The Importance of Indonesia’s Middle Class – Defining the Engine of Indonesia’s Economic Growth
The middle class plays an important role in the economic development of Indonesia. Typically, nations with large middles class grow faster for a combination of reasons. And so, if Indonesia wants to achieve its ambition of becoming a developed country by 2045, then a significant percentage of its population (preferably over 70 percent) needs to join the middle class in the next two decades.
How is the middle class important for the national economy?
First, the middle class is a crucial contributor to household consumption. Enjoying a good level of purchasing power, the middle class buys products and/or services that are of higher quality, which then encourages product differentiation, investment and innovation in manufacturing, which ultimately increases income for society.
Secondly, the middle class is a source of entrepreneurship as many members of this class have the financial resources to invest in a business venture. This subsequently creates employment and productivity growth, which – in turn – benefits society as a whole.
Third, the middle class provides the human capital and savings needed to accelerate capital accumulation and wealth creation in the economy.
Defining the Middle Class
We’ve noted before in our publications that estimating the size of Indonesia’s middle class is a matter of definition: setting a low bar will add dozens of millions of people to the middle class segment. Therefore, one can find a wide variety of middle class estimates on the Internet, stemming from a wide variety of institutions that typically set different standards to define Indonesia’s middle class.
The standard or definition that we use in this article originates from the Institute for Economic and Social Research (LPEM FEB UI), part of the Economics Faculty at the University of Indonesia, and it is a definition that is inspired by World Bank research.
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