Exploring the Potential of Digitalization for Inclusive …...Report by Centre for Strategic and International Studies 2018 Exploring the Potential of Digitalization for Inclusive

Report by Centre for Strategic and International Studies

2018

Exploring the Potential of Digitalization for Inclusive Socio-Economic Development in Eastern Indonesia

Authors : Dandy Rafitrandi, Fajar B Hirawan, Medelina K Hendytio, Vidhyandika D Perkasa, Yose Rizal DamuriAssisted by : Arya Fernandes, David Christian and Ira Setiati

Centre for Strategic and International Studies (CSIS)

Jl Tanah Abang III No 23-27Jakarta 10160. Indonesiawww.csis.or.id

For any questions regarding this report, please contact:

Ira Setiati([email protected])

(c) 2018 Centre for Strategic and International Studies (CSIS) & Facebook Indonesia. All rights reserved.

Facebook Indonesia

http://indonesia.fb.com/

Authors And Information

Tableof Contents

Executive Summary

Life in EI, as shown by the indicators

Life in EI, as perceived by local residents

How information & digital technology shapes the life of EI society

MSME behavior and attitude toward digital technology

Recommendations for assistance programs

1 Introduction

1.1 Background

1.2 Methodology

4 Summary and Considerations for Assistance Programs

Some Considerations for Assistance Programs

Possible Assistance Programs

Capacity Building

Technical Assistance for Platform Development

Assistance for Facility Development

2 Socio-Economic Conditions in EI

2.1 Socio-Economic Indicators

2.2 Socio-Political Situation

2.3 Socio-Economic Situation in EI (Findings from the survey)

2.3.1 Public Service Consultation and Administration

2.3.2 Public Service in Education and Health in EI

2.3.3 Security Situation

2.3.4 Economic Situation

2.3.5 MSME Characteristics

3 Information and Digital Technology in EI

3.1 General Conditions

3.2 The Use of Information and Digital Technology

3.2.1 Governance

3.2.2 Education

3.2.3 Economic and SMEs

page IV

page VI

page VII

page IX

page X

page XII

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IV Exploring the Potential of Digitalization for Inclusive Socio-Economic Development in Eastern Indonesia

ExecutiveSummaryExecutiveSummary

Eastern Indonesia (EI)1 is a region rich in natural resources and untapped potential in tourism sector.However, there has been a well-documented gap between EI’s economic development from the rest of Indonesia, as average per capita income of EI is significantly lagged behind that of the national average. One of the main contributors is the digital divide due to the inequality of access and ability to productively use ICT facilities. Therefore, digitalization is an important key in bridging this gap and promoting equitable and inclusive growth, as it can lower entry barriers to economic activities.

Under this context, we have conducted a study to identify the current situation of economic and socio-political development of EI. Particularly, we examine how digital technology is

currently utilized within five spheres of civic life: governance, education, health, security & conflict management and business activities of MSMEs. We also offer a number of specific and targeted recommendations for future assistance programs to support digitalization in EI.

In this study, we use a combination of desk studies, field surveys, in-depth interviews and focus-group discussions (FGD), as well as secondary data analysis. Our field surveys covered 2,000 respondents in 10 EI cities. Furthermore, we also conducted another survey to 1,000 Micro, Small, Medium Enterprises (MSME) businesses to capture the MSME profile in EI, particularly with regard to their behaviors and attitudes toward digital technology.

1 In a general sense, Eastern Indonesia (EI)

usually covers Sulawesi, Nusa Tenggara,

Maluku and Papua. In this report, EI

specifically refers to the ten cities located

in the EI, in which we conducted the

field survey for our study. They include

Makassar, Palu, Kendari, Manado,

Gorontalo, Mataram, Kupang, Ambon,

Manokwari and Jayapura.






P. VI

P. VII

P. IX

P. X

P. XII

P. IV

V

Economic development situations. Most indicators seem to confirm the generally-held belief in public that EI is still lagged behind the rest of Indonesia in term of the development condition. Economic structure of EI is characterized by an underdeveloped manufacturing sector and a dependency on natural resource-based sectors. EI’s income per capita in 2017 is only about two third of the national level, while EI’s average poverty rate is more than 1.5 percentage points above the national average (Table 1). Compared to the rest of Indonesia, EI is still falling behind in term of the availability and quality of physical

infrastructure, such as road and electrification (Table 2). Furthermore, EI is still suffering from relatively underdeveloped health sector, compared to the national average (Table 3).

Socio-political situations. EI does show some encouraging signs with respect to the quality of governance and public institutions. According to KPPOD (2016), six out of ten Indonesian cities with the highest Local Economic Governance index are located in EI (Table 5). However, due to the religious and ethnic diversity of the region, EI is particularly prone to conflicts and violence (Table 6).

VI Exploring the Potential of Digitalization for Inclusive Socio-Economic Development in Eastern Indonesia


Public governance. In areas of public governance, our survey reveals that the general public in EI is calling for significant improvement in areas of poverty reduction, job creation and corruption eradication. Digital technology, in particular, has large potential to provide a more efficient public complaints mechanism, as most of our respondents consider chat applications to be useful for expressing public opinion or complaints.

Health services. Most respondents are fairly satisfied with the quality of basic public health services, in term of building infrastructure, medical staff and supporting facilities. However, more sophisticated health services are difficult to perform

due to the insufficient medical specialists, lack of modern equipment, lack of opportunity for medical professionals to improve their capacity and knowledge and their limited skills in using the technology.

Micro, Small, Medium Enterprises (MSME). Our survey also captures the characteristics of MSME in EI. The majority of MSME can be found in retail and trade sector, followed by the food and beverage sector. About 62% of MSME are micro enterprises that only employ as many as 1-4 persons. Finally, the most frequently cited obstacle for MSME to expand their activities is limited access to finance, as more than 80% of respondents rely on personal and family funding sources.

VII


Online behavior in EI. According to APJII (2017), only 15% of 143 million Indonesian internet users are located in EI. In our survey, about half of our EI respondents are internet users, while the other half are not. Our survey reveals that 88% of respondents access the internet from their smartphones. Furthermore, more than 40% of our respondents find issues with internet stability, speed, price and coverage in EI. Social networking and news consumption are the two most frequently performed online activities by our EI respondents.

Entertainments (music and videos) closely follow behind, while commerce-related activities such as shopping and trading are among the least frequently performed activities.

Lack of public awareness remains an issue. The utilization of digital technology for public services delivery in EI has already existed in one form or another. The main issue here, however, is about the lack of public awareness that certain public services can be accessed online. Only about 42% of respondents are

VIII Exploring the Potential of Digitalization for Inclusive Socio-Economic Development in Eastern Indonesia


aware of the online presence of such services. Another issue is the lack of innovation by local governments, who lack the digital knowhow to adjust various existing online systems to serve local needs.

The necessity for further development of public online system. Most of our respondents have a favorable perception toward the use of digital technology in government institutions for it makes their civic lives easier. However, plenty of respondents (about 60%) are also calling for a more comprehensive system, as the current state of online system still inconveniently requires them to physically go to public offices for some other parts of the online application.

The main challenges of public services digitalization in EI. Furthermore, as many as about 40% of respondents are not even aware of the existence of online platforms to communicate with local government, such as 24/7 Call Center, government website or social media. For the purpose of effective public communication and feedbacks, both local government websites and social media have massive room for improvement as many of them have not been updated for years. Our various findings imply the three most pressing challenges facing EI local government regarding public services digitalization, which include (a) lack of capacity and competence of local human resources, (b) lack of dedicated personnel in charge of updating the contents and (c) lack of sustainable financial resources.

The use of digital technology for supporting public services in education and health. Public and government services would not only benefit from more intensive use of digital technology in administration and community participation, but also from the application in education and health. The public in EI affirms the beneficial effect of digital technology for supporting education process and overcoming public health issues. The technology facilitates more effective queries of information and closer communications between teachers and students, or between health practitioners and public. While the survey shows that public has used internet to find and to discuss those two issues widely, our in-depth interview, however, reveals that the local governments have not intensively used the technology to disseminate information related to education and health programs and issues.

The use of digital technology to counter false information. We also explore the possibility of using digital technology to prevent conflict and maintain public order in the survey. 39% of our respondents agree on the use of technology to report or monitor the potential of conflict in order to act as an early-warning system. Still another 33% call for the use of technology to counter hoaxes. A prime example is found in Ambon, where some people have taken to Facebook to promote ‘positive news’ to counter false information that could potentially lead to a new conflict.

IX

Most of our respondents have a favorable perception toward the use of digital technology in government institutions for it makes their civic lives easier.

The public in EI affirms the beneficial effect of digital technology for supporting education process and overcoming public health issues.

88%of our survey respondents access the internet from their smartphones

40%of our respondents find issues with internet stability, speed, price and coverage in EI

More than

Exploring the Potential of Digitalization for Inclusive Socio-Economic Development in Eastern IndonesiaX


Low degree of internet utilization for business in EI. Our survey and interviews find that the use of digital platforms by MSME for business purposes in EI has not been very extensive, and limited mostly to marketing. On average, only about 30% of our MSME respondents use the internet for their business processes. One of the most obvious obstacles for businesses to go online is the poor internet quality (i.e. accessibility and reliability) in EI. Another important reason is the fact that majority of our respondents either believe that using internet for business consumes too much of their time or that they have no idea how to operate the internet. Lack of customers’ internet literacy in EI is also another big issue, as they tend to prefer a conventional, face-

to-face way of doing business. Therefore, improving the digital literacy of both seller and buyer is of the utmost importance.

