Why Development Feels Harder

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Growth that no longer creates secure employment and upward mobility spreads insecurity beyond the poor into the aspiring middle; expectations outrun opportunities, and politics becomes the binding constraint.
Premature deindustrialization: growth continues but absorbs less labor, producing a middle class large enough to have expectations but not secure enough to feel safe.

Indonesia: two decades of 5 percent growth, low inflation, fiscal deficits below 3 percent of GDP, yet mass protests followed the August 28, 2025 death of a 21-year-old gig worker.
Income and consumption patterns:
- Drivers for Jakarta’s super-app companies earn about $272 a month, nine times the $30 poverty line.
- Indonesia’s middle class shrank from 21 percent of the population in 2019 to 16.6 percent by 2025.
- The aspiring middle expanded to nearly half the country—about 137 million people in 2024.
- Households between the 50th and 80th percentiles saw their real consumption fall from 2019 to 2022.
- In Indonesia, 80 percent of new jobs in 2019–24 were informal, paying about $114 a month, below the $181 minimum wage.
Regional parallels: Middle class is also shrinking in India, Thailand, Vietnam, and Brazil; Chile’s 2019 unrest began after a 30 peso (US 4 cent) subway fare rise.
Structural shifts:
- Less than 10 percent of export growth comes from new products in new markets.
- Growth increasingly flows through capital-intensive resources (e.g., nickel smelting) and services rather than labor-intensive manufacturing.

Deindustrialization dynamics:
- Value chains dominated by incumbents; automation and reshoring shrink labor-intensive work.
- “Servicified” production: design, software, logistics, and R&D add more value but absorb few workers.
Two limits of services-led growth:
- Polarization (Baumol’s “cost disease”): high-skill tradable services raise productivity but absorb few workers; labor-absorbing services (care, education, hospitality) offer little productivity and rising relative costs.
- Non-tradability: many services cannot be exported, so services-led growth is capped by domestic purchasing power.
Skills and technology:
- High-skill activities absorb few workers and hit a skill ceiling.
- AI threatens to cap labor absorption even in mid-skilled activities, sharpening the need to upgrade skills so workers complement automation.

Reform space narrows when the aspiring middle feels insecure because visible costs of reform hit them directly (example: fuel subsidy removal).
Red tape and vested interests:
- Cutting red tape removes income sources for bureaucrats who will resist reforms.
- Good arguments alone are insufficient; the private sector must do more to drive change.
Institutional durability:
- Reforms reliant on a minister’s conviction are fragile; writing reform into law and institutions is essential to outlive political turnover.

Protect the aspiring middle through recalibration rather than net new spending:
- Use existing administrative data (example: state-owned electricity company records combined with social protection data) to better target subsidies and direct compensation to the poor and aspiring middle.
- Recalibrate conditional cash transfers: compensate first, then reform.
Restore labor absorption with lean, capability-focused industrial policy:
- Prioritize export-oriented investment in global value chains and tradable services.
- Focus on activities that absorb mid-skilled labor while raising capabilities on the job: electronics and components assembly, garment and footwear production for export, food processing, digitally enabled logistics and back-office services.
- Use incentives for firms to train workers themselves rather than relying on state-run training.
Improve the business environment without large fiscal outlays:
- Lower barriers to trade in goods and services to pull firms into export-oriented value chains.
- Create a cleaner business climate, broader financial inclusion, and lighter regulation so private firms create the jobs educated young people want.
Address political economy barriers explicitly:
- Recognize and confront the interests that profit from the status quo; letting go of protection and taking on vested interests are necessary parts of reform.

Economic policy alone is insufficient; rebuilding trust is central as middle-class demands shift toward public goods that work and fairness as habit.
Transparency and honest explanations help but may not be sufficient to gain acceptance for reforms (Indonesia’s 2013 fuel subsidy cuts were sound and openly argued yet still faced resistance).
The broader task is a long conversation: policy, institutions, and trust-building across societies whose dashboard prosperity has outrun confidence on the street.

MUHAMAD CHATIB BASRI, September 2026.

Why Development Feels Harder
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