Indonesia: Pope Visit, Shrinking Middle Class & Policy Reforms & Financial Literacy with Gita Sjahrir - E476

Gita Sjahrir, Head of Investment at BNI Ventures, and Jeremy Au discussed:

1. Pope Visit: They reflect on Pope Francis’ recent visit to Indonesia, emphasizing its significance as a beacon of positive media influence. The visit was part of a broader Asia Pacific tour and marked the first extensive travel of the Pope to the region. Gita noted the massive turnout, with events drawing large crowds, celebrating Indonesia's commitment to diversity and religious tolerance.

2. Shrinking Middle Class: Gita and Jeremy examined the significant decline in Indonesia’s middle class, which has fallen from 57 million to 48 million people. Macro factors such as the pandemic, global inflation and supply chain disruptions exposed structural weaknesses within the Indonesian economy, making it difficult for many individuals to maintain their middle-class income.

3. Policy Reforms & Financial Literacy: They stressed the need for more inclusive economic policies to support small and medium-sized enterprises (SMEs). They discussed the logistical and infrastructural challenges faced by businesses in Indonesia’s decentralized geography. While the population is digitally savvy, many Indonesians are caught in cycles of predatory loans due to a limited understanding of financial literacy. They contrasted the ease of obtaining consumer credit vs. the hurdles small businesses face in securing productive loans.

They also talked about redefining economic metrics to better reflect modern realities, the critical role of vocational education in economic empowerment, and the challenges of implementing equitable economic policies.

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(00:01:50) Jeremy Au:

Hey Gita, how are you?

(00:01:52) Gita Sjahrir:

Hi, I'm good. How are you doing?

(00:01:53) Jeremy Au:

It's good to see you. I know it's been a busy news week in Indonesia and month. I think we had the Pope's visit as well. How was that?

(00:02:00) Gita Sjahrir:

It was great. It was a very positive news in our country because it showed how the country is celebrating tolerance and diversity and religion. So overall, it was very positive news story.

(00:02:12) Jeremy Au:

Wow. Yeah. I think it was as nice. He was a visitor at Singapore afterwards and it was a big event and lots of people went. So I think it's apparently like the first time he's really traveled the Asia Pacific, for a very long chunk of time. And I mean, obviously for traveling from Italy, it's a long flight and he's getting older as well.

(00:02:27) Gita Sjahrir:

Yeah, and I think what, we focused on, internally, is how simple he was when he visited. As in he didn't lavish himself in luxury watches or anything like that. He actually was very humble and simple. I mean, he literally has the entire movement globally. Here he is not even riding in an Alphard car, which is considered the most expensive car in our country, not wearing lavish watches and all of these things, and he's just here in a humble manner riding in a normal car and just reaching out to his people and that was the big theme.

(00:03:07) Jeremy Au:

Yeah, I think that at the end of the day, when you are not well off, people have a certain conception of what being rich is. When you become rich, then those are the conspicuous consumption that kicks in, like handbags and other stuff. And then, the joke is that the rich who are truly rich know how to be rich, which is to look poor because you need to avoid taxation and, you know,

(00:03:27) Gita Sjahrir:

Good point.

(00:03:27) Jeremy Au:

Criticism, all the time. And I think that's something that I always remember for China. I always was there during the bull days, right? And people are like, Oh, why are the Chinese like this? And I'm like, well, they are still learning how to be rich. Now we've, obviously, the big kind of like government push to redistribute wealth from the rich to the middle class. It's a big learning where I think everybody has stopped conspicuous consumption in China. So, I think it's a common issue.

(00:03:49) Gita Sjahrir:

Yeah. But overall, I thought it was a positive news and it went on quite seamlessly because there was also a lot of notices from offices, including my office by the way, to work from home because there might be 100,000 people going to the mass that the Pope was holding. So everyone just took their time and work from home and ensured that the traffic wasn't as crazy as it could be. And as anyone who has ever gone to Jakarta knows, the traffic can be insane. So it was really nice for people to recognize that there's a large public figure here because unfortunately, so much of the news has been on religious intolerance, and the way people have politicized religion just for their own benefit. And so, it shouldn't have been a situation where people were worried if something could happen. It was really great that in general, collectively, people were really excited including people of different religions. They were really excited to have a Pope come and visit Indonesia. That was a very big deal. In fact, all of our government leaders, and business leaders even, came and visited and said hello and was just so touched that he visited Indonesia.

