Indonesia’s Digital Economy After the Pandemic

By Dr. Yujia Hu

Data Analytics, Silot

Small businesses around the world were hard hit by the COVID-19 pandemic and the subsequent social distancing measures that occurred during the first half of 2020. For Indonesia, where most of the business are mercantile and based on physical contact, the social distancing measures have had even a greater impact. Digital businesses were slow to grow already before the pandemic. Despite its market potential, with a labor force of 140 million people, which makes it the biggest in South East Asia, its geographic and population diversity coupled with the undeveloped transportation infrastructure created a barrier for digital transactions to happen. The emergence and fast adaption of social media and the higher than usual concentration of young people (particularly Generation Zs, aged between 5-24 years) will prove to be fundamental in moving the country’s economy toward digital and referral-based commerce with its unique characteristics.


The population pyramid of Indonesia is expansive until age 19, below this age, it becomes stationary, meaning the birth rate is keeping constant for the last two decades and the population is likely to grow for the next few decades (assuming future constant birth rate) with the current 0-19 years old being the most numerous age cohort now and in the next 20 years (the 20s-39s) if the birth rate does not increase.


At the onset of the year, the World Bank forecast economic growth for 5.1% [1], in the middle of the year this forecast has been revised to be 0% [2], with the poverty rate increasing 2% points to reach around 12% overall. The actual picture seems even more dramatic, especially for small businesses. Many of those small retail businesses that were struggling before were forced to close down. Those who have the fortune to own their business property made reuse of their business space for livelihood but indeed, they lost most of their sustaining income. And, even so, when the situation seems to have been more relaxed, in September, the Government implemented the second wave of social distancing measure, known as PSBB, to curb down the increasing number of infections.


A popular street vendor in Jakarta receives customers for takeaways in September 2020 just before the second wave of social distancing measures come in effect. Customers interact with their cell phones while waiting for food.



E-commerce and Social Commerce

The businesses that were digitally oriented had a natural hedge against social distancing policies. Tokopedia’s sales reached a record high during the Ramadan 2020 [1], topping in clothing and consumer electronics [2]. Much of the off-line demand switched to on-line during this period. Overall, e-commerce has been growing in the South-east Asian country, with the increased penetration of mobile phones and the internet among millennials. However, the industry is still too small to sustain the country’s massive labor force. Its growth is slow due to transaction costs borne from segregated payment systems and logistics channels. The bank giro transfer, being the most popular payment method, involves too many processing steps from personal details inputting to payment verification. Motorcycles, being the most available delivery mean, lack coordination and operational rules, especially outside the city of Jakarta.

Social media, especially YouTube, Facebook, and Instagram [3], have gained increasing penetration in recent years. A class of young KOLs and influencers are forming with those platforms and small businesses are fast to learn to use Instagram to promote and sell their products. The current year is that of discovery. KOLs are self-defining their social appeal and merchants are learning the feasibility of digital platforms. The pandemic and subsequent social distancing measure may have accelerated this process.

A Market for Influencers

At the current stage, during the pandemic, the social commerce market in the country is relatively small compared to more established economies. The Data Analytics team at Silot analyzed this market during the first half of the year. From the analysis of about 2000 Instagram accounts, covering about 10% of the social commerce related accounts on the platform for Indonesia and about half of the active influencer accounts during the period, the median number of followers per account is 4500. Those accounts are randomly sampled and contain both small and relatively big influencers (including merchants and KOLs). Their overall size is however very small compared to influencers in more established social-commerce economies in East Asia such as China and South Korea, where a typical influencer has half-million followers. However, the engagement rate* for posts in the first half of 2020 has a median of 4% and a mean of 6%, fully in line with global standards of the platform.

* Engagement rate on Instagram is defined as: (number of comments + number of likes) number of followers

During the first half of 2020, the engagement rate for Indonesian influencer and promotion accounts are Instagram varies in 0-18% at 90% range. The median engagement rate was 4% and the mean engagement rate 6%, in line with global standards

While global platforms are established among millennials in the country, they are not optimized for local characteristics of social commerce. Promotion activities and good recommendations on those global platforms are not automatically monetized. For this rising class of influencers, given their small size, the ability to measure the impact of their social activity is important. The most balanced and incentive-compatible retribution scheme would be profit sharing for a successful unit traded through referral, which is indeed not an automated feature of global social media. On the other side, the small merchants of the platform, to complete a transaction, they are required to undergo negotiation and interaction with their customers that often are accomplished only via other platforms such as WhatsApp and Line. A local social media optimized with local features of social commerce is not yet established, but given the rising power of the digitally-native generation Z, this will not delay coming.

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