Why Indonesia is still not a middle-class society (yet)

inequality picture

 

Investment banks, credit rating firms, and a lot other international financial institutions do seemingly have a penchant to studying about Indonesia’s economic outlook. On a positive note, it is remarkable that this country has recovered after being debt-ridden in the 1997/1998 Asian financial crisis, by which Indonesia was the hardest-hit one. The government successfully pushed down debt-to-GDP ratio from an all-time-high of 140% in 1997, all the way down to a little above 27% as of 2015. While I have to caution that this is based from government’s data (which may need further research and analysis), what makes Indonesia able to rebound after the crisis (and also survive the 2008 global recession and 2015 global currency meltdown) is the ability of the central bank to monitor and control capital mobility, in and out of country, relatively free of political interference. Economic growth, while unsatisfactory, still recorded annual rates of a little above 5% in 2014, and slightly 4.7% in 2015.

Nevertheless, if you refer to World Bank income-based classification of countries, Indonesia is still positioned as a ‘lower-middle-income’ country (which has a threshold between US$ 1,045 and US$ 4,125, as of July 2015 updates), at a level of approximately 3,600 US$, and is projected to have a GDP volume of approximately 940 billion US$ this year. Middle-class population, furthermore, while rapidly growing, is still significantly small, even if one compares with neighboring countries such as Malaysia and Thailand.

Even to define who is eligible to be in ‘middle-class’ will undertake serious debates. Various institutions have their own ways in classifying who are in this social stratum, and who are barely. World Bank utilizes two thresholds to differentiate ‘extremely poor’ and ‘poor’ or ‘lower income’: if one either earns below 1.90 US$ (to be considered extremely poor) or below 3.10 US$ (as either poor or low-income). But what about people who earn precisely at these income levels? Or changes in size of currency conversion per unit? Welcome to the grey territory. On the other hand, Japan’s Ministry of International Trade and Industry (MITI) sets ‘middle-class threshold’ at precisely 4 US$ / day, considering that those earning somewhere near that figure are classified as ‘lower-middle-class’. Pew Research Center takes an even more crude and arbitrary measure than the two institutions above by averaging the entire world’s middle-class income (literally), generating an approximated figure of 10.01 US$ per day. For those earning between 2.01 and 10 US$, they are crudely defined as ‘lower-income’.

Yet, as a reminder, I caution not to simply take the entire datasets as they are. For World Bank, the size itself is an estimate, based largely on random-sampling methods on various households across one respective country; some people may not report their actual incomes, either that they are overblown or most likely underestimated. Nonetheless, in spite of existing biases and inaccuracies, they are still pretty useful as a ‘reference work’ (which means such calculation can hardly be fully definitive). Furthermore, I won’t give a detailed explanation about why Indonesia’s middle-class population remains comparatively small, as the information below speaks ‘a bit’ volumes about the social context relating to the country, specifically income and wealth inequalities. I would rather, in this regard, encourage readers to share some thoughts and information based on the presented data below, which I already print-screened here.

The data below are enabled by PovcalNet, a widget tool built by World Bank by which everyone can ‘set their own poverty threshold’ and analyze extent of poverty on a country-by-country basis. The latest available data regarding Indonesia was from the year 2010; it is to be reminded that percentages have shifted, but to which extent they move remains unknown.

income threshold 1

income threshold 2

income threshold 3

income threshold 4

Try this interactive:

pew global middle class survey

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A series of unfortunate events (and a ‘happy’ ending)

burning televisions

 

For non-Indonesians, I understand if you haven’t heard about this news story. For fellow Indonesians, I hope our attention is not solely preoccupied with the aftermath of recent bombs and gunfire in Jakarta last Thursday (and that hashtag which instantly turns into a rap song), or splits within some of the country’s major political parties.

If you notice some conversations in the social media, or even to a limited extent on Indonesian news channels, I bet you must have heard the case of Mr. Muhammad Kusrin. Or no? Perhaps because other bigger issues are dominating major news taglines?

