Indonesia’s digital economy: Digital trade and cross-border data flows in a post-COVID world

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As the digital economy grows in support of life in lockdown, how should policymakers in Indonesia think about international data flows and governance?

By Dora Heng

According to the latest World Bank Global Economic Prospects, Indonesia is facing 0% GDP growth this year—a 5.1% drop from January forecasts. This would be Indonesia’s poorest economic performance since the 1998 Asian Financial crisis, as the country sees muted economic activity from partial lockdown measures and supply chain shocks impact Indonesia’s commodity exports.

But amidst the economy slowdown, e-commerce firms remain bright spots in the digital economy as consumers practice social distancing at home. Indonesia’s digital economy has been valued at US$40 billion, according to the e-Conomy SEA 2019 report by Google, Temasek and Bain & Company—making it the largest e-commerce market in Asia.

As reported by We Are Social, there were 175.4 million internet users in Indonesia in January 2020, representing 64% of the population and a 17% increase from 2019. As for e-commerce penetration, 168.3 million users purchased consumer goods online in 2019.

Digital trade, e-Commerce and implications for cross-border data flows

Cross-border data flows—the movement and transfer of information between servers across country borders—are integral in facilitating trade in the digital economy. Data is multifaceted and can range from information streams between the manufacturers in charge of global supply chains, to financial data and transactions for online purchases. These data flows allow e-commerce vendors to keep track of customers’ orders and product supplies both domestically and abroad. With data as the fuel, emerging technologies such as artificial intelligence (AI), machine learning analytics and cloud computing can further build upon online marketplaces and shape the evolution of new business models.

Free flow of data across borders reduces friction and constraints due to distance, while increasing the efficiency of the economy. As the COVID-19 crisis has illuminated, cross-border flows of certain types of health data are vital for global collaboration on epidemiology and scientific research. This information allowed public health officials to model the spread of COVID-19 and coordinate global supply chains of personal protective equipment (PPE) to fight the coronavirus. In a global pandemic that has closed borders, free flow of data between countries has let markets remain connected and maintained trade.

Indonesia’s policy stance on e-Commerce and data flows

While the free flow of data is an invaluable lubricant behind the digital economy, policymakers are also cognizant of the security risks involved, such as privacy infringement and foreign interference.

The Indonesian government has taken a strong stance on data restrictions and placed emphasis on data localization legislation. The government introduced a national e-commerce policy framework in late 2019: Government Regulation No. 80 (GR 80) of 2019 on Commerce through Electronic Systems.

Under GR 80, local and foreign e-commerce operators must prioritize the use of an Indonesian domain name, use server equipment housed in a data center, register with the Ministry of Communication and Informatics and submit periodic data or information to the statistics bureau.

This policy stance on data localization in Indonesia is one that is highly contested. On one hand, there are domestic pressures in favor of localization from data center groups like the Indonesian Cloud Computing Association (ACCI) and the Association of Indonesian Internet Service Providers (APJII).

Primary arguments for data localization center on the logic of national sovereignty, security interests and protecting local industries. According to market research, the Indonesia data center market is expected to reach US$2.6 billion by 2025 with a Compound Annual Growth Rate (CAGR) of 11%.  On the other hand, global tech giants are lobbying for the loosening of data localization policies, saying burdensome requirements are barriers to trade and hinder economic growth.

The way ahead: the role of ASEAN regional governance in cross-border data flows

Policies and regulations on cross border data flows are inextricably tied to the broader context of regional and international geo-politics. Among the ASEAN countries, different countries have diverging viewpoints on data restrictions on cross-border data flows. Along with Indonesia, countries like Malaysia, Vietnam and Brunei also require data localization in some cases, while Singapore sits on the other end of the spectrum, favoring open data policies and the free flow of data.

Yet despite the differences, the ASEAN member states share a common interest in capitalizing on the US$240 billion potential of the ASEAN digital economy. As a regional bloc, member states have ratified several frameworks, such as the ASEAN Framework on Digital Data Governance, signed when Singapore was ASEAN chair in 2018, and the ASEAN Digital Integration Framework Action Plan, signed when Thailand was chair in 2019. These commitments reflect the ASEAN member states’ progress towards reducing the barriers to regional integration and trade, especially around improving the quality of information infrastructure.

However, these regional agreements can only be successful when countries take into account their diverse perspectives on data localization while advancing the dialogue towards the harmonization of regulations. In the case of Indonesia, the government needs to thread the fine line of protecting domestic interest and national sovereignty while participating in a policy regime that simplifies cross-border data transfer in order to fully reap the benefits of the digital economy.

About the Author

Dora Heng
Dora hails from Singapore but has lived and worked across Asia, North America and Africa. She is interested in how digital economies can support growth across Southeast Asia. She is currently pursuing her masters degree at Harvard Kennedy School of Government.