For many years, the microenterprise sector has played an important role in poverty alleviation. The framework of microenterprise as an antipoverty tool is based on its function and role in enabling poor people to engage in various economic activities. In other words, the microenterprise activity would allow them to generate income for living and to escape from the poverty trap. In short, by involving poor people into the microenterprise sector, it would promote sustainable economic growth rather than through short-term charity-based programs.4
3 PNPM-MANDIRI was introduced in 2007. It comprises four basic programs that help poor people become self- reliant and sustain their wellbeing. The government provides a revolving fund that is managed by the poor people, and a capacity-building program to foster their independence, governance and responsibility toward the program.
PNPM covers approximately 70,000 villages, and is aimed at stimulating pro-poor economic growth at the local level, while also strengthening governance and institutions (PNPM-MANDIRI 2012).
4 The popular expression for this empowerment policy is also called ‘giving a fishing rod rather than fish’.
According to Law No: 20/2008 regarding micro, small and medium enterprises (Usaha Mikro Kecil & Menengah or UMKM), microenterprise is defined as a unit of business that is owned by an individual or sole-proprietorship with total maximum net asset of IDR 50 million (excluding land and property), and a maximum business turnover of IDR 300 million. It is important to note that often the definition of a microenterprise overlaps with that of a small enterprise; in this section, the discussion is focused on microenterprise.
In general, a microenterprise is associated with the informal economy (Versluysen 1999). The predominant characteristic of a microenterprise is that it is easy to enter and exit as it need less capital, simple technologies, depends upon local resources and raw materials and very flexible in term of modus operandi (Tambunan 2007). Formally, for statistical purpose, the Ministry of Cooperative and Small and Medium Enterprise (Kementerian Koperasi dan Usaha Kecil Menengah or MENEGKOP-UKM) organizes microenterprises into nine sectors such as agriculture, mining, manufacture, energy, property, trade and tourism, transportation and communication, finance and services.
The microenterprise sector can be classified into rural and urban bases. In rural areas, the microenterprise sector is a dominant economic player (Tambunan 2007). It is tied to agriculture and the cottage industry structure that includes craftsmanship, off-farm business, food processing, and petty trading in traditional markets (Dunham 1988;
Chandler 1984). In contrast, in urban areas, microenterprises are involved with manufacturing and service sectors and include more diverse business types than in the rural areas (Vial 2011).
Table 1.2. Microenterprise Trend Line (2006–2010)
2006 2007 2008 2009 2010 %
Unit 48.51 49.60 50.84 52.7 53.82 98.8
Employment 82.07 84.45 87.81 96.2 99.40 90.9
Contribution to GDP 588,5 620,8 655,7 682,2 719,0 32.4
Source: MENEGKOP-UKM (2012).
Drawing from Table 1.2, there were approximately 53.8 million microenterprise units in 2010, which constitutes 98.8 per cent of total enterprises. According to the Rural Investment Climate Survey 2009 cited in McCulloch, 2009, a vast majority (over 90 per
cent) of microenterprises are household based and are run by the head of the family or another family member. Moreover, using the database from the BKKBN survey in 2010, it is apparent that nearly all microenterprise units are owned and managed by low- income families (BKKBN 2012). It is equally important to note that the microenterprises are predominantly run by Indonesian Muslim entrepreneurs (Singh et al. 2004) and many of those are women (Weijland 1999).
Following the financial crisis in Indonesia in 1998, the microenterprise sector showed significant progress. In this respect, the crisis has changed the livelihood of the majority of the population, including in Yogyakarta where the study is conducted (Widyatmoko 2008). For low-income households, microenterprises are the most possible survival strategy to cope with shortage of income and to escape from the poverty trap. For example, in urban and nearby areas the number of microenterprises grew rapidly due to massive job terminations in manufacturing and other urban economic sectors. In addition, microenterprise is a means for poor people to be engaged in a number of production activities as a favourable alternative source of income during hardship (Dunn et al. 1996). In other words, the evidence shows that microenterprise sector has played an important role in the economic recovery process.
The microenterprise sector was a major contributor to employment. Data of MENEGKOP-UKM shows, in 2010, the sector employed nearly 90.9 million people or, on average, every microenterprise employs nearly two workers, while well-established and growing microenterprises could employ up to five staff (MENEGKOP-UKM 2012). In addition, however, it is common that employment in the microenterprise sector involves other family members and some unpaid labour for example the workers may be paid in kind, e.g. food. As mentioned earlier, one of the severe impacts of the economic crisis was a decline in job opportunities in urban and surrounding industrial centres, where the majority of households were heavily dependent on wages.
Microenterprises had a very critical role in absorbing a low-skilled workforce. In rural regions, microenterprise is a primary job provider of off-farm employment and seasonal excess of the agricultural labour force, i.e. during drought periods. Microenterprise can be seen as an income safeguard for landless poor households and equally worth noting that microenterprise plays a central role in slowing down the urban migration of unskilled workers.
It also reveals that, although the microenterprise sector is dominant in term of employment numbers and job creation, contribution of the sector to the gross domestic product (GDP excluding the oil and gas sector) was only 32.4 per cent in 2010 (MENEGKOP-UKM 2012). It is important to understand that microenterprises are based on lower capital and simple technology, therefore the output (goods and services) are of less value compared to that produced by medium and large enterprises. In this context, the GDP contribution should be seen from the perspective of poverty alleviation as the sector contributes to greater equity and employment rather than macroeconomic development; the latter is more influenced by medium and large enterprises (Dunham 2009). In summary, it is evident that the microenterprise role in poverty alleviation is critically important, and it also should be considered as one of leading factors to sustain economic development. It is evident that microenterprise as means of income-generating activities for poor households plays a role in wealth distribution and financial safety mechanism in the community (Tambunan 2000). In addition microenterprise activities create demand for financial services, including microcredit, micro-saving, micro-insurance and other innovative financial products.