By: Maria Monica Wihardja, Visiting Fellow at the ISEAS-Yusof Ishak Institute and an Adjunct Assistant Professor at the National University of Singapore
The ASEAN Digital Economy Framework Agreement (DEFA) could not be timelier, especially for Indonesia, ASEAN’s largest digital economy. The physical economy has not only transitioned to online trade but also to a data-driven economy. However, techno-nationalism, data sovereignty, and digital authoritarianism are also on the rise, while international principles and multilateral agreements governing digital trade and the data-driven economy are largely absent. ASEAN DEFA represents not only ASEAN’s inaugural Digital Economy Agreement (DEA) but also the world’s first regional DEA. Unlike Free Trade Agreements, DEA focuses exclusively on digital realms to facilitate cross-border digital trade and data flows, as well as cross-border collaboration on diverse issues such as digital ID and AI governance.
In 2021, Indonesia’s digital economy accounted for 42% of ASEAN’s digital economy, compared to 36% of the total GDP. Globally, the digital economy has grown at two and a half times the pace of the physical economy, while Indonesia’s digital economy expanded by 414% between 2017 and 2021, significantly outpacing the physical economy’s growth of 17%. Investment flows into Indonesia’s digital economy in 2021 constituted 34% of ASEAN’s total, second only to Singapore’s 43%. Indonesia’s expansive archipelago and youthful demographics have greatly benefited from this digital economic growth.
ASEAN DEFA builds upon various existing binding and non-binding ASEAN-wide agreements in the digital economy realm, including the ASEAN Digital Integration Framework (2018), ASEAN e-Commerce Agreement (2019), ASEAN Digital Masterplan 2025 (2021), and the Bandar Seri Begawan Roadmap (2021). ASEAN DEFA acknowledges the necessity for a more cohesive strategy and binding commitments beyond the fragmented and often non-binding existing ASEAN agreements. This aims to foster digital economy integration, expedite post-COVID-19 recovery, and enhance long-term competitiveness. Negotiations for ASEAN DEFA commenced in December 2023 and are set to conclude by 2025, covering nine digital economy areas from cross-border data flows to digital ID and talent mobility.
Given the interdependency among the nine areas covered by ASEAN DEFA, along with regulatory and digital developmental gaps among diverse ASEAN member states, there is a risk that ASEAN DEFA might only achieve the lowest common denominator without significant strides towards integrated ASEAN digital economy.
Which areas should ASEAN prioritise to catalyse progress? What should be the minimal outcome, and what can serve as a guiding principle (North Star) for DEFA?
Toward a North Star DEFA
In the short term, ASEAN can prioritise low-hanging fruits by reinforcing, expediting, and strengthening existing ASEAN-level agreements to make them more binding and more effective. These include the ASEAN Single Window Agreement and Protocol, as well as the ASEAN e-Commerce Agreement. Four key areas covered under ASEAN DEFA have already been extensively addressed in existing ASEAN-wide agreements: digital trade, cross-border e-commerce, data protection and policy, and cybersecurity. While ASEAN member states have agreed upon minimal standards and regulatory/system interoperability through these agreements, some countries still lag behind.
ASEAN can aim for higher standards and broader interoperability as well as wider areas of cooperation, beginning with those governed by existing free trade agreements (FTAs) and bilateral DEAs involving external parties, which some or all ASEAN member states are party to, such as Singapore’s DEAs, WTO’s Digital Economy Partnership Agreement, Regional Comprehensive Economic Partnership (RCEP), and Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). Potential areas for stronger cooperation include the area of digital ID, cooperation on emerging topics such as AI, quantum computing and biotechnology, competition policy, and talent mobility.
A successful North Star DEFA could potentially lay the groundwork for a multilateral DEA and further advance the WTO’s Joint Initiative on e-commerce, aiming for high-standard outcomes building upon existing frameworks with widespread WTO member participation. Presently, 90 WTO members participate, though Indonesia and Vietnam are not among them. Disagreements over data governance continue to impede multilateral trade negotiations.
As ASEAN’s largest digital economy, what then should Indonesia prioritise in its DEFA negotiations?
Strategic Priorities for Indonesia
Not only does Indonesia have ASEAN-level digital economy agreements, but it also has national laws and other domestic regulations in some of the nine areas covered under ASEAN DEFA. Existing domestic regulations have been influenced in many ways by external countries, especially the European Union (often referred to as the ‘Brussels Effect’). For example, Indonesia’s adaptation of its Personal Data Protection Law has been heavily influenced by the EU’s General Data Protection Regulation.
Indonesia could focus on bringing DEFA to higher standards and operability in areas where its regulatory framework and system interoperability are already established. For instance, Indonesia’s digital payment systems, including Quick Response Code, real-time payment methods (BI-FAST), and national payment gateway, already meet international standards for financial transactions (ISO 20022). Another example is Indonesia’s Personal Data Protection Law, which is aligned with the EU’s General Data Protection Regulation and the ASEAN Model Contractual Clauses for Cross-Border Data Flows, and Indonesia’s Electronic Certificate of Origin operating under the ASEAN Single Window.
