What is the role of government in the development of e-commerce in developing countries?

by Zorayda Ruth B. Andam

While it is generally agreed that the private sector should take the lead role in the development and use of e-commerce, the government plays an instrumental role in encouraging e-commerce growth through concrete practicable measures such as:

1. Creating a favorable policy environment for e-commerce; and

2. Becoming a leading-edge user of e-commerce and its applications in its operations, and a provider to citizens of e-government services, to encourage its mass use.

What is a favorable policy environment for e-commerce?

Among the public policy issues in electronic commerce that governments should take heed of are:

• “bridging the digital divide” or promoting access to inexpensive and easy access to information networks;

• legal recognition of e-commerce transactions;

• consumer protection from fraud;

• protection of consumers’ right to privacy;

• legal protection against cracking (or unauthorized access to computer systems); and

• protection of intellectual property.

Measures to address these issues must be included in any country’s policy and legal framework for e-commerce. It is important that government adopt policies, laws and incentives that focus on promoting trust and confidence among e-commerce participants and developing a national framework that is compatible with international norms on e-commerce (covering for instance, contract enforcement, consumer protection, liability assignment, privacy protection, intellectual property rights, cross-border trade, and improvement of delivery infrastructure, among others).

How can government use e-commerce?

Government can use e-commerce in the following ways:

• E-procurement. Government agencies should be able to trade electronically with all suppliers using open standards-through ‘agency enablement’ programs, ‘supplier enablement’ programs, and e-procurement information systems.

• Customs clearance. With the computerization of customs processes and operations (i.e., electronic submission, processing and electronic payment; and automated systems for data entry to integrate customs tables, codes and pre-assessment), one can expect more predictable and more precise information on clearing time and delivery shipments, and increased legitimate revenues.

• Tax administration. This includes a system for electronic processing and transmission of tax return information, online issuances of tax clearances, permits, and licenses, and an electronic process registration of businesses and new taxpayers, among others.

More often than not, the e-commerce initiatives of government are a barometer indicating whether or not the infrastructure supports e-commerce use by private firms. This means that if government is unable to engage in e-procurement, secure records online, or have customs fees remitted electronically, then the private sector will also have difficulties in e-commerce uptake. Virtually, the benefits from e-commerce accrue to the government, as the experiences of some countries reflect.

Are existing legal systems sufficient to protect those engaged in e-commerce?

Unfortunately, the existing legal systems in most developing countries are not sufficient to protect those engaged in e-commerce. For instance, with respect to contracts, existing laws were conceived at a time when the word “writing,” “document” and “signature” referred to things in paper form. On the other hand, in today’s electronic business transactions paper is not used for record-keeping or entering into contracts.

Another important and common legal issue faced by many developing countries is uncertainty regarding whether the courts will accept electronic contracts or documents and/or electronic signatures as evidence. One view is that the issue of admissibility of electronically generated evidence will not be resolved unless a law specifically referring to it is passed. This gap in existing legal systems has caused the emergence of at least two divergent views: one bordering on the conservative interpretation of the word “document” as to exclude non-paper-based ones; and the other involving a liberal construction, which allows electronic counterparts of documents.

In the ASEAN region, only three countries-Singapore (Singapore Electronic Transactions Act), Malaysia (Cyberlaws), and the Philippines (Philippine E-commerce Act)-have a legal framework for e-commerce. These frameworks provide for the legal recognition of electronic documents and signatures and penalize common crimes and offenses committed in cyberspace.

What other relevant policy issues should be addressed?

Other policy issues concern basic prerequisites of infrastructure for successful e-commerce, as follows:

1. Telecoms pricing and performance

One of the aims of telecommunications policy and legislation should be to ensure that the public has access to basic telecommunications services at a reasonable cost. The goal should ultimately be universal accessor widespread access to reliable information and communication services at a reasonable cost and its availability at a reasonable distance.

To enhance the quality of telecommunications services, policies should encourage:

• open access, which refers to the absence of non-competitive practices by network providers;

• open architecture, which pertains to the design of a system that facilitates interconnection among different systems and services currently and as they develop over time; and

• flexible access, which pertains to interconnected and interoperable networks of telecommunications, broadcasting, and electronic publishing, where the format will be digital and the bandwidth will be adjusted according to the demands of the user and the character of communications.

2. Quality and speed of distribution logistics (i.e., roads and bridges)

Roads and bridges, especially in developing countries, still form part of the e-commerce infrastructure. Very few goods are delivered over the information infrastructure or the Internet (the exceptions are music and software). Most of the goods purchased over the Internet are still delivered the conventional way (i.e., physical delivery). Hence, poor roads and bridges, inefficient transport systems, coupled with the high cost of international parcel services and bureaucratic customs clearance processes, are major obstacles in the uptake of e-commerce in developing countries. Government should therefore create a policy environment that will:

• encourage investments in the national physical and transport infrastructure; and
• provide for electronic customs clearance processing to streamline the bureaucracy and allow for more transparent, predictable and efficient customs operations.

Both of these will contribute to the reduction of distribution and logistics costs.

How can government intervene in the promotion and development of e-commerce among SMEs?

The following are the more relevant areas for government intervention with respect to SME uptake of e-commerce:

E-SME Development. The market ultimately drives e-commerce development, but it is the private sector that fuels it. Government can provide incentives to encourage widespread e-commerce use by SMEs. An “e-SME development program” in which various sectors can provide technical assistance to SMEs to promote e-commerce uptake, can also be developed. Banks, financial lending and training institutions, and corporations should be encouraged to develop “SME desks” that will address the specific needs of SMEs. In particular, steps should be taken to:

• provide incentives to individuals to become entrepreneurs by lowering borrowing rates;
• provide incentives to SMEs that intend to use e-commerce in their business operations;
• broaden credit extension facilities to SMEs in order for them to use ICT and e-commerce; and
• offer discounts on business solution software packages and software licenses.

