An essay by Yulian Suhamto
Indonesia is a country that has economic strength in MSMEs. The role of MSMEs is very large in the Indonesian economy where MSMEs are driven by all levels of society from large cities to rural areas. According to the Coordinating Ministry for Economic Affairs in 2022, 64.2 million MSMEs were contributing 61% of Indonesia’s Gross Domestic Product (GDP). Furthermore, MSMEs also play a role in absorbing 97% of the domestic workforce or around 119.6 million people. In the trade sector, Indonesia has also opened free trade agreements (FTAs) to reduce or eliminate certain barriers to trade and investment, and to facilitate trade relations. As of September 2023, Indonesia has 18 FTAs (DGCE, 2023) with the expectation that these agreements will help MSMEs become stronger and contribute greatly to the country’s economy.
However, in recent years, the significant expansion of Indonesia into non-traditional markets through FTAs has sparked public debates. FTAs have been criticized in terms of disadvantageous effects on the growth and competitiveness of Indonesian MSMEs in both domestic and international markets. This article will analyse this issue from three primary areas: competition and exposure to foreign markets, access to finance, and government, digitalisation and guidance support to illustrate that FTAs are beneficial to increasing MSME’s profits, growth opportunities, and a level playing field in competitiveness.
Competitions and Exposure to Foreign Markets
In terms of competition and exposure to foreign markets, some contend that the increased competition and foreign market exposure resulting from the implementation of FTAs in Indonesia may lead to business closures and job losses among MSMEs. Tambunan (2011) argued that many MSMEs have closed due to the excessive export of raw materials, resulting in domestic shortages facilitated by market liberalization. Furthermore, global opinions suggest that the role of FTAs or increased market liberalization can lead to serious job losses (Kokshi, 2014). Free trade agreements tend to favour the interests and resources of large companies, providing them with a more significant competitive advantage compared to MSMEs (Kawai & Wignaraja, 2011). The utilization of FTAs is perceived as assisting larger companies in more effectively operating in international markets, expanding their operations, and achieving economies of scale that are difficult for MSMEs to attain. Furthermore, according to Pratiwi (2014), MSMEs are vulnerable to unfair trade practices, such as dumping, which may become more prevalent due to market liberalization under FTAs, thus undermining the domestic industry.
However, according to Rahman et al. (2016), the competition stemming from FTAs can be addressed by providing incentives to MSMEs effectively, resulting in significant growth and job creation. These incentives can include improved access to financial resources, digitalization, and ease of access to goods. Concerning the competition between large companies and MSMEs, Indonesia has the Indonesia Competition Commission (KPPU/ICC), established by Law No. 20 of 2008, to oversee and strengthen the relationship between large enterprises and MSMEs by creating a mutually beneficial level playing field. Additionally, MSMEs can more easily access and gain more profits in niche markets through the utilization of FTA facilities where these markets are generally ignored by large companies (Cao et al.,2018). Concerning raw materials and distribution, Siahaan and Ariutama (2021) argue that regional FTAs facilitate MSMEs in obtaining raw materials at a lower cost, thus easing access to export markets by reducing or eliminating tariffs on partner countries. Moreover, FTAs followed by Indonesia have specific provisions related to competition and MSMEs in several recent FTAs, such as the Regional Comprehensive Economic Partnership (RCEP) and other agreements. Article 14.2-14.3 of the RCEP contains provisions for improving small and medium enterprises’ access to markets and participation in global value chains, including the promotion and facilitation of partnerships among businesses. Concerns regarding the impact of dumping and countervailing measures are also addressed through anti-dumping provisions in FTAs followed by Indonesia. Moreover, Indonesia responds seriously to dumping issues by employing the Anti-Dumping and countervailing measures mechanism in the World Trade Organization (Fernando & Ing, 2022). In terms of competition and increased exposure to foreign markets, FTAs facilitate the role of Indonesian MSMEs in becoming better protected, competitive, and prospering with good relationships with large enterprises, both domestic and foreign.
Access to Finance
Access to finance is another concern raised by some, as the increasing number of FTAs has heightened global market competition. Consequently, the MSME sector must make efforts to expand their businesses to enhance export opportunities. Nevertheless, the primary challenge faced by MSMEs is the lack of access to the necessary financing for this expansion (Tambunan, 2018). Some also believe that financing for the MSME sector is challenging to obtain, primarily due to issues related to collateral, uncertainties in business track records, and immature management systems (Shinozaki, 2012). Furthermore, MSMEs are hindered by limited financing options tailored to their unique needs. While banks and other financial service providers offer loans based on capital and collateral, there is currently no institution that offers loans based on cash flow (International Labor Organization, 2019). This obstacle is further worsened by data that the majority of MSMEs do not have adequate financial literacy skills in finance (OJK, 2020), making it difficult for MSMEs to fulfil the requirements put forward by financial institutions.
