How efficient and productive are co-operatives in Indonesia? Empirical evidence from data envelopment analysis

Abstract

Article 33 of the 1945 Constitution of Indonesia positioned co-operative as a pillar and backbone of the national economy. To optimally function as the pillar and backbone of the economy, the co-operatives should be managed efficiently and productively. Considering their pivotal roles in the Indonesian economy, this study is aimed at empirically measuring efficiency and productivity of the co-operatives across 33 provinces nationwide. Three inputs (i.e., own capital, external financing, and board size) and one output (co-operative surplus) over the period 2010-2015 are analyzed using Data Envelopment Analysis (DEA) with Malmquist Index. The study documented that the co-operatives were highly inefficient, indicated by the average level of inefficiency of 47.6%. Out of the co-operatives in 33 provinces, 42.42% were found to record efficiency level of less than 50% and only 12.12% of them were fully efficient. In addition, the study also documented that, of 33 provinces, only the co-operatives in 14 provinces were found to experience an increase in their total factor productivity. The co-operatives in the province of East Nusa Tenggara recorded the highest productivity progress by 49.9%, while the co-operative in the province of Bangka Belitung recorded the highest productivity regress by -24.4%. Overall, the productivity level of the co-operatives only slightly increased by 9.9% over the study period nationwide, which was mainly contributed by an increase in technical efficiency. These findings implied that to further enhance the productivity level of the co-operatives, improving their pure efficiency should be prioritized, followed by enhancing their scale efficiency and technical efficiency. The co-operatives should provide regular training for their staff, professional management, adopt advanced technology, and enlarge their size by merging small co-operatives become a larger entity.