Toward ASEAN Economic Community 2015: Prospects, Challenges, and Opportunities for Small Medium Enterprises (SMEs) in Indonesia

Toward ASEAN Economic Community 2015:Prospects, Challenges, and

Opportunities for Small MediumEnterprises (SMEs) in Indonesia

Edy Irawan1, Feisal Makarim2, Irfany Phalita3

1Universitas Indonesia, Depok, [email protected] Indonesia, Depok, [email protected]

2Universitas Indonesia, Depok, [email protected]

Association of Southeast Asian Nations (ASEAN) countries havereached agreement on the establishment of the ASEAN Community thatis scheduled to be realized in 2015. One of the significant pillarsin the establishment of the ASEAN community is economic. In 2007,the leaders of ASEAN countries in following up on the ASEAN EconomicBlueprint. It is the forerunner of the emergence of the idea of theestablishment of the ASEAN Economic Community 2015.

ASEAN in general is being categorized as a developing regional. Inmany ASEAN countries, we will find their economics sector highlyrely on small/micro enterprises. Micro enterprises provedcontributing significantly to the GDP of the nation. As an example,it contributes 33.81% to the GDP and make up until 90.98% employmentrates in Indonesia.1 This model also applied as a typical model ofASEAN countries in general.

Nowadays, discussion related to ASEAN Economic Community moresignificant to discuss. Therefore, this paper will discuss aboutASEAN Economic Community. This paper will specifically discuss aboutthe implications of establishment of ASEAN Economic Community forsmall medium enterprises (SMEs) in Indonesia. The research questionof this paper is how do the implications of establishment of ASEANEconomic Community for SMEs in Indonesia? By the fact that SMEs inIndonesia contributing significantly, it is significant to discussabout ASEAN Economic Community. As we know when ASEAN Economic

1 KUMKN, BPS (Center of Statistics), UKP4 Indonesia, 2008 and 2010.

1Proceedings of International Conference on Indonesian Development ICID 2013

Community realized in 2015, the free or single trade mechanism isone of the consequences.

Methodology of writing will be directed to the study of literaturewith sources such as books, journals, reports, and so forth. Theconclusion of this paper, we assume, the establishment of ASEANEconomic Community 2015 indeed will give challenges for SMEs.However on the other hand, it will give prospects and opportunitiesfor SME in Indonesia.

KeywordsASEAN Economic Community, Economic Integration, GDP, Indonesia,Small Medium Enterprises

1. IntroductionThe Association of Southeast Asian Nations (ASEAN) was establishedon August 8, 1967, in Bangkok by the five initial Member Countries:Indonesia, Malaysia, Philippines, Singapore, and Thailand. The othercountries joined after 1967, Brunei on January 8, 1984, Vietnam onJuly 28, 1995, Laos and Myanmar on July 23, 1997, and the lastCambodia on April 30, 1999. The main purpose of the establishment ofASEAN is to promote intra-regional trade by reducing tariffs betweenmember states. In the 1960s and early 1970s, the share of intra-ASEAN trade in the total trade value of its Member Countries wasbetween 12% and 15% (http://www.aseansec.org). ASEAN in general isbeing categorized as a developing regional. In many ASEAN countries,we will find their economics sector highly rely on small/microenterprises. Micro enterprises proved contributing significantly tothe GDP of the nation. As an example, it contributes 33.81% to theGDP and make up until 90.98% employment rates in Indonesia.2 Thismodel also applied as a typical model of ASEAN countries in general

As a regional organization, ASEAN encourage the member states tohave integration. ASEAN itself basically consist of three pillarswhich are the pillars of ASEAN Community.. The three pillars ofASEAN Community are ASEAN Political-Security, ASEAN EconomicCommunity, and ASEAN Socio-Cultural Community. Firstly, ASEANCommunity scheduled to be implemented on 2020. However, there aresome concerns to accelerate the implementation of ASEAN Community by2015. This paper will focus on the second pillar, which is ASEAN

2 KUMKN, BPS (Center of Statistics), UKP4 Indonesia, 2008 and 2010.


http://www.aseansec.org/

Economic Community, and related with SMEs in Indonesia toward ASEANEconomic Community 2015.

