Sri Mulyani Indrawati, Indonesia's Finance Minister since 2016, describes the community of micro, small and medium sized enterprises (‘MSMEs’) as the ‘backbone of the entire Indonesian economy’.
The metrics of the MSME sector in Indonesia are startling, and differ greatly from the comparative position of the peer economies in SE Asia, namely:
MSMEs comprise 99%+ of the number of registered enterprises operating in Indonesia.
They create and sustain a total of 120 million jobs in SE Asia's largest economy.
They contribute over 60% to Indonesia's Gross Domestic Product (GDP).
However, the fundamental characteristics of the business environment within which the MSMEs are operating - industry structures, sector diversity, market dynamics, etc. - are neither well documented nor fully appreciated.
In this latest Wellington Perspective, we are aiming to provide further insights into the unique breadth and depth of the MSME sector in Indonesia - with an emphasis on the impact of technology and regulatory change.
We highlight the initial steps being taken to create a pathway to digital transformation for these companies that is both scalable and sustainable - particularly for the wholesale and retail trade industries across the entire archipelago.
Our key belief is that the socio-economic condition of the MSME sector is a vital factor in Indonesia’s ‘bounce-back’ from the massive disruption arising from COVID-19 pandemic. (*)
With 88% of MSMEs still not using the Internet, the opportunity for dramatic productivity and performance gains bodes well for future expansion.
Innovative platforms like Tokopedia, Bukalapak and Shopee Indonesia are redefining the MSME marketplace, and a plethora of adjacent MSME-oriented platforms are addressing issues such as distribution logistics, payment processing, book-keeping and external funding.
It is also clear also that the COVID-19 phenomenon is accelerating the much-needed and long-overdue digitalization of the core business operations of the MSMEs.
In summary, we contend that the MSME sector remains the primary engine of growth for the Indonesian economy in the post-pandemic period - driven by technology innovation and facilitated by the wide-ranging regulatory changes currently being enacted by the Government.
Furthermore, we envision an opportunity for the Government to leverage this transformation of the sector by broadening the aggregate tax base of the nation - given that a) the majority of MSMEs do not currently pay any taxes and b) the vast bulk of MSME workers belong to the informal employment sector.
With MSMEs currently contributing less than 2% of the total ‘tax take’ in Indonesia, there is obvious scope for the Government to increase the fiscal obligations of the sector significantly.
We cover all of the above issues - and more! - in depth as part of the report pack available here
If you would like to discuss any aspect of this report, please feel free to contact us
(*) To understand the WCA perspective on the ‘bounce-back’ prospects for the Indonesian economy, please see this recently-released report.