Is software piracy bad for Indonesia?

economics ▪ intellectual property ▪

Here are two quotes that might give some insights into the trade-offs of intellectual property rights (IPR) policies. First, from the Jakarta Post:

"Using pirated software means depriving emerging software entrepreneurs of their right to grow and develop their businesses," said Microsoft Indonesia director Irwan Tirtariyadi at a piracy discussion in Jakarta on Tuesday.

Irwan argued that purchasing pirated software instead of more expensive genuine programs only helped to decrease opportunities for other software companies to compete in the market, particularly Indonesian developers.

"Basically, piracy decapitates competition. Hence, nobody will profit from it," Irwan said.

Another, from the Economist on the factor that has limited productivity increases in some rich countries:

Why does [Information Technology (IT)] matter so much? The greatest impact of advances in IT, notes Mr Nicoletti, has come since the mid-1990s. Countries with policies preventing their diffusion lost out. And because IT can boost productivity in many industries, its effects (or the absence of them) were felt across the economy. “Policies that prevent the spreading out of this technology”, he says, “are damaging precisely because of its general application.”

Strict enforcement of anti-(software)-piracy law is exactly the kind of policies that prevent the diffusion of IT to the greatest number of people, especially young people, in Indonesia. The claim of Irwan, the Microsoft man, that "nobody will profit" from piracy is simply wrong.

It doesn't mean that piracy will, in equilibrium, always be good for Indonesia. So, we need to think about its costs and benefits.

Here are some of its costs: The potential growth of local software producers. I think this is only partly true: Large scale software industries will surely fail to grow without a strong local IPR protection for softwares. But small and medium ones will survive, mainly by receiving outsourced work from countries with a mature software industry.

The benefits? First, productivity for the overall local services industry from the use of pirated software. The loss of this productivity from strong anti-piracy enforcements will be costly, mainly for small-to-medium local services enterprises and, at least in the short term, the cost will be huge.

The second benefit is to Indonesia's human capital. Enforcement of anti-piracy policies will reduce the extent to which schools and universities can introduce IT to their curriculum (or, at least, reduce the number of software available to use), and the extent to which parents can provide their children with brain-stimulating software -- limiting the kind of diffusion described in the Economist article. I think this will inflict a large medium-to-long-term cost to the Indonesian economy.

The bottom line? Without empirical evidence, it's hard to say. But were I to decide, I'd keep those Mangga Dua and Ambassador-Mall vendors alive...