Posted: January 11, 2011 in Philippine politics, Political economy

The essential features of the different types of economic activity are summarized in the following Table 1.

Table 1


Essential Features of Different Types of Economic Activity

Type of economic activity Object of transaction Nature of transaction Tax status Receipts/contracts Transacts with ROTW
Formal Legal goods & services Voluntary exchange Paying Yes Yes
Informal Legal goods & services Voluntary exchange Non-paying No Yes
Criminal Illegal/exclusive goods and services Voluntary and involuntary “exchange” Non-paying No Yes
War-related Illegal/exclusive goods and service Voluntary and involuntary “exchange” Non-paying No/Yes Yes

Interactions between the economic sectors

It is the state that determines which economic activities are criminal and which ones are not.  It does so through a body of laws commonly known as the penal code.  In several instances, agents of the state ‘stretch’ the law to such an extent that some patently criminal activity can be de-criminalized.  In this regard, we can cite the case of the so-called biyaheras (female travelers): matrons engaged in the quasi-formal or informal trade of imported finished goods.  In the past, the destination of choice was Hong Kong; nowadays, it is Bangkok and Jakarta.  Through their biyahe (trip) to these destinations, traders can either stock their established shops (e.g. in Greenhills or Cartimar) or sell informally to their relatives and friends (usually on pay-by-installment basis).   While these traders are technically engaged in smuggling (since they do not pay any customs duties on the imported goods), the practice has become so pervasive that government authorities have learned to adjust and tolerate it.  At the Manila international airport (and other ports of entry), incoming cargo of the biyaheras are assessed and slapped a flat rate on a por kilo [per kilogram] basis.

Nonetheless, both formals and informals can still engage in criminal activity. For instance, formals can undervalue sales or not issue receipts to reduce their tax liabilities.  They can wittingly launder dirty money from crime lords and politicians to augment their banks’ loanable funds. Or they can set up legitimate businesses as fronts for criminal activity.  So we have countless lounges, karaoke bars, massage parlors, beer gardens—all registered with city hall—where prostitution flourishes.  Or, as Mary “Rosebud” Ong attests, they can operate money changers registered with the Central Bank engaged in dollar salting and money laundering.[1]

How may one classify rent-seeking activities, defined as the use of non-market, i.e., political, religious, cultural, etc., means to achieve economic ends?  The existence or creation of rents is often attribut­ed to state action that artificially restricts or eliminates competition. This action in turn stimulates private actors to attempt inducing government officials to allocate rents in their favor.  When a monopoly rent exists in an economy, resources equal approximately to the mono­poly rent will be wasted in directly unpro­ductive activi­ties (i.e., lobbying, bribery, political intimida­tion, etc.)  in order to capture the said monopoly rent.  These resources are considered wasted because they could have been employed in more productive ventures.  The time and talent that entrepreneurs use in rent-seeking also have alternative uses.

Depending upon the active agent, it is also important to distinguish between private rent-seeking and public rent-seeking.  Murphy, Shleifer and Vishny (1993: 412) define private rent seeking as taking the form of “theft, piracy, litigation, and other forms of transfer between private parties” while public rent-seeking is “either redistribution from the private sector to the state, such as taxation, or alternatively from the private sector to the government bureaucrats” taking the form of lobbying, corruption, and the like.  While I do not subscribe to the notion that taxation is rent-seeking, the concept of public rent-seeking provides the bridge between rent-seeking and the much older concept of corruption.

How do we relate rent-seeking and corruption, the latter category invariably classified as a criminal activity in many jurisdictions?  In a situation where the state (or a state agency) creates rents, the normal economic reaction of private actors is to use all means—legal, extra-legal, and illegal—to corner them.  Lobbying government officials is a legal way while bribery is an illegal or criminal way of capturing rents.  The bribe can be seen as the purchase price of a good or a service that the state officially owns but is now appropriated privately and personally by government officials.  In so far as officials have discretion over the provision of these goods, they can collect bribes from private agents (Shleifer and Vishny 1993: 599).

Criminal rents can be “earned” from benefices granted by the powers-that-be to operate or maintain gambling, prostitution, gun-running, illegal drugs, illegal logging, and other illegal businesses without fear of persecution or harassment in exchange for a cut of the proceeds (Sidel 1999).  The impeachment hearings of deposed President Estrada during the late 2000-early 2001 period revealed the existence of such benefices with respect to jueteng, or the popular illegal numbers game in the Philippines.

The different types of rent-seeking discussed above straddles all four economies.  Most of the rent-seekers are formal economic actors and as well as institutionalized political agents.  For example, businessmen spent time and resources to obtain preferential treatment and favors from the state.  They do not only abide by laws but they also resort to informal (e.g., ‘gentlemen’s agreements’ reached on golf fairways) and criminal (e.g., paying a bribe) means.  The criminal rents are usually earned by various actors from the four economic spheres through informal and criminal means.  Nonetheless, violence is inextricably linked with criminal rents.  The NPA used to earn ‘protection’ rents from concessionaires cutting trees illegally even in environmentally protected areas before it discovered the lucrative cell-phone towers.  Local civil and military officials share in the criminal rents ‘earned’ by these illegal businesses by tolerating or protecting the latter.

