Small and medium enterprises face a barage of problems

By Santi W.E. Soekanto

JAKARTA (JP): Can only the rich do business in Indonesia?

The question was posed by a small-scale trader in Jakarta in her letter to the editor of Republika daily recently. She was describing the threat of Indomaret minimarkets which have sprung up in every corner of the city, even in the suburban areas and villages, causing great concern to local traders.

"As a giant in the retail business, Indomaret has rich experience in the business and is supported by an effective marketing approach and huge capital. Therefore, it can easily cause the owners of kiosks and stalls who have only hard work and strong will as their capital to go out of business. These small- scale traders are usually lacking in capital and technical experience," she complained.

"These worries have haunted us small-scale traders, and the question whether only the rich can do business in our country and we -- the economically weak -- must be left marginalized," she added.

The letter aptly summed up what is happening to Indonesian small and medium enterprises (SMEs). The small fries in the Indonesian business world are having to contend with not only the Goliaths, but also a basketful of other problems such as poor access to credit and information as well as inadequate human resources.

For instance, the Indonesian SMEs were among those affected by the IMF-sponsored economic restructuring which included reduction of subsidies, the privatization of state enterprises that had been operating in the red, and bank restructuring. Countless small businesses have reportedly closed following the collapse of banks appointed to serve them.

There are currently about 40 million SMEs in Indonesia, making up 99 percent of all of economic players in the country. However, for more than 30 years under Soeharto's administration that ended in May 1998, the businesses in the one percent were the focus of his economic policies.

Banking regulation and taxation, for instance, were geared to facilitate activities of large businesses. The policy on SMEs was usually formulated in conjunction with the government's poverty alleviation programs -- which initially targeted at least 22 million people but rapidly increased to more than 100 million, or half of the population, following the crisis.

Strong regulation marked Soeharto's policy on SMEs -- up to the point where a loan for a poor family amounting to Rp 2,000 (approximately US$0.15) was arranged through a number of village bureaucrats. This particular program stopped functioning when the Soeharto government was replaced.

However, when millions of people became unemployed and small and large businesses alike folded in the months following the start of the 1997 economic crash, millions of new small businesses emerged.

For instance, former executives in Jakarta opened up roadside food stalls and small convenience shops. The mushrooming use of tents for food stalls lent to the term "tent cafes" (kafe tenda).

The SMEs in Indonesia became what scholars described as a "safety valve" which helped millions of people survive the brunt of the economic crisis. The SMEs are "Indonesia's main economic pillars."

Still, policies of succeeding administrations, under the pressure of international financial institutions such as the IMF and World Bank, are still biased toward large corporations. The government has set aside Rp 300 billion (approximately US$23.7 million) for SMEs' credit programs, but has prepared Rp 360 trillion (approximately US$28.5 billion) for re-capitalization of bad banks.

This imbalance serves to illustrate two points: the vulnerability of SMEs to external shocks of macroeconomic policies, but also their resilience in the face of economic failure.

What is an SME? A small business is usually defined as a venture financed by one individual or small group and is directly managed by its owner(s), not through the medium of a formalized management structure.

It is perceived as small in terms of physical facilities, production/service capacity, market share and number of employees. A small business usually has no power to control prices of the products it buys and sells and the credit it gives and receives. It will typically have fewer than 20 employees but may have as few as one (the owner-manager) or as many as 500.

The small business serves as an important economic player in both developing countries and the most developed ones. In Indonesia, according to official 1998 statistics, there were 36.81 million enterprises of which most or 36.76 million were small firms, 51,890 medium-scale businesses and 1,831 big companies.

Their employment was 57.34 million, 6.97 million and 0.36 million respectively. Small enterprises in the agricultural sector, including livestock, forestry and fisheries, were the largest employers with 62.83 percent of total employment in the small-business sector. These figures changed following the crisis, and the government's last estimate of the number of SMEs today is 40 million.

For comparison, in the United Kingdom, the small business sector grew from an estimated 1.9 million firms in 1980 to 2.8 million in 1990, with 90 percent of such businesses employing less than 20 employees.