Promising local digital initiatives have been taking place. Despite the generally scarce use of internet among MSME, EI is also home of several promising local digital initiatives. In Manado, an internet community has been actively promoting local tourism by producing videos and reviews of tourist attractions using social media. In Makassar, a local e-commerce platform known as makassarberdagang.com publishes job opportunities and offers capacity building activities for sellers and buyers (including online marketing advices), to the benefit of local MSME.

XI

Social media are preferred by MSME as marketing tool. Local MSME in EI tend to overwhelmingly (80%) prefer social media, rather than other online platforms like e-commerce, as their marketing tools. The often cited reason is the fact that social media facilitates an easier and safer way of handling complaints, as business owners can directly

address them personally through email, phone calls or private messaging. Another benefit for MSME of using social media for marketing purpose is the possibility to conveniently showcase their products and communicate with potential customers. Facebook, WhatsApp and Instagram are the three most popular marketing platforms for MSME in EI. For example, an operator of a bridal (wedding salon) in Palu acknowledges her use of Facebook and Instagram for showcasing and marketing her place and services.

The lack of capacity and literacy as obstacles for online business activities. In addition, our survey also seems to confirm that issues of capacity and literacy have been the main stumbling blocks of the development of technology in EI. Most respondents who do not use social media for their businesses are not sure about its effectiveness to promote their products (40%), while another 33% have no knowledge on how to operate the social media. Some capacity-building programs in EI have been initiated to solve this fundamental problem. Two prominent examples are Kampung Digital (supported by PT Telkom) in Kendari, which provides digital equipment and Wi-Fi to support local online businesses, and Jago Jualan in Gorontalo, which holds regular meetings, training sessions and workshops to enhance its local members’ knowledge of online marketing strategies in social media.

Social media facilitates an easier and safer way of handling complaints, as business owners can directly address them personally through email, phone calls or private messaging.

XII Exploring the Potential of Digitalization for Inclusive Socio-Economic Development in Eastern Indonesia


In formulating an effective programs, policymakers should take the following four considerations into account when formulating assistance programs to support digitalization in EI:

• Each city has a unique condition and context, and therefore, should be considered separately from each other. Different cities might require different type or level of programs• Proposed programs can potentially support and enhance the currently existing digital-related programs initiated by local governments.• Proposed programs should consider engaging the already existing local online communities• Proposed programs may be targeted to support local village enterprises (Bumdes).

XIII

With that in mind, we believe that the following three areas of assistance can support further process of digitalization of EI:

Capacity building activities are the most important aspect of the assistance programs, given the severely lacking public awareness of digital technology in EI and should be specifically targeted to three different local stakeholders: (a) government officials, (b) local public service workers and (c) local businesses and MSME.

First, local communities in EI could benefit from workshops or seminars, intended for a large, general audience, that are designed to provide basic general knowledge of the potential benefits of digital technology in their respective areas (i.e. for public services delivery, for online marketing or promotion of MSME, etc).

In addition to capacity-building, assistance programs may also involve projects to develop online platforms, that are designed to specifically cater to

Finally, given the lacking digital infrastructure in EI, assistance programs can be complemented by the development of digital facilities in public areas, such

For government officials, basic workshops on digital technology should be complemented with technical and hands-on trainings aimed to develop and maintain simple platforms to deliver and support various government programs.

Finally, intermediate technology users could benefit from more advanced trainings to develop specific skills of using social media or online platforms to support their activities, e.g. a training on developing online teaching materials for local educators, on online marketing for MSME, or on photo or video-editing in regions with famous tourist destinations.

local needs. A potential example is the development of social media pages for technical offices of local government.

as public Wi-Fi, particularly in areas with big tourism potential. This can be done with the collaboration with local government or related service providers.

(1)Capacity building programs

(2)Development of online platforms

(3)Facility development

T he EI covers 13 provinces2 with an area of 92 million hectares (land and sea). The Central Statistics Agency (BPS) estimates the population in this part of Indonesia to be 30 million people with more than 50 percent under 30 years of age. EI is a region rich in natural resources in agriculture, fisheries, livestock, forestry and

mining. Additionally, it has untapped potential in the tourism sector along with well-known tourist spots such as Lombok, Komodo Island and Raja Ampat. Thus, why is there a gap between economic development in the EI and the rest of Indonesia?

A possible reason is that the EI is somewhat underdeveloped and trapped in low investment compared with other regions of Indonesia. The fact is, in general, people in EI generate less per capita income compared with those living in western Indonesia.3 This is also reflected in the high number of poor people in the region with three of the poorest provinces in Indonesia located in the EI, East Nusa Tenggara (NTT) with a poverty level of 21.38 percent, Papua (27.76 percent) and West Papua (23.12 percent). Moreover, physical and non-physical infrastructure is not evenly distributed throughout the region so that expected economic growth does not reach all residents. Except for North Maluku, North Sulawesi and South Sulawesi, all regions in EI also still lag behind the national electrification rate. No wonder then that this unequal infrastructure distribution creates high infrastructure costs and exacerbates economic stagnation and low-income levels in the region.

One of the major drawbacks in EI is a lack of infrastructure especially in information and communications technology (ICT). One of the most awaited infrastructure projects is the Palapa Ring Project. This aims to build a national fiber-optic cable network all over Indonesia with 13,000 kilometers undersea as well as 22,000 kilometers onshore. The project will provide a fast broadband internet that can be enjoyed by all cities and districts in Indonesia and hopefully help to reduce the potential impact of unequal digital economic development, the so-called digital divide in Indonesia.

To achieve more inclusive and equitable economic development, the inequality problem in Indonesia needs to be addressed. In other words, there is a coupling between inequality and economic growth in some areas, and decoupling

Introduction

2 Bali, West Nusa Tenggara, East Nusa Tenggara,

North Sulawesi, Central Sulawesi, South Sulawesi,

Southeast Sulawesi, West Sulawesi, Gorontalo,

Maluku, North Maluku, Papua and West Papua

3 https://www.adb.org/sites/default/files/

publication/229411/adbi-wp667.pdf

4 The Kuznet curve connects inequality and

economic growth. It explains that at the early

stage of development there is high inequality and

high economic growth, while at a later successful

development stage there will be low inequality and

high economic growth. In EI the variation of coupling

and decoupling between inequality and economic

growth signals that development in these areas does

not follow the “standard” growth pathway—which is a

cause for concern.

IntroductionCh.01

Despite its abundance of natural resources and massive potential in tourism, there has been a noticeable gap between EI economic development from the rest of Indonesia. One of the main contributors is the digital divide due to the inequality of access and ability to productively use ICT facilities.

1 Exploring the Potential of Digitalization for Inclusive Socio-Economic Development in Eastern Indonesia1

between inequality and growth in other areas4. Different impacts of economic development in one city/municipality from other cities in this part of the country add to the already high conflict potential resulting from religious, ethnic and racial differences in this particular area. This signals a need for affirmative intervention programs to enable the EI region to closely follow the direction of the socio-economic development pathway of the rest of Indonesia. Some of the origins of these development disadvantages are inadequate basic infrastructure, a lack of investment and low levels of education.

1.1 BackgroundThe literature on digital economy establishes that digitalization can expand opportunities for wealth creation and inclusive growth since it can lower entry barriers (Pangestu & Dewi, 2017). For example, by participating in online trade, micro, small and medium enterprises (MSMEs) can reduce the need to invest in an expensive physical storefront and marketing costs, while still being able to reach a larger pool of potential customers. However, Indonesia can only take advantage of the digital economy to promote equitable and inclusive growth if we address the issue of the digital divide, which refers to inequality in accessing and ability to productively use ICT facilities–such as computers, laptops and smart phones to access the internet. (Pangestu & Dewi, 2017). According to the Socio-Economic National Survey (BPS 2016), there is an unequal level of internet penetration, unequal quantity (time spent accessing the internet), and quality (purposes of accessing the internet) of internet usage.

This situation calls for a greater contribution, not only from the Indonesian government, but also from many other parties, including the private sector, and in particular internet-based companies such as Facebook. As the providers of many internet-based services, those companies are in a good position to provide assistance and to increase digital literacy in EI.

According to the current situation and potential of digitalization for Indonesia’s socio-economic growth, the Centre for Strategic and International Studies (CSIS) proposed a study to identify the economic growth potential of various cities in EI as well as the use of the digital economy to support that. Specifically, we will assess local government capacity and readiness to partner in helping its residents take advantage of various online business models. Based on the data we gather from the study, we will provide recommendations to assist implementation of effective programs related to the use of the digital economy.

This study explores the socio-political and economic context and potential of 10 EI cities, and identifies some challenges and recommendations for digitalization programs in EI.

2

Given the aforementioned economic development challenges and the potential benefits in using digitalization to promote inclusive and equitable growth, the objectives of this study are to support assistance programs in the future. We elaborate as follows:1. To provide assessments of city-level economic and socio- political contexts in the EI region2. To identify gaps between economic potential and current economic conditions, while assessing what are the challenges and opportunities for Facebook in implementing its programs3. To identify the intended impacts of program implementation in EI

1.2 MethodologyWe began by selecting 10 priority cities included in the study. We then conducted an assessment of pre-existing conditions to give a strong background for the program for each city. The goal was to assess key sectors, opportunities and challenges. The approach included desk studies, field surveys and also in-depth interviews and focus-group discussions (FGDs). Later on, we identified the intended impacts of possible assistance programs and finally came up with a set of implementable recommendations.