Regarding economic development and ASEAN Economic, in ASEAN heldsome meeting which attended by ASEAN countries leaders. Forinstance, in 1977, ASEAN introduced the first Preferential TradingArrangement, which contractually accorded tariff reductions amongASEAN economies. In 1992, the Framework Agreement on Enhancing EconomicCooperation was adopted at the Fourth ASEAN Summit in Singapore. Itincluded a scheme of the Common Effective Preferential Tariff (CEPT) within theASEAN Free Trade Area (AFTA). The elimination of tariff and non-tariff barriers among the member countries was expected to promotegreater economic efficiency and productivity. This had the finalgoal of increasing competitiveness of production locations in ASEAN.Within 3 years from the launch of AFTA, the share of intra-regionaltrade in ASEAN’s total trade volume rose from 20% to almost 25%3

In 1995, the Fifth ASEAN Summit held in Bangkok adopted the Agenda forGreater Economic Integration, which included an accelerated timetable forthe launch of AFTA from a 15-year timeframe to 10 years. In 1997, theASEAN leaders adopted the ASEAN Vision 2020, which called for ASEANPartnership in Dynamic Development aimed at forging closer economicintegration within the region. The vision statement also resolved tocreate a stable, prosperous and highly-competitive ASEAN EconomicRegion, characterized by free flows of goods, services, investment,and capital. It was hoped that this deepening in integration wouldlead to a process of economic development that would reduce povertyand socio-economic disparities.4

At the Bali Summit in October 2003, ASEAN Leaders declared that theASEAN Economic Community (AEC) shall be the goal of regionaleconomic integration (Bali Concord II) by 2020. In addition to theAEC, the ASEAN Security Community and the ASEAN Socio-CulturalCommunity are the other two integral pillars of the envisaged ASEANCommunity. All the three pillars are expected to work in tandem inestablishing the ASEAN Community in 2020. Subsequently, the ASEANEconomic Ministers Meeting (AEM) held in August 2006 in KualaLumpur, Malaysia, agreed to develop “a single and coherent blueprintfor advancing the AEC by identifying the characteristics andelements of the AEC by 2015 consistent with the Bali Concord II withclear targets and timelines for implementation of various measuresas well as pre-agreed flexibilities to accommodate the interests ofall ASEAN Member Countries. At the 12th ASEAN Summit in January3 Wlfens, Paul J.J. et al. EU ASEAN Facing Economic Globalisation. (Springer-Verlag Berlin Heidelberg, 2009), page: 76-774 Ibid


ASEAN Community

Political-Security Community

Economic Community

Socio-Cultural Community

2007, the Leaders affirmed their strong commitment to accelerate theestablishment of an ASEAN Community by 2015 as envisioned in theASEAN Vision 2020 and the ASEAN Concord II, and signed the CebuDeclaration on the Acceleration of the Establishment of an ASEANCommunity by 2015. In particular, the Leaders agreed to hasten theestablishment of the ASEAN Economic Community by 2015 and totransform ASEAN into a region with free movement of goods, services,investment, skilled labor, and freer flow of capital.5

Diagram 1: The summary of the paper

The main objectives the establishment of the ASEAN EconomicCommunity (AEC) are to create a: single market and production base,highly competitive economic region, region of equitable economicdevelopment, region fully integrated into the global economy. AECenvisages the following key characteristics: (a) a single market andproduction base, (b) a highly competitive economic region, (c) aregion of equitable economic development, and (d) a region fullyintegrated into the global economy.6 SMEs on the other hand, belongto equitable economic development, because as mentioned above thatASEAN in general is being categorized as a developing regional. Inmany ASEAN countries, we will find their economics sector highlyrely on small/micro enterprises.

2. SMEs Evidence in Indonesia: Prospect, Challengesand Opportunities5 Association of Southeast Asian Nations (ASEAN). Roadmap for an ASEAN Community 2009-2015. 2009, Page 21-226 http://www.asean.org/communities/asean-economic-community, access on 29 June 2013


SMEs Indonesia

Prospects

Challenges

Opportunities

http://www.asean.org/communities/asean-economic-community

Based on development experience that has been implemented byIndonesia, SMEs had proved that they can be a main actor in nationaleconomic development. When Indonesia was hit by monetary crisis in1997/1988, many big enterprises which got many facilities fromcountries and had loan from foreign investment faced seriousproblems caused by rupiah’s depreciation. SMEs on the other sidetook the benefit from this depreciation. Many SMEs, especially fromagribusinesses and agro industries which exported their productslikes coffee, pepper, nutmeg fruit, cloves, shrimp, and anotherfishery products, and furniture, enjoyed the benefits from rupiah’sdepreciation.7

