Small Business in Indonesia

Peter van Diermen

• Publisher: Routledge
• Year: 2019
• Print ISBN:
  9781138348004
• eBook ISBN:
  9780429792052
• Topic: Commerce
• Subtopic: Commerce Général

First published in 1997, this volume examines why small-scale enterprises have performed so well in Indonesia, given that the country's labour force is expected to expand and urbanise rapidly between 1995 and 2025. It also considers what future contribution small-scale enterprises could make. Peter van Diermen explores the industrial organisation of family businesses, local development in a global context and family businesses in Jakarta in considering the unexpected success of small-scale enterprises and the future contributions they could make.

Part One
INDUSTRIAL ORGANISATION OF FAMILY BUSINESSES

1 Examining a Third World system of enterprises

The identification of a continuum of productive activities in the cities of developing countries and the empirical description of complex linkages and dependent relationships between production and distribution systems, has resulted in a dissatisfaction with any two-sector division in the urban economy (Moser 1978: 1055).

Informal sector enterprises or small firms in industrial economies generally are often integral parts of the functioning of much larger industrial complexes, involving a diversity of firm types and a great deal of organizational flexibility (Storper 1991: 13).

As Moser (1978: 1055) has noted there exists a complex network of linkages and relationships between enterprises in the city. These are not limited to the informal sector or small enterprises but encompass all enterprises, regardless of size or activity (Storper 1991: 13). Since the mid-1980s writers have recognised that industrial systems in the advanced capitalist economies have begun to change from Fordist to post-Fordist modes of production (Piore and Sabel 1984). Part of this process has been a re-emergence of small enterprises and a break-up of multinational enterprises (Sengenberger 1990). The changing nature of industrial systems in advanced capitalist economies has implications for the Third World. In particular, the relationships between and within enterprises have to be examined. In doing so, it is essential to examine the significance of different size enterprises for intra- and inter-firm relationships in systems of enterprises.

Key intra- and inter-firm relationships are investigated in this chapter with the intention of constructing a suitable framework for examining ‘systems of enterprises’ in Jakarta’s small-scale wood furniture and garment industries. Such a framework focuses on the interdependence of inter- and intra-firm relationships in a system of enterprises. The discussion in this chapter is essentially divided into a review of dualistic models that leads to the identification of key elements and relationships, and their subsequent classification within an alternative framework.

Conceptual models of Third World industrial systems

An early and crude concept of production systems in the Third World was developed by the Dutch economist Boeke (1953).¹ While having little relevance to modern Indonesia, this model provided a starting point for subsequent dualistic concepts that have persisted into the 1990s (see, for example, Garnaut and McCawley 1980; Sweeny 1990).² Boeke’s concept of dualism was of particular interest to Indonesian studies since the model was based on an examination of the Dutch East Indies in the 1910s.³ In his often cited book, Economics and Economic Policies of Dual Societies, Boeke (1953: 3) defined social dualism as:

The clashing of an imported social system with an indigenous social system of another style. Most frequently the imported system is high capitalism.

He assumed capitalism was imported from abroad and the more advanced of the two social systems, though it was unable to ‘oust or assimilate’ the domestic social system (Boeke 1953: 2). The two social systems were seen as distinct, and each dominates part of society. Boeke illustrated this by almost exclusive reference to Indonesia. In presenting the argument for social dualism Boeke (1953: 143) argued conventional economic theories were unsuitable to explain the disintegration of society and, therefore, a new body of theory was required.

In 1933 an influential periodical editor, Wellenstein (van Hoeve 1961: 193–213), examined Boeke’s model and found, contrary to Boeke’s assertion, that the main features of social dualism were not unique to Indonesia and could be found in all societies, including advanced capitalist economies. After Wellenstein, Boeke’s theory continued to exert strong influence until Higgins (1956) delivered a telling criticism. Reiterating Wellenstein’s criticism that social dualism was not unique to colonial countries, Higgins further pointed out that: (a) many of the so-called ‘unique’ features of social dualism could be explained by reference to conventional economics and did not require a new body of theory; and (b) there existed many inconsistencies in the evidence Boeke provided to support his model of social dualism. For example, Boeke claimed that there was low labour mobility in agriculture, but contradicted this by maintaining that low wages in industry were a result of widespread labour migration (Mackie 1980: 302). In his later critique Higgins (1968) offered an alternative model which he named technical dualism.⁴ This model’s major thrust was to emphasise that the modern and traditional sectors have different production functions. The modern sector was said to favour capital-intensive production and the traditional sector labour-intensive production, leading to the underemployment of labour as factor of production.

