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Digital inclusion matters for wider productivity gains
Businesses at all scales and the public sector have flocked to digital technology to manage their activities amid government-imposed mobility restrictions.
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Leaving no one behind in the rush toward digitalization
D
igital technologies and digitalization are commonly used terms these days. They appear to be paramount in any solution to any problem. There is some truth in this, during the pandemic, digital technologies have helped us navigate the worst public health crisis of our lifetime.
Businesses at all scales and the public sector have flocked to digital technology to manage their activities amid government-imposed mobility restrictions. Even services traditionally deemed to have personal interaction such as education and some health services are now conducted remotely. These are things that were perhaps beyond our imagination a few years ago.
Yet, even before the global pandemic, there was already excitement about the acceleration of digital adoption in Indonesia. In 2011 only 13 percent of the adult population aged 15 years or more accessed the internet. By 2019, more than half of the population accessed the internet (World Bank 2021).
Similar to what we have observed elsewhere, the rapid adoption of the internet has propelled the so-called “digital economy”. E-commerce has arguably taken the largest share of the digital economy. An estimate suggests that the gross merchandise value of e-commerce in Indonesia is expected to have increased by 54 percent year-on-year (yoy) from US$21 billion in 2019 to $32 billion in 2020 (Google Temasek and Bain 2020).
The dynamics of the digital economy in recent years offer high hopes. The government is even preparing a roadmap for the digital economy, suggesting a serious policy direction toward digital-economy development. This is welcome news. But then could the digital economy be really the driver of Indonesia’s economy in the future?
This is hard to answer. But a recent report by the World Bank titled Beyond Unicorns could serve as a good reminder that, despite rosy news about Indonesia’s start-ups and tech companies, the economy-wide productivity gains from the digital adoption are surprisingly lower in Indonesia than in peer countries. This finding reminds me of Robert Solow’s aphorism. Solow, an economist who was awarded the Nobel Prize for Economics in 1987, famously said “you can see the computer age everywhere but in the productivity statistics.” That is, despite the high rates of adoption of the computer, we did not see any increase in productivity.
Data limitations might be behind the reason for the observed low productivity gains. Yet the World Bank report reveals several important facts. First, Indonesia’s digital economy shows a high concentration geographically, mainly in Jakarta and some parts of Java. Second, the adoption of information and communication technology (ICT) has been heavily concentrated within a small number of “digital leader” firms. Data show that only 1.2 percent of manufacturing firms in a survey by Statistik Industri produce ICT products and only 1.3 percent of manufacturing firms use ICT inputs in their production processes (World Bank 2021).
The concentration of adoption either by geography or sector appears to be the major impediment to achieving wide benefits from the digital economy. Improving digital infrastructure and connectivity would break this concentration and extend digital services to all corners of the country. But more importantly, promoting more inclusive digital adoption is also a strategic policy option. That is, we need to make the digital economy work for all of Indonesia’s population, but how?
There are certainly many ways to promote a more inclusive digital economy. However, I believe that inclusive digital financial services (DFS) could lead to both economic gains and inclusion at the same time. Indonesia has made rapid development in financial inclusion. But when it comes to DFS, the adoption is relatively low, which is in contrast with the frenzy of digital innovation and the growth of digital financial products, such as electronic money (e-money) and e-wallets. We again see the concentration of the usage of DFS.
My research finds that the low usage of DFS could be attributed to a problem called coordination failures. Coordination failures happen as demand and supply are unable to come up with optimal outcomes. Thus, it leaves both sides of the market reluctant to enter. As an example, consumers prefer using cash transactions rather than using DFS because they think only a few merchants use them. On the other hand, merchants have less interest in using DFS as they think few consumers use them. Thus, the misperceptions of both sides, consumers and merchants, lead to market breakdown.
To address this coordination failure, promoting the usage of DFS among merchants, particularly micro, small and medium enterprises (MSMEs) is important. But it is also important to note that the policy should move beyond encouraging the use of digital platforms or e-commerce among MSMEs. Research by Mandiri Institute finds that although 53 percent of MSMEs have online channels, more than half of them still use non-DFS in their transactions. This highlights that the digitalization of MSMEs does not translate into higher usage of DFS.
Increased digital literacy through spreading knowledge and information regarding various DFS products are also crucial. Our study shows that the low adoption of DFS can be attributed to the lack of knowledge about DFS. Only 13 percent of respondents in a 2019 World Bank survey had heard of the term e-money, a basic DFS. Moreover, expanding digital infrastructure is important not only for extending services to all groups but also for improving reliability of services in order to gain trust among consumers. Another critical aspect is policies aimed at MSMEs owned by women. The Mandiri Institute’s survey shows that 51 percent of small business owned by women use DFS, which is higher than in businesses owned by men.
All in all, digital inclusion matters for tapping the economy-wide productivity gains from the digital economy. Promoting DFS and digital-payment solutions that reach the unbanked and the underbanked would bring the benefits of the digital economy to them. From the policy perspective, this is clearly a strategic approach.
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Head of Mandiri Institute
