The Contribution of Household and Small Manufacturing Establishments to Indonesian Economic Development 1986-2000

Household and small manufacturing industries (HMIs and SMIs) are very important especially in terms of employment generation in the densely populated areas of Indonesia like Java. This is because in 1996 they accounted for 44% and 17% of manufacturing industry employment respectively, but only 6% and 5% of manufacturing industry value-added. They were even more important in rural areas because 95% and 59% of HMI and SMI employees were in rural areas and 92% and 44% of their value-added. Many of the establishments in rural areas processed imported raw materials instead of locally produced materials. The rates of growth of household and small manufacturing industries real value-added were high from 1986 to 1996 in spite of unfavourable government policies, 7.2% and 12.3% per annum, but lower than medium/large establishments at 16.4%. HMS and SMIs were hit hard by the economic crisis of 1997, especially those selling fully or partially non-tradeable goods using fully tradable inputs, although they recovered quite quickly. There is a good potential for firther development of HMIs and SMIs that can be facilitated by the expansion and improvement of financial institutions and supplies of privately delivered business services, and improved foreign direct investment and marketing, micro-establishment retailing, and local government economic policies.