From 13 provinces, we used four main indicators that captured economic and socio-political aspects in each city to identify its readiness and potential for the digital economy. We only assessed the capital cities of each province for two resons. It was easier for the program implementation since in these cases, the capital city already had adequate infratructure and a potential market. The second was related to the cities special position as provinces capitals, which would allow positive spilover effects to other areas of the provinces. We later excluded Bali as it has different

10 EI cities with sizeable potential for digitalization programs were selected in this study based on indicators of economic potential, governance, infrastructure and socio-political aspects.

3 Exploring the Potential of Digitalization for Inclusive Socio-Economic Development in Eastern Indonesia

characteristics and a more advanced economy. Finally, Mamuju (West Sulawesi) and Sofifi (North Maluku) did not make the cut because they are relatively new provinces so it might be difficult to implement the program.

The four indicators were economic potential, governance, infrastructure and socio-political aspects, which would be translated in the sub-indicators. The figure below illustrates the selection process and prelimenary assessment of each city from secondary data. Chapter 2 provides a more comprehensive discussion of the cities’ socio-economic conditions.

Desk Study: Economic and Social-Political ConditionBased on the selection of cities, we perfomed a literature review and a data-gathering exercise to understand the current level of development, both economic and socio-political, in EI and the selected cities, in general. The economic part of the study focused on how the program could help the cities to address the inclusive-growth problems, while the socio-political aspect covered education, governance, conflict management and local political aspects of the cities. This step relied on secondary data and past literature. We also explored the regulatory environment that promoted or hampered inclusive growth in cities in EI.

SurveyTo complement the study, we also conducted a survey of the general public in the region. This was designed to get information on access to the internet and technology; how technology was used and its frequency; what were the obstacles; degree to which technology had been used to support good governance; the use

MakassarManado

KendariJayapura

MataramKupang

ManokwariAmbon

GorontaloPalu

Figure 1 City Selection Process

Source: CSIS Jakarta

EconomicPotential Governance Infrastructure Social-

Political

• Regional GDP Growth• Human Development Index Growth• Population Growth

• Transaction cost• Gov’t capacity & integrity• Local regulation quality• Local gov’t interaction with businesses

• Quality of road• Quality of sanitation

• Peace & Conflict Resolution • Political Fragmentation

4

We combine analysis from desk-study with local insights from focus group discussions (FGD), in-depth interviews and field surveys to both general public and MSME in the 10 selected EI cities, from which we gathered information regarding the use of technology for public services and business purposes in each of the cities.


of technology in political education; the role of technology in conflict management and so forth. The survey covered 2,000 respondents distributed proportionally in 10 cities in EI. The population sample was Indonesian citizens residing in the targeted cities that held ID (KTP) cards.

In addition to the general public survey, 1,000 MSME respondents were selected in the 10 cities. This particular survey was intended to capture the MSME profile in EI with regard to behavior and attitude toward digital technology, the use of digital technology in MSMEs for business purposes (sales, marketing and promotion) as well as to facilitate MSMEs’ ways of doing business (licensing etc).

The sample was selected through multi-stage random sampling. The data collection was conducted through face-to-face interviews

peformed by well-trained surveyors with respondents.

FGD and In-depth interviewsWe also conducted FGDs in each city. These involved 10 participants, comprising business people, local government officials, legislators, local education officials, teachers, academics and NGO staff. The aim of the FGDs was to explore further the issues and findings that were not captured through the survey.

We then selected 10 informants for in-depth interviews in each cities. The interviews gave more space for the CSIS to explore in-depth crucial issues that related to the economic, social and political dimensions of digital penetration for economic growth. The selected informants were local government staff, police personnel, religious and society leaders, students, “ordinary” people, IT company and telecommunications staff and so forth.

Source: CSIS Jakarta

No Provinces Capital CitiesLocal

Economy Index5

Population Growth

PDRB Growth

HDI Growth

1 Gorontalo Gorontalo 78.76 0.80% 7.42% 3.19%

2 Central Sulawesi Palu 73.12 2.16% 6.11% 0%

3 South Sulawesi Makassar 72.67 3.90% 7.98% 0.74%

4 Southeast Sulawesi Kendari 72.13 3.45% 9% 0.28%

5 North Sulawesi Manado 71.71 0.53% 7.10% 0.34%

6 Maluku Ambon 71.71 3.96% 5.90% -0.01%

7 East Nusa Tenggara Kupang 66.67 2.83% 6.74% 0.06%

8 West Papua Manokwari 65.4 2.60% 7.49% 0.61%

9 West Nusa Tenggara Mataram 55.33 1.06% 8.06% 0.90%

10 Papua Jayapura 54.73 1.95% 7.20% 0.65%

5 The index comprises government, infrastructure and socio-political indicators. Please refer to Table 5

for more specific indicators for each sub-indicator

Figure 1 City Selection Process

6

Socio-Economic Condition in EI

Socio-Economic Condition in EI

Ch.02

7 Exploring the Potential of Digitalization for Inclusive Socio-Economic Development in Eastern Indonesia7 Exploring the Potential of Digitalization for Inclusive Socio-Economic Development in Eastern Indonesia

Indicators EI Rest of Indonesia Source

GRDP (percent yoy) 5.1 5.07 BI, BPS

GRDP per cap (Rp mn) 35.3 51.9 BPS

Inflation 3.4 3.61 BI, BPS

Unemployment (percent) - open unemployment 4.43 5.50 BPS

Gross Capital Formation (percent yoy) 4.50 6.15 BPS

Foreign Direct Investment (US$ mn) 9,970 32,228 BKPM

Domestic Direct Investment (Rp bn) 49,226 261,690 BKPM

Poverty rate (percent) 11.72 10.12 BPS

Table 1 Macroeconomic Indicators for EI and Rest of Indonesia, 2017

T his section provides summary findings of the study into the prevailing situation in EI. We looked at several statistics and indicators to give a general picture of the region on socio-economic and socio-political issues. It is followed by a discussion of our findings from surveys

and field research. Understanding the existing conditions is crucial to understanding the needs of society in EI and how the application of digital technology might help. It also helps in designing appropriate assistance programs.

2.1 Socio-Economics IndicatorsEI has a number of characteristics that increase the vulnerability of the region. First is the dependency on natural resource-based sectors, especially agriculture and mining, with a total share of about 33 percent of the GDP of EI. Second is the underdeveloped manufacturing sector. It is dominated by agriculture-based products using low and lower medium technology, coupled with poor capital expenditure.

This economic structure poses sustainability risk of EI’s economic growth. The export performance of EI is vulnerable to the movement of commodity prices in the world market and global demand. Large reliance on the agriculture and mining sectors tends to create volatility in economic growth. This is shown from the region’s economic growth in the last five years, where economic growth is highly dependent on performance in the mining and processing of mining products. As an illustration, economic growth in Papua in several quarters in 2015 grew by double digits, but in the next two quarters of 2016, it suffered negative growth.

Table 1 below shows the economic development of EI, which is relatively underdeveloped. Per capita income level is much lower than the national average (Rp 35.3 million vs Rp 51.9 million). Investment also shows a lower level than the Indonesian average.

Since 2014, the government has pushed through more equitable economic development in Indonesia. Physical infrastructure development projects in EI are prioritized for implementation. Data from the Public Works and Housing Ministry show about 60

EI’s economic structure is characterized by an underdeveloped manufacturing sector and a dependency on natural resources. EI’s income per capita in 2017 is only about two third of the national level, while EI’s average poverty rate is more than 1.5 percentage points above the national average.

8

percent of its infrastructure budget (Rp 42.14 trillion) in 2017 was allocated to EI. A total of Rp 6.12 trillion was used for road construction on the Indonesia-Malaysia border along Kalimantan, development of the trans-Papua (Wamena-Hatem-Kenyam-Batas-Mamugu) highway and expanding the Manokwari-Maruni road.

More than half of the provinces in EI are listed as having fewer viable roads than the already low national average (only 45.1 percent roads in decent condition). Another indicator is the electrification ratio. Some provinces such as West Papua and NTT have electrification ratios of only about 50 percent. The low availability and quality of physical infrastructure in EI has caused the isolation of the area and has resulted in higher prices, which contribute to the high levels of poverty. Regional tourism potential also cannot be utilized optimally either, since the infrastructure for visitors is insufficient.

Province Electrification Ratio

Number of international

airports

Total number of airports

Number of commercial

ports

Total number of ports

NTB 77.22 1 4 3 15

NTT 58.93 1 16 6 64

North Sulawesi 91.31 1 5 3 43

Central Sulawesi 89.11 0 7 3 32

South Sulawesi 92.09 1 8 4 41

Southeast Sulawesi 74.47 0 6 1 37

Gorontalo 87.66 0 2 1 5

West Sulawesi 80.06 0 2 0 12

Maluku 87.12 1 14 2 67

North Maluku 98.06 0 12 2 70

West Papua 47.78 0 23 3 28

Papua 88.24 3 82 3 27

Indonesia 91.16 28 289 108 743

Table 2 Infrastructure (Electricity, Ports, Airports), EI vs Rest of Indonesia

Source: BPS

Compared to the rest of Indonesia, EI is still falling behind in term of the availability and quality of physical infrastructure.


