The Amazing Cottage Economy of Indonesia

During my recent visit to Medan Indonesia, one impression that struck me was the amazingly rich number of cottage businesses, especially along the main roads. Within a couple of blocks, you can literally find nearly any kind of consumer retail business, grocery or food stand, and even some manufacturing.

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Common residential / retail home in suburban Medan. Newer buildings have newer construction techniques, but basic architecture remains the same.
[SOURCE: © 2013 Greg Chase – According to Creative Commons License, use with attribution.]

In the Indonesian cottage economy, your neighbors are your customers.  You are doing business with people you know well. Obviously many of these business owners are dependent upon a large network of distributors to get their goods and supplies. There are also larger supermarkets and department stores in Medan, but they are few and far between considering that over 4 million people live in the metro area. In the case of the department stores, these primarily sell imported goods, which are beyond affordable for most Medanese.

Since the industrial and commercial sectors of Indonesia are nowhere close to being able to provide enough good jobs for the people, the government actively encourages this cottage economic system by leaving it untaxed and unregulated. Speaking with some of the residents, they mentioned they paid no taxes to the government. You can also see there’s also a lack of zoning regulation or enforcement with regard to placement of businesses. You can literally set your business up anywhere, including the side of the road or median strip, and in front of other storefronts.


Sample of activity along the street I stayed at in Medan.
[SOURCE: © 2013 Greg Chase – According to Creative Commons License, use with attribution.]

The owner of the house in which I was staying runs a furniture store in the bottom. In front of his store was a produce vendor they fondly called “The Pineapple Lady” who has been setting up her table for 30 years selling pineapples grown on her land. While you can see the lack of government oversight here, you can also see the personal relationships between neighbors, even in as heavily urbanized area as greater Medan.

When I first started this blog, I was looking for some trite comparison between the Indonesian economy and US economic ideas such as Libertarianism. However, I quickly came to realize that such comparisons were not really possible because the way of life that has evolved in Medan has its own complex history and influences.

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View from Marriott Hotel in Medan shows the contrast between new and old construction – bigger stores replacing cottage businesses.
[SOURCE: © 2013 Greg Chase – According to Creative Commons License, use with attribution.]

I feel comfortable with a few smaller comparisons and questions though:

1)   In the US, our politicians often describe themselves as supporting small business owners, yet it’s much more difficult to start and operate a business than in Medan. Competition from malls, big box stores, and Amazon kill any chance for the kinds of businesses you see on the streets of Medan from even subsisting.

2)   Is lack of taxation and local regulation the best or only way to encourage such entrepreneurship? Other US politicians might also point out the lack of a welfare and support system in Indonesia as being doubly motivating.

3)   Years ago, it was local factories and regional companies that provided the many high-skilled, middle class jobs and standard of living that Americans fondly remember. These jobs were later offshored to countries with lower wages, and are now being onshored again, mostly because they are highly automated. I’m not convinced that the kind of cottage economy I saw in Medan is a sufficient replacement.

4)   I think many capitalists that visited Medan would see opportunity to make lots of money in a highly fragmented economy ripe for optimization of supply chains, consistency of retail experience, and increased business efficiency.  Would this increase the wealth and standard of living of the average Medanese, or simply re-distribute the wealth more efficiently to those already well off?

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