Towards Global Digital Economy

Closing the Digital Divide and Promoting E-commerce in Indonesia*

By: Maryke Silalahi Nuth

Introduction

Science and technology revolution have resulted in the introduction of advance Information Communication Technologies (ICTs). These new technologies change our society rapidly and provide new opportunities from electronic commerce to mass communication and information services. Unfortunately, most developing countries including Indonesia have largely been by passed by this digital revolution and the opportunities it provides. Such limited democratisation of digital technology has resulted in the digital divide of modern society. In this era of global digital economy, closing the digital divide is no doubt one of the prerequisites for economic development.[1]

The digital divide is a familiar concept. Although it is often understood as significant different in numbers of inhabitants with access to Internet in developed countries compared to developing countries, digital divide can be measured not only by looking at penetration of the Internet but also of other major ICTs such as fixed telephone lines, mobile cellular and broadband.[2] Furthermore, digital divide is not a single concept or a single divide for that purpose. There are multiple divides such as between individuals, age groups, gender, households, businesses, regions or even within nations. The last one is known as domestic digital divide and refers to the uneven distribution of ICT within a nation resulted in a situation where certain people have access to modern communication technology while others in the same country are not able to make use of telephone, Internet or other ICTs. This paper discusses the digital divide within Indonesia by looking at domestic exploitation of ICTs with particular emphasis on the use of Internet as medium for electronic commerce (e-commerce) and information dissemination channel.

The Extent of Indonesia’s Digital Divide and E-commerce

Generally e-commerce means any form of business transaction or information exchanged using ICTs. In other words, it is another means of distance selling using communication technologies such as telephone/mobile phone, satellite or broadband connection. Thus, e-commerce relies heavily on various ICTs for its adoption. Very often, the success of e-commerce is influenced by penetration of ICT in a particular region. Low ICT penetration leads to low number of e-commerce transactions while high ICT penetration will potentially lead to high rate of e-commerce activities. Certain advantages offered by using the World Wide Web in conducting business online have made the Internet becomes the most famous tool and venue for e-commerce activities. For these reasons, looking into e-commerce situation in Indonesia will inevitably require a closer look on the adoption of some major ICTs in Indonesia but especially of the Internet:[3]  

-  Telephone main lines in Indonesia in 2005 were 12,8 millions or around 5.8 per 100 people.[4] However, the more than 220,000 telephone kiosks (wartel) spread around in Indonesia made the coverage was actually greater than the number of lines suggested. Subscribers of fixed telephone line consisted of household (78,8%), business (19,8%) and government (1,4%).[5] Jakarta alone has over half of the national fixed lines.

-      Mobile telephone which now considered as one of the “must have” technological features especially amongst teenagers has increasing popularity from year to year. While in 2002 there were 7,4 millions mobile-phone subscribers, a year later the number increased to more than 11 millions surpassing the number of fixed line in that year.[6] Within a short period of time, mobile subscribers per 100 people became 21.3 in 2005. 40% of mobile subscribers are based in the greater Jakarta area.[7]

-      Personal Computer per 1000 people in 2004 was only 12,8 despite there were over 6,000 local companies producing computer equipment (hardware) and 200 software and IT service companies in Indonesia by the end of that year. A year later, the number climbed up to 14 per 1000 people.

Table 1:

Internet Subscriber and Users in Indonesia (Cumulative) according to APJII*

* Access to the Internet can in fact be higher as people can access the Internet via Internet kiosk (warnet) (50%) or from workplace (40%).

** Estimation only.

Given the above, it is therefore not surprising that while electronic commerce has transformed traditional business and consumer life in western world at least since 1994, in 2007 electronic commerce in Indonesia is still in its initial phase. Indeed, Internet users in Indonesia have annually been growing at unprecedented rate. Tabel 1 shows significant leap in numbers of Internet users each year since 1998. Nevertheless, the percentage of Internet users as compared to Indonesia’s total population of 245 millions in 2006 was still less than 10 per cent. Similarly, the growth of Internet domain, one of the e-commerce basic infrastructures, has also been high but not significant if put in perspective of Indonesian population and geographical situation. By 2004, there were only 21.762 Internet domains based in Indonesia. Certainly, not all of them are e-commerce sites since some of them account for private or governmental sites.

