The Digital Economy Landscape in Indonesia

This op-ed is part of AASYP’s Digital Dialogues 2022, which is a programme that aims to provide a platform and forum for future leaders from across the region to contribute to the policymaking and diplomacy sphere by engaging in issues relating to innovation and investment, digital economy, and regional mobility.

With the rapid growth and utilisation of digital technology, the question is no longer whether the digital economy has become the new normal but to what extent emerging market economies such as ASEAN countries, especially Indonesia, can optimise the use of the digital economy in the future. How can Indonesia, as the largest digital economy in Southeast Asia, become a key player in the digital economy? The current digital landscape in Indonesia is a reflection of the Indonesian government’s regulations and policy agenda.

Internet users in Indonesia have increased from around 83.7 million in 2013 to 210 million in 2022. With the demographic bonus phenomenon, half of Indonesia’s population from 2030 to 2040 will be Generation Y. The number of working-age youths will be much higher than those of non-productive age and is projected to dominate the entire population of Indonesia. It is important from a market point of view because the productive ages of 15 to 64 years are those who will have purchasing power.

There are approximately 650 million people in Southeast Asia. Around 40 per cent of the total population in Southeast Asia is in Indonesia. This makes Indonesia a big market for an internet-based economy. No less than 75 per cent of the population in Southeast Asia is currently online. About 80 per cent of them are digital consumers. Approximately 60 million new digital consumers emerged after the COVID-19 pandemic.

The phenomenon of the digital economy has been proposed since 1995 by Don Tapscott, but the presence of the digital economy has gained more importance after the world community was faced with the global COVID-19 pandemic. The various restrictions that have been imposed one after another by countries as one of the steps in dealing with the COVID-19 pandemic are one of the reasons why the use of the digital economy continues to grow rapidly. The digital economy is an emerging feature of the post-pandemic world and is considered an alternative solution to answering the problems that were present during the pandemic until the post-pandemic transition period. 

Currently, Indonesia has a total of more than 2,000 startups, 2 decacorns, and more than 7 unicorns. Start-ups with the highest growth were in the on-demand services, financial technology, and e-commerce sectors. Indonesia’s rapidly growing digital economy grew by 52 per cent in 2021 with a total of 53 billion US dollars and is projected to exceed 124 billion by the end of 2025. The rapidly growing digital consumer is supported by increasing internet penetration and exponential growth in e-commerce. Factors such as a population of 278 million, a growing middle class, and mass smartphone use have underpinned the digital economy.

Although not everyone is tech-savvy, the digital economy brings benefits and opportunities for governments, businesses, and consumers. The digital economy has helped promote inclusion. The digital economy has made various activities, including business models, more efficient, innovation-friendly, and varied. The digital economy also has room to thrive and create the same level of playing fields for everyone. 
Nearly 90 per cent of Indonesia’s supporting economy is the informal sector. Indonesia continues to encourage the economic sector based on micro, small and medium enterprises (MSMEs) to take advantage of digital platforms in marketing their products. Currently, no less than 8.4 million MSMEs have digital platforms to market their products. This internet-based economy (e-commerce) will cut out intermediaries. The producers no longer need to go through these channels and only need to access the internet application and carry out sales and self-promotion in marketing their products. The sales and marketing process becomes easier and simpler.

Like two sides of a coin, this digital economy also comes with obstacles and challenges. In navigating and responding to these challenges, various strategic steps can be taken by the Indonesian government in collaboration with the private sector to maximise the benefits of the digital economy and become a key player in the digital economy.

Broadly speaking, there are several things that the Indonesian government needs to prepare and improve thoroughly. First, regarding the digital talent deficit, Indonesia needs around 9 million digital talents in the IT sector in the next 15 years. Indonesia needs 600,000 digital talents per year. The Indonesian government can collaborate with the private sector to reduce the digital skill gap in terms of increasing the capacity and capability of its human resources.

Second, the Indonesian government must provide inclusive digital access to all levels of society. The development of digital infrastructure is still uneven. The gap between megapolis (urban) areas and rural areas is still clearly visible. Internet access is still highly concentrated in Java. In Jakarta, the internet access speed reaches 7 Gbps, while in the eastern region it is only around 300 Mbps and the price is more expensive. With the increasing penetration of mobile internet and meeting the demands of the consumer market, the availability of quality internet access in both capacity and coverage throughout Indonesia is an important point in the development of digital infrastructure. 

Third, the development of the digital economy requires a supportive ecosystem and investment climate. Start-up, as part of the digital economy, is still one of the mainstay sectors in encouraging the flow of foreign capital into Indonesia, especially in the form of foreign direct investment. The government can collaborate with business actors and state-owned enterprises in encouraging financial institutions in Indonesia to fund potential start-ups to develop faster.

Finally, data regulations are not yet progressive. The Indonesian government as the regulator, facilitator, and accelerator of the digital economy must be able to continue to improve existing regulations to adapt to this changing lifestyle, especially regarding the protection of personal data. 

This article was written by Sri Reskiyah, edited by the Diplomacy Team, and reviewed by the AASYP Publications Team.

Note: The views and opinions expressed in this op-ed are solely those of the writer and in no way represent nor reflect the position of AASYP and members of the AASYP Publications Team. The AASYP Horizons Blog provides a platform for the free expression of opinions and intellectual discourse.

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