Underground Economy In The Philippines 1v3h52

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University of the Philippines - Diliman Extension Program in Pampanga

Underground Economy: A Sneak Peak The Underground Economy in the Philippines: Its Economic Impact

Erica V. Abillon WF 10:00 – 11:30

Prof. Cynthia Sanguyu

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ABSTRACT Most of the activities in the underground economy, a big part of our economy that can never be separated from our culture, are unknown to the government. Even if it is illegal, people can see and observe that in every part of our country, the underground economy will never be absent. On the streets, outside the malls or schools, at the terminals, etc., wherever people go, they can always see that there are many economists that are underground. The researcher finds this study beneficial, not only because this is a major concern nowadays, but also because this is included in her interests. This research paper is a study of the contributions and drawbacks of the underground economy. Also, this paper tells the problems that people are experiencing on the underground economy. Lastly, this paper presents the actions or responses of the government with respect to the underground economy. In connection with these, the researcher will voice out her opinions and recommendations concerning this topic.

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I.

INTRODUCTION

A. Background of the Study Nowadays, there are many different kinds of businesses in every part of the Philippines. Whether it is made over a short or a long period of time, it contributes to the growth of the economy. But even if there are many big time and small time business owners everywhere, there are some who do not contribute to the growing economy of our country. There are some owners who earn lots of money but do not pay taxes. There are also those people who do not have companies, but they earn money in simple ways. Those vendors of ice cream, fishballs, kikiam, kwek kwek, gulaman, etc. that can be spotted on every street are some examples of those people who earn money but do not pay taxes. Even if it is good in the eyes of many, those people with their small or big businesses do an illegal job because they do not give what is due to the government and in return, the plans and projects that the government will undertake will be affected. The researcher is interested in this topic because she wants to know their impact and significance to our economy even if they cause negative consequences to our country. She wants to know if the underground economy in the Philippines somehow benefits us and if the government is doing any actions to either stop or promote underground economy. B. Significance of the Study This research will give information about the positive and negative consequences of the underground economy in the Philippines, the reasons why people enter underground economy and the reasons why the government is against it. People who don’t know about this matter will now be knowledgeable because they will acquire understanding and will be aware of the impacts

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that underground economy gives in our country. It will unveil how the government deals with illegal and unrecorded sector which are parts of the underground economy. It will also inform us about the problems that people are experiencing when they enter the underground economy. C. Statement of the Research Problem Even though the underground economy in our country, which is composed of two parts, has some positive sides that keep the people’s conscience at ease and make the people think that what they are doing can be justified, it gives more negative effects in our economy that’s why the government is performing some actions for it to be lessened or to be prevented. D. Objectives The main goals of this research are the following:  To identify the differences between the unrecorded sector and the informal sector that are parts of the underground economy  To determine how the underground economy affects the growing economy of the Philippines, both the positive side and the negative side  To know the problems occurring to the underground economists  To determine the actions of the government to either stop or promote the underground economy E. Review of Related Literature Economics: Theories and Principles by Evelina Viloria, Julia Rillo, Exuferencia Mina, Purificacion Jacob, Julius Espero and Teofista Vivar; Microeconomics (Third Edition) by David C. Colander; and Marcoeconomics (Fourth Edition) by Michael Parkin provide an overview

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about the illegal sector or “black market” as referred to by many. The researcher finds these books significant because it contributed lots of information for this research paper. In the Informal Economy: Is it a Problem, a Solution or both? The Perspective of Informal Business by Omar E. Garcia-Bolivar and in the Philippine Journal and Industrial Relations by Isagani Antonio F. Yuzon on his article Globalization and Human Resource Development for the Informal Sector, the contributions of the underground economy in our country are stated. They also provide the possible negative consequences of the underground economy. An Overview of the Lurking Economy: The Underground Economy and the National s of the Philippines by Mary Ann Toyoken enumerates some of the programs of the government that can help people in the underground economy. This manuscript is important for the researcher because it shows that the government somehow is doing some actions towards the underground economy. The ing Workers in the Informal Economy: A Policy Framework by the Women in Informal Employment Globalizing and Organizing (WIEGO) and The Philippine Urban Informal Sector by Reginald M. Indon provide some valuable information about the problems in the underground economy. These are helpful to the researcher because they give helpful information in connection with this study. Finally, there are also internet articles that the researcher used in her research. These articles are Consequences of the Underground Economy by San Choon Yin and The Underground Economy. They gave additional information suited for this research paper.

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F. Methodology In completing this research paper, the researcher has performed several steps. First, she did some research on the internet after finalizing her topic. She gathered information and read several blogs and articles regarding the underground economy to have more background and understanding in her topic. After the approval of her proposed topic, she started collecting more information in the Angeles City Library and in the library of University of the Philippines – Diliman Extension Program in Pampanga. She also used the internet to get some additional information. When she had all the data she needed, the researcher started sorting out the information. She used notecards for organization purposes. Next, she compiled all the information and did a draft. Lastly, she revised the draft to correct some mistakes and rechecked it for some careless errors. II.

