SME Policy Index: ASEAN 2018

Chapter 8. Institutional framework

Introduction

The institutional framework for SME policy shapes the scope and efficacy of interventions. It defines the segment of enterprises that can benefit from targeted policies and how interventions are organised. Institutions, and the laws, regulations and policies they produce, define the “rules of the game” that influence the actions and behaviour of economic actors (North, 1990[1]; Williamson, 2000[2]) and policy makers.

Implementing an effective and efficient SME policy is a challenge across different country income groups, even in countries that benefit from substantial public resources and a competitive public administration. This is due to the highly diverse nature of any SME population and its geographic spread, and to the significant impact that SME policy has on economic growth, employment and social inclusion, rendering it a highly political topic. The fact that SME policy cuts across many different policy areas also makes implementation challenging. The co‑ordination, sequencing and targeting of interventions thus becomes critical to effective SME policy.

The institutional framework for SME policy should include both a “hardware” component and a “software” component. The hardware component is the set of bodies in charge of elaborating, implementing, monitoring and evaluating SME policy, at both the central and local levels, as well as their physical structures and human and financial resource allocations. The software component determines how and whether those institutions work together towards reaching common objectives, how they interact with target enterprises and their representatives, and how they interact with a broader community of SME policy stakeholders including employers, employees, local administrations, academics, development assistance agencies and non-governmental organisations (NGOs).

Assessment framework

The assessment framework for this policy dimension on institutional framework (Dimension 5) is comprised of three sub-dimensions, each covering different building blocks of SME policy. The first and third are concerned with the scope of SME policy, and the second covers the organisation of interventions and strategic planning.

Sub-dimension 5.1 considers the nature and use of the respective country’s SME definition. The object is to define the scope of an SME policy and to establish a common understanding of the target of public policies and programmes in order to facilitate co‑ordination among public institutions. Alongside an assessment of whether a definition exists and is used consistently, this sub-dimension looks at the nature of the definition itself: the criteria it uses and whether it segments an “SME” by sub-class (micro, small and medium). The type of criteria used has implications for data collection and the efficacy of policies. If the purpose of SME policy is to address market failures of scale and scope, the definition must define the limit above which such structural market failures no longer play a significant role.

Figure 8.1. ASPI 2018 framework for assessing institutional framework

Sub-dimension 5.2 looks at how SME policy interventions are organised, whether mid- and long-term strategic planning is conducted, whether co‑ordination and consultation mechanisms are in place, whether the impact of policies is monitored and evaluated, and whether a comprehensive set of SME statistics is regularly collected. This sub-dimension covers both the “hardware” of SME policy (institutions, budgets and resources) and its “operation software” (strategic approach, action plans, policy mandates, co‑ordination and consultation mechanisms), as mentioned in the introductory section.

Sub-dimension 5.3 covers the informal economy. In many ASEAN member states, a significant number of SMEs, particularly those operating at micro level, can be considered informal – either entirely (they are absent from formal business registers), or in part (they adopt informal practices that make them non-compliant with government laws and regulations). Enterprise informality is a complex phenomenon with wide social, fiscal and legal/regulatory ramifications. While this assessment considers the size and structure of the informal economy to be an important consideration for SME policy makers, informal enterprises mostly operate outside the scope of SME policy, and therefore this sub-dimension is restricted to examining the intensity of policies and research dedicated to tackling informality. Brunei Darussalam, Malaysia and Singapore are not assessed here, since they have indicated that informality at enterprise level plays a marginal role and that addressing the phenomenon is therefore not a priority objective.

The assessment framework assigns a weight of 10% to sub-dimension 5.1 (the SME definition), 60% to sub-dimension 5.2 (strategic planning, policy design and co‑ordination) and 30% to sub-dimension 5.3 (measures to tackle the informal economy).

Analysis

The overall assessment results for Dimension 5 are presented in Figure 8.2. Countries are scored for each sub-dimension on a scale of 1 to 6, with 6 being the highest. Detailed analysis by sub-dimension follows.

Figure 8.2. Weighted scores for Dimension 5 by sub-dimension

Sub-dimensions 5.1 and 5.2 show a relatively high and similar ASEAN median score. However, significant dispersion can be observed in sub-dimension 5.2, suggesting significant variation in the level of policy development across the region. Sub-dimension 5.3 presents a lower ASEAN median score and an equally significant dispersion of scores at the country level.

Sub-dimension 5.1: SME definition

Although the ten ASEAN Member States (AMS) are moving towards closer co-operation in the area of SME policy,1 they have not adopted a common SME definition, unlike the European Union, for instance. Each AMS has its own SME definition, which reflects the country’s economic characteristics, its policy priorities and the level of data available on enterprise dynamics.

