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SME Promotion Policies for Indonesia

The Indonesian government has for a long time been concerned with the development of small- and medium-scale enterprises (SMEs). Like in other countries, SMEs are the main players in the production, distribution and service sectors of the Indonesian economy. Since SMEs are often directly exposed to ever-changing market conditions, they are quick to react to such change, as was the case when the economic crisis struck Indonesia. SMEs tend to have a more flexible organisation and quicker decision-making processes than large 27 enterprises. SMEs can also, through their exports, play a role in improving the balance of payments (Urata, 2000: 3-9). According to the Central Agency of Statistics (BPS), the proportion of SME exports to total non-oil and –gas exports after the Asian economic crisis varied between 4.6 to 7.5 per cent, although a study conducted for the ADB estimates that the contribution of SMEs to total exports is higher, almost 11 per cent (Asian Development Bank, 2004: 10).

The proportion of SMEs is high in all sectors of the Indonesian economy.4 If all forms of enterprise, formal and informal, are included in all sectors, there were an estimated 40 million SMEs operating in Indonesia in 2000, employing approximately 73 million people. However, most of these enterprises are micro or cottage enterprises rather than SMEs in the strict sense of the word and the largest percentage are in the agricultural sector (PPTA & The Asia Foundation, 2005: 25).

Indonesia’s SMEs are regionally dispersed, and are mostly located in the rural areas. They therefore have the potential to exert a favourable influence on rural and regional development and on income distribution, as the experience of Taipei,China has indicated. SMEs in Indonesia, specifically the dynamic and modern small and medium-scale industries, can also provide a good training ground for developing the managerial and organizational skills of small entrepreneurs and the technical skills of workers and can also contribute to manufactured exports. As producers of parts and components, technically competent small firms can also function as supplier firms to the large, downstream assembling industries.

Since the economic crisis SMEs in Indonesia have received renewed attention, as many of these SMEs turned out to be more resilient than the highly indebted conglomerates. However, many less viable SMEs experienced great difficulties and had to go out of business. Nonetheless many SMEs dependent on local inputs rather than expensive foreign inputs could survive and several of them were able to turn to export markets to take advantage of the steep depreciation of the rupiah. Hence, these firms and others able to survive during the crisis were seen as being more viable than the discredited conglomerates. These conglomerates were only able to thrive because of the various facilities and protection they received from the government.

Despite the often stated government concern about SME development, during the Soeharto era SMEs were actually not considered a vital part of the economy. Rather than viewing SMEs as important economic actors and an important part of a vibrant economy, many Indonesian policy-makers viewed them primarily as a social group, which needed assistance based on welfare or equity considerations rather than efficiency considerations (Hill, 1997; 266; PPTA & The Asia Foundation, 2005: 32). These welfare or equity considerations were based on the not quite correct perception that the SMEs, specifically the small enterprises, were owned and run by indigenous (pribumi) Indonesians, who were equated with the economically weak groups ( (golongan ekonomi lemah) in society. On the other hand, the non-indigenous (non-pribumi) Sino-Indonesians were equated with the economically strong groups (golongan ekonomi kuat) in society, who owned and ran most of the large enterprises (LEs) or conglomerates in the country. This distinction is not correct, because the large majority of Sino-Indonesian businessmen do not own large enterprises, but are engaged in SMEs. A major reason for sticking to this distinction is that overtly racist or ethnic affirmative policies in favour of the pribumi Indonesians is frowned upon in Indonesia, so that affirmative policies are couched in these euphemistic terms.

For this reason government policy toward SMEs, or specifically small enterprises, assumes that these small enterprises need protection from competition. This is for instance reflected in article 50h of Indonesia’s Competition Law, which exempts small-scale enterprises from the provisions of the Law. Apparently, the people who drafted the Law believed that small enterprises need additional support, and that exempting small enterprises from the provisions of the Law would contribute to their development (Thee, 2002: 339). However, the reverse is true, as SMEs, jut like large firms, can also engage in anti-competitive behaviour against other small firms. By taking firm and consistent action against ant-competitive behaviour by either dominant large or by small firms, the Law should be able to protect SMEs against the abuse of market power at their expense. Hence, exempting SMEs from the provisions of the Law will not give them any significant competitive advantage over the large enterprises (Thee, 2002: 33.9). All that may be achieved is to give a green light to well-connected SMEs to engage in anti-competitive behaviour at the expense of other SMEs who are not wellconnected.

