The government always prioritizes the development of small and medium enterprises (SMEs). It has launched numerous policy instruments to assist them.
But unfortunately, there has never been a comprehensive official evaluation of these policy instruments and their effectiveness. Several empirical studies conclude that the numerous policy instruments have been largely ineffective in promoting SMEs.
The failure is related to the government’s basic approach. The government tends to see SMEs as unable to adapt to economic and market operation. Thus, many policy instruments for SMEs have been designed around political and social motivation rather than economic.
Strong emphasis on the provision of direct assistance is strong evidence that the government’s policy instruments for SMEs are designed on the assumption that SMEs will be affected adversely by the unfettered operation of economic and market systems. This assumption leads the government to provide direct assistance on the basis of a strong welfare orientation. Hence, the direct government assistance failed to provide sufficient economic incentives to promote SMEs. Indeed, as some scholars pointed out, SMEs that both did and did not enjoy direct assistance have a similar pattern of development, suggesting that the effectiveness of direct government assistance in promoting SMEs is questionable.
Policy instruments for SMEs also tend to be supply-driven. Government officials’ inability to fully understand the characteristics, the problems, and the needs of SMEs is the main reason why policy instruments for SMEs tend to be supply-driven rather than demand-driven. This supply-driven policy fails to provide sufficient means either to overcome the problems or to promote the interests of SMEs.
Even though conceptually the government stated the development of SMEs is a top policy priority, paradoxically many other economic policies tended to discriminate against SMEs. For example, Indonesian trade policies still maintain a protective regime to provide preferential treatment to large enterprises.
Moreover, although Indonesia has adopted an anti-monopoly law since 2001, this law has several shortcomings, including vague provisions in several articles and exemptions for certain kinds of enterprises, both opening the possibility for large enterprises to maintain their engagement in monopolistic practice. These large enterprises, which continue to engage in monopolistic practices, are producing several major inputs for many SMEs.
Fiscal and monetary policies also often work against SMEs. For instance, in relation to fiscal policy, the government frequently offered fiscal incentives, such as tax concession, for specific investments in particular regions. The problem is that almost all fiscal incentives offered by the government are often related to certain small-sized firms, which exclude SMEs. In regard to monetary policy, several regulations such as the imposition of a ceiling on lending rates or collateral requirements, have created an environment where banks are reluctant to lend to SMEs.
Indonesia’s decentralization policy that has enabled local governments to have more power, authority and responsibility in managing their local economies, have also to some extent, been detrimental to SMEs. In an attempt to increase their revenue, local governments frequently levy new taxes and charges. Some of these new taxes and charges have little or no legal basis and are nothing more than nuisance taxes. Others overlap with similar charges imposed by the central government. These nuisance taxes and overlapping charges add unnecessary costs doing business for SMEs.
The policy to maintain high prices on high-quality imported raw material is another problem that hampers the promotion of SMEs. Such a policy not only increases production costs, but also limits the ability of SMEs to improve the quality of its products.
To strengthen its commitments to prioritize the development of SMEs, the government needs to take various actions.
Firstly, reassess its preference to provide direct assistance on the basis of political and social orientation. Besides requiring huge financial support and much involvement of government officials, there has been little evidence that assistance has contributed vitally to promoting SMEs.
SMEs that grow and develop are those that can adapt to the market’s operation. Thus, instead of intervening through welfare-oriented policies, the government should create a competitive business environment by providing manageable and stable economic conditions.
Secondly, ensure that SMEs and large enterprises are able to compete fairly. To this end, eliminating discriminatory policy against SMEs and strengthening the implementation of the anti-monopoly law are other important procedures the government should consider.
Thirdly, remedying various supply-side problems may also provide a conducive environment for promoting SMEs. In this regard, the government could help SMEs to reduce their production costs by eliminating taxes and price on input and getting rid of nuisance charges.
The government should also provide SMEs more access to sources of capital, the market, technology, and information.
The writer is a researcher at the Economic Research Centre (P2E)-LIPI