Table 8.1. Scores for sub-dimension 5.1: SME definition

	BRN	KHM	IDN	LAO	MYS	MMR	PHL	SGP	THA	VNM	Median	StD.
Planning and design	3.95	3.95	4.51	5.06	6.00	3.77	4.51	5.43	4.87	5.43	4.69	0.70
Total sub-dimension score	3.95	3.95	4.51	5.06	6.00	3.77	4.51	5.43	4.87	5.43	4.69	0.70

Note: Scores are on a scale of 1 to 6, with 6 being the highest. Please refer to Chapter 2 and Annex A for further information on the methodology.

In line with international good practices, most AMS have adopted a multi-criteria definition of SMEs or MSMEs that covers both employment and either total assets or turnover. Brunei Darussalam and the Philippines rely on a single criterion to determine size: namely, employment in Brunei Darussalam and total assets in the Philippines. Employment is the most common criterion used across AMS, as it is the easiest characteristic to observe and a proxy good indicator of enterprise structure. Only Indonesia and the Philippines do not use employment as the central criterion for SME classification. In Lao PDR, Malaysia, Myanmar and Thailand, different thresholds are applied based on the enterprise’s main sector of activity. While sectoral differentiation may facilitate better policy targeting, it can also increase the complexity of data collection, particularly in countries that may currently have less sophisticated statistical systems in place.2

Table 8.2. SME definitions in AMS by type, criteria and sector approach

	Type		Criteria			Sector approach		Upper threshold for employment
Economy	Legal	Working	Employment	Assets	Turnover	Cross-sectorial	Sector-specific
Brunei		✓	✓			✓		100
Cambodia	✓		✓	✓		✓		200
Indonesia	✓			✓	✓	✓		–
Lao PDR			✓	✓	✓		✓	99
Malaysia	✓		✓		✓		✓	200
Myanmar	✓		✓	✓	✓		✓	600
Philippines	✓			✓		✓		–
Singapore		✓	✓		✓	✓		200
Thailand	✓		✓	✓			✓	200
Viet Nam	✓		✓	✓	✓	✓		200

SME size thresholds vary considerably across the region but respond broadly to standard international practices. All AMS except Myanmar use fairly restrictive criteria to set the threshold between medium and large enterprises, using a maximum threshold of 200 employees for medium-sized enterprises. Given that many enterprises in the manufacturing sector tend to engage in labour-intensive operations, particularly in the lower-income AMS, a restrictive upper limit may prevent a number of medium-sized enterprises with relevant growth potential from receiving policy support. It may also result in a relatively small share of medium-sized enterprises in the total SME population.

SME definition: All public agencies should recognise a common definition

All AMS except Brunei Darussalam and Singapore have given a formal basis to their SME definition by either enshrining it in a specific SME law or charter3 or through a specific act issued by the mandated ministry. Brunei Darussalam and Singapore have taken a more flexible approach, using a definition that responds to the operational needs of the various government agencies implementing SME policies.

This definition sets the scope of SME policies and programmes, while establishing a common denominator for policy co‑ordination across different government agencies. It also provides a single classification for private enterprises to determine their size, which can be useful for accessing certain programmes. It would therefore be good practice for all public agencies to recognise a common SME definition. Currently this only appears to be the case in Malaysia, with other AMS using a number of different definitions with varying degrees of internal co‑ordination. In several cases, for example in Lao PDR, the national statistical office uses enterprise size categories that do not correspond with the official definition, potentially depriving policy makers of a solid statistical base. Some AMS have established inter-agency working groups that are currently reviewing the country’s SME definition in order to establish a common understanding of the target segment among public agencies.4

Sub-dimension 5.2: Strategic planning, policy design and co-ordination

SME policy tends to be horizontal in nature. It is applied in a wide range of policy areas and requires intervention by a number of different public agencies to be effective. Since it generally aims to produce structural change, it tends to require a longer policy cycle to take effect. SME policy thus requires a strategic medium-term approach with close co‑ordination among different public agencies, and this should be built on consensus through consultation with the private sector and other policy stakeholders.

To organise policy interventions effectively, countries often elaborate a multi-year strategic document for SME development – either as a stand-alone strategy or as part of a national medium-term development plan. A well-structured strategy should usually include the following elements: i) a clear indication of how the SME sector is expected to perform at the end of the strategy timeline; ii) well-defined and quantifiable objectives, as well as intermediary targets; iii) an outline of how to organise policy interventions to achieve these objectives; and iv) the sequence of policy interventions. It should indicate the resources required to implement the strategy, as well as how to monitor and evaluate implementation. The strategy should be elaborated on the basis of intense consultation within and outside the public administration in order to build consensus among different stakeholders. Strategy elaboration should be based on solid evidence, in particular a thorough understanding of the characteristics and trends of the SME population. It should also usually be developed in reference to broader development plans or strategies at the national and regional levels.

