Official support for SMEs in Indonesia has been a priority of all post-independence governments, from Sukarno to Susilo Bambang Yudhoyono. Support for SMEs has featured prominently in key government documents, such as five-year plans (Repelita), Broad Outlines of Government Policy and other official statements (Hill 2001). Indonesia’s newest president, Joko Widodo also made promoting SMEs and reducing the cost of obtaining business licences a priority in his campaign platform.
However, many policymakers view support for SMEs as a form of social welfare. Programmes to enhance the performance of SMEs are often justified with arguments for equity or fairness and considerations for social justice. During the Suharto era, SMEs were often not considered a vital part of the economy but seen as a social group in need of assistance (Wie 2006). From informal discussions with policymakers, this view persists and it is thought that because SMEs are inherently disadvantaged by unfair competition in the marketplace, they require special support. Programmes to promote SMEs are sometimes justified on the basis of encouraging rural or regional development and gender equality or redressing perceived ethnic imbalances in business ownership (Hill 2001).
In chapter 2, we argued that SMEs play a vital role in Indonesia’s economy. If we include micro firms, nearly all firms in Indonesia are SMEs and these firms account for approximately 97 percent of total employment. Given the prominence of SMEs in Indonesia and their role in paying wages and employing workers, it is important to stop viewing support for SMEs as a form of social assistance. Instead, policies to promote SMEs should be focused on promoting economic growth and improving productivity, not on reducing inequality, reducing regional disparities or promoting inclusive growth. These policies should be evaluated and justified on the basis of economic efficiency instead of equity.
In box 6, we describe the experiences of several policymakers and their attempts to collect data on SMEs, design and implement programmes to support them and work with other offices responsible for supporting these businesses. Policymakers encountered a range of challenges when they tried to implement programmes, including inadequate accurate information on SMEs in their jurisdictions and coordination issues between different agencies implementing programmes.
67
Recommendations for Improving Policies to Support Small and Medium-sized Enterprises
Recommended policy actions
We recommend the following policy actions to improve the existing range of SME support policies and to help policymakers make more informed decisions:
• Policies to assist SMEs should focus on promoting economic growth, improving productivity and creating an enabling business environment. Issues of inclusive growth, inequality or social assistance are secondary.
• A more detailed and frequently updated national registry of SMEs made available at all levels of government would enable policymakers to design and target SME support programmes more effectively. • Policymakers need accurate and timely information about the actual size and importance of the SME
sector in the Indonesian economy, which will help shape the debate about how the government views and treats SMEs.
Box 6 Stories of policymakers’ experiences with SME support programmes
Aceh, North Sumatra Department of Cooperatives and MSMEs
An officer we interviewed in the provincial Department of Cooperatives and MSMEs in Aceh believes that capital and access to markets are major barriers for SMEs in Aceh. He reported that the local Office for SMEs and Cooperatives, Industry, Trade and Labour in Aceh has a number of programmes designed to help SMEs, including training courses, organising events and procur- ing equipment. However, their main constraint over the years has been maintaining updated data on active SMEs. The officer was aware that the original data they had did not accurately reflect the existing firms. The earthquake and tsunami in 2004 had destroyed all the data on SMEs and other business enterprises in Aceh. This led the office to collect new data in 2014 so they could provide assistance and design suitable programmes for these enterprises. After the ten-year gap in data collection, the district found that most of the SMEs formerly listed no longer existed although they still showed up as registered beneficiaries of government programmes. Another challenge is inaccurate data due to the frequent rotation of district officials who are charged with collecting basic information on SMEs.
North Sumatra Office of Industry and Trade
One officer in North Sumatra’s Office of Industry and Trade identified food processing and coffee as leading sectors in the area. While the government has run training programmes on access to credit, procuring equipment and technology development, this officer said that the main obstacle for SME programmes was the weak coordination among government offices. SME-relat- ed offices (the Office of Cooperatives and SMEs and the Office of Integrated Licensing) each designed and implemented their own separate programmes. The officer recommended that all SME development programmes should be planned, implement- ed and evaluated in a coordinated manner across offices. A related problem is that local governments treat SMEs differently. For example, some local governments concentrate on administrative issues for small businesses but do nothing to expand their markets while other local governments have broader agendas for SMEs.
Central Java Department of MSMEs, Cooperatives and Markets
An officer in the Central Java Department of MSMEs, Cooperatives and Markets had transferred from another government office six months prior to our interview. Rotational positions among local government offices are common and, in this officer’s experience, this leads to a lack of knowledge about SMEs among government officials. Due to the rotation policy, the officer is not able to do anything innovative so is just continuing the SME programmes already in place. This officer finds it difficult to collect detailed data on SMEs because (1) there is limited data to be collected and a lack of cooperation with Statistics Indone- sia, and (2) SME owners are afraid that government will burden them with taxation. He also pointed out that there are a lot of overlaps among the departments in charge of SMEs. For example, the local Office of SMEs, Cooperatives and Markets and the local Office of Industry and Trade are working in the same area, and carrying out similar programmes, such as fairs and training for SMEs, but the division of authority between the two offices is not clear.
Bandung, West Java Local Office of Cooperatives and SMEs
A city government official in the local Office of Cooperatives and SMEs in Bandung, West Java, thought that the constraints SMEs face included capital, marketing, production technology and financial administration. The official also noted that SME owners often mix up company and household funds. This leads to problems with obtaining bank loans. Some entrepreneurs cannot calculate the annual revenue of their businesses, so the information for bank lenders is unsatisfactory. In his work, he found that SME programmes and events are not well planned. For example, he has been asked to find participants for SME training at short notice. He asked the subdistrict officials to identify entrepreneurs who had the time to participate but the local government did not have SMEs listed in their database.
• Many SMEs, especially the smallest, are probably not growth-oriented but policymakers and their policies need to target those SMEs that are growth oriented.
• While eliminating overlaps between government offices responsible for supporting SMEs may not be feasible, policies and financial resources that support better communication and coordination across offices, at the local and national levels, may reduce barriers for firms trying to navigate government policies and programmes.