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Kennedy Tangestu
Sep 67 min read

Understanding and Acting: Taking Upon the Small Ones

“Development should be people-centered, reflecting the fundamental concern with institutions, policies, and processes, while at the same time respecting the agency of all individuals.” -Emil Salim

For the longest time, MSMEs have been the lifeblood of the Indonesian economy, fostered as the backbone, acting as a nest for innovation, employment, and growth. But even as large policy strides are made by both the national and local governments to foster the development and prosperity of MSMEs, their welfare continues to hang in the balance. To describe Indonesia’s economy in the form of the human body, one will come to see that the spine comprises multiple micro, small, and medium enterprises (MSMEs). Each and everyone of them, though relatively tiny, contributes a significant chunk to keeping this body running. But I’d like to imagine the complexities of all these proprietors as the human brain. 


Just like the human brain, current growth in Indonesia would not be possible if it weren’t for the developments happening with MSMEs. Contributing to 61% of the GDP and over 97% of total employment, MSMEs have driven the livelihoods of most households in Indonesia. This collective of enterprises certainly aren’t small in the aggregate sense, and the Indonesian government has realized that for a long time. There is no shortage of policies and aid programs that the government has taken to help them improve; but romanticized as helping the small people, spatial policies in particular lack a key understanding of the situations faced by these businesses, leading to inequalities between MSMEs and large businesses.


A Problem of Duality

Like listening to a friend’s rant, the underlying circumstances and background of these proprietors need to be fully understood before handing out advice. If two friends have differing understandings of a certain situation, there will most definitely be more problems than solutions. In the case of these developments, there exists a dualism; the coexistence and difference of two parts within a system. Dualism in MSMEs takes the form of the coexistence of large, more developed sectors, and small, more traditional sectors. It can also take the form of a productivity gap between regions, comparing output within provinces. But one thing that these contrasts have in common with one another is that they are tied to inequality within a system or region (Bourguignon and Morrisson, 1998, as cited in Azis, I. J. 2022). The varying environment between and within regions creates rifts, therefore policies would have to adapt to these nuances and cater towards the contrast in order to be properly effective. 


The developments we are focusing on entail us to understand that development does not always happen in a linear fashion affecting everyone all at once. There are centrifugal forces of dispersion that allow for the spread of growth in an outward pattern, allowing for smaller businesses to reap the benefits that are provided by larger actors in the economy. Conversely, centripetal forces of agglomeration concentrate development specifically only on certain economic actors, like large corporations. It follows the pattern where both the actors and institutions that support them have the tendency to overlook the externalities of this concentration in favour of realizable short-term growth. (Azis, I. J. 2022)


Figure 1: Development with agglomeration and intersectoral-interregional interactions

Source: Periphery and Small Ones Matter, Azis, I. J. (2022)


Figure 1 illustrates how developments on MSMEs and large businesses may happen in a region. Since the forces of agglomeration are larger than dispersion, development is closely tied to the main actors that hold the most market share. Shown as the increase in C in each of the 3 regions, the regions do actually experience growth and development in the aggregate. But exactly like the Indonesian government, it fails to notice that all other components do not experience growth at all, leaving the net welfare of most people unaffected or potentially worse. (Boeke 1953). This is then exacerbated by lags in education, institutions, and financial literacies, which holds back MSMEs from growing past the informal sector.


Societal Barriers on Growth

The inequality between MSMEs and large corporations is then attributed to a dualism in social capital. There are disparities in trust, which drives cooperation, and in education which generates participation between MSMEs and the aggregate economy. A simple example of a startup compared to a street vendor proves this point. Street vendors rarely find ways to further develop their enterprises because they don’t feel the need to. These micro enterprises are often built by people just looking for a side hustle like mom’s MSMEs, or a vendor just trying to get by. But on the other hand, startups are always rearing to grow their business. This isn’t to say that the street vendors should be more proactive in developing their business, but more to highlight the different behaviours each actor takes upon. As a result of this, there is a disproportionate impact towards different actors in the market due to the agglomerative policies by the Indonesian government such as providing subsidies. 


Figure 2: MSME density and lending/GDP in 2010. (Indonesia in red)

Source: World Bank, IFC, 2010


Problems such as credit rationing worsens this dualism even further as MSMEs find it harder and harder to borrow money. Banks by design are meant to lend money for the small actors in order for breakthroughs and growth, but adverse selection happens between businesses that look more promising compared to budding MSMEs. This is referred to as “Redlining”, where MSMEs pose a higher credit risk for the bank and cannot obtain credit with a given supply of loanable funds unless the lending criteria is relaxed. Figure 2 shows this by indicating how Indonesia is an outlier amongst other countries. Where MSME density typically has a positive correlation to SME lending, it becomes paradoxical that we have the densest distribution, but a lack of institutions and socialization to support MSME lending.


