Small but important

Government and private-sector economists in both developed and developing countries very rarely achieve a full consensus on any issue. But they share the same view on the important role of small enterprises in economic development. No wonder small business has been the topic of numerous conferences, seminars, either at national or international levels, and has become the target beneficiary of foreign aid programs in many developing nations.

Now the same topic is again the central theme of a three-day international conference at the Jakarta Convention Center that was opened by President Soeharto on Monday.

The benefits which small enterprises can generate for the economy are obvious. As President Soeharto said in his opening address, small businesses are labor intensive, their number is quite massive, their locations are spread out and their operations encompass almost all sectors of the economy. Various studies in developed and developing countries have shown that small enterprises also are quite flexible in their operations in that they can easily adjust to new business opportunities and develop new products.

These advantages prove that the development of small business is actually most appropriate to developing countries, which usually encounter high rates of unemployment and the problem of unskilled manpower. Further down the line, the bottom line of such a program is poverty alleviation and enhancement of more equitable income distribution.

The intriguing question then is why the development of small enterprises in the developing countries lags far behind that in the industrialized countries which pursue free-market capitalism. One may hastily blame the problem on the undeveloped spirit of entrepreneurship in the developing nations. That may well be one of the constraints but, perhaps, not a very significant one.

The experiences of almost all developed and developing countries, such as the United States, Japan, Germany, Taiwan and South Korea, which perform well in nurturing small businesses, show that the right environment is very crucial. What we mean by "environment" here is the right combination of the general business climate, the legal and regulatory frameworks and integrated support services.

Those countries we cited above all have small business acts, clear-cut regulations on contracts between small and big firms and all the necessary support services such as credit guarantee funds and local assistance centers that provide extension services in financial diagnosis, accounting, management and other aspects of business operations. Their development of small business also is based on the same principle: open market competition.

The first mistake made by many developing countries in small business development is to emphasize concessional credit funds and market protection. They wrongly assume that preferential treatment is the most effective way of nurturing small-scale businesses.

What is, in fact, needed is a conducive legal and regulatory framework, as well as open market competition.

The legal framework should enhance linkages between small, medium and large-scale firms because only through transactions with medium-sized or big firms can small enterprises develop their business. Small firms need legal protection for their deals with the "big guys". But large enterprises also need legal certainty for their transactions with the small firms because such deals usually incur learning costs. The regulatory framework also should provide small businessmen with easy entry to and exit out of business as the failure rate among start-up small enterprises is usually high.

Indonesia has done a lot in promoting small businesses. Banks, for example, have been required to allocate at least 20 percent of their total lendings to small firms. A ministerial post has been created especially to handle the development of small businesses and cooperatives. But the government has yet to provide a favorable legal and regulatory framework and an integrated support service network. The House of Representatives has yet to deliberate the bill on small business, a credit guarantee fund is still in the planning stage and support services for small enterprises have yet to be integrated.