In addition to physical infrastructure, the government also needs to pay attention to non-physical infrastructure such as health and educational services in EI. Various indicators show a low level of health and education, which in turn lead to greater economic imbalances and an increased number of poor people in the region.

In education, the situation in EI is not that bad. The government support for the nine-year compulsory education program and a 20 percent commitment in the state budget (APBN) each year mean education indicators in EI are not much different from the national average. The healthcare sector shows a different picture. The number of malnourished children in some EI provinces is higher than the national average. Similarly, the number of households that have access to proper sanitation is still very low.

The level of poverty in EI is still quite high with the poorest three provinces in Indonesia located within EI. Table 4 below shows three provinces, Papua, West Papua and NTT have the highest number of poor people, far higher than the national average.

Province Average years of schooling

Net enrollment rate - primary

Share of toddler with

malnutrition*

Share of underheight

toddler*

Share of household with access to proper

sanitation

NTB 6.79 98.13 20.2 30.0 69.25

NTT 7.02 95.40 28.2 38.7 45.31

Sulawesi Utara 8.96 94.46 7.2 21.2 71.93

Sulawesi Tengah 8.12 92.75 24.2 32.0 61.12

Sulawesi Selatan 7.75 97.49 25.1 35.6 76.73

Sulawesi Tenggara 8.32 96.62 15.8 29.5 69.52

Gorontalo 7.12 97.54 22.3 33.0 58.75

Sulawesi Barat 7.14 95.51 24.7 39.7 59.48

Maluku 9.27 95.50 24.2 28.9 63.29

Maluku Utara 8.52 97.01 17.0 24.6 66.18

Papua Barat 7.06 93.58 23.3 30.2 65.30

Papua 6.15 78.83 15.1 27.9 33.06

Indonesia 7.95 97.19 17.8 27.6 67.89

Province Poverty headcount

Poverty Gap Index

Poverty Severity Index

NTB 15.05 2.63 0.63

NTT 21.38 4.16 1.17

North Sulawesi 7.90 1.30 0.30

Central Sulawesi 14.22 2.80 0.78

South Sulawesi 9.48 1.92 0.50

Southeast Sulawesi 11.97 2.09 0.52

Gorontalo 17.14 3.31 0.85

West Sulawesi 11.18 1.81 0.45

Maluku 18.29 3.41 0.89

North Maluku 6.44 0.81 0.15

West Papua 23.12 7.41 3.12

Papua 27.76 6.25 1.93

Indonesia 10.12 1.79 0.46

EI 12.16 2.40 0.69

Table 3 Education and Health Indicators, EI and Rest of Indonesia (2017)

Table 4 Poverty Indicators (2017)

*The most recent data is for 2016, from Ministry of Health

Source: BPS

10

2.2 Socio Political SituationSocio-political conditions in EI vary greatly given the diversity of the region. Potential conflicts always exist due to religious, ethnic and other differences. However, some areas have very good local government institutions to deal with these issues. The table below shows a summary of the 2016 Committee Monitoring the Implementation of Regional Autonomy (KPPOD) report on government institutions in EI in 10 selected cities.

The Local Economic Governance (LEG) Index shows that several provinces in EI have achieved a high LEG performance. Of the 10 best provinces, six are located in EI namely Gorontalo (2), Palu (5), Makassar (6), Kendari (8), Manado (9) and Ambon (10). Other indicators, such as the quality of local regulations / Perda show that Manado is the best provincial capital.

Furthermore, Makassar is the provincial capital whose performance in interaction between local government and business actors was considered the best. Two other cities, namely Gorontalo and Palu have their own achievements. Gorontalo is the provincial capital that has the best private business development program while Palu is deemed as the provincial capital where transaction costs and access and legal certainty in land ownership/acquisition are the best.

Provinces in EI are committed to making competitiveness improvements. With the improved institutional capacity and the development of physical infrastructure, they are trying to catch up with economic developments in western Indonesia, including reducing poverty and economic inequality in their provinces.

Province

Local Economic

Governance Index

Licensing InfrastructureSecurity

& Conflict Resolution

Labor Issues

Local Regulation

QualityRanking

Gorontalo 78.76 83.14 77.01 95.24 65.98 46.36 2

Palu 73.12 76.53 60.39 88.71 58.13 61.62 5

Makassar 72.67 87.42 27.00 99.84 68.19 35.59 6

Kendari 71.13 80.66 53.33 99.89 49.65 90.10 8

Manado 70.70 90.05 59.49 88.56 55.31 100.00 9

Ambon 68.46 81.06 61.59 58.01 74.95 91.59 10

Kupang 66.67 84.67 51.61 47.43 36.22 38.17 12

Manokwari 65.40 88.70 79.67 66.64 46.55 16.82 13

Mataram 55.33 96.88 67.38 93.61 53.17 81.60 25

Jayapura 54.73 35.51 69.13 87.24 33.33 32.81 26

Banjarmasin 64.53 84.73 82.75 72.04 22.25 47.59 15

Denpasar 58.04 80.91 51.30 96.97 41.06 25.22 22

Sofifi/Tidore 56.86 75.30 24.16 100.00 33.45 84.42 23

Mataram 55.33 96.88 67.38 93.61 53.17 81.60 25

Jayapura 54.73 35.51 69.13 87.24 33.33 32.81 26

Average Indonesia 63.29 74.73 60.68 89.19 49.31 64.95

EI 66.60 81.66 63.42 85.88 49.57 58.62

Table 5 Summary of KPPOD Survey of Provinces (2016)

Note: Local Economic Governance Index is calculated by comprising 10 perception indexes from KPPOD Survey on the particular year. The 10 variables are business perceptions 1. licensing, 2. transaction costs, 3. land access, 4. interaction between local government and businesses, 5. private sector development program, 6. local heads capacity and integrity, 7. infrastructure, 8. security and conflict resolution, 9. labor issues and 10. regulations

Source: KPPOD


In addition to the KPPOD data, it is also crucial to look at the state of political affairs in the regions. This year, Indonesia has hold concurrent local elections in 171 regions. Of these 171 elections, 17 elections have elected governors in 17 provinces and the rest have been carried out to pick city mayors or regents. We note that six out of 11 provinces in EI have geared up for these gubernatorial elections. We summarize the so-called vulnerability index of elections in the eight provinces in EI (see Table 6) based on data from the Election Supervisory Board (Bawaslu).

According to Bawaslu, the vulnerability index includes a number of potential factors that may impair the election processes. There are 30 indicators to measure the index such as the integrity of the local election commission (KPUD), the existence of conflict among candidates and their supporters, the quality of voter database, etc. Bawaslu grades the index based on the following order: score 0 to 1.99 for a low vulnerability region; 2 to 2.99 for medium vulnerability, and 3 to 5 for high vulnerability.

Provinces Vulnerability Index

Papua 3.41

Maluku 3.25

Southeast Sulawesi 2.81

North Maluku 2.71

NTT 2.70

NTB 2.54

South Sulawesi 2.53

Bali 2.19

Table 6 Election Vulnerability Index, 2017

Source: Bawaslu

Six out of ten Indonesian cities with the highest Local Economic Governance index are located in EI. However, due to the religious and ethnic diversity of the region, EI is particularly prone to conflicts and violence.

12

As demonstrated in the table, Papua is the most vulnerable province in the eastern part of the country. Coupled with Maluku, the two provinces are classified as highly vulnerable regions. The other four regions, namely, Southeast Sulawesi, North Maluku, NTT, NTB, South Sulawesi and Bali are followed in respective order and are classified as medium vulnerability.

Another interesting factor lies in the degree of violence in the eastern regions. It is widely argued that the less developed regions are more prone to violence than more developed ones. How true is this hypothesis for our study? To examine this question, we looked at data from the National Violence Monitoring System (MVNS). These data list the total number of incidents for many types of violence occurring in Indonesia from 1998 up to the present. However, the most complete data that cover all provinces are only available in the year 2014. We screened the data for 11 eastern provinces only (Figure 2).

North Sulawesi was the most violent province in 2014 with 1,664 incidents, followed by Papua (1,435) and South Sulawesi (1,224 incidents). It is evident that the number of violent incidents in these three provinces far outstrips the other seven provinces. Whereas the least two provinces in terms of violence were West Sulawesi and Gorontalo.

Figure 2 Number of Violent Incidents

(Deaths, Injuries, Rapes, Kidnappings, Buildings Damaged)

Source: NVMS

Month

Num

ber o

f Inc

iden

ts

MalukuSulawesi TengahPapua BaratPapua

Sulawesi TenggaraGorontaloSulawesi Barat

Nusa Tenggara BaratNusa Tenggara TimurSulawesi UtaraSulawesi Selatan

200

150

100

50

0

01/2

014

02/2

014

03/2

014

04/2

014

05/2

014

06/2

014

07/2

014

08/2

014

09/2

014

10/2

014

11/2

014

12/2

014


2.3.1 Public Service Consultation & AdministrationIn general, respondents in the 10 cities we surveyed showed high satisfaction levels with governance. The aggregate result of 10 cities shows that 80 percent of respondents are satisfied with the performance of local government, while the satisfaction level with local representatives is slightly lower at 66.2 percent. This high satisfaction is also shown at the community and village level.

