The role of government policy in Indonesian small and medium enterprise development, 1966-2006

This dissertation analyses how the policies of Suharto’s New Order government (1966-98) and post-Asian Financial Crisis reforms shaped Indonesian SME development. Indonesia featured as one of the high-growth Tiger Economies in the World Bank’s (1993) East Asian Miracle report. One of the features of the East Asian model is the ‘principle of shared growth’, implemented through various reforms, including SME-targeted support policies. Suharto restructured the Indonesian economy along similar lines, yet it is commonly argued that Indonesia suffered from a ‘missing middle’ - a gap in firm-size distribution due to small firms staying small and large firms being born already relatively large. This perceived inability of indigenous firms to grow is subject to recurrent heated public debate. Chapter 2 places indigenous entrepreneurship in historical context, showing that attempts to foster it during the late colonial and early post-independence period largely failed. Chapter 3 explores the question of the missing middle in the manufacturing sector despite the New Order government’s objective to strengthen small enterprises. Using Economic Census data on number of firms, workers and value added by firm-size category reveals that as the Indonesian economy grew a missing middle emerged and persisted. A comparison with South Korea and Taiwan shows that this could not be explained by Indonesia’s stage of economic development and is indicative of a dual economy. Chapter 4 focuses on access to credit, a main constraint to SME development. Using Bank Indonesia data and statistical yearbooks, I analyse the various small business credit schemes introduced since the early 1970s. These generally showed – at best – mixed results. I identify a turning point when the approach shifted from subsidised targeted government credit programmes to market-led financial intermediation by commercial and local rural banks with market interest rates on savings and loans. However, the vast majority of SMEs remained self-financed and access to credit continued to be a pervasive issue for Indonesian SMEs during the New Order period and beyond.