Another scheme to assist or protect small firms was the reservation scheme which, just like in India, reserved certain sectors or sub-sectors for small-scale enterprises. Large- and medium-scale enterprises could not enter these sectors or sub-sectors, unless they established a partnership with small-scale enterprises. However, this decree was not very effective in helping the small-scale enterprises, as these joint ventures or partnerships enabled the larger firms to dominate the sectors or sub-sectors reserved for small firms, which often ended up as producers producing only for a larger partner (PPTA & The Asia Foundation, 2005: 32-3).

Another important problem with the SME promotion policies is that the various policies do not make a clear distinction between cottage or household enterprises with little economic potential and the small- and medium-scale enterprises with growth potential. As a result, government promotion policies were directed indiscriminately at an unmanageably large target group that included more than 95 per cent of all enterprises in Indonesia (PPTA & The Asia Foundation, 2005: 32). Although many officials were aware of this problem, no steps were taken to make a clear distinction between the huge number of cottage enterprises, mostly operating in the rural areas, and the potentially dynamic small- and medium-scale enterprises (SMEs). Unlike the practice in the other Southeast Asian countries, in Indonesia a distinction is made between small enterprises, which are often lumped together with cottage enterprises on the one hand, and medium- and large-scale enterprises on the other. As a result, confusion arises when SME policies are designed, which are, in fact, only directed at small enterprises. More effective and better targeted SME promotion programs should therefore solve this problem first by combining small and medium-scale enterprises in one clearly defined category.

Since this section deals only with the SMEs operating in the non-agricultural sectors, it is important to give an idea of the total number of SMEs operating in these sectors. Table 6 [ PDF 62.2KB | 1 page ] 29 below shows the distribution of the non-agricultural, small and medium-scale enterprises in Indonesia, as classified by the number of workers.

Because of the different definitions of the agencies in charge of implementing SME promotion programs, it is virtually impossible to assess the real impact of the SME programs. Too broad definitions of what constitute SMEs are not useful for policy purposes, as they do not distinguish between subgroups of SMEs which may have different characteristics and which may require different policy interventions. Without a common and consistent definition of the SMEs, coordinating the various SME programs carried out by different agencies is quite difficult. Moreover, with too broad and expansive definitions of SMEs, it is difficult to assess whether specific programs are effective or not (PPTA & The Asia Foundation, 2005: 25).

Not only government agencies do not have one over-riding definition of SMEs, but most external aid agencies, such as the World Bank and the ADB, also do not have a single accepted definition of SMEs. For instance, the World Bank’s Small and Medium Enterprise Development acknowledges there is no single accepted definition of SMEs nor does it attempt to offer one. Other external aid agencies having SME programs do not have a common definition of SMEs either. However, these agencies do define SMEs for their specific operations in order to define the limits of the scope of their projects and the eligibility criteria for aid. To this end, it usually incorporates some part of a country’s definition of SMEs (Asian Development Bank, 2004: 5).

4.1 SME promotion programs during the Soeharto era: an assessment

With these caveats in mind, the major SME programs implemented during the Soeharto era are reviewed. One has to bear in mind, however, that these SME programs were often directed at small-scale enterprises only, rather than at promoting SMEs as a whole.

In Indonesia the concern with the development of SMEs was reflected in various direct promotion policies and special programs. initiated by the Soeharto government. Most of these promotional policies and programs for SMEs were aimed at assisting these SMEs in 30 overcoming the major constraints to their growth, namely low levels of technology and managerial skills, poor marketing, and difficulty in accessing the financial institutions aimed at providing credit to SMEs. The major direct assistance programs for SMEs included special credit programs, including subsidised credit programs, (non-financial) business development services programs, particularly industrial extension services and training, and the above-mentioned reservation of selected sectors or sub-sectors to small enterprises (Asian Development Bank 2000: 14).

Credit programs for SMEs

The two major nation-wide credit programs for SMEs included the Small Enterprises Development Program (KIK/KMKP program) and the Small Enterprises Credit (KUK) program. The following table presents the major features of these programs (Table 7 [ PDF 66.3KB | 1 page ]).