(00:04:59) Jeremy Au: Yeah, I think it's amazing to see that interfaith for religious tolerance really kind of be exhibited. I think everybody was very nice. I mean, come on, 2024 plus plus, right? Let's be chill and let's hang out and let's be friends and try to help poor people and move on with life.

(00:05:15) Gita Sjahrir:

Basic stuff, you know? We fightabout basic stuff. .

(00:05:17) Jeremy Au:

And you know, one of the basic stuff we were talking about as well was I think the middle class statistics that came out recently, right? It was a big debate that we were having, which is about the department for economic statistics basically shared that the Indonesian middle class is shrinking from their perspective. They said that, Hey, the number of people who are categorized as middle class used to be about 57 million out of a total population of around, 270 to 290. And then this has dropped down to about kind of 48 million. So about 4% drop in the percentage. Obviously, it was slightly bigger denominator as well but, and they define a middle class as those having a per capita expenditure of between 2 to 10 million rupiah per month, which is about 3 to 17 times the World Bank's poverty line. So yeah, what are your thoughts, GIta?

(00:06:05) Gita Sjahrir:

That's been big news here. We've talked about it informally and also formally in various situations. First of all, my gut instinct was to go, yeah, that sounds right, but if I have to take a step back, I also have to take a look at how do you define middle class. And how you define middle class, also depends on the context of that country. When you said it is based on per capita expenditure, okay, yes, but per capita expenditure doesn't necessarily correlate highly with how much income they're making. Gdp per capita and also not just gdp per capita, but what is their savings rate? What are their typical expenditure for for basic needs and those are the things that I think if you're in countries where it doesn't have a strong support system for certain basic needs. You're going to have that easier slide from middle class to lower class because if there's any shocks to the system, so, for example, a health crisis or financial crisis, aka the pandemic, and then the current economic issues, then yes, they will be less likely to survive.

So I think, although my initial instinct is to say, yeah, that sounds about right, we need to also go back and ensure that everyone's talking on the same page in terms of how do you even define middle class? And should we challenge the definition of middle class? Should it be, for example, based on GDP per capita or should it be GDP per capita plus savings plus expenditure on non basic needs? What are the necessary definitions needed for a country like Indonesia, for a context like Indonesia?

(00:07:40) Jeremy Au: Yeah, I think that's the permission for the economist nerd in me to come out, but yeah, I think I agree with you. There's a definition piece and then obviously there's a directional and policy piece, right? So I think on a definitional piece, it's always hard to be apples to apples. Even GDP per capita is highly contested, which is about the amount of production. So Singapore has an equivalent GDP per capita as United States, in higher than that of United Kingdom, which was used to be the former, I guess, colony, supervisor, I don't know how to describe it these days. But, it was a inversion there. But, of course, I think people have shared that both London and Singapore serve as headquarters for multinational corporations. So a lot of the production is getting recognized. Is that a right thing? So then if you flip it the other way around, you look at expenditure per capita, Singapore has lower expenditure per capita than the United States.

But now, of course, you can, like I said, argue the other way around, which is united States actually has a much lower savings rate in Singapore households are being forced to save by the government, which saves their own accounts. And then of course, the United States has a lot more depth, right? That's a little bit of a definitional piece where it's like, production or income per capita is not the right measure all the time, but neither is expenditure per capita. So there's always a definitional piece, but I guess Gita, how do you feel about the direction of the middle class in Indonesia?

(00:08:54) Gita Sjahrir: By the way, you totally scratched this itch of mine that one day I want to be an economist, but I'll probably never get there because I just won't go back to school for it. Anyway, one of the things that I realized, too, right, as you said that, is that there was recently a study showing that almost half of Americans have five hundred dollars or less in their savings because you're right, because expenditure doesn't also always reflect other ways that they manage money, right?

