What the SMEs don't need: Unwise intervention

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)