Public satisfaction with local government’s performance can be translated into the ability of the government to provide public services and execute development plans. The public in the 10 cities of EI where we conducted our study believes that the government has been able to provide education, health and security services of appropriate standards, but is still weak in its efforts to reduce poverty and create jobs. The government’s ability to reduce the level of corruption is also considered less than optimal (Figure 3). In general government performance is determined by leadership, quality of state apparatus, work methods and technology.

Our survey reveals that most of the people (76.5 percent) have never filed complaints. A majority of them are pessimistic about their opinions being heard by officials or responded to. That is also the reason why out of those who do voice their opinions or complaints to the government, a majority of them still use direct means of communications or face-to-face (14.6 percent). Other means are phone calls/text messages, social media and government websites. Interestingly, chat applications are deemed to be quite useful for voicing opinions and complaints (Figure 4).

From the six medium that were used to file complaints or opinions, demonstration was widely used (77.4 percent), and followed by chatting applications (34.4 percent) and social media (23.5 percent).

Meanwhile from its effectiveness, face to face interaction was seen as the most effective (87 percent) to voice complaint even though from its frequency only 14.6 percent respondents ever used such mechanism. In general, above 70 percent of the respondents stated that the mechanisms provided to voice opinions and complaints are effective.

This is consistent with our interviews and FGDs. Face-to-face and direct communication is still considered the most appropriate method to submit complaints, especially for a society where technology has not been part of daily life. People argue that if their complaints are not delivered directly, they tend not to be addressed.

Figure 4 Public Opinion and Complaints In EI

Source: CSIS Survey, 2018

Figure 3 Government Performance in Providing Public Services Capable Not Capable DK/DA


Provide access to education

Alleviate poverty and inequality

Eradicate corruption and illegal fees, particularly in

government offices

Provide access to affordable health care

Provide job employment

Creating a secure environment in the

society

78,4 80,5

43,639,4 40,3

56,7

77,2

21,2

1,63,0

58,1

2,6

20,2 18,1

54,7

1,4 1,4 1,8

SocialMedia

Chatting Apps e.g BBM

& WhatsApp

Face to Face

Telephone/SMS

DemonstrationProtest

Gov’tWebsite

23.5

14.6

7.4

77.4

10.7

73.5

79.3

75

87

64.9

34.4

83

Public’s Experience Expressing Opinions or Complaints to the Government (Have Ever)Effectiveness of various mechanism (Useful)

2.3 Socio-Economic Situation in EI: Findings from the Survey

14

2.3.2 Public Service in Education and Health in EIEducation is very important in improving the capacity of human resources in society. It is even more important in the current digital era, where the public needs certain levels of knowledge and skills to utilize digital technology optimally. A lack of high-quality education might hinder the development and use of digital technology in various livelihood aspects.

Our survey reveals that the majority of respondents believe that there are improvements in the quality of education. In terms of material/school curriculum, 59.8 percent stated that it is getting better, while 28.8 percent of respondents claim that it has not changed. Meanwhile 60.6 percent of the respondents believe that the quality of teachers has improved. Finally, 58.9 percent of respondents also state that school infrastructure is in a better condition (Figure 5).

Health care is also an important pre-existing condition for the optimal utilization of digital technology. Although it less directly affects human-resource capacity and knowledge compared to education, better health is necessary to maintain the ability to perform social and economic activities.

The survey reveals that the majority of respondents (75 percent – 85 percent) in the 10 cities are of the opinion that quality health services in terms of building infrastructure, health staff and supporting facilities are available and sufficient. Except for Manokwari, which only has 34 percent satisfied with health services in the city, a majority in the 10 big cities in EI is quite happy with health provision in their cities (Figure 6).

Figure 5 Assessment of Education Quality


Material / School Curriculum

Quality of teachers

School infrastructure

59,8

28,8

4,4

7,0

60,6

30,4

3,4

5,6

58,9

30,0

5,3

5,8

Getting better

Same condition

Getting Worse

Don’t Know

More sophisticated health services are difficult to perform in EI due to insufficient number of medical specialists, lack of modern equipment, lack of opportunity for capacity building of medical professionals and their generally limited skills in using the technology.


2.3.3 Security SituationA conducive environment is needed for effective policy implementation. In that case there needs to be a stable environment with an absence of conflict, both vertical and horizontal. From the observation in 10 cities, a majority of the respondents argue that they feel safe (52.7 percent) and extremely safe (28.3 percent) in the cities in which they live in. Meanwhile, 17.5 percent argue that their cities are not safe. People in Ambon have the highest perception that their city is safe (64.3 percent) while 41.7 percent of people in Jayapura argue that their city is not safe. Despite a past history of religious conflict in the 1990s, the local government in Ambon has made significant progress in maintaining peace and stability in the city. Meanwhile maintaining security has always been an issue in Papua and more specifically in Jayapura. Papua is known for multi-dimensional types of conflict.

The breakdown of security elements shows that conflict among society, or horizontal conflict, is the most predominant (74.5 percent) in the 10 cities, followed by local government and society conflict (10.1 percent). The most common cause of conflict is because the government does not implement policies as promised (15.6 percent), followed by causes related to poverty and injustice (13.8 percent) and land issues (12 percent).

Figure 6 Assessment of the Quality of Health Services


Clean and well maintained building

Sufficient Health Staffs

Sufficient supporting facilities

81,678,8 78,7

19,5 19,5

1,8 1,8

16,8

1,7

Yes No Don’t Know / No Answer

Maintaining security in EI has always been an issue in EI, specifically in cities known for multi-dimensional types of conflict. Our survey finds that horizontal conflicts (i.e. conficts between societies) is overwhelmingly the most frequent type in EI.

16

2.3.4 Economic SituationFrom the economic point of view, this sub-chapter shows the general perception of respondents in the 10 cities related to the economic situation, both at the city and household level. The economic issues discussed during the survey were focused on four main areas, such as general economic and welfare conditions, employment, business opportunities and public service delivery in the context of economic equality. The discussion also included the development of MSMEs in EI and their business environment.

Based on the CSIS survey, the majority of respondents who live in the 10 cities feel that the economic and social welfare conditions in their city remain unchanged compared to three years ago. Around 53 percent of the respondents feel that the economic conditions are the same, while 33.9 percent of them think that the economic situation in their cities is getting better compared to three years ago. Only 9.7 percent of the respondents believe that the economic and welfare conditions are getting worse.

The public perception of employment and job opportunities in the 10 cities is similar to the perception of the economic situation. The majority of respondents (51.6 percent) think that employment and job opportunities are the same compared to three years ago. Moreover, 21.6 percent of the respondents feel that employment and job opportunities are getting better, while the same percentage believes the situation is getting worse.

Manado has the highest number of respondents who feel employment and job opportunities, both at the city

(34.2 percent) and household level (37.2 percent) are deteriorating. Meanwhile, Jayapura is the city with the lowest proportion of respondents (15.6 percent) who say employment and job opportunities are getting worse at the city level. Policy synergy and coordination between the national and local governments in opening new employment opportunities should be improved and strengthened to accommodate the employment needs in Indonesia, especially in EI.

A similar pattern can be observed in the case of business opportunities. Most of the respondents claim that there is no significant change in the situation compared to three years ago. Around 45 percent of respondents feel that there is no change in business opportunities, while 29.6 percent perceive that the situation is getting better and 10 percent thinks that the situation is getting worse. The highest percentage of respondents who state that business opportunities are getting better is in Manado (43.2 percent), while the lowest is in Manokwari (18.4 percent) and Ambon (20.5 percent).

The study also attempted to capture the issue of economic inequality and public service delivery, e.g. food security assistance, social protection, in the 10 cities. On average, 52 percent of the respondents believe that the government efforts to reduce economic inequality as well as efficiently delivering public services have not resulted in a positive outcome. Only 21.1 percent of the respondents feel that economic equality and public service delivery are getting better, while 14.7 percent think that the situation is getting worse. Manado is

Figure 9 Economic and Welfare conditions: City and Household Level


10 cities Makassar Palu Kendari Manado Gorontalo Mataram Kupang Ambon Manokwari Jayapura

0.0

40.0

10.0

50.0

20.0

60.0

30.0

70.0

City Level

Getting Better

Same Condition

Getting Worse

Don’t know

33,9

39,5

31,5

28,0

47,7

34,0 36

,0

35,0

26,0

34,2

27,1

61,3

9,6

50,5

7,9

60.0

59,0

12,0

45,5

57,5

8,5 12

,0

5,5

42,2

9,6

53,5

52,0

13,5

10,0

48,0

8,0

53,0

9,7


among the cities where people are confident in the current government’s efforts to solve the issue of economic inequality and public service delivery, with 33.7 percent of respondents in Manado arguing that the situation is getting better. Manokwari and Ambon have the lowest perception of their government on this issue, with 13.7 percent and 16 percent, respectively, saying that the situation is getting worse.

The survey also reveals that most of the respondents still think that the potential sectors to be developed in those cities are related to agriculture and fisheries, while only a small percentage thinks that tourism can a potential driver for the economy, except for cities already known to be tourist destinations, such as Mataram and Manado. The false understanding about Indonesia as one of the biggest agrarian countries in the world, as well as the motivation of the current government to strengthen the maritime economy might have affected this view. This also indicates that many of the cities’ populations might not be well-informed about the business and economic potential in their cities and surrounding areas.

Most of our respondents perceive no significant change in economic welfare, employment opportunities and business opportunities in their cities within the last three years.

