Is Covid-19 terminal for the rising middle classes of Malaysia and Indonesia?
Before Covid-19 hammered the Malaysian economy, Kuala Lumpur native Jeremy Johnson made 7,000 ringgit ($2,250) a month as the general manager of a coffee company, and even had a car as part of his work benefits. His family of six were firmly entrenched in the middle class: what Malaysia calls the M40  for the 40 per cent of households considered middle income  defined as those earning 4,850 ringgit to 10,959 ringgit a month. But movement restrictions forcing people to work from home and cautious spending from consumers hit his company hard and Johnson lost his job in August last year. Since he was the sole breadwinner, that one change swept his family into the low-income group. The 43-year-old is unable to access government handouts and relies on assistance from his family and friends from church. Johnson said that even when he was employed it had been hard to save money, as he had four children aged eight to 14 and was servicing the 2,500 ringgit monthly mortgage for his familys home. Ive been struggling, he said. Jeremy Johnson. PHOTO: Handout For Ramli Ismail, a father of four, life has also changed in the past year. Ramli resigned his position as a senior lecturer voluntarily in lieu of retrenchment when the private university he was working at wanted to cut its workforce. The sole breadwinner for a family of six went from being able to dine out as often as he pleased to struggling to service his 3,000 ringgit monthly mortgage, pay for utilities and school fees and feed the family. All over Malaysia, a country of almost 33 million, hundreds of thousands of middle-income workers have suffered pay cuts and job losses, while small- and medium-sized enterprises are struggling to stay afloat. In June this year, the Malaysian Economic Action Council revealed that since the pandemic hit, 600,000 households  about eight per cent  had fallen from the middle-income bracket to the low-income one of under 4,849 ringgit a month. (The council used the latest Malaysian Department of Statistics census of 7.8 million households in 2019 as a comparison). Ramli Ismail (in middle with suit). PHOTO: Handout At the same time, unemployment had risen from 3.2 per cent to 5.3 per cent. This led economist Muhammed Abdul Khalid to pronounce on television news channel Astro Awani that Malaysia had lost its middle class. There are no more savings, which means youve no more capital to invest in education or asset accumulation. Were going to become a very unequal society.  The same problem is unfolding in Indonesia , Southeast Asias largest economy. The country of 276 million had in the past decades grown its middle class to 115 million people, with the World Bank in a report published last January saying expanding this group was vital to unlocking Indonesias development potential and propelling the country to a high-income country status. But in the past year, Indonesias unemployment rate has risen to more than seven per cent from 4.9 per cent, and while there are no official statistics on how many have fallen out of the middle class, Asep Suryahadi, senior research fellow at Jakarta-based the SMERU Research Institute, said the middle class would have born the brunt of Indonesias 2.07 per cent economic contraction last year. These people, she said, have escaped poverty but not yet achieved full economic security. On July 1, the World Bank downgraded Indonesia from upper-middle to lower-middle income status with a gross national income (GNI) per capita of US$3,870. Indonesia had only attained the prized upper-middle income status a year ago with a GNI per capita of US$4,050, its first time in that band since 1988. ALSO READ: Bali reopening to foreign tourists delayed as Covid-19 surges  Economists say the erosion of the middle class is a problem because they are the backbone of healthy economies and societies. Walter Theseira, an economist at the Singapore University of Social Sciences, explained that one theory was that the middle class consumed goods and services and supported inclusive political and economic institutions, which in turn underpinned economic growth. The consumption of Indonesias middle class, for example, has grown at 12 per cent a year since 2002, according to the World Bank. They are the source of almost half of the total household expenditure of Indonesia. The pandemic has undone gains made in Asia over the past few decades. In 1960, the Asian Development Bank tracked 10 Asia economies as extremely low income or low income but by 2014 nine of those were considered middle-income economies. According to the Brookings Institute, around two billion Asians were members of the middle class last year. While low-income workers were most affected by the economic contractions last year, OCBC Bank economist Wellian Wiranto said the problem for the middle class was a lack of aid if they lost their jobs. They might not be directly targeted by the social safety nets and subsidies that were offered by the authorities, he said. In Malaysia, for example, government assistance such as Bantuan Prihatin Rakyat (Peoples Prihatin Aid)  4.9 billion ringgit of fiscal firepower doled out as cash aid because of the pandemic  is available to low-income workers. Households with more than two children who earn less than 2,500 ringgit a month are entitled to 1,800 ringgit, split into three payouts. However, it is based on tax returns from the year before so workers such as Johnson, who were previously classed as middle income but who have recently lost their jobs do not qualify. ALSO READ: Field ICUs, shipping containers and