65

LOCAL GOVERNANCE AND SHARIAH COOPERATIVES IN INDONESIA

Abdul Ghafar Ismail1

Islamic Research and Training Institute

Islamic Development Bank

8111 King Khalid St., Al NuzlahYamania Dist.

Unit No. 1 Jeddah 22332-2444, Kingdom of Saudi Arabia

Email:AgIsmail@isdb.org

Muhammad Hasbi Zaenal2

Research Center for Islamic Economics and Finance

Institut Islam Hadhari

Universiti Kebangsaan Malaysia

Bangi, 43600 Selangor D.E., Malaysia

Email: fathanalahwazy@gmail.com

Paper to be presented at the Konvensyen Kebangsaan Koperasi Patuh Syariah, Universiti

Kebangsaan Malaysia, 24 September 2016, Bangi, Malaysia

Abstract

This paper examines governance issues more closely and in relation to rural institutions and

sustainable livelihood improvement, drawing on evidence from shariah cooperatives in

Indonesia. More specifically, this paper provides a diagnostic of governance systems in

Indonesia, which basically follow the Dutch law origin. Indonesia and the role that shariah

cooperatives might play in strengthening such systems. This paper offers a description of both

formal and informal rural governance systems in Indonesia, the role of shariah cooperatives and

other membership-based rural producer organizations in these systems, and possible avenues

through which rural organizations can play a larger role in improving rural governance. By using

a combination of survey data and case studies, it sheds light specifically on the influence of local

governance systems on people’ cooperatives in Indonesia. The relationships and interactions

between local governance systems and cooperatives are an important issue in Indonesia because

both play an essential part in promoting and implementing the Government of Indonesia’s far-

reaching rural development and poverty reduction strategies. These strategies include the

government’s agricultural development-led program, its unitary policy, its administrative and

fiscal decentralization efforts, and a whole range of social welfare and capacity building

programs designed to support these strategies. Findings suggest that local governance systems

and cooperatives are closely linked by interactions at multiple levels and with varying effects on

1 Head of research division, Islamic Research and Training Institute and Professor of Islamic Banking and Financial

Economics. He is also AmBank Group Resident Fellow for Perdana Leadership Foundation and Fellow, Yayasan

Pembangunan Ekonomi Islam Malaysia 2 PhD Candidate in Islamic Economic, Institut Islam Hadhari, Universiti Kebangsaan Malaysia

66

rural people. These interactions have the potential to strengthen the role of cooperatives in local

development, but also run some serious risks. Underlying these risks is the long-standing issue of

trust between government and community. While it is difficult to provide explicit policy

recommendations based on the analysis provided in this paper, at least one key issue can be

raised for consideration by policymakers at all levels in Indonesia. If efforts to strengthen local

governance systems and to build effective cooperatives can focus on this issue of trust between

government and community, there is much cause for hope. However, getting this balance right is

difficult and, in the long run, will be a significant challenge for policymakers to address.

Keywords: governance; cooperative organization;

JEL Classification: G21; G23; G38; P13; Z12

67

1. Introduction

There is plenty empirical evidence to suggest that improving the productivity of micro and small

enterprises (MSME) and integrating them into commercial markets is a promising strategy for the

broad-based alleviation of rural poverty. At the same time, it is also part of the strategy in

strengthening the MSME as an engine of growth and in generating employment. Yet while this

strategy has been very successful in some countries such as Indonesia (see, Permata Wulandari &

Salina Kassim, 2016), Korea (Kim, 2004), it has faced major challenges in large parts of Africa

(see, Fjose et. al, 2010) and in the less-favored areas of Asia (see, Fjose et. al, 2010) and Latin

America (see, Ferraro) who are host to high levels of rural poverty and food insecurity. Among the

contributing factors are: deep and persistent market failures, as well as government failures in

providing the services that poor people in rural areas need to access technologies, participate in

markets, and improve their livelihoods and well-being. Additional factors, as mentioned in Birner

and Gunaweera (2002), relate to community failures, where local institutions fail to emerge and

establish commonly accepted rules to govern issues such as the sustainable use of common-pool

resources or to facilitate collective action in natural resource management.

These factors refer to the underlying issue of rural governance, a topic that has emerged on

the international development agenda in recent years. As a result of this growing interest in rural

governance, governance reforms in many developing countries have been undertaken with the

aim of improving rural service provision and empowering the rural poor to demand better rural

services. Reforms have included administrative decentralization, participatory planning exercises,

local elections, public administration reforms, and investments in building local-level governance

capacities (International IDEA, 2000).

However, the evidence regarding the scope and impact of these governance reforms is

mixed, and there are major knowledge gaps regarding the question of what makes rural

governance systems work effectively for small-scale, resource-poor people, women-headed

households, landless agricultural labourers, and other vulnerable social groups. In view of an

inherent tendency to promote “one-size-fits- all” models, empirical research is needed to identify

how reforms to rural governance and rural service provision work where and why.

68

This paper examines governance issues more closely and in relation to rural institutions

and sustainable livelihood improvement, drawing on evidence from shariah cooperatives in

Indonesia. More specifically, this paper provides a diagnostic of governance systems in Indonesia,

which basically follow the Dutch law origin (Rowen, 2003). Indonesia and the role that shariah

cooperatives might play in strengthening such systems. This paper offers a description of both

formal and informal rural governance systems in Indonesia, the role of shariah cooperatives and

other membership-based rural producer organizations in these systems, and possible avenues

through which rural organizations can play a larger role in improving rural governance.

In doing so, the paper highlights governance as it relates to interactions between the state,

the market, and civil society, or the public, private, and civil society sectors (see, e.g., Rhodes

1997), and follows the definition of governance as is currently favoured by the World Bank

(2007). The traditions and institutions by which authority in a country is exercised. This includes

the process by which governments are selected, monitored and replaced; the capacity of the

government to effectively formulate and implement sound policies; and the respect of citizens and

the state for the institutions that govern economic and social interactions among them.

Data and information used in this paper are drawn from a combination of sources. This

paper draws from the literature on rural governance in Indonesia; data from the 2005 Indonesia

Rural Smallholder Survey (ERSS); data from the 2006 Indonesia Smallholder Cooperatives

Survey (ESCS); and information collected from the 2007. Cooperative-level Case Studies that

were explicitly conducted as a part of this study.

This paper proceeds as follows. The remainder of this section examines the rural

governance in Indonesia and the relevance of this paper to governance reform efforts in the

country. Section 2 provides insights into the relationship between rural governance and rural

institutions, with specific emphasis on sharia’ cooperatives, a type of membership-based rural

producer organization. Section 3 examines the livelihood outcomes associated with the

relationship between rural governance and rural institutions, followed by conclusions and policy

recommendations in Section 4.

69

2. Reform Initiatives on Governance in Indonesia

Since the resignation of former President Soeharto until now, the 1945 constitution has been

amended 4 times, in October 1999, August 2000, November 2001, and August 2002. Among

other things, these amendments deal with far reaching issues such as limitation of power and

term of office of the President; decentralization of central government’s authority to provincial

and regional governments; and creation of additional state bodies such as House of Regional

Representative (Dewan Perwakilan Daerah), Constitutional Court (Mahkamah Konstitusi), and

Judicial Commission (Komisi Yudisial).

