ICTs and Indonesian economy today – Vice or virtue?

An analysis of the role of ICTs in Indonesia’s economy after 1997 economic crisis

An Essay on Economics & Technological Change

Fig. Nusantara-21 IT Project

by
Yanuar Nugroho
PREST, the University of Manchester

© January 2005
PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

ICTs and Economy in Indonesia today – Vice or virtue?

An analysis of the role of ICTs in Indonesia’s economy after 1997 economic crisis

Yanuar Nugroho
PREST, the University of Manchester

Abstract

With regard to the view that to a certain extent information and communication technologies (ICTs) and
economic growth can be independently analysed, the main concern of this paper is the respects in which
economic growth and ICTs are interdependent rather than independent phenomena. In particular, the
argument that interdependence varies in many ways is reached by specifically assessing the role of ICTs in
fostering the economic growth in Indonesia, one of developing countries. The economic implication of
technological change is introduced to understand how ICT as a result of technological change implicates the
work of market and economy. Yet since this view is suffering from technological determinism, some
approaches in the development informatics are proposed. By analysing the dynamics between ICTs and
economic development in Indonesia, the paper sees two distinct, but related, implications. One of which is
that the current economic growth in Indonesia needs to be clearly distinguished from previous historical
periods, particularly before the 1997 economic crisis. Second, the pattern of economic growth is implicated
and heavily conditioned by the particular form of technical change of ICT. The paper looks at the various
mechanisms through which ICTs exert a powerful influence over economic growth and development using
Giddens’ structuration theory, Miles’ structuralism and Bijkers’ social construction of technology, among
others, which influence the discussion and make up the finale.

Keywords: economy, economic growth, development, intermediary, information and communication technology (ICT, ICTs)

***

Words Count : 4,506 (excluding abstract, contents, tables, graphics, figures, footnotes and references)

Cover : Nusantara-21 Project, as in

http://www.isoc.org/isoc/conferences/inet/00/cdproceedings/7c/7c_3.htm

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PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

Contents

1. Introduction

CONTEXT
2. ICTs in Indonesia
3. Indonesian economy: Before and after economic crisis 1997

DISCUSSION
4. Economical implication of technological change in ICTs
5. ICTs and economic growth

6. A Finale: ICTs and Economy in Indonesia after crisis – a breathless move

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PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

“We have for the first time an economy based on a key resource [Information] that is not only
renewable, but self-generating. Running out of it is not a problem, but drowning in it is.”
(John Naisbitt, 1997)

1. Introduction
Just as transport costs tend to reduce the level of trade below what it might otherwise be (Kindleberger, 1969)
so do the costs of communication between buyers and sellers in different area. Today, with the vast progress
of the information and communication technologies (ICTs), particularly Internet, the relationship between
economic actors has changed significantly in terms of time and speed of transaction. What is the assumption?
Whether information technology expands the ratio of trade to output in already traded goods or bring
previously untraded services into trade, in neither case however, is this achieved simply by a fall in
communication costs. For what is also of crucial important is the speed with which data can be
communicated between buyers and sellers via ICTs (James, 1999).

To a certain extent, ICTs and economic globalisation can be independently analysed, given the numerous
respects in which these two important phenomena are unrelated to one another1. The paper is, however,
concerned mainly with the respects in which economic growth and ICTs are interdependent rather than
independent phenomena. The interdependence, as I try to diagrammatise below, is with the overlapping
segment of the sets representing economic growth and ICT –rather than the individual sets themselves. And
within the intersecting area, I will focus on the ICT-mediated economic growth, rather than conventional
economy, in the discussion about Indonesia’s economy in wider context of development.

Economic ICT-mediated
Economic Growth ICT
Growth

Figure 1. Focus of the paper

This paper presents the contexts, i.e. the development of ICT in Indonesia and picture of Indonesian
economy before and after economic crises. Then it evaluates the role of ICTs in economy from the
economical implication of technological change. Having examined the relation between ICTs and economic
growth, the paper offers a finale by looking at ICTs and economy in Indonesia after crisis.

1
The famous text on economic globalisation by Hirst and Thompson (1996), for example, contains nothing on ICT

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PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

2. ICT in Indonesia
What is the relation between ICTs and development? A simple answer: ICT is “a vitamin of growth that enable
country development through close cooperation among government, civil society, business and private sectors.”2 Yet, the simple
answer has many underlying assumptions one of which is the access to ICT as the first context to understand.