On a broader level, the roles of different agencies involved in policy design, implementation and monitoring and evaluation should be clearly assigned. Action plans, usually annual, should be in place to govern the mobilisation of human and financial resources over the short-term.

Table 8.3. Scores for sub-dimension 5.2: Strategic planning, policy design and co‑ordination

	BRN	KHM	IDN	LAO	MYS	MMR	PHL	SGP	THA	VNM	Median	StD.
Planning and design	3.43	2.93	5.47	4.04	5.76	2.84	5.10	5.76	5.88	4.66	4.88	1.13
Implementation	5.22	2.03	4.53	2.44	6.00	2.38	4.52	6.00	5.86	3.68	4.52	1.48
Monitoring and evaluation	2.34	2.04	4.12	1.49	5.62	1.43	5.38	6.00	4.31	2.96	3.54	1.65
Total sub-dimension score	4.02	2.35	4.77	2.81	5.84	2.35	4.89	5.92	5.56	3.88	4.40	1.31

Note: Scores are on a scale of 1 to 6, with 6 being the highest. Please refer to Chapter 2 and Annex A for further information on the methodology.

The median score for this sub-dimension is relatively high, at 4.40. Yet the standard deviation is also high at 1.31, indicating a wide dispersion in performance across AMS.

Planning and design: AMS share a culture of consensus building on SME strategy

All AMS agree on the benefit of adopting a strategic approach to SME policy, but they are at different stages of policy development and implementation. Indonesia, Malaysia, the Philippines, Singapore, Thailand and Viet Nam carry out strategic planning for SME development, in line with many good-practice approaches noted above. Most are currently implementing mid-term strategies for SME development. In the Philippines, a new strategy has been drafted to cover the period 2017-2022. In Viet Nam, a new strategy is being prepared following the approval of a new SME law in June 2017.

At the time of assessment, Lao PDR’s new SME strategy (that would run until 2020) was pending approval, and Brunei Darussalam had begun to elaborate its first SME strategy. Cambodia has enacted two major strategic documents, the Cambodia Industrial Development Policy (2015-20) and the National Development Plan (2014-18), both of which include a section on private-sector and SME development, and it planned to elaborate a dedicated SME strategy in 2018. Myanmar has not yet put in place a comprehensive SME strategy, but it has elaborated plans to increase the competitiveness of its tourism and garment industries, and both of these plans include an SME component. Where strategies are in place, they generally conform to SAP SMED 2016-25 goals.

All AMS share a culture of consensus building around the government’s strategic objectives for SMEs, and this is typically achieved through inter-ministerial consultation and private-public dialogue. Most AMS view SME policy as a tool for achieving productive transformation, and therefore place significant emphasis on enterprise internationalisation, integration into global value chains, linkages between SMEs and larger enterprises, and technological upgrading and innovation. In Malaysia, Singapore and Viet Nam, SME policy primarily targets enterprises with high growth potential, mainly in the advanced technology sector or within specific manufacturing sectors. In many AMS, however, SME policy is also used as a means to achieve inclusiveness objectives. In Thailand, for instance, policy makers adopt a firm life-cycle approach to SME development, and they provide support measures to further both inclusiveness and competitiveness objectives.5 In Indonesia, and to some degree the Philippines and Lao PDR, a much stronger emphasis is placed on the social aspects of SME policy, for instance as a means to alleviate poverty. In these countries, a strong emphasis is placed on support for micro enterprises and measures to reduce informality.

Table 8.4. Status of SME strategic planning among AMS

Economy	Status of national strategic plans for SMEs
	Developed	Being developed	Period covered
Brunei		✓
Cambodia		✓
Indonesia	✓		2015-19
Lao PDR	✓		2016-20
Malaysia	✓		2012-20
Myanmar		✓
The Philippines	✓		2017-22
Singapore	✓		2016-20
Thailand	✓		2017-21
Viet Nam 1		✓	2016-20

Note: 1. At the time of assessment Viet Nam had recently passed a new SME law (in 2017), and this was serving as a broad strategy for SME development.

In most ASEAN member countries, SME policy is governed by a ministry connected to the economy – for instance the Ministry of Economy, Trade or Industry – in line with the productive transformation approach. In Indonesia, SME policy is governed by a dedicated ministry for SMEs and co‑operatives that was established in its current form in 1995. In Thailand, SME policy is supervised by the National Board of SME Promotion, which is chaired by the prime minister. Policy in most AMS is conducted centrally, while in Indonesia and Philippines, two large and geographically dispersed countries, many SME support programmes are led by local authorities, often in co‑operation with central government institutions.

