Understanding Indonesia's Economy Through Pancasila
Indonesia marks Pancasila’s anniversary this year with strong macroeconomic fundamentals. The Central Statistics Agency (BPS) recorded economic growth of 5.11% for 2025, up from 5.03% in 2024. Inflation remained within Bank Indonesia’s target range of 2.5% ±1%, investment realised in Q3 2025 reached Rp491.4 trillion, a 13.9% year-on-year increase, and poverty rates fell to 8.25% in September 2025, while the Gini ratio dropped to 0.363—the lowest in recent years. Yet behind these achievements lies a question increasingly hard to ignore: why do most people still feel the economy hasn’t truly improved? This discrepancy reflects a gap between statistical realities and everyday experiences.
Thus, Indonesia’s main challenge has shifted. The issue is no longer growth speed, but growth quality—how well it creates decent jobs, strengthens the middle class, boosts productivity, and distributes benefits equitably.
Three structural symptoms reveal that growth quality is the real issue. First, the middle class has shrunk. BPS data shows it fell from 57.33 million in 2019 (21% of the population) to 47.85 million in 2024; Mandiri Institute, processing BPS data, recorded a further drop to 46.7 million or 16.6% of the population in 2025. In other words, around 9.5 million people fell out of the middle class in five years. Meanwhile, the aspiring middle class swelled to 142 million or 50.4% of the population. This means over half of Indonesians are just below the middle-class threshold, vulnerable to downward mobility from minor shocks. This is the starkest paradox: aggregate poverty and inequality have improved, largely supported by social assistance keeping the poor afloat, yet the productive middle class is eroding.
Second, most workers remain trapped in low-productivity sectors. Data from the Coordinating Ministry for Economic Affairs shows SMEs contribute around 61% of GDP but employ nearly 97% of the workforce across 65.5 million businesses. Conversely, a small number of large enterprises generate nearly 39% of output with minimal employment. This is the face of our economic dualism: almost all workers produce little, while a small minority produce much. This issue is most acute among youth: youth unemployment (Gen Z) remains around 16%, and ironically, vocational high school (SMK) graduates account for the highest unemployment rate at 8%.
Third, the strongest engine for middle-class formation has weakened. Manufacturing’s contribution to GDP is now around 19%, down significantly from its late-1990s peak of 26-30%. Several economists, including those at INDEF, view this trend as early deindustrialisation, though the government disputes the term, citing slight improvements in manufacturing’s contribution recently. Whatever the label, the fact is manufacturing—the sector historically most effective at creating formal jobs and stable middle-class growth—is no longer expanding as it once did.
These three symptoms confirm one thing: economic growth does not automatically equate to economic justice. This is where Pancasila’s birthday commemoration gains relevance, as the founders anticipated this issue. This idea is strongly reflected in Hatta’s thinking. As Indonesia’s economic democracy architect, Hatta rejected two dominant global economic extremes: capitalism concentrating wealth in few hands, and centralised socialism handing all economic control to the state. For Hatta, Indonesia’s economy must be built on principles of togetherness, mutual cooperation, and shared prosperity. This thinking gained constitutional foundation in Article 33 of the 1945 Constitution, which states the economy is organised as a collective effort based on familial principles.
Thus, Article 33 is not merely a legal norm but a development vision: growth remains vital—without it, nothing can be distributed—but must proceed alongside equal opportunity and benefit distribution. The founders never envisioned development as merely expanding the economy’s size, but as a path to social justice. Translating this vision into today’s policies demands concrete steps, not slogans. First, boosting people’s economic productivity as the foundation of transformation. Key is integrating SMEs into industrial supply chains, especially in downstreaming initiatives. Downstreaming has boosted investment and exports, but success should be measured not by investment value alone, but by links to SMEs, cooperatives, and local economies through mandatory partnerships and tangible local content. Exclusive downstreaming yields growth without equity. At the same time, classic SME barriers—financing, technology, and market access—must be addressed through expanded Kredit Usaha Rakyat, strengthened Sharia microfinance such as BMT and bank waka.