If you don’t, that’s okay. Based on the information I compiled from several news articles (my apologies all of them are only available in Indonesian language), Mr. Kusrin was a self-taught entrepreneur who assembled parts from unused PC monitors, and converted them into TV screens. He didn’t get himself an engineering degree in order to obtain such knowledge; indeed, this man only managed to finish his primary-level education, and most of the skills he possessed in reproducing those devices originated from decades of repairing electronic products. From Karanganyar, a mid-sized town in Central Java Province, which is also his hometown, Mr. Kusrin managed to open up a small assembly center that recycled those PC monitors into television screens, employing over 35 persons, with daily revenues up to 75 million rupiah (or equivalent to 5,500 US$). Every TV screen was sold with prices ranging from 500,000 rupiah (~ 36 US$) up to 800,000 rupiah (~ 58 US$).

The Lemony Snicket-esque irony began, nonetheless, when he tried to apply for national product standardization, or in Indonesian known as SNI (Sertifikat Nasional Indonesia). Never mind with the fees charged (it costs 35 million rupiah, or approximately 2,590 US$, to get one), albeit it’s costly. But the application process, on average, requires almost half a year for an inventor in order to get this standardization for his or her product. Within this timeline, one has to go to the national accreditation body to begin the application process, and demonstration of competence has to be conducted. Even that process doesn’t simply end here. In the following procedure, three stages of processes are applied here, mainly product-testing by a designated state lab, followed by standard inspection by a special appointed body, and certification of product parts by another appointed body, all affiliated with the standardization process. The last process includes ‘demonstration-of-conformity’ test, so as to adjust these products with consumers’ needs, before a fixed standardization is issued. And lastly, within this period, one is not allowed to produce and/or sell their products to the public. In the eyes of Max Weber (father of bureaucracy), it is turning into a golden cage for the universe.

And it was bureaucracy itself that became the biggest problem for Mr. Kusrin’s business: he, and just like most other small-and-medium-sized enterprises (SMEs), had no slightest idea about the idea of ‘product standardization’ required by the government. Having both business and trade licences, both of which had also required light years in process (sorry for hyperbole), were not sufficient to safeguard his business assets; police, assisted by local prosecutor’s office, raided his company, confiscated almost all his assets, and put him into prison, back in March 2015, as his company continued selling the assembled product in the absence of SNI. To exacerbate the matter (or cause you some conflagration), both police and prosecutors openly smashed and set his business’ TV screens, unused PC monitors, and carton-made packages on fire, very proudly captured in front of reporters and journalists, just a few days ago. As Mr. Kusrin was in prison, the business couldn’t operate, and all his 35 employees immediately lost their jobs.

 

idiot1

idiot2

Pictures: retards (above), another retard (below)

 

This is my afterthought: what the heck are these prosecutors doing? First, if you burn a TV, regardless of its status as cathode-ray or LED or whatever, from a very close distance, your chances of inhaling cancerous chemicals into your lungs increases dramatically (without me having to be a forecaster, unless you people are already chain-smokers). Second, this country, of which I have to share with those buffoons, is still struggling to shelve its ‘punish-only-ordinary-people’ mentality; it’s true hundreds and hundreds of politicians, mayors, regents, governors, and even ministers have been put into prison on charges relating to corruption and other forms of power abuse, but out there, there are still countless other people sitting on top of the elites who, having committed numerous mistakes that cost Indonesia huge amounts of money, remain safe and untouched by the existing laws. Third, you proudly burn someone’s creation in front of cameras! What makes you different from thugs, after all?

Again, this was another reason why I really adore the way social media works. Soon after this incident, people on Facebook, Twitter, and various petition websites began posting for demands to release Mr. Kusrin out of prison, and at the same time, these prosecutors (and some police involved) underwent their mob-trial by the media. This news soon reached out to the central government in Jakarta, with the immediate response by Ministry of Industry to directly reward him the standardization, thus enabling him to breathe the air of freedom. Yes, he just got the certificate a few hours ago, all the way directly bypassing the months-old procedures.

