18 October 2018

Leveraging the Digital Economy to Achieve Equitable Growth

Despite ongoing global economic uncertainty, Indonesia’s economy has been growing steadily over the past few years, albeit not at the pace that President Joko Widodo and his government had predicted when he took office in 2014.

In 2019, the final year of his first term, President Jokowi is targetting 5.3 per cent GDP growth, as revealed in his address to Parliament during the budget debate. Although much lower than the 7 per cent growth he had projected, this would still rank Indonesia amongst the fastest growing economies in the world.

But growth alone is not sufficient to tackle the myriad social issues facing the nation. The country needs equitable growth to raise living standards, lower income inequality, increase access to better public services and attract value added investments.

One of the factors driving Indonesia’s economic growth has been consumption, underpinned by a fast-growing middle class and the country’s youthful population. With more than half under 30 years of age, Indonesia’s population is one of of the most productive in the world.

This demographic dividend has long been touted by policymakers and economists as a huge advantage for Indonesia as many other countries, especially in the developed world, grapple with aging populations. Indonesia’s demographic bonus, coupled with sound fiscal management, is its pathway to achieving developed country status.

But the clock is ticking in terms of harnessing this demographic bonus as Indonesia’s population will begin to age around 2040. This means that the country must become rich before it gets old.

“Indonesia needs 40 years to move out of the middle-income trap,”  Bambang Brodjonegoro, Minister of National Planning Development of Indonesia, said in a speech earlier this year at the HSBC Chinese New Year dinner.

“South Korea took only 20 years to move from middle income to high income while Chile, which graduated to high income in 2012, also took 40 years,” he added. South Korea relied on manufacturing but Chile based its growth on natural resources.

Indonesia, he noted, cannot use the South Korean model as the country is still heavily reliant on labor-intensive manufacturing industries. As such, the Chile model is more appropriate for Indonesia to study and learn from.

“How did Chile do it? Today we have a large consuming class of around 45 million. In 2020, this will increase to 90 million, and by 2030, it will reach 130 million,” he said.

Indonesia’s climb out of the middle-income gap began two decades ago following the 1998 political and economic crisis. The country has undertaken reforms in its bureaucracy and economic management, waged a war against corruption and strengthened its fiscal management. These reforms have delivered sustained economic growth and reduced poverty levels dramatically to under 10 per cent of the population, a commendable achievement.

Digital Transformation

One bright spot in Indonesia’s efforts toward greater equitable growth has been the growth of the digital economy. According to research reports, the digital economy could add US$150 billion to Indonesia’s GDP by 2025. Digitalization will have tremendous impact on labor productivity, jobs and lifestyles.

The rise of unicorns (start-ups with a valuation of US$1 billion) such as Go-Jek, Tokopedia, Bukalapak and Traveloka is proof that the country’s digital economy offers great opportunity and promise. Indeed, Indonesia has the third highest number of start-ups in the world and the highest in Southeast Asia.

According to Shinta Dhanuwardoyo, founder and CEO of Bubu.com and a tech pioneer in Indonesia, the digital economy is poised to take off, creating transformational impact on jobs and industry.

“By having all these digital platforms, the opportunity for anybody to start their own business is way bigger,” she notes. “But entrepreneurs must be able to adapt and use digital platforms for their business, especially social media.”

“Instagram, for example, is primarily used for business as 90 per cent of users use the platform to showcase their products but the sales and payments are still manual,” she adds.
Whatapp in Indonesia is also increasingly being used for business given that Indonesia has more than 100 million smartphone users.

Shinta, however, cautions that the digital economy will not grow as rapidly as hoped without more programmers. This problem is primarily because the current education system is not geared to support the digital economy.

“When a company grows from 100 users to one million users, it’s a different ball game,” says Shinta. “The DNA of a start-up is tech so we need to think about a moonshot education system to produce sufficient programmers and tech-savvy engineers.”

Indonesia, she adds, can adopt programs already being used in Silicon Valley that adopt peer-to-peer learning rather than teacher-student relationships.

“There are some 42 schools with 1,200 students involved, all learning on a platform without teachers. This will solve the problem of not having enough teachers,” she notes.
“I see this an answer to Indonesia’s own challenge of scaling up the number of programmers to support the growth of the digital economy.”

Boosting the digital economy is the easiest way for Indonesia to close its income gap and empower entrepreneurs, including small and medium-sized enterprises. E-commerce platforms such as Tokopedia and Bukalapak are already working with local SMEs to help them market their products to the global market, thus helping them grow faster.

“Scaling up for a start-up is not easy. They do not have sufficient experience and sometimes they do not have the right business model,” notes Shinta. “They must adjust their business model constantly if they want to succeed.”

Achieving equitable and sustainable growth is the new objective of President Joko Widodo’s government. The president unveiled a number of policies in the 2018 draft budget aimed at boosting incomes of civil servants and increasing the incomes of the poorest segments of the population.

Continued infrastructure development, especially in rural areas, will also be critical to ensuring sustainable economic growth that benefits all segments of society. Better infrastructure will improve the wellbeing of rural communities, not just economically but also socially.

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