In 2001 UNDP suggests that accessible ICTs is of paramount importance to foster ‘people centred’
development. That is why technology achievement index (TAI) has been introduced as an indicator in calculating
human development index (HDI), decomposed into further detailed indicators like fixed-line penetration, cellular
subscribers, Internet users and subscribers, among others (CountryWatch, 2001). In this light, how does
Indonesia perform?

While Gartner Dataquest3 informed that the world computer industry shipped its one billion PCs in 2002 and
another billion more are expected to be built in the next six years starting from 2003, ICT expenditures in
Indonesia reached above US$ 3,540 million in 2002 (WB, 2002)4. Studies also reveal that of 220 million
populations, the internet penetration up to 2003 only reached 8 million users (less than 3%) and was expected
to reach 12 million by the end of 2004 (APJII, 2003; 2004; Purbo, 2002).

When the number of mobile phones worldwide (1.47 billion) outstripped the landline (1.14 billion) for the
first time in 2003 (Economist, 2002), in Indonesia the increase of mobile phone usage over the past seven
years was also dramatic, with statistics rising from one mobile phone per 1,000 people in 1995, to more than
17 mobile phones per 1,000 people in the same year. Meanwhile, the density of fixed line in Indonesia was
31.4 per 1,000 people, which was much lower compared to other developing countries whose density was
around 80.9 phone-lines per 1,000 people (WB, 2002)5.

The last official status of ICT infrastructure in Indonesia discloses that there are currently 9.2 millions
telephone lines (but only 0.35 million public phone with two-third of them are telecommunication kiosks), 23
millions cellular subscribers, 5-8 million PC penetrations, 35 million TV penetrations and the
telecommunication services has reached only 80% of sub districts and only 40% of villages (Bappenas, 2002;
Telkom 2002).

2
Quoted from Mr. Douglas Gardner, UN Resident Coordinator in Ukraine, at the forum took place within the framework of the XI International
exhibition dedicated to the “Information science and communication – 2003”
3
American research firm, as mentioned in its website www.dataquest.com
4
See World Bank (2002), ICT at a glance: Indonesia
5
See www.theworldbank.org,

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PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

Figure 2. ICT in Indonesia

Source: World Bank Report (2002)

The development in ICTs in Indonesia seems to keep changing the way people communicate, interact and
thus, live. But this is only true in areas where people can gain access to it. In fact, access to ICT is unevenly
distributed. For instance, the spread of Internet kiosks –a most economical access point for people—is still
concentrated in big cities like Jakarta, Surabaya, Yogyakarta, Bandung and Semarang (Wahid, 2003).

Figure 3. The diffusion of Internet kiosks in Indonesia.

Source: Wahid (2003), http://www.natnit.net

The uneven distribution of Internet kiosks has similar pattern with the development of ICT companies, as
figured below. In 2001, of 649 companies (53 consultants, 59 internet, 52 programming consultants, 68
software consultants, 27 total solution, 13 multimedia, 88 software, 2 e-commerce, 24 IT, 133 internet-
services, 13 internet data, 25 internet portal, 90 ISP, 2 web design), more than 60% were located in Jakarta
and Bandung, while only few spread outside Jawa island (Purbo, 2002b).

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PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

Figure 4. Distribution of ICT Company (Purbo, 2002b:14)

On one hand, in terms of distribution of access the abovementioned fact indicates Indonesia is facing a
serious problem, on the other hand in terms the adoption of ICT innovation and its technological changes,
Indonesia is actually not far left behind EU or US. This can be seen from the adoption of Code Division
Multiple Access (CDMA), 3G-cellular technology and broadband service –to name a few6. Certainly, the
diffusion of ICT is uneven. As most of countries in the world are being left in a ‘technological apartheid’
(Castells, 1999), the same could be said of many other regions of Indonesia.

The situation may look difficult to resolve but technology per se does not solve social problems. I share
Castells’ (1999) view that the availability and proper use of ICTs is however a pre-requisite for economic and
social development. The crucial role of ICTs in stimulating development is a two-edged sword (Castells,
1999).

