What the SMEs don't need: Unwise intervention

The following are excerpts of an interview with Erna E. Chotim, current research director of the Bandung-based Akatiga center. Set up in 1991, its main focus of research has included labor, small and medium enterprises and land issues.

Question: Your organization recently completed a study on small and medium enterprises (SMEs). What were your findings?

Answer: One of the most important factors that contribute to the marginalization of SMEs is the upstream-downstream business structure. The upstream flow of goods, the supply of raw material as well as production activities which mainly involve SMEs are concentrated on the upper-stream of industry.

Large businesses control both upstream and downstream industry, and they are there not because they are more competitive but because of (government) facilities and incentives. Take wood-related industry, for example. We know who controls forest concessions as well as the downstream chain of industry. This leads to monopoly and oligopoly.

Such a structure puts SMEs in poor position. Now if SMEs want to have a better bargaining position with a better margin of profit, they should have access to both ends of industry. Therefore, the government's approach to SMEs development must refer to this industry structure.

Q: What can be done to correct the situation?

A: The small and medium entrepreneurs can strive to access downstream industry, but it is the government that has to take proper intervention. Instead, the government often intervenes by applying policies that cause (adverse) impacts on other sectors.

Take the government's decision to reverse its earlier policy of allowing only half-processed or processed rattan exports. The government believes the new policy would benefit rattan farmers, but downstream rattan business such as rattan-furniture workers in Tegalwangi, Cirebon in West Java, now suffer from limited raw material. The farmers in Kalimantan now prefer to export their rattan rather for a bigger profit.

The government is often like that, issuing policies that later on will have to be amended by other policies.

Q: Why does the government has such a piecemeal policy on SMEs?

A: Poor coordination among technical departments in charge of SMEs development. The mobilization of credit schemes for SMEs, for instance, has led to greater availability of capital but out there, problems remain because there is no coordination.

The current government has promised to turn SMEs into the main pillar of its economy, but it really should take a more serious approach. The government has been focusing its attention on injecting capitals but neglecting the fact that most SMEs are able to overcome this problem but are hampered by other problems.

Remember how during the worst of the economic crisis many banks stopped issuing credits and yet the small businesses survived because they had the internal mechanisms to solve the capital problem.

Our recent study in Bali, Central Java, Yogyakarta, West Sumatra and South Sulawesi showed the SMEs had ways to survive. They subcontracted, they had principals that could help them in this matter, they borrowed from relatives.

Not that capital is not important, but there are certain stages when other problems such as the exporting process that imposed on them a greater strain. This is where the government and banking help is needed.

Q: The government pledged in its Letter of Intent for the IMF to empower SMEs. Your opinion?

A: Support from such international institutions usually takes the form of technical assistance such as training, help with credit issuance and others.

But let's discuss the problem of training for SMEs. The government still applies training modules indiscriminately, regardless of the different characteristics in the small businesses.

There is no medicine that cures all diseases, so training modules should be adjusted to the SMEs' needs. Considerations should be given to the kinds of the businesses engaged, and the upper and downstream structure of the industry they are in.

If a small enterprise needs access to the market, then training should be given on that matter. Training for businesses outside of Java, where marketplaces are distant, for example, should be different from training for Java-based SMEs.

In Yogyakarta, for instance, there are a number of (traditional) food businesses which have been given credit several times. Every time a new loan was to be given, the business owners were given some training on healthy food preparation. Come on! They know all that already.

What they need is training on other matters such as obtaining licenses (for expansion). The problem is that such training is now a condition of credit.

The business owners told me they took the training and the credits even though they knew that they wouldn't be able to do much with the money. They needed, say, Rp 100 million for expansion but only Rp 25 million was given. "We're not progressing nor regressing with the credits", they told me.

The reason why they took the loans was because who would refuse money? Some business owners even used the credits for other purposes, such as renovating their houses, rather than to develop their business.

Q: How will our SMEs survive the free-trade?

A: It is now time for the SMEs to be allowed to take more initiatives. Other players, including the government, should reduce their presence if it only causes negative impacts to the survival of SMEs.

The government must instead create a good business climate, which enables all entrepreneurs to play a fair game. It should establish facilities to enable the SMEs to access various opportunities.

The government needs to phase out its protection of SMEs. Allow them to develop naturally. However, it seems to me the government does not wish to take its hands off SMEs because these are (some government officials' money making) projects. (swe)