Opportunities and Benefits

The above shows that ICT (telephone, mobile, computer, Internet) penetration in Indonesia, although rising rapidly, is still very low. Indonesian IT market has been considered as one of the smallest in the Asia region and the IT spending in Indonesia was reported to be relatively small compared to neighbouring countries.[8] The growth of E-commerce in Indonesia has not been spectacular and number of online shopping transactions is very modest. This is perhaps due to the fact that most Business-to-Consumers (B2C) sites in Indonesia are mainly designed for informational purposes rather than transactional.

The extent of Indonesia’s digital divide represents market potential and opportunities for e-commerce in Indonesia. Low number of online businesses means competition is not yet high and new players have thus higher chance to gain part of market portions. There are still many sectors and business areas not connected to Internet, thus opportunities to establish new online markets are also available. Furthermore, since e-commerce is conducted online and mostly on the Internet, the benefits derived from the use of Internet also apply to e-commerce such as: better information availability, global reach, reduced transaction costs, lower barriers of entry or establishment and new sources of revenue.[9]

There is a correlation between bridging the digital divide and economic development. Building ICTs infrastructure and securing universal access to ICTs to reduce the digital divide will encourage (further) adoption of the e-commerce which in turn will facilitate economic growth. According to International Telecommunication Union (ITU), every 1% increase of ICT penetration can accelerate economic growth up to 3%.[10] Commonly, economic growth is defined as an increase in the productive capacity of the country or sustained increase in the real Gross Domestic Product (GDP) per capita over time. Successful e-commerce adoption would accelerate growth of other industries. E-commerce allows local businesses to raise global awareness about their products and reach customers beyond their traditional market. E-commerce also provides the possibility to virtually link with each other to improve businesses and gain economic benefits. Cross border deliverance of purchased goods would in turn increase exports. Time saved by doing e-commerce transactions could be allocated to do other activities. All of these would eventually add on to the GDP. 

Economic improvement enables people to finance their access to ICTs. Proper use of information and opportunities provided by ICTs will create incentive and benefits for parties involve in e-commerce transaction. As the process repeats itself nationwide, the digital gap will eventually be closed.

Problems and Challenges 

What are the reasons for the slow embrace of ICTs in Indonesia that has resulted in low rate of e-commerce activities? A wide range of explanations can be offered to this query. The most relevant in e-commerce perspective include technology infrastructure and geographical distribution, socio-economic conditions of Indonesian society and governmental responses and initiatives. These underlying problems pose inherent challenges in promoting e-commerce in Indonesia.

Technology Infrastructure and Geographical Distribution 

One of the most significant problems in Indonesian telecom sector is the lack of solid telecommunication and broadband infrastructure accessible to most Indonesians. Although Indonesian’s government has defined fixed line public payphone service as universal service, many parts of Indonesia have yet to enjoy telephone services. This is partly due to Indonesia’s geographical condition which comprises more than 17,000 islands (many of which are small islands) and stretches 9,8 million square kilometers long. The other half can be attributed to the lack of commitments from government and businesses (telecom operators) in fulfilling Universal Service Obligation (USO). It is estimated that 43,000 out of a total of 70, 000 villages have no access to telecommunication services. 

Most of Internet connections still use copper wires with low transmission speed capacity and only few major cities have fiber optic connections.[11] High costs involve in building and connecting telecommunication infrastructure in the whole nation or just to build broadband infrastructure in some major cities are often discouraging for businesses especially when there is lack of government commitment and political will in the process. 

Another technological feature needed for e-commerce is electronic payment system. Buying and selling goods or services on the Internet most certainly will involve payment. If there is no mechanism for users to pay goods or service purchased, how can we expect e-commerce in Indonesia to boom? Indeed some Indonesian banks have been offering Internet banking services to their customers. But there is no true electronic money system in operation in Indonesia as most Internet banking services only facilitate money transfer between accounts and limited bill payments. As such, e-commerce in Indonesia relies only on credit card to facilitate payment. The latest survey conducted by CLSA in autumn 2007 reveals that only 1 per cent of their 67 million respondents have credit cards.[12] This reflects the general situation in Indonesia where credit card ownership is still very rare.

Socio-economic conditions 

Lack of Information Technology (IT) education is another problem in Indonesia. Only few Indonesians have certain level of IT education or skills. To some extent this reflects the limitations of Indonesia’s technical and further education systems. Not surprisingly, there are only few available professional services supporting the development of online business. 