Figure 3: Indonesia’s Relative GNI/Capita Compared to USA

Source: CEIC, Azis, I. J. (2022)


As a result of this, wealth disparity has become greater and greater over time. From 2014 to 2019 alone, the wealth share of the highest 10 percent in Indonesia had increased from 36.4% to a whopping 74.1%. Indonesia’s wealth inequality falls into one of the worst in the world, with implications showing that the wealthiest 1% of the population owned 45% of total wealth (Credit Suisse, 2019). As money breeds more money, those who do not have much to begin with will struggle to accumulate wealth. Coupled with difficulties in borrowing, the wealth gap will only keep growing as the rich get richer and the poor lack the support they need to succeed.


Culture Distribution and Integration

Julius Herman Boeke (1953) highlighted the need to take into account the characteristics of dualistic society if we intend to have a better understanding about the persistence of interregional inequality, and the reasons why a good majority of MSMEs had difficulties to improve their performance. He was a Dutch economist and lawyer who closely studied the concept of social dualism during Indonesia’s colonial period between 1910 and 1929, assigned to improve education, health care, and credit cooperatives. Boeke’s findings stated that the problem lies in the fact that pre capitalist economies such as Indonesia and India were being subjected to the importation of western ideologies such as capitalism and socialism, but left without further institutionalization to support its integration.


Figure 4: Backwards Bending Labour Supply Curve

Source: Wikipedia


Boeke's analysis concluded that the absence of institutions and a brash economic approach clashed with the unexpected response from the indigenous population. It implied a culture-related backward-bending supply curve for labour that was driven by the ‘limited wants’ as well as inelastic demand behaviour among the indigenous social system. Whether or not the policies of the Dutch worked at home didn’t matter since the Indonesian people did not think the same way as them. Traditional farmers and traders did not have visions of grandeur, and were merely just trying to put food on the table. Hence, even as the policies implemented by the Dutch rewarded high income and productivity, the Indonesian people had nothing they wanted to buy apart from basic needs, so they chose more leisure in return. This dualism of economic ideologies later on becomes the reason for the persistence of informal economies in developing countries. Since the development of institutions may differ across cultures, a capitalistic system cannot be easily implemented elsewhere in a top-down manner under such a short time frame.


This capitalistic approach on the indigenous population wants to reflect classical economic thinking (Kaldor, 1956, as cited in Azis, I. J. 2022) that describes how the rich have a higher incentive to save compared to the poor, where a higher degree of initial income inequality tends to result in higher savings and investment, leading to more loanable funds and therefore potential growth. But the modern view as asserted by Nissanke & Thorbecke (2007) is that greater inequality actually causes a lower growth because of disincentives among the rich to invest due to redistributive policies, and underinvestment by the poor caused by imperfect credit markets, exactly the case in modern Indonesia.


Social Capital, Social Policies

Knowing how recognizing the dualism of social capital has a profound impact on MSMEs, the question that remains then is; what are the particular policies that will benefit productivity whilst taking into account this dualism? Azis, I. J. (2024) focuses on improving and bridging the dualisms happening in the participation and coordination of MSMEs, as they were found to be the most important for real improvements in performance. 2 main policies were discussed in his book, Listen and Design, which were namely policies on linkages which intend to create and strengthen interactions among MSMEs and other stakeholders, followed by access to affordable financing that was more relaxed and did not nitpick. Medium enterprises were particularly highlighted for their capability to contribute to exports and could enhance productivity through the use of digital technology and IoT. Digitalization itself as a whole contributes widely to close the information asymmetry between lenders and borrowers as well as improve loan and information access.


Pulling back to the metaphor in the beginning, the development of MSMEs should rather be illustrated as the entire human body itself, not a single component of something bigger. These proprietors are the Indonesian people themselves, and focusing on our economy requires a holistic approach that does not merely assess the numbers being pumped out. Scrutinizing where the developments are happening and actually listening on a micro scale is necessary to gain an understanding of where that development is happening and to properly aid them.


Kennedy Tangestu | Ilmu Ekonomi 2023 | Staff Divisi Kajian Kanopi FEB UI 2024



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