PRESENTATION AND ANALYSIS OF DATA

A. What is the Underground Economy? The underground economy has many definitions and interpretations based on different authors. One of them defined the underground economy as the informal economy. When harmful activities are associated with it, it is often referred to as the black market. The underground economy that helped out countrymen during the 1980s was a combination of these two, but the bigger part was the contribution of the uned, blue-collar workers who work hard on different places (SEAsite, 1997).

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In the website http://choonyin.tripod.com/consequences (n.d.), it states that the underground economy is composed of the unrecorded sector where the legal activities that are unknown to public authority are going into actions, and illegal sector – both criminal and noncriminal based activities. Just like what those two stated, the underground economy has two parts, the unrecorded sector and the illegal sector. After knowing this fact, it is only right to differentiate these two. First, the unrecorded sector is the part of the underground economy that is not known to the government to avoid taxes and regulations. It may also be hidden because the goods and services that it offers are illegal. It is not counted from the GDP because it is unreported (Parkin, 1998). Examples of those who are in the unrecorded sector are the different kinds of street vendors and the repairer of broken things at low cost. Meanwhile, those who are engaged in prostitutions and drug smuggling are part of the illegal sector. The illegal sector of the economy is composed of actions that are still being done even if it is against the law. Examples are drug trafficking, illegal currency transactions, illegal gambling, prostitutions, and pornography (Viloria, Rillo, Mina, Jacob, Espero, & Vivar, 1998). It includes the production and distribution of illegal drugs, production that uses illegal labor that is paid less than the minimum wage, and jobs done for cash to avoid paying income taxes (Parkin, 1998). Sometimes, it is also referred to as the black market. A black market, which involves trades of a good that can’t legally be traded, is a natural result of government price restrictions. Often the government knows that such trading goes on and chooses, for political reasons, not to enforce its own laws strictly. And when a black market is unofficially approved and the deals or trades become more open, it is called a gray market (Colander, 1998).

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B. The Contributions and Drawbacks of the Underground Economy in the Philippines The underground economy has a few positive sides that make the people think that what they are doing can be justified. First, it gives job opportunities to poor families. What the Philippine Journal and Industrial Relations by Isagani Antonio F. Yuzon (2008) says is that the informal sector or the underground economy is a safety net. It catches all the victims of globalization. Even if it doesn’t offer jobs, it still offers income opportunities. Furthermore, Mary Ann Toyoken in her paper An Overview of the Lurking Economy: The Underground Economy and the National s of the Philippines states that underground economy provides a way of earning money to poor people in the country and it also offers opportunities to those who have jobs but still need extra income. Aside from that, the prices of the products in the underground economy are cheaper than the products of the formal sector. The informal sector suppresses the effects of globalization on the formal sector. It offers cheap labor, cheap raw materials, and cheap domestic products to the wage sector (Yuzon, 2008). Another benefit of the underground economy is that it makes the product of the formal sector be distributed. It gets its capital from the formal sector because the informal sector can’t buy its capital or non-labor inputs elsewhere. Unlike the formal sector, products of the informal sector are offered at a cheaper price. This activity makes a huge benefit to the formal economy because it makes the goods of the formal sector be distributed (Toyoken, 2012). It enlarges the domestic market by distributing the purchasing power among the poor. It offers the products of

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the formal sector to different parts of the society, especially on the areas where there are many poor families (Yuzon, 2008). On the other side of the coin, even if it has positive sides, the underground economy still has more drawbacks or negative effects and consequences. First, the projects of the government are affected negatively because of the unpaid taxes. According to the Informal Economy: Is It a Problem, a Solution or Both? The Perspective of Informal Business by Omar E. Garcia-Bolivar (2006), they government cannot finance some of their projects because they cannot collect taxes from the underground economy. The government then increases the rates of tax to those who belong to the formal economy. Because public authority can’t monitor the underground activities, the recorded economic statistics has a possibility to misrepresent the true economic statues of our country. The government that was supposed to measure and to record the activities has failed ( Yin, n.d.). The researcher also believes that it may result to the manufacture of products that are of low quality because the government is not able to monitor the activities inside the underground economy. Underground economy also promotes corruption. The informal sector entrepreneurs end up paying bribes to government inspectors, “kotong” or protection money to the police, and goodwill money to business cartels just to carry out their day-to-day activities (Yuzon, 2008). In additional, the informal sector employees somehow suffer. Informal sector encourages child labor and lack of formal work contracts among employers and employees. Because of that, those employees in the underground economy can be easily targeted for exploitation. Also, there is no assurance that the jobs in the underground economy will be permanent. And unlike the formal sector employees, employees in the underground economy have no benefits. They do not