Personal computer is considered as expensive feature to have at private homes and its use is not considered as crucial. Many businesses refrain from connecting to or doing business in the Internet because of lack of perceived relevance of the Internet to their respective businesses.[13] These situations imply another underlying problem i.e. the lack of knowledge, or perhaps the ignorance, of the importance of computer and the Internet for individual, business and society development. This is very unfortunate because “knowledge is the most important factor of production and its growth is essential to propel a country into self-sustained growth.[14 In the same time as the Internet distributes more knowledge to the few Indonesians with Internet access, the knowledge gap is widening between this group and those without Internet access. It has been argued there appears to be a connection between the digital divide and knowledge gap where “the digital divide determines to a large extent the capacity of producing and using new knowledge.[15] In other words, gaps between “information haves” and “haves nots” are widening as the digital divide widen. 

The costs of securing ICT features or access to ICTs are often unaffordable for most Indonesians who have low average income level. Internet access cost of around 160 – 250 Indonesian Rupiah per minute is considered high and thus use of Internet is often seen as a luxury. In business sector, most medium and small scale businesses can not afford to buy computer not to mention securing Internet access. As such, the concept of “gap” indicates hierarchy between “haves and have-nots or haves and have-less”. This economic condition has great impact on the use of Internet and a major hindrance for e-commerce adoption. In a society with unfavourable economic conditions, e-commerce adoption is not likely to be successful.

Governmental Responses and Initiatives 

Indonesia has no comprehensive strategies for the ICT sector. Indeed some initiatives have been taken to accelerate ICT growth such as liberalisation of telecommunication sector since 2001.[16] Before 1994, PT Telecommunication Indonesia (Telkom) and PT Indonesian Satelite Corporation (Indosat) were the only two players in Indonesia’s telecommunication sector. Today, there are several telecommunication services providers, some with region specific coverage while others with whole nation coverage. Even so, the market is still in great need for new and further ICT investments that will promote competition and benefits consumers. 

In December 2003, the Indonesian Ministry of Communications established the Indonesian Telecommunications Regulatory Body (BRTI) to become country’s telecommunications sector watchdog independent from the government. BRTI has since assumed the responsibilities of the Minister of Communication including the functions of regulating, monitoring and controlling. While this initiative was welcomed, its structure has been the subject of criticism.[17] BRTI is composed and assigned by the Ministry of Communication through a selection process carried out within the Department of Communication. Any decision made by BRTI shall be enacted in form of the Decree of the General Directorate for Post and Telecommunication which is structurally within the Department of Communication. Consequently, BRTI may not be free from any influence of power or interests of the government. 

Government responses in the initial phase of the introduction of the Internet were discouraging for international investors.[18] In 1998, the government banned foreign investors to participate in the Indonesian Internet industry but then revoked such policy just two weeks after its issuance in response to strong protest from the industry. Similarly in early 2001, the government imposed 20% luxury tax on computers and its components but changed its mind again within months after its implementation. Although the government has since been careful in their responses, such inconsistency sent waves of insecurity to the foreign investors and perhaps may have discouraged new or further investments. In addition, many of the government policies encouraging ICT developments are in form of guidelines and thus often lack concrete steps to be taken. This may invite inconsistency in the implementation as well as risk of different or unfair treatments on similar cases.

Strategies for Closing the Digital Divide and Promoting E-commerce

Integrated approach and the importance of education 

Government has an important role in creating favourable and enabling conditions for investment and competition. Although Indonesian government so far has been quite active in efforts to attract investors to build ICTs infrastructure in Indonesia but the building of infrastructure alone is only part of the job done. As once said by Dr. Michael A. Calvano, Head of the ITU Regional Office for Asia and Pacific: “infrastructure can only be effectively leveraged by strengthening the human resource and institutional and cultural capacities of organizations that provide and regulate the network and the services.[19] It is not enough to just have infrastructure available, what really matter is how the infrastruction(technology) is used. 

