(figure 4). Moreover, economic activity in the formal and informal markets seems to be intertwined. According to the latest enterprise survey in 2015, around 65 percent of formal firms in Indonesia are competing with informal firms. This contrasts for example with Thailand where only 25 percent of formal firms compete with informal firms. It is also a larger share compared to EMDEs and EAP averages (respectively 54 and 47 percent) (figure 5).<sup>7</sup> Across the country, this practice is most prevalent in Bali, where almost all firms (98 percent) report competing with informal firms. Bali is a province particularly known for its dominant service sector, especially in tourism and hospitality as well as other low-value-added services.

# **3.3 Informality at the regional level in Indonesia**

25. **Across the region, most of the provinces in the eastern part of Indonesia show a relatively higher informal economy.** Papua province has the highest informal output, comprising almost 80 percent of its economy (figure 6). This is followed by three other provinces in the eastern region (East and West Nusa Tenggara, West Sulawesi) with around 70 percent of informal output. However, with unweighted computation,<sup>8</sup> Lampung province has the highest level of informal output with the informal output capturing almost 45 percent of total economic output. Different methods of measurement of informality also resulted in a significantly different informality level. For example, an Informal Sector Survey conducted by the Statistics Agency in 2010 in two pilot provinces (Yogyakarta and Banten) used questionnaires to determine output produced by production units in the informal sector. Output informality was estimated at 37 percent and 27 percent in Yogyakarta and Banten respectively, lower than the estimation produced by the model.<sup>9</sup>

**<u>Figure 6 Output informality by regions or by provinces</u>**

<!-- Start of picture text --> A. Regional informality B. Provincial informality<br>Percent of total output Percent of total output<br>45 2019 2020 2021 2019 national lvl 50 2019 2020 2021 2019 national lvl<br>40 40<br>35 30<br>30 20<br>25 10<br>Sumatera Java/Bali Kalimantan Sulawesi Nusa Tenggara Maluku Papua Kep Riau DKI Jakarta Banten East Kalimantan Bali DI Yogjakarta Central Kalimantan West Papua West Java Bangka-Belitung East Sumatera South Kalimantan Southeast Sulawesi West Kalimantan North Maluku Maluku South Sulawesi Riau East Nusa Tenggara NAD Gorontalo South Sumatera East Java Central Java Bengkulu Papua Central Sulawesi West Sumatera Jambi North Sulawesi West Sulawesi Lampung West Nusa Tenggara<br><!-- End of picture text --> Source: BPS; World Bank Staff Calculation.

26. **The regional pattern of informal employment seems to mimic the regional pattern of output informality** (figures 7) **.** Informal employment is most prevalent in Nusa Tenggara and Papua regions, which could be explained by the nature of jobs in that province (i.e., agriculture

> 7 World Bank Enterprise Survey, 2015.

> 8 The weighted computation is accounting for the weight of the observation in the survey, while the unweighted computation is excluding the weight. See section 2 for the formula.

> 9 While the model calculated data for 2020 which could potentially show different figures, the result is significantly different where Yogyakarta informal output reached more than 50 percent of the economy and Banten informal output comprised more than 40 percent of the economy using the model.

11