Anti-Subversion Law of 1969 was repealed in 1999. Law No. 39/1999 was enacted,

giving the pre-existing National Commission of Human Rights an independent status, equal to

other state bodies. Most importantly, pursuant to Law No. 4/2004 on Judicial Powers that

repealed Law No. 14/1974 as amended by Law No 35/1999, the Supreme Court assumes all

organizational, administrative, and financial responsibility for the lower courts from the

Department of Justice and Human Rights, Department of Religious Affairs, and Department of

Defense. One roof system of administration of justice under the Supreme Court was finally

created. Accordingly, amendments to pre-existing legislations are consistently made to fit in the

new political framework and administration of justice (Laiman, et. all, 2009).

Indonesia adopts democracy, which means that sovereignty is vested in the people and

implemented pursuant to a rule of law. The basic rule of law is represented in the Indonesian

constitution, i.e., the Principle Laws of 1945 (“1945 Constitution”). It divides the power

horizontally by making a separation of powers into equal functions of state institutions, which

control each other based on checks, and balances system. These functions, although not strictly

so, are generally ascribed to executive, legislative, and judicative power which suggested the

adoption by Indonesia of trias politica.

The executive power is held by the President and Vice President which are elected

directly by the people in a general election every five years. The President is both the head of

state and the head of government. The President may appoint ministers heading departments or

ministries as his aides in the government. As stated in the constitution, there are six branches of

state. The people elect the member to the People’s Consultative Assembly (MPR). The president,

70

who has the full executive power, is elected by the people and responsible to the MPR.

Legislative power is shared with the House of People's Representatives (DPR). The Supreme

Advisory Council advise the president, whereas the State Audit Board exercises financial

oversight. At the apex of the judicial system is the Supreme Court.

Legislative Bodies

(a) People's Consultative Assembly (MPR)

People’s Consultative Assembly (Majelis Permusyawaratan Rakyat – “MPR”) which consists of

the members of the House of Representative (Dewan Perwakilan Rakyat – “DPR”) and the

Senate (Dewan Perwakilan Daerah – “DPD”). Among the functions of these authorities is the

amending of the 1945 Constitution, appointing President and/or Vice President in the case of

vacancy in the position, inaugurating the President and/or Vice President, and to impeach the

President and/or Vice President in accordance with the 1945 Constitution. With the existence of

MPR as a separate entity, jurist ascribed Indonesia’s legislative power to “tricameralism” (as

opposed to “bicameralism” (Laiman, et. all, 2009).

People's Consultative Assembly (MPR) is the highest constitutional body, which meets

every five years in the year following the elections to the parliament - the House of People's

Representatives (DPR). The MPR has 692 seats, 132 of DPD members and 560 which are

assigned to the members of the DPR. Sebelum reformasi, MPR terdiri Of the other 500 seats,

100 are reserved for representatives of anggota DPR, professional groups, including ABRI,

appointed by the president and, as of 1992, 147 seats were held by delegates elected by

provincial-level legislative assemblies. The balance of seats--253 in 1992--were assigned after

the 1987 DPR elections on a proportional basis to representatives of the political parties,

depending on their respective membership in the DPR. Golkar took the largest number of these

seats based on its 1987 winning of 299 of the 400 elected DPR seats. This election resulted in a

total of 540 Golkar seats in the MPR, an absolute majority even without counting the ABRI

faction and the provincial-level representatives. The Muslim-based PPP and PKS only had sixty-

71

one DPR seats and ninety-three MPR seats, whereas the PDI, with its forty DPR seats, was at the

bottom of the MPR list (Widayati, tth). But after the reform of the Assembly only consist of

members of the DPR and DPD members are elected through general elections.

The principal legislative task of the MPR is to approve the Broad Outlines of State

Policy, such as National Committee for Islamic Financial (Komite Nasional Keuangan Syariah -

“KNKS”) newly published early in 2016, a document that theoretically establishes policy

guidelines for the next ten years, which will be led by the President of the Republic of Indonesia

directly. This committee will involve several agencies, such as the OJK, BI, LPS, Bappenas,

MUI, and a number of ministries, such as Ministry of Finance, Ministry of Religious Affairs,

Ministry of State Enterprises, the Ministry of Cooperatives and SMEs. Its existence is based on

Indonesian Islamic Financial Architecture Masterplan 2014-2024 initiated by Bappenas.

Masterplan is a comprehensive map the Islamic financial sector in Indonesia, which consists of

four main sectors, namely banking, non-banking institutions (Takaful insurance, finance

companies, pawn shops, cooperatives / BMT, and pension funds), capital markets, and the

religious sector. The draft is prepared by a government task force and is expected to be approved

by consensus. After year 2011, several related policy on Islamic finance, such as laws zakat,

waqf laws, and various other regulations related to financial policy Islam; However, the MPR

forced a recorded vote on two amendments to the Broad Outlines of State Policy, which,

although the government won overwhelmingly, was taken by some observers as an indication

that automatic adherence to the requirement for consensus was no longer a given in Indonesian

politics. The second amendment had to do with a commitment to waqf and zakat. It shows that

the MPR was no longer satisfied with a rubber-stamp role, MPR would have greater input into

the initial stages of drafting the Broad Outlines of State Policy.

(b) House of People's Representatives (DPR)

Legislative authority is constitutionally vested in the House of People's Representatives (often

shortened to House of Representatives or DPR). This 560 member body meets annually, opening

on August 16, the eve of National Day when the president delivers his National Day speech.

These seats are electorally contested by the 10 political parties which PDI-P (109), Golkar (91),

72

Gerindra (73), Demokrat (61), PAN (48), PKB (47), PKS (40), PPP (39), NasDem (36) and

Hanura (16) in provincial constituencies, which in the 2014 general election were based on a

population ratio of approximately 1 representative per 400,000 people. Each administrative

territorial district (kabupaten) is guaranteed at least one representative no matter what its

population.

The DPR is led by a speaker elected from the membership. For the current sitting, this

position is filled 5 leaders chaired by Golkar faction. Work is organized through eleven

permanent committees, each with a specific functional area of governmental affairs. The

legislative process begins with the submission by the government of a bill to the DPR. Although

members can initiate a bill, it must be accompanied by an explanatory memorandum signed by at

least thirty legislators. Before a bill is approved, it must have four readings unless accepted by

the DPR Steering Committee. The first reading is its introduction in an open plenary session.

This reading is followed by a general debate in open plenary session with the government's right

of reply. The bill is then discussed in committee with the government or initiating members. The

final discussion of the draft legislation takes place in open plenary session, after which the DPR

makes its decision. The deliberations of the DPR are designed to produce consensus. It is the

political preference of the leadership to avoid overt expressions of less than complete support.

This position is justified by the claim of a cultural predisposition to avoid, if possible, votes in

which majority-minority opposing positions are recorded. If votes are necessary, however, a

quorum requires a two-thirds majority. On issues of nomination and appointment voting is by

secret ballot but on all other matters by show of hands.

