Indonesia's Path to Upper Middle-Income Status

 Indonesian: Upper Middle-Income Country

Four income groups have been assigned to the global economy by the World Bank Group: Low, Middle, Upper and High. Based on the previous year's GNI per capita value, this classification shall be updated every year on 1 July. Using the Atlas of GNI per capita to measure economic capacity as a widely used indicator, the World Bank's income classification aims at determining countries' level of development. The type of countries into income categories has changed significantly since the late 1980s. In 1987, 30% of countries were classified as low-income, but by 2022, only 12% fell into this category. (Hamadeh, Rompaey, & Metreau, 2023).

Middle-income countries worldwide are diverse in size, population, and income levels (The World Bank, 2022). Several factors, such as fluctuations in the Atlas GNI per capita value and classification thresholds, can influence the grouping of these countries. Inflation, population growth, economic progress, and a country's exchange rate can change Atlas GNI value per capita. On the other hand, the classification threshold uses the SDR, which is the weighted average of the GDP deflators of China, Japan, the UK, the United States, and the Euro Area, to adjust yearly to deal with low inflation. (Hamadeh, Rompaey, & Metreau, 2023).

Figure 1: The new thresholds for Atlas GNI per capita Source: The World Bank

                                                                                                               

Figure 2: Countries changing income category in FY24 Source: The World Bank

 According to the data provided in Figure 1, lower middle income countries are defined as those with a GNI of less than USD 1,136 for every capita between USD 2,465 and USD 4,465. On the other hand, countries with a GNI per capita ranging from USD 4,466 to USD 13,845 are categorized as upper-middle-income countries (The World Bank, 2022

As the recovery from the impact of the COVID-19 pandemic continues, many countries will move up to higher income categories in 2022 (Hamadeh, Rompaey, & Metreau, 2023). Previously, Indonesia had received promising news for transforming into an "upper middle-income country." However, due to the emergence of COVID-19, it suffered a recession, leading to a downgrade of its economic status to a lower middle-income country in 2020. In the June 2023 edition of Indonesia's Economic Prospects report, the World Bank noted that Indonesia has regained its upper middle-income country status (as shown in Figure 2, indicating a gradual recovery) With a GDP of USD 4,580 per capita in 2022. This implies that Indonesia experienced a 9.8 percent increase from the previous year's GNI per capita of USD 4,170. (Indonesia Investments, 2023).

Middle-Income Trap

According to research by Jesus Felipe, Arnelyn Abdon and Utsav Kumar (2012), the Middle Income Loophole has an ambiguous definition. However, policy discussions on how to avoid it are very challenging. If the country had remained in the upper middle income group for a longer period of experience than before, it may have fallen within an upper middle income trap. (Felipe, Abdon, & Kumar, 2012, p. 21).

The middle-income trap (MIT) is an economic phenomenon generally occurring in any country with a different historical, cultural, and economic background. The fragility of the financial system and a slowdown in economic growth typically accompany such situations or phenomena. Many countries can quickly change from low-income to middle-income countries, but many countries need help passing through the middle-income stage to become high-income countries (Galvan, Bhatt, Campo, & Trujillo, 2022, p. 2). For instance, a country such as Brazil, Argentina and Mexico has quickly moved from low to middle income countries in Latin America. This is due to these countries' increasing national economic growth and per capita income. However, on the other hand, they experienced financial setbacks one after another, to be precise, between 1970 and 1980 (Parrique, et al., 2019). Meanwhile, of the countries in Asia, only Japan has succeeded in overcoming the "middle-income trap." Indonesia, Philippines, India and others remained in the group of Middle Income Countries because they could not continue to develop economically as rapidly as before Financial turmoil had caught up with them. Apart from occurring in developing countries, the middle-income trap phenomenon also occurs In a few developed countries that are still at the beginning of development, like the US and UK. (Galvan, Bhatt, Campo, & Trujillo, 2022).

