JOURNAL | COVER STORY by: Martin Schell
Attention in Indonesia’s media and upper government circles tends to focus almost exclusively on the economic power of the largest cities, particularly in regard to major projects and rising real estate prices. The latter boom dovetails with the creation of offices and malls in the city core, while factories and low-income residences shift toward the periphery. The peri-urbanization may appear chaotic, but it has steadily filled in space to the point where “greater Jakarta” was already being called JaBoTaBek (Jakarta-Bogor-Tangerang-Bekasi) 40 years ago, with Depok included in JaBoDeTaBek about 20 years ago. The conurbation happened so long ago that the boundaries between components are no longer distinct at the street level.
In contrast, the polycentric nature of urbanization can still be seen in other parts of the country. Long acquaintance with smaller cities in Central Java led this author to observe degrees of commercial clustering that correspond to the administrative hierarchy, which is generally related to population centers. The degrees seem to reflect stages of growth, because commerce naturally becomes denser and more varied as population increases. Inspired by Indonesia’s concept of nine fundamentals for daily life (sembilan barang pokok, widely known by the portmanteau SemBaKo), the author wondered whether there might be fundamentals of commerce. Are there retail operations that sprout up as a rural area becomes a village, then increase in number and type as the town grows? With this hypothesis in mind, short expeditions were undertaken in December 2017 to survey a dozen outlying areas of Klaten, in Central Java Province, where the author has had family connections for more than 20 years.
This essay explores patterns in endogenous development, summarizing several ways that greater complexity arises as population increases. The author hopes the reader will perceive this exploration not merely as a palette of observations but also as a wake-up call to recognize the cumulative economic power of areas beyond the capital. A nation with a large population inevitably generates wealth through its domestic market. Native commerce emerges from simple interactions among the populace as they address their fundamental needs. This component of the Indonesian economy has been growing on its own for the past 20 years, developing through popular will and innovation.
Economists such as Hernando de Soto of Peru’s Institute for Liberty and Democracy have studied the aggregate wealth of the lower class. His book “The Mystery of Capital” mentions a visit to Indonesia during his study of land registration as a means to unlock capital, a facet of bureaucracy where Indonesia fares far better than most of South America. Another of his books, “The Other Path: The Economic Answer to Terrorism,” led to economic policies that undermined the Maoist insurgent group Shining Path. The recognition of the entrepreneurial spirit of Indonesians at all economic levels is essential at a time when nationalist sentiment is pushing back against the globalist tendency to view foreign direct investment as a panacea. The rapidly growing domestic market should be appreciated for its inherent power, which enables it to function as a counterweight equal in importance to global markets.
What is urbanization?
According to the Indonesia’s official Central Statistics Bureau (BPS) (https://www.bps.go.id/), the country as a whole was already 53.3 percent urbanized by 2015. However, this figure makes more sense as a median than as a mean. As of 2017, 11 cities had a population of more than one million people, while 122 cities ranged in population from 100,000 to one million people (http://worldpopulationreview.com/countries/indonesia-population/cities). At the other end of population density, we see from BPS figures that villages designated as rural outnumbered those considered urban by four to one (66,356 versus 16,285).
At this point, it is worth taking a brief look at what “urban” means (https://www.citylab.com/equity/2012/03/us-urban-population-what-does-urban-really-mean/1589/). In the United States, it means either of two things: an “urbanized area” that has 50,000 or more residents (71.2 percent of the United States, according to its 2010 census); or an “urban cluster” that has between 2,500 and 49,999 people (9.5 percent of the US population in 2010). Everyone else (nearly 20 percent of the US population) is classified as living in rural areas.
For Indonesia, the division is a simple dichotomy (urban versus rural), but it is not defined in terms as simple as those in the United States. The BPS classifies a village as urban (perkotaan) by calculating an index based on population density, percentage of farming households and the availability of facilities such as paved roads, schools, health services, markets and electricity. (http://sp2010.bps.go.id/index.php/site/tabel?tid=264&wid=3310000000) Meeting in person with the author, staff members of the Klaten branch of BPS explained that the granularity of urbanization data is at the village level: if a village qualifies as urban, all of its residents are tallied as urban. They described the urbanization index as weighting access to facilities (presence, but if absent, then distance from nearest school, etc) more than the prevalence of farming households or population density.
