In Challenging Times, Digital Economy Can Chart a Path Toward Recovery

By Jeff Paine

Arecent World Bank report on the impacts of COVID-19 provides sobering reading for the region. It states that “significant economic pain seems unavoidable in all countries”.

Indonesia’s finance minister has said the best-case scenario for Indonesia is 2.3% economic growth, the lowest in 21 years. The worst case was for the economy to contract by 0.4%. 

While an economic slowdown seems unavoidable, this is a window to leverage the power of the internet and accelerate the pace of digitalization to help mitigate risks. Indonesia’s digital economy, the largest in Southeast Asia, is valued at US$ 40 billion. By 2025, the number could reach US$ 133 billion, a leap from just US$ 8 billion five years ago. Maintaining this growth trajectory will be crucial to help enable a rapid economic rebound when the pandemic threat is over.

The path to that growth is a balanced and proportionate policy and regulatory environment that takes a long-term view. 

The national E-commerce policy, GR80, will play a crucial role across Indonesia’s economy and society. The plan is for a comprehensive framework designed to regulate E-commerce, define E-commerce services and develop regulatory and licensing requirements for E-commerce providers. The policy also outlines the responsibilities of providers in areas such as consumer rights, payments, advertising and dispute resolution. 

A recent digital economy report highlighted online travel, ride-hailing and E-commerce as the brightest lights behind Indonesia’s internet economy. Indonesian E-commerce itself is forecast to reach US$ 21 billion in total value this year, or 52% of Indonesia’s current US$ 40 billion digital economy. By 2025, E-commerce is anticipated to comprise two-thirds of the country’s digital economy. 

Indonesia’s young, growing and digitally savvy population has among the world’s highest social media and mobile-usage growth rates, which are critical drivers of E-commerce adoption. Underpinning this growth are Indonesians micro, small and medium enterprises (MSMEs). These enterprises are crucial to the economy, and they also comprise virtually all online sellers. They have helped improve socio-economic outcomes for millions of Indonesians and have created new markets domestically and abroad.

A platform like Tokopedia has over 7 million digitized microbusinesses operating across its platform; 86.5% are first-time entrepreneurs, and no matter the location across the vast archipelago, the marketplace is no longer the confines of their desa (village). 

Government initiatives to digitize MSMEs are well underway, but more must be done to ensure E-commerce policy can enable the sector’s full potential. The government is right to drive this. However, the current approach outlined in the regulation could hurt investment, undermine competition, stifle growth and lead to less choice and higher costs for Indonesian consumers. 

Implementation regulations for GR80 are currently being drafted. Vital areas need resolving to enable E-commerce to unlock opportunity and growth. 

Indonesia’s E-commerce sector is at a nascent stage, with expenditure a relatively low 3% of total retail, compared to 16% for China and 12% for the United States. To capture this significant value, Indonesian MSMEs need simple and clear rules. These rules should be applied consistently and not create additional burdens that could restrict the ability for MSMEs to scale operations and trade. 

GR80 mandates such as having global players establish a physical in-country presence will serve as a market access barrier. Local consumers and businesses will face limited choice and increased costs if international companies are forced to limit their offerings to Indonesians as a result of these requirements. 

A premature tax burden will disproportionately impact MSMEs who rely on E-commerce to reach new customers, suppliers and markets. It may also push local sellers back into informal channels, inhibiting their growth and hence likely reducing the future tax base. Guidance from international organizations like the Organization for Economic Cooperation and Development (OECD), whose proposals on digital economy taxation are due at the end of 2020, will ensure Indonesia is at pace with global economies. 

An inclusive, fair and transparent approach, in alignment with other sectoral regulations, will ensure all businesses can participate in global export and trade opportunities. An increased burden at a country level will make it more difficult for Indonesian companies to export, and for global innovations and services to be imported. 

Cross-border data flow is core to global business and supply chains. Restrictions proposed by GR80 would remove the ease of doing business and deter investments into the development of high-value digital products in-country. These restrictions will also thwart the competitiveness of Indonesia’s unicorns in the global playing field and cripple start-ups trying to internationalize. 

Productivity and growth will also suffer if local companies can’t leverage technology like cloud-powered software, data analytics and artificial intelligence, which require data flow for processing.

E-commerce comprises diverse businesses models and sectors. The significant growth forecast for Indonesia’s digital economy is not the exclusive preserve of unicorns and E-commerce start-ups. Farmers looking to sell overseas, hotels managing bookings, sole traders banking online and a myriad of other transactions rely upon and interact with the digital economy. 

The intention behind GR80 is right. How it is currently structured can and should be urgently improved. The implications of implementing the GR80 framework without wide stakeholder consultation will likely create barriers for MSMEs trying to digitalize and innovate in this difficult time. Inclusive feedback from domestic and foreign players will help future-proof Indonesian E-commerce. 

That significance is underlined by President Joko  Widodo’s ambition to make Indonesia ASEAN’s digital powerhouse. To that end, national digital policies must be practical, give consumers more choice and control, create an even playing field and align with international best practices and standards.

Indonesia will rebound more robust than ever. Making the right policy decisions now, in times of crisis, will be crucial for both the speed of the recovery and Indonesia’s long-term prosperity alike. 

· Source: The Jakarta Post