Informal Cross-Border Trade: Who Participates And What Is The Impact of Participation on Income? A Case Study in Entikong, Indonesia

This study analyzes the determinants of people’s participation in informal cross-border trade (ICBT) and to what extent household income is affected by participation in informal trade. By applying a snowball sampling method, the author carried out a survey among 77 ICB traders and 70 non-ICB traders who live all in the Entikong border area of Indonesia. The ICBT questionnaire developed by the Uganda Bureau of Statistics (UBOS) in 2008 was adapted. ICBT is non-taxed but formalized in Indonesia since 1970 under The Border Trade Agreement. It allows traders within a certain area to exchange pre-specified goods below a value of Rp. 2,025,900 (RM 600). The numbers of monthly trades are also limited. To assess the role of ICBT for the Entikong region I make use of quantitative and qualitative methods. First, a model of ICBT participation is estimated using a multivariate logit regression. The findings illustrate that gender, location, distance, multiplicity of jobs, position in a household and asset ownership affect the decision to engage in ICBT. Second, an OLS regression model was employed to examine the individual monetary benefit from ICBT. The result indicates that ICBT participation boosts income and improves the household’s economic prosperity, especially secondary income in the Entikong region results to a large extend from ICBT. Third, I assess the nature of trade and show that the major exported goods are sour eggplant and pepper. The major imported goods are sugar and cooking oil. Proceeds from ICBT are mainly used for reinvestment, for rental payments and to cover school fees. I conclude that ICBT is needed as an important source of income in Entikong and a coping mechanism. In the absence of ICBT, the economic conditions of the households would be worse suggesting that the government would need to step in with social programs that are costly. Therefore, it is questionable whether the government would really gain from formalizing this small-scale cross-border trade.