Implementation: Four AMS have specialised SME development agencies

Four AMS – Brunei Darussalam, Malaysia, Singapore and Thailand – have created a specialised agency for SME development, and one AMS (Viet Nam) has created a specialised agency for enterprise development in general. These agencies contribute significantly to SME policy elaboration, lead policy implementation and manage intra-agency co‑ordination. They manage a broad range of support programmes,6 and are typically well-resourced. The agencies in Brunei Darussalam, Malaysia and Thailand are exclusively dedicated to this task, while the agency in Singapore performs a number of parallel functions.

Malaysia established a specialised SME development agency in 1996, and this was rebranded as SME Corp. in 2009. The agency is a central co‑ordinating body under the Ministry of International Trade and Industry. It is in charge of implementing the country’s SME Masterplan (2012-20), which involves co‑ordinating policy interventions carried out by 15 ministries and more than 65 government agencies at central and provincial levels. SME Corp. also acts as a secretariat for the National SME Development Council, chaired by the prime minister. It employs over 300 staff.

Thailand established the Office for SME Promotion (OSMEP) in 2000. This agency reports directly to the National Board of SMEs Promotion, which is chaired by the prime minister. OSMEP is responsible for overseeing implementation of the national SME Promotion Plan (2017-21), which involves co‑ordinating SME policy-related interventions carried out by 20-30 government agencies, managing the integrated budget for SME development7 and monitoring implementation of the SME Promotion Plan. It employs around 200 staff.

Singapore established an agency responsible for SME development, among other tasks, in 1996, and this was rebranded as the Standards, Productivity and Innovation Board (SPRING) in 2002. The agency falls under the institutional umbrella of the Ministry of Trade and Industry, but it enjoys considerable operational autonomy. MTI governs SPRING Singapore via a set of key performance indicators that are developed for the agency, and they have a contractual relationship. On 1 April 2018 SPRING Singapore merged with International Enterprise Singapore, the government agency in charge of helping Singaporean companies to internationalise, to form Enterprise Singapore.

Brunei Darussalam and Viet Nam have established their agencies more recently, but they are advancing quickly. Brunei Darussalam established a dedicated SME development agency, Darussalam Enterprise (DARe), in 2016. This agency offers a variety of business development services as well as logistical support to local enterprises. Viet Nam established its Enterprise Development Agency (EDA) in 2010, and this agency has an SME division. The EDA operates under the Ministry of Planning and Investment, and SME policy elaboration and co‑ordination is conducted through the Council for SME Development, which is chaired by the prime minister. The country’s new Law on SME Support and an associated decree provide new guidelines on public support for SME development.

In the remaining AMS,8 the functions of policy elaboration, implementation, monitoring and evaluation are concentrated in a single unit situated within the line ministry in charge of SME policy. The Philippines and Indonesia have a relatively well-developed institutional framework, and the central ministry can rely upon a network of implementation units across the country, established with the support of local authorities. In Cambodia, Lao PDR and Myanmar, the institutional framework for SME policy is still being developed.

In the Philippines, the policy scope and mandate for SME development has been defined under the Magna Carta for MSMEs since 1991.9 The mandate for SME development has been assigned to the Department of Trade and Industry (DTI), while policy action is co‑ordinated through the SME Development Council, which brings together all line ministries and government agencies involved in SME policy. A similar structure is replicated at the provincial level. Direct enterprise assistance is provided through a network of Negosyo Centres, which are co-managed by local authorities. Their role was enhanced in 2014 under the Go Negosyo Act.

In Indonesia, the Ministry of MSMEs and Cooperatives is responsible for SME development and it also manages central government instruments for SME support. These instruments mainly focus on improving access to finance, with two notable examples being the SME Revolving Fund and the KUR microcredit programme.10 The Ministry of Economic Affairs is responsible for policy co‑ordination, while Bappenas, the national planning ministry, ensures that these policies are consistent with national development objectives. Enterprise assistance is provided by a network of business development centres at the local level.

Cambodia and Lao PDR have a dedicated department or unit for SME development that sits within the line ministry responsible for SME policy. In Cambodia, the General Department for SMEs, under the Ministry of Industry and Handicraft, has limited policy implementation capacity due to a lack of funding and human resources. It therefore generally exercises a regulatory function, and SME development programmes tend to be conducted in co‑operation with bilateral and multilateral donors.

In Lao PDR, the Department for SME Promotion is part of the Ministry of Industry and Commerce. Its policy implementation capacity is limited, and enterprise support is mainly provided by donor-funded projects. A first pilot SME support centre was established in 2017 in Vientiane in co-operation with the Chamber of Industry and Commerce, the Department of SME Promotion (within the Ministry of Industry and Commerce), and GIZ. The plan is to establish similar centres in the country’s main economic centres.