In 1999, the figure grew to 3.7 million small businesses which accounted for 44.3 percent of total turnover and 51.2 percent of total employment. This is a feature that is replicated in other advanced industrial countries such as Germany, Japan and the United States.

In Japan, almost 80 percent of jobs are in small and medium businesses employing less than 300 people. In USA, there are more than 20 million small businesses with almost 250,000 new ones emerging each year and employing six out of every 10 people.

In Australia, the number of SMEs exceeds 799,000 or more than 90% of total Australian businesses. They play a critical role in the Australian economy and account for more than 50 percent of the collective purchases of government and corporations.

They also account for the majority of private sector employment growth in Australia, employing more than two thirds of total non-government workforce. They account for 54 percent of total Australian sales in goods and services, about 40 percent of the taxable income generated by Australian businesses and more than half of the GDP.

The SMEs constitute the bulk of economic activities, which explains why they are so important.

One scholar, Ted Fuller, said last year: "Microsoft was small once."

More countries and international communities -- such as the World Bank, the G7, and the Asia Pacific Economic Co-operation (APEC)-now realize the importance of SMEs and their empowerment.

How do governments empower the SMEs? One of the views frequently expressed is that governments need to intervene by introducing regulations that benefit the SMEs. However, experts and many SME owners themselves have argued that a lower degree of government intervention would contribute more positively to the development of competitive SMEs.

British government policy on the SMEs can be used as an example. Prime Minister Tony Blair promised in a speech in February 1999 to constantly look at ways to improve the situation of SMEs. However, since he was in office in May 1997, more than 2,000 new regulations affecting SMEs have been implemented and small business bankruptcy increased by 14 percent during the first half of 1999.

Included in those regulations are extended maternity leave, parental leave, welfare to work and working time directive. The last policy, for instance, guaranteed employees three weeks paid annual leave which rose to four weeks in November 1999. This policy, according to some writers, means production of fewer units and higher production costs while customers refuse to accept price increases.

Another example of strong government intervention in SMEs is the Indonesian poverty alleviation program. Less than two months before his removal, Soeharto launched a new credit scheme to help develop small business.

Called the Business Partnership Promotion Credit (KPKU), the low-interest loan scheme regulated the running of small businesses by members of the government-sponsored Prosperous Family Program (Prokesra).

The loans -- from a government budget of Rp 500 billion (then approximately US$ 58.8 million) -- were to be given to those who had a partnership program with small and medium sized companies and cooperatives. This usually meant a connection with Golkar.

The heavy government regulation in the Prokesra scheme was evident in a number of activities including the obligation of participants to replace their homes' dirt floor with cement.

On the other side of the fence are those who argue for government intervention. This group believes that, in reality, no economic activities today go without regulations -- and these affect all economic institutions including small businesses.

Some scholars think intervention occurs and affects SMEs because of the very vulnerability of the small businesses to macroeconomic regulations of the government.

Banking crises involving failures, capital shortfalls, regulatory changes, or other difficulties have in recent years occurred in both developing and developed countries such as Japan, the USA, Japan and the Scandinavian countries.

This was usually followed by periods of recession or reduced economic growth. Indonesia is a case in point -- small business finance can be severely affected by policy shocks such as bank restructuring demanded by the IMF.

By the end of 1996, Indonesia's foreign loans (public and private) constituted 73 percent of the country's GDP, compared to the Philippines, 64 percent, Thailand, 63 percent, Malaysia, 56 percent, Singapore, 15 percent, and Taiwan, 12 percent (Far Eastern Economic Review, March 1999).

Large enterprises in Indonesia and other Asian countries contributed to the high level of foreign loan exposure in the region. When these countries had to undertake a massive bank restructuring, including mergers and acquisitions, the small businesses were affected as well.

It is clear that small business cannot escape government intervention -- even if it is in the form of policies meant for large enterprise as well macroeconomic policies. If we accept this conclusion, the next logical question would be what kind of intervention is needed to enable SMEs to grow stronger?