MSME 4.0

KOMPAS/TOTOK WIJAYANTO

A shopper browses clothing for sale on Saturday (18/7/2020) in Blok B of Tanah Abang Market, Jakarta. Since the market reopened following the easing of the large-scale social restrictions (PSBB), it has yet to see customer numbers return to normal, particularly shoppers who come from outside the nation’s capital.

There is a trade-off between maintaining public health or safety and efforts to spur the economy.

We have faced this situation since Indonesia officially announced its first COVID-19 cases and implemented large-scale social restrictions (PSBB). From the beginning, we have placed our mental health and safety as our top priority. Livelihood affairs follow later. The principle: only saving lives will save livelihoods. However, after five months have passed, we cannot close our eyes, this pandemic has actually hit the Indonesian economy. This is evidenced by the decline in economic growth in the first quarter of 2020 to only 2.97 percent (yoy). It was still positive because the influence of the pandemic was not yet big. However, in the second quarter (April-June), yoy economic growth fell 5.32 percent. In the second quarter, the impact of Covid-19 on the Indonesian economy was purely illustrated, considering that the second quarter was the PSBB period.

Preventing recession

The limitation of social interaction plays a major role in weakening the economy. Moreover, economic activities with minimal contact (less contact economy) in Indonesia is still not significant. For the third quarter (July-September) it is difficult to predict. However, if the contraction continues, Indonesia will enter the brink of recession. This is what the government wants to avoid. Since June, the government has begun to relax the PSBB. The human health aspect remains the priority, with Covid-19 protocols is still being implemented. However, equal attention is starting to be given to the health of the economy. The issue of livelihoods is no less important. In the last two quarters of 2020, the central and regional governments were required to work hard to realize the state budget (APBN) expenditure plan of Rp 1.6 quadrillion.

Efforts to avoid this recession are certainly not easy, considering that many countries have already fallen into it, such as the US, Japan, Germany, France, Italy, South Korea, Hong Kong, and several neighboring countries, such as Singapore and the Philippines. The Covid-19 pandemic has indeed caused economic shocks leading to a global recession. Various policies to curb the spread of Covid-19, such as closing the schools and various business activities, PSBB, to lockdown result in a decrease in the level of consumption and investment in almost all countries in the world.

Also read : Minimal-Contact Economy

Careful and strategic thinking is needed so that the limited APBN expenditure funds can be channeled effectively in order to sustain economic activities. One that has a high urgency to be saved is MSMEs. The reason is that this sector is the most vulnerable to the economic downturn due to the pandemic. The results of the Indonesian Institute of Sciences (LIPI) survey last May showed that without assistance 47.13 percent of MSMEs could only survive until the end of this August; 25 percent will be closed in November; and 13.4 percent survive only a year since the pandemic broke out. Less than 15 percent of MSMEs are alleged to survive more than a year. This is different from the 1998 and 2008 crises.

During the two crises, most MSMEs relatively did not experience serious problems. Even those which were export-oriented and utilized domestic raw materials could make a profit. MSMEs arguably became the bumper of our economy at that time. This time the situation is different. This pandemic causes shock both on the supply and demand side. On the supply side because the supply chain is disrupted, while on the demand side there is a decrease in spending plus purchasing power.

Also read : Pharmaceutical, Medical Innovation

Kompas

Economic growth development (Annual in percent)

Practically all sectors and layers of society are affected. MSMEs that made sales physically had a very high vulnerability during the PSBB period. The number reached 87 percent of all MSMEs (Cooperatives Ministry, MSME, 2020). MSMEs in the fields of transportation and warehousing, tourism, education, accommodation and food services were the most vulnerable because they were estimated to last a maximum of three months.

It is not difficult to imagine what will happen if many MSMEs are forced to close their businesses. Bankruptcy, layoffs, bad credit, dwindling supply and demand are things we want to avoid. UMKM is a support for national production as well as a source of income and welfare for most of the community. The UKM Center of the School of Economics and Business, University of Indonesia, noted that in 2018 there were 64.19 million MSMEs in Indonesia, contributing 60.3 percent of GDP and absorbing nearly 117 million (97 percent) of the workforce. MSMEs provide nearly 99 percent of employment, contribute 14.17 percent to total exports, and are linked to 58 percent of total investment.

Enlivening MSMEs

This shows how important and strategic the role of MSMEs is in the national economy. Therefore, the economic impact of the pandemic will truly be devastating if there is no government intervention. So many people will lose their jobs and income if MSMEs collapse. The impact on unemployment and poverty will be very serious. The right and comprehensive policies to invigorate MSMEs are needed.

Also read : Technology Can Save MSMEs

Realizing this, since the end of April the government has provided stimulus for MSMEs in the form of interest subsidies, credit restructuring, and tax incentives with a total budget of Rp 123.46 trillion. The government will also provide productive social assistance in the form of easy access and guarantee of working capital loans. This scheme is in the finalization stage and will be launched soon.