In Myanmar, SME policy is guided and co‑ordinated by an inter-ministerial body, the Central SME Development Committee, which is chaired at the highest government level. The mandate over SME policy has been assigned to the Ministry of Industry, but other line ministries retain responsibility for SMEs operating in non-manufacturing sectors. Over the last three years, the Ministry of Industry has established SME Centres across the country. It plans to establish a dedicated SME development agency and bring the centres under its aegis, but development plans have been slowed by the fact that the SME Development Committee rarely meets and by limited human and financial resources. More concrete plans to establish this agency have recently been proposed.

Monitoring and evaluation: A lack of reliable data can hinder assessment

Monitoring of SME policy is conducted across all AMS. Regular monitoring and advanced mechanisms have been established in the countries with the most advanced institutional frameworks (Malaysia, the Philippines, Thailand and Singapore). Indonesia and Viet Nam are working on improving current monitoring systems, which partly rely on information provided by local administrations. Brunei Darussalam, Cambodia, Lao PDR and Myanmar have implemented a limited number of SME support programmes, which rely mainly on monitoring performed by international and bilateral donors.

Impact evaluation of SME support programmes commissioned by public institutions is relatively rare in the ASEAN region. In Singapore, Enterprise Singapore (SPRING Singapore at the time of information gathering and validation) regularly commissions independent evaluations of its major enterprise support programmes to independent experts and academics. The evaluation reports remained confidential, but their conclusions were taken into account during periodic programme reviews. In Malaysia, SME Corp., with the assistance of the World Bank, undertook a Study on Early Assessment of the Malaysia SME Masterplan to assess the implementation of the plan’s High Impact Programmes, including the performance of their monitoring and evaluation frameworks. In the Philippines, the DTI has commissioned an independent review of the 2011-2016 SME Development Plan, but no programme impact evaluation studies have commissioned so far.

Reliable and timely data on SME population characteristics and trends allow governments to design policy actions based on strong evidence. Such data form the basis for effective monitoring and evaluation. But standards on official SME data vary considerably across the ASEAN region which could contribute to confusion.

The most economically developed countries (Singapore, Malaysia and Thailand) release yearly data, including information on SME numbers, employment, turnover, and, except for Thailand, value added, divided by enterprise classification size, sector and location. Viet Nam is also producing increasingly complete sets of SME statistics, while Brunei Darussalam has started to collect SME data regularly. Philippines Statistical Authority produces fairly complete SME data, but the figures are issued irregularly and are subject to time delays. In Indonesia, the data set is limited and the classification of independent farmers as SME units results in a bloating of the total SME population. SME data for Cambodia, Lao PDR and Myanmar are limited and the available data sets are often incomplete. In Myanmar, for instance, SME statistics include only enterprises operating in the manufacturing sector and registered with the Ministry of Industry; likely underestimating the total number of SMEs in the country. In Lao PDR, SME data exclude micro enterprises (the large majority of enterprises) and, in a country where enterprise informality is estimated to be extensive, official statistics significantly underestimate total employment in MSMEs.

Sub-dimension 5.3: Measures to tackle the informal economy

Most mid- and low-income ASEAN Member states have a large informal sector. As informality plays only a marginal role in two relatively high-income countries – Malaysia and Singapore – they are not included in the following analysis.

The presence of a large number of informal enterprises has significant implications for social, fiscal and economic growth. Those implications extend to enterprise development and competition dynamics, and are therefore highly relevant for SME policy. The level of informality is often particularly high among micro enterprises and self-employed entrepreneurs, which make up a large share of the SME population. These enterprises and entrepreneurs have no public voice or representation, and there are no official statistics documenting their existence, only anecdotal evidence and ad hoc surveys. A considerable section of the enterprise population thus risks being confined to a limbo outside the scope of SME policy.

A broad definition of the informal sector includes all enterprises and self-entrepreneurs that produce legal good and services but are not compliant with labour, fiscal and administrative laws and regulations (Feige, 2016[3]). There are different degrees of informality, from unregistered enterprises and self-entrepreneurs with no relations with the public administration (total informality) to enterprises that are registered and acknowledged by the public administration but that are not fully compliant (partial informality). The most common cases of non-compliance relate to non-respect of labour regulations, non-payment or partial payment of social security and pension contributions, and tax evasion.

The reduction of informal labour has wide implications for social inclusion and public health, and it is these areas that have attracted the highest attention from economists, international organisations (particularly the ILO) and policy makers. The same is true of informality’s fiscal implications. The implications of informality on enterprise development have been relatively less studied, mainly due to the extreme difficulty of collecting data for empirical analysis.