The KIK/KMKP program, launched in 1973, was the first major nation-wide subsidized credit program in terms of the volume of credit provided to SMEs. The scheme was aimed at helping small, indigenous (pribumi) enterprises, including cottage enterprises, to obtain subsidized credits for investment and working capital purposes. The bulk of the funds was provided by the Bank of Indonesia, which also coordinated the implementation of this program. The actual provision of credit was handled by Indonesia’s five state-owned commercial bank, the Indonesian Development Bank (Bapindo), all Regional Development Banks, and 14 private banks, which around the mid-1980s had more than 1,000 branch offices throughout the country (Thee, 1994: 102).

While the KIK/KMKP credits were intended for both investment and working capital purposes, the bulk of credits provided was used for working purposes to keep the operations of these SMEs going, rather than for investment purposes, such as purchasing new equipment or expansion purposes. Small manufacturing enterprises, however, received 13 per cent of KIK (investment) credits, and 11 per cent of KMKP (working capital) credits (Poot, Kuyvenhoven, & Jansen, 1990). These figures suggest that, unlike the majority of SMEs, small manufacturing firms used slightly more of their credit for investment.

By the late 1980s the sustainability of the KIK/KMKP program became increasingly in doubt, as arrears and collection problems had driven the default rate to more than 27 per cent. This high default rate and serious collection problems were most likely caused by various factors, including inadequate training of bank staff, unofficial payments to corrupt bank staff, mismanagement of the funds, and inadequate penalties for default or incentives for the bank staff to be diligent in the collection of loan repayments (Grizzell, 1988). Because of the high default rate, the KIK/KMKP program was terminated in 1990.

To replace the KIK/KMKP program, the government in 1990 introduced the Small Enterprise Credit (Kredit Usaha Kecil, KUK) program. Under this program all commercial banks, including state-owned and private banks, were required to allocate 20 per cent of their loan portfolio to small enterprises (defined as enterprises with assets amounting to a maximum of Rp. 600 million (roughly US$ 3.3 million at the prevailing exchange rate), excluding the value of land and buildings) and cooperatives at market interest rates.

The implementation of the KUK program did not proceed satisfactorily because the banks either found it difficult or were reluctant to provide 20 per cent of their loans to SMEs. To meet the requirement of providing 20 per cent of their loans to SMEs, the banks often extended credits to the owners of SMEs for consumption rather than for business purposes. Moreover, in view of the rather broad definition of SMEs (enterprises with a capital investment of less than Rp. 600`million), it has been the larger SMEs rather than the small SMEs which have benefited from this program.

The available data also show that it has been SMEs in Java, and particularly in the Jakarta Capital Region, which have benefited the most from this program (respectively 67 per cent and 27 per cent of the total). The data also show that the state-owned banks provided more KUK loans than the private banks (FIAS, 1996: 53-4). As a result of the lack of success of the KUK program in promoting the development of viable SMEs, this credit program too was discontinued after the Asian economic crisis.

Technical assistance programs for SMEs

Among the technical assistance programs for SMEs, the Small Industries Development (Program Pembinaan dan Pengembangan Industri Kecil, BIPIK) program, initiated in 1980 by the Department of Industry, was by far the most important program. This program provided training and extension services to SMEs and was also carried out by the Department of Industry (Thee, 1994: 108).

The BIPIK program was a coordinated program of input provision for SMIs, under which technical assistance is provided to clusters of firms. This concept of clusters is a major element of the BIPIK program which actually dates back to the 1950s when the government established Industrial Centres (Induk Industri) to provide technical assistance, particularly to the indigenous (pribumi)-owned weaving industry. However, insufficient funding and reluctance on the part of the small entrepreneurs to utilise the facilities of the Industrial Centres accounted for the lack of success of this early technical assistance program in the 1950s (Grizzell, 1988).

Despite these early failures, the BIPIK program again focused on the development of industrial clusters or centres of SMEs, specifically small and medium-scale industries. These centres generally consist of 50 to 100 small manufacturing establishments, including cottage establishments. These small industry clusters were supported by Technical Service Centres (Unit Pelayanan Teknis, UPT), which provided extension and technical services and occasionally raw materials (Departemen Perindustrian, 1982).