Moreover, big businesses and corporations should be encouraged to transfer technology to SMEs by offering them free training in ICT and e-commerce.

Awareness Campaign. Evidence suggests that SMEs have insufficient knowledge of information technology and e-commerce. Many SMEs have identified their lack of knowledge of technology as one of the main barriers to using e-commerce. Government and private sector partnerships can engage in a campaign to disseminate information to SMEs about e-commerce policies, best practices, success stories, and opportunities and obstacles relating to the use of ICTs and e-commerce. These awareness campaigns could include free training courses and workshops on e-commerce, security and privacy, awards programs, and information centers to assist SMEs. Ultimately, this information campaign should come in the form of an overall e-commerce development strategy for the economy, focusing on its various innovative applications for SMEs.

E-Government. Government should be the lead-user of e-commerce if various business and private-sector related activities are to be prompted to move online. In effect, government becomes a positive influence. E-government can take the form of various online transactions such as company registration, taxation, applications for a variety of employee- and business-related requirements, and the like.

Network Infrastructure and Localization of Content. A developed national information infrastructure is a necessary, though not a sufficient, condition for e-commerce uptake of SMEs. Without reliable and inexpensive telecommunications and other information services, SMEs will not be able to go online. An important strategy in this regard is the construction of “telecenters” or electronic community centers that would serve as a community-shared access and connectivity platform especially in the rural areas (e.g., an electronic agri-information center which provides market information to farmers in rural areas). These telecenters can also be a venue for capacity building, skills enhancement, training, communications and content development. Government can also adopt agglomerative approaches to Internet use to reduce costs (e.g., export aggregators, such as B2B or B2C portals/exchanges for SMEs, which will facilitate trading with fellow SMEs and with other companies in the international market).

Strengthening Consumer Protection. Among the more common trust-related issues that SMEs take note of in considering whether to engage in e-commerce are: where and how payment takes place (whether real or virtual); when settlement takes place (before, during or after the transaction); who settles; whether the transaction is B2B or B2C; and whether settlement can be traced. Generally, however, among e-commerce users in developing countries, including SMEs, there is very low willingness to provide sensitive financial information over the Internet. On the other hand, consumers have reservations about transacting with SMEs through the Internet due to the lack of a clear policy on returns and use of data. To address this concern, government can encourage companies/ SMEs to make their privacy policy explicit in their Web sites.

A more comprehensive measure that government can undertake to ensure security in e-commerce transactions is the establishment of a Certification Authority, which verifies seller and buyer identities, examines transactions and security procedures, and issues digital certificates to those who are able to meet the set security standards. A good example of this government effort is Singapore’s Certification Authority, Netrust. This suggestion does not to discount the importance of private-driven security solutions such as Web sites like Hypermart, which host and build storefronts for SMEs while providing them a common system for secure payments.

Data Protection and Transaction Security

Transaction security pertains to three important components and related issues, namely:

• Transaction Privacy, which means that transactions must be held private and intact, with unauthorized users unable to understand the message content;

• Transaction Confidentiality, implying that traces of transactions must be dislodged from the public network and that absolutely no intermediary is permitted to hold copies of the transaction unless authorized to do so; and

• Transaction Integrity, which pertains to the importance of protecting transactions from unlawful interference-i.e., transactions must be kept unaltered and unmodified. In an open network like the Internet, it seems difficult to ensure these. There are, however, technological solutions that seek to address these security concerns. These solutions usually come in the form of authorization schemes, i.e., programs that make sure that only authorized users can gain access to information resources such as user accounts, files, and databases. Typical examples of authorization schemes are: password protection, encrypted smart cards, biometrics (e.g., fingerprinting, iris-scanning), and firewalls. A firewall is a system of cryptographic methods supported by perimeter guards to ensure the safe arrival and storage of information and its protection from internal and external threats. The most common data and transaction and data security scheme is encryption, which involves a set of secret codes that defends sensitive information crossing over online public channels. It makes information indecipherable except to those with a decryption/decoding key.

Government can also provide guidelines for SMEs in the development of a system of collaborative ratings, which these entrepreneurs can display on their Web sites not only to inform but also to assure their consumers of security. For instance, in electronic exchanges, customers should be able to rate suppliers in terms of quality of product or service and speed of delivery, among others. To minimize fraud, certain safeguards should be built into the rating system like imposing the requirement of presenting evidence of purchase before one’s rating can count, with ratings of regular customers having more weight. Trends in ratings and comments should be made readily available to all users. SMEs should also be encouraged through appropriate government incentive schemes to participate in internationally accredited Web-based online rating schemes.

Government can also design and establish a legal and judiciary framework that provides for minimum standards of and requirements for transparency, impartiality and timeliness. While in many developing countries this may be a very ambitious goal, in the medium term SMEs may use self-regulated codes of conduct covering, for example, return policy, data protection, and acceptable forms of content, that are applicable within associations, cooperatives or their respective groups of peers and e-entrepreneurs. It is important to have not only a rating system but also an enforcement regime that people trust.

Human Resources Development. The government can initiate pilot projects and programs for capability-building, training and e-commerce support services, such as Web design. In Kenya, for instance, the youth from Nairobi’s slums are being trained in Web design skills.

In general, government initiatives should be in line with current efforts in the foregoing areas of concern. Coordination with development cooperation agencies is important to avoid any duplication of initiatives and efforts.