In general terms, informal enterprises tend to have lower operational costs than their formal peers. Informality tends to be higher in sectors where non-qualified labour is the main production factor, entry of barriers are low and economies of scale play a very limited role. In those sectors – traditional services, low-scale construction activities and labour-intensive manufacturing such as garment, furniture and food processing – competition from informal enterprises undercuts the margins of more formal enterprises. This distorted competitive dynamic reduces incentives to formalise and has a negative impact on capital accumulation and on the upgrading of production processes and the introduction of product innovation. These factors may force formal enterprises to move towards partial informality or to rely on informal suppliers and sub-contractors to retain a competitive edge. Informal enterprises are less inclined to invest in skills development and in fixed assets, also because they are excluded from formal access to finance.

A high rate of enterprise informality is common in many rapidly developing countries and can be viewed as a transitory phenomenon that is driven by economic necessity and will decrease as more opportunities open up in the formal sector. Factors that increase informality include lack of social benefits in the formal sector and high costs, like taxes, that are imposed on formal employees and entrepreneurs. Informality can also result from a dual economic system, with informal workers and entrepreneurs providing cheap labour, goods and services to the formal sector.

Since the informal economy tends to be hidden, both the forces driving it and the characteristics of informal enterprises across ASEAN remain largely opaque. The scarce available data indicates that informality is also pervasive in mid-income and well-diversified ASEAN economies. In Indonesia and Philippines, informal labour represents around 70% of total employment in the non-agricultural sector. In Viet Nam and Thailand, the informal labour share is respectively 44% and 42% (ILO, 2013[4]).

The assessment framework for sub-dimension 5.3 looks first at the efforts of the selected AMS to document, analyse and understand the issue of informality. It then considers the government policy response and the status of policy implementation. The final set of indicators covers the phase of monitoring and evaluation.

Table 8.5. Scores for sub-dimension 5.3: Informal economy

	BRN	KHM	IDN	LAO	MYS	MMR	PHL	SGP	THA	VNM	Median	StD.
Planning and design	NA	2.65	3.48	2.65	NA	1.83	3.48	NA	5.15	5.15	3.48	1.18
Implementation	NA	2.65	3.77	2.65	NA	1.00	3.75	NA	2.65	3.75	2.65	0.93
Monitoring and evaluation	NA	1.83	2.65	1.00	NA	1.00	3.06	NA	2.65	2.24	2.24	0.76
Total sub-dimension score	N/A	2.49	3.44	2.32	NA	1.29	3.52	NA	3.53	3.94	3.44	0.87

Note: Scores are on a scale of 1 to 6, with 6 being the highest. Please refer to Chapter 2 and Annex A for further information on the methodology.

The overall assessment scores for this sub-dimension are relatively low. The median score for the seven countries covered by the assessment is 3.44, but the level of standard deviation is also relatively low at 0.87, indicating that no country has made major progress in this area.

Planning and design: Toleration of informality is higher in lower-income AMS

Of the seven AMS scored in this sub-dimension, four have made attempts to evaluate the size and characteristics of the informal sector (Indonesia, the Philippines, Thailand and Viet Nam). In three countries (Cambodia, Lao PDR and Myanmar), where the level of informality is believed to be particularly high among micro enterprises, the government is currently considering policy options to tackle informality.

The countries in the first group generally consider that informality is mainly driven by the regulatory system’s complexity and high compliance costs, but that it is also generated by poor enforcement of labour regulations, particularly for labourers who have low skills and limited information, and by the lack of access for most micro enterprises to formal external financing. Statistical information about the size and characteristics of the informal sector are drawn mostly from the population census and labour force and household surveys, complemented by ad hoc surveys conducted by international institutions, NGOs and independent researchers. Data availability remains limited, is often not updated and mainly relates to informal labour.

In Cambodia, Lao PDR and Myanmar, informality is largely seen as way of securing employment opportunities and subsistence for large segments of the low-income population. Self-entrepreneurship and informal household business activities act as a buffer given the lack of social protection and the high rate of urbanisation. At the same time, an increasing number of formal jobs are being generated in labour-intensive manufacturing activities, such as garment production in Cambodia and Myanmar, or in the service sector, such as tourism in Lao PDR.

Implementation: AMS are tackling informality from different perspectives

The four countries that are most advanced in planning and design have taken action to reduce the level of informality, although the level of implementation still remains rather limited. There is scant evidence of targeted government actions to tackle informality in the lower-income AMS, where toleration of informality is higher.