With the built-in PDI-Golkar faction absolute majority, the DPR has routinely approved

government legislation. However, with the appearance of many younger DPR members, there is

a new willingness to use the forum for fuller and more forthright discussions of public issues and

policies. This openness paralleled a similar trend toward greater openness in non-legislative elite

circles that seemingly had received government encouragement. Part of the discussion inside and

outside of the DPR had to do with increasing the role and institutional capability of the

parliament in order to enhance political participation.

73

The Executive

(a) The President

Indonesia's government is a strong presidential system. The president is elected for a five-year

term by a majority vote of the people, and he may be reflected when his term expires. The only

constitutional qualification for office is that the president be a native-born Indonesian citizen. In

carrying out his duties, the president is the Mandatory of the MPR, responsible to the MPR for

the execution of state policy. In addition to his executive authority, the president is vested with

legislative power, acting in concurrence with the DPR. The president also serves as the supreme

commander of ABRI. He is aided in his executive role by a presidentially appointed cabinet.

The term limitation question was embedded in the larger question of presidential

succession in the event that Suharto chose to step down or declined to accept reflection. The term

limitation question also had the effect of refocusing attention on the vice presidential office.

Constitutionally, the president is to be assisted in his duties by a vice president, who succeeds in

the event of the president's death, removal, or inability to exercise official duties.

Constitutionally prescribed, it has been accepted that the president would present his own

nominee for vice president to be elected by the people.

(b) The Cabinet

The president is assisted by state ministers appointed by him. 34 departments are headed by

ministers in year 2016. These departments are grouped under three coordinating ministers:

politics and security; economics, finance, industry, and development supervision; and public

welfare. There are eight ministers of state and six junior ministers. In addition to the cabinet

members, three high-ranking state officials are accorded ministerial rank: the commander in

chief of ABRI; the attorney general; and the governor of Bank Indonesia, the central bank.

Appendix list of department

Specialized agencies and boards at the central government level are numerous and

diverse. They include the National Development Board (Bappenas), Central Bureau of Statistics

74

(BPS), the National Family Planning Coordinating Agency (BKKBN), the Investment

Coordinating Board (BKPM), and the Agency for Regional Development (BAPEDA), The

Commission for the Supervision of Business Competition (KPPU), and Indonesia's Corruption

Eradication Commission (KPK), included BAZNAS and BWI. At lower levels there are regional

planning agencies, investment boards, and development banks under the aegis of the central

government.

(c) The Supreme Advisory Council and the State Audit Board

Two other constitutionally mandated quasi-independent bodies exist to support the executive and

the government. The Supreme Advisory Council is mandated by Article 16 of the constitution. A

forty-five-member group nominated by the DPR and appointed by the president, the council

responds to any presidential question regarding affairs of state. It is organized into four

permanent committees: political; economic, financial, and industrial; people's welfare; and

defense and security.

The State Audit Board is specified in Article 23 of the constitution to conduct official

examinations of the government's finances. It reports to the DPR, which approves the

government's budget requests.

The Judiciary

The Indonesian legal system is extraordinarily complex, the independent state having inherited

three sources of law: customary or adat law, traditionally the basis for resolving interpersonal

disputes in the traditional village environment; Islamic law (shariah, or, in Indonesian, syariah),

often applied to disputes between Muslims; and Dutch colonial law. Adat courts were abolished

in 1951, although customary means of dispute resolution were still used in villages in 1992. The

return to the 1945 constitution in 1959 meant that Dutch laws remained in force except as

subsequently altered or found to be inconsistent with the constitution. An improved criminal

code enacted in 1981 expanded the legal rights of criminal defendants. The government in 1992

was still reviewing its legacy of Dutch civil and commercial laws in an effort to codify them in

75

Indonesian terms. The types of national law recognized in MPR(S) Decree XX, (July 5, 1966),

include, in addition to the constitution, MPR decrees, statutes passed by the DPR and ratified by

the president, government regulations promulgated by the president to implement a statute,

presidential decisions to implement the constitution or government regulations, and other

implementing regulations such as ministerial regulations and instructions. Obviously, the

executive enjoys enormous discretion in determining what is law.

With respect to the administration of justice, Article 24 of the constitution states that

judicial power shall be vested in a Supreme Court and subordinate courts established by law, and

that the organization and competence of courts shall be established by law. In Sukarno's Guided

Democracy, the justice system became a tool of the revolution, and any pretence of an

independent judiciary was abandoned. One of the goals of the New Order was to restore the rule

of law. A major step in that direction was the enactment of the Basic Law on the Judiciary

Number 14 of 1970, which defined an independent status for the Supreme Court and emphasized

non-interference in judicial matters by persons outside the judiciary. Theoretically, the Supreme

Court stands co-equal with the executive and legislative branches. The president, vice president,

and justices of the Supreme Court are nominated by the DPR and appointed by the president.

The Supreme Court has exclusive jurisdiction in disputes between courts of the different court

systems and between courts located in different regions. It can annul decisions of high courts on

points of law, not fact. On request, it can give advisory opinions to the government and guidance

to lower courts. It is not part of a system of checks and balances, however, since it does not have

the power of judicial review of the constitutionality of laws passed by the DPR. Its jurisdiction is

limited to whether or not implementing administrative regulations conforms to the laws as

passed. Moreover, the Supreme Court has no control over the integrity of the lower courts, which

are under the supervision of the Department of Justice.

Below the Supreme Court four different court systems can be distinguished. First, there

are courts of general civil and criminal jurisdiction. District courts are the courts of first instance.

The high courts are appellate courts. The administration of these courts is under the minister of

justice, who controls judicial appointments, promotion, transfer, and pay. Despite protestations

of independence, the lower courts had, as of the early 1990s, shown themselves reluctant to

challenge the government, particularly in cases with political overtones. In the view of some

76

observers, these courts routinely allowed egregious breaches of fundamental civil rights. There

were also regular allegations of corruption in the lower court system in both civil and criminal

cases.

Second, there are religious courts, under the Department of Religious Affairs, which exist

to resolve specific kinds of disputes between Muslims in matters of marriage, divorce,

inheritance, and gifts. These courts base their decision on Islamic law. To be legally enforceable,

however, the religious court's decisions must be approved by a corresponding secular district

court. The Directorate of Religious Justice within the Department of Religious Affairs has

ultimate appellate jurisdiction. One of the persistent tensions between Islam and the state arises

from Muslim efforts to expand the jurisdiction and autonomy of the sharia courts.

Third, in 1992 there was a Taxation Review Board that adjudicated taxation disputes.

Other administrative courts had been eliminated as part of government's effort to simplify and

standardize the court system.

Fourth, there are the military courts, which have jurisdiction over members of ABRI or

persons declared to be of a similar status. After the 1965 coup attempt, special military courts

were given authority to try military personnel and civilians alleged to be involved in the abortive

coup. Hundreds of sentences ranging from twenty years' imprisonment to death were meted out

by the special military courts, with executions continuing more than two decades after the event.

Local Government

Government administration is processed through descending levels of administrative subunits.

Indonesia is made up of thirty-seven provincial-level units. Currently, there actually are thirty

four provinces (propinsi), two special regions (daerah istimewa) - Aceh and Yogyakarta - and a

special capital city region (daerah khusus ibukota) - Jakarta. The provinces in turn are sub-

divided into districts (kabupaten), and below that into sub-districts (kecamatan). There are 93

municipalities or city governments (kotamadya) that are at the same administrative level as a

kabupaten. At the lowest tier of the administrative hierarchy was the village (desa). According to

2012 statistics, Indonesia has 415 districts, 6.793 cities, and 79.075 villages.

