Jakarta Globe | Insight

Making Smart Regulations for a Digital World

We keep talking about the potential of Indonesia’s economy, but are we close to making it a reality?

McKinsey has found that Indonesia could reap $150 billion in annual economic impact by 2025 by maximizing digital economy. Yet, Indonesia is far from where we need to be: weak ICT infrastructure, uneven digital usage, low internet penetration, slow adoption of modern technology, and a regulatory environment that is stuck in the analog world.

All these factors contribute to Indonesia’s dismal ranking at the 2017 Global Innovation Index – we fared below Malaysia, Kazakhstan and Mongolia, cumulatively across indicators of infrastructure, human capital, research and institutions. The last indicator specifically looks at regulatory quality and ease of doing business.

All of Indonesia’s Facebook users, vibrant startups, tech-savvy millennials can’t deny the fact that our regulations are not fit for an increasingly digitized world.

Most of Indonesia’s regulations are isolated. Each economic sector is regulated as a stand-alone segment. Regulations around retail are designed for supermarkets, digital payment requirements are created with banks in mind, shipping procedures for logistics companies, and transport rules for taxi  companies. But what happens when innovation moves quicker than regulations? Companies like Go-Jek provides food delivery, courier service, e-wallet, transport and manicures at once!

This is the digital world now: a convergence of multiple traditional industries into a digital ecosystem that provides customers an end-to- end experience without leaving the ecosystem. Governments cannot make siloed regulations in a digital economy.

Disruption is challenging for regulators, and resistance to innovation is littered throughout history. In 17th century France, the conventional button industry lobbied the government to fine tailors who used new innovative cloth buttons.

The French incumbent dyed cloth industry also called for a total ban on cheaper printed calico cloth. In both cases, businesses that felt threatened by innovation turned to the government to crush the opposition, rather than innovate themselves. France, which had the potential to be a global textile leader at the time, set back their own economic development because of its own protective policies.

The key is striking the right balance between regulation and innovation. Frequently, regulations around innovative sectors are restrictive to “protect consumers,” however, this reason is more often used to protect incumbent local industries. When innovation is unnecessary stifled, it is ultimately consumers who lose.

Take for example Airbnb, which threatens conventional hotels. In Amsterdam, citizens also blamed Airbnb for overcrowding. Instead of an outright ban, Amsterdam’s city government ruled that owners may lease their properties for only 60 days per year, to up to a maximum of four people at a time or face being classified as an “illegal hotel.” Airbnb also agreed to police its own listings. Thanks to the balanced regulation, visitors can enjoy cheaper accommodation, the city gets tourism revenue, and tax-paying citizens are still protected.

Indonesia should learn from these examples and start making smarter regulations that enable the digital economy. Outdated policies, such as government regulation No. 82 of 2012 that forces technology players to place their data in local servers, hurt startups and e-commerce players that want to use cheaper cloud technology.

Restrictive draft policies for over-the-top providers, which mandate local establishments for international companies, can result in increased costs of services that consumers are now enjoying for free, like social media. There needs to be balance between protection and innovation in these regulations to ensure that Indonesian consumers continue benefit from digital economy.

Indonesia is falling behind our friendly rivals. Vietnam has high IT education expenditure, Thailand is experimenting with modern financial technology in regulatory sandboxes, Malaysia partners with Silicon Valley bigwigs for knowledge exchange, and the Philippines has adopted a “cloud-first” policy, where government agencies will have to consider cloud computing solutions as a primary part of their infrastructure planning.

It’s time for Indonesia to stop using digital economy as a buzz word, and start planning for it instead.

Astrid Kusumawardhani is a senior associate at Asia Group Advisors, a public affairs consulting firm.