Towards a new model of the Philippine political economy, Part II

The formal economic sector

The formal sector is best defined (operationally) as the one where receipts, as evidence of economic activity or transactions, are issued.  In instances where an economic obligation is to be performed in the future, a written contract is executed.  Transactions in this sector are voluntary exchanges[1] and transfers.[2] These transactions can occur between economic actors within a specific national economic territory or could involve domestic economic actors and economic actors located outside the national territory (i.e., the rest of the world, or ROTW).  In this sector, legal goods and services are the objects of economic transactions.  The legality of specific goods and services is determined exclusively by the state through its penal code and other laws.

This sector accounts for a country’s gross national product (GNP), leading one to conclude that it consists of reported or measured economic activity and that all unmeasured or unreported economic activity are either informal, criminal, war-related, subsistence, or household-related.  Formal economic activity supposedly enjoys the state’s protection since the latter’s authority is recognized by those engaged in this type of activity through the payment of registration dues and licenses, and a myriad of other taxes.

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[1] These exchanges are voluntary in the context of a prevailing distribution of assets and incomes in a given society.  This is not to imply that an economic actor willingly chooses to be a worker even if he has an option of being a capitalist.  If that economic actor has no other productive assets save his labor power, then he has no option but to hire out that labor power in order to survive.

[2] Transfers are payments made without any corresponding production, expectations of production, or exchange of value.  They represent one-way movements of economic value between two economic actors.  In contrast, an exchange is a two-way movement of economic value between these actors.   The term generally refers to payments made by government to the household sector.  An example is the monthly pension check that a retired government employee receives from the Government Service Insurance System (GSIS).  However, the business sector can also be the source of income transfers.  For instance, a retired private employee can receive a similar check from a private pension fund.