Simultaneously, Indonesia could concentrate on areas that could accelerate its domestic reforms, which might otherwise be challenging to implement without pressure from ASEAN or other member countries. These areas include cybersecurity, online safety, the removal of data localisation requirements for specific sectors, talent mobility, as well as digital literacy.
A recent cyberattack on Indonesia’s national data center, affecting 210 institutions at national and local levels, including immigration systems at Jakarta’s Soekarno-Hatta International Airport, once again exposed Indonesia’s weak cybersecurity record. Moreover, Indonesia imposes data localisation requirements on public enterprises and commercial banks (with some exceptions). This contrasts with Cambodia, the Philippines, and notably Singapore, where there are no restrictions on international transfer of personal data if recommended safeguards are in place.
Despite significant progress in opening the economy to foreign workers, there is still room for improvement in Indonesia’s talent mobility policies, given its relatively protectionist stance on cross-border movement of people. Given Indonesia’s lower human capital and skills development, the country could also advocate for capacity building in skills development and digital literacy in ASEAN DEFA negotiations. The rise in non-performing peer-to-peer lending and online gambling addiction in Indonesia is disheartening, presumably due to low digital literacy.
Challenges and Opportunities in Indonesia’s Digital Economy
As DEFA will be negotiated based on competing interests of its multiple stakeholders – governments, business community, NGOs, consumers, civil society – Indonesia could champion a balanced approach to negotiations to the more contentious areas in DEFA, drawing on its own experiences at home:
Sufficient regulations are essential to preempt and mitigate the potential harms associated with emerging technologies, such as the widespread use of social media, which can lead to social issues like disinformation and mental health concerns. However, it is crucial to achieve this without unnecessarily stifling future innovation.
In the context of ASEAN, particularly in the DEFA’s pillars on online safety and cooperation regarding emerging topics, member countries could establish a common framework to monitor and measure the potential adverse effects of emerging technologies. Based on evidence and data, ASEAN nations could then collaboratively decide on appropriate national or regional actions.
A light-touch approach to regulating the digital economy may be preferable for ASEAN as it fosters innovation. Nevertheless, where evidence indicates harmful practices, regulations should be promptly implemented to safeguard societal well-being and ensure sustainable technological advancement.
The growth of the digital economy, characterised by the expansion of data centers, AI facilities, and cloud services, necessitates substantial energy consumption. However, this expansion must contend with ASEAN’s forthcoming net-zero commitments, which will increasingly shape the sector’s future growth prospects.
Sustainability within ASEAN’s Digital Economy Framework Agreement (DEFA) also necessitates inclusivity. Beyond environmental concerns, DEFA must address the digital skills gap, a critical aspect of fostering inclusivity. The push towards a more integrated and robust digital economy often prioritises skill-intensive investments, potentially exacerbating existing inequalities by emphasising technical expertise.
Moreover, technology giants wield substantial influence due to their extensive data capabilities and networks. It is imperative for these organisations to collaborate closely with governments and smaller entities, such as micro, small, and medium enterprises (MSMEs), which constitute the vast majority of businesses in the region. Enhancing digital literacy among these entities is crucial to ensuring collective progress under DEFA.
To tackle these challenges, ASEAN nations could establish comprehensive guidelines. These would focus on preparing future workers and supporting those affected by digital transformations through initiatives like skills development programs and protective labour policies. Concurrently, aligning ASEAN’s digital and sustainability goals involves leveraging digital technologies to improve environmental outcomes.
Finally, Indonesia’s commitment to a longstanding, non-aligned foreign policy positions it to facilitate ASEAN DEFA in navigating the US-China digital landscape. By advocating for a middle ground, Indonesia can help ASEAN accommodate international standards and external pressures while safeguarding its strategic autonomy.
In conclusion, Indonesia’s pivotal role in ASEAN DEFA negotiations highlights its leadership in shaping the region’s digital future. As ASEAN’s largest digital economy, Indonesia’s proactive engagement is essential for advancing comprehensive standards and fostering interoperability across member states. Moreover, Indonesia stands to benefit from its domestic reforms aligning with ASEAN DEFA’s success. By raising standards and enhancing interoperability, Indonesia not only strengthens its digital ecosystem but also has the capacity to significantly advance ASEAN towards an integrated digital economy.
About the writer
Maria Monica Wihardja is a Visiting Fellow at ISEAS – Yusof Ishak Institute and an adjunct assistant professor at the National University of Singapore. She is a former World Bank Economist in the World Bank’s Poverty and Equity Global Practice. She was the recipient of the Nikkei Asia Scholarship in 2023. In 2017, she was seconded to the Executive Office of the President of the Republic of Indonesia as a senior advisor to the Deputy Chief of Staff in charge of strategic economic issues, where she oversaw food policy reforms and the stunting prevention agenda. She holds a PhD in Regional Science from Cornell University, an MPhil in Economics from Cambridge University, and a BA in Applied Mathematics-Economics from Brown University.
The views and recommendations expressed in this article are solely of the author/s and do not necessarily reflect the views and position of the Tech for Good Institute.