Closing the digital divide and promoting e-commerce require more than telecom sector specific approach. Other sectors influencing ICT growth must also be taken into account such as economy, trade, industry, legal, socio-cultural and education. In fact they need to be integrated and mainstreamed into national ICT growth strategies. Judging from the situations of Indonesia’s digital divide and e-commerce today, it is an open question if there is ever truly integrated cross sectoral approach in the nation’s ICT growth strategy. For example government strategy to stimulate market dynamic by encouraging competition is not accompanied with strategies for human capacity buildings. Lack of funding has been a recurring problem in Indonesian ICT drives. Past experiences showed that no specific fund was allocated in the national budget plan for IT education as well as for public campaign and education to promote awareness of the importance of ICT. Most schools, with very few exceptions, are without connection to the Internet. Without proper knowledge, it will be difficult if not impossible to make use of technology or the opportunities it provides. 

Like fixed telephone line, the Internet should be part of universal service provided to all inhabitants of Indonesia. Everyone has the right to participate in the new (digital) economy. Access to the Internet has been confined to those who can afford computer equipment while effective use of the Internet has been restricted by illiteracy in technology. It is the government responsibility to remove such barriers. This could be done by gradually connecting schools to the Internet. In the absence of government fund and considering the huge number of schools in Indonesia, the government must find a way to involve private sector in such project. For businesses, educating more people to become computer/Internet literate opens more doors of opportunities. These people are potential customers and business partners. The more people use the Internet, the bigger is the e-commerce market and the higher chance these people will visit e-commerce sites. 

The failure to coordinate efforts in promoting ICT growth has compelled the government to establish The National Information and Communication Technology Council (DeTIKNas) at the end of 2006 with Presidential Decree No. 26/2006. The Council’s main task is to “give recommendation” to the government to accelerate ICTs penetration in Indonesia. It is chaired by the President himself and has at least 10 ministers amongst its member in addition to some known personalities from private sectors.[20] It also has several team partners including stakeholders in ICT industry. Given its broad composition, it is expected this Council will be able to coordinate efforts between the different ministries and cross sectoral. Nevertheless, it remains to be seen if this Council will prove to be more effective than the previous Tim Koordinasi Telematika Indonesia (TKTI) once established under the administration of President Abdurrachman Wahid with more or less similar ministerial member composition.

Legal framework 

Legal framework needs to be addressed with caution. Laws and regulations are purported to guide society at certain given times. Nevertheless, regulating legal aspects of technology is like trying to take aim at a perpetually moving target. Technology continues to develop ahead of the law. Rigid regulation in one particular time may no longer be relevant within a short period of time. When to regulate and to what extent are therefore very crucial questions in the law making due process. Inconsistent or incomprehensive regulations create uncertainty which in turn leads to insecurity. Not regulating at all also has its own risk: dominant player rules and sets rule of the game. Effective regulation can help create favourable investment climate and competition while ensuring the interests of society at the same time. 

To be effective, regulation must also be responsive to the change in society. As the trend of converging ICT sector (telecommunication, Internet (and computing) and broadcasting) becomes more common, regulatory mechanism should also be able to follow this development. Many western countries now have a consolidated regulator with extended mandate to regulate telecommunication services (including Internet) and broadcasting. In the United Kingdom, its national regulatory agency called OFCOM is in fact a result of merger of five independent regulatory bodies. Such scheme does not only offer effective and efficient work processes but also allows for coordinated responses to market conditions. In the end, this will serve both legality and non discrimination principles. 

Legal framework for e-commerce in Indonesia are scattered within different legislations such as law protecting trademarks and administering domain names, telecommunication laws, anti monopoly and unfair trade practices laws, consumer protection law and so on. There is no specific law concerning e-commerce. In dealing with legal issues of e-commerce transactions, lawyers do their best to interpret existing law and regulations. In the field of electronic contracting, they rely on the Indonesian Civil Code inherited from Dutch colonial time. Heavy reliance on the interpretation of old laws invites not only inconsistency and uncertainty but also risk oversimplification of the problems to fit the existing regulation despite the fact that many legal issues of e-commerce transaction have not been properly addressed. The time is mature for Indonesia to have its own e-commerce laws. Ideally, such laws will address legal issues involve in:

-         electronic contracting (formation, negotiation, validity and enforcement),

-         electronic signature (legal effects and evidence weight),

-         electronic money and electronic payment system,

-         privacy and data protection including spam,

-         online intermediaries,

-         choice of law and jurisdiction,

-         self-regulation (trustmark, codes of conduct, labelisation or filtering) and alternative dispute resolution. 

