Inequality in The Digital Era
President Joko “Jokowi” Widodo has stressed that the government he leads pursues the vision of building a digital economy. One aspect of this is the reform of public services, which will be based on electronic platforms to facilitate and accelerate delivery.
Private firms in the digital economy ecosystem will be encouraged to play a leading role in development. On various occasions, the President has also stated his determination to make Indonesia the country with the largest digital economy in Southeast Asia. An economy based on digital technology is a smart way to simultaneously make progress on two key pillars of the five-pillar development program envisioned by President Jokowi: infrastructure and human resources. The development of infrastructure, including digital infrastructure, will increase the connectivity needed to facilitate trade and accelerate growth. These two things, in turn, will accelerate efforts to overcome poverty and increase public welfare.
Meanwhile, human resource development will facilitate the digital economy through the creation and fostering of new innovators. Breaking up established market structures and disrupting the status quo, these innovators will increase productivity and thus accelerate growth. A rapidly growing economy, in essence, implies creative destruction by innovators. Unfortunately, those who support the vision of a digital economy based on infrastructure and human resource development seems to negate the problem of inequality, which has been highlighted by the United Nations as a major development problem in the 21st century. Inequality will erode economic growth in the short term and even cut a country\'s gross domestic product (GDP) if it continues in the long run. Inequality also reduces the quality of living and threatens social cohesion.
In the first half of his administration, Jokowi has succeeded in reducing inequality, as reflected in the decline of the Gini ratio from 0.408 in March 2015 to 0.382 in March 2019. However, this effort needs to become more sustainable. There is still a high concentration of wealth, according to the World Bank, with the richest 10 percent of Indonesians controlling 77 percent of the country’s wealth. Moreover, the inequality rate is still relatively high even compared to other countries in ASEAN, such as Thailand, Vietnam, Cambodia and Laos.
Concentration of economic rent
Experience in OECD countries that have already carried out the digital revolution shows that the digitalization of the economy contributes to increasing inequality due to the concentration of economic rent generated by high-income groups (Guellec and Paunov, 2017). Here are some of the factors that cause this concentration of economic rent.
First, inequality is exacerbated by the general increase in industrial concentration in the era of the digital economy, leading to increasing economic rent enjoyed by a handful of capital owners and corporate executives. The industrial concentration itself is caused by the emergence of intangible assets and knowledge as the creators of major economic value in digital age business. Likewise, with the accumulation of knowledge, data, software and network usage, the lower the unit costs and greater economic rent is obtained by a handful of digital companies.
Second, the development of the digital economy also gives rise to what is called the economic superstar, where many professions/jobs are displaced by the few winners, who exercise control through digital applications. Whether we realize it or not, this phenomenon is rife in Indonesia, where several types of professions and expertise have been automated and replaced with digital applications, which are constantly updated and improved with various additional features that make it easier for users to lead to redirection. As more professions are displaced and only a few digital-based companies benefit, income distribution and inequality will worsen.
This inequality adds to the complexity of inequality previously caused by the loss of work in part of the community and inequality due to disproportionate compensation within companies.
Third, another dimension of the superstar economy is increasing inter-company inequality, which then impacts inequality among the people who work for them. Superstar company workers can usually get much higher compensation at all levels than similar companies. This inequality adds to the complexity of inequality previously caused by the loss of work in part of the community and inequality due to disproportionate compensation within companies.
Fourth, the macro condition that causes this deepening inequality is exacerbated by micro conditions in the form of asymmetric work relations created in the digital economy era. This asymmetric relationship is designed through an algorithm in a digital application that allows investors and corporate executives to control and manipulate employee behavior. This algorithm is also often changed according to development to benefit the companies, which causes the creation of exploitative employment relationships and is detrimental to workers. The end result is increasingly concentrated mastery of rent and unequal distribution of income.
The last point is worth elaborating by looking at the example of mobile app-based transportation services. Both outside and inside the country, this industry is dominated by a handful of companies, which have many workers whose behavior is controlled through the applications. An American study on Uber, the largest player in the industry in the world, shows how the company controls the communication and behavior of its workers through the application. The app is designed to establish power relations to workers and make internal communication asymmetric for the company’s profit (Rosenblat and Stark, 2016).
Related to this, observations I made on two app-based transportation companies in Indonesia show that there are actually two types of workers in this business: those looking for a side job and those signing up to avoid unemployment. Most workers in the industry fall in the second category. They usually are somewhat forced to join the workforce.
My initial study with several students shows that there is a significant increase in income for the first type of workers compared. Conversely, the second type of workers actually has a significant decrease in income compared to their previous condition. Thus, the initial conclusion: There is no significant increase in income for people working as partners in these companies. Work protection for them is also minimal, which is often justified by companies because they are merely "partners" instead of workers, which is ironic when compared with the exponential increase in the wealth of owners and financiers of these app-based transportation companies.
Preventive measures
Besides deepening the issue of inequality, the development of the digital technology-based transportation industry also raises new problems in many big cities of Indonesia, by informalizing several urban sectors, which leads to increasing traffic problems in the form of congestion.
From this description it can be concluded that the development of a digital economic vision will open up many opportunities for Indonesia to grow and achieve prosperity more quickly. However, several aspects related to its implementation must also be noted to prevent growing inequality in the country.
The Financial Services Authority’s (OJK) regulatory sandbox model for implementing innovation in the financial industry through P-OJK 13/2018 should be emulated by policymakers in other industries.
In terms of creating competitive and efficient market structures, the government must prepare various regulations to prevent excessive industry concentration in the digital economy era. To do this, frequent and wide-ranging incentives and disincentives are needed that are monitored in a flexible -- but inherent -- way in a variety of industries to enable rapid intervention and corrective action. The Financial Services Authority’s (OJK) regulatory sandbox model for implementing innovation in the financial industry through P-OJK 13/2018 should be emulated by policymakers in other industries.
Likewise, there needs to be a disintermediation of digital applications with algorithms that facilitate exploitative industrial relations. In the app-based transportation industry, for example, this disintermediation must begin with the recognition that workers in this industry are not partners, but workers, who have limitations in the pattern of relations and communication with companies. Thus, they need affirmative action from the government to protect their rights, including the right to work protection and health insurance, training and education that allows them to get increased income and old-age insurance.
Of course, these preventive measures are not easy, because, besides being a part of what is already happening, it also requires coordination and cooperation among state institutions and government agencies. However, I believe with new enthusiasm and determination in the early years of his second term, President Jokowi and his chosen assistants will be able to implement it. Let’s hope so.
M Ikhsan Modjo, Senior Economist of School of Economics and Communication, Binus University