Pandemic and digitalization

We use the term “technological disruption” to describe major changes in economic organization brought about by information technology.

Many people use the term “technological disruption” superficially, without really understanding what effects it has on societal and institutional interactions.

Digital disruption is not just the emergence of a new economic pattern beyond the existing pattern. It can also refers to a disruptive condition that brings intense institutional pressure. Existing institutions may start to lose relevance as well as control in making economic arrangements.

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Before the pandemic, digital disruption was already seen as causing swift changes. Technological advances gave birth to the “data imperative” logic, in which data became the part of the mechanism to make and implement decisions.

However, digital development has been going on for decades with technological algorithms accelerating imperative data.

The COVID-19 pandemic has effected many changes in economic institutions and others. Public needs, lifestyles, economic shares and growth structures have rapidly changed.

With people having to do away with or reduce physical contact, paradoxical health-economic problems quickly arose.

Changes as a result of the pandemic occurred in a matter of months, all starting from the forced change in human physical contact. With people having to do away with or reduce physical contact, paradoxical health-economic problems quickly arose.

The government is facing tremendous pressure over mitigation efforts, so digitalization can provide hope for a way out. However, a digitalization road map, without the readiness of economic organizations and institutions, can wear down the resilience of the national economy.

Digitalized economy

Digitalization in trade transactions has been rising sharply around the world since the pandemic. In Indonesia, last year’s banking transactions increased by 25 to 40 percent (Kompas.com, 29/9/2020).

KOMPAS/RADITYA HELABUMI

Rony, a gado-gado and ketoprak seller, shows his shop on the ShopeeFood application in the Tanjung Duren area, West Jakarta, on Friday (13/8/2021).

Increasing online purchases across all categories of goods have also increased the use of “pay later” platforms in less than half a year. This shows that economic platforms are increasingly determining economic transactions. This fact has awakened many circles, including the government, to the need to accelerate economic digitalization.

Digitalization is also seen as the main road to developing micro, small and medium enterprises (MSMEs). This is imperative in today’s economic development, a technology-related phase reminiscent of the use of phones in 1970s.

There are several elements to the encouragement of economic transactions (Khana and Palepu, 2005). They are (a) information analysis and advice on sellers and buyers, (b) the promotion of the financial wellbeing of clients, (c) information about credibility, (d) aggregators and distributors that bring together interests so as to create a profitable economy, (e) transaction facilitation and (f) the settlement of disputes in economic engagements.

The use of services, trade in goods and finance are now increasingly relying on digitalization to meet the first five of the above elements. Digitalization makes it easier for people to solve problems arising across the five elements of economic engagement.

However, at the same time, the platforms can also create economic imbalances if the state cannot regulate them.

Digitalization has resulted in new information and technological platforms established by companies to help them in business. However, at the same time, the platforms can also create economic imbalances if the state cannot regulate them.

First, although information technology can be accessed widely, individuals or companies with large resources are the ones that can systemize certain information. They have the capacity not only to create a network of big data about, for example, consumption patterns, employment and regional economic structures, but can also develop further data on, for example, income, age and consumption patterns.

Besides big data access, algorithm technology is available to select and provide information for decision-making. The data can be used to assess what kind of investment will be profitable in the future.

Deutche Welle TV recently published a report on Amazon\'s power to navigate and address individual consumer needs in a digitalized society through its resourceful data.

Companies initially looked as if they were wasting fantastic amounts of money in establishing technological platforms. In fact, over the years, they have not only collected data, but created a business ecosystem in two ways.

The first way is by expanding cooperation with various service providers, such as restaurants, massage providers, expeditions, health and beauty services and others. With such a network, consumers do not need to go out to meet their needs. Everything is right at hand.

Customers are pampered with convenience. However, this kind of network will produce only one or two players. New players will struggle to enter. Business competition sees the winner take all.

KOMPAS/RADITYA HELABUMI

Payment service by scanning the QRIS code (Quick Response Code Indonesian Standard) installed on a fruit salad seller cart in the Kebon Jeruk area, West Jakarta, on Friday (13/8/2021).

Second, the company with the growing platform will develop all the needs to accelerate its businesses. This is a system solidification process, in which the company\'s platform becomes no longer largely dependent on others, such as capital goods, rating agencies, intermediary organizations and businesses and the payment system.

An organization like Alibaba has its own “academy” to sustain the growth of new ideas for their business platforms. Business platforms that emerge first and have strong capital will buy start-up companies to support their businesses.

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Third, giant platform companies control five market mechanisms. They create their own measures of performance with rewards. They are relatively independent of outside credibility benchmarks imposed on them and have their own mechanisms for efficiency.

In a conventional economy, these five functions are carried out by other organizations, including the state.

Economic development

Daron Acemoglu, a notable political economist, wrote in Project Syndicate (5/6/2020) on bureaucratic governance being affected by the COVID-19 pandemic, one way being that the government may concede public regulations to technology companies.

The state may not be able to control such companies. The government may not have sufficient resources to gauge the potential or capacity of the company.

Digitalization seems to be able to solve the health-economic paradox arising from the enforcement of physical distancing measures. Therefore, it is not surprising that some people are excited to say that the digitalization of MSMEs will save the Indonesian economy. However, the provision and development of digitalization is only part of the solution to the problem seen from a macroeconomic perspective.

A large number of our MSMEs engage in trade and in the food and beverage service sector, fields that do not require much expertise. They run businesses individually, indicative of a weak network in industrial structure.

This sector is so easy to enter that it has become congested as the pandemic has caused job losses. Business competition has become very tight.

A digitalization strategy alone will not solve the problem of Indonesia\'s economic resilience. The MSME sector is too crowded – "easy to enter, yet easy to die".

Like a double-edged sword, digitalization provides ease for market penetration on one hand but allows “clotting” of credibility assessment on the other hand.

Business players are suddenly eliminated, merely because of the mechanism used in MSME ratings. As such, online platform providers should be approached with caution. Indeed, individual participation in MSMEs as “traders” has increased rapidly, but only a few can benefit from the such platforms.

In addition, they need simple technological assistance that will improve their production step by step.

MSMEs engaging in the manufacturing sector, whose percentage is small, face the problem of obtaining raw materials. In addition, they need simple technological assistance that will improve their production step by step.

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.

Assistance from governmental institutions, such as in the provision of opportunities to be involved in the modern and formal economy (without always having to become a formal body), must be done systematically. Digitalization is adopted in the framework of amplifying involvement in the network, or even the reconstruction of the economic network itself.

The ongoing pandemic has given room to improve MSME standards. With the emergence of new needs due to the pandemic—medical devices, food supplies, expeditions—local governments have the opportunity to get MSMEs in the network, not only to absorb their products and services, but also to improve production and service standards, such as in nutrition, raw materials and distribution management.

Meuthia Ganie-Rochman, Organizational sociologist, University of Indonesia

(This article was translated by Musthofid).