At first glance, the term “population density” might seem more definitive than “population” because urban experience, especially commerce, is closely related to the frequency of interactions a resident has. However, dramatic improvements in transportation (registered motorcycles totaled 105 million in 2016, up from 61 million in 2010) and communication (the proportion of rural households with a cellphone jumped from 8.2 percent in 2005 to 82.9 percent in 2015), suggest that “density” resembles a fuzzy social concept more than a straightforward image of how closely dots appear on a map.
Central Java is the third-most populous province in Indonesia, with 32 million residents (2010 census), behind West Java (43 million) and East Java (37 million). The provincial capital is Semarang (1.7 million), the seventh-largest city in the country if one omits the Tangerang and Bekasi components of JaBoDeTaBek. Central Java contains five other incorporated cities led by mayors: Surakarta (known locally as Solo), Pekalongan, Tegal, Salatiga and Magelang. Administratively similar to the incorporated cities are the districts (kabupaten), each of which is led by an elected chief official (bupati) instead of a mayor and can be considered analogous to a county in the United States or Great Britain. A district is sometimes called a “regency” because in former times it was the responsibility of a regent appointed by the area’s sultan. Each city or district has a “level 2” legislature that is more local than the province’s “level 1” legislature.
With 48.4 percent of its people living in urbanized locations, Central Java is slightly more rural than Indonesia as a whole. Although most of its districts contain more rural villages than urban villages, the ratio for the entire province outside the incorporated cities is less than 5:2 (Master File Desa of BPS at http://mfdonline.bps.go.id). Two districts even have more urban villages than rural villages: Klaten (253 urban and 148 rural) and Sukoharjo (106 urban and 61 rural). Klaten is actually more populous than the city of Magelang, while Sukoharjo has become a suburb of Surakarta. Each of the six incorporated cities contains few or no rural villages. Every district is divided into administrative subdistricts (kecamatan), and each subdistrict is then divided into villages (desa or kelurahan). Like the districts, the subdistricts and villages each has a local administrative center staffed by civil servants. Locales in Java smaller than a village are sometimes still identified by a hamlet (dukuh) name, but administrators now tend to refer to them by RW number according to the rukun warga/rukun tetangga (RW/RT) addressing system. In the United States, each state is subdivided into counties, but only some states totally subdivide every county (eg, townships in North Carolina or towns in New York State). However, in Indonesia, the entire land area of a subdistrict (kecamatan, analogous to a township) is subdivided further into contiguous villages (a desa is a sub-subdistrict, so to speak). Therefore, a village classified as urban may have most of its land utilized for agriculture.
Klaten straddles the four-lane Highway 15 (known locally as the Solo-Yogya Road or Yogya-Solo Road, depending on one’s direction of travel), with a two-lane bypass north of downtown and another to the south. Each bypass has traffic lights at key intersections to cope with bottlenecks that have developed in recent years. Used cars aged five to 10 years now seem like a necessity for a middle-class lifestyle, while lower-middle-class families can afford new motorcycles because monthly payments are typically less than USD 50. August 2017 saw 426,892 new motorcycles sold in Central Java (which ranked behind West Java, East Java and the capital district DIK Jakarta), suggesting an annual rate of more than 5.1 million in this province alone (http://sidomi.com/556735/ini-daerah-yang-paling-banyak-beli-sepeda-motor-tahun-2017/). Connectivity with peripheral regions is provided by well-paved, two-lane roads that branch from the highway or one of its bypasses. The branch roads lead to subdistrict administrative centers and onward into rural areas, but some of them loop back to reconnect with the highway. Every branch has a high volume of local traffic, so retail establishments tend to cluster along them.