2.3.5 MSME CharacteristicsThe survey of MSMEs found that the majority of small business in the 10 cities are predominantly in the retail and trade sector. Small businesses in the food and beverage sector can also be easily found in this region, followed by handicrafts from wood, bamboo and rattan. However, a large portion of respondents could not be classified easily into a common statistical classification.

That might be because of the issue of informality. Many of the business are not registered. On average, only 60.71 percent of MSMEs are registered with the government. Manado and Kupang are two cities that could become examples for the importance of registering MSMEs. Around 82 percent of small businesses in Manado have been registered, while Kupang follows with 78.89 percent.

18

Figure 10 Main Reasons why MSMEs Register their Businesses


Business certainty

Increase sales value

Others

Jayapura

Mataram

Ambon

Manado

Manokwari

Gorontalo

Kupang

Kendari

Palu

Makassar

10 cities

0 20 40 60 80 100

The majority of MSME can be found in retail and trade sector, followed by the food and beverage sector. About 62% of MSME are micro enterprises that only employ 1-4 persons. The most frequently cited obstacle for MSME expansion is limited access to finance.


Figure 11 Main Reasons for Starting a Business


Fill the spare/free time

Motivation to become

an entrepreneur

Do not know

Difficult to get a formal job

Utilize the excess fund

Continue the family business

Jayapura

Mataram

Ambon

Manado

Manokwari

Gorontalo

Kupang

Kendari

Palu

Makassar

10 cities

0 20 40 60 80 100

Almost 80 percent of MSMEs in the 10 cities say they register their business because they need business certainty. Only 12.09 percent of MSMEs in the 10 cities registered their business to increase their sales value. The rest of the respondents state the various reasons why they register their business with the government were because they mostly want to run their businesses without any interference from either government or non-government bodies.

Meanwhile, for the MSMEs that have not registered their businesses, they mostly think that it will be time-consuming to register because of complicated bureaucracy. On average, 34.79 percent of MSMEs in the 10 cities admit that they have not registered their businesses because they still have a poor perception of government bureaucracy, primarily related to corruption, bribery and other activities that can be categorized as red-tape bureaucracy. Moreover, 30.41 percent have different reasons that they did not specify during the interviews. Meanwhile, 10 percent are simply too lazy to register their businesses, or they think that it is too expensive to register and the other 14 percent did not answer the reason. The issue of complicated and time-consuming bureaucracy or time-consuming issue is also the main reason why MSMEs in Jayapura (46.34 percent), Gorontalo (44.44 percent), Kendari (42.22 percent) and Mataram (39.58 percent) are reluctant to register their businesses. The national regulatory reforms that have already been implemented should be implemented at a local level to remove this issue.

Another issue related to MSMEs in EI is their size. On average, our survey reveals that more than 62.24 percent of the MSMEs employ only one to four persons (micro business/industry), and usually the workers are their own families or relatives. Moreover, 15.51 percent of the MSMEs engage five-19 persons (small business/industry) as workers in their businesses. And only 2.14 percent and 1.02 percent

of the MSMEs employ 20-99 persons (medium business/industry) or more than 100 persons (big business/industry), respectively. Their small size prevents them from working efficiently and expanding their businesses.

These drawbacks might be also related to the motivation in starting the business. The results from the survey show that the main reason for starting their business is a motivation to become an entrepreneur (52.24 percent). But a significant proportion of them do it for “involuntary” reasons, such as difficulty in finding formal jobs, or just filling in their free time.

One of the most commonly cited obstacles for small businesses in expanding their activities is limited access to finance. Most of the MSMEs in the 10 cities (more than 80 percent) rely on personal and family sources. The awareness of MSMEs in utilizing banking and financial sector services for their businesses is still too low, fewer than 20 percent of them take a loan from commercial banks. Only MSMEs in Manado and Kendari seem to have a relatively high understanding of the banking and financial sector in running their businesses, with 36 percent and 25 percent, respectively, taking a loan from a commercial bank for their businesses. Meanwhile, the proportion of MSMEs that use the banking sector as a source of financing is relatively low, less than 20 percent, in other cities.

The figure above shows that MSMEs are mostly driven by personal or family reasons. When business people or entrepreneurs start their business in the context of MSMEs, they mostly rely on advice or insight from their close family. Strong faith in family is the key reason why many young entrepreneurs or business people take the risk of running a business. MSMEs’ lack of faith in the banking and financial sector is the factor that leads them not to rely on money from commercial banks.

20


Information and Digital Technology in EI

Information and Digital Technology in EI

21

Ch.03

More than 40% of our respondents find issues with internet stability, speed, price and coverage in EI. Social networking and news consumption constitute the two most frequently performed online activities by our EI respondents, while commerce-related activities, such as shopping and trading, are among the least frequently performed activities.

Exploring the Potential of Digitalization for Inclusive Socio-Economic Development in Eastern Indonesia

3.1. General Conditions

A ccording to APJII data, about 54.68 percent of the Indonesian population use the internet. This is an increase from only 20

million users in 2007 to 143.26 million people in 2017. Most of the internet users are concentrated in Java (58.08 percent), followed by Sumatra with 19 percent. Meanwhile, the whole of EI (Sulawesi, Bali-NTT and Maluku-Papua) only accounted for 14.85 percent of internet users in Indonesia.

The 2017 APJII Survey provides an overview of the penetration of internet users in urban areas (72.41 percent) compared to rural areas (48.25 percent). Surveys conducted by CSIS to explore the potential of digitalization in 10 major cities in EI showed that 50.8 percent of respondents are internet users. The remaining 49 percent do not use the internet.

The latest data released by the Technology and Information Ministry for 2016 is consistent with the results of the APJII survey, which showed that some internet users in Indonesia (44.16 percent) used smartphones to access the internet. Very few (4.49 percent) use computers/laptops to access the internet. CSIS surveys in 10 EIn cities

also showed similar results in which 87.7 percent of general respondents often use mobile phones while accessing the internet.

Another profile fact revealed by the APJII Survey 2016 was that people spent most of their time on the internet chatting and social networking (89.35 percent) and only a small portion used it for mobile banking (7.39 percent). This is similar to the findings of a survey conducted by CSIS in January 2018 when most respondents answered that chatting and social networking are their main activities while accessing the internet (62.7 percent of respondents answered “often”). In addition, another of the respondents’ similarly frequent activities when accessing the internet is reading the news (62.6 percent). Other activities undertaken while accessing the internet were listening to music, watching videos and browsing for information.

The issues of internet penetration and access in EI are captured in our survey, explaining many of the underlying factors ranging from a lack of infrastructure, less reliable internet connections because of poor existing infrastructure and high prices to access to the internet and so forth.

Figure 12 Frequency of Devices Used in Accessing Internet


100

90

80

70

60

5040

30

20

100

Mobile phone Tablet Laptop Computer

Often Rarely Never

2222

Figure 13 Activities Conducted While Accessing Internet

Figure 14 Respondent Perception of Internet Reliability,

Pricing and Coverage



3.2 The Use of Information and Digital Technology3.2.1 GovernanceIn general, the 10 cities of EI have used digital technology for providing public services, albeit in still limited ways. One of the issues in the use of digital technology is a lack of awareness by the public that certain services can be accessed online. Only 42.2 percent of the respondents were aware that some services are available online. Another 42 percent said they had not used digital technology and the internet for that purpose, while the rest had no idea about it. It is fair to say that the problem is not about availability, but rather about the information known to the public. Among the public services provided by local governments, most respondents were aware of the use of digital technology for civil registry matters: land certification (66.4 percent), business permits (61.4 percent), building permits (58.3 percent) and policy publicity efforts (56.6 percent).

Another issue is the lack of local innovation in the use of digital technology by local governments. Most online systems and applications are built by the central government or adopted from other local governments in Java, such as those for business permits and citizenship IDs (KTP). While that might be a good strategy for introducing the use of digital technology, most of the local governments in EI have very limited ability to adjust the systems according to local needs and that might discourage people from using them.In general, public perception of technology usage in government institutions is favorable. Of the three variables (ease of access and usage, 24-hour availability and the comprehensiveness

80

70

50

40

30

20

10

0

60

Often Rarely Never

Socialnetworking

Blogwriting Music

Internet stability

Internet speed Price Coverage

News Games Shopping Videos Website Online trading

60

50

40

30

20

10

0

Satisfied

Not Satisfied

DK/ NA


The main issue of technology usage for public services delivery is the lack of public awareness that certain public services can be accessed online. Only about 42% of respondents are aware of the online presence of such services.

24

Three key challenges of public services digitalization include the lack of capacity and competence of local human resources, the lack of dedicated personnel in charge of updating the contents and the lack of sustainable financial resources.


Figure 15 Digital Technology Utilization in Government Programs

Figure 16 Public Perception of Digital Technology Usage in

Government Offices




of services), ease of access ranks the highest. Meanwhile, 24-hour availability and comprehensiveness still have less than 50 percent favorability. We found that even if the hardware is available, it is still not comprehensive enough. While in more developed cities – for example Makassar – online public services have been used for certain administrative applications, residents still often need to go to government offices for other parts of the applications.

The survey found that respondents are quite favorable to the use of online platforms for administrative and public services when they are available. Of the four variables in the survey, speed of service ranks the highest at 90 percent, followed by the saving of administration costs at 80.3 percent, avoidance of unauthorized charges at 77.9 percent and saving of transportation costs at 76.3 percent. However, most respondents (60.6 percent) say there is no online platform available for reporting problems and feedback to the government and another 20 percent have no information on the location of this platform.