Saving Behavior  

In low-income countries, changes in accurate interest rates may impact savings less than in middle-income countries. (Rossi, 1988) conducted a study that suggested that in low-income countries, savings are less affected by changes in actual interest rates compared to middle-income countries. This is because low-income developing countries often face significant liquidity constraints. As a consequence, rather than changes in the expected rate of return, consumption growth is likely to be driven by income growth in these countries. However, the intensity of this situation differs from country to country. (Ogaki, Ostry, & Reinhart, 1996).

(Rebelo, 1991)’s argument is that saving and economic growth will not be substantially affected by the financial liberalization in Low Income Developing Countries. More than a dozen Low and Middle Income Developing Countries have been trying to stimulate savings with real interest rate changes. Higher investment can be financed in countries with higher savings rates, leading to faster growth. In addition, the elasticity of private savings in relation to changes in the rate of return is sensitive to the impact on external current accounts of fiscal policy changes that alter domestic interest rates. (Ogaki, Ostry, & Reinhart, 1996).

Green Investment

Every country aims for sustainable economic growth, measured by the GDP. To achieve this, governments need to complete various targets and tasks. One of the effective ways to accomplish this is by increasing savings and investments in environmentally friendly technologies. Technological innovations not only conserve energy sources but also help to minimize environmental degradation and reduce carbon emissions (Li, Yu, Jahanger, Usman, & Ning, 2022, p. 3).  Initially, humans focused on economic development and ignored its negative environmental impact. However, as the quality of life improved, they adopted cleaner environmental strategies to ensure sustainable economic growth (Li, Yu, Jahanger, Usman, & Ning, 2022, p. 15).

Conclusion

Indonesia is gradually recovering its economic position in the Upper-Middle Income group after a slump caused by the impact of COVID-19. The fear of being caught in the Middle middle-income trap should serve as a wake-up call to further boost economic growth in our country. One way to achieve this is through green investment. As explained in the previous section regarding saving behavior, green investment can be a win-win solution for Indonesia. On the one hand, it can help the country's economic growth. On the other hand, it can also reduce the impact of economic activities on the environment to increase economic growth.

 

References

Felipe, J., Abdon, A., & Kumar, U. (2012). Tracking the Middle-income Trap: What Is It, Who Is in It, and Why? Levy Economics Institute.

Galvan, L. P., Bhatt, U. A., Campo, C. C., & Trujillo, R. A. (2022). The Nexus Between CO2 Emission, Economic Growth, Trade Openness: Shreds of Evidence From Middle-Income Trap Countries. Frontiers in Environmental Science.

Hamadeh, N., Rompaey, C. V., & Metreau, E. (2023, June 30). World Bank Group Country Classifications by Income Level for FY24 (July 1, 2023- June 30, 2024). WORLDBANK.ORG.

Indonesia Investments. (2023, September). Economic Update: World Bank Puts Indonesia Back in the ‘Upper Middle Income Country’ Category. Indonesia Investments Report - September 2023 Edition.

Li, S., Yu, Y., Jahanger, A., Usman, M., & Ning, Y. (2022). The Impact of Green Investment, Technological Innovation, and Globalization on CO2 Emissions: Evidence From MINT Countries. Frontiers in Environmental Science.

Ogaki, M., Ostry, J. D., & Reinhart, C. M. (1996). Saving Behavior in Low- and Middle-Income Developing Countries: A Comparison. Palgrave Macmillan Journals: International Monetary Fund.

Parrique, T., Barth, J., Briens, F., C., K., Kraus-Polk, A., Kuokkanen, A., & Spangenberg, J. (2019). Evidence and Arguments against Green Growth as a Sole Strategy for Sustainability. European Environmental Bureau.

Rebelo, S. (1991). Long-Run Policy Analysis and Long-Run Growth. Journal of Political Economy.

Rossi, N. (1988). "Government Spending, the Real Interest Rate, and the Behavior of Liquidity Constrained Consumers in Developing Countries. Staff Papers: International Monetary Fund.

The World Bank. (2022). The World Bank in Middle-Income Countries. World Bank Group.

The World Bank. (2022). World Bank Country and Lending Groups. The World Bank.