77

Since independence the nation has been centrally governed from Jakarta in a system in

which the lines of authority, budget, and personnel appointment run “top-down” and “bottom-

up”. Regional and local governments enjoy little autonomy. Their role is largely administrative:

implementing policies, rules, and regulations. Regional officialdom is an extension of the Jakarta

bureaucracy. The political goal is to maintain the command framework of the unitary state, even

at the cost of developmental efficiency. Governments below the national level, therefore, serve

essentially as subordinate administrative units through which the functional activities of Jakarta-

based departments and agencies reach out into the country.

In the early 1990s, there was neither real power sharing nor “bottom-up” political

communication through representative feedback. Real feedback occurred through bureaucratic

channels or informal lines of communication. Elected people's regional representative councils

(DPRD) at the provincial and district levels had been restored in 1966, after operating as

appointive bodies during the period of Guided Democracy. However, the DPRDs' participation

in the early 1990s governing was extremely circumscribed because the councils lacked control

over the use of resources and official appointments. Even though 1974 legislation gave

provincial DPRDs some voice in selecting their governors - DPRDs could recommend

appointments from a list of potential candidates submitted by the minister of home affairs -

provincial governors were still appointed by the president. District heads were designated by the

Department of Home Affairs.

The structure of provincial-level and local government in Indonesia is best understood in

terms of the overriding goals of national political integration and political stability. At the

governmental level, integration means control by the central government, a policy that was in

part conditioned by historical experience. Political stability was equated with centralization and

instability with decentralization. Lateral coordination of civilian administration, police, justice,

and military affairs was provided at each provincial, district, and sub-district level by a Regional

Security Council (Muspida). The local Muspida was chaired by the regional army commander

and did not include the speaker of the local DPRD.

Added to the political requirement for centralization in the early 1990s was the economic

reality of the unequal endowment of natural resources in the archipelago and the mismatch of

78

population density to resources.3 The least populated parts of the country were the richest in

primary resources. A basic task of the national government was to ensure that the wealth

produced by resource exploitation be fairly shared by all Indonesians. This goal meant that, in

addition to Jakarta's political control of the national administrative system, the central

government also exercised control over local revenues and finances. Thus, the absence of an

independent funding base limited autonomy for provincial and local governments.

In looking to future policy, there would be stepped-up efforts to provide autonomy and

decentralization. Such steps, however, would require strengthening the capacity of sub-national

units financially and administratively, as well as strengthening local participation in the setting of

national goals and policies.

3. Governance, cooperatives and rural Indonesia

In this section, we describe the key elements of rural governance systems in Indonesia—namely,

the formal and informal structures and systems of governance, and their influence on rural

livelihoods at the local level. This is followed by a description of how rural governance systems

and reforms both influence and are influenced by collective action among smallholders—namely,

membership-based rural producer organizations or sharia cooperatives. Note that while these

descriptions draw from both the primary and secondary information sources described earlier, the

extensive variation in Indonesia between regions, ethnicities, and communities means that it is

impossible to make conclusive, generalizable or nationally- representative observations here.

However, an effort is made to raise certain key issues for further consideration by policymakers

and researchers engaged in efforts to strengthen rural governance and rural livelihoods in

Indonesia.

Formal and informal governance institutions

Local governance in Indonesia is the domain of the desa such as pesantren association (PAs) and

National Program for Community Development (PNPM Mandiri). Desa play various governance

3 Refer to Ismail and Hamzah (2006)

79

roles ranging from the representative (e.g., conveying the interests of desa citizens to higher

levels of government), to the judicial (e.g., adjudicating over local disputes and conflicts), to the

executive (e.g., maintaining a security to defend and protect the desa). Desa(s) are comprised of

various governance bodies including elected councils and executive bodies, social courts, and

other local entities with the authority to respond to citizen’s needs and implement government

policies transmitted down from the regional and federal levels.

A variety of informal governance systems co-exist with these formal systems throughout

Indonesia. For example, traditional systems operate at the community level to adjudicate over

conflicts (e.g., kiyai or councils of elders); to pool resources for production (e.g., work- or labor-

sharing groups (e.g., rcti), land-sharing groups (e.g., muzaraah); to provide financial services

(e.g., rentener (loan sharks); to provide social welfare services (e.g., funeral groups or nama in

indonesian); or to carry out traditional and religious functions, (e.g., masjid associations (nama

in indonesian). A study done carried out in the village numbering Bobos 3700 jiwa suggests that

approximately 60% percent of all rural households are members of at least one type of traditional

institution, most often a funeral group (see Table 1).

Table 1. Households reporting membership in traditional institutions

Institution Percent Households reporting membership in at least one traditional institution 60 Community associations (funeral groups) 25

Pesantrean Associations

Mesjid Groups

20

35

Types of credit and savings association: 30

Rentener (informal credit associations) 20%

Syariah Cooperative 60%

Other 10%

Source: Survey, Bobos village, Cirebon, West Java

Other, more modern community-based governance systems have also emerged to give voice to

local development priorities and manage local development activities, for example, self-help

associations, solidarity groups, village organizations, and women’s organizations. Often, these

80

civil society organizations operate with financial or technical support from local and non-

governmental organizations As reported in The World Association of Non-Governmental

Organizations (WANGO),4 some 127 NGOs operated in Indonesia, operate at all levels in

Indonesia with particular emphasis on marginalized populations. In many rural areas, NGO

activities in agriculture are often planned and implemented in consultation or collaboration with

the regional agriculture and rural development bureaus or their district-level offices. Leading

NGOs in the areas of agriculture and rural development include Lembaga Pemantau

Pembangunan Daerah and Rumah Zakat Indonesia Foundation. The interaction between formal

and informal governance institutions. The interplay between the formal and informal governance

realms is complex in Indonesia. There is, for example, evidence of local conflict resolution

processes being managed by both formal and informal governance institutions. In such instances,

an adjudication process might be undertaken by desa social courts or kecamatan level bodies and

forwarded for review or consultation by a body of community elders before final decisions are

made. Likewise, community-level work teams or work brigades (badan amal) organized at the

sub-desa level are involved in organizing community-level collective action, assuring repayment

of fertilizer loans, and promoting collaboration with extension agents on behalf of the formal

government system.

Similarly, author xxx observe development agents (Das) at the desa level playing roles that

involve them in various - and sometimes conflicting - governance domains. DAs may

simultaneously play the role of extension agent, political campaigner, credit recovery officer, and

community planner, and are often driven by a system that is described as largely top-down,

supply-driven, and driven by state priorities, not necessarily to the benefit of smallholders and

smallholder innovation.

The interplay between the government, NGOs and civil society organizations has become

more common in recent years with the advent of kecamatan-level coordination committees in

many regions. These committees are chaired by the kecamatan administrative head and include

representatives from both government line departments and civil society organizations or NGOs

operating in the kecamatan. Their mandate is, quite obviously, to coordinate their interventions in

ways that respond to the development priorities of the kecamatan. However, their success varies

4http://www.wango.org/resources.aspx?section=ngodir&sub=list&newsearch=1&regionID=35&col=cc3300

81

by region; found little coordinated NGO activity in several regions, with only a few organizations

maintaining bilateral relations with the regional government and/or engaging with kecamatan

governments.

