How to ensure SMEs prosper

By James Castle, Todd Callahan & Andri Manuwoto

JAKARTA (JP): At the beginning of 2000, many economists predicted that Indonesia's economic growth would continue to falter due to the extraordinary problems faced by the government and business community. On the surface, this view appeared plausible. The exchange rate of the rupiah was still very vulnerable to depreciation. Big local business was saddled with massive corporate debts and the banking sector was not lending.

Furthermore, substantial foreign investment dollars stopped flowing to Indonesia as big international players sat on the sidelines. In this sort of environment, how in 2000 could the country book gross domestic product growth of 4.8 percent, which was significantly higher than other flat forecasts of between 0 percent and 1.5 percent growth? The answer was due in large part to the resilience and strong performance of Indonesia's nearly 40 million small and medium sized enterprises (SMEs).

The contribution of SMEs is not confined to just improving national economic indicators such as GDP growth. More importantly, SMEs continue to provide jobs to workers in an economy still reeling from the 1997 Asian financial crisis.

According to one report published by PT Biro Data Indonesia, SMEs employed 74.4 million workers in 2000. If we accept that the national labor force consists of approximately 80 million workers, this means that about 93 percent of all working Indonesians owe their livelihoods to small and medium sized businesses.

Other estimates from the ministry of cooperatives and private think-tanks put the number of Indonesians working at SMEs even higher. Setting aside the statistics for a moment, clearly SMEs are a critical source of employment in Indonesia and their strength has helped moderate the effects of the economic crisis still stalking the country.

It would be wrong, however, to draw too rosy a picture. Many owners of SMEs, like their counterparts at large-scale businesses, faced difficult times as a result of the economic crisis and more than a few downsized their operations or closed.

Moreover, the contribution of SMEs to the economy, albeit important, is still disproportionately small at only 56.7 percent of GDP. In comparison, Japan's SMEs contribute 85 percent of GDP, Singapore's SMEs 90 percent and Taiwan's SMEs 92 percent. In terms of national exports, Indonesian SMEs are also underperformers. Although statistics vary, it is safe to say large companies produce the vast majority of Indonesia's exports.

The weak export orientation and relatively low contribution of SMEs to GDP indicates that there is much room for Indonesia to expand their role in national development. To accomplish this, there are many things that can be done to improve the environment in which SMEs operate. Two of the most important are improving services or at least reducing obstacles from the bureaucracy and increasing access to credit facilities. Progress in these two areas would go a long way toward helping SMEs contribute more to the economy.

On the government side, the main impediments are predatory bureaucrats who exploit small scale entrepreneurs for their own personal gain. Their primary tool of oppression is complicated procedures that make running a business burdensome and give bureaucrats too much discretionary authority. This authority all too often translates into leverage for extortion.

According to one survey of SMEs conducted by The Asia Foundation, the incidence of formal and informal levies has actually worsened during the economic crisis. Levies, according to those surveyed, have increased an average of 50 percent to 75 percent over levies prior to the crisis. Meanwhile, the list of permits and licenses that an SME has to acquire has grown so long that many small business owners do not even bother anymore with the process.

Clearly the government must do something about this problem. Admittedly, it is unrealistic to expect much of the petty corruption associated with various business licenses to disappear overnight. The government, however, can reduce the burden on small and medium scale entrepreneurs by eliminating most of the licenses required. For example, there is no good reason why an SME owner should have to apply for a Certificate of Registration (TDP) and a Business Location License (SITU). The purpose of these licenses is redundant and they only serve to transfer more of the entrepreneurs' money into the pockets of dishonest bureaucrats.

Related to this point, SMEs cannot be passive if they want a better environment in which to conduct business. To ensure better service from the bureaucracy, SMEs need to form associations that push for more business-friendly licensing procedures. These associations should also speak out against the rampant rent seeking endured by their members at the hands of unscrupulous bureaucrats. Individually, there is little that SMEs can do to affect change in the bureaucracy. There is safety and strength in numbers, though, and SMEs should employ this leverage to their advantage.

Finally, if SMEs are to develop in Indonesia, more must be done to increase their access to credit. Overcoming this obstacle consists of two parts.

The first part involves educating SME owners, who are resistant to applying for credit, that they can benefit by tapping into loans to build their businesses. This is a much greater challenge than many observers might recognize. NGOs and other organizations can play an important role in making SMEs more aware of the benefits of credit.

The second aspect of increasing access involves changing the way that the government and financial institutions view SMEs. While the importance of SMEs has always enjoyed plenty of lip service, policies have overwhelmingly favored large industries and conglomerates. Bankers in the past, for instance, readily financed deals worth trillions of rupiah while they balked at providing small credit facilities to SMEs. Even government credit programs have failed, existing more in form than in substance. For example, PT Permodalan Nasional Madani, a state company established in 1999 to help provide finance to SMEs, is reportedly having difficulty appropriating the necessary funds from the government to carry out its mission.

The fact that SMEs are a vital part of the national economy is indisputable. Small and medium scale entrepreneurs have helped sustain the country through the difficult economic crisis by contributing to GDP growth and providing employment for the majority of Indonesian workers. A policy transformation now is necessary which prioritizes steps to improve the operating environment of SMEs so that they can play an even more important role in national economic development.

The writers work at PT Jasawenang Citrasempurna, a research and business information consultancy based in Jakarta.