Only 20 percent of the survey respondents said there are online platforms to report problems and feedback. The majority of them said they believe the mechanism is not yet optimal. Of the three tested aspects, the availability of an online mechanism scores below 65 percent. Only 59.7 percent said a 24/7 call center is available, while 62.2 percent said a government website is available and 59.4 percent said social media is available. Overall, the availability of government websites is still low. Many of the cities’ websites have not been updated for years and have become ineffective for communication. Again, a lack of resources emerged as the major reason for outdated and dormant websites. However, even the less demanding social media has not been used intensively to communicate with the public. Only a half of those 20 percent of respondents know that social media is used to communicate with the public and to allow feedback and complaints.

The digitalization of public services in local government still faces challenges, such as the lack of capacity and competency of local human resources. There are almost no dedicated personnel in charge of updating the contents of websites or social media pages. Most officials are not that familiar with the use of online platforms and lack the creative capacity to update the information. Another issue is a lack of sustainable financial resources. While the governments might spare funds for the development of online platforms, including websites or social media pages, they are often unable to provide funding for further development. It is common to see city websites not being updated for years.

CategoryAvailability Benefit

Available Not Available Yes No DK/NA

Call Centre 24/7 59.6 40.4 88.1 11.9

Gov’t Website 62.2 37.8 83.3 15.5 1.2

Social Media 59.4 40.6 83.8 16.3

Table 7 Poverty Indicators (2017)

ComprehensiveAvailable 24/7Easy to access and use

Yes No

78,3

21,7

40,8

59,2

40,9

59,1

Available

Not Available

DK/ NA

Citizen administration

Land certificate

Business permits

Building permits

Socialization of Government programs

93,86,0

0,2

64,4

61,4

58,338,8

2,9

1,941,5

56,6

26,22,4

33,22,4

26

3.2.2 EducationAfter observing the current situation related to public service provision in education, health and security, it is also significant to notice how digital technology has been used in those aspects and how people perceived the benefits.

According to the survey, the majority of the respondents in the 10 cities value the positive benefits of technology in education and health issues, because it supports the finding of information more effectively (74.5 percent) and also to facilitate communication between teacher and students, or between health workers and public (13.1 percent).

The survey also reveals that search engine is widely popular among the respondents for supporting the learning process (65.3%). Meanwhile, social media applications, such as Facebook, Twitter and Instagram, were also popular among the respondents. Almost half (45.2 percent) of the respondents perceive that social media has been used to support education process, while 78.5 percent feel its benefits. Social media is most widely used in Gorontalo (55.5 percent), followed by Manado (54.3 percent). The lowest usage of social media was found in Mataram (34 percent), followed by Manokwari (38.4 percent). Yet, most of the internet uses remain to be individually-motivated, with only limited government programs are available.

Similar situation can also be observed on health-related issues. Cities governments have not used online information intensively to support their public service duties. Only 14.3 percent of the respondents use online registration for available health services, 15.3 percent for health information from local health centers and even fewer for obtaining doctor practice schedules. This is mostly due to limited availability of such online services and information in the cities we surveyed. Most information on health issues was acquired over the phone or through text messages. During the FGDs, many local health officials acknowledged that they have not used online platform, including social media, to disseminate

information intensively, although most of them said they know it is very effective for informing the public about local government health programs.

From the FGDs and in-depth interviews, the participants argued that internet applications have been used frequently to spread fake news and to start conflicts. However, the significant role of technology for preventing and mitigating conflict has been widely acknowledged by the respondents in the 10 cities. The majority (38.4 percent) agree on the use of technology to report or monitor the potential of conflict as an early-warning system. This was followed by the 33.2 percent who favour the use of technology to counter hoaxes. According to our field research in Ambon, which has experienced brutal religious conflicts in the past, Facebook has been used to promote “positive news” to counter disinformation or hoaxes that could potentially lead to new conflict. Some local governments have also introduced online-based initiatives to prevent conflicts and improve public security.

Digital technology has been beneficial for supporting education process in EI. However, our respondents report that the use of digital technology for education in EI is mostly individual-driven and primarily limited only to administrative aspects of education.

Only a few respondents claim to ever use online registrations for the available health services (14%), or to find health-related information from social media (34%). Meanwhile, local health practitioners acknowledge their struggles, due to lack of time and creative skills, in maintaining online presence and developing contents for social media or websites.


Figure 17 Usage of Online Health Services


Digital technology has been utilized to monitor and counter false information, and serve as an early-warning system against potential conflicts. A prime example is found in Ambon, where some people have taken to Facebook to promote ‘positive news’.

Online registering Online doctor practice schedule Online consultation

Services and health information in health

centres

14,3

7,2

52,254,0

38,8

7,9

53,7

38,4

15,3

46,5

38,2

33,6

Already online

Not online

Don’t know

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3.2.3 Economic and SMEsThe SME survey stressed the role of technology, especially the internet and social media, in business. It not only captured the SMEs’ internet and social media utilization in the region, but also their perception of government services: i.e. e-government. Some potential benefits and challenges were discussed to assess the SMEs’ digital readiness and, finally, to formulate relevant policy recommendations. This section covers the findings from both the survey results and some narratives from in-depth interviews and focus group discussions.

To explore the use of technology by SMEs in the 10 cities, we focused on the internet as a business and marketing platform, such as social media, chatting applications, e-commerce, etc. In general, the respondents of the SME survey divide into three major sectors: trade (24 percent), food and beverages (7 percent) and automotives/components (5 percent). The SMEs’ utilization of the internet in the 10 cities is markedly low. Only 30 percent of the SMEs use the internet in their businesses. Palu is the only city that has an internet utilization rate of slightly above 40 percent, while Manokwari has the lowest with less than 10 percent.

Figure 18 shows that internet quality – e.g. accessibility and reliability – are the most important challenges for the businesses. This trend is found

in almost all the cities. According to in-depth interviews in Manokwari and Jayapura, internet infrastructure is still the major obstacle in Papua. In 2016, internet services were static for about three weeks because the fiberoptic infrastructure was damaged by an earthquake. Because there is only one provider available in Papua, its reliability is crucial so that internet services can be sustained. If an SME relies heavily on internet/online marketing, then there is a high chance that this situation would be harmful to its business.

Despite all the obstacles, some local initiatives are quite promising. From the interviews, we found an internet community in Manado that tries to promote local tourism by producing videos and reviews of tourist attractions using social media. This helps the tourism sector, especially helping SMEs obtain greater market access through social media promotion. In Makassar, SMEs benefit from a local e-commerce platform called makassarberdagang.com. It is not only limited to commerce, but also publishes job opportunities. In addition, it offers capacity-building activities for sellers and buyers, such as tips and success stories about promoting their products in the online market.

Of those who are not using the internet, most of the respondents argued that it takes too much time (53

Figure 18 What are the Challenges in Internet Utilization?


0 20 40 60 80 100

Others

Takes too much time and effort

Costly

Feature knowledge

Platform availability

Internet speed

Internet network stability

Internet access


percent) and they do not know how to operate it (37 percent). Therefore, it is important the SMEs develop their understanding of and skills related to the internet to enjoy the potential benefits of using it. Second, it is also possible that their customers still lack internet literacy, so they prefer to do business the conventional way, like through direct face-to-face commercial activities. Therefore, capacity building – for example, training and workshops to increase the digital literacy of both seller and buyer – is crucial.

As a marketing tool, social media is preferred by local SMEs compared with other online platforms, such e-commerce. Almost 80 percent of the SMEs choose social media for marketing their businesses. One of the possible reasons that we discovered during interviews in Jayapura is that social media provides an easier way to handle complaints because they can be responded to personally by email, phone calls, or messaging. In e-commerce, reviews are visible to other customers and they can affect the rating of the SMEs and, finally, sales and profits.

According to the survey, the utilization of social media for business is relatively low. Only 32 percent of the SMEs are using it as a business or marketing tool. The highest utilization is found in Gorontalo and Kendari, where the rate is about 73 percent. The lowest is Manokwari where less than 10 percent of the respondents use social media for their businesses. One of the possible reasons, according to the interviews, is that most SMEs focus on local markets. Some of them prefer to use regional forums/platforms in social media so that their products can be sold faster with lower logistic costs. An example is the regional Buy and Sell Group in Facebook.

The use of digital platforms by MSME in EI has been limited mostly to marketing. Apart from the poor internet quality, the lack of internet literacy of both customers and business owners is also a major impediment. Therefore, improving the digital literacy of both parties is crucial.

Figure 19 Why are Respondents not using the Internet?


100

80

60

40

20

0Makassar Kendari GorontaloPalu Manado Mataram Kupang Ambon Manokwari Jayapura

No smartphone

No internet access

Takes to much time

Does not know how to operate

30

Social media are generally preferred by MSME as marketing tool, compared to other online platforms like e-commerce, as social media facilitates an easier and safer way of handling complaints.


Facebook, WhatsApp and Instagram are the most popular platforms for SMEs to use as marketing tools. An interview with the operators of a wedding salon in Palu revealed that they mostly use social media, such as Facebook and Instagram, to promote their products and services. On these platforms they can showcase their products and communicate with their potential customers. In the case of WhatsApp, the platform has been very useful for one retailer in Manokwari, where the operators usually use it to communicate with their suppliers, which are mainly located in Surabaya and Manokwari. For example, the staff can ask the suppliers by WhatsApp about the products in stock and the suppliers can send them pictures of what they have. All in all, these platforms have increased their efficiency.