There is also evidence of a strong divide between the formal and informal governance

realms in Indonesia. For example, concerns are commonplace over the lack of coordination

between community-based development organizations, their NGO sponsors, and government

offices; the crowding-out effects of NGO operations; the hostility of government officials to

NGOs; and the lack of coordination between and among NGOs themselves. Moreover, there is

evidence to suggest that efforts to use traditional institutions as a conduit for more development-

oriented activities (for example, HIV/AIDS awareness and treatment) are being met with

community-level resistance due to concerns over politicization. These issues of trust between the

state and its citizens (i.e., Prophet Muhammad’s “social contract” or ukhuwah) are deeply rooted

in Indonesia’s history.

Cooperatives and rural governance systems

Cooperatives in Indonesia are another example of this interaction between formal and informal

governance. In effect, cooperatives lie at the intersection of state, market, and civil society.

Although they are typically established and organized for the precise purpose of increasing rural

production and commercialization, - activities that rely largely on the private entrepreneurship of

individuals - they also seek to promote and manage community-based collective action. And

although they are often managed as private enterprises - denoted by procedures such as the

owning of shares and distribution of profits to individual members - they are also designed and

managed based on clearly democratic principles of governance that are appropriate to collective

action-based organizations. In short, cooperatives in Indonesia share many characteristics with

non-governmental, membership-based civil society organizations even though they also seek to

generate distinctly financial benefits for their members.

Importantly, cooperatives are also generally not perceived as government agencies, at least

not in the most obvious or direct sense. While the Indonesian Government actively promotes and

82

supports cooperatives, and while cooperatives were a means of extending state authority and

control via Koperasi Unit Desa (KUD) or Village Cooperative Unit, they are now functioning in

Indonesia as generally independent and voluntary entities. Indeed, there is a general recognition

in Indonesia that second generation (i.e. post-KUD) cooperatives are intentionally designed as

private sector agents with the right to participate in market-based exchanges, buy and sell assets,

and distribute dividends to their member-shareholders. And while these observations may vary

between localities and cooperatives - with some cooperatives being more closely linked to the

state apparatus than others - they represent the general intention of the federal and regional

cooperative promotion strategy in Indonesia.

Of course, cooperatives in Indonesia are also closely related to the country’s formal

governance structures. This relationship is manifested in various ways. Firstly, cooperatives play

a central role in providing rural people with access to inputs (seed, fertilizer and credit) typically

provided by the government.

Cooperatives provide these inputs where private traders do not operate, or at more

favourable prices or better terms than those provided by private traders. This role necessarily

links cooperatives to extension services provided by DAs at the desa level; to credit disbursement

and recovery by regional savings and credit institutions; and in some instances, to mobilization of

community work teams for public works initiatives - all of which are associated state agencies or

agencies with close relations to the state.

Secondly, cooperatives are often characterized by interlocking leadership between formal

and informal governance systems at the local level. The number of individuals with the capacity

or interest in leading such cooperatives and government institutions is often limited at the local

level. Thus, only a small number of individuals with the “right” qualifications (e.g., age, status,

wealth, literacy, risk tolerance, interest, social capital, party membership, etc.) are viable

candidates for leadership roles, both formal and informal. This often means that the same

individuals are engaged in multiple leadership positions that span across both formal and

informal realms.

83

4. Case Study – Cirebon district

Consider, for example, the Al-Ishlah cooperative in Cirebon kecamatan of Dukupuntang, West Jawa,

established in 1990 and currently host 110 members (700 men and 400 women). The cooperative

operates in a relatively resource-poor corner of Indonesia characterized by low and volatile

rainfall patterns, high population pressures on the land, and soil fertility issues brought on by a

lack of organic or chemical fertilizers, livestock overgrazing and other factors. The leadership is a

common illustration of interlocking leadership. The cooperative’s chairperson and most of its

management committee members are veterans of the struggle against the KUD, and all are active

participants in the region’s party politics. None have been voted out of office or otherwise

replaced since the cooperative’s inception, although its bylaws allow for general elections every

two years.

This leadership structure was not uncommon in the sites covered by other cooperative-

level case studies. KORPRI (Koperasi Pegawai Republik Indonesia) in the same kabupaten was

similarly led by staff of the two generations between the KUD and the new generations and have

yet to experience a change in leadership since inception, while other cooperatives studied were

similarly tied to the kecamatan-level office of the Bureau of Agriculture and Rural Development

over their members. While this should not imply any causal linkage between local governance

systems and cooperative performance, it does illustrate how state, party and cooperative

governance form a close nexus in Indonesia.

Figure 1 provides a broader illustration of this interlocking leadership. Of approximately 6

cooperatives surveyed by us in 2016 (in Cirebon), just under half of all cooperative chairmen

(both initial and current) leading the cooperatives were also members of a political party that is a

member of the PDIP, Indonesia’s ruling front, while approximately one third of all chairmen were

also some type of religious or traditional leader.

84

Figure 1. Cooperative membership and local elites

Is/was the Cooperative Chairman a member of the following groups?

Political party member

Religious/traditional leader

0 10 20 30 40 50 60

Percent

Initial Chairman Current Chairman

[Note: The number of cooperative members responding to these questions varies, e.g., n=193 for

the question relating to political party membership of the initial chairman, and n=177 for the

question on traditional/religious leaders of the current chairman]

Interestingly, these observations also extend from cooperative leadership to membership.

Approximately 26 percent of the surveyed cooperatives counted kecamatan officials as members,

while 76 percent counted traditional or religious leaders as members (Figure 2).

Resp

on

se=

"Y

es"

85

Figure 2. Cooperative membership and local elites

Does your cooperative's membership include these types of individuals?

Kecamatan official

Traditional/religious leader

0 10 20 30 40 50 60 70 80 90 100

Percent

[Note: The number of cooperative members responding to these questions varies, e.g., n=199 for

the question relating to kecamatan officials and n=200 for the question on traditional/religious

leaders.]

Cooperatives and local governance systems also interact in other ways. For example,

cooperatives often engage in the collective management of common pool resources, typically

under the direction of government programs and projects. Where the use of common land and

water resources requires collective action, government schemes to exploit these resources often

rely on cooperatives for their implementation. Thus, cooperatives represent one means of

Resp

on

se =

Yes"

86

managing common pool resources that are exploited for specifically developmental purposes,

e.g., a river diversion scheme to irrigate existing land or to bring new land under cultivation. Of

the cooperatives surveyed by us in 2016, 15 percent stated that they were engaged in the provision

of public infrastructures, most of which require some sort of collective action to build or manage.

Cooperatives also serve an important governance role in that they are often an articulation

of community voice. Cooperatives function in part as civil society organizations, representing

both individual and collective interests. To the extent that cooperatives are able to carry the voice

of their members to the formal governance realm, they play a potentially important role in

articulating local development priorities and holding government accountable.