“On the one hand, it allows countries to leapfrog stages of economic growth by being able to modernise
their production systems and increase their competitiveness faster than in the past. The most critical
example is that of the Asian Pacific economies, and particularly the cases of Hong Kong, Taiwan,
Singapore, Malaysia and South Korea. This is so despite the current financial crisis, which is unrelated to
competitive performance and may be related, in fact, to the attractiveness of booming Asian economies to
global capital flows. On the other hand, for those economies that are unable to adapt to the new
technological system, their retardation becomes cumulative. Furthermore, the ability to move into the
Information Age depends on the capacity of the whole society to be educated, and to be able to assimilate
and process complex information. This starts with the education system, from the bottom up, from the
primary school to the university. And it relates, as well, to the overall process of cultural development,
including the level of functional literacy, the content of the media, and the diffusion of information within the
population as a whole.” (Castells, 1999:3)

We need, therefore, to look at the next context, i.e. the economy of Indonesia, before we can continue to
scrutiny the role of ICTs and their technological change in fostering economy in the country.

3. Indonesian economy: Before and after 1997 crisis

Some recent studies (Robison & Hadiz, 2004; Leinbach, 2003; Dewitt & Hernandez, 2003a; 2003b; Dick et al,
2002; Rosser, 2001) suggest the analysis of modern economy of Indonesia should be distinguished between
two different historical paths, i.e. before and after economic crisis 1997.

6
See the Indonesian version of the news, www.infokomputer.com/arsip/0898/utama/utama1.shtml (08.98)

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PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

Before being hit by the deadly economic crisis in 1997, despite the ‘centralisation bias’ as consequence of the
national strategy of “trickle-down effect” approach7, Indonesian economy was seen as ‘good and promising’,
developing from an agrarian into an emerging industrialised economy. World Bank in 1997 even nicknamed
Indonesia “an economic miracle” in the Far East, to describe an economically-backward and poor country in
1970’s to a country with a medium-income level of more than US$ 1,200 per capita in early 1990’s with
annual average GDP growth around 7% in 25 years continuously (WB, 1997).

GDP & GDP Growth

According to constant price
3.66

%
440,000 3.44 6.00

430,000 4.00
4.92
2.00
420,000
0.79 0.00
410,000
-2.00
Billion Rp

400,000 -4.00

390,000 -6.00

-8.00
380,000
-10.00
370,000
-12.00
-13.13
360,000 -14.00

350,000 -16.00
1998 1999 2000 2001 2002

GDP GDP Growth

Figure 5. Economic Growth

Source: CFPS (2003) based on Bank Indonesia’s monthly report

But the severe crisis8 has made Indonesian economy suffered from no less than 13.1% GDP contraction and
an almost hyper-inflation rate of 77% in 1998. Unemployment rate soared to 80 million people and more
than 150 million people lived below US$2 per day/person. Crisis has made economic growth to experience a
significant slow down. During 1998 – 2002, the average economic growth rate was minus 0.3%. Under IMF
supervision, growth is estimated to be between 3%-4% in the next 3-5 years at current levels of productivity,

7
In economics, the “trickle-down effect” is central to post-Keynesian versions of conservative economic theory (Wikipedia Encyclopaedia). It is
promoted by hard-right institutions like The Wall Street Journal or The American Enterprise Institute, and does not centre on the proposition
that benefits given to the upper classes will “trickle down” to those below them on the social hierarchy due to the compassion or kindness of
the rich. Rather, this will occur mostly as a result of the normal workings of unfettered markets. However, most-accepted definition addresses it
as an economic theory that the support of businesses that allows higher-income group to flourish will eventually benefit middle- and lower-
income people, in the form of increased economic activity and reduced unemployment. It is also known as simply the economics of President
Ronald Reagan, or “Reaganomics.” See Wikipedia (http://en.wikipedia.org/wiki/Trickle_down_effect)
8
It was when Thailand announced the devaluation of its currency, Baht in July 1997, a move that caused the value of Indonesia’s currency –
Rupiah – to drop as much as 80% at one point. Foreign investors fled and many companies, adversely affected by the currency devaluation,
went bankrupt. Like other Asian countries, Indonesia’s banks were hit especially hard; by January 1998, 16 banks had their operations
suspended. As the country negotiated with the IMF over the terms of its USD 43 billion bailout package in early 1998, riots began to erupt over
rising food prices, gradually intensifying despite violent police efforts to put them down.

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PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

investment and government accountability9. Yet, that such a modest economic growth rate is too low to
absorb new labour force as well as the high number of unemployment (BWI, 2004)10.