Figure 21 shows that most of the respondents who do not use social media are not sure about its effectiveness for promoting their products (40 percent). Moreover, they also do not how to operate the social media (33 percent). Again, the issue of capacity and literacy are the Achilles’ heels of the development of technology in EI. One possibility is that there are not many examples of local SMEs that have been using social media extensively.

Figure 20 Which Social Media do You Use?

100

80

60

40

20

0


Facebook WhatsApp Instagram Line Google+ Other

The lack of capacity and literacy are important obstacles for both online business activities and the stumbling block for development of technology in EI.

Figure 21 The Reasons Why SMEs do not use Social Media


40.36% 38.19% 32.69% 28.97% 22.77%Not effective Don’t know

how to use social media

Don’t have social media

Limited internet access

Limited smartphone access

32

and management of content and communication with buyers.

Finally, Figure 23 explains the SMEs’ perceptions of the use of technology in government services, such as e-government. Based on the survey, 25 percent and 23 percent of the respondents agree that tax and business permits are already covered by e-government. The responsible agency for these services is the Pelayanan Terpadu Satu Pintu (PTSP) office. According to our interviews, the number of permits that can be done online varies across the region depending on the city. In addition, the government also faces a big challenge publicizing these services.

Consistent with our findings, the ease of following procedures has a positive correlation with the availability of e-government. Business permits are rated as the easiest of all services at 38 percent. Slightly lower rated is taxation, which is 37.6 percent on average. Export and import procedures are the most difficult. Note that the services provided by the PTSP office are not yet fully online, so people still need to go to other government agencies. However, the efforts to digitalize government services on the city level should be appreciated.

There are two examples of capacity-building programs that we found in the interviews. The first is the Kampung Digital that is supported by PT Telkom in Kendari. This initiative facilitates communities by providing digital equipment and Wi-Fi to support their online businesses. The program helps SMEs and communities that rely on internet access for their businesses. Another example is a local community group called Jago Jualan in Gorontalo. The members of this community are largely youth who already have businesses up and running and spreading widely to other regions in Indonesia. They used whatever online platforms they can to promote their own products. The community holds regular meetings, training sessions and workshops to update the members’ knowledge of online marketing strategies in social media.

Other than social media, only 10 percent of the respondents use e-commerce platforms. According to an interview in Manokwari, the subject rarely uses e-commerce to find products because the logistic costs are very high. In fact, the cost of delivery can be as high as the cost of the product itself, if not more expensive. The main challenges in e-commerce are the design

Figure 22 The Use of E-Commerce Platforms and its Challenges


0 105 15 25 3520 30 40

Return management

Communication with buyers

Tracking management

Updating the page

Online payment/transaction

Designing the page


Figure 23 Availability of E-Government


50

45

40

35

30

25

20

15

10

5

0

Business permits

Tax

Labor affairs

Export/import documents

Police affairs

Makassar Palu Kendari Manado Gorontalo Mataram Kupang Ambon Manokwari Jayapura

Despite the generally scarce use of internet among MSME, EI is also home of several promising local digital initiatives.

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35 Exploring the Potential of Digitalization for Inclusive Socio-Economic Development in Eastern Indonesia35

Summary and Considerations for Assistance Programs

Summary and Considerations for Assistance Programs

Ch.04

Some Considerations for Assistance ProgramsGiven the pre-existing situation of the utilization of online services in the various aspects of the social and economic life of EI, we observed several possible considerations for designing assistance programs in the region. Here we discuss each of them briefly before coming up with possible programs that potentially improve benefits from digitalizing the region.

• While, in general, the region remains less developed in terms of digital utilization, the situation varies greatly in cities that have advanced use of technology to support public service delivery and to support business and economic activities. Therefore, it is important to look at conditions in each city when designing possible assistance programs. Some less advanced cities might be more suited for introduction programs about the potential uses of online platforms, including social media, while some more advanced ones need more specific assistance to build their capacity and to promote more effective use of the internet. Our city analysis provides the pre-existing conditions in each city and the possible assistance programs to address relevant issues6.

• It is also important to acknowledge that the city governments have started their own programs to use digital technology and online platforms, although there are various issues as discussed above. The proposed programs can be linked to their digital-related programs. However, there are also many potential areas where relatively simple use of online platforms might help significantly, but the government has yet to come up with an effective program to harness the benefits of digital technology. The proposed assistance programs would provide significant contributions for supporting government programs in those areas.

6 In addition to this general report, CSIS also produces city analysis reports for each city we surveyed. City level analysis is

available upon request for those interested.

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• In addition to governments, various local communities have also utilized online platforms to support their activities. These communities might be based on geographical areas, such as local communities for certain districts in the city, or be based on common interests, including professions. Digital technology, for example, has allowed local health professionals to communicate and share information with each other and to form online communities. Having engagement with those online communities and providing technical assistance might increase the contributions of these proposed assistance programs.

• Since three years ago, the Indonesian government has been disbursing Village Funds, a relatively significant amount of money distributed to villages across Indonesia, including to kelurahan (subdistricts) in urban areas. Many of those villages and subdistricts use the money to finance village enterprises: Badan Usaha Milik Desa (Bumdes). Those Bumdes can become candidate recipients of the assistance programs, in particular for assistance in economic activities.


Capacity building is the most important aspect of this proposed assistance program. It is intended to provide participants with better knowledge of the use of digital technology and online platforms, such as social media. It can be done via two types of activities, namely workshops/seminars and training.

Workshops or seminars are designed to provide basic general knowledge of the potential benefits of digital technology and to present the possible uses of such technology for supporting various aspects of society and for the delivery of public

services. They are intended to be delivered to larger audiences in order to raise awareness of related issues. These workshops and seminars might be complemented by training sessions that provide hands-on knowledge of the use of digital technology for certain purposes. The training can also cover various other related aspects, like video making, photography for promotions, or product cataloguing for online marketing. The training activities should be aimed at potential and selected users in order to create concrete benefits. Below we discuss some potential capacity-building programs for various elements of society.

(i)Capacity Building

Possible Assistance ProgramsThere are three areas of assistance that can be designed to support the digitalization of EI: (i) Capacity-building programs, (ii) Assistance for the development of online platforms, and (iii) Assistance for facility development.

Those three areas would complement each other and provide support for the optimal use of digital technology in the region. We discuss each of the assistance programs below.

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For Government OfficialsWhile most government officials are aware of the benefits of the use of digital technology, many are not aware of its potential use to support their work as public servants. A workshop that provides real examples of the use of even a simple social media page might be good for increasing knowledge about what online platforms can deliver to support public services. One potential application is to use social media to communicate various issues or events and programs that a city government has initiated. Another use is to provide a platform for members of the public to express their opinions and aspirations to the local government. Each technical office – for example, education or public health – might develop its own page and maintain good communications with the public.

A workshop can be complemented by technical and hands-on training in developing and maintaining simple platforms to support government programs. Materials for the training can include information about the technical issues of maintaining the platform, but also about creative processes, such as photo editing, creative writing and other related skills. The training should ensure that the officials become more confident and enthusiastic in developing such platforms.

For Local Public Service WorkersSimilar workshops and training sessions might also be aimed at public service workers, such as health workers or teachers and educators. The workshop should introduce various potential uses of social media platforms for (i) the exchange of information

and communication among those professionals, (ii) communication with patients or with students and (iii) the dissemination of information to the general public.

Training for those educators and health workers might provide them with the skills needed to advance. For example, training or workshops for educators might be intended for developing teaching materials. The program might even go further to give technical assistance to develop such materials that can be used by many schools and teachers in the region.

To Businesses and MSMEsAs revealed by our field research, the utilization of online platforms for business and economic activities is still limited, in particular in less developed cities. Therefore, workshops and seminars conducted to introduce the application of social media and online platforms for marketing, promotion and business communication are still important in several cities.

In more advanced areas, more specific training might be conducted to fill the gaps of needed skills. In several tourist destinations, for example, training for photo and video editing is needed in order for recipients to produce attractive and informative tourism promotion. In several cities with a strong business presence, more specific training, such as for product cataloguing or delivery packaging, might be needed to support online-based marketing, as well as for photo and video editing.


In several cases, assistance programs can take the form of help to develop the online platforms themselves, based on available ones, but designed to cater to local needs. One example is assistance for the development social media pages for technical offices in city government. It would complement the training of government officials described above. These activities would provide hands-on experience to the officials involved, which would be useful for the future maintenance of the platforms.

Two striking features learned through our field research is the lack of open public facilities for internet access and the high demand for such facilities, even in more developed cities. The assistance programs might also be complemented by providing such facilities, such as public Wi-Fi

Another example of technical assistance is support for the development of online teaching materials that can be used by online educational programs in the region. This can be combined with the development of interactive online platforms to allow better communication among teachers and between teachers and students.

areas, including in tourist destinations. Another example of useful assistance might be support for digital community development by providing spaces for young people to engage with and learn about digital technology.

(ii)Technical Assistance for Platform Development

(iii)Assistance for Facility Development

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Documents

Exploring the Potential of Digitalization for Inclusive …...Report by Centre for Strategic and International Studies 2018 Exploring the Potential of Digitalization for Inclusive