 

172743_kusrin3

“My name is Kusrin, and I am not a copyright-pirate.”

 

I don’t know if getting the standardization will become an eventually happy ending for his business (as well as his family and the workers) as there are still obstacles Mr.Kusrin has to face, given that he has lost most of the capital he needs to resume the operation, all engulfed on that big fire. For now, from my standpoint as a rational optimist, this is a ‘happy ending’ that he deserves for years of hard work and expertise he has accumulated.

Let me say something: this is another harsh lesson, one after another, that the government hasn’t succeeded to learn. I must be both proud and outraged to say that Indonesia has so many geniuses that the existing system, engendered after decades and decades, fails to cultivate. Education system remains rigidly on one-direction approach (students are discouraged to critically evaluate their teachers’ explanations), while a lot of government regulations, rather than stimulate the growth in creativity and innovation, end up choking new ideas to death. It is not just one Kusrin I’m referring to, but also the entrepreneurial culture in Indonesia. Most media remains conditioned to only focus talking about politicians and stuff happening on their parties, while little attention is paid on how people like Mr. Kusrin are transforming their communities with their creative works and/or other inventions.

Which brings me to one question: how’s President Joko Widodo’s ‘mental-revolution’ plan? This becomes interesting.

 

(please give me feedback if you get to find any fallacies)

Reality check: ASEAN Economic Community

ASEAN economic community

 

By December 31, 2015, ASEAN (or for those outside Southeast Asia, known as Association of South East Asian Nations) has officially entered a new phase of its region-based integration with the launching of ASEAN Economic Community, or AEC in short. With that new precedent established, the 10-country association will become a single-market base, integrating a combined population that is projected to surpass 640 million by the end of 2016, with total GDP output approaching 3 trillion US$. The launching of AEC will enable near-limitless intra-ASEAN capital, human, investment, talent, and social mobility. People from all ASEAN member-states will soon be faced with intense competition with the free inflows and outflows of goods, services, labor, capital, and almost everything within the region.

Heck, a lot of my close friends I personally asked had not even the slightest idea what ASEAN Economic Community is.

If you look at all these numbers and figures (640 million people, middle-class population of over 100 million, 3 trillion US$ of GDP output, over 1.5 trillion US$ in goods and services exports and another 1.3 trillion US$ in imports), they are sexy. Indeed, these figures make the notion of AEC so sexy and attracting, particularly for multinational corporations seeking to invest in this region as labor costs remain lower than those in China. But, hold a second, why the heck do a lot of people here seem not attracted to this idea of ‘economic integration’? Even more people out there, I bet, would think of a cow playing a piano when imagining the impacts of this agreement.

Beforehand, we need to unmask the uneasy reality being faced by ASEAN in facing this brand-new world of free trade agreements, economic unions, customs unions, and so much other stuff you may think they are a series of one-off talk shows.

We have been so integrated economically, but separated culturally and socially.

Even before the implementation of AEC, ASEAN has signed lots (and damn lots) of trade agreements, mostly with our own neighbors. China, Japan, South Korea, India, Australia, and New Zealand have attested to such cooperation, and European Union (to a lesser extent also including Gulf Cooperation Council) are hastening up negotiations for the completion of another round of FTA – albeit EU is pursuing the negotiation with individual states. The implementation of ASEAN Free Trade Area, or AFTA, has also eliminated most existing trade barriers, in this regard the imposition of tariffs. All ASEAN countries have reported the rate of tariff elimination at above 95%, with the exception that some non-tariff barriers remain. And what about Myanmar, our ‘friend’ that just (supposedly, maybe?) became a democracy after November 2015 election? Economic reforms beginning in 2011 have resulted in Singapore and Thailand becoming the largest foreign investors in the country, but to which extent the economy will further open up remains another question worthy of further scrutiny.