How is about the growth of SME in Indonesia? Based on data whichwas released by BAPPENAS (National Panning Board), the number ofSMEs achieved 55.2 Million units which contributed 99.09% nationalenterprises. That number consisted of 54.5 million microenterprises. 602,195 units came from small enterprises and 44,280from medium enterprises. SMEs can absorb lots of employees. In 2011,SMEs absorbed 101.7 million employees. SMEs has important role inthe economic growth because it contributed about 57.6 percent of GDPand about 16.4 percent export of nonoil and gas sector in 2011.SMEs’ growth in Indonesia is rising steadily. Between 2006 until2011, SMEs’ growth average about 5.7 percent.8

However, productivity rate of SMEs is not balanced compared to itsbig number. It’s productivity still far below productivity rate ofbig enterprises. Productivity SMEs per unit in 2011 is IDR. 24.8million, besides productivity of big enterprises in the same yearachieved IDR 203.5 billion. SME’s contribution in nonoil and gassector in 2011 which was only 16,44 % still lower than average ofexport value of nonoil and gas SME ‘s in 2005-2007 period(20,0%).The Low of SMEs productivity reflected of its lowcompetitiveness power. This condition needs acceleration forimproving SMEs capacity in a frame take advantage of enterprisewhich is created by economic growth, market that gives wideropportunity, and investment improvement. These efforts need supportby doing restoration of business climate, improving access toproductive resource, and improving participation of stakeholder,both of public and private sector. Many efforts needed by SMEs,especially in facing business competition that is getting harder,

7 Infokop, page: 558 Bappenas. Warta KUMKM Daya Saing Koperasi dan UMKM. Volume1 No.1 Juni 2013 page : 6


including involvement of planning of implementation ASEAN EconomicCommunity in 2015.9

The important role of SMEs for economic growth and development inIndonesia is protected by government rules and policies. Laws thatprotect SMEs such as MSME Law No. 20/2008, Cooperative Law No.17/2012, Government Regulation No. 17/2013, Various GovernmentRegulations related to cooperatives, Government Regulationsconcerning Government Affairs Division between Central, Provincialand District/City Government and UU No. 17/2007 on Long-termNational Development Plan (RPJPN) 2005-2025, Presidential Regulationrelated to medium-term and annual development plan.

Long-term National Development Plan (RPJPN) 2005-2025 is a directionof policy, program, and development activities including effortsfor strengthening development as a whole with giving emphasize todeveloping excellence competitive, economy based on naturalresources, high quality human resources, and capacity on informationand technology. Especially intertwined with SMEs empowerment, thepolicy is directed to support effort to realize competitive nationand equality and equity of development.

In RPJPN, there are two focus issues and three levels in viewingSMEs empowerment. Two main focuses which are used is approach ofdeveloping capacity and institutional strengthening in a frame ofimproving adaptation SMEs in changing market: advantaging resourcesmore efficient, advantaging innovations results and implementationtechnology in healthy business climate. There are three level usedby RPJPN: Macro, Meso and Micro levels. In Macro level, policy forimproving business environment needed in frame of strengtheningcompetitive capacity of SMEs. In Meso level, policies are needed tofocus on improving access of SMEs to productive resources in frameof improving healthiness and broadening the enterprises. Focus isgiven for developing the institutions and improving capacity tosupport enterprise network and market development, improving accessto financial resources, information, skills, and escalatingintensity of technology implementation that matched with SMEs needs.In Micro level, empowerment policy of SMEs must touch the essentialissues in empowering SMEs, that is characteristic and businessmanbehaviour. Joko Sutrisno suggests, limitation and problems thatfaced by SMEs mainly in investment, Human Resource and Technologyaspects.10

9 Ibid, page: 610 Op.Cit page: 106


The low of capital ownership intertwined with investment resources.This problem until now cannot be solved because the development ofSMEs is still blocked by the issue of difficulties to access capitalloan from loan formal institutions. Even this issue is classical andhas been obstructing for a long time, this problem has not beensolved yet. Problem to access SMEs to capital resources cannot beescaped from the low of entrepreneurship of SMEs.

