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c 5715409 d 5715245 A BRIEF STUDY OF ACTUAL AND STRATEGIC ISSUES Vol. XV, No. 14/II/Pusaka/July/2023
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IMPLICATIONS AND CHALLENGES

IN INDONESIA AS AN
16 UPPER MIDDLE-INCOME COUNTRY
Edmira Rivani*

Abstract
Indonesia has succeeded in entering the upper middle-income country (UMIC)
group, obtaining several benefits, including strengthening investor confidence, en-
couraging more foreign investment, and strengthening financial support. The gov-
ernment must maintain UMIC status and target Indonesia as a high-income coun-
try. This paper discusses the implications and challenges of Indonesia as a UMIC.
There are several problems and challenges in maintaining UMIC status, such as
vertical and horizontal gaps, quality of life standards, and competitiveness in the fu-
ture. The implication of Indonesia becoming a UMIC is that Indonesia needs quality
human resources, adequate infrastructure, as well as a regulatory and bureaucratic
system that provides more certainty and convenience for investment activities and
the business world. The DPR RI, especially Commissions VI, VIII, and XI, need
to oversee the government, especially in their commitment to improving people’s
welfare, through strengthening social protection, accelerating the eradication of ex-
treme poverty, and controlling inflation in the short term.

Introduction 2021. This places Indonesia within

The World Bank officially
classified Indonesia as an upper-
middle-income country (UMIC)
on July 1, 2023. This decision was
based on Indonesia’s per capita
gross national income in 2022,
which amounted to USD 4,580,
PUSAKA BKD marking a 9.8 percent increase
from the USD 4,170 recorded in
the upper middle-income classifi-
cation range of USD 4,466 to USD
13,845 (Bloombergtechnoz.com,
July 3, 2023). Indonesia was initial-
ly included in the UMIC category
in 2019 with a per capita income
of USD 4,070, fitting within the
UMIC range of USD 4,046 to USD
12,535. However, in the subsequent