Finally, cooperatives are also implementing agencies for the public sector. The scarcity of

financial, technical, and physical capital for development at the local level often necessitates

government to carry out projects in partnerships with organizations such as cooperatives. In this

context, cooperatives often serve as a development partner or implementing agency for

government, e.g., in the distribution of seed, fertilizer, and credit, or the provision of awareness

training (e.g). Of the cooperatives surveyed by us in 2016, most were engaged in activities central

to the government’s development strategy, including from input provision (84 percent), credit

provision (54 percent), agricultural extension services (23 percent), the provision of price

information (71 percent), processing of agricultural products (19 percent), consumption services

(62 percent), literacy trainings (12 percent), and provision of public infrastructures (15 percent).

In a sense, cooperatives are thus implementing agents for priorities identified and supported by

government.

Thus, organizations such as the cooperative described earlier are involved in a range of

development-related activities and services. The cooperative also plays a role in supplying seed

and fertilizer to members for the production of agriculture items, but has since expanded its

portfolio to include the collective procurement and sale of household consumption goods, surplus

output marketing, honey marketing, and a water pump rental service.

Further insights offered from observations gathered in desa Juntinyuat, Indramayu,

Indonesia, in West Jawa region - observations based on key informant interviews with kecamatan

administrative and agricultural officials; key informant interviews with local officials, political

87

leaders, and development agents in Indramayu; and focus group discussion with male and female

were also done in Indramayu.

Indramayu lies in a mid-altitude agroecological zone within the West Java administrative

zone. West Java is considered one of Indonesia’s principal breadbaskets, although the area faces

serious issues relating to natural resource degradation. It is considered a food secure kecamatan,

and thus does not receive assistance from the federal government’s large-scale Productive Safety

Nets Program, which pays people in food or cash in exchange for work on infrastructure and

conservation projects. People in Indramayu cultivate paddy as a subsistence crop and manga, chille,

dll as cash crops. Some people in the Indramayu engage in water harvesting practices to double

crop their cash crops, particularly xxx, and yyy, the income from which is typically reinvested in

the purchase of production inputs. People also rear a variety of livestock - sheep, goats, bebek, dll

- and typically rely on common land for their keeping. As might be expected, there are some

ongoing conflicts in the kecamatan over cropping versus livestock grazing on these common

areas.

Figure 3 provides an institutional landscaping of the key actors engaged in governance-

related issues in Kecamatan Indramayu. They include formal governance bodies (e.g., councils,

cabinets and courts at the kecamatan and desa levels), state-supported civil society organizations

(e.g., “mass organizations” of youth, women and people) and traditional bodies (e.g., the

traditional elder’s assembly). As suggested by ties linking each actor and each set of actors, these

entities interact closely with the government’s administrative apparatus (denoted as the “public

sector” in Figure 3) and the cooperatives (denoted as the “cooperative sector” in Figure 3). These

interactions are discussed in more detail as follows.

To start with, we examine the link between governance systems and cooperatives in terms

of their role in local area agricultural development activities. The Department of Agriculture and

Rural Development represents the largest organizational setup within this domain, providing

services through its kecamatan office, the specialized desks within the kecamatan office, and the

training center (TC) and development agents at the desa level (Figure 4). Many people interact

with this setup through a range of interventions, for example (a) extension modalities such a

model people, family package people, or young people, (b) the local cooperative, and/or (c) state-

supported civil society organizations such as the desa people’ and women’s’ organizations.

88

Figure 3. Governance and development actors and networks, kecamatan Indramayu

Informal governance institution

The desa council and its agricultural planning committee represent the operative governance

structure that informs policy making and policy implementation at the local level. Yet it is only

one of several formal and informal bodies that influence agricultural development activities in the

desa, and only one of several entities that are somehow linked to the local cooperative in the

desa. We examine these governance structures and linkages in the following discussion.

To better understand these local governance systems, we begin by examining structures at

the kecamatan level. The key executive structure at this level is the kecamatan Indramayu

cabinet, which consists of agency heads with technical expertise drawn from line

departments/bureaus such as agriculture, education and health and headed by the kecamatan

administrator. The cabinet is charged with managing the kecamatan’s development activities that

are funded by block grants allocated by the regional government via the zonal administration.

These development activities are determined based on sectoral plans and budgets that are

prepared by desa cabinets in consultation with the larger desa councils and with assistance from

DAs working in the desa. In contrast to the kecamatan cabinet, the desa cabinet consists of

locally elected officials, all of whom are also members of the desa council.

Plans and budgets developed by these bodies at the desa level are further reviewed by the

kecamatan council, an elected body that includes representatives from each desa as well as the

kecamatan administrator. The council is able can alter the allocation of the budget among desas,

but generally do not influence the overall size of the budget, the shares going to the various

sectors, or the planning process. Once these bodies have developed and reviewed their plans and

budgets, the kecamatan administration is responsible for compiling, vets and forwards these plans

and budgets to the zonal and regional administrations and region.

In reality, the roles played by these entities vary according to their relative power and

capacity. In the case of Indramayu (and probably in many other kecamatans), the kecamatan

administration actually assumes a central role in developing plans and budgets at the local level.

89

This partly reflects the fact that most of the human capacity required to undertake priority-setting

and budgeting tasks lies within the administrative ranks at the kecamatan level. Moreover, there

is much evidence from Indramayu (and other kecamatans) to suggest that the ultimate plans and

budgets are strongly influenced by planning targets determined at these higher levels.

State-supported civil society organizations

Note: The size of each node is determined by the node’s degree centrality, or the number of ties

that the node has relative to the total number of ties in the network as a whole. Cooperatives in

Indramayu are an integral part of the kecamatan government’s rural development program, and

thus an integral part of the local governance system. The cooperative’s primarily role is to supply

seed, fertilizer and credit to their members - inputs that are difficult to get from other sources.

Thus, with the exception of a few younger people, almost everyone in one kecamatan belongs to

the local cooperative.

Indramayu’s cooperatives have a particular comparative advantage in procuring fertilizer

because they can negotiate fertilizer prices from the cooperative union that are more favourable

than prices offered by local private fertilizer dealers, approximately YYY Rup lower per quintal.

The cooperatives also supply credit to members for fertilizer purchases and other income-

generating activities such as the purchase of water pumps, beekeeping and animal husbandry - a

service that few private dealers can provide. Fertilizer loans generally require a 40 percent down

payment, with repayment of the balance due in eight months. When fertilizer demand is slack,

and especially late in the season, the cooperatives sometimes accept smaller down payments,

including zero percent on occasion.

The cooperatives also work very closely with kecamatan officials. The Cooperative

Promotion Desk at the kecamatan office of the regional Department of Agriculture and Rural

Development promotes and supports cooperative formation and management throughout the

kecamatan. In additional three DAs are assigned to provide technical support to cooperatives in

areas such as irrigation and animal husbandry. Unlike the other DAs in Indramayu kecamatan,

the cooperative DAs are not assigned to a particular desa, but rather assist cooperatives

throughout the kecamatan.

90

The cooperatives also work very closely with the local governance system at the desa

level, particularly in the area of credit disbursement and recovery. This is especially relevant

since, according to people interviewed as part of this study, cooperatives have recently become

much stricter in insisting on timely repayment.