Number & Growth of Employment Absorption,

Growth of Unemployment

10 93,000,000
9.1

91,600,000
9 92,000,000
8.10
Growth of Employment Absorption &

8 91,000,000

90,807,417
90,000,000

Total workforce
7 6.36
Unemployment Rate (%)

6.08
89,000,000

88,816,859

89,837,730
6 5.46
4.68 88,000,000

87,672,449
5
87,000,000
4
2.65

86,000,000
85,405,529

3
85,000,000
1.42

1.31

1.18
1.15
2

0.87
84,000,000
1 83,000,000
0 82,000,000
1997 1998 1999 2000*) 2001 2002

Growth of Employment Absorption

Growth of Unemployment
Total Workforce

Figure 6. Number & Growth of Employment Absorption & Growth of Unemployment

Source: CFPS (2003) based on Bank Indonesia’s monthly report

Sectoral data (Fig.7 below) shows that the most severe sectors affected by crisis are financial, rental and
corporate services. Since 2000, these sectors have been recovering in which growth rate is above 4%. In 2001,
the recovery tended to slowdown and by the end of 2002 it approximately reached 5.8%. Trade, restaurant
and hotel sector, which was on 2000 experienced growth that reached almost 6%, was drastically decreased in
2001 reaching 0% due to the issue of terrorist attack (CFPS, 2003).

9
Interim Consultative Group on Indonesia, Economic and social update, 2 June 2003 (see www.worldbank.or.id). The second quarter growth
rate in 2003 was 3.76%. Meanwhile, the economic growth rate in year 2002 was 3.6%– see data from Indonesian Financial Statistics, Bank
Indonesia (www.bi.go.id)
10
The high population requires extensive employment and to provide a high growth rate of employment, a high economic growth is needed.
However, the financial and political crisis has made it hard to be achieved. The increasing trend of unemployment rate is a serious problem
since it induces other increasing social problem, such as criminality. Criminality is a terrifying phenomenon in Indonesia, not to mention the
problem of fundamentalism which one of its root is poverty problem related to the lack of employment opportunity. Conflict and violence across
the archipelago has harmed, traumatised and displaced children and women on a massive scale. The vast majority of Internally Displaced
Persons (IDPs) are women and children and is estimated to be some 1.4 million. See UNICEF’s website for more information
(http://www.unicef.org/infobycountry/indonesia.html)

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PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

Sectoral Econom ic Grow th

Farming, Cattle-
breeding, Forestry
10.00 Trade, hotel and
restaurant
8.00
Processing industries
6.00
Electricity, gas and
4.00 clean w ater
Buildings/Properties
2.00

0.00 Minings and Exploration

1999 2000 2001 2002
-2.00 Transportation and
Communication
-4.00
Finance, Rental and
-6.00 Corporate Services
Services
-8.00
GNP

Figure 7. Sectoral Economic Growth

Source: CFPS (2003) based on Bank Indonesia’s monthly report

In general, Indonesia’s sectoral economics started to experience a recovery and stabilisation in 2000, when
almost every economic sector had a positive growth trend. Some sectors were not affected by crisis, e.g.
electricity, water and gas sector since they are related to common basic needs.

From the above figure, from economic activities supporting growth, it seems that processing industry sector
becomes leading sector with above 25% portion, followed by forestry and agricultural sector; trading, hotel
and restaurant sector. Up to 2002, sector which grow above the average growth rate (above the GNP growth)
are ‘financial, rental and services’ sector, which experiences a keen increase due to banking restructuring.
Other sector is ‘electricity, water and gasses’ sector, whose growth can be made as a leading indicator to the
increasing of people informal activity. Transportation and communication sector shows an above average
growth rate too due to the recovery of air transportation sector and the boisterous investment in
telecommunications sector11.

The question with regard to this study is whether or not and to what extent ICTs play role in Indonesian
economic recovery. The formal answer is that “as a commitment of the Indonesian government policy in the ICT area,
President Instruction No. 6, 2001 on the development and use of ICTs was issued as a way to Indonesian economic recovery”
(Gunawan, 2002). But surely, such an official answer is far from adequate.

11
The hardcopy submission, since printed in the black-white laser printer, may not present the graphic properly. The electronic version should
however do.

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PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

4. Economical implication of technological change in ICTs

Firstly, let us have a closer look using the concept of ‘non-adoption and product substitutability’ to examine
the economical implication of technological change in ICTs by concept.

To address this issue, we need to recognise that within broad product groupings, some goods have
characteristics that make them close substitutes for one another, while other goods have characteristics in
proportions that make them entirely non-competitive. In between, there are intermediate degrees of
substitutability. The impact of technological change that affects one product within a particular group will
have a varying impact according to how substitutable they are for one another (Cameron, 2004). Figure 8
below shows goods A, B and C which contain three characteristics in varying proportions.

