Transformation of MSMEs and Cooperatives

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.

From time to time, the structure of micro, small and medium enterprises (MSMEs) in the country has not shown significant changes. Micro businesses have continued to thrive while small and medium enterprises have been stagnant.

Statistics Indonesia (BPS, 2018) recorded 63.4 million micro business players (98.68 percent of total business players in Indonesia), 783,132 small business players (1.22 percent), 60,702 medium business players (0.09 percent) and 5,550 large-scale business players (0.01 percent). Nonetheless, labor absorption in the sector of MSMEs has been quite high, reaching 97 percent.

Micro businesses can mostly be categorized as subsistence economy, although a small number of them have innovative products and business models with the potential for class promotion. This fact explains that those unaccommodated in the formal sector have to open their own businesses to support their families.

Cooperatives have also been stagnant and have become increasingly unpopular among millennials. Registered cooperatives totaled about 123,048 (2019), almost 60 percent of which were engaged in credit savings. The population’s cooperative participation ratio in the country was only 8.41 percent, lower than the world ration of 16.31 percent.

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Cooperatives’ contribution to the Gross Domestic Product (GDP) is also only 5.54 percent. Cooperatives have not yet played a significant role in promoting small and individual businesses of an economic scale. The slogan of cooperatives as the “backbone” of the national economy is yet to be strived for.

On the other hand, the rate of unemployment is quite big, totaling 6.9 million people. This is not to mention the newly unemployed due to the Covid-19 pandemic. Indonesia has to provide job opportunities for at least 3-million new workforce annually. The average economic growth rate of 5 percent over the last five years is not sufficient to create employment in the country.

People already employed have to share with those still out of work.

Consequently, every family has to support unemployed members of the family. Intricately, the policy option of employment expansion also has to face the demand for wage increase. People already employed have to share with those still out of work.

Not yet consolidated

So far, the management of MSMEs has not yet been properly consolidated. In fact, MSMEs affairs involve many hands, at least 18 ministries and dozens of agencies and regional administrations. The most basic things like single data on MSMEs becomes difficult to obtain for planning, development and evaluation. Funding channels and schemes that relatively are now generously available to MSMEs should be synergized to support priority sectors and be adjusted to their needs.

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Today we are presented with the Job Creation Law. On the one hand, this will facilitate the designing of a national strategy for the development of MSMEs. On the other, this will also answer the main problems of MSMEs and cooperatives, such as their licensing access, financing access, market access and the need for strengthening their human resources.

At least 79 sectorial laws have been slashed or supplemented to ascertain the easier growth of MSMEs. This is a major agenda of deregulation and debureaucratization to respond to a big challenger as well. There must be many interests and comfort zones that are disturbed.

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Therefore, it’s not exaggerating to say that the party primarily enjoying the benefits of the Job Creation Law is MSMEs. The fact is that at present the majority of business players in the country are MSMEs. Lengthy, complicated and highly uncertain business licensing regulations always give rise to administrative corruption at all government levels. For MSMEs this is a hard blow because they lose the opportunity to utilize public service facilities. Indirectly the business participation access for the lower-class economy becomes limited.

Deindustrialization is not only experienced by Indonesia but also by neighboring countries, except Vietnam.

MSMEs contributed 60 percent to the GDP (2018). Meanwhile, the manufacturing industry’s contribution to the GDP has been declining from year to year. In 2008 manufacturers contributed 27.81 percent and in 2019 only 20.07 percent. Deindustrialization is not only experienced by Indonesia but also by neighboring countries, except Vietnam.

DOKUMENTASI PRIBADI

Musa Hubeis, Professor of IPB University, is often a guest speaker for the development of MSMEs in Indonesia. During the Covid-19 pandemic, the fate of MSMEs became a byword. Musa was often asked to be a guest speaker at a webinar program about MSMEs.

Some hold the view that this development is not only due to the many manufacturing companies being relocated abroad, but also because their manufactures fail to compete with cheaper products of China.

It should be noted here that productivity and inefficiency become the main issue of domestic business activities that requires a solution. The Job Creation Law will be put to the field test how far it is capable of getting rid of various sources of high-cost economy as well as preparing an inexpensive system of logistics and basic materials. The current logistic cost in Indonesia is comparatively high, standing at 23.5 percent of the GDP. Based on data from the World Bank Logistic Performance Index, Indonesia ranks 46th, Malaysia 41st, Vietnam 39th, Thailand 32nd and Singapore 7th. MSMEs as a national economic buffer will find it harder if deindustrialization keeps going.

