Small and medium enterprises face a barage of problems

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?