Decentralization and Regional Autonomy in Indonesia: Implementation and Challenges

7. Small Enterprises and Decentralization: Some Lessons from Java

183 Small Enterprises in Java 183 7 SMALL ENTERPRISES AND DECENTRALIZATION Some Lessons from Java Henry Sandee INTRODUCTION In Indonesia, decentralization means more responsibility for provincial and district (kabupaten/kota) authorities in the formulation and implementation of a wide range of services and programmes including small enterprise development. This chapter concentrates on small and medium-scale manufacturing enterprises (SMEs). The provincial and district governments are becoming much more influential in the coordination of technical and financial promotion activities for SMEs and in the provision of a business environment and climate that is conducive to SME development. The decentralization process asks for new views on local governance. The chapter discusses the issues at stake and reviews some experiences in simulating public-private partnerships as a tool to stimulate participatory development at the local level in promoting SME development. The chapter deals with SMEs in Java specifically. It is not about micro enterprises and it is important that this distinction is made right at the beginning. In Indonesia, the discussion on SME development is often blurred by the fact that micro enterprises are included in the analysis. Micro enterprises and SMEs have very different characteristics and need to be distinguished. This chapter refers to the classification of the Central Bureau of Statistics in 183 07 D&RA_Indonesia Ch 7 9/16/09, 8:50 AM 183 184 184 Henry Sandee Indonesia to make this distinction. Micro enterprises offer employment to one to four family and paid workers and play a main role in poverty alleviation by offering jobs to those that do not have access to better paid work elsewhere in the economy. During the economic crisis (Krismon), micro enterprises were important providers of jobs to those that lost their work in the formal sector. SMEs are different and have a stronger orientation towards growth and are participators in the process of economic development. The development of micro and SMEs in Indonesia will be discussed in more detail further below. Subsequently, the chapter will briefly look at a specific characteristic of SMEs, namely their tendency to cluster according to sub sector and location. In rural Java, there are a large number of villages which are specialized in the manufacturing of specific products only. It will then look at various programmes and projects of the Indonesian government to promote SME development at the national level which were executed throughout the country with little variation among provinces. The chapter will also discuss recent developments in SME promotion and review changes in programmes and projects now that provinces and districts play a bigger role. The final section of the chapter will illustrate the issues at stake for specific small-scale industrial activities in Central Java. MICRO ENTERPRISES AND SMEs IN INDONESIA’S ECONOMIC DEVELOPMENT Liedholm and Mead (1999) have analysed the transformation of the micro and SMEs in several developing countries during economically good and bad times. Their findings are relevant when we want to assess what has happened to the manufacturing sector in Indonesia before and since the crisis. Their findings for several African and Latin American countries suggest that when the economy as a whole is growing, SMEs add more employees to their workforce. At the same time, micro enterprises tend to close down while there is less pressure to start new micro enterprises. In general, there is less interest to be involved in badly paid micro enterprise work because of the growing presence of better paid work elsewhere. By contrast, the opposite forces are at work in the SME sector during an economic crisis. Under these circumstances, many SMEs remain stable in terms of employment, shed some labour or close down. There are only a few small firms that grow during such a period. Simultaneously, a shortage of jobs in the overall economy increases the pressures on people to start their own (micro) enterprise even though these may generate only very low incomes. 07 D&RA_Indonesia Ch 7 9/16/09, 8:50 AM 184 185 Small Enterprises in Java 185 Table 7.1 presents an overview of the developments in the manufacturing sector in the period 1975–96. These estimates are based on the data recorded by the Economic Census. The census is executed every ten years and provides an in-depth insight into the structure and dynamics of the manufacturing sector. The table shows that during the New Order period, there has been a structural change in the structure of...