Since the late 1970s, Small Industry Estates (Lingkungan Industri Kecil, LIK) were established in some regions with a relatively large concentration of small industries and where specific skills appropriate to them were available. The two major facilities available in these Small Industry Estates were facilities for education and training and facilities for improving the quality of products (Departemen Perindustrian, 1982). However, these Technical Service Centres and Small Industry Estates were not successful. Occupancy of these facilities was relatively low, and the productivity of the firms in these facilities low. The reason was that in general the field extension officers had little or no technical and business experience. Moreover, training and subsidised inputs were provided according to a schedule determined by central planners rather than by the real needs of the small entrepreneurs (Grizzell, 1988).

That the BIPIK program was not successful is evident from the findings of an impact assessment study conducted by ILO. Of the 200 enterprises interviewed, 100 had participated in the BIPIK program and another 100 had not. The study found that there was no difference in performance between enterprises in the two groups. The study also found that while in some clusters where the BIPIK program had established common facilities, the enterprises had benefited, they did not feel responsible for maintaining these facilities. Not surprisingly, these facilities deteriorated (PPTA & The Asia Foundation, 2005: 35). Another important finding of this study was that growing firms were most likely to seek support, suggesting that they did so because they were growing but not that they were growing because they were supported. Hence, this study concluded that this broad, general support BIPIK program had not led to the growth of SMEs (PPTA & The Asia Foundation, 2005: 35).

The account of the credit programs has shown that even after many years of implementation, these programs were on the whole not successful and cost-effective in developing economically viable SMEs. The continued ineffectiveness of government credit programs in reaching SMEs is, for instance, reflected by the fact that in 1998 total credit extended to SMEs by state banks amounted to less than 15 per cent of their loan portfolio. Research sponsored by the Jakarta Office of The Asia Foundation found that only around 17 per cent of the SMEs ever turned to the formal banking system to obtain credit (The Asia Foundation 2000).

Similarly, the various (non-financial) business development services programs, particularly the Small Industries Development (BIPIK) Program administered by the Department of Industry, have not been effective either in raising the technical capabilities of SMEs, because these programs suffered from poor design or deficient implementation (Thee 1994: 105-6; Asian Development Bank 2000: 14).

Past experience with supply-driven business development services provided by government agencies has thus indicated that these services, often provided on a cost-free basis, were not effective in meeting the needs of the SMEs. Because there is no market test for the provision of these services, there is no way of verifying whether these services met the real needs of SMEs. Moreover, in view of the weak capacities of the government agencies providing business development services, there were no mechanisms to ensure the quality of the business development services provided to the SMEs (Hillebrand 1999: 1).

The lack of success of the government SME programs can be attributed to lack of coordination between the agencies in charge of SME programs, poor program design, and inadequate monitoring and evaluation (World Bank, 2001: 2.16). During the past decade there were at least two government agencies directly concerned with SME development, namely the Directorate-General of Small-Scale Industry, Department of Industry, and the Office of the State Minister for Cooperatives and Small Enterprises. Between these two major agencies concerned with SME development there was little communication to delineate a clear division of their respective responsibilities.

There has also been a proliferation of other government subsidised credit schemes extended to small enterprises administered by various government agencies, many of which inevitably overlapped with one another. This has often led to a wasteful use and misallocation of scarce financial resources, which became more serious after the economic crisis because of the large government budget deficit. Because of the government’s fiscal constraints, large government subsidised credit programs will not be easy to finance despite numerous calls from politicians, NGOs and populist academics.

In view of the general lack of success with these direct assistance programs, the government in the early 1990s turned to indirect assistance programs, notably the Foster Father-Business Partner Linkage scheme. Under this scheme a large private or state-owned enterprise (SOE), the so-called Foster Father, were pressured to assist their Business Partner, the small enterprise, in raising their capabilities in management, technology, marketing, and in accessing finance (Suhardi 1992).

