Digitalization and Equity
Through digitalization, economic growth will eventually combine with equitable income distribution to finally improve public welfare.
There seems to be no end to the debate about disparity. This problem has been there from the agrarian and industrial eras to the digital society of today.
Several experts, such as Prof. Jan van Dijk and Prof. Glenn Woroch, even maintain that the digital era has only given rise to a new form of inequality, the digital divide, also called the digital gap.
In developing countries, the digital divide is generally defined as the gap between those who have access to digital technology and those who don’t. In developed countries, where access to digital technology is almost universal, the digital gap exists at a different level, which is the gap in digital skills among people who use digital technology.
All phases of the digital gap come in succession, even affecting the real gap in society. As access to technology is uneven, a gap in skills automatically forms among users of digital technology.
Eventually, the difference in skill levels in this digital era will affect the depth of social and economic disparity, in which people with digital skills will grow even more prosperous, while those who aren’t will not be able to use digital technology to better their welfare.
In Indonesia, equitable distribution of infrastructure must be pursued first in order to reduce the digital gap. The government, through the Communications and Information Ministry, has set a goal to build 9,586 base transceiver stations (BTSs) from Sabang to Merauke by 2024. The Palapa Ring network will also be optimized through an integration program spanning 12,083 kilometers across land and sea.
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According to a study by Statista, broadband network penetration in Indonesia is currently just 3.82 percent at an average speed of 27.83 Mbps, far below the global average of 113.25 Mbps. High-speed internet coupled with superior infrastructure is vital to boosting the digital economy.
Google forecasts that the value of Indonesia’s digital economy in 2025 will reach US$146 billion. McKinsey Global Institute (MGI) also estimates that the digital economy will contribute $130-150 billion, or 4 percent, to the growth of gross domestic product (GDP) in 2025. This high estimate is inseparable from the increasing growth in internet users. In 2021 alone, 197 million people of the population were already connected to the internet.
As the current digital gap indirectly effects socioeconomic disparity, bridging the gap through digital transformation is highly important. In this case, the trade industry is the most vital area for digitalization.
MSME digitalization, the key to equity
The 2015-2019 strategic plan of the Cooperatives and Small and Medium Enterprises (SMEs) Ministry states that empowering micro, small and medium enterprises (MSMEs) would realize national economic development that is capable of inducing equitable income distribution and job creation. This is inseparable from the fact that 99 percent of Indonesian businesses are MSMEs.
During the Covid-19 pandemic, the Indonesian Institute of Sciences (LIPI) found that 94.69 percent of MSMEs experienced a significant decline in sales. This should be given due attention because MSMEs contribute 61.07 percent to GDP and absorb 96.9 percent of the national workforce.
As the engine of the national economy, MSMEs should of course begin to adopt digital platforms to enhance their competitiveness. Sadly, only a limited number of MSMEs are digitally literate. Based on data from the Cooperatives and SMEs Ministry, only 13.7 million MSMEs have entered the digital ecosystem. By 2030, the ministry’s goal is to connect 30 million MSMEs with the digital ecosystem.
Last year, the government granted funds of Rp 1.2 million to each business to prevent insolvency during the pandemic. Through the presidential assistance scheme, these businesses were expected to resume their activities.
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However, direct cash aid is not enough. The cash aid can cover operating costs for some time. For their future, MSMEs must undertake digital transformation to survive. Digitally transforming MSMEs involves not only online marketing on e-commerce platforms, but also business development, supply chain expansion, data analysis and logistics.
Towards this end, training and partnership programs with e-commerce platforms or brand aggregators can be considered. One successful partnership program is that between the Bukalapak and Tuka Tuku start-ups and the Purbalingga regency administration. Through this program, the regency administration displays the MSMEs’ products on the storefront of an online marketplace and offers warehousing, branding and packaging services.
As the Purbalingga administration functions as a curator, MSMEs also receive customer service and delivery service support. In addition, as a partner, Bukalapak helps promote the human resource capacity of businesses through training and guidance in online sales.
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Bukalapak’s online-offline training program, Mitra Bukalapak program, also helps to accelerate MSME digitalization. Through the Mitra Bukalapak program, food merchants and general stores are given access to special apps that enable them to procure goods and services online. These services include topping up phone credit and buying data packages, paying electricity and water bills, and paying Healthcare and Social Security Agency premiums. Food merchants also receive facilities to purchase products for resale through a special app.
Bukalapak also cooperates with fast-moving consumer goods (FMCG) companies like Unilever, Wings and ABC and shortens their distribution lines so shop owners do not need to wait too long for the goods they purchased to arrive. The presence of shops across many regions nationwide makes them a strategic target of digitalization. By entering the digital ecosystem, the shops’ incomes will certainly increase and their operational costs will be reduced.
In 2021, Bukalapak recorded that it had helped digitalize 8.7 million shops. The majority of shops affiliated with the Mitra Bukalapak program enjoyed an increase in income of up to threefold.
