Causal Threads: SMEs and Macroeconomic Indicators in Indonesia

Abstract

The linkages between small and medium enterprises (SMEs) and macroeconomic indicators in developing countries indicate a significant contribution. The contribution is reflected through beneficial impacts of the number of SMEs and SME workers on economic growth. However, investigations into the causality between SMEs and macroeconomic indicators from the 1997 Asian financial crisis to the 2020 global health crisis have yet to be comprehensively examined. This study investigates the causality between SMEs and macroeconomic indicators in Indonesia from 1997 to 2020. The Granger causality test and vector autoregression were applied. The findings revealed that the number of SMEs, the number of SME workers, and total SME exports have a one-way causality with inflation rate, poverty rate, unemployment rate, and money supply. In addition, the number of SMEs has significant implications for economic growth, inflation rate, and money supply. Meanwhile, total SME exports have a significant impact on economic growth, unemployment rates, and money supply. A level of cointegration occurs between SMEs and economic growth, inflation rate, poverty rate, and unemployment rate. Policymakers face the challenge of facilitating the development of SMEs, ensuring economic growth, maintaining stability of inflation rate, in addition to lowering poverty and unemployment rate.