Pancasila Economics and Cooperatives: The Path to Digital Economic Democracy in Indonesia

Indonesia’s constitution emphasizes the role of the people as the major players in the country’s economy. Indonesia’s founding fathers defined their approach to the economy with the intention of freeing the country from the shackles of economic colonialism imposed by the Dutch during their colonial rule, as the Dutch implemented a capitalist system that drained the country’s wealth for their own benefit. The Indonesian people’s struggle for independence was driven by the desire to reclaim their economic and political sovereignty. Today, Indonesia continues to strive for economic growth and development that prioritizes the well-being and prosperity of its people.

Indonesia’s economic system was designed by Mohammad Hatta, a key figure in the country’s independence movement. Hatta’s economic concept, known as the Pancasila Economic System (PES), was based on Indonesia’s ideology of Pancasila, which draws from indigenous social values and incorporates modern economic theory. The PES is a unique system that reflects the values and aspirations of the Indonesian people and stands in contrast to the economic models imposed by foreign powers during the colonial period. Through the PES, Indonesia strives to create an economy that is just, sustainable, and reflective of its cultural heritage.

Bung Hatta was a visionary who held a unique perspective that differed from all the economic schools of thought that existed at that time. He looked towards the future and created a modern economic system that also integrated the wisdom of the local Indonesian people. The Pancasila Economic System was conceptualized based on the fifth principle of Pancasila and Article 33 of the 1945 Constitution. It sought to ensure that Indonesia’s resources and wealth were used for the benefit of the Indonesian people and not exploited by foreign powers or a small elite group. The system aimed to empower the people by giving them control over the country’s natural resources and industries. The Pancasila Economic System was a bold and innovative idea that reflected the spirit of independence and the desire to build a better future for all Indonesians.

Children hold the symbol of the Pancasila. Photo credit: Angga Yuniar

Pancasila, the foundational philosophy of Indonesia, serves as the philosophical basis of the country’s economic system. This system is rooted in the principle of kinship, which lies at the heart of the nation’s economy. Despite this, few Indonesian economic actors truly grasp this philosophy, including those who identify as Pancasilaists but are swayed by neoliberal-capitalism. Sadly, these economists are currently at the helm of the nation’s economy, carrying out the desires of global investors and financial institutions. As a result, the economic system is not working in the best interests of the Indonesian people, as originally intended by Bung Hatta and the founding fathers. It’s time to return to the roots of the Pancasila Economic System and ensure that it serves the needs of the people, rather than catering to external interests.

The Pancasila Economic System prioritizes economic democracy as its fundamental principle, making it the first of its kind. Bung Hatta recognized the need for economic democracy as a prerequisite for achieving political democracy. Even before independence, he cautioned against the influence of capitalists in shaping government economic policies.

The objective of economic democracy is decentralization and equal participation of all members of society in policy making, based on their respective abilities. This aligns with the 2nd principle of cooperatives “Democratic Member Control.”

Indonesia aims to achieve prosperity and justice by challenging colonialism and imperialism. he Pancasila Economic System (PES) is firmly rooted in the notion of kinship, which encompasses a vast network of interrelated relationships and close-knit bonds based on shared family ties, biological or cultural links, and social connections between individuals. By drawing on this concept, the PES emphasizes the importance of nurturing a sense of communal responsibility and interdependence, wherein individuals are viewed not in isolation but as integral members of a larger social fabric. In this way, the PES places a significant emphasis on promoting cooperation and mutual support. This approach aligns with our objectives to create a just economy that is not influenced by external factors such as capitalism. The principle of kinship fosters a cooperative and egalitarian society, enabling all members to participate according to their abilities.

PES has three economic pillars: state-owned public companies, cooperatives, and the private sector. The most significant pillar is cooperatives, owned by their members. The state only handles crucial aspects of the economy, while the private sector manages the rest. Bung Hatta made cooperatives the primary foundation of the Indonesian economy, allowing for the application of economic democracy. This concept challenges the economic power of capitalists and enables a participatory democratic society. The economy is controlled by the people, rather than investors or the government, thereby maintaining national sovereignty.

