The impact of circular economy and community development on human wellbeing in informal settlement areas in Indonesia: a systematic literature review

BackgroundIndonesia’s rapid urbanization has led to a proliferation of informal settlements facing environmental degradation and social marginalization. The circular economy (CE) is promoted as a sustainable solution, but its dominant discourse remains technocentric and rooted in Global North industrial contexts.Field interventionThis review intervenes in a critical gap in sustainability science: the misrecognition of necessity-driven, grassroots circular practices within dominant technocentric CE frameworks. While mainstream CE discourse emphasizes formal industrial systems and corporate business models, it systematically overlooks the lived realities of circularity in the Global South—where scarcity, informality, and community-based resource recovery constitute not exceptions but foundational patterns of material circulation. This analytical blind spot has consequences: it renders invisible the contributions of millions of informal workers, obscures the trade-offs they bear, and produces policy prescriptions ill-suited to contexts where formal infrastructure is absent but informal circular systems thrive.Research gap and objectiveBuilding on this field intervention, the study addresses a specific analytical gap: the lack of systematic synthesis examining how necessity-driven, grassroots circular practices affect multidimensional human wellbeing in the informal settlements of the Global South. While reviews exist on CE policy frameworks and industrial symbiosis, and others examine informal settlement housing or infrastructure, none have systematically mapped the five-dimensional wellbeing outcomes—economic, social, environmental, health, and empowerment- of community-level CE practices in this context. This study addresses this gap by synthesizing evidence on how CE initiatives function within Indonesian informal settlements and their subsequent impact on wellbeing.MethodsA systematic literature review was conducted following PRISMA 2020 guidelines. Databases included Google Scholar, Web of Science, Scopus, and PubMed, targeting peer-reviewed studies on CE, wellbeing, informal settlements, and Indonesia (2012–2025). A total of 34 studies were included in the qualitative synthesis. The Mixed Methods Appraisal Tool (MMAT) was used for quality assessment; of the included studies, 12 were rated high, 18 moderate, and 4 low qualities.Key resultsThe review yields one overarching finding and several supporting insights. The overarching finding is a “wellbeing paradox”: grassroots circularity provides vital economic livelihoods but simultaneously exposes workers to severe health and social risks—a tension that dominant technocentric CE frameworks fail to capture because they treat “jobs created” or “materials recovered” as unambiguously positive indicators, obscuring the lived trade-offs experienced by informal actors. Evidence from aggregated studies indicates that waste pickers can earn average incomes reported to be around $216 USD/month, and informal sector workers recover a significant portion reported as 33.8% of urban plastic. CE practices also serve as a driver for gender equity, with community waste banks enabling women’s economic participation. Supporting insights include: CE practices contribute to wellbeing through economic, social, environmental, and health pathways; effective initiatives are “socially embedded” rather than technically driven; and polycentric governance (community hubs, waste banks, multi-stakeholder coordination) rather than technical fixes or top-down state control. Policy implications include formal recognition of informal workers with healthcare access, inclusive Extended Producer Responsibility mandates, and fostering polycentric governance platforms.ConclusionThis review positions informal settlements not as environmental liabilities but as critical incubators for inclusive circularity, revealing the need for a transformational circular society framework centered on recognition, protection, and social equity.