The table below provides the data regarding ASEAN member-states, as cited from MIT’s damn-pretty data-visualization website Atlas of Economic Complexity:

 

ASEAN export-import

By the way, never mind with the fact that most Southeast Asian countries look up to the world’s biggest panda for trade (at least for now, as China is Asia’s biggest economy currently), with the exception of Brunei, which exports bulk of its oil to Japan, and Laos, which has Thailand as its ‘friendlier’ partner. One obvious indication with such pattern is the increasing Asian-centric nature of these countries’ trading activities. If you dig more data from the Atlas, especially with regard to ASEAN member-states, one major thing you observe is the overwhelming domination of Asian (and fellow ASEAN) countries taking huge portions of their trading volume.

Nevertheless, the inconvenient truth is that we remain ‘separated’ culturally and socially. Never mind with the fact that intra-ASEAN migration is of a huge and tremendous scale, especially if you try to consider these figures below (data obtained by UN International Migration 2013 report):

  • More than 3.7 million foreign migrants residing in Thailand originate from Myanmar, Laos, and Cambodia, overwhelmingly employed in low-paying jobs, particularly in construction, farming, and fishing industries
  • Over 1 million Indonesians are currently staying in Malaysia (mostly to work as domestic helpers or factory workers), but many unofficial estimates put the figure between 2.5 and 3 million people instead, due to the possibility that a lot of them ‘overstay’
  • Almost 1 million Malaysians are currently in Singapore, coming in and out of Johor Bahru on a daily basis, mostly for work

Or consider these news samples, based on what I obtained and summarized from mainstream media:

  • People in Yangon (capital of Myanmar) protest against death-sentence verdicts against two Myanmar nationals charged of first-degree murder in Thailand they possibly didn’t commit
  • Discrimination, at a lower level, continues for ethnic Vietnamese living in Cambodia
  • More than 150,000 Cambodian migrants rushed home in the aftermath of 2014 May coup in Bangkok, for fear of military persecution
  • Thousands of Rohingya (a Muslim ethnic group from Myanmar) refugees were stranded in seas as Indonesia, Malaysia, and Thailand refused to grant them protection, only to be resettled after months of intense negotiation between the countries
  • Potential future standoff by Sulu insurgents (from the Philippines) in Sabah State, Malaysia (located in Borneo Island)

Without trying to provide further explanations, I suppose I have given enough examples to highlight the problems with regard to our concept of integration. No?

Another problem is our extremely huge economic discrepancies within ASEAN member-states. Seriously.

Consider another table below for your reference. Do notice, for the fourth column, that I input ‘4 US$ a day’ as a threshold, largely following the guidelines set by World Bank and also Japan’s Ministry of International Trade and Industry (for the latter, the reason is you know why) to differentiate those as ‘lower-middle-class and above’ and ‘low-income and poor’.

ASEAN middle class

With such extremities occurring if comparing these countries, it is worth questioning the viability of socio-economic integration of communities representing a huge array of income strata, particularly when everyone is entering the AEC era, as the leaders always like to envision. Then there comes the gap in the quality of manpower. A large proportion of population, especially in countries with GDP per capita below 10,000 US$ per year, are deprived of access to education due to poverty and many other reasons, and of course this is a legitimate reason to worry about. How will people compete on a level playing field if the resources provided to them are not even on their own level playing field? While unfortunately this is the underlying reality that shapes the contemporary world (and we can’t deny that fact), it takes a massive investment to equip individuals in these countries with sufficient capacity to compete against each other, and the amount itelf is of a no-joke hold-no-breath size; McKinsey Global Institute, the world’s most optimistic consulting firm (I guess), forecasts that ASEAN member-states have to spend upwards to 3.3 trillion US$, from 2015 up to 2030, to totally upgrade their infrastructure, especially in education. Where on earth are they going to get the money? While asking for international aid sounds more like an off-sounding joke, the only possible models that can be envisioned are either public-private partnership (PPP) or simply total liberalization that will enable inflows of foreign direct investment (FDI).

Even in terms of political orientation, each ASEAN country is completely ‘unique’ on its own.

