Can rural microenterprise foster industrial development and alleviate poverty? In rural Indonesia, small-scale enterprises often provide employment for people who are excluded from other income-generating activities. Simple or even primitive products can be made for sale when demand arises, time allows, and weather conditions are favourable. Technology levels tend to be low and earnings are often below subsistence. Yet, certain clusters of such enterprises have been unexpectedly successful and have shown such promise that they could be considered seedbeds for industrial development. International research, co-ordinated by IDS, has tracked this phenomenon for over a decade and asks: how is successful clustering achieved?

Flexibility and low labour costs can offer competitive advantages to rural microenterprises. However, these are often offset by high costs if enterprises are geographically dispersed and operate intermittently. Clustering helps overcome transaction costs as well as marketing, finance, and technology problems inherent in fragmented production. Traders can more easily find their way to clusters to supply inputs, finance production, sell outputs, and provide technical information. Findings highlight that:

• Trade networks function more efficiently when coupled with producer networks for subcontracting or shared production, including sharing labour, machines, and equipment.
• Trade and producer networks are fostered by a substantial body of social capital, rooted in traditional rural society.
• Technical indivisibility of machinery and equipment offers scope for achieving economies of scale within a cluster.
• If different strands of the production process can be separated out, specialisation and subcontracting can be opened up, creating more employment.
• The potential for successful cluster development differs according to the indivisibility of capital and production in each sub-sector.

The Indonesian government has long been fostering clusters within rural industry as a means of alleviating poverty. The results of a United Nations Development Project (UNDP) -sponsored initiative suggest that while it is possible to encourage clustering for the most deprived rural people, the following policy implications should be considered:

• Clusters with easily accessible technologies are prone to overcrowding and shared poverty, while those with high barriers to entry are more likely to become seedbeds of industrial development.
• Clusters are unlikely to prosper in sparsely populated areas with few transport facilities and failing trade networks.
• Building the social capital required for successful producer networks takes several years.
• The long gestation period required for social networks to flourish might exclude poor workers who must somehow earn a living in the meantime.
• Once effective social capital has been established and workers are familiar with joint production, their networks can be used for various purposes.

Source(s):
'Microenterprise Clusters in Rural Indonesia: Industrial Seedbed and Policy Target' World Development, September 1999

Funded by: Department for International Development, UK

id21 Research Highlight: 20 October 1999

Further Information:
Hermine Weijland
Langebuurt 72
1911 Uitgeest
The Netherlands

Tel: +31 25 131 5948

Free University, Amsterdam

Free University
Amsterdam
The Netherlands

Fax: +31 20 4444 6003
Contact the contributor: hsandee@econ.vu.nl

Other related links:
IDS Collective Efficiency Project

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