Looking at the Digital Economy in 2021

Economic recovery will be a major theme of the Indonesian economy in 2021. The Covid-19 pandemic has pushed many countries, including Indonesia, into recession.

Hope for recovery has begun to appear, with the discovery of several Covid-19 vaccines and the relatively better economic growth in the third quarter of 2020 compared to the previous quarter. This indicates an early sign that the economy will be able to recover quickly. The digital economy will play a key role in accelerating economic recovery in 2021.

The pandemic is forcing many people to adapt to technology. A report released by Facebook and Bain Company shows that in 2020 there was an estimated 310 million digital consumers in Southeast Asia, a figure that should have been reached in four years.

Also read: Digital Economy Blueprint

The report shows that the goods bought by Indonesian consumers increased by 40 percent compared to those in 2019, while the number of online shops visited increased by 30 percent. Overall, the number of digital consumers in Indonesia has increased by 35 million from the figure recorded in 2018.

Interestingly, in the Indonesian context, the increase in digital consumers during the pandemic mostly occurred in non-metropolitan areas. Based on research by Google, Temasek, and Bain & Company (2020), 56 percent of additional digital consumers come from non-metro cities.

This research shows that Indonesia\'s digital economy in 2020 is projected to experience a sharp increase, growing by 11 percent compared to 2019, to US$44 billion. The number is expected to further increase to $124 billion by 2025

The role of digital economy in 2021

Entering 2021, the digital economy is expected to be the main engine in the recovery of the national economy. A big issue for the economy during a pandemic is the difficulty of making transactions due to lack of mobility. In this regard, in 2021 the digital economy plays at least three important roles.

The service sectors such as education and health are currently changing the form of services into digital formats.

The first role is to encourage the digitization of economic services. A number of service producers are trying to adapt, either by changing services in digital forms or by making digital platforms as a means to sell products. The service sectors such as education and health are currently changing the form of services into digital formats.

Also read: Growth and Productivity

Apart from online courses, health-tech services are also growing. This is supported by the increasing demand for digital services. Research conducted by Google, Temasek, and Bain & Company (2020) shows that 37 percent of digital service consumers in 2020 are new consumers, of which 93 percent will continue to use digital services after the pandemic.

KOMPAS/ISMAIL ZAKARIA

A woman arranges a display of locally produced coffee on Thursday (23/7/2020) at a business meeting on micro, small and medium enterprises (MSMEs) in Mataram, West Nusa Tenggara (NTB). Local MSMEs have developed superior products from the NTB administration’s economic assistance for earthquake-affected communities. Today, MSMEs in Lombok have said they have been encouraged by the transition to the “new normal” phase of the Covid-19 mitigation measures.

Richard Baldwin in his book Globotics Revolution said that digital technology, robotics, artificial intelligence will reduce the need for face-to-face interactions in the service sector, which in turn will lead to an increase in the number of service jobs that can be traded across national borders. For example, a number of services, such as design services, animation, and financial audits, are currently being traded through digital platforms or cross-border outsourcing.

Based on KPMG\'s analysis, the transaction value for information technology outsourcing (ITO) and Business Process Outsourcing (BPO) globally has reached $167.9 billion, with around 84 percent of outsourcing requests coming from the United States.

Also read: Digital Economy

The second role is to encourage trade in goods through e-commerce services, especially for micro, small and medium enterprises (MSMEs). Based on a study conducted by AMTC (2018), digitization can save the cost of MSME exports in India, China, South Korea and Thailand by up to $339 billion. Furthermore, AMTC\'s research found that digital technology can save the duration of MSMEs’ exports by 29 percent, and reduces 82 percent of the export costs of the MSMEs that utilize various digital tools. The digital technology encourages MSMEs to enter global markets that were previously difficult to reach.

The third role is to facilitate payments. To encourage transactions, a secure payment system is certainly needed and this can be facilitated by financial technology or fintech services. In early 2017, according to data released by one of Indonesia\'s largest market places, 57 percent of e-commerce payments were conducted through bank transfers and 28 percent were made through a cash on delivery method (pay on delivery). Both payment methods are still very manual, which in turn lead to a high cancelation rate.

