Small-scale enterprises and the grassroots economy

Small and medium-scale enterprises (SMEs) have always emerged as a major topic in seminars and discussions about Indonesia's devastating economic crisis.

The general conclusion is that, had it not been for the flexibility and resilience of SMEs, the entire Indonesian economy would long ago have collapsed into total ruin. So it was that the SMEs have been hailed as the savior of the economy.

However, while such multilateral institutions as the World Bank and the Asian Development Bank always define SMEs as a segment of the corporate or business sector, some economists view them as part of what they refer to as the people's economy (or the grassroots economy).

Other economists have tended to lump SMEs into what they call the informal economy, frequently seen as synonymous with the economy of the poor.

The different interpretations have led to different analyses of economic problems resulting from different policy recommendations, as can be seen in the debates within the year- end panel discussions of The Jakarta Post

One of the panelists asserted that Indonesia has never actually suffered an economic crisis. What it has been mired in since 1997 is, instead, only a banking collapse, or a monetary crisis.

"Just look at what the government has established to cope with the crisis," the panelist added. "It is a bank restructuring institution (Indonesian Bank Restructuring Agency), and not an economic restructuring agency."

Hence, he said, it is the banking industry that is severely sick -- not the nation's economy, nor the people's economy.The common people in the rural and urban areas, he said, have been doing well.

He asked what it meant when the economy succeeded in growing by 4.8 percent in 2000 -- at a time when most business conglomerates were being treated at the emergency hospital of IBRA.

Likewise, the national economy is estimated to grow by at least 3.5 percent in 2001, in spite of the weakening global economy and a crippled corporate sector.

That meant that the common people's economy, which accounts for 75 percent of the national economy, has been performing well, coming out as the savior of the economy as a whole.

Now that the nation's economic carrier has been salvaged by the people's economy, it is entirely irrational not to recognize the crucial role of the common people in the national economy.

He sees the people's economy as a self-reliant one, not dependent on big inflows of foreign capital. Hence, foreign capital inflow is not the prerequisite for a strong economic recovery.

The economist also advised the government, which he said had almost fallen into bankruptcy in bailing out big conglomerates, not to undertake any new borrowing, and not to pursue high growth driven by big conglomerate investment as a high priority policy.

According to his view, new foreign borrowing to plug the state budget hole (or deficit) is not the right medicine to cure what ails the national economy.

"The Indonesian economy is not sick at all; it has only been knocked into unconsciousness by the power of the global economy," he said. "The most effective way of dealing with these greedy, powerful capitalists is to further strengthen the resilience, and not the competitiveness, of the national economy."

He defined this competitiveness as a development process that makes efficiency, not justice, its top priority.

On the other hand, a national economy with a strong resilience can be constructed only through development with a built-in principle of justice, designed to empower the common people's economy.

Other panelists, while concurring on the crucial role of SMEs and the grassroots economy, disagreed with the assumption that the common people have been doing well during the crisis.

They cited the fact that almost 40 percent of all people are either underemployed or fully unemployed, and that almost 16 percent of the population lives below the poverty line (based on a daily per capita spending of $1 to support their argument).

"Official statistics show that since the onset of the crisis the per capita value generated by small businesses and cottage industries has been declining and their proportional share of the national economy has been decreasing," one panelist said.

It is, therefore, ill-advised to see small firms, cottage and home industries as the backbone of the national economy, as their back is quite fragile, he added.

He argued that the national economy expanded by 4.8 percent in 2000. But since the economy contracted by almost 14 percent in 1998 and remained flat in 1999, the 2000 expansion was far from sufficient to accommodate new job seekers -- not to mention the large pool of unemployed and underemployed.

This economist also observed that the farmers' terms of trade has been declining, and that the capacity of the rural economy to accommodate job seekers has also been decreasing. There has instead been a strong push from the rural areas which has, in turn, set off a higher rate of urbanization.

"Job creation should be made the top priority," said the economist. "The problem, though, is that new investment is needed to generate jobs, while the state budget cannot provide fiscal stimulus and private investors remain jittery about the security and political condition as well as weak law enforcement."

The focus, then, should be on making the total environment hospitable to private-sector investment -- including that of SMEs. Another panelist disagreed with the argument that the government should completely stop new foreign borrowing.

"How could the government survive without new foreign loans?" he asked. "Its revenues are not even enough to cover its debt service payments, its price subsidies for basic commodities, fuels and civil servants' salaries.

"That is the stark reality that we have to live with," he added. "The best the government can do is steadily cutting down new foreign borrowings until they stop altogether in 2004, as it has pledged to do."

In fact, he said, the government has already begun decreasing its foreign borrowings.

For fiscal year 2002, for example, the Consultative Group on Indonesia has pledged, at the government's request, only Rp $3.1 billion in new loans -- compared with the $4.7 billion that had been committed for 2001.