National sovereignty is crucial for the independence and freedom of a nation. It is the noble aspiration of Indonesia to create an independent and peaceful society where all ethnic groups work together to build a Pancasila society without any coercion or intimidation. An independent and peaceful people is the noble aspiration of Indonesia as a nation, in which all ethnic groups in the Indonesia Archipelago work together to build a Pancasila society without coercion and intimidation from any party.

The vision of our founding fathers for a prosperous and equitable society remains a distant dream, as corruption, collusion, and nepotism have plagued our country since the early days of independence. The collusion of political elites and private sectors for their own benefit has marginalized the people and left them in the background.

Moreover, wealth inequality in Indonesia is a pressing issue that has deepened over the years. According to an Oxfam Report, Indonesia is among the most unequal countries in East Asia. The concentration of wealth in the hands of a few is leading to social unrest and hindering the development of a just society. It is crucial for Indonesia to address these challenges and move towards a more equitable and democratic society.

Shockingly, the top 1% of the population controls roughly half of the country’s national income, while the private sector dominates the economy, with the state a distant second and cooperatives trailing far behind. This state of affairs stands in stark contrast to the principles of economic democracy and kinship that were espoused by the country’s founding fathers, and underscores the need for a more equitable and just economic system.

Indonesian Cooperatives need to demonstrate their superiority over conventional capitalist corporations by showcasing their practical advantages in society. Unlike traditional corporations, cooperatives eliminate the inherent conflict between employer and employee. Every member shares the responsibility for the survival of the cooperative, and the primary goal is mutual benefit rather than profit. 

Cooperatives, the foundation of people’s prosperity, are marginalized in the current economy. The majority of Indonesians lack financial capital, affecting their mindset and nutrition, with a lack of competency in our education system. 

Cooperative program for our society is urgently needed. Not only in business economic terms but also to create community wealth based on mutual benefits. Bung Hatta stated that Indonesian cooperatives have important tasks for our people to overcome our economy and social problems.

  1. The cooperative’s primary goal is to increase the production of essential goods, such as shelter, food, and clothing, in order to increase not only the quantity of the production line but also the intensity of the work, which can be produced independently in our country, thereby reducing the import of raw materials.
  1. The cooperative ought to improve the quality of the products produced by the people. For example, the cooperative should transform the corn produced into a more desirable product, such as corn flour or corn oil, thereby increasing the income of the cooperative and corn farmers.
  1. With its economies of scale, the people-owned cooperative could generate distribution channels from the producer to the end-user at the lowest possible cost.
  1. The cooperative’s goal is to provide value to its members, therefore the price margin for consumer members should be as low as feasible, the price margin for producer members should be bigger than that of other businesses, and the pay for worker members should be more decent.
  1. Many people, especially farmers, are still victims of loan sharks that operate legally in Indonesia, but cooperatives may help end such financial schemes, as they have in the past.
  1. Due to the low financial literacy of the Indonesian population, cooperatives can play a crucial role in administering the financial affairs of their members, as the majority of people lack access to financial institutions and other forms of fund management.
  1. In order to help manage food security, which is crucial in Indonesia as rice is the country’s main staple food, agricultural cooperatives should be able to manage the rice granary that keeps the farmer’s stock of rice and trade it when the market requires it.
Indonesian Cooperators photo credit: Heira Hardiyanti

In Indonesia, cooperatives play an important role in connecting their members to local markets, such as fairs, and preparing them for future participation in more formalized banking systems. But to better leverage the opportunities of the digital economy, cooperatives can embrace worker cooperatives and multi-stakeholder models, and establish public-private partnerships. Ultimately, also a commitment to digital transformation, a digital commons, and open source is a commitment to youth, in the agricultural sector and beyond.

To that end, the first step is to ensure access to internet infrastructure. This work requires practice-facing research, practical coordination, and the development of innovative novel business models. The Pancasila Economic System and the cooperative model prioritize economic democracy and the principles of kinship, offering a unique opportunity for Indonesia to build a more equitable, just, and prosperous future that reflects the values and aspirations of its people.

Learn  more:
Cooperatives in Indonesia
The Role of Cooperative in the Indonesian Economy