parking lots: Malaysia rolls out unorthodox measures to cope with Covid-19 overflow  While the recently announced Covid-19 special aid does cover middle-income families, it provides only a one-off 250 ringgit payment. That doesnt go far for someone like Johnson. Luckily, his family and church friends have pooled together 15,000 ringgit for him to start a cafe. But the cafe is at present unable to make money due to Malaysias third lockdown. Former Khazanah Research Institute chairman Nungsari Ahmad Radhi said it was frustrating that many people who had lost their jobs were not getting government aid despite needing to pay off loans and mortgages. The problem goes beyond the individuals affected. When a cash-strapped middle class finds its ability to spend and consume restricted, the economy takes a hit. Before she was laid off from her job, Dian Setyaningsih  who used to write school textbooks in Klaten district, Yogyakarta province, Indonesia  was able to pay for everything without worry. Dian, 35, was able to invest and buy jewellery on her 2.5 million rupiah (US$171) monthly salary  just 500,000 rupiah above the minimum wage in Klaten. But she lost her job in June last year then put her savings into an online business selling churros. The business tanked and Dian had to borrow money from her friends. She has sold her investments and pawned her jewellery. She has also since split from her husband and moved into her parents home. Michael Forster, an economist at the OECD, said people like Dian liquidating their assets was worrying, especially if they were parents. They will also have less chance to invest in their children, and this is the most important point, because if todays children cannot get a good start it is very, very difficult to undo the situation in 10 years, he said. Forster said some parents might have to pick one child out of three to send to university. What Im saying is that the long-term effects on risks for youth are a much, much bigger concern for society, he said. Nadia Jalil, regional head of CIMB group economics and markets analysis, is worried about Malaysias state pension scheme. The government had allowed withdrawals from the Employees Provident Fund for financial relief during the pandemic. But with 6.3 million out of 15 million depositors having less than 10,000 ringgit in their retirement savings, Nadia said current withdrawals could create a pensions crisis 10 years down the road since the bulk of the depositors are in the middle-income group and many have exhausted their savings. You imagine someone who has worked for 20 years, has less than 10,000 ringgit and they are heading to retirement. They only have 10,000 ringgit for retirement, thats a crisis, she said. ALSO READ: Here's how Stanley Ho's wealth compares to Asia's richest  The danger was multifaceted: beyond the impacts on the individual, the family and the economy, a shrinking middle class could also lead to social fragmentation. Donghyun Park, principal economist at the Asian Development Bank, said the middle class tended to be the moral, political, social and economic foundation and bedrock of most countries. If countries lost their middle class, disenchanted voters could be captured by politicians pursuing populist policies, accompanied by large-scale theft of public resources, running the economy into the ground. The 2016 election of Donald Trump as president of the United States , for example, was often credited to his inflammatory and populist appeals to disillusioned working-class voters, blaming Hispanics and immigrants for the countrys economic woes. To salvage the situation, government intervention had to go beyond preventing poverty to investing in peoples futures, OECDs Forster said. Both he and Park said social safety nets were important. Forster said: Governments think in terms of government terms  four years, five years, whatever it is. To protect the poor and vulnerable and to strengthen basic public services, especially education and health, to promote equality of opportunity, said Park. Theseira, at the Singapore University of Social Sciences, said governments needed to ensure as many people as possible had access to good education, training and jobs so they would have the financial ability to invest in their families and in assets. Nungsari said governments like Malaysias should take on more debt to tide the middle class through the pandemic. We can actually borrow another 30 billion to 40 billion ringgit, he said, saying the government was exercising too much fiscal discipline and had a short horizon. The 40 billion ringgit will not go anywhere else, people are going to spend it. That will generate expenditure in the economy, he said. Muhammed suggested that monthly payments of 1,500 ringgit should be made to low- and middle-income workers for at least three months. OCBCs Wiranto said the near-term challenge was dealing with the ongoing waves of the virus that kept dashing businesses plans to reopen. He expected economies to be on a steadier footing by the end of the year as vaccinations picked up pace. But Park said the hit to the middle class was only temporary. Asias economic growth is expected to bounce back strongly this year, and we expect the rapid growth of the middle class to resume, he said. Asias growth has been and will continue to be broadly inclusive, meaning that its fruits have benefited the broader population rather than a small politically well-connected elite.  Forster said there was still time to act. Its not too late, of course not. It takes political will, thats all, he said. This article was first published in South China Morning Post.