Jakarta, IO – Technological Changes, Level of Education and Job Losses
Indonesia is seeing its 9.48mn middle-class segment being downgraded to an “aspiring middle-class segment” over the 2019-2024 period. It suggests these 9.48mn people are seeing their purchasing power decline from Rp1.2mn-6mn/month to Rp532k-Rp1.2mn. It implies a 56-80% drop for this segment.
How significant is this phenomenon, from an Indonesian national economic point of view? If we calculate the GDP losses from this downgrade, Indonesia is losing from this middle-class segment Rp75-546tr in GDP every year. Even worse, it suggests that the country is losing Rp8.3-60tr in tax revenue, if we assume 11% VAT.
In fact, a middle-class segment is disappearing globally. To some extent, this is no Indonesia-specific issue. However, we should be wary of the fact that Indonesia’s middle-class segment is disappearing FASTER than that of any other country. Even more worrying is the fact that it is taking place at a time when our demographic boom is anticipated to peak, namely, the 2030- 2032 period. The driving factor is the fact that manifold technological innovations globally are specifically designed to address aging populations; hence they involve much automation and robotic technology.
When such technological change is implemented, companies will naturally cut costs, as it is more efficient to use automation and robots, compared to managing human resources. Technology costs tend to decline over time, while its capability is increasing every year. Human resources costs are the exact opposite in nature: costs rise over time in line with wages, while worker capability does not necessarily improve over time: it is highly dependent on individual initiative.
As the fourth-largest country in the world, Indonesia will naturally Indonesia appear be an attractive candidate, when it comes to both investment and cost-cutting targets. In that table of priorities, Indonesia is competing against the United States, China and India. The only issue is that Indonesia is ranked at the bottom, in terms of market size, educational level, ease of doing business and corruption perception. As the world moves towards automation, Indonesia is squeezed as the victim: both losing investment to other big countries, and cost-cutting measures at the same time. That is how a middle-income class disappears.
This issue needs to be addressed by improving the level of education. Indonesia will need to ramp up efforts to align with international standards in its education quality, thus allowing employment at international standards across different sectors, both domestically and globally. This is imperative to make Indonesian workers relevant. It will be a hard, politically-exhausting exercise, because educating citizens requires heavy-handed measure. The cost of failure, however, is very clear. In an age of automation, the alternative outcome will be an unemployable population.
Middle-class Bears a Disproportionate Burden of the Economy
In Indonesia, the middle-class segment bears a disproportionately higher burden of the economy. Of a total of 12,697,754 tax filings, 12,349,437 are personal while 348,317 are corporate. To put it in context, this statistic suggests there are only 12.3mn people who earn above Rp54mn/year, or Rp4.5mn/ month, and pay their taxes every year. This figure suggests only 4.5% of a total of 282,477,584 citizens pay taxes, of whom 97% of them are middle class.
Tax is only one of the factors that create burdens for this productive segment of the population. They also need to pay VAT on their consumption, BPJS (national social security scheme), pension funds and other forms of taxes (PBB/PKB/ excise tax). If we combine all mandatory expenses that need to be paid, middle-class citizens need to pay 33-64% of their income in the form of taxes and other mandatory contributions.
The biggest issue is that these segments of the population who pay and contribute generally do not see any benefit of their work because they constitute a very small percentage of the population. In an economy as big as that of Indonesia, these funds are being used to develop infrastructure, a healthcare system, defense and cross-subsidizing consumption for other segments of the population.
Looking at the numbers, it is very clear that there is a disincentive to being middle class. Combining this factor with the fact that global trends result in a tough middle-class job market, it is clear why statistics reveal this very important segment of the population is starting to disappear.
Institut Teknologi Bandung
What to do?
Creating a middle-income class will require instituting unpopular policies, politically difficult as it will seem to be promoting that which is irrelevant to the masses and informal sector, which constitutes 90%+ of the population. However, failure to do so will result in an economic setback for the country. At a moment when Indonesia’s demographic bonus will peak, in 2030-2032, a failure to beef up middle-class and economic activity will be catastrophic. Here are some key ideas on how to nurture this middle-class segment for a better Indonesia.
Increase productivity at all costs. Indonesia cannot afford any “work-life balance”. That is a luxury that can be enjoyed after per capita GDP reaches beyond USD14,000. From the current USD4,800 level of per capita to USD14,000, people need to work 60 hours a week, rather than just 40 hours. If we devote study to how China, Japan, Korea and Singapore can struggle out of poverty in just one generation, none of them are able to work a 40-hour work week. It will be wildly unpopular, but nothing can substitute for hard work.
A higher education requirement, especially for government officials. If we learn from successful countries that can lift their societies out of poverty, government officials need to be the smartest segment of the population. The reason is simple: these are the groups that will define policies affecting 282 million citizens. Within an Indonesian context, a minimum of a Master’s Degree at minimum should be required for any civil servant at Echelon 1 or 2. Fortunately, Indonesia has spent a great deal on its LPDP program over the past 10 years.
Explicit Measurement of Government spending quality. Our Government disburses Rp2467triliun, equivalent to 11.8% of the total economy. While a larger budget is welcome, there is a clear need to measure the quality of spending. Every single Rupiah being spent should directly translate into goods and services with clear-cut standards.
Encourage corporate spending: such operating expenses are key to generating economic activity. This is even more important than capital expenditures, as it is by nature recurring. The Government should create a clear tax incentive for every Rupiah being spent by corporations, including continuous education upgrades for employees, and the type of transportation being used.
Read: Indonesia Bolsters Global Reputation with Enhanced Drug and Food Monitoring
Remove foreign income tax for Indonesian companies and individuals. This measure will naturally push both corporates and individuals to find new markets outside Indonesia and help bring income back to the country, in both the form of spending and investment. Unlike FDI incentives, which might disrupt local industries, removal of foreign income tax for all Indonesian taxpayers will create an incentive for people to improve quality, expand regionally, and bring their money back to Indonesia.
Put English and Mandarin as Indonesia’s second and third languages. The Indonesian language is great as it is the one that unifies Nusantara. Nevertheless, when it comes to economic activity, Indonesia needs to be able to trade with both the Wester and Eastern sides of the world. While Indonesian is spoken by 282mn, the English language is spoken by 1.4bn people worldwide, while Mandarin is spoken by 1.1bn. By having these language skills, Indonesian workers’ economic potential will soar by 9x!