GOVERNMENT POLICY TO ENHANCE MSMEs CAPACITY IN COPING WITH FIERCER FOREIGN COMPETITION RESULTING FROM TRADE LIBERALISATION: THE STORY FROM INDONESIA Tulus T.H. Tambunan Center for Industry, SMEs and Business Competition Studies, Trisakti University, Jakarta, Indonesia

THE MAIN ISSUES: CAN INDONESIAN MSMEs SURVIVE UNDER GLOBALIZATION/TRADE LIBERALIZATION? WHAT ARE THEIR MAIN CONSTRAINTS TO COPE WITH FIERCER FOREIGN COMPETITION IN BOTH DOMESTIC AND FOREIGN MARKETS? WHAT THE INDONESIAN GOVERNMENT HAS BEEN DOING IN SUPPORTING THEM?

Part 1: THE CURENT STATE OF MSMEs’ DEVELOPMENT The main characteristics of MSMEs: MSMEs are the majority in number of enterprises and employment creation The majority of MSMEs are MIEs They are concentrated in agriculture, though it varies by subcategory They are yet so strong in manufacturing industry In the manufacturing industry, they are mainly in low technology based industries and subcontracting between MSMEs and LEs are still weak

Part II: MSMEs’ EXPORT PERFORMANCE AND COMPETITIVENESS The Main Characteristics: Though export of Indonesian MSMEs increases annually, rhe majority of MSMEs are domestic market oriented. The majority of exporting MSMEs only export some proportion of their total output. Exports of Indonesian MSMEs are traditionally in low technology- based products. The majority of exporting MSMEs do export indirectly through trading companies or subcontracting with export-oriented LEs. No evidence that some Indonesian MSMEs are engaged in regional/global value chains/production networks. Low level of competitiveness (e.g. productivity, efficiency, and quality of products)

Part V: GOVERNMENT POLICY V.1 MSMEs Policy The current official guidance for the MSME policy in Indonesia is stated in the so-called Strategic Plan (Renstra) from the State Ministry for Cooperative and SME. Regarding MSMEs, the Plan has a number of strategic targets, which are the followings: 1) To increase the role of MSMEs in the national economy by increasing: (a)productivity 5% on average per year; (b)contribution to GDP 6% per year, (c)employment creation 5% per year, (d)investment 10% per year, and (e)export 15% per year;

2)To increase the capacity of MSMEs by (a)increasing the number of MSMEs entrepreneurs in attending training programs organized by the Ministry (or other stakeholders), (b)organizing many entrepreneurship trainings for potential entrepreneurs/new graduated men and women, (c)increasing the number of place for skill practice in education institutes in rural areas, (d)increasing the number of training programs for MSMEs, (e)providing more models of international best practices, (f)increasing the number of MSMEs using information and communication and other appropriate technologies, and (g)promoting/supporting business partnerships between MSMEs and LEs as well as among MSMEs.

3) To increase the competitivenss of MSMEs by (a)expanding the domestic use of products produced by local MSMEs, (b)maintaining at least 65% domestic market share of local MSMEs in retail businesses, and ( (c)increasing export of MSMEs up to the level of minimum 20% share in Indonesia’s total non-oil and gas exports per year. 4) To expand marketing of local MSMEs’ products by (a)expanding existing trading houses and developing new ones in all provinces in the country, (b)improving quality of facilities supporting production and marketing of MSMEs, (c)increasing promotion activities of MSMEs’ products, (d)increasing the number and quality of modern retail shops of MSMEs, and (e)strengthening marketing of MSMEs’ products in clusters in all locations, including in backward/isolated and bordering areas, in the country.

5) To provide MSMEs with full access to financing and financial guaranteeing by (a)providing credit schemes which are relatively cheap, accessible for all MSMEs and quick in process, (b)(b) increasing the number and quality of banks and other non-bank financial institutions. 6) To establish an enabling or conducive business environment for MSMEs by (a)simplifying all regulations and bureaucratic procedures, (b)making and implementing policies, regulations and constitutions which are pro-capacity building of MSMEs, and (c)harmonizing all MSMEs development programs from all different government departments and agencies.

7) to increase new MSME entrepreneurs up to 5,000 men in the coming few years through (a) entrepreneurship education/training in universities and other education institutions, and (b) expanding venture capital providers.

V.2 Key Executing Government Departments and Non- Department Agencies State Ministry for Cooperative and SME Ministry of Industry Ministry of Trade Ministry of Research and Technology National Development Planning Agency Central Bank Ministry of Manpower

Part VI CONCLUSION virtually no evidence to suggest that MSMEs in general in Indonesia have been negatively affected by trade liberalization (e.g.no evidence that the collapse of many local MSMEs has happened significantly because of imports). Government has been doing many efforts to support capacity building in MSMEs, but not so much emphasis has been given to development of technology or innovation; credit schemes component of MSMEs development policies has been given too much attention. It is likely that as long as Indonesian MSMEs, especially MIEs and SEs still have their own market segments, i.e. supplying cheap consumer goods to low to middle income groups, and poverty in Indonesia is still present, MSMEs will keep exist or even grow despite the increasing competition pressures from imports.