The author visited a dozen areas within Klaten district (population 1.13 million, according to the 2010 census) in the middle of December 2017. Table 1 shows 2016 village population estimates from the Kecamatan Dalam Angka series of 2017 publications issued by BPS Klaten (https://klatenkab.bps.go.id/publication/). Wedi and Tulung subdistricts are mostly rural, but all of the other surveyed subdistricts are classified as more than 70 percent urbanized. For this informal survey, the author defined a retail establishment as having a structure enclosed by four walls, even if it was part of a row of connected shops and/or had a shutter instead of a front door. This definition excludes itinerant sellers of fresh produce, eggs and meat, as well as those who operate from a stall, table or floor space within a pasar (a centralized market, often in a government-owned building where spaces are rented).
Some fundamental types of commerce are primarily services (eg, salon, laundry, motorcycle repair) that can be conducted from a dedicated space within a proprietor’s home. In densely populated areas, it is common to see them inside a residential neighborhood rather than situated on a main road. Other establishments mix goods and services (eg, a restaurant) or goods and financial transactions (eg, cellphone accessories, prepaid subscriptions and credit top-up). Still others combine manufacturing and retail (eg, producers of concrete blocks and paving stones, vendors of homemade pastries or other snacks).
Multistory structures are sometimes built as a row of shophouses (rumah + toko = RuKo). However, a row of shops outside a city is likely not to have even a second story. Such clusters of single-story shops are reminiscent of a suburban strip mall in North America.
It is noteworthy that commercial clustering along a local main road often contrasts starkly with nearby land use, which can involve grazing or farming instead of housing. A village shop might have a rice paddy literally outside its back door.
The term sembilan barang pokok (often abbreviated as SemBaKo) in Indonesian refers to nine fundamental items of daily consumption:
1. Rice, sago and corn
2. Granulated sugar
3. Vegetables and fruit
4. Beef, chicken and fish
5. Cooking oil and margarine
8. Kerosene or liquefied petroleum gas (LPG) for cooking
9. Iodized sodium salt
Mirroring the predominance of food items in the official list of SemBaKo, the most common retailer is the warung makan, a small eatery that can vary in form from a pushcart (with a bench plus an extendable canopy to protect customers from rain) to an enclosed restaurant (with tiled floors plus a full kitchen in back). Retail providers of LPG in tanks are also ubiquitous; those that offer delivery tend to focus solely on this one item.
The following list encapsulates the most fundamental types of retail shops, even though only five or six of them appear to be truly ubiquitous:
1. A place to sit and eat cooked food (warung makan)
2. LPG in refillable tanks
3. Clothing (sometimes with a tailor for school uniforms or bespoke items)
4. Grocery store (packaged foods and common nonfood items)
5. Laundry service (especially ironing)
6. Prepaid cellphone credits and subscriptions (new phone numbers)
7. Barber or salon (sometimes offering a makeup service for weddings)
8. Motorcycle repair (bengkel motor)
9. Photocopy (sometimes offering school supplies and/or photography)
These retail types can be considered “first stage” commerce arising from the endogenous development of a village’s economy. Half of the surveyed areas can be classified as first-stage clusters: Majegan (#2), Gatak (#4), Pendem (#5), Muteran (#6), Setran Baru (#7) and Ngering Cilik (#11). Laundry and cellphone services are the most recent additions to the set. Laundry services have become popular this decade even though the official statistic of 55 percent of women in the labor force varies little from year to year. One laundry provider affirmed that housewives used her service as often as career women. This could be due to the shortage of full-time maids: some maids leave small towns in order to get better salaries in Jakarta; others increase their income by working at half-day rates for two clients. The lifestyle of bathing twice a day tends to result in additional changes of clothing, which thereby increases a household’s laundry load.
There is an additional way that cultural habits influence consumer demand: the tropical climate increases the frequency of getting haircuts, as does the extended social network that obligates an Indonesian to attend numerous ceremonies for people who are not close relatives. A shop in a village may include several fundamentals in its purview, such as a grocery store that also offers laundry services and cellphone credit top-up. On the other hand, some commercial ventures need more floor space so they opt for the lower land price on an isolated stretch of a main road (eg, a hardware store that stocks bulky items like tiles and cement bags) or a side street with a sign visible from the main road (eg, a spa).