Around the same time Higgins (1956) presented his model, other variations of dualistic models were being proposed, many focused on labour surplus, with the most famous of these being Lewis’s (1954: 139–91) dual-sector labour model. Lewis argued that the non-capitalist (traditional) sector declined as the capitalist (modern) sector expands, and that labour moved from the non-capitalist sector to the capitalist because of higher wage rates in the latter.⁵ The argument is based on a labour surplus economy, which assumed that labour was infinitely elastic at the given wage and that labour supply to the modern sector will exceed demand without affecting the wage rates in the non-capitalist sector. Wage rates are said to be infinitely elastic because it is assumed surplus labour supply from agriculture has a marginal productivity which is zero or close to zero (Nurkse 1957: 1). In Lewis’s model capital remained the scarce resource in the production process. As modified by others, such as Todaro (1971: 391–413), this model has provided the theoretical underpinning of much development planning in the 1960s and 1970s — a testament to the power of dualistic models in the development process of the Third World.⁶

A final example of the direction and continuing relevance of dualism in the 1980s, is Myint’s (1971, 1985) work. His model of organisational dualism, incorporated the various kinds of dualism: technological, financial and wage, into a single model of economic dualism. Myint investigated labour, capital and commodity links between the modern and traditional sectors. Earlier models assumed that the two sectors were more or less spatially separated into the modern industrial sector geared to export and located in the few urban industrial centres, and the traditional agricultural sector where the largest part of the population resided (Paauw and Fei 1973: 225). Myint, however, made it clear that dualism not only meant ‘the co-existence of a modern and a traditional sector within the same economic system but also frequently within the same industry’ (Myint 1985: 42). This notion of two sectors and one location was a departure from earlier dualistic models. While dualism, emphasising spatially separate sectors has survived, the emphasis has shifted towards studies incorporating different sectors in one location, as exemplified by informal/formal sector studies.⁷ This is largely because these studies provided better explanations of actual events in the Third World. In particular, the generalisation in earlier dualistic models that equated the modern sector with dynamic economic activity and the traditional sector with stagnation, was by the early 1970s seen as being too dogmatic. In response to these criticisms and country studies undertaken in the early 1970s by the ILO (1972) a variation of the dualistic model was developed under its auspices. Unlike the earlier dualistic models, the informal sector model of the 1970s emphasised their dynamic role, offering a range of opportunities for generating income, employment and entrepreneurial talent.

Informal/formal sector dichotomy

While earlier forms of dualism, with their concept of spatially separate sectors, was shown to be of limited use in analysing small enterprises, the informal/formal sector dichotomy — a derivative of dualism — promised a more suitable framework for analysing systems of enterprises. The original concept of the informal sector was first presented by Hart (1973) in a study of Ghana.⁸ His paper, concerned with rural-urban migration and employment opportunities for Ghana’s growing urban work force, describes the economic activity carried out by urban wage-earners in the face of declining real income. Hart’s work, while mostly descriptive and based on fieldwork conducted between 1965 and 1968, is significant because it introduced the concept of the informal sector, and clearly identified the income generating strategies of the urban underemployed and ‘unemployed’.⁹ This work was quickly followed by the ILO (1972) study of Kenya, and subsequent ILO country studies which popularised the informal sector model.¹⁰ In the ILO study of Kenya there were seven characteristics given to each of the two sectors (see Table 1.1) and these have become the starting point of most informal sector studies. In the ILO model, growth was claimed to be a measure of both the formal and informal sectors. Thus, a dynamic role was ascribed to the informal sector, providing a more realistic explanation for the large number of urban labourers who do not appear in official employment statistics but somehow continue to make their livelihood in the urban sector.

Table 1.1
Characteristics of the informal and formal sector

Source: ILO (1972: 8)

The informal sector in which these labourers — men, women and children — work is characterised by large numbers of very small-scale producers or service units which were family owned and used very simple, labour-intensive technology. In addition, these units were not registered or regulated, paid low wages and their workers are assumed to have little formal education. Moreover, the informal sector served local markets and produced cheaper and/or lower quality goods than did the formal sector, or alternatively, produced goods and services which the formal sector did not provide. In addition to the seven characteristics identified by the ILO 1972 study, several distinctive features were ascribed to the informal sector as portrayed in the literature (Henry 1987: 140). These features included: a lack of access to government and political power; exclusion from formal credit; a dual labour market; and high insecurity of employment.

Lack of access to government organisations and the lack of power to influence government decision-making processes were essentially due to informal enterprises being unregistered or unlicensed, operating in places not zoned for such use, or illegally using the land. This made it difficult to influence government officials, especially since it is those same officials and other minor government bureaucrats to whom members of the informal sector often paid ‘unofficial fees’. Uppal (1989: 49) suggested it may also be because those working in the informal sector lacked education and resourcefulness. More recently, Sanyal (1991: 39–56), concluded that the formal and informal s...

Table of contents

• Cover
• Half Title
• Dedication
• Title Page
• Copyright Page
• Table of Contents
• List of tables
• List of figures
• List of plates
• Abbreviations and glossary
• Acknowledgements
• Preface
• Introduction
• Part One: Industrial organisation of family businesses
• Part Two: Local development in a global context
• Part Three: Family businesses in Jakarta
• Conclusion
• Bibliography
• Index