By: Sulis Usdoko
Entrepreneurship Enthusiast and SME Expert, Director of PT Jamkrindo
In several periods of economic downturn, micro, small, and medium enterprises (UMKM) have always been the driving force behind the recovery process. Even during the critical period caused by the Covid-19 pandemic, collaboration between various stakeholders is expected to maintain UMKM's consistency in becoming a solution to employment and demand issues.
The government has taken the right steps by limiting activities involving large crowds as a strategy to maintain public security and health (people protection). Therefore, the impact of the decline in economic activities or demand must be compensated immediately to restore the national economy’s bottom line.
We have good capital because, in reality, the decline in demand is not primarily caused by the lack of purchasing power from the public but because people are holding back on spending and investment. It’s just a matter of timing. Therefore, when the demand level is confirmed, with the continued high volume of food orders via online motorcycle taxis during the large-scale social restrictions (PSBB) and the crowded tourist spots post-PSBB easing locally in various places, it is time for the public to be facilitated.
Health protocols should no longer be an issue; they must become a new habit that no longer needs to be reminded in order to reduce the potential for transmission. Therefore, the next step is to carry out economic activities that are safe from a health perspective, so that the demand, which is slowly beginning to grow, meets a supply curve of quality, namely production activities that can absorb significant amounts of labor.
The UMKM sector is very resilient and can adjust to any situation. Its flexible structure can be capitalized on to drive the economy. For example, the culinary and tourism sectors, which have already received a portion of public spending in a limited manner, can be relied upon to expand economic activities. This could be a good formula to reduce the potential for layoffs or absorb the abundant labor market during the Covid-19 pandemic.
After strengthening the foundation and structure in phase I, namely people protection, the government has also taken the right step by launching the National Economic Recovery (PEN) program. This program is crucial to encourage the economy, especially in the UMKM sector, which nearly ran out of steam during the pandemic. To ensure the success of this program, particularly in working capital loans (KMK) from banks to customers, the government appointed PT Jamkrindo as one of its guarantors. This is a model of collaboration that has previously proven to support UMKM, such as the People's Business Credit (KUR) program, where Jamkrindo was also appointed as one of the guarantors.
So, why is the government so determined to protect and promote the UMKM sector in the PEN program? One of the reasons is that UMKM plays a crucial role in Indonesia’s economy, as it also does in Southeast Asia and Asia in general. This sector is the backbone of job provision, consistently absorbing around 97% of Indonesia’s workforce.
According to data from the Ministry of Cooperatives and UMKM, in 2017, the number of UMKM in Indonesia reached 62.928 million units, employing 120.26 million people. Referring to the 2016 Economic Census by Statistics Indonesia (BPS), micro-enterprises absorbed the most labor, reaching 87% of the entire workforce. This was also confirmed by a survey conducted by the Organisation for Economic Co-operation and Development (OECD) in 2016, which showed that 76.3% of UMKM in Indonesia had fewer than 20 employees.
In line with the high absorption of labor, UMKM’s contribution to gross domestic product (GDP) is also relatively high. UMKM contributes 60.34% to Indonesia's GDP, according to the 2016 Economic Census, with the UMKM sector contributing 58.18% to total investment and 14.17% to total exports. However, in the past 25 years, UMKM’s contribution to GDP has remained stagnant at around 60%.
In addition to its contribution not growing, the productivity of UMKM in Indonesia also lags behind several ASEAN countries, although its labor absorption is the highest. According to the 2014 Asia SME Finance Monitor report released by the Asian Development Bank, in 2012, Indonesia's UMKM productivity was only USD1,355, while Malaysia reached USD20,609 and Thailand USD12,263. As for productivity growth, Indonesia’s UMKM grew by 4.9%, while Thailand grew by 6.1% and Malaysia by 9.5%.
This stagnation in the growth of the UMKM sector’s contribution to GDP is related to competitiveness. According to the International Trade Centre (ITC), there are three pillars that become parameters for competitiveness at the micro level: the capacity to compete, the capacity to connect, and the capacity to change. The capacity to compete relates to the company’s operations and efficiency in terms of costs, time, quality, and quantity. The capacity to connect relates to the ability to gather and utilize relevant business information and knowledge. Meanwhile, the capacity to change relates to the company’s ability to execute changes in response to or anticipation of market dynamics.
Since UMKM operates and functions amid the national and global economic dynamics, its competitiveness will be determined by macro conditions, namely the business ecosystem and national environment. Therefore, assessing UMKM’s competitiveness is related to business conditions and the environment that enable UMKM to compete, connect, and change.
In its journey, many institutions have made various efforts to improve UMKM’s competitiveness. However, given that UMKM has not yet been able to increase its contribution to GDP, despite its significant labor absorption, a breakthrough is needed.
This breakthrough refers to involving UMKM in three aspects: rational thinking, emotional feeling, and motivation factor, and combining these with positioning UMKM as a subject, not an object. Several studies have shown that the failure to empower UMKM often stems from the mistake of placing UMKM as an object of assistance, rather than as a subject with the ability to compete, connect, and change. To provide a clear and real example, I will share a model of empowerment by involving UMKM in the entire process, such as PT Jamkrindo’s empowerment of UMKM in Geopark Ciletuh, Sukabumi, West Java; Larantuka, East Nusa Tenggara; and Kintamani, Bali.
Literally, the concept of rational thinking prioritizes the use of reason, correct reasoning, and logic to verify facts. Rational thinking requires a strong effort to think and, specifically, to use intuition based on experience and the will to continuously improve.
In the context of involving UMKM actors in developing their capabilities and businesses, the concept of rational thinking refers to the mutual belief between UMKM and its mentors that mutual understanding is essential and the need to jointly formulate an empowerment concept. Rational thinking is always the first stage in the empowerment process because UMKM needs to be invited to think, formulate concepts, make plans, and execute those concepts and plans.
Although all three processes are important, rational thinking must place the highest priority on execution, emphasizing this stage. In some cases, it is possible that UMKM and their mentors have developed good concepts and plans, but they often fail because of weaknesses in execution.
In the model of UMKM empowerment in Larantuka, we invited cashew nut farmers to sit together and analyze the problems one by one. The rational thinking approach led us to realize that each cashew nut farmer had their own specific issue, so their solutions had to differ. This arose from the belief that the root cause of UMKM empowerment failure lies in an irrational way of thinking: that UMKM has the same problem—access to capital.
It turned out that access to capital was not the only, and not the main, issue that hampered UMKM. In Larantuka, this was confirmed because each farmer had different problems, even though they ultimately led to the same impact: cashew nut cultivation had not been able to contribute optimally to their local economies.
To optimize cashew cultivation, rational thinking led us to solve each farmer’s individual problems. Some were caught in an ijon system to finance healthcare, some were stuck with loan sharks for agricultural needs, and many other problems emerged. (Source: Koran Sindo)