As part of this Partnership and Linkage Scheme, since November 1989 state-owned enterprises (SOEs) were also required to set aside one to five per cent of their net profits to assist small enterprises in improving their performance. Aside from the assistance given also by private large enterprises, these SOEs were also expected to act as guarantors of SMEs in their loan applications (Suhardi 1992). This financial assistance would terminate once the small enterprises had improved their financial and commercial performance to such an extent that they would be able to obtain bank loans on their own without needing the guarantees provided by the SOEs.

There was from the outset great skepticism about the effectiveness of this scheme. Forced (non-market) partnerships were unlikely to be viable in the long run, particularly as the large firm obtained little or no benefit from this scheme, except perhaps some political goodwill (Thee 1994: 106-7; 114). The experience of the past decade has confirmed that these forced Partnership and Linkage Programs have not been successful. Generally they were difficult to implement because the large enterprise experienced difficulties in finding a suitable SME partner. Because these schemes were not based on proper commercial considerations, there was little incentive for the large enterprises to make a serious effort to make this scheme work. In some instances these schemes also encouraged rent-seeking behaviour (Asian Development Bank 2000: 14).

With regard to the financial assistance provided by SOEs, a study by the Department of Finance on the results of the financial assistance provided by SOEs under the jurisdiction of the Department of Finance found that this type of financial assistance had not led to improved performance of the small enterprises. The reason for this was that these SOEs had only limited themselves to allocating the stipulated percentage of profits to small enterprises. Aside from this, they did not bother to provide managerial or technical assistance. Aside from the lack of proper incentive to provide assistance to the SMEs, these SOEs lacked the proper skills and experience with SMEs to provide the latter with the assistance relevant to their needs (Thee, 2000).

The reason that these SME programs have in general not been successful is that these programs have, like in the other Southeast Asian countries, been based on 'welfare' or 'equity' rather than on 'efficiency' considerations. SME programs based on ‘welfare' considerations assume that SMEs are inherently disadvantaged by the unfettered operation of markets, and that therefore these SMEs deserve special preferential treatment (Hill 1997a: 267). In other words, SME programs have in general been based on the view that SMEs are inherently weak, and therefore need to be subsidised or protected (The Asian Foundation 2000).

In view of these considerations the main policy thrust of these SME programs has not been clearly focused on the encouragement of entrepreneurship and healthy growth of viable and competitive SMEs. On the other hand, macroeconomic policies, public investment decisions, and public administration systems have not created a favourable business environment conducive to the emergence of new entrepreneurs and the growth of viable SMEs (Ahmed 1999: 1-2). Like in the other ASEAN countries, government policies and practices in Indonesia have often been discriminatory in nature against SMEs. For instance, in Indonesia as elsewhere in the region, fiscal incentives have been given to large investments. As a result, larger enterprises have received greater tax benefits than small enterprises (Chee 1987: 4-6).

With regard to licensing requirements and regulatory policies, both large as well as small enterprises often have to pay bribes to officials to obtain the necessary licenses and permits. These 'unofficial' payments obviously mean a big burden for small enterprises. A study sponsored by The Asia Foundation, Jakarta Office, found that onerous licensing procedures on the average added up to 30 per cent to the start-up costs of SMEs in Indonesia (The Asia Foundation 1999: 1).

4.2 Developments in the post-Soeharto period

Statistics on industrial production in the aftermath of the crisis showed that growth in industrial production, which only reflects the production of larger enterprises, was falling. However, output of non-oil and gas manufacturing remained positive. The difference in these two trends suggests that the output of small manufacturing enterprises, which is captured in manufacturing statistics, was holding up better than that of the larger enterprises. This is confirmed by the data on credit, which show that growth in credit to SMEs was high until the first quarter of 2002, although it has leveled off since then (World Bank, 2003: 4).

It has been the success of these SMEs, particularly export-oriented SMEs, which has led to the perception that the SMEs, unlike the debt-ridden large enterprises, had weathered the severe economic crisis better than the large enterprises (Cameron, 1999). The crisis, however, had a differential impact on the various SMEs depending on the sector in which they were operating. Largely export-oriented SMEs in the manufacturing sector or which competed with imports and did not rely on raw materials or capital goods imports fared much better than domestic market-oriented SMEs which relied on raw material and capital goods imports (Berry, et.al., 1999: 12). These SMEs as well as many SMEs in other sectors were doing poorly after the crisis.