For example, what is their savings rate? What is their ability to withstand shocks? Those are things that make up the stability of certain social classes. So I think for the middle class, it is going to be very tough if you're already on the cusp to maintain that status. If there are shocks to the system, if i'm looking ahead now, this is really a lot of responsibility and also opportunity for the new cabinet to create supportive policies for different areas of society that may be more vulnerable to these shocks. So, the very common one we see is middle class and then there's actually lots more. There are children, because everything starts from the baseline of basic needs. Nutrition, like health care, and those are the things that if we don't invest into them knowing full well that the benefit might not be seen for maybe 10 years or more, then we might lose out on this rush towards a high income country or this rush towards Indonesia goal 2045 when we become a high income country because you would need people for that.

So we're talking about hundreds of millions of people who might miss out on this opportunity simply because, for example, their nutrition wasn't taken care of, or they didn't have equitable access to health care or basic education. So it's just very basic stuff. This is an area of opportunity for the new cabinet to ensure that you do have access. Don't put more and more people into very precarious position. And that is why, just like what you said, it's not always about GDP per capita because you could have a higher GDP per capita and less savings, higher debt. You could also have a higher GDP, but actually not necessarily higher gDP per capita for a certain segment of society, right? You might end up having very large inequality that could lead to societal shocks in other ways in the future. Basically, it's a lot of homework.

(00:11:17) Jeremy Au:

No, I mean, it goes back to it, which is like, the government has a responsibility to, if they do take out debt or whatever it is, at the end of the day, it's like, are you investing in pro growth economic policies that grow the middle class, and take more people out of poverty, and give them better opportunities and they then believe that there's a future that's better for their kids than the life they have for them right now?

So, when we talk about the middle class, beyond the definitional piece, how do you feel about the Indonesian middle class? What are the issues? Are they shrinking? Are they growing? How do you really think about it?

(00:11:48) Gita Sjahrir:

Yeah, I do believe they might be shrinking. Even if I talk about definitions earlier on, I do believe they might be shrinking because we have had a lot of large external shocks. And again, when you look at the pandemic, that was a huge wake up call for Indonesia to realize that, hey, you're not really structure to be able to withstand a lot of shock, as in that's a really bad thing because, the pandemic may come and go, but the shock to the system will stay right? And they have stayed. And so you're talking about issues in your law where a lot of people just simply weren't covered at the time, simply didn't have access to equitable health care. And that continues until today. So I'm not surprised if all these shocks have caused a lot of people to slide backwards.

Now, there's a lot of complaints and talks about unemployment rates. Also, Indonesia has some very strange, I would say they're unofficial regulations that a lot of private companies, for example, have maximum age of applicants. So, oh, people 27 and under are only allowed to apply. And that's really strange because then what are you going to do with all of those that are not included in this equation? Are you just going to have more unemployed 29 and up? That's odd. So we do a lot of these things and we don't enforce inclusive economic policies, which in the end, say there's another shock, and there might be one because again, we're all looking towards the US and their economic policies, right? And their interest rate. Then you simply won't be as equipped to survive more and more of these issues. So I think when we're looking at for the future cabinet, really consider how are you going to make more inclusive economic policies, equitable economic policies, so that you don't have strange rules and regulations that is currently operating, that actually limits how much economic growth happens. So this isn't just you're doing these things to be quote unquote nice to people. No, you need to do it. So people work and they're employed and generate income, which then will boost expenditure.

(00:13:54) Jeremy Au:

Yeah, I think, basically, you know, to pass it right, which is like saying that there are shocks and then there's the fact that the work still needs to be done, right? To be fair, that's the shocks that have also impacted Singapore, right? So obviously, pandemic killed off, like there's tourism and a bunch of industry. It was a big shock to the middle class. Then obviously there's a global economic slowdown with supply shortages. I mean, global conflict and you have all these issues on, for example, Ukraine, agricultural production, Russian oil, the US-China decoupling. So I think there's a lot of supply chain shifts as well.

So, not easy for both Singapore and Indonesia. That caused inflation as well, right? Cost of goods went up. In the past, it used to go down. Food used to be cheaper and cheaper. Energy used to be cheaper and cheaper. And now it's at best it's growing slower than it, the really rapid inflation, which obviously kills the middle class because as a middle class, you're eating soybeans and cooking oil and food, right? You know what I mean? And then obviously, we had high interest rates as well because of the US, and the EU and interest rates have been high. Southeast Asia from Thailand to Singapore to Indonesia has been, you need to keep those interest rates high to prevent the Asian financial crisis from happening again, where money flows from our currencies to America, even though we probably don't want to have high interest rates, but so, I think these shocks are applied to the whole of Southeast Asia, from my perspective.

