Middle Class and Economic Inequality

It was getting late and very cold. The simple shop was still crowded. You could hear chatter amid the music of Dave Brubeck\'s Take Five from the jukebox in the corner of the room.

KOMPAS/HERU SRI KUMORO

Muhamad Chatib Basri

Next to me there sat a young boy. I did not know him, but because the shop was full, we had to share a table. We engaged in casual conversation. When he found out I was from Asia, he began to talk about the poverty he saw in Asia. Then, he mentioned the issue of economic inequality in the United States. He talked about a magnificent apartment in Tribeca, lower Manhattan, New York. Then, in gloominess -- while quoting CNBC -- he said the average income of the richest one percent population in the US is US$1.32 million per year. Meanwhile, the remaining 99 percent earn an average of US$50,107 a year. I did not know how accurate that number was. However, I was able to catch his state of confusion.

He is not alone. These days we are dealing with a world that is anxious and easily angered. Algeria, Bolivia, Chile, Ecuador, France, Hong Kong, Lebanon, and many others completed the story of protests in 2019.

In Hong Kong, protests were triggered by antilegislation that allowed extradition to China for criminals in Hong Kong; in Chile, a large demonstration was triggered because of the government\'s decision to raise metro fares by "only" 3 percent; in Lebanon protests were triggered by taxes on cell phone services such as Whatsapp. The trigger can be varied, there is no single explanation for this. However, we cannot negate economic factors as the explanation.

Christoph Lakner and Branko Milanovic (2015) in their seminal work, Global Income Distribution: From the Fall of the Berlin Wall to the Great Recession showed: the pattern of income distribution in the world 1988-2008 resembled the elephant curve: rising from the tail to body, down at the head, then rising sharply like an upward trunk.

It is understandable why the middle class in Europe and the US are anxious and angry.

They pointed out: low middle income countries (which are in the 10-70 percentile income from the global income distribution) such as China and India -- I suspect ASEAN, including Indonesia -- are experiencing growth. In contrast, the 80-90 percentile -- which reflects the income of the middle class in Europe and the US -- has decreased and stagnated.

In contrast, incomes of the rich groups in Europe and the US who are in the 90-99 percentile have increased. What is remarkable is: the top 1 percent income groups in the US and Europe have experienced very sharp increases in incomes - almost vertically. It is understandable why the middle class in Europe and the US are anxious and angry.

Read more : Coping with the Threats of Recession

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A retail supermarket in South Jakarta, Saturday (9/11/2019). The Indonesian economy in the third quarter of 2019 grew 5.02 percent. Household spending, which grew 5.01 percent, contributed greatly with a portion of 56.52 percent.

This anxiety may also be triggered by demographic factors. Just look: most protests in many countries are driven by young people. I suspect young people in countries in Europe and the US know:

the problem of the elderly population will make the economy increasingly heavy. They will not enjoy the glorious times like their parents. There is anxiety there. Also anger at the situation. They go to colleges, but there are no decent jobs available.

How about Asia? My study with Hal Hill from the Australian National University titled The Southeast Asian Economies in the Age of Discontent (forthcoming) shows: symptoms of dissatisfaction also occur in ASEAN, but on a much smaller scale compared to Europe or the US. Why? Consistent with the findings of Lakner and Milanovic, relatively good economic growth in East Asia and ASEAN -- compared to developed countries -- has given rise to new middle classes in China, India, Southeast Asia, including Indonesia.

In contrast to the US and Europe, countries in East Asia and ASEAN are relatively benefited by global trade and industrialization. Maybe that is why Asia is not as worried as Europe or the US. However, our study shows that there is no room for complacency. Economic growth in several ASEAN countries begins to slow down or stagnate, social uncertainty increases.

Middle class vulnerability

How about Indonesia? Our middle class is increasing rapidly, poverty is decreasing. However, there are some important things to pay attention to.

