MSMEs: The Catalyst of Sustainable Future

Our exploration of MSMEs’ significant role in alleviating poverty

Adianto Trihatmojo
Data Science Indonesia

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Photo by Lok Yiu Cheung on Unsplash

The UN’s Sustainable Development Goals (SDGs) are among the most important commitments made by 192 countries of the world in 2015 in order to ensure the future viability of civilization, and in the decade spanning we will face our moment of truth, so priorities will need to be applied systematically before we run out of time.

Time is also running out for the skeptics and deniers. The facts of global privation emergency are there for all to read: from academic institution and the press; the point is that it is time for action not opinions: the effects of the poverty emergency are all around us, and doing nothing because “the government has got it wrong” would be an act of irresponsibility.

Government Efforts in Indonesia

Indonesian President Joko Widodo said on March 2020 he expects extreme poverty to be reduced to zero percent in the country within the next three years.

The government has been distributing cash and non-cash benefits like cards for health benefits and food discounts to eradicate impoverishment in remote and urban areas. State-owned enterprises has been addressing this problem as well, among others through their corporate responsibility programs. However, despite those efforts, the population living in a state of penury remains a challenge.

Poverty alleviation in Indonesia has resulted in the expected progress, albeit the rate is not yet ideal. The number of Indonesians living in poverty in 2011 was 30,02 million people (12,49% of the population). This total had declined further to 25,14 million (9,41% of the population) in 2019. The government target to eradicate poverty to 0% of the population in 2024 cannot be achieved if the alleviation acceleration follows the trend of the last decade. A more solid strategy is required.

Photo by Jonathan Kho on Unsplash

Anthropologist Clifford Geertz explained that destitution in Indonesia was related to social and cultural tendency of low-income people to share. He found poor people tend to share their limited assets among their relatives, a habit that makes them more indigent as their families get bigger. In addition, most of the poor are not employed or do not earn enough to lift themselves out of impoverishment.

After we came across this study, my friend and I were thinking:

“What if those unfortunate people could earn enough income for their families to escape poverty?”

MSMEs Are Helping Us Get Back on Our Feet

As of 2019, Indonesia has the most MSMEs (Micro, Small, and Medium Enterprises) in the world. This indicator sparked us to dive deep into MSMEs datasets, and explore MSMEs’ role in various SDGs. Our most interesting finding after going through several datasets provided by Depkop and BPS (dataset A, B, and C), is that these kind of informal ventures do have significant importance in alleviating poverty.

MSMEs’ contribution to economy growth and jobs. (made by author)

Just going through above visualization, you can already say that MSMEs as a concept is very — if not extremely — relevant to Goal 8 of SDGs. However, I want to convince you further that Goal 8 is only a milestone that we will eventually go through, and that Goal 1 is our finish line.

What role will MSMEs play in all this? One that is absolutely fundamental. The development and expansion of MSMEs will be vital in meeting the challenges we face.

We found that the increase of MSEs output can generate income for MSE actors that further contribute to the reduction of poverty. The increase of income increased expenses, thus minimizing the poverty gap. That result is inline with the real condition of Indonesia, where most MSME actors come from micro-small enterprise scales. Therefore, the more developed the scale of an MSE, the stronger the business competitiveness that further improves the income of the actors. This finding is inline with Ali, Rashid, and Khan (2014) in Pakistan.

MSMEs’ correlation to reducing privation and unemployment. (made by author)

Our exploration confirms that the influence of SMEs on poverty reduction was significant and showed negative signs on three poverty indicators. The negative signs indicate that the increase of SME outputs can reduce the number of people under the poverty line, minimizing the gap between the average expenses per capita between them.

However, we also found out that MSEs have not been fully able to minimize the disparity of average expenditure between poor people. As a rule, actors of medium enterprises have higher input than actors of MSEs. The differences in growth affect the income earned. Moreover, MSEs face many limitations which medium enterprises have access to, including markets, financial support, and training.

Photo by Nick Fewings on Unsplash

What’s Next?

“Poverty is not an accident. It is man-made and can be removed by the actions of human beings”

To summarize, policies to alleviate poverty have been implemented by the government through social empowerment programs. Other variable that contribute to reducing poverty is the absorption of labor in MSMEs. Theoretically, the more employment absorbed by MSMEs, the fewer people living in poverty. As laborers receives a salary, there is a better chance for them to escape their poor status, and for their average expenses to approach the poverty line or at least minimize the disparity between them.

Our findings suggests additional ideas for policymakers that effective strategies to push MSEs to improve the volume and values of their business outputs through innovation and use of various technologies, so they can access a wider market, could solve impoverishment problems in Indonesia. Programs promoting MSME empowerment should be improved to solve challenges faced by MSMEs, such as the availability of investment, economic openness, and training.

We are optimistic while our situation can be deemed unfavorable looking back at our historical rate, with focused efforts of the decision-makers and joint support among national population, our shared purpose to eradicate impoverishment can be achieved sooner!

#DSW21 #DataStorytelling

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Adianto Trihatmojo
Data Science Indonesia

I improve business with data and machine learning. An adventurer and a sucker for words.