If one has to look at it from a very truthful, and I could say somewhat inconvenient, language, the unique ‘selling point’ of ASEAN lies in its all-inclusive spectrum of political orientation. It has 1 absolute monarchy (Brunei), 2 military dictatorships (Thailand and Myanmar, so long as the junta doesn’t permit Aung San Suu Kyi to become the president), 2 Communist countries (Laos and Vietnam, but the latter has better political space than China), 3 semi-democracies (Cambodia, Malaysia, and Singapore, which have continuously been ruled by the same ruling party), and 2 ‘problematic’ democracies (Indonesia and Philippines, which are still struggling to control corruption and cronyism).

And in recent years, there have been concerns by academics whether many countries are actually deteriorating in terms of quality of democracy. While I’m not to subscribe to the belief that democracy is a panacea or a cure-all, the major advantage of democracy is it allows freedom to voice dissenting opinions on existing issues. But that’s it. Numerous research works in political science, mind you, have warned the public that rule of law has absolutely nothing to do with the fact if a country is a democracy or a dictatorship. And even in terms of rule of law, most Southeast Asian countries are lagging behind (except Singapore). Indeed, corruption and abuse of power have been deeply entrenched as a kind of ‘inalienable’ mindset among a large proportion of population in those countries.

Even then we still intensely debate and struggle to define what is corruption, which has only been constrained to these two actions: either you bribe or are bribed, or that you steal state assets. But what about these possibilities:

  • Because you are close to people with influential political power, you can monopolize an economic sector, depriving other more capable players of equal opportunity to compete. Is that not corruption?
  • Major corporations donate to political parties financial support so that they can win election. Is that not corruption? (okay, some consider this lobbying, but still, you know what I mean)
  • Political parties, especially ruling regimes, create ‘linked companies’ as their major source of revenue, controlling various economic sectors. Some consider this a legitimate way of earning money and lessening dependence on private donors, but again, is that not corruption?

This is the big Achilles’ heel that almost all ASEAN countries are being faced with. How will there be a level playing field if one side endorses one thing more than the other? One can talk about the concept of ‘single market base’, but with governments sometimes going to all available means to protect their cash cows, is that not killing competition? Is that not corruption?

But the most challenging aspect is their solidarity in international issues, especially those that carry significant stakes to ASEAN. Did anyone still remember the failure in 2012 ASEAN Summit in Phnom Penh, Cambodia? If not familiar, this is the brief explanation: all the 10 countries failed to deliver a major communique about their stance on South China Seas, which are currently being disputed between China, Taiwan, Brunei, Malaysia, Philippines, and Vietnam. Even to deliver only a unified response ended up as a major fiasco! While further communication has been done and some ‘unified messages’ have been crafted, there remains an aura of uneasiness among those countries in responding to this issue, which has been their biggest major international challenge. Still, given the huge socioeconomic gaps that become internal problems in those countries, to some extent we also have to understand why these countries fail to show unity when presented with some crucial issues.

And there is another table that I have obtained from The Economist, Transparency International, and Freedom House. While the ranks may be somewhat subjective and disputed, at least they offer a general overview of the current sociopolitical situation in these Southeast Asian countries. For more examples, I would encourage you to look them up by yourself (as too many examples will render this blog post more like a ranting essay):

ASEAN political quality

This is the reason why the real ASEAN Economic Community will only be felt in a longer future to come, given the existing obstacles. Despite such reality, still, the initiative has been launched, and even with that celebration merely in name one has to start preparing oneself to face future challenges. While red tape will still exist, companies will face less restriction in investing in these emerging markets. A large population still below middle-class status will experience upward social mobility with closer economic cooperation. Furthermore, with mega-regional free trade agreements such as TPP already reached and soon to be ratified, as well as negotiations in RCEP that will also be completed in the near future, by which most ASEAN member-states are participating, this is the huge opportunity (altogether with its underlying risks) that the countries must adapt with in order to succeed in the long run. Now, the challenge with AEC is how long it will take for the entire bloc to achieve the envisioned integration, and truth be told, the path towards that vision will not be as easy as we imagine.

And yes, my friends already knew about this initiative, anyway.