Informal economy in Indonesia

  • A traditional market in Papua, Indonesia

  • A small shop in Timor-Leste

According to the Central Bureau of Statistics, 68 per cent of Indonesians was employed in informal economy in 2009, often with low pay, hazardous working conditions and no social security.

Despite the fact that the Government of Indonesia enacted the National Social Security System Law in 2004, which stipulated universal coverage for workers in both the formal and informal economy, only 17 per cent of the population was covered by the employment-linked system of contributory social insurance as of (ILO, 2009). Many of those who do not have access to the system are employed in the informal economy.

To address this issue, in 2009 ILO has commissioned studies and organized workshops on trends, issues, patterns and policy options relating to the informal economy. This includes a study on extending social security to the informal economy.

The ILO study suggests that the informal economy in Indonesia is a rural and urban phenomenon with a huge disparity among the regions. The size of the informal economy has been increasing since the financial crisis in 1998, which stalled the economic transformation from agriculture to industrialization in Indonesia. The study also indicates that no policy that has been implemented to date by the government has focused on the informal economy instead of formulation between 2008 and 2009 have been driven by the crisis recovery efforts.

Understanding the driving factors behind the patterns and trends of the Indonesian informal economy, and whether it is a permanent or a transitory phenomenon is a key to formulating policies that effectively addressing poverty reduction through the formalization of the informal economy.

The study on extending social security to the informal economy concludes that 80 per cent of informal workers have no social security apart from their families, and that 80% would be willing to pay for social security on a regular monthly basis.

The purpose of the study is to contribute to the discussion on realistic steps to be taken to improve the existing social security scheme, and on an effective action plan to implement a national social security system in Indonesia.