Remarks by Angel Gurría
10 October 2018 - Bali, Indonesia
(As prepared for delivery)
Dear Minister Anak Puspayoga, Minister Bambang Brodjonegoro, Ladies and Gentlemen:
Thank you for hosting today’s launch of the OECD Review of SME and Entrepreneurship Policy in Indonesia, which was undertaken in close collaboration with Indonesia’s Ministry of Cooperatives and SMEs and the Ministry of National Development Planning (BAPPENAS).
I would also like to thank H.E. Ambassador Peter MacArthur for Canada’s support to SME development in the ASEAN region through the Canada-OECD Project for ASEAN SMEs (COPAS).
Small and medium sized enterprises (SMEs) are a key driver of economic growth and social inclusion. In the OECD area, they account for about 70% of total employment and between 50% and 60% of value added. In emerging and developing economies, they contribute to more than one third of GDP and account for between 34% and 52% of formal employment.
Here in Indonesia, based on information from the last Economic Census, small companies employing less than 20 people accounted for 76.3% of national employment in 2016, more than in any OECD country.
This is why SME development has been a top priority for the Indonesian Government. The introduction of the 2008 Micro, Small and Medium Enterprise (MSME) Law, the establishment of the Ministry of Cooperatives and SMEs, as well as numerous SME programmes in many Ministries, have all contributed to the development of Indonesia’s SME sector. Business digitalisation has been another priority of the Government, notably through the E commerce Roadmap, which includes financial and non-financial support for the adoption of e-commerce in SMEs.
These are important steps and achievements; however, numerous challenges remain. Let me briefly highlight some of them.
First, while, on the whole, the increased focus on SME development is very positive, it also poses certain coordination challenges. To improve SME policy coherence, our Review recommends developing an SME Strategy Document – similar to Malaysia’s SME Master Plan 2012-2020 – outlining the main policy objectives, policy measures and implementing agencies, as well as streamlining programme offerings in certain policy areas such as business development services by merging similar programmes.
Second, while it is true that there are many programmes for SMEs, most of them are targeted at the self-employed and micro-enterprises. Relatively few programmes address productivity growth in SMEs: for example, Indonesia spends less than 0.1% of GDP on R&D, compared with the OECD average of 2.3%, and standard innovation policies such as R&D tax credits remain relatively underdeveloped.
As such, the Review recommends higher spending on policies and programmes that address productivity growth in SMEs – which has been modest in recent years. In addition, scaling-up of existing businesses is also important since Indonesia’s average enterprise size remains small by OECD standards. I mentioned earlier that small companies with less than 20 people accounted for 76.3% of Indonesian employment in 2016 – but, in fact, two thirds of these firms employ no more than two people!
Third, our Review argues that there is space for reform in recent programmes that focus on improving the financial environment for SMEs. One example is the largest SME programme by budget, the KUR Programme (Kredit Usaha Rakyat, People’s Business Credit), which, since 2015, includes an interest rate subsidy in addition to the original government-backed loan guarantee.
Along with additional measures – such as the requirement for banks to dedicate 20% of their business loans to SMEs – KUR has succeeded in increasing the credit flow to micro and small enterprises and has thus favoured social inclusion through economic activity. Micro and small business loans amounted to 423 trillion Rupiah in 2016 (22% of which were backed by KUR), up from 353.5 trillion Rupiah in 2014 (14% of which were backed by KUR), an increase of 16.5%.
Despite its success, a number of challenges relate to the long-term sustainability and high opportunity cost of the KUR Programme. In this respect, the OECD Review recommends better targeting KUR on disadvantaged borrowers – such as first-time borrowers, enterprises in lagging regions, and sectors experiencing more constrained access to finance. In addition, we also suggest earmarking some of the potential savings generated for productivity-enhancing policies.
Fourth, SME internationalisation has been on the decline in recent years. Based on data from the Ministry of Cooperatives and SMEs, the share of SMEs in national exports declined from 18% in 2006 to 15.7% in 2013. Our Review recommends addressing this challenge through policies that favour stronger linkages between foreign investors and local suppliers, as well as policies that target networks of SMEs, for example, through the means of consortia or cooperatives.
Important lessons can be drawn from Italy, for example, which has a long tradition in supporting export consortia; as well as from Malaysia and Singapore, both of which have used tax breaks for multinational companies that invest in the upgrading of local suppliers through training, mentoring and staff secondment programmes.
Last but not least, the Review also recommends measures to improve business digitalisation through, for example, its E-commerce Roadmap. Among others, it recommends that e-commerce targets – for example, the new One Million id. Domain – are not only met, but also have a real economic impact. It also recommends the development of new policy initiatives that encourage the adoption of digital technologies beyond e-commerce, such as the use of management software to improve small business administration.
By comparison, in my country, Mexico, micro-entrepreneurs receive six hours of basic management training from the Government, as well as an electronic tablet that incorporates a management software programme and a point-of-sale extension to allow customers to pay by credit card.
Ladies and Gentlemen:
SMEs are laboratories of ideas. Beyond their important role as drivers of job creation and sustainable economic growth, they are also indispensable in promoting entrepreneurship and innovation. And, in turn, actions in support of broad-based and grassroots entrepreneurship and innovation can foster inclusive growth, as highlighted by the OECD Framework for Policy Action on Inclusive Growth.
Supporting SMEs to thrive is therefore paramount and it is very encouraging to see that the Indonesian Government is taking important steps in this direction. The OECD stands ready to support you in the development of the SME sector and in tackling the challenges you encounter on this path. Thank you.