Transaction Costs and Linkage Creation: Experiences from Indonesia

Abstract

High transaction costs are created by the lack of interaction, trust, and information flows between sectors and regions in poor countries. This paper assesses impacts of Indonesian linkage strategies on transaction cost reduction in rural businesses. We also discuss the general relevance of the linkage term and policy alternatives for employment creation and business development in poor areas today. The research is mainly based on extensive literature reviews, and also on sessions of fieldwork in Indonesia. Conclusions on effects of public linkage strategies are generally negative. Good intentions have been spoiled by elite interests and corruption. Alternatively, we argue that programmes for transaction cost reduction in rural areas should focus on problems of information asymmetry, be more politically conscious, and based on community interests and initiatives. Cooperatives may have better chances to succeed in linkage creation after the breakdown of traditional power structures.