Figure 8. Non-adoption and product substitutability (James, 1998)

Let us assume that initially the efficiency frontier is OPQ (this means that given the price of three goods and
the level of income, some point on the frontier OPQ will be chosen by the efficient consumer, assuming that
the goods can be purchased in relevant combinations) and which particular point on OPQ will be chosen
depends solely on consumer preferences. For example, where these are represented by indifference curve IC2,
the optimal combination will be somewhere between O and P. But where it is represented by IC2, consumer
will be in equilibrium purchasing only good C.

Technological change in ICT is now introduced by assuming that it influences the characteristic of good
whose marketing is altered by, say, the adoption of web-based or email promotion. It is assumed that as a
result of the technical change embodied in the marketing, good A comes to posses more of both
characteristics than before so that the efficiency frontier shifts from OPQ to, say, O1PQ. This change alters
the comparative advantage of (the producer of) product A. The effect on the competitive standing of goods B
and C is very different for while A and B substitute quite closely, A and C do not. Further, in the market
segment where A and B competitors, B is the loser relative to A because in the new equilibrium consumer
chooses point O1.

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PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

Above explanation is particularly true in the Lancastrian view where products are seen as embodied
characteristics (Lancaster, 1966). To my mind, there is however an empirical question, i.e. is the extent to
which the trade (economic transaction) from developing countries (in this case, say, Indonesia) adopting ICT
technological change are better represented as substitutes for, or non-competitors with, good A? There is
extreme case where the poorest of the non-adopting countries suffer most from the problem of product
substitutability (B in the figure).

James (1999) shares this view when he summarises the mechanism of influence of ICTs in economy,
particularly trade and foreign investment in table below. This summary, however, cannot be taken to
represent the total extent of the influence exerted by ICTs. What this summary ignores are the crucial and
numerous interactions between the individual mechanisms – interactions which are of a highly cumulative
nature. Ignoring these might effect understating the inegalitarian influence of ICTs on the pattern of global
integration among developing countries (James, 1999).

Developing countries Developing countries

Form of ICTs
Communication technologies (e.g.
mobile phones, fax machines, e-
mail)
Telecommunications
Industrial technologies (e.g. CAD,
CNCMTs)
Electronics (e.g. diodes,
peripherals, computers)
Communication technology
(telecommunications and
computers)
Communication technology
(telecommunications and
computers)
Organisational technology
combined with IT (e.g. JIT)
Information technology in general
Table 1. Trade and foreign-investment-induced mechanisms of technological influence on globalisation.
Mechanism of influence
Promotes trade by reducing
information imperfections
Technological leapfrogging via
digital switching promotes spread
of telecommunication infrastructure
Adoption enhances competitive
advantage of adopting firms and
countries at expense of non-
adopters
Exports of electronics to world
markets
IT promotes global dispersion of
services by multinationals
IT promotes global dispersion of
R&D by multinationals
Promotes concentration of
investment by multinationals near
major markets
International strategic alliances in
information technology promote
globalisation
Source: James (1999: pp.84-85), based on James (1998)
most likely to benefit
Countries with extensive telephone
networks (for fax, e-mail) or
relatively high PCI (for mobile
phones)
Countries with high rates of
investment, skills and
multinationals located in urban
areas (e.g. Asian NICs)
Countries with local or foreign
firms competing in ‘high income’
markets (e.g. more industrialised
LDCs)
Local or foreign firms with
advanced production capabilities
(e.g. Asian NICs)
Countries with an abundance of
low-cost skilled labour (e.g.
Caribbean region for data
processing)
Countries with advanced base of
science or technology (e.g. NICs,
China, Mexico)
Countries with large markets or
near major markets that are able to
participate in post-fordist
production systems (e.g. NICs,
Mexico)
Countries with innovation
capabilities in information
technology or advanced research
capabilities in those technologies
(e.g. NICs, India, Brazil)
least likely to benefit
Countries lacking adequate
telephone networks and with
relatively low PCI
Countries with low rates of
investment, inadequate skills and
small-scale firms in rural areas.
Countries with local or foreign
firms competing in price-sensitive
markets
Local or foreign firms lacking
advanced production capabilities
Countries lacking skilled labour or
with relatively high labour costs
Countries lacking either an
advanced science or technology
base
Countries far from major markets,
with small markets of their own
Countries lacking innovation
capabilities or advanced research
capabilities in information
technology

However, to my mind, the above economical quest may suffer from ‘structure bias’, particularly when we do
not take into account properly the interaction between the users of ICT as agency and economy, involving
ICTs as ‘modality’ in the structuration dynamics (Giddens, 1984). To remedy, we need to shift our view to
some paradigms in ICTs and economic growth.