In Indonesia, the government is trying to tackle formalisation of the informal sector from different perspectives. It has created incentives for informal enterprises to register as companies by providing free registration for micro enterprises and simplifying the registration process. It is also facilitating access for all micro and small enterprises to a system of subsided loans and government-backed credit guarantees (the KUR programme), regardless of the formal or informal status of the company, with the expectation that an informal enterprise will move towards formalisation once it starts to expand its operations.

In the Philippines, most government action is directed at reducing the level of informal labour through a series of pro-active programmes conducted by the Department of Labour and Employment. The government is also simplifying company registration procedures, extending the network of Negosyo centres that provide assistance and information to formal and informal entrepreneurs, and creating incentives to push informal enterprises towards formalisation, for example by reserving 10% of the total value of public procurement tenders for formal MSMEs.

In Thailand, a large number of enterprises (around 2.2 million) are known to the authorities but are currently classified as non-juristic entities. Only around 600 000 enterprises are currently classified as juristic entities. Non-juristic entities are those enterprises that are unincorporated11 yet still licensed to operate (usually by the local government administration). Thailand is currently working on a legal framework to enable sole ownership enterprises to register as a juristic entity. While the government has not yet put in place a comprehensive strategy for the reduction of informality, the National Economic and Social Development Board has been active in this area. After it organised a national conference on the matter, the reduction of informality became a main objective of Thailand’s national economic and development plans.

Table 8.6. AMS shadow economies, 1991-2015 (% of official GDP)

Economy	Average	Standard deviation
Brunei	29.8	1.2
Cambodia	46.0	6.8
Indonesia	19.8	1.6
Lao PDR	30.3	3.8
Malaysia	31.5	2.8
Myanmar	51.4	6.9
Philippines	39.3	5.5
Singapore	11.9	1.3
Thailand	50.6	3.4
Viet Nam	15.1	2.3
ASEAN	32.6	3.6

Note: “The shadow economy” refers to all economic activities that are hidden from government authorities.

Source: Schneider and Medina (2018), https://doi.org/10.5089/9781484338636.001.

Viet Nam is currently developing initiatives to encourage household enterprises, where informality is prevalent, to register as incorporated enterprises. This is part of its objective of reaching the bar of 1 million registered enterprises by 2020. At the same time, it is tackling the issue of informal labour and monitoring the progress of labour force surveys conducted by the General Statistical Office.

Monitoring and evaluation

Few AMS have monitoring mechanisms in place to assess the performance of programmes to tackle informality, since few countries have a concrete strategy to tackle informality. Some countries do monitor the performance of specific initiatives. For instance in some countries the main initiative in this area is to increase the ease of company registration. These countries often use some metrics to monitor performance here, for instance performance in the World Bank’s Doing Business, or the number of local government offices where registration can now be conducted. However few AMS conduct assessments of informal or previously informal enterprises to ascertain the effectiveness of public programmes and policies.

The way forward

The institutional framework is the main building block for effective and time-consistent public policy towards the SME sector. A strong correlation exists between the level of a country’s institutional and policy framework and the results achieved across the other policy dimensions. The development of the overall institutional and policy framework varies considerably among the AMS Figure 8.3. However, a number of trends can be observed.

Figure 8.3. Weighted scores for Dimension 5: Institutional framework

Note: The graph demonstrates the level of policy development in each AMS indicated by the 2018 ASPI scores. Countries fall into one of three categories and are ordered in this category alphabetically.

Countries in the “early stage” of policy development are generally still in an early phase of institution building. While a multi-criteria definition of SMEs has been developed, the public administration generally uses a common definition of SMEs consistently. Some countries are still the in process of formulating comprehensive strategic documents to guide policy interventions for SME development. Many of these countries are in an early implementation phase. Instead of a specialised agency, policy elaboration and implementation is generally performed by a single unit placed within a ministry responsible for industry, commerce or trade. Human and financial resources are often limited, which can reduce the unit’s capacity for policy implementation. SME data for impact evaluation is often incomplete, and few programmes are comprehensively evaluated. The level of informality in these countries is often high, particularly among micro-enterprises, and governments are still considering how to tackle this issue.

Countries in the “mid stage” have largely built institutions for SME policy and are now fully engaged in policy implementation – testing and refining strategic planning and policy co‑ordination mechanisms. The majority of the countries have established a common SME definition and an SME or enterprise development agency (Thailand, Brunei and Vietnam). In large and geographically dispersed countries (Indonesia and the Philippines) SME development programmes tend to be implemented by local authorities, with a central authority acting as co-ordinator. Regular monitoring mechanisms have typically been established, although there tends to remain a lack of robust and regular data for effective monitoring. Many of these countries have made attempts to evaluate the size and characteristics of the informal sector and have taken actions to reduce the level of informality, although the level of implementation still remains rather limited.

