Politics of MSME Development

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.

President Jokowi has mentioned the importance of mainstreaming the development of micro, small and medium enterprises (MSMEs) so that inclusive and fair economic growth can be achieved.

This was expressed at an event held by the Investment Coordinating Board (BKPM) on Jan. 18. The head of BKPM also showed a new investment policy framework in Indonesia: large businesses must collaborate with MSMEs. "Investment politics" by promoting cooperation between the two levels of business is a noble endeavor and has great leverage to create a national economic order that is more equitable and humane.

The National Development Planning Board (Bappenas) head, at the end of 2020, also stated that Jokowi\'s second term would focus more on the development of MSMEs. The Cooperatives and Small and Medium Enterprises Ministry has also improved the organizational structure at the ministry to strengthen the power and execution of MSME development. The ship has set sail.

Mainstreaming of MSMEs

Mainstreaming MSME development requires massive commitment and a number of steps, some of which must come from three main things: policy, organization and financing. MSME development policy can technically be coordinated by a special ministry, such as the SMEs Ministry, which needs institutional strengthening. At the policy level, collective action is needed that focuses on strengthening MSMEs through policy, fiscal or monetary efforts, trade, industry and agricultural or village-level efforts.

Fiscal politics must include incentives in taxation, excise, budgeting and other policies directed at this business level. Several steps have already been taken, such as lowering the final MSME tax in 2018. Trade policy regulates cooperation and competition, especially between small/medium business and large enterprises. Don\'t let them prey on each other. Industrial, agricultural and village policies, as well as others, work in line with this main effort.

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Organizing MSMEs is a very tough challenge. It takes enormous resources: bureaucracy, the business world, campuses and NGOs. So far, MSMEs have worked in fragmented structures. They are less consolidated – horizontally and vertically – and their information network is relatively weak. So far, the role of the bureaucracy has been very large in facilitating MSMEs, but it can be understood that its ability is very limited to support this burden. The most optimal facilitation that the bureaucracy can do is formulate ideal cooperation rules and strategies. If this can be executed smoothly, it will be a great blessing.

The classic problems faced by MSMEs are issues related to financing and flexibility. The majority of MSMEs do not have business legality and access to finance (88 percent of them have not obtained or applied for credit). The fiscal capacity to support financing needs is also small, including the available monetary instruments. Commitment from the financial sector (particularly banking) is also small. From time to time, the contribution of bank credit to MSMEs is no more than 20 percent of total credit. In Singapore, the proportion of credit for MSMEs is 30 percent, Malaysia 51 percent, Thailand 50 percent, Japan 66 percent and South Korea 81 percent (Bappenas, 2020).

Consolidation of fiscal and monetary resources is urgently needed at this point. The allocation of the fiscal budget is made into a single allotment for the benefit of strengthening MSMEs, not being spread across many ministries or institutions in the form of MSME development programs, so that there is one main source for comprehensive policies.

Banks, especially state-owned ones, should get out of their comfort zone and allocate more credit to MSME players.

Route to strengthening MSMEs

The national economic structure, if seen from several angles, is not ideal. One issue is the proportion of MSMEs to large enterprises. Most of the businesses in Indonesia are dominated by MSMEs (99 percent). Medium and large enterprises are often considered hopefully as a means to employ people, add value to the economy and increase exports. Medium and large businesses are considered to have good capital, technology and labor skills, so that it is not difficult for them to serve as pillars of the economy.

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However, looking at the composition of the structure, it is difficult to achieve the gigantic goal of economic development. On the other hand, even though the number is very large, it is difficult for micro and small businesses to be relied on to support economic transformation projects and export promotion. The President often reminds us of the process of "upgrading" as an effort to increase the number of medium and large businesses so that the level of welfare and economic competitiveness increases.

The focus of production costs is to reduce raw materials, increase technology utilization and improve labor competency.

Other countries whose economies are mostly also small businesses have created two routes to strengthening their existence. First, micro and small businesses continue to be facilitated so that business capacity, labor, capital and technology increase. Every business will be faced with the iron laws of the economy: efficiency and innovation. If small companies do not reach a degree of efficiency and carry out innovation, they will surely collapse. Efficiency and innovation are supported by two sources: the cost side of production and transactions. The focus of production costs is to reduce raw materials, increase technology utilization and improve labor competency.

The concentration of transaction costs is the efficiency of market penetration, corporate management innovation and policy adaptation. In developed countries, the facilities for both sources of efficiency are restricted to small businesses so that the overall capacity of their businesses is exactly the same as those of large businesses. The only difference is the scale of business, the rest (the workforce, business management and innovation power) have the same capabilities. This is the case in South Korea and Singapore.

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Third, intensive collaboration between small, medium and large businesses is needed so that players support each other. Business actors in the upstream, middle and downstream areas are neatly arranged so that there is a healthy level of competition and cooperation. This model guarantees two key things: markets and knowledge. Not every business needs to think about the product market because there are other players who will absorb the commodity, for example collaboration in the automotive industry. This collaboration also sustains the shared learning process so that knowledge will be distributed evenly.

