Shadow Play: Understanding Indonesia's Informal Economic Landscape & Role in Society

However, there’s also a very different form of shadow play ongoing in Indonesia; one that is present on basically every street, in every town and city. It is one that defines the Indonesian economy by (largely) shaping its structure, and therefore it also has a huge impact on Indonesian society as a whole.

In this article we focus on the informal economy of Indonesia (or shadow economy, although we explain below that both terms are not completely the same) and discuss its crucially important role in Indonesian society. This importance, in fact, makes it very hard for authorities to reduce the size of this country’s informal economy as a too harsh approach would only inflict social and economic damage on society.

The Huge Informal Sector of Indonesia

According to data from the Indonesian Chamber of Commerce and Industry (Kadin Indonesia), released in 2023, a whopping total of 99 percent of all business ventures in Indonesia involve informal businesses. In absolute numbers, this was 66 million units of micro, small and medium-sized enterprises (MSMEs). They contributed an estimated 61 percent to Indonesian gross domestic product (GDP), and delivered employment opportunities for around 117 million workers (which is equivalent to 97 percent of the total labor force in Indonesia).

All numbers mentioned above underscore the huge role of MSMEs in the Indonesian economy. Without the MSMEs, little would be left of the Indonesian economy.

When we zoom in on informal sector workers in Indonesia, then it is best to separate agriculture from all other economic sectors as agriculture really stands out in terms of its informal nature, but at the same time plays a very large role in the economy.

Based on data from Indonesia’s Statistical Agency (or BPS), 87.3 percent of workers active in the agricultural sector of Indonesia are informal sector workers. So, one can certainly argue that agriculture, which contributes heavily (roughly 12-13 percent) to Indonesian GDP, is largely an informal affair, with a large majority of Indonesian farmers being smallholders, often operating on less than one hectare of land (these are typically family-owned and family-run using traditional cultivation methods).

Meanwhile, 46.4 percent of workers active in all other (non-agriculture) sectors are informal sector workers. While this is not as impressive as in the agricultural sector, it is still a huge number that carries consequences, both for the informal business-owner and informal sector worker (which we discuss in much more detail below).

[...]

These are the first couple of pages of the article (which covers 20 pages in total). The article discusses various matters including:

• The significance of the informal sector and shadow economy for Indonesia;
• Risks for business-owners in the informal sector;
• Risks for workers in the informal sector;
• Challenges of reducing the size of the informal sector;

The article is available in our May 2025 report. Want to order this report? The report (an electronic report, PDF, in English) can be ordered by contacting us through email and/or WhatsApp:

- info@indonesia-investments.com
- +62(0)882.9875.1125

Price of this report:

Rp 150,000 (or equivalent in other currencies)

Take a glance inside the report here!

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Thomas Higgins | 17 June 2025 23:15

Looks very interesting and I'd like to subscribe to the May report and for a few months after.
Thanks,
Tom Higgins