However, according to 2022 OECD data, Indonesia’s financing in the MSMEs sector in 2020 increased by 202% compared to 2012. Even during the pandemic, Indonesia provided financial support to MSMEs amounting to IDR 353 trillion (USD 22.4 billion) as part of its national economy recovery program. The Indonesian government has implemented the Micro Business Credit/ Kredit Usaha Rakyat (KUR) policy, offering low-interest loans of up to 500 million without collateral to facilitate financing for MSMEs to boost exports through FTA (Limanseto, 2022). In Indonesia, not only commercial banks are institutions providing financing for MSMEs, but also Rural Banks/Bank Perkreditan Rakyat (BPR) which reach out to remote levels in Indonesia. In addition, funding in Indonesia for MSMEs is not only from the banking sector but also from the non-banking sector or Microfinance Institutions for MSMEs who cannot access financing from banks. The Indonesian government has established microfinancing programs, such as through PT Pegadaian (State Owned Pawnshop), which has provided funding amounting to IDR 36.76 trillion (USD 2.94 billion) in the last decade, as well as Rural Microfinancing Units/Koperasi Unit Desa (KUD) for the MSMEs sector (OJK & Asian Development Bank, 2020).
Furthermore, the Indonesian Government through the Indonesia Financial Services Authority/ (OJK) is also encouraging the development of Financial Technology (Fintech) to support the Financial Literacy of the Indonesian population and has included it in Indonesia’s National Strategy on Financial Literacy (SNLKI) since 2013. By having 28 FTA partner countries (DGCE, 2023) and easy access to financing, Indonesian MSMEs are progressively open to developing their businesses, increasing export value and being more competitive.
Government, Digitalisation and Guidance Supports
There is a viewpoint that FTAs may increase the complexity of international trade and the production costs of businesses. Due to differences in regulations among different FTAs, complying with the rules and regulations of each FTA can pose a significant challenge for businesses (DFAT Australia, 2001). For MSMEs, this situation adds a burden on top of the competition and financial issues arising from FTAs. Additionally, the issue of FTA-related Intergovernmental Cooperation in Indonesia seems to be lengthy and slow, deterring MSMEs from taking advantage of FTAs (Nyoman et al., 2020). Moreover, Wicaksono & Simangunsong (2022) argue that only 13% of Indonesian MSMEs currently use the Internet, resulting in reduced competitiveness in marketing among MSMEs amid the opening of Indonesia’s free market.
Nevertheless, the Indonesian government, through the Omnibus Law of Job Creation No.11/2020, has streamlined the bureaucratic process of business permits, including the establishment of Special Economic Zones (SEZs) as regulated by Law No.39/2009 to facilitate administrative processes for exports and imports. More specifically, FTA facilitation for MSMEs is achieved through the Ease of Import program for MSMEs for Export Destination (KITE IKM), which exempts them from value-added tax and customs duty when importing raw materials (Risydan et al., 2019). This program aims to increase MSME export volumes through FTA facilitation in the destination country. Furthermore, in the Indonesia-Australia CEPA FTA scheme, provisions for workshops and MSME development are included in the Economic Cooperation Chapter (DFAT Australia, 2020). These provisions are expected to improve the understanding of FTAs to support MSME development in the long run.
Concerning digitalization support, Rizki (2022) suggests that there are currently 202 million internet users in Indonesia, which has driven an economy worth $70 billion in 2021 and is projected to reach $146 billion by 2025. This opens up new roads for MSMEs in terms of technology adoption, finance, and inclusive trade. Moreover, Indonesia has launched programs and a roadmap for Indonesia 4.0 and Go Digital Vision, which aims to enhance the competitiveness of MSMEs in digitalization and the economy.
The governmental endorsements of facilities, streamlined procedures, and digitalisation as the benefit of FTA implementation not only ease the operational burdens on MSMEs but also afford them a strategic opening to broaden their export horizons and fortify their resilience in the face of volatile market dynamics.
Conclusion
This article has covered three main areas of concern to highlight that FTAs are beneficial to the growth and competitiveness of MSME businesses in Indonesia. Even though there is criticism and public concern regarding increasingly tight competition and limited access to finance for MSMEs in the FTA context, it needs to be understood that this comprehensive trade framework was created to support the development of these enterprises. Government initiatives, such as the Micro Business Credit (KUR) policy, Rural Banks (BPR), and Microfinance Institutions, have been crucial in providing financial support to MSMEs. The introduction of digitalization initiatives and financial literacy programs further enhances their ability to navigate the evolving economic landscape.
Additionally, FTAs offer benefits to MSMEs by facilitating access to cost-effective raw materials and easing entry into international markets through reduced tariffs. The presence of regulatory bodies, including the Indonesia Competition Commission, and the inclusion of provisions in recent FTAs like the Regional Comprehensive Economic Partnership (RCEP) are instrumental in creating a fair competitive environment.
In conclusion, FTAs positively affect the growth and competitiveness of Indonesian MSMEs by addressing challenges and providing a supportive ecosystem that empowers these enterprises to prosper and contribute significantly to Indonesia’s economy.
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