People's Economy
The controversial people's economy concept, which Minister of Cooperatives and Small Enterprises Adi Sasono has staunchly promoted since last June, has gained endorsement from the quarter considered most important for its advancement.
The International Monetary Fund's Asia-Pacific director Hubert Neiss discussed the issue in a meeting with President B.J. Habibie on Monday. Neiss said that policies under the people's economy concept -- which will focus on the empowerment of small and medium enterprises (SMEs) -- would be included in the next letter of intent on the economic reform agenda between the Indonesian government and the IMF due to be signed mid-March.
In fact the program is a not entirely new concept within the government's economic development program. Former president Soeharto -- notorious for his cozy relations with tycoons -- launched measures in the late 1980s designed specifically to bolster the role of cooperatives and SMEs.
In 1990, Soeharto directed big business groups to allocate up to 20 percent of their shares at par value to cooperatives. State companies were instructed to set aside at least 5 percent of their net earnings for helping SMEs. Other special programs were also set up.
However, these programs, similar to previous schemes, faltered after a short while, as a result of collusive and corrupt interventions. Due to a lack of transparency and accountability (as well as institutional capacity), the funds allocated for these programs flowed largely to officials, middlemen and big companies, abandoning the target beneficiaries.
The controversy and criticism triggered by Adi's initiative to revive the concept seem to rest more with his promotional manner, his constant attacks on ethnic-Chinese businesspeople and his confusing statements about the redistribution of assets. Perhaps the most damaging aspect of his public-opinion campaign -- and the reason why his populist pitch remains suspect -- is his political lobbying activities together with his close ties with President B.J. Habibie. Habibie, despite his unpopularity and lack of legitimacy, is suspected of harboring strong ambitions for reelection.
Theoretically, all economists agree that economic development is more sustainable socially and politically if it is broad based, which means that economic activities are not too heavily dominated by big groups but involve an extensive web of SMEs. Moreover, most studies have proven that SMEs are labor intensive, more flexible, easily adaptable to market demands and are based mostly on local resources, which make them even more appropriate for application in Indonesia.
Adi's campaign -- already questionable due to his background -- has in addition been raising many eyebrows because of the complete absence of technical details on how he would manage the distribution of the Rp 10.8 trillion (US$1.23 billion) in subsidized loans allocated for the people's economy program.
His dogged determination to push ahead with the program at a brisk pace, in spite of what many analysts see as inadequate institutional capacity to manage the operations, unavoidably raises the prospect that Adi is dispensing political goodies either for his own or Habibie's popular appeal.
Unlike the social safety net project, which distributes money to poor people, the people's economy program is a business concept designed to build up a large pool of SMEs in order to eventually form the backbone of the economy. The biggest challenge then, lies in the assessment of the business viability of those who will be given the subsidized loans. This is not a simple process, given the different characteristics of the many business areas in which SMEs operate and the scattered locations of the target beneficiaries.
The program is highly vulnerable to corruption and failure if adequate institutional capacity as well as competent and highly dedicated personnel are not in place to manage and oversee the program. And we all know, given past experiences with similar programs in the past, that it takes some time to create such preconditions.
A gradual approach is especially warranted for ensuring a smooth execution of the program, because the spread-out location and different characteristics of the target SMEs require the development of local autonomy and a decentralized organizational structure to allow for an effective credit-quality control system.
Pushing ahead speedily with the program now, despite the complete lack of the vital preconditions cited above, would succeed only in temporarily dissipating, not solving, the issue of inequalities in the distribution of income and the ownership of economic assets. Then the program would die out after one or two years, just like previous schemes, leaving behind new trails of bad credits.