The digital economy can accelerate Indonesia’s journey to a prosperous future but technological transformation without sufficient planning and proper policies risks creating regional disparities and deeper poverty.
An expanded digital economy could add up to $2.8 trillion to the Indonesian economy by 2040, spurring economic expansion by an additional 11% over the next two decades, according to the recent study Innovate Indonesia.
But this projected prosperity would not be felt evenly across the vast Indonesian archipelago.
The island of Java is expected to reap the most benefits, further entrenching its position as the country’s main economic center. According to the study, the region could see growth rates of up to 6.65% from 2030-2040 with the adoption of new technology, up from the baseline scenario of 5.88%.
On the other hand, the regions of Papua and Maluku — already the most disadvantaged areas in the country — would fall further behind. They are projected to only see economic gains of up to 3.8% during the same decade, even with the adoption of new technology, up from 3.56% in the baseline scenario.
To help ensure that technological transformation does not exacerbate these disparities, Indonesia needs targeted policies to prepare disadvantaged regions for digitisation.
An expanded digital economy could add up to $2.8 trillion to the Indonesian economy by 2040.
These five policy actions should be considered:
First, inadequate telecommunication and internet infrastructure poses a critical constraint to investments in new technologies. Strategies aimed at addressing lower internet coverage and connection speeds in provinces outside Java are crucially needed.
Second, access to information is one of the main barriers to innovation and technology adoption by firms in the automotive, electronics, food and beverage, textile and clothing and footwear industries. Thus, regions that rely heavily on these industries could implement programs to improve companies’ understanding of new and emerging technologies and their potential business benefits.
Third, on technology transfer and technical support for firms, it is similarly important to consider that Indonesian manufacturers have varying levels of capacity and readiness to adopt new technologies, not just within sectors but across regions. This means varying levels of support mechanisms are needed to address the challenges faced by firms, depending on whether they are technologically advanced, intermediate or at a basic level.
Fourth, the perceived high cost of new technology and the difficulty of accessing financial support constrain technological adoption. To address this, resources could be pooled to develop or source technological solutions that can meet common requirements of companies operating in certain regions. Singapore’s Tech Depot platform, for example, makes dozens of technology solutions available for SMEs to easily adopt, with funding support.
And fifth, a critical mass of appropriately trained workers will become an increasingly important driver of competitiveness. The policy challenge, therefore, is to understand the evolving requirements of firms in a particular region, and then to design education and training programs that would ensure the supply of local skills to match these needs.
In identifying and designing these policies, local governments have a critical role to play, as they are likely to have an information advantage over the central government when it comes to responding to local needs and preferences.
The challenge is huge, but Indonesia has had a track record of achieving strong economic growth while narrowing the gaps between its regions. Since the launch of decentralisation reforms in 2001, the levels of income per capita, inequality, and poverty across the country’s districts and municipalities have shown a trend toward convergence, according to a 2021 paper co-written by one of this article’s authors.
The paper also shows that lower-income areas will be able to catch up with higher-income ones through targeted policies that address the differences in their natural resources, human resources, institutions and other “endowments”.
With the right policies, Indonesia can ensure that as it rides this wave of technological transformation, no region will be left behind.
As a Resident Mission economist, Aji conducts economic surveillance and research and writes papers and articles, including contributions to the Asian Development Outlook series. He assists in the design and implementation of loans, as well as technical assistance in macroeconomic management, connectivity, technological innovation, and financial inclusion, among other things.
Jiro has nearly 30 years of international development expertise in infrastructure, electronic government, and development evaluation. Since September 2021, he has overseen ADB's Indonesia country strategy and operations as country director. He was director of the SPD's Strategy, Policy, and Business Processes Division and principal evaluation specialist in the Independent Evaluation Department before his current assignment.