* Associate Legislative Analyst in the Field of Economy, Finance, Industry, and Development at the
Center for Parliamentary Analysis, Expertise Agency of DPR RI. e-mail: edmira.rivani@dpr.go.id
year (2020), Indonesia’s status was
downgraded to the lower middle-
income group due to the impact
of the Covid-19 pandemic (Bisnis
Indonesia, July 24, 2023). Draw-
ing lessons from past experiences,
Indonesia’s position within the up-
per middle-income country group
remains quite susceptible.
A country’s transition from
a low to a high-income status is a
narrative of sustained economic
growth. The pace at which the abil-
ity to produce goods and services
over the long term improves hinges
on two factors: the accumulation
of physical capital and human re-
sources, alongside productivity and
efficiency (Kompas, July 25, 2023).
While this explanation appears
straightforward, it’s important to
acknowledge that only some coun-
tries have succeeded in breaking
free from the low-income category
and achieving this swiftly.
Indonesia’s advantages in at-
taining UMIC status include bol-
stering investor confidence, attract-
ing increased foreign investment,
and enhancing financial support.
The government must sustain this
UMIC status and aspire for Indo-
nesia to become a high-income
country. This paper examines the
implications and challenges of In-
donesia’s transition to UMIC status.
Implications of Indonesia’s
Re-Entry into the UMIC
Category
Class promotion brings hope
to everyone, both domestically and
internationally. On the investment
front, such promotion heightens
and reinforces investor and trade
partner confidence in Indonesia,
consequently attracting new inves-
tors. Conversely, labor-intensive
sectors may perceive Indonesia as
less appealing for business as the al-
lure of low labor wages diminishes
due to the country’s elevation to the
UMIC category. Regarding inter-
national trade, Indonesian export
products must intensify their com-
petitiveness since fewer products
will qualify for trade tariff relief,
similar to lower-income countries.
In international cooperation, the el-
evated status prompts Indonesia to
manage higher interest rates when
repaying debts, potentially restrict- 17
ing access to easy loans and low-in-
terest rates. This elevation also ne-
cessitates Indonesia to contribute to
nations below it, thus demanding a
shift in stakeholders’ mindset from
a recipient to a contributor perspec-
tive.
Some of the implications are
as follows: First, Indonesia can no
longer overly rely on the accumu-
lation of physical capital and cheap
labor. In the short term, the econo-
my can still experience growth by
directing factors of production to-
wards productive sectors, as there
remains a significant disparity in
labor productivity among sectors
(INDEF, 2021). Indonesia needs to
shift the foundation of long-term
economic growth towards technol-
ogy- and innovation-based activi-
ties to attain high-income country
status. It was second, enhancing the
quality of human resources through
education and diverse training pro-
grams. The accumulation of hu-
man capital through education and
research and development (R&D)
initiatives yields considerable, and
even more importantly, sustainable
spillover effects (kompas.id, July 14,
2023). This attribute gains increas-
 ing significance, particularly as the
economy approaches the limits of
its productive capacity.
Third, institutions must
change to support the engines of
technology- and innovation-based
economic growth. The goal of es-
caping the middle-income trap is
pointless without substantial in-
stitutional reforms (fiskal.kemen-
keu.go.id, July 3, 2023). Economic
growth driven by technological
progress, efficiency, and innovation
is necessary from upper-middle-in-
18 come countries to affluent nations.
Fourth, there is always the possibil-
ity of descending from the upper-
middle-income group. The experi-
ences of Indonesia falling into lower
income classes in 1998 and 2020 due
to the Covid-19 pandemic provide
clear evidence of Indonesia’s vul-
nerable position within the UMIC
group (kompas.id, July 14, 2023).
Challenges Faced by Indonesia
as a UMIC
To realize Indonesia’s am-
bitious goal of becoming a high-
income country before 2045, con-
sistent high economic growth is
required, ranging from 6 percent to
7 percent per year. Indonesia needs
to address several challenges. First,
the vertical gap remains an issue.
The problem of social inequality
between the rich and the poor con-
tinues to impact Indonesia’s popu-
lation composition. The Gini ratio,
which measures social inequality,
indicates a relatively significant fig-
ure. From 2010 to 2019, the Gini
ratio experienced a marginal shift
from 0.378 to 0.380. Therefore, it can
be concluded that social inequal-
ity in Indonesia has yet to undergo
substantial changes (Bisnis Indo-
nesia, July 24, 2023). This issue is
significant for the government to
reduce the ratio significantly. By
the time Indonesia achieves its ulti-
mate goal of becoming a developed
country, the issue of poverty should
have been effectively addressed.
The 2018 Global Wealth Re-
port reveals that the wealthiest 1
percent of Indonesians control 46
percent of the country’s wealth,
and the top 10 percent control 75.3
percent of the population’s wealth
(Credit Suisse, 2018). These facts
demonstrate that the trickle-down
effect of development has yet to be
entirely successful. Instead, what
is observed is a trickle-up effect.
Therefore, the elevation to UMIC
status should not further empower
the affluent in economic develop-
ment but rather contribute to a
more equitable income distribution
among various groups.
Secondly, there is a horizon-
tal gap. Being an archipelagic coun-
try, Indonesia faces the challenge
of achieving equal development
across its different regions, which
are different in their conditions.
Empirical evidence paints a less en-
couraging picture, indicating that
many areas endowed with abun-
dant natural resources still have a
significant proportion of poor pop-
ulation. This is evident in provinc-
es such as Papua and West Papua.
Similarly, the disparity between dif-
ferent islands could be more consis-
tent. If not addressed effectively, it
could exacerbate the social inequal-
ity gap among these regions. The
issue of social inequality is sensi-
tive due to its potential to trigger
national disintegration and disrupt
the country’s security. Therefore,
the elevation to UMIC status must
 Table 1 . Global Competitiveness Index Ranking 2010–2019
Country 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Singapore 3 2 2 2 2 2 2 3 2 1
Malaysia 26 21 25 24 20 18 25 23 25 27
China 27 26 29 29 28 28 28 27 28 28
Thailand 38 39 38 37 31 32 34 32 38 40
Russia 63 66 67 64 53 45 43 38 43 43
Indonesia 44 46 50 38 34 37 41 36 45 50
South Africa 54 50 52 53 56 49 47 61 67 60
Philippines 85 75 65 59 52 47 57 56 56 64
Vietnamese 59 65 75 70 68 56 60 55 77 67
India 51 56 59 60 71 55 39 40 58 68
Brazil 58 53 48 56 57 75 81 80 72 71
Source: World Economic Forum, 2021.
19
also benefit individuals living out- the 2019 Global Competitiveness
side Java Island. Report by the World Economic Fo-
Thirdly, the standard of qual- rum, Indonesia was ranked 50th
ity of life is a crucial concern. The (Indonesian Business, July 24, 2023),
challenge of enhancing the quality remaining challenged to rival Sin-
of life for the Indonesian popula- gapore (1st), Malaysia (27th), and
tion remains pertinent as Indone- Thailand (40th) (Table 1).
sia steps into the UMIC category. The competitiveness rating is
The Human Development Index an indicator that provides informa-
(HDI) provided by UNDP serves as tion about a country’s ability to pro-
a key indicator to assess the stan- vide prosperity for its people. The
dard of living for countries across momentum of Indonesia’s entry
the globe, with higher values repre- into UMIC must be utilized as ef-
senting a better quality of life. East- fectively as possible to enhance In-
ern regions of Indonesia, including donesia’s global competitiveness to
provinces like Papua, West Papua, a higher level.
Maluku, North Maluku, NTT, and
NTB, necessitate heightened atten- Conclusion
tion to ensure their quality of life One of the implications of In-
aligns with other regions. Elevat- donesia re-entering UMIC is im-
ing Indonesia’s UMIC status should proved economic welfare. Several
uplift the standard of living for the actions must be taken as a result of
Indonesian people across all regions Indonesia becoming a UMIC, in-
in an equitable and just manner cluding developing quality human
(kompas.id, July 16, 2023). resources, increasing technology
Fourthly, future competitive- and innovation-based economic ac-
ness is a significant consideration. tivities, implementing institutional
The elevation of Indonesia’s status reform, and preparing for the pos-
is anticipated to enhance its com- sibility of Indonesia dropping back
petitiveness on the global stage from UMIC status. As the position
against other nations. According to obtained by Indonesia is still at the
 lower limit, there is a need to pur-
sue the target of becoming a devel-
oped country. Indonesia needs to
overcome several challenges, such
as vertical and horizontal dispari-
ties, improving the standard of liv-
ing in Indonesia, and increasing
Indonesia’s competitiveness in the
global arena. The DPR RI, espe-
cially Commissions VI, VIII, and XI,
need to oversee the government’s
commitment to improving people’s
welfare by strengthening social pro-
tection, accelerating the eradication
20 of extreme poverty, and controlling
inflation in the short term.
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