Indonesian Democracy & its Rising Consumer Class: Three Bottlenecks (Part II)

In my previous column, I outlined the emergence of a new and promising class of Indonesian consumers that is most likely to bring a positive effect on the country's economic growth in the years ahead. I also pointed out that the level of prosperity of a population is an influential factor towards the state (and future) of democracy in a country: the wealthier a population becomes in terms of per capita GDP, the longer the life expectancy of its democracy will be.

In the last six years, Indonesia has posted annual economic growth of between 6.0 and 6.5 percent (with the exception of 2009 when amid global turmoil the country grew 'only' 4.6 percent) and its per capita GDP rose accordingly. In fact, the National Commission on Economics (Komite Ekonomi Nasional, or abbreviated KEN) predicts that the level of Indonesia's per capita income might reach USD $6,000 within the time-span of three to four years.

However, despite this optimism there are a number of matters that complicate (as well as frustrate) Indonesia's current economic growth. Moreover, as I argued last week that economic growth and democracy have a (complex) relationship, these matters thus also form a risk for the state of democracy in Indonesia. These matters include income distribution inequality, corruption, and weak state institutions.

Firstly, income distribution inequality needs to be mitigated. Indonesia's Gini coefficient, which measures income distribution inequality, has been at 0.4 for the last two years. For Indonesia, this is the highest figure in the last fifty years (a coefficient of 0 indicates perfect equality, while a coefficient of 1 indicates perfect inequality). It implies that economic development has favoured Indonesia's middle class, upper middle class and elite but not the poorer segments of the country. This situation cannot be ignored because the more unequal society becomes, the more social problems will emerge and frustrate the economy or bring major uncertainties along.

Secondly, corruption should be dealt with. A study, conducted by Drury, Krieckhaus and Lusztig (2006), concluded that in non-democratic countries corruption will slow down economic development. Although in democratic countries the influence of corruption is smaller, it will still impact negatively on economic development. According to Transparency International 2012, Indonesia is currently number 118 (out a total of 176 countries) on the corruption perceptions index. After 15 years of Reformation, it does not represent a good performance. The battle against corruption in Indonesia is difficult. Apart from technical constraints, the politicization of corruption cases often make law enforcement agencies,  such as the Corruption Eradication Commission (Komisi Pemberantasan Korupsi, abbreviated KPK), not free to carry out their investigations optimally.

Lastly, Indonesia needs improvement of its state institutions. An orderly democracy as well as economic development are not possible without good-functioning state institutions. Institutional reform should lead to reduced transactional costs, the minimization of moral hazard, and the establishment of full transparency and accountability. All of these matters are important prerequisites for creating an atmosphere of good governance within the state institutions.

Indonesia's new consumer force is rising. It will be important not to let the three aforementioned subjects become bottlenecks that impact negatively on Indonesia's expanding consumer class as well as on its burgeoning democracy.

Agung Budiono is an analyst at Jakarta-based Pol-Tracking Institute

Indonesian Democracy: Towards Indonesia's Rising Consumer Class (Part I)

A fresh breeze is blowing on the face of the Indonesian economy. One that is characterized by the projected growth of a new class of Indonesian consumers that seems promising in the years ahead. This new consumer force certainly brings a positive effect on Indonesia's economic growth as domestic consumption has always been a pillar of economic support for the country. Agung Budiono, analyst at Jakarta-based Pol-Tracking Institute, takes a closer look at the topic.

At least two global institutions conduct research about this new consumer class in Indonesia. First, McKinsey, that, according to its research released in September 2012, predicts that Indonesia's consumer class with a minimum annual per capita income of US $3,600, or a daily consumption rate of about US $10 to US $100, will reach 135 million people by 2030.

Secondly, the Boston Consulting Group (BCG), which released a report in early March stating a similar bottom line as well as mentioning an increasing portion of the Indonesian population that can be categorized as middle-class and affluent consumer (MAC). MACs are individuals with a minimum monthly income of IDR 2 million (about US $217). BCG expects that by 2020 about 141 million Indonesians will fall in the MAC category; a number that is almost twice as much as the current 74 million Indonesian MACs).

The blossoming of this new consumer class in Indonesia is an important asset for the economy. John Maynard Keynes explains in his book "The General Theory of Employment, Interest and Money" that stable, middle-class consumption is required to spur investments that will drive economic growth.

When examined further, an important question arises related to the emergence of this new consumer class: is it able to maintain and strengthen the consolidation of democracy in the future? Or vice versa? This question is of high importance because the reciprocal relationship between economic growth and democracy is a complex one.

In their research, Przeworski and Fernando (1997) concluded that the level of prosperity of a population is very influential towards the state of democracy in a country. Their study indicates that, when a country's per capita income reaches US $1,000 to US $2,000 (based on purchasing power parity), the life expectancy of a democracy is 18 years. Furthermore, when a country's per capita income is in the range of US $2,001 to US $3,000 then the life expectancy of its democracy increases to 26 years. Lastly, when it touches the level of US $6,000, then democracy is believed to be "eternal". Their research, which is often cited by others, was based on a sample of 135 countries during the period 1950-1990.

According to the World Bank, Indonesia's current per capita income level stands at US $4,636 (based on purchasing power parity in 2011). When we apply this figure to Przeworski and Fernando's categorization above, it means that democracy in Indonesia should last for at least the next two decades.

In addition, a classical study regarding the relationship between democracy and economic development (Lipset, 1959), emphasizes the symbiosis between prosperity that is the result of development and democracy. That relationship implies that a population of which the majority is rich is more likely to participate in the country's political domain. The reason being that a rich population desires to maintain its political system.

However, the relationship between economic growth and a growing democracy is not always linear. There are also views that argue the relationship between the two does not occur directly, but instead through an intermediary, such as access to education and evenly distributed revenue due to the democratization drive.

Although Indonesia's growing consumer class has a positive impact on Indonesia's expanding economy, there are of course a number of bottlenecks that need to be dealt with. In my next column I will discuss a number of these bottlenecks, which include corruption, income distribution inequality, and weak state institutions.