So I wouldn't say it's just Indonesia on the shock side. but I think the difference that you said is that the base is different. Singapore has a lot more resilience with the social support networks, the higher GDP per capita, so forth. The forced savings by the government and the forced savings of households kind of like create that, I mean, it's still painful, but it's not as painful as the shrinking middle class.

(00:15:29) Gita Sjahrir:

Yeah. I think also when we're talking about economic policies, in Indonesia, the majority of movement and growth can still be seen from the large conglomerates, but again, this is back to what kind of inclusive economic policies do you have that spurred the middle class, which also correlates with your banking laws, right?

So, how easy is it for small companies or medium companies, not even small, let's just talk about medium companies, to take out bank loans? It's notoriously difficult, because bank loans and due to federal reserve laws in Indonesia, they would need to maintain a higher amount of liquidity, right? Unlike, let's say the US, so that you can avoid bank runs. They've come to a level where it's very hard to maintain and grow their businesses without access, equitable access to financing, where usually it's really only available to arch conglomerates. So I think when we're thinking about economic policies, also think about how are you making it easy for businesses to operate?

(00:16:27) Gita Sjahrir:

Any business, how pro business are you not just pro large business, but pro small, medium size, actually MSMEs, like what initiatives are there to allow them to thrive? And this goes down all the way to the bottom because Indonesia is naturally decentralized. We have thousands of islands. So it's also not about just creating industries in certain islands because simply certain islands don't have as much infrastructure, for example, as Java, Bali Island, which are the most developed island, also the most densely populated. But, that shouldn't stop people from growing and from thriving. If that means those areas end up having more MSMEs, then what would the government do in order to allow those MSMEs to thrive and finally grow, right?

And that again goes back to how protectionist are your economic policies? Is it easy for them to get certain types of raw materials? Is it easy for them to export anything. Is it easy for them to set prices and have access to technology and Wi Fi? Those are the things that I think are actually areas of opportunity for the next cabinet, which is to truly think about equitable access and more open economic policies to allow, entrepreneurs of any size, not just large conglomerates to thrive.

(00:17:46) Jeremy Au:

I think you talked about so much important stuff, which is, when we talk about, for example, borrowing, why are you borrowing? If you're talking about MSMEs and saying, Hey, I want to borrow in order to increase my productive capacity, have a better income. That's, I want to say a good form of credit, but I mean, I think it's the goal is to generate more revenue in the future versus I think consumer credit, where if you're borrowing from future income to fund current consumption, then that's very different, because you're not improving the life or, there's a big difference between borrowing to fund your kid's education, makes sense versus borrowing to buy more clothes or a fancy hardware,. So I think there's a big piece that's pretty important. And I think government's policy is always that, you need to push hard on the business lending piece because I think by nature, banks and finance institutions will always do the consumer one because it's kind of like a no brainer.

(00:18:36) Gita Sjahrir:

Of course.

(00:18:37) Jeremy Au:

Everybody wants to borrow and buy something now and pay later. Buy now, pay later is probably like the most obvious, I don't know, value proposition. Probably worked it like 5, 000 years ago. Probably like, you go to some caveman and you're like, Hey, do you want to buy now and pay later? I was like, it would make total sense from a consumer perspective but I think it's hard to do it, and you need a lot of government support to push capital into micro and small medium enterprises that are not sophisticated or not thoughtful about how to do so.

(00:19:01) Gita Sjahrir:

Yeah. And by the way, I am very aware of how challenging non performing loans are. I really am because I am a venture capitalist and I see a lot of fintech deck and more than that is through my Instagram platform, I do get a lot of stories on people finding it very hard to get out of predatory loans and all these debt mechanisms. So I think very, very aware of that. And the question is more than what can you do to break this cycle because so much of people taking on personal debt is also to fund whatever thing that they want to fund, which is not what it's used for. It's supposed to be for consumer debt because as you said, everyone wants to go there. Everyone wants to pursue that. That seems to be an easy avenue for revenue, but again, it's about what are the safeguards we can put in place. What supportive systems and policies we can do so that the middle class continue to thrive rather than always be pulled back every time there's a shock to the system?