Micro-entrepreneurs are also included in the social assistance scheme, especially those related to food packages. Opportunities are also given to MSMEs in the agricultural sector, home industry, or traditional shops to continue operating with strict health protocols. These various programs are intended to prevent the decline of MSMEs.

Also read : Bridging the Financial and Real Sectors

KOMPAS/TOTOK WIJAYANTO

A worker carries trays of freshly made tofu to the packaging section of a small tofu producer on Thursday (23/7/2020) in Pancoran, South Jakarta. As of July 21, the government has disbursed Rp 11.84 trillion in working capital for cooperatives and micro, small and medium enterprises (MSMEs) through national economic recovery program. The figure is 9.59 percent of the Rp 123.46 trillion fund for cooperatives and MSMEs.

Restructuring and credit interest subsidy could ease 125,000 customers of people\'s business credit (KUR). Food and non-food cash assistance, if right on target, will reduce the vulnerability of MSME actors who lose income even though temporarily.

However, these efforts are not sufficient because they are just short term. There must also be efforts to prepare MSMEs to enter the new habitual adaptations. MSMEs that are ready to navigate in the Industry 4.0 era. This pandemic must be seen as a momentum for digitizing MSMEs and encouraging them to become familiar with technology. This is no less important than the issue of financing and access to financial institutions. The challenge is that only about 13 percent of the 64 million MSMEs are connected to the digital ecosystem. The rest carry out all business activities through physical interactions, from buying, selling, marketing, to payment.

Also read : Maintain Commitment in Economic Recovery Plan

MSMEs that use the internet have proven to be increasingly able to withstand the crisis. The LIPI survey shows that MSMEs that have made transactions online are less affected by the negative impact of the pandemic than those which are still selling directly. For those which are internet literate, digital technology can and has been used to market products either through social media or the marketplace. The internet is also used to find information on business development and raw materials.

This pandemic is considered to have become a catalyst for the growth of digital MSMEs. More than half of consumers now increasingly use online services, particularly in markets with fast-growing transactions. During the pandemic, digital shopping transactions increased by up to 50 percent. This increase was also driven by the availability of multiple platforms and more practical payment methods through fintech companies.

Also read : Notes for Recovering the Economy

KOMPAS/ISMAIL ZAKARIA

A woman arranges a display of locally produced coffee on Thursday (23/7/2020) at a business meeting on micro, small and medium enterprises (MSMEs) in Mataram, West Nusa Tenggara (NTB). Local MSMEs have developed superior products from the NTB administration’s economic assistance for earthquake-affected communities. Today, MSMEs in Lombok have said they have been encouraged by the transition to the “new normal” phase of the Covid-19 mitigation measures.

During the pandemic, to make various efforts to connect MSMEs with potential buyers is badly needed. Currently, many small, micro and ultra-micro (home) entrepreneurs seem to be "disconnected" from their consumers. Selling through the online system requires access and literacy of MSME actors to technology, while not all MSME players have it. In fact, 97 percent of Indonesia\'s territory has been reached by e-commerce.

The desire to involve more MSMEs in the digital ecosystem is not easy. Apart from having a large population, generally they also do not have the basic infrastructure to enter. Many of them do not have computers, do not have phone credit or internet packages, and some do not even have cell phones. So, digital transformation is difficult to run smoothly because not all MSMEs are ready to run a business digitally.

Without innovation and business transformation, it will be difficult for MSMEs to recover and survive in this crisis.

This is where the role and involvement of the government is demanded. For example, the most real thing is giving a smart phone plus the phone credit for internet connection. The Research and Technology Ministry/National Agency for Research and Innovation can help and facilitate MSMEs regarding the ease of market access, connect with micro fintech, and enable them to adopt production technology that produces quality and up-to-date products. Besides that, it supports training and mentoring, product downstreaming, presenting a market platform, dissemination of information and campaign of MSMEs in the marketplace such as Tokopedia/Bukalapak.

At least four advantages can be created through the digitization of the MSMEs (McKinsey, 2018). First, financial gain through increased sales. Second, job creation. Third, the advantage for buyers with the opportunity to save 11-25 percent of the retail prices. The last, social equality, namely the opportunity for women to do activities and earn income through activities in the means of electronic commerce.

KOMPAS/RADITYA HELABUMI

Bambang PS Brodjonegoro

Without innovation and business transformation, it will be difficult for MSMEs to recover and survive in this crisis. Let alone, expecting it to skyrocket in order to ward off an economic downturn. Only with intensive training and mentoring, product downstreaming, and intense campaigning in the marketplace can we hope that UMKM 4.0 will be realized, namely MSMEs that are familiar with the digital world and technology. MSMEs which are adaptive with a dynamic digital technology ecosystem.

Bambang PS Brodjonegoro, Research and Technology Minister/Chairman of National Research and Innovation Agency (BRIN).