

Indonesia’s challenge today is not simply to grow faster but to grow strategically—achieving development that is sustainable, inclusive, and capable of reducing poverty, narrowing inequality, and improving human capital.

If the country fails to rebuild a productive middle class, its ambition of becoming an advanced economy by 2045 will be just wishful thinking.

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