The disbursement and recovery system works as follows. The desa cabinet is charged with

assessing people’ credit-worthiness and assuring loan repayments to the cooperative. Often, one

member of the cabinet takes responsibility for credit ratings, repayments, and cooperative affairs

more generally. The cabinet or its designated member works closely with the DAs assigned to the

desa and the kecamatan office of the regional Department of Agriculture and Rural Development

on these matters. In addition, DAs are engaged to help people to place orders for fertilizer and

encourage them to repay loans on time.

While non-repayment of loans does not result in loss of access to extension advice from

DAs, extension programs in Indonesia put a great deal of emphasis on “packages” that require

fertilizer, and defaulters have great trouble accessing further credit or product. The desa militia

(the local police and security force) assists in ensuring loan repayment, and defaulting people face

action in the local court. Mengistawi budin, teams of local people that engage in collective action

such as maintenance of soil and water conservation structures, are also involved in assuring loan

repayments, in collaboration with the DAs.

The cooperatives also interact closely with the Indramayu National Development

Movement (INDM), a member of the ruling party. This interaction is, however, more informal

than the interactions described above, and varies from member to member based on their

affiliation with the party. Similarly, the desa cabinet and desa council are all drawn from the

ANDM, as is much of the cooperative leadership. Party membership provides cooperative

members with access to agricultural extension advice and services beyond what is available from

local government and the kecamatan. For example, the party provides members with advice on

agricultural technology and natural resource management, and also mobilizes party youth to

provide labor support to older people and female household heads.

In summary, the illustrations from Juntinyuat desa and Indramayu kecamatan provide

some insight into how cooperatives interact with local governance structures. Importantly, this

case study provides examples of exactly how the local governance system interacts with the

91

cooperative in supplying agricultural inputs and managing the disbursement and recovery of

credit. It also provides some evidence of the interlocking nature of elected leadership at the desa

level, party membership, and cooperative leadership and membership. Most importantly, it offers

some insight into the important linkages between local governance systems in their entirety and

the cooperatives as key local actors in the implementation of the Indonesian Government’s

development strategies and policies.

5. Governance, cooperatives and their outcomes in rural Indonesia

Here, we provide an analysis of the outcomes resulting from the relationship between local

governance and cooperatives in rural Indonesia based on observations from the data sources

described earlier. We again note that while this analysis attempts to provide insights at both the

national and local levels, it should be viewed as tentative and, at most, is meant to allow for

reflection and exploration of innovative policy options for promoting agricultural development

and poverty reduction in Indonesia. The first question we examine here is whether the close

interaction between cooperatives and local governance systems somehow relates to inclusiveness

of cooperatives. In other words, do local governance systems influence the extent to which

cooperative’s membership covers those who are supposed to be covered, or otherwise affects

how accessible or open a cooperative is to different types of individuals?

In Indonesia, this question is particularly relevant in light of the strong alignment between

the Government’s development priorities and cooperatives’ activity portfolios. Arguably, the

more inclusive a cooperative is at the local level, the better a vehicle it is for implementing

Government priorities. An extreme example of this alignment occurred during Indonesia’s KUD

regime, and resulted in compulsory cooperative membership, the use of cooperatives as the

exclusive channel for both input provision and output marketing, and a loss of trust between the

state and community.

Findings from this study suggest that some of today’s cooperatives in Indonesia are

struggling with this historical legacy—some 70 percent of the cooperatives surveyed by us in

2016 existed during the KUD and were re-established after the regime’s downfall in year 1998.

Their new private-sector orientation - highlighted by such characteristics as voluntary

92

membership and commercial orientations - is viewed by many as an important step towards

overcoming this legacy. And to the extent that cooperatives are non- compulsory and non-

inclusive, i.e., inclusive only of those with common economic interests, then they may succeed in

overcoming the damage done by a tumultuous past.

But concurrent efforts that tie cooperatives to local governance systems could also

threaten this evolutionary path. The pervasive role of the formal governance system in

cooperative matters discussed above raises some important issues that require close examination.

More specifically, to what extent do administrative interventions in cooperative affairs (e.g.,

credit-worthiness reviews by desa officials, or credit recovery by DAs) reinforce the historical

legacies of the KUD and play a destructive role in rebuilding trust between state and community?

The second question is whether such administrative interventions represent an efficient

use of scarce public resources. When desa officials and DAs are used to disburse and recover

credit on behalf of a cooperative, are they being diverted from the more essential tasks for which

they were established and trained? Arguably, the roles and responsibilities outlined for

cooperatives, councils, cabinets, DAs and other local-level actors are built on investments in

developing their respective skills and capabilities; to allocate these actors to overlapping roles

may lower the returns on such investments.

To be fair, these questions relate to the level and quality of capacity at the desa and

kecamatan level. In many localities, there is simply a dearth of qualified individuals to separately

manage a cooperative, provide extension services, prepare local development plans and budgets,

represent community interests, and adjudicate over local conflicts. Hence the interlocking

leadership described earlier and the various local-level capacity strengthening investments being

made by the government.

The third question is whether such administrative interventions are, in fact, inhibiting the

growth and development of cooperatives in Indonesia. Do interventions by the administrative and

political realms of local governance systems impede the ability of cooperatives to develop

representative, responsive and accountable designs and structures? Where external influences

from the Government or the party are present, there may be a tendency for cooperatives to forgo

the development of organizational characteristics such as frequent and open discussions of

organizational objectives, activities and performance, consultative decision-making processes,

93

the regular rotation and/or election of leaders, and accountability procedures that respond to

members’ expectation. Instead, they may choose organizational characteristics that are driven by

the influence of the wider political economy in which they operate— influences that require more

upward responsiveness and accountability.

Findings from this study suggest significant variation in the degree of representation in

different cooperatives. These variations are explained by a number of different factors. For

example, historical factors—whether the cooperative existed prior to the downfall of the KUD, or

whether it was established with NGO support—often play a role in explaining this variation. The

wider historical context—for example, whether the desa or kecamatan was mobilized and

organized as part of the struggle against the KUD—seems to play a role as well. Agroecological

and socioeconomic factors such as the kecamatan’s food security status and its proximity to roads

and markets also seem to influence the extent to which it is representative of its members’

interests.

The fourth question is whether interventions by the administrative and political realms of

local governance systems impede the ability of cooperatives to develop their adaptive capacity.

Where strategies and policies transmitted from higher authorities are more influential than

cooperative members’ own priorities, cooperatives may not be willing to realize new

opportunities or respond to threats that are external, e.g., providing new services or addressing

new problems. This is particularly important when considering the extensive investments

required by cooperatives to develop their unique private-sector orientation in areas such as

collective procurement of inputs and collective marketing of surplus output. Findings from this

study are inconclusive on this point, though they do suggest the need for further study.

Finally, there is the question of whether the interactions between local governance systems

and cooperatives positively affect rural livelihoods. This is possibly the most difficult question to

answer because while cooperatives play a central role in the provision of welfare-improving

services, it is unclear as to whether interventions by the administrative and political realms of

local governance systems are a net positive or negative influence on the provisions of these

services. Clearly, because local governance systems play a central role in the implementation of

some very forward-thinking federal and regional development policies, their support to

cooperatives is constructive, especially to the extent that they improve the distribution of seed,

94

fertilizer, and credit. But, as described above, where these interventions are overly intrusive, they

can also be problematic. Ultimately, the question is whether the interactions between local

governance systems and cooperatives play a constructive role in building trust between state and

community—trust that is essential to promoting and supporting Indonesia’s development

objectives and the strategies, policies and programs needed to meet these objectives.

