Teguh Dartanto: Upper Middle Income Group, Challenges of Policy Implication
Delli Asterina ~ FEB UI Public Relations Officer
DEPOK, Monday, 06/7/2020 – Media Indonesia daily published an article written by Teguh Dartanto, Ph.D., Vice Dean for Education, Research and Student Affairs, Faculty of Economics and Business, Universitas Indonesia, entitled Upper Middle Income Group, Challenges of Policy Implication.
Any achievement and good news call for a celebration, especially amid the sluggish economic situation due to the Covid-19 pandemic. Coinciding with the new school year, Indonesia received a special gift from the World Bank. On 1 July 2020, its status was upgraded to the upper middle income (UMIC) category. Indonesia needed 18 years from 2002 to transition from a lower middle income country to an upper middle income country.
The World Bank used gross national income (GNI) to classify countries into four main categories, namely low income countries (US$12,535).
The World Bank upgraded the status of seven countries in 2020, namely Benin, Indonesia, Mauritius, Nauru, Nepal, Romania and Tanzania. With a per capita income of US$4,050, Indonesia exceeded the threshold for the upper middle income group by a slight margin. This upgrade brings hope for the country’s attempt to escape the middle income trap. Any upgrade comes with challenges and calls for preparation so that Indonesia can survive and enter the high income group.
Decision makers need to pay attention to five important things. First, the GNI was assessed using 2019 data, which excluded the impacts of the Covid-19 pandemic on the economy. Therefore, the 2020 GNI assessment will change the classification. Indonesia, which is only slightly higher than the threshold, is very likely to return to the lower middle income group due to economic slowdown during the Covid-19 pandemic.
The downgrade of Algeria and Sri Lanka from the upper middle income group could serve as an important lesson for Indonesia so as not to become complacent because it is actually highly likely for Indonesia to suffer the same fate as Sri Lanka. Second, judging from the length of time it took Indonesia to transition from LMIC to UMIC, which was 18 years, a very simple calculation will show that Indonesia will need half a century to transition to a high income country. It is a very long time and far beyond the projections of various institutions.
Sometimes institutions make projections to make their clients happy without taking into consideration Indonesia’s diverse society, mindset, culture and geographical conditions.
Investment in human resources
Instead of dreaming that Indonesia will become a high income economy by 2045, or a century after its independence, we should start taking a realistic approach in forecasting the country’s future by laying solid foundations for the next generations. Generation Z (born between 1995 and 2010) and Alpha (born between 2011 and present) are the ones who will realize Indonesia’s dream of becoming a high income country. Therefore, the pre-millennial and millennial generations have to be open minded in looking at the future by preparing an inclusive, dynamic, diverse and equal environment for Gen Z and Alpha so that they can grow, become creative and innovative to bring glory to the country.
Investment in human resources through education and health is key to driving Indonesia’s development (Dartanto et. al., 2019). In the context of upper middle income countries, education is no longer dependent on equal access, but has to move even further to ensure better access to high quality education. Education should no longer promote schooling; it has to promote learning instead.
The “Kampus Merdeka” movement initiated by Minister of Education and Culture Nadiem is a revolutionary policy that gives students freedom to learn how to be responsible, creative and innovative in pursuing their study so that future generations are ready to face challenges. However, just like the majority of government policies, the policy is good only on paper but faces many obstacles in the implementation phase due to poor preparation and understanding among education practitioners about the concept of “Kampus Merdeka.”
Third, the middle income trap is real. History shows that not many countries were able to transition to the high income group smoothly. Several countries, such as Argentina, bounces in-and-out of the high income group. Indonesian household data using the Indonesia Family Life Survey (IFLS) 1993-2014 data shows that the middle income trap is real. Dartanto et al. (2019) found that 42.3% of middle-income Indonesians could not move up to the high income group, while the remainder are the middle income earners who are highly vulnerable to the risk of falling into the lower income group.
The latest research by Dartanto et al., on inter-generation economic mobility shows that the majority of Indonesian children could easily climb to the middle income group, but will struggle to enter the high income group. This condition provides an important lesson for all of us that unlike the statement in the text of the Proclamation of Indonesia’s Independence, becoming a high income country is not an instant process. It needs hard, continuous and long-term work by the current generation to build the foundations for development.
Tracing the development achievements
Fourth, Indonesia’s status as an upper middle income country has complicated implications. The criteria for welfare assessment, such as poverty, has to be adjusted with the threshold for the upper middle income group. Jolliffe and Prydz (2016) showed that the poverty line for the upper middle income group is a per capita income of US$5.5 per month, not US$3.2 per month. However, to this date, Indonesia’s poverty line is equivalent to US$1.85 per month.
Dartanto and Otsubo (2013) stated that the assessment for welfare and poverty should be adjusted to the development and economic growth of the people. For least developed nations or countries, poverty is evaluated using food security. However, in line with the economic growth of a country, the poverty rate is assessed using non-food aspects, such as education, health and housing. In line with its economic growth, the evaluation of a country should also include the basic needs of its people. A per capita income of US$1.85 per month is too low for Indonesia, as it does not fully reflect the needs of the Indonesian people today.
Indonesia’s low poverty threshold produces an even lower poverty rate. However, the rate is mere statistics that does not reflect the real situation. Indonesia last updated the poverty line in 1998 when it was still in the lower income group. Therefore, Indonesia has to revise the welfare or poverty threshold to better represent the upper middle income group. The poverty rate will increase from the current rate, but it will better reflect the real condition and is better aligned with the government’s figure for the disbursement of social assistance, which is 100 million people.
Mental and physical preparation
Fifth, the upgrade of Indonesia’s status gives hopes for everyone, both domestically and internationally. In terms of investment, the upgrade has increased and strengthened investors and trade partners’ confidence in Indonesia, which enabled the country to attract new investors. On the other hand, investors or business players in labor-intensive industries will no longer consider Indonesia a convenient location to do business because upper middle income countries don’t offer cheap labor.
In terms of international trade, Indonesia’s export commodities have to be more competitive because there will be less products that receive trade tariff relaxation as opposed to lower income countries. Therefore, the government should mitigate investment and trade problems in the context of Indonesia’s status upgrade.
In terms of international collaboration, the status upgrade makes Indonesia seem capable of paying off higher interest debts. This will reduce the country’s room for securing debt facilities and low interest rates. The upgrade will force Indonesia to be generous to countries in the lower ranks, which calls for a shift in the mindset of decision makers, from the recipient mindset mentality to a giver mindset. There is no need for us to be arrogant and conceited about our achievements because an upgrade needs mental and physical preparations so that we can survive and advance to the next upgrade.
Without extra measures to handle Covid-19 and build solid economic foundations, Indonesia’s dream of becoming a rich and glorious country will be shattered.
The views and opinions expressed in this article are those of the author and do not reflect the position of the institution.
Source: Media Indonesia daily
(lem)