Using System Dynamics Approach to Understand Impacts of Cash and In-Kind Transfer Policies to Small and Medium Enterprises: A Lesson from Indonesia

Abstract

This paper presents the latest quantity data from the Central Bureau of Statistics of Indonesia (BPS) regarding the trend number of small, medium enterprises (SMEs) and large enterprises (LEs) in Indonesia from year 1999 until 2008 that are behaved dynamically. The discussions will be focused on SMEs rather than LEs. In the early period, the number of those business units for all categories shows more or less a linear trend. Then started in 2003, it seems to have a very high spike followed by a very drastic decline until the end of 2008. The kind of behavior is so called ‘overshoot and collapse.System dynamics approach is applied to understand this behavior. By using this approach, such behavior could be well duplicated. Some relevant variables included in the simulation model are potential demand, aggregate demand, and quantity of SMEs and LEs. The behavior of SMEs and LEs’ quantity were regarded as the reference data. Comparison and statistical test were performed to see the representativeness of the model developed. The tests were based on shorter period before the shock; from 1999 to 2004 and longer period to capture such behavior; from 1999 to 2008.This paper also discusses most possible implemented policies, which caused overshot and collapse behavior on the system. The adoptions of cash and in kind transfer policies by government and politicians on the year 2003 to 2009, in the short term, were followed by the increasing aggregate demand and the quantity of SMEs and LEs but not for in the longer term. Based on the model simulation, the quantity of SMEs in Indonesia will very hard to reach the same quantity as the year 1999 even though in the far forthcoming years.