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Opinion | Co-regulation To Map The Many Faces of Indonesia’s Micro and Small Businesses

Updated: Apr 19, 2022

First published in The Jakarta Post (5/8/21).

Government support for micro and small businesses both prior and during the Covid-19 Pandemic, have taken various forms, like cash transfer, tax incentive and low-interest loan, but these have mostly proven to be ineffective because of poor targeting caused by outdated databases that failed to recognize the diversity of micro and small business (MSEs)

Considering the large pool of MSEs as a uniform group with similar characteristics and needs remains a common fallacy and one of the main barriers to providing well-targeted and well-tailored effective interventions.

By motivational drive alone, MSEs can at least be differentiated into two groups. First, is the opportunity-driven entrepreneurs who aim to seize market opportunity and accumulate capital through business expansions. This group typically has a growth-oriented mindset in entrepreneurship and will benefit from entrepreneurial support programs.

The second group is the necessity-motivated entrepreneurs who engage in business out of lack of alternatives. Small kiosks or warung owners, for example, often opt for informal entrepreneurship merely to make ends meet due to limited options in the formal job market. This group is unlikely to expand their business or shift into a more profitable sector. As a corollary, they tend to be a stranger to innovations and remain micro in size.

For these necessity-driven businesses, well-designed poverty reduction programs are the first-best option to address the low productivity in the sector. For example, the low level of education and limited assets ownership that characterize this group, are cross-sectoral issues that would require reforms in education and in other socio-economic segments. The majority of entrepreneurs in this group also operate informally, meaning that they are unregistered and do not usually hold a business license.

From this alone, one can already question the impact of the Ministry of Finance’s six-month tax relief program for MSEs during the first Covid-19 outbreak last year. While this may profit the opportunity-driven businesses, informal necessity-driven businesses with below-subsistence level earnings are unlikely to benefit from this.

A similar case is the latest budget reallocation in the National Economic Recovery (Pemulihan Ekonomi Nasional) programs. When supporting funds for MSEs are reduced from Rp 139 trillion to Rp 171 trillion to increase business incentives from Rp 56 trillion to Rp 62 trillion, opportunity-driven businesses are set to gain more than the necessity-driven entrepreneurs.

Gender variable also adds an extra aspect to MSEs typology. Many women-owned MSEs suffer from traditional gender preconceptions, making their problems unique. For example, they are still expected to bear the responsibility of care and domestic work, leaving them with insufficient time to manage their business.

The limited access to assets and capital commonly found among MIEs in general, are also further also exacerbated by gender-specific attributes. In the rare occasion when low-income women own valuable fixed assets such as land and building, the sale or use of such assets as collateral often requires the consent of a male spouse or relative.

Banks and other financial institutions should therefore be encouraged to widen the range of their collateral to include movable assets that are common for women to have like, jewelry or gold.

Reliable database as a starting point

A reliable and regularly updated database plays a crucial role in mapping the many faces of MSEs and providing the right interventions. Current official data on MSEs have yet to reflect the above variances. On gender, for example, government data on how many women are engaging in informal MSEs is unavailable, let alone identifying their motivational drives to engage in entrepreneurship.

To address this, government ministries and agencies must work together with private stakeholders and adopt the co-regulation approach -- a responsibility sharing between state and broad-based private stakeholders in both policy making and enforcement. In the context of data collection, for example, Presidential although Presidential Regulation No. 80/2019 still features a traditional top-down regulatory model, requiring e-commerce platforms to submit transaction data to Statistics Indonesia (Badan Pusat Statistik/BPS).

The minimal private sector involvement in regulation making has led to a lack of details on the types of data and the mechanism, raising concerns that this may violate users’ privacy rights. Platforms are faced with the dilemma of having to choose between users’ rights and regulatory obligation and this could possibly affect compliance levels.

As such, BPS needs to include e-commerce platforms and business associations in designing the implementing rule of this policy. Platforms and BPS can, for example, agree on collecting only aggregate and not granular data to minimize the risk of violating user’s data privacy rights. Platforms can also provide best practices on how to minimize cybersecurity risks when managing data.

For example, when new merchants register their business in the marketplaces, platforms can include an optional question on their motivational drives and ask their consent for the submission of their answers to BPS, strictly to improve government databases. Users can also be given an option to opt out from having their personal data transferred without their permissions.

Business associations such as the Indonesian E-Commerce Association (idEA), could also be given a supervisory role to ensure that data submissions are not compromising data security and users' privacy rights. This approach is likely to produce better results in improving databases on e-commerce sellers.

In conclusion, recognizing the different types and needs of MSEs is crucial for optimal and well-targeted policy interventions. Reliable and updated databases are a promising starting point, but for this to be effective, private parties such as online marketplace providers or business associations must be involved in policy making and enforcement using the co-regulation approach. Public and private stakeholders need to mutually complement each other to improve the MSEs database, and thus allow the formulation of effective policy intervention for each group.


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