Australia’s middle class Indonesian dream

Despite rapid growth, Indonesia’s middle class doesn’t match the consumption capacity of developed countries, or even those we would consider poor. AAP

Since its election, the Abbott government has presented Indonesia as a huge opportunity based on its growing middle class and long-term growth prospects. The recent economic narrative has been an attempt to shift the focus away from the issue of asylum-seekers to one nearly everyone can agree on – making money.

Andrew Robb, Minister for Trade and Investment recently argued, “Indonesia has a middle class twice the size of Australia’s population and, given its proximity, it is a market Australia should develop”.

Indonesia is a market Australian companies should embrace through trade and investment, but the equation of Indonesia’s “middle class” with Australia’s population is profoundly misleading. The middle classes of Indonesia and other developing countries do not match the consumption capacity of developed country middle classes or even those we would consider poor.

Indonesia’s economy has grown rapidly in recent years. Measured in US dollars, Indonesia’s GDP is smaller than Australia’s, although in terms of purchasing power parity it is slightly larger. In 2012, Indonesia’s GDP per capita was $3,592 (USD) or $4,977 (in Purchasing Power Parity (PPP) International dollars). Australia’s GDP per capita was US$67,643 (or $42,640 PPP). Indonesia is ranked 121st on the World Bank’s Human Development Index (based on life expectancy, education, and income). Australia ranks second.

Tony Abbott has presented Indonesia as a huge trade opportunity for Australia - but success will not be automatic. AAP

Recently, Indonesia has struck economic difficulties with slowing growth, increasing inflation and a falling rupiah against the US dollar. The latter could be a problem for Indonesia given that 68% of its US$259.54 billion foreign debt is denominated in US dollars.

Like Australia and much of the rest of Asia, Indonesia has benefited from China’s massive economic stimulus. The Chinese investment surge encouraged investment in countries supplying China. This provided the impression that Asia and other parts of the developing world had decoupled from the rich world. However, in a globalising world economy where rich countries still dominate final demand, decoupling can only really be a short-term proposition.

As Prema-chandra Athukorala argues:

The PRC’s imports of components from countries in ASEAN and other developing East Asia countries have grown rapidly, in line with the equally rapid expansion of manufacturing exports from the PRC to extraregional markets, mostly in North America and Europe.

The danger for Indonesia is that the virtuous circle of Asian growth will turn into a vicious one of low growth and financial instability. Over the medium to longer-term, Indonesia’s economic prospects, like the rest of Asia, remain good. However, the argument that Indonesia is on an unstoppable path of never-ending economic growth is very optimistic.

Also optimistic, therefore, is the assertion that Indonesia will develop an ever-expanding middle class.

Indonesia has benefited from the investment surge in countries supplying China. AAP

Robb based his assessment of Indonesia’s middle class on a recent McKinsey report. In the report, McKinsey doesn’t use the term “middle class”, instead it refers to the “consuming class”, which includes anyone with an income greater than $3600 a year on a PPP basis (based on 2005 exchange rates). The report argues that there were 45 million Indonesians in the consuming class in 2010 (out of a population of 240 million).

Based on an annual growth rate of 5-6%, it contends that the consuming class will grow to 85 million by 2020 (out of 265 million) and to 135 million (out of 280 million) by 2030. If Indonesia grows at 7% per annum until 2030, its consuming classes will grow to 170 million. That’s a big call.

The Boston Consulting Group argues that there are currently 71 million middle class and affluent consumers (MACs) in Indonesia. It expects this group to increase to 141 million by 2020. The range for MACs includes regular monthly spending that equates to between a US dollar equivalent of between $2070 and $7765 a year (between $US5.60 and $21.27 a day). A flattening of economic growth (or worse) would mean many of those classified as MACs would return to the ranks of the poor.

Optimistic assessments excite policy-makers and business people because if Indonesia were to become progressively richer it would undoubtedly provide enormous opportunities for Australia. It would also allow Australia to diversify its exports away from resources towards services and advanced manufactures. An assessment of the current economic relationship, however, provides for a less cheerful narrative.

Despite being one of our closest neighbours, Indonesia accounts for only 2.4% of our total trade in goods and services. In 2012, it ranked as our 12th largest merchandise export partner and 11th largest source of merchandise imports. Last year, total merchandise exports fell by 10%, with the ban on live cattle exports obviously not helping. On the other side of the ledger, we are Indonesia’s tenth largest export market and eighth largest source of imports.

Australia’s total accumulated investment in Indonesia is nearly A$6.8 billion, of which A$4.9 billion is foreign direct investment. Australian investment in Indonesia accounts for 0.5% of total investment and 1.33% of FDI. Australian companies continue to invest mainly in countries that speak English. Indonesian investment in Australia summed to $595 million by the end of 2012, which was 0.03% of total accumulated investment.

These economic statistics show that there is considerable opportunity for increased commerce, but Australia needs to engage with Indonesia based on a hardheaded assessment of current realities, rather than grandiose projections of future possibilities.

The assumption appears to be that Indonesia will automatically become a more important economic relationship for Australia when in reality there is a lot of work to do on both sides.