7 - Small Enterprises and Decentralization: Some Lessons from Java

Summary

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 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.