T This study investigates the nexus between the underground economy and industrialization in indonesia for the 1996–2024 period. to address the risks of simultaneity and endogeneity bias, a simultaneous equation modeling approach with the two-stage least squares (2sls) estimation method is employed. the findings reveal a significant positive reciprocal relationship, industrial expansion triggers the growth of the shadow economy, while the underground econnomy acts as a crucial \\\"efficiency subsidy\\\" for formal manufacturing competitiveness. these results validate the \\\"grease the wheels\\\" hypothesis and confirm that indonesia has not yet reached the “lewis turning point”. the primary determinants of the underground economy are significantly driven by rising income inequality and tax burdens, while institutional quality acts as a critical disincentive. furthermore, the study identifies a failed structural transformation through a series of anomalies, foreign investment remains an enclave, gross fixed capital formation is misallocated (becoming counterproductive to manufacturing) and educational investment paradoxically expands the informal sector due to skill mismatches. systemically, indonesia is trapped in persistent economic dualism. it is recommended that the government reorient investment allocation toward technological deepening and transform fiscal policies from repressive to incentive-based to encourage inclusive economic formalization.