Collaboration is built on three main principles: understanding, mutual benefit and collective work. This kind of collaboration model is carried out in Japan and Taiwan so excessively that all economic actors get into the economic carriage. In Indonesia, 93 percent of MSMEs have not established partnerships (Cooperatives and SMEs Ministry, 2019).

Business consolidation

Helping strengthen MSMEs on the field is an equally tough challenge. For decades processes of mentoring, coaching, empowerment and the likes have been carried out by the government, but many parties feel that the facilitation model has not yet made progress. Other approaches and innovations are needed in order for the desired success to be achieved. First, the solidification of MSMEs is a necessity. The number of micro and small businesses is so large that they must be merged first. Ideally, the number of MSMEs shoud not be more than 15 million businesses so that about 4-5 businesses are consolidated into stronger and healthier businesses, according to the same type and location of business.

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The MSME clusters have been operating, both naturally and with the facilitation of the government (central and regional), but not all of them have been followed with business mergers that have made the business actors increase their business scale and capacity. This basic step must be done first. This business consolidation will not be done quickly, but gradually. The process also takes into account social and cultural aspects so as not to cause unnecessary shocks.

Business literacy and explanations of the need for business unification should be carried out painstakingly so that the actors understand why this effort is mandatory. Once this is running, efforts to strengthen the capacity of business organizations can be directed toward these MSME actors. Times are constantly changing; business insights must also bloom in line with the demands of change, for example business planning, information management, technology adoption and innovation engineering. Facilitation at this level is not just through conventional training but is accompanied by inherent mentoring that is potentially empowering. Here, the bureaucracy will not be able to do it alone. There needs to be an injection of actors and experts who have the capability to work on the facilitation of mentoring.

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.

Only after that process is established, can program execution and financing facilitation be implemented. In many cases, financing that is not preceded by an incorporation process and strengthening of capacity has drowned MSMEs. The capital assistance being provided has made them more dependent so that their independence is far from expectations.

Likewise, capital without capacity will make the businesses use facilities in ways that are not in accordance with their intended purpose.

This sequence of facilitation should be realized and made into a joint consensus so that the targeted progress can be met.

This story has been going on for decades and is still repeating itself today. On the other hand, if the collection and strengthening of capacity has been enforced first, the financing facilities will support MSME actors to make it easier to use them for business strengthening. This sequence of facilitation should be realized and made into a joint consensus so that the targeted progress can be met.

"Ant warriors"

At the implementation level, institutional arrangements are a central issue so that this mainstreaming idea has feet. So far, the coaching model and various facilities have been ineffective in working on the field because several core things have been neglected. There are at least five issues that have not been maximized: (i) an unhealthy and unfair business climate that tends to kill small businesses. Micro and small enterprises are allowed to compete freely against medium and large enterprises that have network capabilities and significant capital; (ii) insufficient access to market information and opportunities. Small business actors rely only on information from neighbors so that product exposure is very limited; (iii) bureaucratic support (both licensing and export-import procedures) is weak so that most actors do not have legal businesses; (iv) limited business and digitalized marketing networks. About 94 percent of MSEs do not use computers and 90 percent do not use the internet; and (v) a lack of connection to downstream industries.

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The government has homework to do to ensure the adequacy of institutional support (macro and meso) so that MSMEs can operate comfortably. Competition regulation must be reorganized and enforced. In the past 20 years there has been intensive exploitation among business actors because of the loose (free) competition model, so tighter regulations in this regard are needed.

Furthermore, the government has invested heavily in policies so that business licenses can be fast and cheap, including tax incentives. This support needs to be continued according to the needs in the field. The development of network lines among MSMEs and cooperatives is a steep climb because this is one of the weak points. If business integration is executable, the problem becomes easier to solve. Only after that can we work on the arrangements for collaboration between large companies and MSMEs and cooperatives, as well as strengthening financial institutions.

In the end, the government is struggling with matters related to empowerment. Complete facilitation has limits, and so does affirmation. On the road map for strengthening MSMEs, the end point is empowerment so that they can surf independently on the economic waves. The business ecosystem begins with the character of each actor, namely the mindset of being a self-helping entrepreneur. As long as the mindset still relies on assistance/facilities (both from the government and other parties), the (micro) ecosystem will not take shape for MSME actors.

Kompas

Ahmad Yustika Erani

The phase of awareness and the formation of self-helping behavior are necessities that cannot be compromised. The transformation of organizational/business capabilities in the form of knowledge, expertise and skills is as vital as the creation of this sovereign character. Only with this process can the phase of empowerment edge (the power of initiative and independent business innovation) be obtained in a field. The time has come for these business-oriented "ant warriors” to encircle the world.

Ahmad Erani Yustika, Professor of economics and business at Brawijaya University, senior economist at Indef

(This article was translated by Kurniawan Siswoko)