(00:20:00) Jeremy Au:

Yeah. So many things to talk about, and obviously I'd love to poke deeper the downperforming loans. Is that a function of people just being not financially sophisticated, for example, to know what the loans are? Or is that function that the loan terms are just too strict and does not have regulation of it? What's going on there? Oh

(00:20:16) Gita Sjahrir:

I think for a lot of developing economies like Indonesia, where the populace are both very digitally savvy and very digitally aware. At the same time, financial literacy and education is simply not at the standard that it should be. So if you put two of those together where it's so easy to open up an app and get a loan, and i've seen a lot of people do this and go through it when it's so easy, it becomes very hard to get out of the cycle once you're in it. And again, let's not take our financial literacy for granted because we are so privileged to even be in this situation because that means you learned it from someone. Someone taught you. The earlier, the better. But in places like Indonesia, where, a lot of the wealth is also generated only in the last 30 or something years, you have that issue of financial literacy just not keeping up with the rise of digitalization and technology adoption.

And that becomes very challenging. And by the way, this also is a challenge to public administrators because a lot of public administrators and decision makers simply don't have also enough digital literacy. When you have the majority of decisions being given to the hands of, insert whatever political elite that's been around for 30 years or more or 20 years or more, and they're older, and the people surrounding them, their inner circle are also older people, and they're all of, let's say, the top 1 or 2% of the economy, then, they are separated from the real issue of the populace and therefore, they don't have enough connection with the actual problem. And so for them, they often don't see a problem until it becomes the avalanche that it is because they only see the iceberg this entire time. Oh, that's interesting, there are apps. I'm like, well, there are millions of Indonesians currently trapped in predatory loans. Issues with online gambling is extremely prevalent in Indonesia. And it's heartbreaking. It's so heartbreaking and it's sad.

So for example, a really weird statistic is that more than 30% of people that currently are stuck with predatory loans and are just suffering under it are teachers. what does that have to do with anything? Does it mean teachers just love buying nice stuff? No, it's because they simply started making less. So I think all of these issues, whether you call it nonperforming loans, predatory loans, online gambling, all of these issues with money fall back down to the question of one, do people even feel psychologically safe and secure with the money that they have now? Do they generate enough income and feel secure enough to buy their everyday basic needs? That's number one. That's the issue because you can stamp out all of these online gambling platforms all you want. But again, when people do not feel enough security and comfort with where they are in life, they might take huge risks, finally get some money, right? That's the sad reality. And then two, the question is, is there enough government support and equitable access for financing needs for the everyday people or for MSMEs? Not just conglomerates. It's a lot of questions.

(00:23:23) Jeremy Au:

I think the crux of it is that, where government comes in is that, you are accepted to take more loss in the sense that, if you're supporting the poor or the middle class, especially the lower middle class, then you're expected to subsidize. In other words, take a loss on some of this financing or guarantees or create a corporate slash national guarantee on some programs in order to do grants or subsidies or do subsidize interest rates effectively to help them grow to the next stage. So I think it's not an easy set of positions to be because, it's hard to do.

(00:23:53) Gita Sjahrir:

Yeah, no, I'm not saying this is easy, nor am I saying the solutions can be had in the next two years. Absolutely not. But it's about putting the building blocks in place so that over time, the policies can adjust with the macros, right? So, for example, with more digitalization, what are you going to do with the rise of all these loans? And what are you going to do with the rise of, even alternative assets, because with less trust in the banking system, people might run to crypto. And they do, by the way. So then how are you going to regulate that? Because you can't just block stuff. You can't just block websites all the time. Because one, there's VPN, but also two, you're just addressing the wound. You're just putting a band aid. You have to see the entire system. You have to see the entire trauma within. Not just the band aids of, oh, why are people doing online gambling? Maybe because they don't feel secure and they don't have enough money. Or like, oh, why are people so down in predatory loans? Maybe they don't have enough money to even pay for basic stuff.

(00:24:55) Jeremy Au:

And so I think in the context of this, shrinking middle class, we can look at some of these policies that we've discussed before, in past episodes we discussed. For example, the decision to increase the debt to GDP ratio to increase investments. We talked about the 200% tariffs on Chinese imports, but also the Chinese infrastructure spending in Jakarta and potentially Bali as well. How do you feel about that set of, I guess, administrative or government measures?