In view of widespread support for a more vigorous development of SMEs, the successive post-Soeharto governments confirmed their commitment to promote a more rapid development of SMEs. However, because of the lack of success of past SME promotion programs, after the crisis a number of policy-makers, including officials in the Department of Industry, Indonesian academic economists, experts in the multilateral and bilateral aid organizations, and foreign foundations engaged in SME development, stated that these preferential and protectionist programs were ineffective in nurturing viable SMEs. They argued that ‘welfare-oriented’ SME programs should be replaced by market-oriented, demand-driven programs based on 'efficiency' considerations, that is programs based on the stated needs of the SMEs themselves rather than based on the perceptions of officials. This view was based on the consideration that a healthy growth of SMEs depends on a steady rise in their productivity. As this depends to a great extent on the policy environment, Indonesia's new SME programs should aim at promoting the sustainable growth of viable SMEs (Asian Development Bank 2000: 14).

A strong case for market-oriented and demand-driven SME programs was made at a National Seminar on Small and Medium Enterprise which was held in Jakarta on 8 an 9 December 1999, and which was jointly sponsored by the Asian Development Bank (ADB), the World Bank, the International Labour Organization (ILO), and Bappenas, Indonesia's National Planning Board.

The proposed new, market-oriented and demand-driven SME programs included four major elements, namely:

- The establishment of an enabling or conducive business environment for SMEs;

- The development of financial institutions which can provide finance to SMEs on an open and accessible basis;

- The effective provision of (non-financial) business development services to SMEs;

- The formation of strategic alliances between SMEs themselves or with domestic or foreign, large firms.

To what extent, however, the current government is committed and able to introduce and implement truly market-oriented and demand-driven SME programs depends great deal on the outcome of a still on-going debate within government circles, the political elites, academics, and the small and medium entrepreneurs themselves, about the merits and demerits of the proposed market-oriented SME programs. Despite the clear evidence that the 'subsidise and protect' SME programs have not worked in the past, many policy-makers, politicians, academics, and small and medium entrepreneurs still adhere to the view that SMEs are weak and therefore should be assisted and protected against the much stronger large enterprises. The case for continuing SME programs based on 'welfare' or 'equity' considerations would be strengthened politically, if the proposed market-oriented and demand-driven SME programs are depicted as intellectual concepts proposed to or imposed on a weak Indonesian government by foreign experts and international or foreign aid organizations. Against these arguments, proponents of market-oriented, demand-driven programs could argue that ‘supply-driven’ programs, such as the unsuccessful BIPIK technical assistance program, had failed.

However, during the past few years there has been a rising public awareness about the adverse effects of trade and investment barriers on the activities of SMEs which was was highlighted in several seminars and meetings by SME owners from various regions. In various regions these SME owners have formed a regional forum (Forum Daerah, FORDA) to articulate the needs and problems faced by SMEs, including problems caused by cumbersome and time-consuming government regulations. Through regular consultations between government officials, SME owners, concerned academics and foreign experts from donor agencies, workable and effective market-oriented and demand-driven SME programs could be formulated and implemented given the political will of the government.

The findings of a recent study on the development of Indonesia's SMEs acting as subcontractors to the large assembling firms (Hayashi 2002), indicated that market-oriented, demand-and private sector-driven SME promotion programs have been more effective in developing viable SMEs, including raising their technological capabilities, than the 'subsidise and protect' SME programs.motivated by 'welfare' or 'equity' considerations. The findings of other surveys have also indicated that SMEs in general rated government assistance as low, meaning that these programs were viewed as ineffective in raising their technological, managerial, marketing, and financial capabilities.

Following the Indonesian government’s decision in August 2003 not to renew its IMF supported program by the end of 2003, on 15 September 2003 it issued an ‘Economic Policy Package Pre and Post IMF’ or White Paper. In this White Paper the government outlined the various measures it would take to maintain macro-economic stability; restructure and reform the financial sector; and increase investment, exports, and employment (World Bank, 2003b: 7-8).