Further development and growth
The second stage of endogenous development is less clear-cut, but seems to consist of the following set of businesses, most of which are present in small towns or in clusters near major intersections between large towns:
1. ATM or walk-in branch of a bank
2. Minimart (often an Alfamart or Indomaret, which are nationwide chains)
3. Toy store
4. Hardware store (often supplying floor tiles, cement, paint, etc)
5. Provider of drinking water (bottled water distributor and/or filtration shop)
6. Metalworker (fences, gates, bannisters)
7. Cement items (concrete blocks, paving stones, culverts)
8. Motorcycle oil, tires and/or spare parts
9. Gas station
11. Household furnishings made of plastic (dressers, buckets, utensils)
12. Exercise studio
Another one-third of the surveyed areas could be classified as second stage: Ngupit (#1), Gaten (#3), Jambon (#8) and Jabung (#12). In the second stage, some of the grocery stores sell in bulk (wholesale) to owners of village or hamlet shops. At this stage, capitalization becomes a significant factor, particularly when someone invests in the establishment of a gas station or minimart as a franchise operation. The bar graph compiled by Indonesia’s central bank indicates a dramatic shift nationwide at the start of this century: in 1999, 61 percent of all credits were extended to individuals and businesses in Jakarta; but beginning in 2000, the majority of all credits (56 percent, quickly rising beyond 60 percent) went to recipients outside the capital. This shift coincided with the beginning of the otonomi daerah policy that promoted regional autonomy.
The branch manager of Bank Rakyat Indonesia’s North Klaten unit in Gaten told the author that her location was set up about 20 years ago. She explained that new branches were split from older ones as the customer base increased. A loan officer explained that they extended credit to small shops that had already been in business for a year. Generalizing, one could say that most retail establishments at this stage of development provide their own start-up capital and then request working capital when they are ready to expand.
The third stage of development is characteristic of population centers that include a subdistrict administrative center (kantor camat): Kradenan (#9) and Kalitengah (#10). Note that the subdistrict office for Trucuk is not in the village named Trucuk, a situation that also applies to Ngawen, where the subdistrict office is in Kahuman village rather than Ngawen village. Wedi, Gantiwarno and Jogonalan subdistricts do not have eponymous villages. A larger population makes the set of retail establishments in the third stage more diverse but also somewhat nebulous. Variations in connectivity, density and other factors might encourage or discourage the presence of local distributors of nationwide brands.
The set of retailers includes:
1. Sellers of new motorcycles
2. Sellers of new cellphones
3. Gold jewelry shop
4. Computer sales and service
5. Internet gaming centers
7. Wooden furniture (showroom or a workshop that sells directly)
8. Motorcycle ornaments (stickers and decals) and seat covers
9. Supplies for baking (including small cardboard boxes for baked goods)
10. Supplies for sewing (sequins, buttons, beads, thread)
11. Video shooting for weddings (usually offered by photography studios)
12. Auto repair and services (washing, painting)
13. Shoe stores
14. Sellers of new bicycles
15. Sporting goods (fishing tackle, soccer balls)
Town becomes city
The fourth stage is characteristic of a district’s eponymous city (equivalent to a county seat). Additional retailers include print shops for signs, banners and documents; shops that sell bolts of cloth; curtain stores; lamp shops; pet stores (primarily fish and birds, but dogs and cats are becoming popular); and stores that sell TVs, white goods or other large furnishings.
In downtown Klaten, a small city that contains three subdistricts, there is a proliferation of all third-stage retail types. For example, one sees multiple dealers of motorcycles made by the same manufacturer (in contrast to a single dealer in Jambon or two rival makes in garage-size structures on opposite sides of the main road in Jatinom). In addition, the fourth stage typically includes a private hospital and a multistory, air-conditioned shopping mall, which has both a department store and a supermarket that sells some imported foods.
The fifth stage can be seen in the Central Java provincial capital (Semarang) or a large city (Surakarta). A city with more than one million people usually has auto dealers and authorized car repairs, as well as several malls that each contain outlets for imported clothing brands (Levi’s, Timberland); international fast food (Starbucks, Pizza Hut); a hypermarket; a department store with a wider range of items; a home furnishings store (Electronic Solution, Home Solution, Informa); and multilevel parking. Such a city might be home to the regional headquarters of a nationwide brand’s distributor, where people are employed doing office work in a multistory building.
