Historical view on informal sector

The Jakarta Post, Jakarta

Lea Jellinek, in her book titled, The Wheel of Fortune, the history of a poor community in Jakarta (1991), describes the changing relationship between the formal and informal sectors as falling into three phases:

First, from the late-1950s to the mid-1960s, the "modern" sector declined while the small-scale sector continued to grow, largely because of a vacuum in production, retail and transport.

During this period, both public utilities and large-scale private enterprises could not function properly. Government agencies were hampered by too many employees, poorly qualified staff, irrelevant rules and regulations, extremely low salaries and corruption.

As the formal sector did not satisfy most people's basic needs for food, transport, amenities and housing, an estimated 80 percent continued to patronize the goods and services of vendors, pedicab drivers, messengers and small producers.

Second, during the initial five to ten years of the New Order government (965/68 to 1975/78), both the formal and informal sectors of the economy thrived.

The rehabilitation of government-owned utilities by the late 1970s and the promotion of large-scale private companies resulted in more centralized and efficient food distribution, transport, electricity, gas, water and telephone facilities. These developments supplanted the need for many informal sector activities.

Third, after the mid-1970s, the very growth of the large-scale economic sector resulted in structural and locational changes especially at the city center, which undermined the informal sector.

The rise in incomes during the 1970s caused the expanding middle class to change its patterns of consumption. The middle class could now afford to buy expensive items, such as cars, refrigerators and large houses. As a result, becak drivers and push-cart vegetable vendors lost a remarkable number of customers.

Changes in customer tastes and technology caused certain products to become obsolete, such as banana leaves being replaced by plastic bags, pottery and coconut husks by imported porcelain, fresh avocado and mango juice by mass-produced and bottled tea and beverages.

But after the economic crisis in 1997, a decline in the formal sector caused a boom in the informal sector. As many companies went bankrupt and millions of people became jobless, many went into the informal sector, which functioned as a safety valve for the general public.