To some extent, some of the above listed issues have been covered by the draft Law on Information and Electronic Transactions which currently are being socialized to the public. Many provisions in this draft law bear close resemblance (if not copy) of the laws of the European Union. Adopting laws invented for and based on the western societal conditions should be done with extra care. Further clarifications are imperative on many of the draft law’s articles, a discussion of which will not be addressed here. 

Consumer confidence in e-commerce must also be fostered. Consumer is often the weaker party in e-commerce transaction and thus needs to be protected in all stages of e-commerce transaction ranging from pre-contractual, contracting, payment, delivery and post contractual phases. Integrating clear guidelines on fair business contract terms and fair online business practices in the e-commerce legislation is one of the ways to do so. Secure online transaction also promotes consumer confidence. In fact, successful e-commerce adoption often depends on secure transmission of sensitive data such as credit card details, banking account numbers, fund statement or other financial data commonly exchanged during payment process. This information is of great value to its owner and its misuse on the Internet can discourage its owner from making any purchase online. It is therefore important to issue law and regulation ensuring information confidentiality and security in e-commerce transactions. For example a person unlawfully putting confidential information on the Internet should be liable in damages to the owner of the confidential information. Alternatively, the government can set minimum security requirements for e-commerce sites accepting electronic payment as well as stipulate clear rules concerning liabilities. Fraud, spam, viruses, web squatting, theft or manipulation of information should be made offences punishable by law with clear definition and enforcement mechanism.

Corporate Social Responsibility (CSR) 

Closing the digital divide is not the task of government alone. All stakeholders including businesses, non-governmental organisations and communities must also participate in bridging the gap. Digital divide is inherent digital opportunities for business. Businesses have thus digital CSR towards society. While pursuing economic benefits, businesses have moral (and sometimes legal) obligations to consider society interests by taking responsibility of the impact of their activities on the society. This means that business values and behaviour need to be adjusted to balance the business economic imperatives with the noble intention to empower society. The fulfillment of USO in the telecom sector could be used as an example. Many remote areas are still without access to fixed telephone line despite the fact Indonesian government has imposed USO to some telecom operators. Although building and connecting infrastructure in remote areas are probably not the most favorable economic decisions, telecom operators in conforming to their digital CSR must be willing to manage their business process in the direction that will produce an overall positive impact on society whilst balancing the interests of diverse stakeholders. 

Promoting use of Internet should also be part of CSR. Businesses should take part not only in building technological infrastructure but also promoting effective use of technology. Even though big numbers of Indonesians already access the Internet from public locations such as warnets, the potential of expanding public Internet connection is still immense. Building and spreading warnets in Indonesia which so far have happened with little government supports (there are very few government policies supporting public Internet access)[21] are still current business opportunities due to Indonesia’s big geographical coverage.  For businesses already involve in e-commerce, the digital CSR can be reflected in efforts to make e-commerce sites user friendly and technologically secured. Making relevant information available in the sites and accessible to all customers (for example stages to conclude e-commerce transaction), not only will foster customer confidence in the process but also show business consideration of the interest of society. 

Innovations in businesses and technology should also be directed towards society empowerment. Businesses can generate profits while at the same time provide customers with new opportunities, new perspectives, new freedom or even new skills. As an example: many e-commerce sites nowadays have its user to generate content and conduct businesses between themselves such as auction sites (ebay.com, amazon.com, finn.no, etc), game sites (Second Life), informational location tool sites (google, yahoo, etc) and so forth.

Concluding Remarks

Indonesia is divided digitally and struggling to close the gap. Lack of integrated and cross sectoral national strategy to improve ICT growth has proven to be fatal. Indonesia finds herself falling behind many of her neighbouring countries when it comes to e-readiness. Proactive and effective cross sectoral efforts (not only coordination or giving recommendation) and regulations are called for. While it is important to set goals (as Indonesian government has been very good at), it is also important to set measurement criteria to identify whether the goals have been reached or not. Setting ICT growth as priority should also be reflected in funding commitment. No matter how good a national ICT strategic plan is, it can not be implemented without financial supports. In Indonesia at this moment, this funding is urgently needed for IT education purposes to ensure that the focus of Indonesian ICT strategy is not only building the infrastructure but also human capacity building.

Business should also take its share of responsibilities in closing the digital divide and cooperate with other relevant stakeholders and government to establish better and more extensive infrastructure as well as bridging the benefits of ICTs to all.