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experience health benefits and other compensations that the formal sector employees are experiencing (Toyoken, 2012). Furthermore, the informal sector suffers from the lack of social protection because it is not covered in the regulatory coverage of the government. Because they do not almost contribute taxes, government in return gives them less attention, like policies, services, social insurance, unless election time (Yuzon, 2008). C. Problems of the Underground Economy According to the ing Workers in The Informal Economy: A Policy Framework by Women in Informal Employment Globalizing and Organizing or WIEGO (2001, November), the issues and problems of those who work in the informal economy differ based on their employment status, by the industry or trade in which they are engaged, and by the wider social economic and political context in which they live and work. Those in the formal and informal economies face the same general risks, but the informal workers have the greater exposure to these general risks. The other two are the work-related risks and the problem in fewer mechanisms. The first issue or problem is the productivity. Productivity is low because of limited knowledge of modern ways of production. According to The Philippine Urban Informal Sector by Reginald M. Indon (2002), the income suffers because the level of productivity is low. There’s a low productivity because informal economy entrepreneurs lack modern skills, technology, and resources. They are also exposed to limited educational background and organized skills training. They only depend on basic technologies and resources The next issue is that employees are usually exposed to harmful environment. Some activities of the informal economy are done with exposure to harmful and toxic materials for the

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production of goods or services, risking their health and safety. Also, because most informal economy entrepreneurs do their jobs on streets, some suffer from other hazards like urban pollution (Indon, 2002). Lastly, there is an inconsistency in work and income. Fifty percent or less of those informal sector entrepreneurs has assurance in their job. There’s also an unfair giving of what is due to them. They work for long hours without safety equipment and social security, but they are paid below minimum wage (Indon, 2002). D. Government’s Responses to Underground Economy The government is offering programs for the people involved in the underground economy. One of those programs is the 4Ps or the Pantawid Pamilyang Pilipino Program. It is one of the programs by the Department of Social Welfare and Development (DSWD). It is a human development program based on the CCT or Conditional Cash Transfer that aspires to provide social assistance and social development (Toyoken, 2012). Moreover, the government is also offering National Household Targeting System for Poverty Reduction. It is a statistics management system that identifies who are the poor in our country and where can they be located. It is being done to recognize the potential recipients of the social protection programs (Toyoken, 2012). KALAHI-CIDSS, which means KApit bisig LAban sa kaHIrapan, is also offered by the government. It is a project by the Department of Social Welfare and Development or DWSD. It is a “comprehensive and integrated delivery of social services” that aims to alleviate the poverty in the Philippines. The World Bank also aids in this project (Toyoken, 2012).

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Tindahan Natin Program is also in line with the projects of the government to aid in the multiplication of the underground economy. It is a national government program by the DSWD that distributes low priced noodles with good quality to families who have low incomes. These products are offered with the help of the LGUs and the provincial and municipal social welfare and development officers (Toyoken, 2012). III. CONCLUSION AND RECOMMENDATIONS A. Conclusion The underground economy, with its unrecorded and illegal sector, is everywhere in the country. Even if it is illegal because of the underground economy do not pay taxes, it is can still be justified in the eyes of many because of its certain positive effects. It also somehow helps the daily living of the people involved in the economy. But even though it has several positive sides that make the people’s conscience at ease, it is still against the law. It also has more negative than positive effects in our country’s economy because of several factors. Aside from those, the people connected to underground economy experience certain problems because of certain reasons. Lastly, even though the underground economy looks like invisible to the government because of their appearance everywhere, it is not completely hidden. Somehow, the government is doing some actions to help them. B. Recommendations Because the underground economy is not legally acceptable, the researcher thinks that it should be prevented. Yes, it is not easy, but it is possible. The researcher recommends that the government should not only make laws but also perform those laws. The researcher also thinks

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that if the government gives proper attention to the underground economy, and they can give supplemental training and educational programs, most of the people with respect to the underground economy can be knowledgeable. If they obtain certain knowledge based on those programs, they can use it to have a formal and legal business. And if that can happen, the researcher thinks that the underground economy can somehow be lessened or be prevented. REFERENCES Colander, D. C. (1998). Microeconomics (Third Edition). The McGraw-Hill Companies, Inc. Garcia-Bolivar, O.E. (2006). Informal Economy: Is it a Problem, a Solution, or both? The Perspective of Informal Business. The Berkeley Electronic Press. Indon, R. M. (2002). The Philippine Urban Informal Sector. Loyola Heights, Quezon City: Ateneo de Manila University. Parkin, M. (1998). Macroeconomics (Fourth Edition). Addison-Wesley Publishing Company, Inc. SEAsite. (1997). Retrieved March 10, 2014, from The Underground Economy: http://www.seasite.nio.edu/tagalog/Modules/Modules/PhilippineEconomy/underground_ economy.htm Toyoken, M. A. (2012). An Overview of the Lurking Economy: The Underground Economy and the National s of the Philippines. Unpublished manuscript. Viloria, E., Rillo, J., Mina, E., Jacob, P., Espero, J., & Vivar, T. (1998). Economics: Theories and Principles. Metro Manila: Vibal Publishing House, Inc.

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Women in Informal Employment Globalizing and Organizing (WIEGO). (2001, November). ing Workers in The Informal Economy: A Policy Framework. Yin, S. C. (n.d.). Consequences of the Underground Economy. Retrieved March 10, 2014, from Tripod.com: http://choonyin.tripod.com/consequences/ Yuzon, I.A. (2008). Globalization and Human Resource Development for the Informal Sector. Philippine Journal and Industrial Relations, 248-250.