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PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

5. ICTs and economic growth

In the context of economic development, ICTs have been generally accepted as a potentially powerful tool so
that countries which succeed in harnessing the potential of ICTs can look forward to greatly accelerating
economic growth (WSIS, 2003)12. How far is this claim true?

The features of ICTs are designed mainly in and for developed rather than developing countries. What is
theoretically important in this regard, to my mind, is the notion of a ‘technological system’, into which
features of technologies are designed to fit (James, 1999). More specifically,

“… any single technical innovation has to fit in with the rest of the system both in terms of requirements it
imposes for inputs, and in terms of the demand for the good. … A new technique must use inputs that are
available, and must provide output which will fit into further production if it is an intermediate good, or into
consumption patterns if it is a consumer good. While these requirements leave some leeway for variations,
they also impose restrictions. There are technological linkages between different parts of the system which
mean that much of technology comes as a package, which cannot be separated and introduced bit-by-bit,
but which goes together. The requirements of a technique extend beyond the material inputs directly
involved in the productive process to managerial inputs and infrastructural services. Thus the efficient use
of a particular technique may only be consistent with sophisticated managerial methods … Technical
requirements extend to methods of administration in the system as a whole; the type of law and order
required for successful operation, the tax system, etc.” (Stewart, 1977: 6-7 as in James, 1999)

Applied in ICTs for development, the notion suggests that the major beneficiaries among developing
countries would tend to be those with technological systems that are most closely near to the relevant
characteristics of developed countries (e.g. in terms of technological capabilities, economic gains, education).
Extending this logic, the expectation is for the gains from ICTs to accrue mainly to economic agents that
form part of the modern technological system – as distinct from the agents who belong to the ‘traditional
system’ typically characterised by pre-capitalist modes of production (i.e. non-wage labour and small-scale
labour-intensive technologies). Then, ICTs will generally tend to exacerbate, rather than ameliorate, the
degree of technological dualism (Khan, 1988; Thorbecke, 1989) within developing countries, i.e. to widen the
gap between the ‘modern’ and ‘traditional’ technological systems13.

In Indonesian context (and maybe also true in other developing countries), the ‘digital divide’ within the
country, reflected by serious uneven distribution of ICT access (as explained in point 2) seems to be the direct
implication of the gap between the two technological systems as claimed above. However, the process is not
one way. In the areas where access to ICT infrastructure is relatively high, one would easily find that the areas
may have been economically developed and therefore are able to provide necessary requirements for the
technological system of ICTs and further innovation which in turn would foster the economy – the ‘virtuous
circle’. Alas, the areas, where access to ICTs is relatively low, are usually economically less developed regions
which have no adequate resource to use the technology properly to boost the economy – the ‘vicious circle’.

12
See Report Of The Geneva Phase Of The World Summit On The Information Society Geneva-Palexpo, 10-12 December 2003, Chapter 1,
par. 2 (p. 2), available for download at http://www.itu.int/wsis/documents/doc_multi-en-1191|0.asp
13
Khan (1983) first raised the issue of linking technological dualism to poverty theoretically. Khan (1988) and Thorbecke (1989) were further
applications of technological dualism to Indonesia.

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PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

However, to my mind the claim about technological system remains debatable particularly when the notion of
‘social construction of technological system’ (Bijker, et al, 1993) is taken into account. Otherwise, we will be
entrapped in the ‘technological determinism’. A moderate approach may be looking at the role of ICTs as the
intermediary in the economic growth. There are at least two views.

Dicken (1992) sees particularly from the perspective of technological innovation:

“It is claimed that technological innovations especially in information technology, have made it possible …
for some kinds of service transactions to be conducted with a geographical separation between the
producer and consumer of the service. For example, the development of sophisticated information
technologies permits the international- or transborder-flow of data and information. In that respect, they
allow ‘information based services’ to occur even when the producer and consumer are geographically
separated, that is, they can be traded internationally.” (Dicken, 1992: p. 355)

Whether technological innovation of ICTs expand the ratio of traded goods or brings service into market,
this is achieved by a fall in communication cost, which is also in relation, among others, to the dramatic fall in
the costs of telephone calls. We can see clearly here that what is of importance is the speed with which data can
be communicated between buyers and sellers through ICTs, in addition to the convenience. Mobile phones, for
instance, have been the “mainstay of the telecommunication revolution over the past five years” (Cairncross, 1997), partly
because of the convenience and mobility they offer.