In the meantime, national large-scale businesses have not yet significantly entered downstream operation and developed modern industrial technology to substitute the fields of work left behind by the sunset industry. Large mining or estate companies, for instance, still give business priority to the control of concessions rather than their downstream activity.

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The maritime sector has great economic potential not yet seriously handled. Many big capital holders are now even opening basic staple stores, coffee shops and others. The tradition of wealthy people in advanced countries to join the development of research, industrial technology, higher education and philanthropy perhaps should become the new prestige of the rich in Indonesia.

Transformation of MSMEs

Partnership between MSMEs and large-scale businesses becomes a crucial part regulated in the Job Creation Law. Startup businesses among young people with higher education now flourishing and showing the potential for further growth need to be given access to low-cost financing through crowd funding, venture capital, angle capital, or seed capital. If investments are only directed at large-scale businesses, the economic gap will be even wider. What should be anticipated in this partnership scheme is the presence of protection and guidance so that small enterprises will not be overwhelmed by the big ones, but they are progressing together.

From the experience in many countries, MSMEs integrated in the production chains of large industries have the chance of class promotion for being connected with the ecosystem that enables them to develop entrepreneurship. The automotive production chain in Japan or the metal sector in Indonesia has such connection although still on a small scale. Part of the partnership in Indonesia is found more in the distribution chain of large industries’ product trading, or later the digital platform offers many domestic market access facilities to small businesses.

In Japan, MSMEs in the manufacturing sector contribute 50 percent to Japan’s exports. In China 70 percent of its exports are contributed by MSMEs that have an important role the global supply chain. Telecommunication and electronic companies get supply from MSMEs’ spare parts. In South Korea, MSMEs’ 38 percent exports are supported by the model of partnership between large and small businesses that enable them to innovate.

“Chips, agates and batiks” still dominate MSMEs’ activity in Indonesia. Beyond agriculture, 60 percent of micro and small enterprises specialize in foods and beverages. MSMEs’ exports have kept decreasing year after year to only 14.37 percent (2018), below Malaysia, Thailand and Vietnam.

The model of developing successful micro and small businesses has the potential for their class promotion through business incubation. This is the appropriate choice to present future MSMEs capable of competing on domestic and global markets. The involvement of colleges in preparing future entrepreneurship with excellent human resources is highly important.

We should admit that on the online market many “trivial” things widely sold for daily needs still rely on imports from China. We should increase the entrepreneurship rate currently still 3,47 percent as a prerequisite to becoming an advanced country.

The transformation of MSMEs and cooperatives to the productive sector and their integration in the chains of industrial production, especially in domestic prime sectors such as downstream operation in maritime, estate and mining sectors, is the solution to boosting economic growth in order to increase labor absorption amid the loss in competition of import-material based manufactures on domestic and world markets.

The waging policy excepted from the regional minimum wage of the MSMEs sector will be more competitive and encourage large-scale businesses to subcontract their work to MSMEs.

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The acceleration of digitalization of MSMEs and cooperatives becomes a major part of the Job Creation Law’s project to realize innovation and productivity. At present the MSMEs already connected with the digital ecosystem has only reached 16 percent or around 10.25 million players.

The value of Indonesian digital economic transactions is the highest in Southeast Asia and projected to achieve Rp1,826 trillion in 2025. Today most of the Indonesian territory can relatively be accessed by digital trading as a result of the accelerated development of internet and land infrastructure. There have been many digital platform innovations, on national and regional scales or certain captive markets. Moreover, the MSMEs already connected with the digital ecosystem have proven to be capable of surviving the pandemic period. This trend is expected to further increase in the post-Covid-19 time.

The facilities provided by the government in the Job Creation Law concerning the formation of limited liabilities (PT), cooperatives and licensing, as well as tax incentives and healthcare and worker social security (BPJS) for micro and small businesses may speed up the transformation from the informal to the formal economic sector. This is very fundamental for the development of a stronger national economic structure. Ideally the national economic structure takes the form of an earthen jug, rather than a pyramid with a broadening base in the micro business sector.

Kompas

Teten Masduki

I am convinced MSMEs and cooperatives can serve as the foundation of the national economy if their productivity are maximized. The development of successful MSMEs and cooperatives based on zones and supply chains will accelerate their class promotion.

Teten Masduki,Minister of Cooperatives and SMEs