Informals can be employed by criminal groups at the retailing end.  We hear of balut (salted duck eggs) and fishball vendors who also double as resellers of shabu (‘crack’)[2].  The jueteng cobrador (collector of jueteng bets) is another example.  Haven’t you noticed the Manila street vendors peddling fake or smuggled Nokia mobile phone accessories?  Since not even the informal sector can accommodate all prospective job seekers, the criminal underworld can absorb some of the surplus labor.

The relationship between formals and informals is not nefarious.  Some of the goods hawked by informals are manufactured or sold wholesale by formals.  At supermarket check-out counters, the shopping carts of informals are full of such staples as instant mami (Chinese noodles), shampoo packets, cheap sardines, junk food, and what have you.  Economic actors normally employed in the formal sector sometimes engage in informal activity, especially during difficult times to supplement household incomes.   The stereotyped example is the public schoolteacher who sells tocino (cured sweet meats), ready-to-wear (RTW) clothes, and toiletries on the side.

New thinking (e.g. Chen, n.d.) stresses the systematic relationship between the formal and informal sectors of any given political economy.  Informals undoubtedly expand the market reach and increase the sales revenues of formal enterprises.  To the extent that informal enterprises are unregulated, their existence helps lower production costs in several formal enterprises that enter into sub-contractual arrangements with them.  The informal economy is thus a useful appendage to the formal economy since it subsidizes the latter through lower costs of production.  It is not a mere vestige of a traditional and obsolete economy.  It will in fact continue to thrive and grow as the formal economy grows.    Thus, one can conclude that the growth of both the formal and informal economies is correlated.

A country’s economic sectors relate to the rest of the world.  It may be safe to surmise that the informal sector is least integrated with the global economy.  But one can be mistaken here.  Numerous anecdotes have been heard claiming that the dollar remittances of Filipino overseas contract workers (OCWs) sent through informal channels exceed amounts sent through banks.[3] In addition, international criminal networks threaten to overwhelm many states including the Philippines. If crime was simply home-grown, then the size of the criminal sector would be smaller.  The global trade in drugs is estimated to be larger than the global trade in crude oil.  If we are to believe Col. Victor Corpus and Rosebud, the Philippines is a major link in the international drug trafficking chain as well as a major consumer of prohibited drugs.[4] The internal war economy is similarly not insulated from the rest of the world (ROTW).  Armed insurgencies gather material and moral support both from domestic and international sources—including diasporas, international arms merchants, sympathetic states, and other foreign actors.  Similarly, the challenged state also relies on domestic and international supporters, including foreign governments.  However, its war-related transactions do not have a criminal character since it defines what is illegal and criminal.  However, the free-lance activities of rogue state agents in pursuit of private gain are by nature criminal activities.

Criminal and war-related activities are essentially predatory and the other economic sectors are the victims.  While saleable products can be created both by the criminal and internal war economies, these products (esp. those of the criminal economy) are not goods but are undoubted ‘bads.’   The jury may still be out on the social utility of anti-state warfare especially when existing states are themselves predatory and corrupt.  However, the opportunity cost of resources diverted to warfare in any given economy is quite substantial.

[1] Ong surfaced as a major witness during hearings conducted by the Senate in mid-2001 regarding the involvement of the Philippine National Police (PNP) in various crimes, particularly drug trafficking, during the administration of President Joseph Estrada (1998-2000).

[2] Interview with police officials, NCRPO, 15 April 2006, Quezon City.

[3] Some of these remittances are actually made without compensating the transmission channel.  In the padala system, for example, an emigrant worker may entrust money to a fellow worker who is travelling back home.  The first worker then instructs his family members at home to get in touch with the incoming worker to get the remitted amount.  To lessen the risk, the remitting worker may tap the services of more organized informal fund transfer systems (IFTs) for a fee.  In the Arab world, the system is known as the hawala or hawallah system.  The hawala has counterparts in other regions of the world.

[4] According to the United Nations Office on Drugs and Crime (UNODC), the country ranks third in the world in the consumption of amphetamine-type stimulants like shabu.  Illegal drugs have reportedly become a P216 billion to P432 billion industry.  Philippine drug authorities reported that there are 3.4 million regular and part-time drug users in the country, up from only 20,000 in 1970.  About 13 transnational drug rings and 175 local drug syndicates operate in the country where there are some 45,000 drug-pushers (Flores 2003).  After three years, the industry’s value has doubled to the P700 billion mark as of September 2006 largely due to the increase in the street price of the most popular drug, shabu, from P2000 to P5000 per gram.  Drug users have increased to around 9.3 million.  The typical drug user is male, around 29 years old, and earns an average of P30,000 monthly (Porcalla 2006).

  1. bongmendoza says:

    Reblogged this on bong mendoza's blog.

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