(00:25:19) Gita Sjahrir:

Again, unfortunately, we have a tendency to be reactive rather than proactive. Tariffs, all of these things are in the end, they can end up being a short to middle term solution. But the real question then is, is your country friendly to businesses? Is your country friendly to people trying to make a business? And when I say the word business, unfortunately, there's an association in Indonesia, Oh, you have a business. That means you must be a top 1%, but actually, a business can be anyone. You can be a one person business selling something on Shopee, and the fact that the policies have been so skewed towards the very small slice of conglomerate companies is an issue because business should feel doable for the average person, but then again, without equitable access to all of these things including at the baseline is, education and the ability to know you can make a business that's already a problem. So we're not even talking about equitable access to financing tools if the country also cannot address the basic issue of just education.

And so when thinking about the future, again, this is a challenge for the administration to think about how are you trying to solve your education problems? Does this mean there should be more policies on trade schools? Does this mean there should be more policies on maybe not a traditional, four year university? Maybe it's something that's more skill based education, or is it the kind of education where there are more access to alternative ways of learning? I don't know, but these are actually areas of opportunity of saying, Hey, maybe the way we've been doing things now isn't the best. That maybe we could move forward because the thing is when people say oh, other countries haven't done it before. We can't do it. I'd like to call BS on that because lots of countries outside of the US, the UK, and the EU have made big progress on their own before other countries.

For example, Indonesia is actually one of those countries that have had paid first day of menstrual leave. We've had this policy since the late 40s or 50s because our first labor minister was a woman. You can be the first in something. And so, I think that is where, also as a populace, Indonesians can ask for more. And what made me very hopeful is that we did. We asked for more only a month ago, where we went down to the streets and said, No, you are not going to mess around with the constitution even more. This is what we want. That was actually a signal that the Indonesian middle class is now ready to say something in politics and make their voices heard, which is very powerful and should be a lesson also for other countries.

(00:28:02) Jeremy Au:

When we think about this, what do you think at a, let's say wishlist, right? Either magic wand. My daughters were watching Cinderella a little bit, the fairy godmother, you know, the little, you know, and then, you know, turning a pumpkin into a carriage. If you had the magic wand, what would be the three things that you would transform?

(00:28:19) Gita Sjahrir:

Oh my gosh. If it's me, first things first is basic needs. That's just 100% number one basic needs. So nutrition, housing, and to be honest, clean air, basically people where if you live, you won't end up with higher healthcare costs to be a basic need, like that should be basic need. And then second is education because that's the building block of society, right? A healthy society.

So the first one, nutrition, health care, housing, healthy air, the environment. Then second is education. And then the third would be economic policies, inclusive economic policies, which is how are you going to make things more equitable for small medium businesses, including micro businesses. How are you going to allow more women to participate in the economy and not just devalue the care economy. These are really big questions, right? And right now, for example, Indonesia doesn't have an Equal Pay Act. Unlike, Stuff like that, we have to think about for our future. How are you going to make it more inclusive and equitable? Not because you're being quote unquote, so nice and permissive. No, it's because that's what you need to have more participation. Don't you want more participation? Because the more you divide things up and create hierarchies, I hate to say it, that's how you create more grafts, more issues of corruption in public administration. Then that's also how you give the wrong incentives to the populace and what you end up having is a societally, disruptive force whenever another shock comes to the system. So that wasn't our last pandemic. Nor is this our last economic crisis in the future. So what are you going to do to create a stable society?

(00:29:59) Jeremy Au:

Yeah, definitely. on that note, I think that's a good way to wrap things up. And so, thank you so much for sharing about what your Magic Wand policies will be.

(00:30:07) Gita Sjahrir:

Oh my gosh. Don't hold me up to that.

(00:30:09) Jeremy Au:

I mean, nobody's expecting you to do it yourself, Gita.

(00:30:12) Gita Sjahrir:

That's true. It better not.I don't work there. E

(00:30:15) Jeremy Au:

Alright, peace out.

(00:30:16) Gita Sjahrir:

Thank you. Peace.