Technology that needed by SMEs generally is precisely benefittechnology (Teknologi Tepat Guna/TTG) that does not demand high skillsand high investment. During last four decades, although they werenot well spread, some of technology production of SMEs has beendeveloped, caused by innovation by SMEs itself and introduced byexternal side including the government. It is caused by somepoints : (1) the limitations of technology innovation skills (2)the limitations of capital ownership (3) insufficient information todeveloping technology (4) Low provisions of technology developmentfacility and (5) implementation various programs of SMEs technologydevelopment by stakeholder is not optimum yet.

The slowness of SMEs technology development is one of indicator thelow of entrepreneurship and the programs of SMEs empowerment are noteffective yet to stimulate in promoting technology. This conditionof course will not be happen if policies and SMEs empowermentprograms guided to be more creative and innovative. To fix SMEscondition, the action that must be taken is improving technology ofSMEs so SMEs can escape from structural trap. Fixation of SMEs canbe done by inventorying and technology need analysis which arecontinued by appointment and new technology adoption by SMEs.

Whereas, in human resource issue in SMEs intertwined withentrepreneurship that owned by SME entrepreneurs. Cullen (1998)suggests the successes of them in competition are decided by theirentrepreneurship competence and how they apply it. Entrepreneurshipstrategies which are mostly applied are export, license, strategicalliance, joint venture, and direct investing. Each of enterprisecontains risk, capital, and revenue.11

The problem that found frequently in human resource isentrepreneurship which is owned by SME enterprises. Syarif (2007)argue mostly SMEs run their enterprise not because they have skillin business activities but mostly trapped by scarcity of job fieldand just follow the other. So, the motivation to run the businessactivities is not because they think they view the potential but

11 Ibid, page: 1227

Proceedings of International Conference on Indonesian Development ICID 2013

only follow the other. This paradigm can be dangerous because theenterprise for them can get saturated and cannot give economicbenefit again.

2.1 ASEAN: The Significant Roles Regarding Regional SMEsRealizing small and medium enterprises (SMEs) as the backbone of theeconomy in ASEAN Member Countries, ASEAN has implemented theStrategic Action Plan for the ASEAN SME Development (2010-2015). Asthe third pilar of AEC: Equitable Economic Development, it is aimingto further enhance the competitiveness and resilience of SMEs towarda single market and production base. However, SMEs are domesticfocused and might be one economy aspect affected much by AEC. Sinceof that, we have to start from the position of Indonesia’s SMEs inASEAN condition today.

Based on Ministry of Cooperative and SMEs statistic on 2011, numberof micro business 98.82%, small 1.09%, medium 0.08% and big only0.01%. Meanwhile the proportion of gross domestic product (GDP) formicro business is 29.74%, small 10.46%, medium 14.53% and big reach45.27%. This lag shows the SMEs performance has not optimalized.This condition related to national competitiveness of a country.Global Competitiveness Report on World Economic Forum 2012 placedIndonesia on 50, far behind from other neighbor countries inSoutheast Asia such as Singapura (2), Malaysia (25), and Thailand(38).

Global competitiveness index consist of 12 pilars which separated in3 subindexes: basic requirements, efficiency enhancers, innovationand sophistication factor. On basic requirement we haveinstitutions, infrastructure, macroeconomic, also health andeducation. Training, good market efficiency, labor marketefficiency, financial market, technological readiness, and marketsize on the second subindex. The last consist of businesssophistication and innovation. This report reveal the top 3 problemof business in Indonesia, from 16 problems occured. They arebureucracy inefficiency, corruption, and the infrastructure.

Here is the comparison table of business access process betweenIndonesia, Malaysia, and Singapore. The table show high gap as oneof the causes of high competitiveness gap too. The more longer inAsia Pacific is only Brunei Darussalam and Papua.