Countries in the “advanced stage” have established institutions that are aligned with internationally-recognised good practices. Specialised development agencies contribute significantly to SME policy elaboration, and they also coordinate implementation with different line ministries and agencies. Some countries have established an agency with the single task of developing the SME sector, while others have established an agency that also performs other parallel functions. Monitoring and evaluation mechanisms are generally advanced, and are supported by robust and timely data.

Across the region as a whole, AMS are moving towards closer co-operation in the area of SME policy. However, the varying stages of economic development may present some challenges here. Going forward, policy makers could consider the following policy options:

Table 8.7. Policy recommendations to enhance the institutional framework for SME policy

Level of policy	Challenges	Policy recommendations
Early stage Cambodia, Lao PDR and Myanmar	Limited human and financial resources may restrict policy implementation capacity	Leverage donor support. Donor support can be used to augment resources. In addition to financial resources, policy makers could consider integrating project implementation units into government structures in order to build further capacity within government institutions Set policy objectives in relation to resources available. Policies and elaborated during the design phase should carefully consider the resources required for desired interventions, in order to ensure that they can realistically be implemented.
	The level of informality is particularly high among micro-enterprises and self-employed entrepreneurs, and there is a lack of reliable statistical data on the dynamics of informality	Enhance cooperation with entities that have extensive contracts with informal enterprises. Working more closely with such entities, such as NGOs, micro-finance institutions and local public administration, may help central governments to gain a clearer picture of informality in the country Develop data collection through enterprise surveys. Where policy makers lack resources for a comprehensive enterprise census, they could consider conducting a survey on the topic, or by utilising studies conducted by bi- or multi-lateral agencies such as bilateral donors, UN agencies and international organisations.
Mid stage Brunei Darussalam, Indonesia, the Philippines and Viet Nam	In a number of countries, some government bodies have overlapping responsibilities	Clearly define clear roles and responsibilities of different actors. Policy makers could consider conducting a stock take of SME development interventions carried out by different government agencies, assigning the body that holds the ultimate mandate for SME development to lead the exercise. This could be followed by a clear delineation of responsibility by policy area.
	Some countries could further refine the practice of evidence-based policymaking	Enhance data collection. In some countries data on the SME population is collected irregularly, with key indicators missing, or by using a different SME definition to the one used by other public authorities. This can hamper governments’ ability to design evidence-based policies. Ensure that strategies include measurable targets, and develop annual action plans. This will be important in later assessing the effectiveness of policies, and ensuring that policy interventions are implemented on time and appropriately sequenced.
Advanced stage Malaysia, Singapore and Thailand	These countries typically host dynamic enterprises, and must stay reactive to their needs	Continue to focus on improving and refining policy co-ordination and monitoring mechanisms. These countries could focus on enhancing the use of systematic independent impact evaluations for their most important support programmes. This evaluation should be planned from the outset, with data collection requirements identified.

References

[3] Feige, E. (2016), “Reflections on the meaning and measurement of unobserved economies: What do we really know about the 'shadow economy'”, Journal of Tax Administration, Vol. 2/1, https://mpra.ub.uni-muenchen.de/id/eprint/68466.

[4] ILO (2013), Key Indicators of the Labour Market, http://www.ilo.org/ilostat.

[5] Medina, L. and F. Schneider (2018), “Shadow economies around the world: What did we learn over the last 20 years?”, IMF Working Paper No. 18/17, https://doi.org/10.5089/9781484338636.001.

[1] North, D. (1990), Institutions, Institutional Change and Economic Performance, Cambridge University Press, Cambridge, https://doi.org/10.1017/CBO9780511808678.

[2] Williamson, O. (2000), “The new institutional economics: Taking stock, looking ahead”, Journal of Economic Literature, Vol. 38/3, pp. 595-613, https://doi.org/10.1257/jel.38.3.595.

Notes

← 1.  As demonstrated by the adoption of the SME Blueprint and the SAP SMED.

← 2.  For instance, this may be the case in Lao PDR and Myanmar.

← 3.  As has been the case in Viet Nam, Indonesia and Lao PDR.

← 4.  For instance in Cambodia and Indonesia.

← 5.  To enhance inclusion, policy makers provide support for micro and community enterprise development. To enhance competitiveness, policy makers provide support for innovative and technology-intensive SMEs.

← 6.  Such as measures to increase access to finance, training and advanced business development services.

← 7.  The number of government agencies varies by fiscal year.

← 8.  Cambodia, Lao PDR, Indonesia, Myanmar and the Philippines.

← 9.  The Magna Carta for MSMEs is a legislative act that was approved in 1991 and amended in 2008.

← 10.  The KUR microcredit programme is a large subsided credit scheme for MSMEs.

← 11.  These enterprises also tend to be absent from the official company register.