Micro, small, and medium enterprises (MSMEs) and poverty reduction: empirical evidence from Indonesia

Abstract

This study aims to analyze the effect of MSMEs on poverty reduction, both directly and indirectly, through labor absorption from 1997 to 2018. The poverty measurements used in this study comprise Head Count Index (P0), Poverty Gap Index (P1), and Poverty Severity Index (P2), while the MSMEs are classified based on their scales, which are small-medium enterprises (SMEs) and micro-small enterprises (MSEs). Control variables, such as economic growth, openness, government expenditure, and investment, are also covered in this model. In general, the results show that MSMEs statistically affect poverty reduction in Indonesia both directly and indirectly. Nevertheless, different business scales offer various implications for poverty reduction. SMEs play a bigger role in alleviating poverty than MSEs as they reduce not only the percentage of poor people but also the Poverty Gap and Severity Index. Furthermore, of the four control variables, only economic growth has a significant effect on poverty reduction, both direct and indirect. Hence, policymakers should support the market certainty of SMEs products to sustain the production cycle.