The other method that can be adopted to promote MSME digitalization is partnering with brand aggregators. This concept is indeed still new in Indonesia, but several companies like OpenLabs and Hypefast have made inroads by acquiring small brands and then investing funds in these businesses. But unlike venture capital firms and other capital firms, brand aggregators
offer not only investments, but also assistance in developing human resources, marketing, products, operations, finance and technology. Several brand aggregators are also helping to widen market access to Southeast Asia for small businesses.
Assisting MSMEs in “promoting” them through digitalization will indirectly effect equitable income distribution. Generally, MSMEs in the regions have less access to digital as well as conventional markets, so they lag behind urban businesses. Digitalization widens market access, which in turn increases the income of businesses, which will eventually boost public welfare.
Equitable funding
The main problem MSMEs frequently face is funding. Before the brand aggregation concept emerged, MSMEs had relatively limited funding options.
In theory, MSMEs can take out loans from banks in the form of MSME business credits, or program credits. But this is not without its problems. According to the Indonesian Joint Funding Fintech Association (AFPI), a total of 46.6 million MSMEs were assessed as nonbankable, so they are not considered by the banking industry. The Cooperatives and SME Ministry’s estimate is even higher.
Data from the ministry show that 35.49 million MSMEs are categorized as unproductive businesses, so they are ineligible for loans. The remaining 15.21 million MSMEs are categorized as productive businesses, but are still not eligible for credits. This creates a dilemma, because MSMEs need sufficient capital to become productive.
The main problem MSMEs frequently face is funding. Before the brand aggregation concept emerged, MSMEs had relatively limited funding options.
MSMEs that already use technology can transform into start-ups. These businesses are fortunate, because they are able to obtain initial capital from angel investors or venture capitalists. By selling ownership shares, start-ups can pursue their “income potential” so they don’t have to be productive at the time they obtain the initial capital.
Among Southeast Asian countries, Indonesia has been relatively prolific in establishing start-ups, with records showing 2,319 businesses that can be categorized as start-ups. This large number of start-ups proves that digitally literate MSMEs can access bigger funding. Some start-ups in the fintech sector are even actively helping fellow start-ups or MSMEs through microfinancing and peer-to-peer (P2P) lending schemes.
According to AFPI data, 9 million lenders support P2P lending with outstanding loans totaling Rp 5 trillion. Most lenders now offer retail loans. With the option to earn credit scores from fintech companies, MSMEs can more easily gain trust to obtain loans.
The microfinancing scheme of fintech companies tends to be different from that of conventional microfinancing institutions. Generally, a conventional microfinancing institution is a public or private bank, pawnshop, or cooperative. Some public banks offer loans at 30 percent interest and a ceiling of Rp 50 million, but very few studies have found that conventional microfinancing schemes reach nonbankable businesses.
Meanwhile, the fintech microfinancing scheme has an advantage in that one borrower can obtain loans from several lenders. The smaller loans and lower interest rates have the potential to ensure smooth processing of many more productive loans, especially for nonbankable businesses. Increasing the distribution of microfinancing to the regions could certainly reduce the disparity of initial capital distribution, which is usually centralized.
Reducing the gap
Data at the Indonesia Stock Exchange show that 75 percent of Indonesians still have no access to banking. Uneven access often hampers the distribution of social aid, during times of both stability as well as crisis. Using technology to distribute social aid through technology firms (start-ups) is seen as a solution to enhance efficiency and facilitate supervision.
Distributing funds via fintech start-ups, or fintech companies, is deemed capable of reaching targets at all levels of society more accurately. As a country with 72 percent smartphone penetration (Statista, 2021), access to fintech can reach communities that conventional banks cannot. Fintech companies’ capabilities in data analytics and electronic know your customer (e-KYC) can also be used to reach communities in remote regions that may have difficulties with directly accessing financial services.
Through digitalization, economic growth will eventually combine with equitable income distribution to finally improve public welfare.
Start-ups can also help grow MSMEs in various sectors. For example, SayurBox and TaniHub assist agriculture businesses in accessing a wider market. Start-ups such as Aruna and E-Fishery are helping more than 15,000 fishers to join communities so they can improve product quality and the distribution and logistics management. In terms of the environment, Waste4Change helps manage the waste of companies and businesses towards reducing the waste that accumulates at dumps.
The government is also actively intensifying the creation of new start-ups, such as through the 1,000 Start-Up Program of the Communications and Information Ministry. People in the productive age group are expected to be more interested in entering the digital economy. Start-ups, as the economy’s engine, should be able to reduce economic disparity, or the Gini ratio, in the future. In 2021, our Gini ratio stood at 0.384. With digitalization, this ratio should decline even more.
All parties, including regional administrations, financial institutions and start-ups established earlier, should work together to boost digital transformation in different sectors. Through digitalization, economic growth will eventually combine with equitable income distribution to finally improve public welfare.
Bambang PS Brodjonegoro.
Bambang P.S. Brodjonegoro, Professor, Faculty of Economics and Business, University of Indonesia
This article was translated by Aris Prawira.
