Summary
Shadow economy is not uncommon in Indonesia. As a matter of fact, shadow economy contributes significantly to the economy of Indonesia, providing economic opportunities to the people of Indonesia in terms of employment, food and shelter. A study by Asian Development Bank (ADB, 2011) reports the shadow economy to the gross value added of Yogyakarta and Banten was 37% and 27%, respectively. The firms in Yogyakarta and Banten that participate in the shadow economy are significant. Rothenberg, Gaduh, Burger et al. (2016) indicates that 93% of firms in Indonesia were in the shadow economy, however, this firms are mostly small in size; and firms remain in the shadow economy for not able to access the financial markets. One of the reasons given due to the complicated procedures associated in getting loans (ADB, 2011). This paper explores the link between the shadow economy and financial sector development in Indonesia; with the inclusion of control variables such as national income, foreign direct investment (FDI) and misery index.
