What can Indonesia learn from China’s digital economic transformation?

Chen (24) and his wife, Ding (24), are store owners on Taobao.com, one of China’s largest online shopping platforms. They started a self-designed trendy clothing store called BlueLand on Taobao right after graduating from college in 2016.  Their studio is located in an office building in the Xiaoshan district of Hangzhou. The promotion of their products is occasionally live-streamed by Chinese influencers, especially during special events like the Double 11 (November 11) or Double 12 (December 12) shopping festival. Orders are directed to local manufacturers. This “Customers-To-Manufacturers” (or C2M) model reduces costs from inventory and logistics to sales and distribution, replacing the traditional product-oriented supply-chain system.  With abundant manufacturers and China’s digital logistics platforms, customers could receive their purchased item within ten days on average after they order it online.

Chen and Ding are among the more than eight million Taobao store owners today, half of whom are women.  They are the beneficiaries of – and contributors to – China’s colossal digital economic transformation.  China’s last two decades represent not only one of the world’s most remarkable poverty reduction stories but also an unprecedented digital economic transformation. In 1999, China only had 8.8 million internet users with a per capita income of (current) US$873; today, China has more than one billion internet users with a per capita income of more than (current) US$10,000. 

China leapfrogged in two major areas in the digital economy. First, China adopted e-commerce for society as a whole. In 1999, China represented less than one percent of e-commerce globally. However, today, China’s e-commerce transactions constitute about 52 percent of global e-commerce. China is also the first country in the world that has e-commerce surpassing traditional retail transactions and volumes.  About 52.1 percent of retail in China is done via e-commerce (2021), compared to 15 percent in the US (2021), and 20 percent in Indonesia (2020).

Second, China’s fintech solutions are tailored toward financial inclusion. Two decades ago, nobody thought about a “cashless society.” China skipped the credit-card generation altogether, moving from cash to cashless society. Today, 90 percent of people in the urban areas and 82 percent in the rural areas use digital payment, and this gap is narrowing rapidly. In terms of financing of loans for small and micro enterprises, according to the People’s Bank of China, more than US$74 billion microloans were given out in 2020 using various fintech solutions.

So, what is fundamentally required for a digital economic transformation at China’s scale to be replicable in Indonesia and other middle-income countries? We believe there are three things to consider: 

First, the nuts and bolts of public policies. Even as one of the poorest countries in the world in the 1980s, China’s population was relatively healthy and well-educated. China built 2.6 million miles of roads to reach remote areas, with half of them built in the last 10 years. Now, almost all villages in China have access to fiber-optic or 4G networks. Thanks to a single set of tax codes, business norms, and other regulations across provinces and states, labor, goods, and information move with minimal friction across provincial borders. This is all critical for supporting the e-commerce system. 

During the past few years, China has done a lot in terms of managing risks in the financial sector to secure the stability of the market. One example is providing a framework to protect consumers and ensuring that the market stays competitive.  A business environment that promotes innovation – such as through the creation of sandboxes to allow companies to experiment while balancing risks – is critical to China’s digital transformation.   

Second, close public-private relationship. Entrepreneurs and government bodies each play their roles in contributing to the digital economy. Over the last two decades, the Chinese government’s clear policy direction signaled which industries would be priorities for national development.  Various five-year plans set an overall industry direction or areas the government is investing in with a purpose to spur broad sectors like fintech, smart logistics, or export promotion. In setting this direction, the government makes relevant public resources accessible to all private sector players. At the same time, the private sector understands best the real commercial needs of businesses and ultimately drives their business growth.

As an example of a public-private partnership, in the early years of China’s rural e-commerce development push, logistics only reached the county or township level. While urban e-commerce flourished, government subsidies were given to some of the users of the e-commerce platforms in the most remote areas to make sure that products reach those destinations.  As volume grew, private enterprises started to invest in the last-mile logistics in those locations. E-commerce platforms established local training centers that are not only benefiting their own employees but also providing training to local youth who then became integral community enablers to grow the village e-commerce ecosystem. 

Third, nurturing a sense of optimism and resilience, especially among young entrepreneurs.  In China, myriads of young people are creating sizable businesses from scratch not only in cities but also in rural areas. Beyond China, we also see amazing cases of impact by resourceful entrepreneurs.

In Indonesia, there are many inspiring stories. Shipper tackled Indonesia’s most challenging issue by digitizing the nations’ logistics infrastructure to enable cost-efficiencies at a nationwide scale. SayurBox is a farm-to-table e-commerce platform enabling rural farmers to sell produce directly to retailers and end customers, and it helps them to make planning decisions utilizing digital insights from their platform. Warung Pintar is a technology company providing solutions to help warungs (stalls or small shops) to more effectively monitor their businesses’ progress, thereby enabling the grassroots underserved populations to improve their lives using digital technology.

Being an entrepreneur is not always a rational decision given the high chance of failure and the seen and more-often unseen challenges one must take on, especially in markets that might still be nascent emerging markets with little infrastructure and support. It is a significant commitment to realize one’s vision and mission and requires great dedication. But with the emergence of more local entrepreneurship-focused educational training programs, more emerging role models, and new incentives from the government to take risks and to support digital innovation, the prospects of a new generation of digital pioneers will only improve.

Indonesia has already made big strides toward developing a vibrant digital economy.  The World Bank’s flagship report Beyond Unicorn has started to map out some of the complementary interventions for creating an inclusive growth of the digital economy in Indonesia, such as logistics development,  promoting digital financial services and digital payment solutions, improving digital connectivity, universalizing access, and nurturing digital skills for the 21st century.  This aspect of inclusion of the digital economy, on top of regulatory reforms on consumer (data) protection, workers protection, leveling the playing field with offline vendors, and competition policies, will be critical as Indonesia develops a more inclusive digital economy.               

Further momentum can be created by learning from China’s success as an inspiration and reference for improvements, with appropriate adjustments. Successful digital economy development in China has unique factors to it that might not be readily replicable to other developing countries. But, China’s case epitomizes the potential of digital economy development as a driving force for poverty reduction and rural development, even at a relatively low level of development with imperfect or incomplete initial conditions.