Miles (1996) offers another view. He suggests that ICTs affect three aspects of social change, i.e. “‘formal
economy’ of paid work and officially organised production and services; the ‘informal economy’ of unpaid domestic activities and
voluntary work; and the boundaries between public and private services.” (Miles, 1996 in Dutton, 1996:43).

Firstly, formal economy affected by ICTs because ICTs change employment patterns and facilitates inter-
organisational change. In employment patterns, ICTs “enable major innovation in practically every aspect of production
and service processes, in almost all economic sectors” (Miles, 1996:44) and this gives significant impact on changing
pattern of employment, i.e. from the primary (agricultural, mining, fishing) to secondary (industrial) to the
tertiary (services). This means that secondary, administrative and professional occupations will surpass
primary, traditional, manual and production jobs and as final result, average working hours will become less.
In interorganisational change for economic activities, ICTs can be used to provide options like closer linkage
between production and remote markets, decentralisation of production operations and decisions (within a
framework of greater co-ordination and strategic control) to increase competitive advantage, among others
(Miles, 1996).

In informal economy, secondly, ICT innovations could encompass most domestic activities, including
improvements to the cost-effectiveness of service organisations, as well as to the consumer goods and new
services associated with them (Miles, 1993). With this technological trend and household innovations
provided by ICTs that will include improvements in the capabilities and quality of existing products, despite

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PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

the sceptical view about the value of the innovation14, another view emphasises the potential for such
capabilities to be of practical benefit in activities which go beyond just entertainment15 (Miles, 1996).

Lastly, distinctions between private and public activities and goods are challenged by the application of ICTs
which facilitate new private modes of provision in areas that were traditionally the preserve of public
authorities like health service, education, telecommunication, among others. This is a …

“…blurring distinction between public and private areas of responsibility for information, commodities,
services, telecommunication infrastructure and other activities. The redefinition of these boundaries will be
affected by general government orientations, agency-specific missions and staff and client interests… The
outcome will depend on the mobilisation of popular feeling against intrusions into privacy” (Miles 1996 in
Dutton 1996: p.43).

The two views (Dicken 1992; Miles 1996) may be fit to what happen in Indonesia’s economy case today,
especially when being faced with the question how ICT helps Indonesia in its economic recovery. This may
particularly be distinguished into two distinct approaches, i.e. where economic projects are ‘ICTs-driven’ and
where ICT plays a supporting role, as Curtain (2004) suggests.

Having (explicit or implicit) objective to promoting economic growth through access to better opportunities
to generate more income to reduce poverty, the ICT-driven approach focuses on providing the poor with
opportunities to receive up-to-date information or the ability to communicate more easily. The ICT-driven
approach is often supported by the economic assumption that better information improves how economic
resources are allocated16. In practice, prices vary widely not only over time but from region to region,
particularly where information flows are limited or non-existent.

What about in Indonesia? In high-income areas (big cities), markets perform relatively well because
information about prices is usually easily accessible. Yet, sometimes they also work imperfectly due to
‘asymmetries of information’. While in less-developed regions, especially in rural areas, information flows are
much worse17. To my mind, the ICT-driven approach emphasises communication as a good outcome in itself.
Therefore, such common ICT-based projects in rural areas in Indonesia, like tele-centres aimed at providing
access to internet as a marketing tool, are favoured because it is assumed to give better access to markets
through current and reliable information on prices, and offer the opportunity to promote goods.

The ICT-in-support approach, on the other hand, places a more specific development objective first and then
seeks to use ICTs to support that objective. This approach sees ICTs mainly as a supporting or

14
This falls into ‘continuist’ perspective (Miles, 1992)
15
This falls into ‘transformist’ perspectives (Miles, 1992)
16
Widely known, it is a fundamental axiom of orthodox economics that the capacity of an economy to operate efficiently depends on how well
markets work. Markets operate through the adjustment of supply and demand of goods and services through prices which send signals about
the balance between these two sides of the equation (Kwang Ng, 2002)
17
A study by Eggleston, et. al. (2002) reveals that there is a case (among many similar) where farmers often produce the wrong mixture of crops
in terms of market demand. The buyers in this setting do not receive the goods they are seeking despite the fact they are willing to pay the
market price. The overall effect is the compounding of poverty through inefficiency in the allocation of basic goods and services (pp. 62-63)

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PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

supplementary role to meeting a primary objective. First it clarifies the development goal, then identifies the
need of information of the target group and finally looks to a cost-effective way that ICTs (and possibly other
medias) can manage information and provide channels of communication (Heeks, 2002).

