The COVID-19 pandemic is causing the largest global socio-economic disruption in decades. While the micro, small and medium enterprises (MSMEs) were hailed as the heroes in the aftermath of 2008 global financial crises and had helped cushion Indonesia’s economy, today they offer less of a buffer given that the public health crisis has generated both supply and demand shocks. MSMEs are more vulnerable today as the pandemic is impacting most of the 64.2 million MSMEs in Indonesia. MSMEs play a crucial role in Indonesia’s economy and absorb about 97 percent of the total national workforce while account for more than half of the country’s GDP. Therefore, how the MSMEs population can navigate this economic downturn will determine the extent to which jobs and productivity in Indonesia can be preserved. The Indonesian government has been struggling with how to manage informal MSMEs. According to Statistics Indonesia, about 98 percent of the enterprises operating in Indonesia are micro in size, with small enterprises only representing about 1.2 percent and medium enterprises representing even less around 0.09 percent of total enterprises(1). Despite a decade of business registration and licensing simplification reforms in Indonesia to make it easier and cheaper for enterprises to formalize, Statistics Indonesia still found that 93 percent of the micro and small enterprises operating in the non-agricultural sector in 2018 remained informal. The reforms also did not reduce informal employment, given that in 2018 an estimated 70 percent of the informal workers in Indonesia are employed by micro and small enterprises.

The partial lockdown measures have forced many MSMEs to scale down or virtually stop operations. Many of the micro and small enterprises tend to have fewer assets as well as more limited cash reserves to begin with, making them and the informal workers employed by the firms particularly vulnerable during the crisis. An estimated 43 percent of MSMEs(2) in Indonesia have already shut down business, and more are expected to be impacted if the situation continues. Given that most of these MSMEs and their informal workers are unregistered, it has been a challenge for the Indonesian government to identify and reach the MSMEs most affected and provide them with much needed financial aid to help relieve them of cash flow pressures during the crisis’ initial shock.

This is also a reminder of the crucial need to help micro and small businesses in Indonesia make the transition from the informal to the formal economy and scale up to bridge the missing middle as a priority for Indonesia’s policy agenda. Recognizing that this is not an initiative that can be achieved in the short-term, the Indonesian government is taking a more pragmatic approach by planning to develop a database that would contain basic information about both formal and informal MSMEs outside of the business registry. Through the USAID funded Economic Growth Support Activity (EGSA) DevTech is currently working with the Indonesian Investment Coordinating Board (BKPM) and Ministry of Cooperatives and Small Medium Enterprises to explores way that the Indonesian government can support the design of the investor-MSME linkage program. This program is informed by international best practice as well as developed in close partnership with the sub private sector stakeholders for effective implementation. The intervention is also expected to be able to help the Indonesian Government to establish a centralized database on both formal and informal MSMEs. The database would help the government in designing and implementing programs that support MSME development such as the investor-MSME linkage, as well as to deliver targeted information campaign that advertises the benefits of formalizing to help those who are ready to transition into the formal economy. The database would help the government develop better targeted support to the firms most affected in future economic downturns in an effort to keep viable firms alive during the crisis.

However, as part of the Economic Reopening plan, the government is linking MSMEs with existing e-commerce, which will provide MSMEs with a platform to market their products, equip them with the skills of online trading, and provide them a platform for conducting their business operations using a modern means. To date, about 8 million (out of 64 million) MSMEs have utilized the digital platform, however the success rate is less than 10 percent. Transforming MSMEs business model to digital is not an easy feat as most of MSMEs are not technologically savvy, therefore the government need to better target young business owners who are more familiar and adaptable to the modern technology.

Additionally, it is critical to build MSMEs’ resilience to help them face future economic downturns. The crisis highlighted the benefit of digitization for the MSMEs in improving their ability to pivot and continue major business functions in an economic downturn. We are already seeing how MSMEs leveraging digital tools and e-commerce platforms are adapting by diversifying their market as well as value chain partners and were still able to seize business opportunities during the crisis. It is apparent that going digital for MSMEs is a necessity and is no longer an option. The effective digitization of MSMEs will require collaborative support from industry players and all involve stakeholders. This includes donor support in developing an effective digital platform, training for MSMEs to improve their ability to leveraging these platforms, and other necessary resources to MSMEs. Together, these steps can strengthen their resilience and improve their contributions to job creation, poverty reduction and socio-economic development in Indonesia.

It is uncertain when the COVID-19 crisis will end. However, is clear is that MSMEs need to rethink their business strategies to survive this and future crises while making an effort to move towards the path of recovery in Indonesia’s “New Normal”.

Sources:

  1. Statistics Indonesia’s Analysis of the Follow Up to the 2016 Economic Survey: Potential for Boosting the Performance of Micro and Small Enterprises, published on February 2019
  2. Liputan6: “Menteri Teten: Terdampak Corona 23 Juta Pelaku UMKM Berhenti Beroperasi” https://www.liputan6.com/bisnis/read/4258403/menteri-teten-terdampak-corona-23-juta-pelaku-umkm-berhenti-beroperasi