In the White Paper the government also outlined steps which were more in tune with market-oriented, demand-driven SME promotion policies rather than the largely unsuccessful supply-driven, protectionist SME policies of the past. To this end, the government positively steered the policy direction of developing SMEs by improving land certification in order to give SMEs better access to credit instead of subsidising various SME promotion schemes. Improving land certification is very important, as the experience of many SMEs has indicated that although many of them have land, they could not use this as collateral to get bank loans as obtaining certificates is very difficult. In fact, less than 25 per cent of holders of rural land parcels have a formal land certificate, a figure which is much lower than in PRC and Vietnam (World Bank, 2005: 71). For this reason, simplifying the procedures required by the government’s National Land Agency (Badan Pertanahan Nasional, BPN) would be necessary. Recent experience has indicated the benefit of land certification, as it has improved the credit flow in rural areas (World Bank, 2003: 38).

In the Road Map, prepared by the Indonesian Chamber of Commerce and Industry (KADIN) in August 2004, and submitted to the in-coming government of President Susilo Bambang Yudhoyono, KADIN stressed the need to empower the private sector, amongst others by promoting the development of SMEs. In this regard, KADIN also pointed out the difficulties faced by SMEs in accessing bank loans because of various administrative hurdles and the requirement to provide collateral (KADIN, 2004).

4.3 Concluding remarks on SME programs.

At present it is too early to tell, whether the current government will vigorously pursue the market-oriented, demand-driven SME policies to develop viable and efficient SMEs or will still continue SME policies guided by populist or ‘welfare considerations’, particularly by providing large amounts of subsidised credit to SMEs. Certainly among many government officials, politicians, NGOs concerned with SME development, and social scientists there is still a strong tendency to channel large amounts of credit to SMEs. If this view prevails, the resulting policies are unlikely, as in the past, to lead to the growth of viable SMEs.

If however, new market-oriented and demand-driven SME programs are adopted, a twopronged approach essential to developing viable and competitive SMEs should be pursued, namely:

- Establing an enabling business environment for SMEs, particularly by removing the various policy and procedural impediments currently hampering the efficient operations of SMEs;

- Providing efficient, demand-driven financial and non-financial business development services to SMEs which are truly responsive to the real needs of the SMEs. These services should preferably be provided by the private sector, complimented (but not dominated) by government agencies if necessary, which have failed n the past in providing effective business development services relevant to the actual needs of the SMEs. Private sector assistance has turned out to be more effective in raising the technological, managerial, marketing, and financial capabilities of SMEs, if this assistance is based on mutual trust and mutual profitability of the private sector providers and the recipient SMEs.

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  1. Thee Kian Wee
    (posted 09 May 2006 / 01:39:20 PM)

    Dear Mr. Cabalza,

    You are absolutely right that the ethnic Chinese, both totoks and peranakans have played and are still playing an important rule in the Indonesian economy. I did not mention this in my paper, as my focus was on how the perception on the part of several Indonesian policy-makers of Chinese economic dominance have shaped various policies to curtail Chinese economic activities in order to promote indigenous Indonesian entrepreneurship. Most of these policies have not succeeded in substantially reducing the economic role of the Chinese, although over time a growing class of indigenous Indonesian entrepreneurs emerged during the New Order era without, however, substantially reducing the economic role of the Chinese.

    While during the late Soeharto era much resentment arose in response to the growth of Chinese-owned and -controlled conglomerates, it is often forgotten that the large majority of Chinese business consists of the large number of small- and medium-scale enterprises (SMEs) operating in manufacturing, trade, transportation, restaurants, and other services, such as the many shops all over Indonesia selling auto parts, electronic products, auto repair shops, and various other economic activities which keep the Indonesian economy running. The surge of manufactured exports after the deregulation measures and trade reforms after the end of the oil boom was to a large extent due to foreign-invested, export-oriented plants from Korea and Taiwan and to the Chinese run garment firms and other firms producing labor-intensive products.

    Thank you for your good comment.

    THEE Kian Wie
    Senior Economist
    Economic Research Centre
    Indonesian Institute of Sciences
    (P2E-LIPI), Jakarta
  2. Chester Cabalza
    (posted 27 March 2006 / 08:14:46 AM)

    It would have been ok if you also highlighted the significant roles of the totoks and peranakans (of Chinese descent) in the economic progress of Indonesia. Despite, some persecutions experienced by this minority group, they have at least contributed a lot to the escalation of the largest economy in Southeast Asia.

The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.

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