Mon, 11 Jun 2001

SMEs economic backbone during crisis

It has become evident that small and medium-scale enterprises (SMEs) are the backbone of the economy that prevents its total collapse, says Sri-Edi Swasono, a senior economist and adviser to the coordinating minister for the economy.

JAKARTA (JP): Small and medium scale enterprises use mostly local materials and components and have no foreign debts. So they have been doing well even after the rupiah melted in late 1997, driving the banking industry into bankruptcy.

Many SMEs which export their products have even been enjoying windfall profits. SMEs have proven to be one of the country's more resilient, vibrant and dynamic economic sectors.

Since they are highly flexible and not as severely affected by the melting rupiah as large businesses, many SMEs have improved their competitiveness on both the local and foreign market.

SMEs account for more than 99 percent of both business establishments and total paid workforce and contribute 57 percent of the gross domestic product and over 25 percent of total non- oil exports. SMEs operate in almost all sectors of the economy.

In contrast, large businesses were the most severely hit by the crisis because they depend largely on imported materials and components and owed large sums of foreign-exchange debts.

The development of SMEs fully implements the concept of people-based, people-centered economic development designed to increase people's productivity. People are developed and empowered to become highly productive assets.

This is what we call development through equity, which embodies the basic moral approach to national development as propagated by Indonesia's first vice president Mohammad Hatta.

As SMEs use mostly local natural and human resources, they create domestic added-value and purchasing power, which in turn strengthens domestic market demand.

One may wonder how the economy could have grown 4.8 percent last year while most large businesses were still reeling under mountains of debts. That is largely because of the robust growth of SMEs.

The development of SMEs also means the nurturing of a grass- roots economy; a frontal attack on poverty. Further down the line, this means welfare-economics aimed not only at generating economic added value for the poor but also socio-cultural added value for the underprivileged. This concept is effective in minimizing the social gap, thereby preventing social conflicts.

The government, which in the past paid lip service to the importance of SMEs, should now nurture them through a more conducive policy and favorable market conditions. One should remember that businesses, whatever their size, take birth, live and die in a market context.

Even the United States pays special attention and provides preferential treatment to its small businesses through its Small Business Administration Act.

Sen. Christopher S. Bond, chairman of the Senate Committee on Small Business, in a recent letter to Tony Agus Ardie, chairman of the U.S. committee of the Indonesian Chamber of Commerce and Industry, wrote that small businesses have been largely responsible for the economic expansion and job growth enjoyed in recent years in the U.S.

Bond even stressed the need for expanded cooperation between the SMEs of both countries.

What SMEs require is not so much subsidies or grants but basic support services such as low-cost regulatory system, fair market competition and business-friendly tax rulings.

This is not a case against the market economy but a market mechanism that leads to unjust free-fight competition that will disempower and push the helplessly weak out of the market.

The International Monetary Fund (IMF) could help in building a much more conducive atmosphere for SME development. Though its competence and authority are related mainly to the monetary sector, together with the World Bank, the IMF could contribute greatly to helping make "the basics" conducive for the vigorous growth of SMEs.

The IMF should take a lesson from its mistake in its bailout program in Indonesia in 1997-1999. During the peak of the economic crisis in 1998, more than US$80 billion in financial assets flew out of Indonesia at a time when the country was under the bailout program and tight scrutiny of the IMF.

This makes it imperative for the IMF to develop a more effective surveillance and monitoring system so that it will not be caught off guard by a similarly devastating crisis in the future.

The World Bank, which has assisted Indonesia's trickle-down development policy since the mid-1960s should now realize that too much emphasis on the development of large businesses is not sustainable economically and politically.

If the IMF or the World Bank does not take heed and learn from their mistakes, if both institutions do not improve their professionalism, many more members of the House of Representatives will be opposed to their involvement in Indonesia.