This approach seems to have more holistic ways at least for two reasons. First, it has multidimensional
perspective on poverty reduction by acknowledging the importance of better access to essential services
needed for the poor such as education and health. Here ICTs play supporting role in development by
providing access to government services in a transparent way with low transaction costs. Second, it takes into
account the role of the poor themselves, as subjects of development, in defining their own information needs.

We need now to offer a finale to this paper, to see particularly how these paradigms are inter-related and put
together in the case of Indonesia.

6. A Finale: ICTs & Economy in Indonesia after crisis – a breathless move

Given the fact that Indonesia’s economy has started to recover from the crisis, we need however to pay
attention since the recovery is marked by the slow economic growth. Why? I would say this is because of lack
of investment growth, compared to consumption. In other words, the economic growth of Indonesia is
moved more by consumption factor (both of governmental and of public) and not by investment. In 1997,
the investment value was far above the consumption. Yet, since 2001 consumption starts to match the
investment value and in 2002 it has resided in far above investment. After crisis, the investment growth seems
to keeps on being subdued, whereas consumption growth progressively increases.

350,000.00
Value of Consumption & Investment 120,000.00

340,000.00
100,000.00
330,000.00

320,000.00 80,000.00
Consumption

Investment

310,000.00
60,000.00
300,000.00

290,000.00 40,000.00

280,000.00
20,000.00
270,000.00

260,000.00 0.00
1997 1998 1999 2000 2001 2002
Consumption Investment

Figure 9. Consumption and Investment, 1997-2002

Source: CFPS (2003) based on Bank Indonesia’s monthly report

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PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

This goes in the same trend with the growth of e-commerce in Indonesia, although still considered low
compared to the total world transactions –as diagrammatised below.

Figure 10.E-commerce transaction volume

Source: http://www.isoc.org/isoc/conferences/inet/00/cdproceedings/7c/7c_3.htm

Obviously, economic growth that is only pushed by consumption has limitations. Yet, economic environment
is now much less favourable than before the crisis. Despite claims, globalisation has been proved no longer to
be able to provide a strong engine for growth –driven by neo-liberal logic much of the industries and
investments have shifted to other countries in the region, like China or Vietnam, which provides cheaper
production cost. Such relocation will not take into account other variables than economics’.

Good macroeconomic management is therefore essential to gain investor confidence and willingness and thus
reduce poverty more structurally. But such management by itself is not enough to sustain high rates of
growth. They require structural reforms to make the economy more efficient and competitive. In this light,
application of ICTs may be of significant help to reduce unnecessary or excessive use of resource in
Indonesia’s economy. By this, hopefully, the government could move ahead in a speed of reform so that
people can reap the benefits of macroeconomic stability, e.g. higher investment, growth, job creation and
poverty reduction.

Yet, will we again be entrapped in the technological determinism? If so, isn’t this another vicious circle when
trying to understand the role of ICTs in development?

Again, we must remember that ICTs per se does not (and will not) solve social problems, although their
availability and proper use of them is a pre-requisite for economic and social development. They are
functionally equivalent to electricity in the industrial era. Studies have shown the close statistical relationship
between diffusion of ICT, productivity and competitiveness for countries, regions and industries. It is also
known that an adequate level of education in general and of technical education in particular is essential for

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PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

the design and productive use of new technologies (Mansell & Steinmueller, 2002). But with regard to all of
these, the successful use of ICT will depend on very much how it is organised (Castell, 1999), not how it is
theorised.

About this, John Rawls in his “A Theory of Justice” says, “A theory however elegant and economical must be rejected or
revised if it is untrue; likewise laws and institutions no matter how efficient and well arranged must be reformed or abolished if
they are unjust.” (Rawls, 2001:3). He is right.

***

Manchester, 15 January 2005

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PR 1103 Essay Assessment ICTs and Economy in Indonesia today – Vice or virtue?

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