Tabel 1: Comparison of Business Permition

Indicator Indonesia Malaysia SingaporeRank 166 54 4

Procedure 9 3 3Day 31 6 3

Cost (%perkapita)

22% 16% 0,6%

Source: Doing Business 2013 (IFC&The World Bank)

We also face serious problem on corruption. Corruption PerceptionIndex (CPI) by Transparency International on 2012 show Indonesiastill in the 118 of 176 countries surveyed. This rank has not beenchanged significantly for years. Compare with ASEAN countries,Indonesia is only above Vietnam in 123 and Myanmar in 172. WhileSingapore in 5, Brunei Darussalam in 46, Malaysia in 54, Thailand in88, and Philipines in 116. This condition should be seen as seriousalert.

The Indonesia infrastructure quality is the lowest in Asia, it isonly better than Philipines. With the position of 92 from 100, itis not a good news. This lack of quality can be seen as impact oflow percentage of infrastructure project budget from gross domesticproduct per kapita as shown diagram below:

Source: Ministry of Finance 2012

Diagram 2: Comparison of Infrastructure Budget

Another reason is the lack of innovation. World Intelectual PropertyOrganization stated Indonesia inovation index in the 100 of 141countries. Again, below Malaysia (32), Brunei (53), and Thailand(57). This innovation including many aspects, start from marketing,design, packaging, management and many others related to the productvalue added.


Since the domestic market has been 40%of total ASEAN citizen about598,5 million, it can be our competitive advantage. ASEAN also hasinitiated the integration. In ensuring a sustainable ASEAN EconomicCommunity beyond 2015, as well as narrowing the development gapsbetween and within ASEAN Member States, it has been endorsed theASEAN Framework on Equitable Economic Development (EED).

Tabel 2; Equitable Economic Development Scorecard

Source: AEC Scorecard

Based on scorecard above, the third pilars of Equitable EconomicDevelopment has so far achieved 66,7% of targeted measures, as theimplementation of various activities in SME development andInitiative for ASEAN Integration (IAI) remained generally on track.

3. ConclusionsAs a member country which led ASEAN two years ago, Indonesia has toprepare toward ASEAN Economic Community 2015. The establishment ofASEAN Economic Community 2015 indeed will give challenges for SMEsin Indonesia. The single and free market mechanism prosecutesIndonesia’s SMEs to be stronger, dynamic, efficient, innovative andcan stand out among others SMEs which come from outside Indonesia.However on the other hand, it will give prospects and opportunitiesfor SME in Indonesia. As a big country with big employment demand,Indonesia should take the advantage of benefits from ASEAN EconomicCommunity, it could be said as prospects and opportunities. Tomaximize both, Indonesia has to increase the infrastructure to bebetter, create a better investment atmosphere, and conduct seriousendeavors to facilitate the SMEs sectors. Indonesia has tostrengthening SMEs human resources in order to increase globalcompetitiveness, as mention above that Indonesia placed 50 far belowother ASEAN Countries. Check and balances mechanism in micro, meso,


and macro level also significant to empower the SMEs sectors. Theother point is involving the other parties out of government tocollaboration empower the SMEs sectors.

AcknowledgementWe would like to thanks to Allah SWT who give us blessing and guidedus to have Islam as our religion. Grateful also for UniversitasIndonesia and distinguished lecturers, who give us insights andencourage us to make the best paper. Our pleasure we represent forBappenas (National Planning Board) Republic of Indonesia whichsupport us always. Last but not least, thank you so much for ourfamilies and friends who supported us, both morally and materially.

References---, Warta KUMKM. VOLUME 1 NO.1 JUNI 2013. Direktorat

Pemberdayaan Koperasi dan UKM, Kementerian PPN/Bappenas ---, INFOKOP. Volume 19 – Juli 2011. Deputi Bidang PengkajianSumberdaya UKMK Kementerian Koperasi dan UKM Jakarta.

Baldwin, Richard E. 2006. Multilateralising Regionalism: Spaghetti Bowls as Building Blocs on the Path to Global Free Trade. The World Economy 29, no. 11, November.

Hew, D. and Soesastro, H. (2003), “Realizing the ASEAN Economic Community by 2020: ISEAS and ASEAN-ISIS Approaches,” ASEAN Economic Bulletin, Vol.20, No.3, ISEAS.

Wlfens, Paul J.J. et al. 2009. EU ASEAN Facing Economic Globalisation.Springer-Verlag Berlin Heidelberg.


Toward ASEAN Economic Community 2015: Prospects, Challenges, and Opportunities for Small Medium Enterprises (SMEs) in Indonesia

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