After about three years, the pattern of payment transactions has undergone significant changes. The community has adopted a digital payment method in line with the rapid growth of fintech companies in Indonesia. Data released by the Indonesia E-commerce Association (IdEA) shows that 34 percent of consumers who bought goods online during the 2019 National Online Shopping Day (Harbolnas) made payment with E-Wallet and other 29 percent of consumers used mobile banking.

Policy optimization

The role of the digital economy certainly needs to be balanced with the right policies. There are at least three policies that need to be optimized to strengthen the digital economy ecosystem.

Also read: Alarm of Economic Recession

First, the policy of the trading through electronic systems. The rules of the trading through electronic systems in Indonesia still do not pay attention to the variations in the business model of each existing e-commerce. As a result, there is a potential for mismatch between liabilities and business models, which can lead to business uncertainty.

AP PHOTO/AHN YOUNG-JOON

A currency trader watches monitors at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea, Monday, Nov. 30, 2020. Asian shares were mixed on Monday on renewed caution despite a record high finish on Wall Street last week driven by hopes for a COVID-19 vaccine and relief for the global economy. (AP Photo/Ahn Young-joon)

Based on a study conducted by the Indonesia Services Dialogue Council (2020), for e-commerce with a classified ads business model, only seven out of 20 obligations can be carried out in full. For e-commerce with a market place business model, only 13 out of 20 obligations can be carried out.

The study shows that Government Regulation (PP) No 80 of 2019 concerning Trade through Electronic Systems imposes obligations on trade operators through electronic systems (PPMSE) disproportionately and it cannot be implemented because it is not in accordance with its business model. The government should revise Government Regulation No. 80 of 2019 and consider variations in the business model of Indonesian e-commerce.

Second, cross-border data transfer policy. This data movement creates a global value chain, connecting MSMEs from all over the world. Based on research conducted by McKinsey Global Survey (2018), data monetization contributes 10 percent to the total profits of 32 percent of high-performing companies.

In 2014, the movement of data reached an estimated $2.8 trillion in the global economy, and is projected to reach $11 trillion by 2025 (Manyika et al, 2016; McKinsey, 2015).

Restrictions from data traffic can have a negative impact on the Indonesian economy.

The existence of Government Regulation No. 71 of 2019 concerning the Implementation of electronic systems and transactions is a breath of fresh air for the world of the national digital economy because it removes restrictions on cross-border data transfers. Restrictions from data traffic can have a negative impact on the Indonesian economy. ECIPE\'s research (2014) shows that data localization policies will reduce the welfare of Indonesian consumers by $2.7 billion-$3.7 billion and reduce the income of workers in general by Rp 300,000-Rp 500,000 per worker.

KOMPAS/TOTOK WIJAYANTO

A worker carries trays of freshly made tofu to the packaging section of a small tofu producer on Thursday (23/7/2020) in Pancoran, South Jakarta. As of July 21, the government has disbursed Rp 11.84 trillion in working capital for cooperatives and micro, small and medium enterprises (MSMEs) through national economic recovery program. The figure is 9.59 percent of the Rp 123.46 trillion fund for cooperatives and MSMEs.

Third, personal data protection policy. Personal data related regulations will play an important role in the development of the digital economy by 2021. The draft law on the personal data protection (PDP) regulates at least six main issues: definition of personal data, rights of data owners, consent mechanism, the obligations of data controllers and processors, sanctions, and related institutions It should be noted that the rules for the personal data protection, if they are not formulated optimally, have the potential to bring negative implications on the economy. There are at least four potential implications that can occur. First, the PDP Bill can make aggregated, encrypted and pseudonymous data become personal data, and this has the potential to reduce the analytical ability of data.

Generally, aggregate data is used for research purposes which can ultimately be used to improve services. When aggregate data is included under the category of personal data, it is feared that it will hinder the analysis ability of the data.

Also read: Tough Economic Heroes

The digital economy has the potential to become the backbone in Indonesia\'s economic recovery in 2021. With its great potential in encouraging transaction mobility, the digital economy is a solution during and after the pandemic. Therefore, an optimal digital economy policy is needed to ensure the sustainability of this ecosystem in the future.

Muhammad Syarif Hidayatullah, Policy analyst at the Indonesia Services Dialogue Council