Government in the Disruption Era
A businessman once complained, "Every time I deal with the government over business licenses or regulations, I become more religious."
I smiled wryly at his words. The businessman sitting in front of me has long been in investment. He did not specify which government – he has investments in many countries – but for some reason, I suddenly thought of Indonesia. He is right: uncertainty is very high when dealing with the bureaucracy. We are frequently forced to throw up our hands and pray that the process will be smooth and fast.
This is not a new story. President Joko “Jokowi” Widodo, during his first speech as the president-elect in Sentul, showed his ire over this. I once wrote in this daily that inconsistent and complicated rules are the main obstacles in this country. This is backed by a study from the National Development Planning Agency (Bappenas). Therefore, Joko Widodo’s speech gave rise to fresh hope.
Regulatory obstacles make for relatively high business costs, including severance. Regulatory inefficiency puts the burden on business. Only large companies can bear this burden; small and medium-sized companies opt to be informal. This is one factor that explains why formal employment is limited.
Role of government
The data shows that even though open unemployment has declined overall, the percentage has increased for unemployed young adults with high school/vocational education and above. The jobs being created are for those with low or informal education. What we need for the future is more than just jobs, but good jobs.
The vital question is, how does the government position itself in this changing world?
Bureaucratic reform and regulatory simplification are key. Ironically, we also realize that rules and protection are needed, especially for those who lose out because of competition. The issue is increasingly important when disruption and innovation are happening so rapidly. The vital question is, how does the government position itself in this changing world?
Several things need attention here. First, products have very short lifespans in this era of disruption. A product expires quickly due to disruption.
How can the government make rules, if the rules made today become irrelevant the following year due to disruption? Besides, making laws and regulations takes a long time. Regulators will always be outrun by business innovations and as a result, regulations frequently become obsolete. We need an agile bureaucracy. However, “agile bureaucracy” is a contradiction in terms.
Bureaucracy is identical with rules, instructions and a clear chain of command. Its goal is good: implement a system of certainty. Flexibility and discretion will only panic and confuse the system. This is a very complicated problem and not unique to Indonesia.
The problem is, if the rules are not detailed, how can they be managed properly? I am not clever enough to answer this.
My suggestion: Maybe it is time to change the mindset and philosophy for making rules. Regulators should no longer regulate in detail, but rather focus on matters of principle. In other words, we change our stance from agreeing on the rules to agreeing in principle. For example, if the government wants to regulate fintech or ride-hailing ojek (motorcycle taxis), just set the standards that the government wants, like security, consumer protection, credit quality and data privacy. With regard to how these are manifest, leave it up to the operators. The problem is, if the rules are not detailed, how can they be managed properly? I am not clever enough to answer this.
Second, if the government focuses on the basic principles, what instruments can be used to guide economic actors (producers and consumers) in line with the government’s target? The incentive-disincentive system is important here. Taxes and excise are not goals, but the tools for the government to achieve its goals. We have a good example of this: the government has asked the private sector to invest in training, research and development as a means of achieving its goal to improve human resources; the incentive is a double tax cut. This is the right step to take, and should be appreciated.
In its effort to increase renewable energy, for example, the government can impose a fuel tax. The excise will reduce fuel consumption and encourage people to move towards renewable energy or electric cars. In other cases, the government has tried to reduce the consumption of liquor, cigarettes and plastics and encourage a switch to better alternatives through excise and taxation.
We are actually talking here about how to influence demand, but we must also think about how to influence the production side: for example, by offering tax deductions for economic activities that are environmentally friendly, promote renewable energy and waste management, have lower external impacts or support health. Incentives can be used, for example, to encourage companies to innovate creative products that can improve the quality of health, which will support preventive measures and reduce the cost of curative care. The funding can be sourced from the collected excise or tax.
Third, Kenneth Rogoff of Harvard University recently wrote an interesting article, “Big tech has too much monopoly power – it\'s right to take it on” (The Guardian, 2 April 2019). He expressed his concern about the monopoly power of large technology companies.
As a result, only those with large market shares survive.
The interesting thing about tech companies is that the process of innovation and disruption requires these companies to continue to invest in order to maintain their return on investment. As a result, only those with large market shares survive.
This poses a complication, because we can no longer use the conventional antimonopoly approach to resolve this issue. Why? Technology companies, especially data-driven companies, must be large-scale. Raghuram Rajan, the former governor of India\'s central bank, wrote that a large amount of data was needed to make a platform more accurate and effective. He mentioned how Waze would be more accurate if it collected more data, and how Google was able to improve its Maps application by buying Waze. Another example he cited was how Facebook increased in value the more users it had.
Under these conditions, the antitrust approach must be different for technology companies, because these companies need to become a monopoly to be more effective. The problem is whether allowing them to become monopolies is dangerous, which was the concern US politician Elizabeth Warren raised. Furthermore, data confidentiality is a highly sensitive and timely issue. How should the government position itself in this situation?
Flexible bureaucracy
Fourth, I believe that disruptive technology will bring a positive impact on the workforce by increasing efficiency and flexibility. It will even create new jobs in the long run. The problem is that transitioning is not easy. As a result, some will be left behind in the short term. For example, the ability to provide information may no longer be important in the future, because Google Search already does this. The companies that will survive are not those that can imitate Google\'s ability to provide information or answers, but those that can develop the questions to which Google does not have the answers.
They will no longer be relevant. Knowledge may expire, but it is curiosity that ensures survival.
I recall when Risto Siilasmaa, the Nokia chairman, spoke at the Astana Economic Forum in May: The disruption happening now will make our academic degrees obsolete in 20 years. They will no longer be relevant. Knowledge may expire, but it is curiosity that ensures survival.
In such an era, all must be able to adapt to change. The government needs to review its role. It may no longer need to be involved at the level of detail (regulation), and instead become a facilitator to arrange matters in terms of principle. The government can also use its fiscal instruments, such as taxes and excise, to encourage the development of a pro-innovation investment climate. And as President Jokowi said in Sentul, all this needs the support of a more flexible bureaucracy that is capable of facing change.
As Leon C. Megginson once said of Charles Darwin, "It is not the strongest or the most intelligent who will survive, but those who can best manage change.” Without this ability, investment will end up with the three W’s: watch, wait, worry.
Muhamad Chatib Basri, Lecturer, Economics and Business School, University of Indonesia