The process of town growth and economic development is not always an additive one. As in other aspects of life, there is a tradeoff when a rural lifestyle becomes urbanized. In terms of retail establishments, rural areas are more likely to have a store selling animal feed or farming supplies (fertilizer, pesticide, seeds), while a small city might lack such shops or have the same number of them serving a far larger population base. Agricultural shops are present on the main road in Majegan, Gaten, Setran Baru and Jabung.
Some nonagricultural items are widely available in villages. Several shops in Gaten, for example, offer brooms as well as plastic wrappers (for packaging homemade snacks) among their wares. The brooms are locally made, but the plastic wrappers are not; distribution is more concentrated in such a village because of the local market for homemade snacks, some of which are provided at social gatherings instead of being sold.
Other transitions are related to technological improvements. In the 20th century, when rural connectivity was less robust, a town in the second stage would usually have a warung Telekom (WarTel) where walk-in customers could place local or long-distance calls via metered telephones. The flowering of cellphone usage has made the wartel obsolete, but some have adapted and become Internet cafes (WarNet) or gaming centers.
Online bill payment is a welcome service in rural areas where few residents use online banking, and many do not want to travel far to pay at the electric company’s office. The utility offers its own online bill payment at its local service office in Jabung. Electronic payment via Bank Rakyat Indonesia (BRI Link) is available at a minimart-cum-laundry in Gatak and a charter car service in Pendem. Even in urbanized areas where BRI and/or other banks have brick-and-mortar branches, many residents prefer to use an online payment service at a neighborhood outlet because the queue is shorter. Electronic payment can also be used to buy plane tickets or pay monthly installments (health insurance, motorcycle loans) via virtual accounts set up by the recipients. Convenience stores typically offer online transactions and some also have an ATM machine on the premises. These air-conditioned minimarts are set up as franchise operations in numerous small towns by local entrepreneurs who assess the population base and local demand.
There are other transitions related to transportation and communication infrastructure. Gaten has two retailers that sell LPG in metal tanks: one sells alongside bottled water and electric goods; the other sells alongside PVC pipes, brooms and other household items. In Ngering Cilik, the tanks are sold at a grocery store, while in Jabung they are available at a plastic goods store. However, in Gatak and Kradenan, LPG is sold by stand-alone retail shops that offer delivery of the larger tanks (12 kilograms) via motorcycle. A retail-cum-delivery service becomes more viable as the population increases. Some sprout up in middle-class homes because better paving in their neighborhoods means easier access for the distributor’s trucks.
Still other transitions are related to sophistication of worldview. Traditional herbal remedies are sold in specialized shops in villages, but second-stage locales typically have a pharmacy (apotek) with nationwide brands for relieving headaches, fever, muscle pains, etc. Baby massage is a traditional art for calming infants, often available in a practitioner’s home in a village, but more likely to be adjacent to a pediatric clinic or a women’s spa in a town. Fish therapy (via a species that will nibble dead skin from feet) is available down the road from the Trucuk subdistrict office, while a face-peeling spa is just off the main road in Pendem.
Laundry, salon and vehicle repair services were identified as fundamental types of retail operations that could be offered in a practitioner’s home. Exercise studios, online bill payment, baby massage and spas can also be seen in residential areas, especially if the location is near a main road. Other common services that could be offered from one’s residence include a medical clinic, midwife, dentures, circumcision and tutoring. Although a larger population base naturally means more clients for such professionals, these businesses might arise in a rural area (or off the main road in an urbanized area) because the practitioner chooses to live there.
However, services such as auto repair clearly seek a niche that is related to population, weighing consumer demand versus the supply of nearby competitors. Perhaps the most common of these population-dependent services is the real estate notaris, a type of lawyer trained to do title search and land sales registration. Because very few people engage in more than a handful of real estate transactions in their lifetime, a notaris benefits greatly from the visibility offered by an office on a main road.