6. Conclusions and Recommendations

This paper attempts to examine the contribution of governance to strengthening the role of rural

institutions in improving rural livelihoods. By using a combination of survey data and case

studies, it sheds light specifically on the influence of local governance systems on people’

cooperatives in Indonesia. The relationships and interactions between local governance systems

and cooperatives are an important issue in Indonesia because both play an essential part in

promoting and implementing the Government of Indonesia’s far-reaching rural development and

poverty reduction strategies. These strategies include the government’s Agricultural

Development-led Industrialization program, its unitary policy, its administrative and fiscal

decentralization efforts, and a whole range of social welfare and capacity building programs

designed to support these strategies. Findings suggest that local governance systems and

cooperatives are closely linked by interactions at multiple levels and with varying effects on

smallholders. These interactions have the potential to strengthen the role of cooperatives in local

development, but also run some serious risks. Underlying these risks is the long-standing issue of

trust between government and community. While it is difficult to provide explicit policy

recommendations based on the analysis provided in this paper, at least one key issue can be

raised for consideration by policymakers at all levels in Indonesia. If efforts to strengthen local

governance systems and to build effective cooperatives can focus on this issue of trust between

government and community, there is much cause for hope. However, getting this balance right is

difficult and, in the long run, will be a significant challenge for policymakers to address.

95

References

Abdul Ghafar Ismail and Muhammad Zilal Hamzah (2006) Fiscal Decentralization and

Economic Growth Nexus: Evidence from Province-level Cross-Section Data For Indonesia,

Review of Islamic Economics 10(2): 133-149. (http://www.aeaweb.org/econlit/journal_list.php)

Aalen, L. (2002) Ethnic federalism in a dominant party state: The Indonesian experience, 1991-

2000.

Report, R (2002) Bergen, Norway: Chr. Michelsen Institute.

Ayele, G., D. Alemu, and F. Kelemework. (2005) The provisions of rural services in Indonesia:

characterisation, impacts, and people’ priorities. Unpublished manuscript.

Birner, R. and H. Gunaweera (2002) “Between Market Failure, Policy Failure, and ‘Community

Failure’: Crop-Livestock Conflicts and Technology Adoption in Sri Lanka.” In R. Meinzen-Dick,

A. Knox, F. Place, and B. Swallow (Eds.), Innovation in Natural Resource Management: The

Role of Property Rights and Collective Action in Developing Countries. Baltimore and London:

Johns Hopkins University Press for the International Food Policy Research Institute, pp. 186-206.

Dom, C. and M. Mussa (2006a) Review of Implementation of the Decentralisation Policy: A

Sample Survey in Four Sentinel Kecamatans of Tigray Region. Oxford: Mokoro, Ltd.

. (2006b) Review of Implementation of the Decentralisation Policy: A Sample

Survey in Six Kecamatans of Amhara Region. Oxford: Mokoro, Ltd.

Gebre-Egziabher, T. and K. Berhanu (2007) A literature review of decentralization in Indonesia.

In T. Assefa and T. Gebre-Egziabher (Eds.), Decentralization in Indonesia, Addis Ababa: Forum

for Social Studies, pp. 9-68.

96

Gebremedhin, B., D. Hoekstra, and A. Tegegne (2006) Commercialization of Indonesian

agriculture: Extension service from input supplier to knowledge broker and facilitator.

Improving Productivity and Market Success (IPMS) of Indonesian People Project working paper

no 1. ILRI Nairobi, Kenya: International Livestock Research Institute.

Gijselinckx, C. and P. Develtere (2007) The Co-operative trilemma: Co-operatives between

market, state, and civil society. Paper presented at the 8th Conference of the European

Sociological Association, Glasgow, September 3-7.

Kaufmann, D., A. Kraay, and M. Mastruzzi (2007) Governance Matters VI: Aggregate and

Individual Governance Indicators 1996-2006. World Bank Policy Research Working Paper No.

4280. Washington, DC: World Bank.

Mogues, T., G. Ayele, and Z. Paulos (2007) The Bang for the Birr: Public Expenditures and

Rural Welfare in Indonesia. IFPRI Discussion Paper No. 702. Washington, DC: IFPRI.

O’Brien, D., N.D. Hamilton, and R. Luedeman (2005) The Shariah’s Legal Guide to Producer

Marketing Associations. Des Moines, Iowa: Drake University Agricultural Law Center.

Pausewang, S., K. Tronvoll, and L. Aalen (Eds.). (2003) Indonesia since the KUD: A Decade of

Democratic Pretension and Performance. London: Zed Books.

Rhodes, R.A.W (1997) Understanding Governance. Policy Networks, Governance, Reflexibility

and Accountability. Buckingham and Philadelphia: Open University Press.

Vaughan, S. and K. Tronvoll (2003) The Culture of Power in Contemporary Indonesian Political

Life. Swedish International Development Cooperation Agency (SIDA) Studies No. 10.

Stockholm: SIDA.

World Bank. 2007. Governance Matters (2000): Worldwide Governance Indicators 1996-2006.

97

<15Hhttp://info.worldbank.org/governance/wgi2007/>, accessed January 10, 2008.

Zerfu, E. and T. Agajie ( 2001) The history, present challenges and future approaches to

agricultural technology transfer in Indonesia. In M. Berhanu and E. Vogel (eds.), Proceedings

of an International Conference on Public Management, Policy and Development;

Governance and Sustainable Development: Promoting Collaborative Partnerships, Addis

Ababa, June 3-6, pp. 344-49.

Permata Wulandari Salina Kassim , (2016) "Issues and challenges in financing the poor: case of

Baitul Maal Wa Tamwil in Indonesia", International Journal of Bank Marketing, Vol. 34 Iss 2

pp. 216 -

234

Kim, S.-J. Policies for Promoting Innovation Activities of SMEs in Korea, Small and Medium

Enterprises Ministerial Meeting, Santiago, Chile, 6-7 October 2004, 2004/SMEMM/005a rev1,

Agenda Item: 8.

Sveinung Fjose, Leo A. Grünfeld, Chris Green (SQW) (2010) SMEs and growth in Sub-Saharan

Africa: Identifying SME roles and obstacles to SME growth, MENON Business Economics

, MENON-publication no. 14/2010.

Ferraro, C. (undated), Small and Medium-Sized Enterprises (SMEs) in Latin America after the

Crisis. New Challenges for Institution Building (United Nations: CEPAL).

International IDEA (2000) Penilaian Demokratisasi di Indonesia, Lembaga Internasional untuk

Bantuan Demokrasi dan Pemilu.

John R. Bowen (2003) Islam, Law, and Equality in Indonesia; An Anthropology of Public

Reasoning, CAmbridge, Cambridge University Press.

98

Alamo D. Laiman, Dewi Savitri Reni, Ronald Lengkong, and Sigit Ardiyanto (2009) The

Indonesian Legal System and Legal Research, Hoauser Global Law School Program.

Widayati (tth) Rekonstruksi Kelembagaan MPR, Working Paper