Jokowi faces challenges in launching his digital economy agenda

By Brittany Betteridge, an intern in the Lowy Institute's East Asia Program.

In February, President Joko Widodo visited Silicon Valley to meet with US technology power players including Google, Facebook, Twitter and the start-up technology investment firm Plug and Play. It was his bid to show that Indonesia is serious about expanding its digital economy and promoting technological entrepreneurship.

Indonesia has an enviable social media presence with the 4th largest Facebook community in the world and the 5th highest number of Twitter users; the challenge lies in how to harness the digital economy for Indonesia's own economic benefit. Jokowi's Administration has taken steps in the right direction by partnering with financial authorities to support small and medium technological enterprises and launching a 4G/LTE telecommunications network.

However, the Administration's proposed new legislation towards foreign e-commerce companies in Indonesia is detrimental to the realisation of a fully liberalised digital economy.

Streaming services like Netflix and Spotify, without a legal presence in Indonesia, have frustrated officials both through their hosted content as well as their capture of advertising revenue streams. As they pay no taxes in Indonesia, Jakarta is unable to gain revenue from the estimated US$800 million value of digital advertising.

Indonesian Minister for Communications and Information Rudiantara has recently proposed a new law requiring foreign companies to have a legal entity in Indonesia or joint-venture partnership with an Indonesian company. The newly proposed law would allow Indonesia to collect tax from these providers. [fold]

However, tech entrepreneurs have criticised the proposal as not having been developed in consultation with digital stakeholders and as causing regulatory confusion. Large tech companies such as Twitter and Facebook, which have had representative offices in Indonesia for several years, could be exposed to higher taxation under the draft, especially if back taxes are pursued, as suggested by Finance Minister Bambang Brodjonegoro in April.

Indonesia needs to revise the current draft to allow it to collect more tax revenue without creating disincentives to new tech investment, or damaging investor sentiments by changing the rules of the game on companies that have already established legal entities in Indonesia.

Jokowi's Administration also plans to create a national payment gateway that facilitates rapid e-commerce payments that Indonesian banks can profit from, as opposed to profit being accrued to foreign banks. The payment gateway would also increase consumer data for e-commerce companies who will be able to track public spending data to better target Indonesian consumers. While the initiative targets an important goal of improving interoperability between different financial institutions and making it easier for Indonesians to make integrated e-commerce transfers, there are questions over how the nationalised system would impact foreign companies.

Under Rudiantara's new business entity regulations, it would be mandatory for national and foreign companies to use the national payment gateway. But established companies, such as Visa and MasterCard, are likely to provide a more efficient and secure service for this goal than a nationalised payment gateway. The enforced usage of this scheme by foreign companies will be another regulatory barrier to pursuing business in Indonesia. This initiative seems at odds with the Jokowi Administration's broader narrative for the liberalisation of the Indonesian economy, and for an Indonesia moving away from a commodities-based economy to one with robust service infrastructure that is attractive to foreign investment.

For Jokowi, supporting innovation in the context of Indonesia's internet censorship regime might also prove a challenge. Indonesia's controversial 2008 Information Law prohibits use of technology that offends religious or community values, and provides for the enforcement at the national level. Foreign start-ups looking to invest in Indonesia can run afoul of these regulations over the content they host or features of their applications.

Recently, Netflix was blocked by state-owned Telkomsel for objectionable content and its failure to have a business permit to operate in Indonesia. Messenger apps such as LINE were also challenged under the legislation in February, with the service forced to remove all emoji stickers depicting LGBT lifestyles. Having to adapt to regional censorship requirements is not unique to Indonesia, but the new business entity regulations will also make it easier for the Indonesian Government to enforce adherence to censorship regulations. Specific content deemed objectionable can be more easily taken down, as opposed to blocking the entire service.

As Jokowi paves the way for a digital revolution, Indonesia still has a ways to go. A strong digital economy needs a technologically skilled workforce to fill these emerging industries. Investments in technology need to be coupled with strong investments in higher education and research/training. Bureaucracy needs to be streamlined to promote business competition in an environment of government-owned infrastructure and to encourage entrepreneurs to build new products and applications.

Large tech firms must negotiate Indonesia's current digital censorship regulations and uncertain business incorporation entity rules, which are barriers to these companies entering and expanding in Indonesia. The time is right for Jokowi to streamline bureaucracy for technological start-ups and increase investment in digital entrepreneurs and higher research/education to ensure young Indonesians are ICT job ready.

Indonesia is moving from 'main internet' (playing internet) to incorporating it as a fundamental to its plans for economic growth.

Photo courtesy if Flickr user Global Panorama.