People's Economy

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.