First, a World Bank study (2018) showed: economic growth in Indonesia has succeeded in reducing the percentage of the poor population and the "vulnerable poor" population. Not only that, "the middle class" grew by 10 percent per year in the 2002-2016 period. I know, we must be careful with the term "middle class". How do we define it? In terms of incomes, type of work, or other things? Moreover, it does not have a political cohesion that can represent its political behavior.

I am not interested in entering into the debate. It is better if I refer to the consumer class based on expenditure. The World Bank (2018) makes the following definition: "middle class" are those whose per capita expenditure per day is US$7.5-US$38 per day (2016 PPP adjusted term). On top of that there is a group of "upper class". And, under the "middle class", there is a group of "aspiring middle class" (AMCs), namely those whose expenditure per capita per day is US$3.3-US$7.5. Then, vulnerable groups whose expenditures of between US$2.2-US$3.3 and the poor (under US$2.2) per day.

Second, what is the impact of an increase in the "middle class" on our economy? Engle\'s law shows: in line with an increase in per capita income, the portion of non-food expenditure will be even greater than the total expenditure. Consumption will shift from "needs" (such as food) to "wants" (non-food). This explains why in line with the rise in the "middle class", sales of cars, motorcycles, cell phones and homes rise sharply. Do not be surprised if the demand for education, health, recreation, lifestyle, and creative industry services will be extraordinary in the future.

The middle class is also vulnerable to economic shocks.

Third, although the "middle class" continues to grow, they are still vulnerable to economic disorder. The World Bank shows: in Indonesia, only 50 percent of those who have become "middle class" in 2000 were able to survive as "middle class" in 2014. The remaining 40 percent went down to aspiring middle class, and another 10 percent returned to become a poor or vulnerable group of the poor in 2014.

What does it mean? The middle class is also vulnerable to economic shocks. Ironically: Indonesia, and also many countries in the world, do not have special programs for the middle class. That is why young boy beside me was worried.

Governments in many countries around the world have so far focused on providing protection for the poor. Then, what can be done to help the middle class? We must think carefully. One of the policies that might be utilized is a pre-employment cards, or cash for training, where workers are trained to increase their productivity when they prepare themselves for their next jobs.

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Visitors have a look at shoes on display at one of the booths in the 2019 Urban Sneaker Society area in District 8 of SCBD building in Jakarta, Sunday (10/11/2019).

Third, I have written in this daily: although economic growth has succeeded in reducing youth unemployment (15-24 years), from 22 percent (2014) to 20 percent (2018), the percentage of unemployed young people with high school education and above has risen sharply. This means: the economic growth that occurred did not fully absorb the young age group with high school education and above. Why? Maybe there aren\'t too many jobs with decent wages available.

Or maybe because of rising job expectations. In fact, as historian Niall Ferguson of Harvard University said, educated young unemployed are one source of middle class dissatisfaction. What we need now is not just job creation, but decent jobs.

Political economic implications

Fourth, this is where the issue of political economy becomes very relevant. Educated young unemployed -- as well as restless middle-class -- if not properly addressed can turn into political problems.

So far, conditions in Indonesia and ASEAN are still relatively good. However, there is no room for complacency. We also know: the emergence of a new "middle class" has economic and political implications.

"Middle class" is a diligent professional complainers. They have high expectations for good quality public services. So far, they have only acted as professional complainers, not yet agents of change. However, it is too early to conclude that their role does not exist. It is not impossible that complaints or dissatisfaction are then transmitted in the form of public unrest. Here, I think, the emergence of a new middle class or consumer class can become a political pressure if the government and politicians do not improve themselves for a just and clean government -- for good public services.

Late at night, music from the jukebox played “Selling England by the Pound” by Genesis. I looked at the disappointed face beside me. I know he is not alone. And, in 2019 so much anxiety was noted. The world is indeed worried. However, we cannot be forever depressed. “I am a pessimist because of intelligence, but an optimist because of will,” writes thinker Antonio Gramsci. Happy new year 2020.

Muhamad Chatib Basri, Lecturer, School of Economy and Business, University of Indonesia.