The purpose of this research is to explain the processes by which communities develop their settlements outside of formal planning and regulatory frameworks in order to recommend ways these processes could be improved. Drawing on empirical evidence from the development processes of four kampung or informal settlements along the Code River in Yogyakarta, Indonesia, this research examines how, without formal-legal status over their settlements, kampung people gained the resources and security necessary to develop their settlements.The research found that the success of particular kampung communities in developing their settlements depends on the ability of kampung people to develop informal-reciprocal relations with external agencies. Although kampung people enjoy some forms of autonomy over the development process of their settlements and are able to carry out significant improvements to their settlements, their position continues to be weak. They are still very much dependent upon the assistance of the state and external agencies. The nature of policy formulation and implementation in relation to kampung problems is characterized by a fluid and reciprocal series of interrelations among many individuals and agencies, within and outside government. In this context, formal laws and regulations play a secondary role to informal-personal mechanisms. Patron-client relations exist between government officials and kampung people, and these relationships significantly determine the level of government support to each kampung. Such mechanisms are inherently unfair, because only a few kampung people have the capacity to take advantage of these mechanisms.This study concludes that the Indonesian government needs to treat housing and kampung issues as part of a broader social welfare policy and should create more transparent and fairer mechanisms to guarantee equal opportunities for access to urban resources and decision making processes. This study argues that kampung people and their local institutions, the RT and RW, have a potential for playing more active roles in the dynamic process of urban and housing development. This study suggests ways in which kampung people could be further empowered and calls for more active involvement of intermediary agencies, such as NGOs and other voluntary organizations, to assist kampung people in mobilizing their resources and negotiating with other parties. Finally, this study suggests that the governments approaches to the promotion of more formalized and regulated urban and housing development should be carefully re-examined in accordance with the social, cultural, and political contexts of Indonesian society.