Despite noting some exceptions, the author has generally followed the paradigm that larger population groupings have greater diversity and quantity of retail establishments. However, services are not the only form of commerce that might appear to arise randomly rather than in a locale that exhibited the appropriate stage of endogenous development. One example might be a shop that sells aquarium fish in Gaten, a hamlet that is no more developed than the second stage. Although that shop is only about 20 meters from the village market (Pasar Mayungan), the presence of a pet shop typical of the fourth stage suggests that the owner picked the location for personal reasons, with an awareness that he or she might uniquely serve customers well beyond the village boundaries.
A more striking example was observed further up the road from that pet shop where Techno Metalindo builds machines to order. The owner showed the author his current project: using the customer’s specs to manufacture a mixer for producing autoclaved aerated concrete blocks. Such blocks have become extremely popular for housing construction in the past couple years. This custom manufacturer might be unique in the entire district, but the proprietor’s skill and reputation have made it feasible to set up in his village (https://technometalindo.blogspot.co.id/p/mesin-pengolahan.html).
The future is likely to bring an even greater diversity of retail choices. Some multi-level marketing companies such as Tupperware have large sales forces in Indonesia. The author saw a stand-alone Tupperware outlet in Gatak, as well as a Majegan local specialty snacks shop (toko oleh-oleh) that offered laundry services along with both Oriflame and Tupperware.
Internet shopping is booming, with several online marketplaces competing for customers and offering prompt delivery. Internet World Stats estimated two million users in Indonesia in 2000, rising to 132.7 million by the middle of 2017 for an Internet penetration rate of 50.4 percent (http://www.internetworldstats.com/stats3.htm#asia). This is close to the Central Statistics Bureau’s 2015 figure for the percentage of people above age 5 who accessed the Internet during the most recent three months. With half the country now having access to the Internet, online shopping is truly a boon for people who live in less-populated areas, where options are limited to first-stage retail shops. BPS only began to collect e-commerce data in 2016, tallying the number of businesses in various categories. Staff openly acknowledged that their initial methodology could not prevent double counting: a company might have its own website and also be listed in multiple online marketplaces such as Tokopedia, Lazada or Blibli. The BPS tally revealed that 37 percent of Indonesian businesses that sell or purchase via the Internet were classified as retail, including vehicle repair (Table 21 at http://se2016.bps.go.id/Lanjutan/files/buku/00_Indonesia.pdf).
Summary and outlook
The author has described a brief survey of endogenous development in the Klaten district of Central Java, undertaken by personal observation of retail establishments along main roads. A general pattern of types of shops that are more fundamental emerged by analyzing which ones were present in nearly all locations. A set of nine fundamentals of local commerce were identified, analogous to the SemBaKo basics of an Indonesian lifestyle. Further, an additional four stages of development, arising as population increases, have been outlined herein to provide completeness.
The Indonesian economy has improved dramatically in the 21st century, with unprecedented diffusion across the archipelago. Nearly all economic statistics (other than traffic congestion) support the view that people outside the capital have achieved much more material happiness in the past 20 years than in the preceding 30 years. In this light, hackneyed references to the earlier period as an “era of development” seem as out of touch as praising a typewriter when a computer with document production software is at hand. Indonesian leaders who take pride in their country would do well to feel and show greater trust in their compatriots, whose long tradition of mutual support makes them naturally adept at increasing social capital. Foreign direct investment can be helpful in improving life beyond the bubble of Jakarta’s elite, but a greater appreciation of local ingenuity and determination might contribute even more to strengthening the country’s economy in the long run.
The old slogan sumber daya manusia (human resources) that was once used as an excuse to keep factories inefficient with bloated payrolls should be revisited. Re-imagining the abundance of labor along the lines of the late American economist Gary Becker’s book “Human Capital” can produce a vision that nourishes innovation at all levels of the economy. The entrepreneurial spirit of Indonesians has become more dynamic as oppression and petty corruption have receded. It is abundantly evident now, ranging from housewives who sell snacks in front of their homes at 5:30 am, to investors in modern convenience stores that offer online bill payment, to young people whose only sales outlet is via the Internet, to people of all ages who enthusiastically shop at online marketplaces.
Martin Schell is a former member of the teaching staff at New York University’s Stern School of Business and a long-time researcher on Indonesia. He can be reached via his website, martinschell.com.