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| The tri-sectoral model of the Philippine political economy Amado M. Mendoza, Jr. Department of Political Science University of the Philippines Abstract This article is a think-piece and a work-in-progress. In this paper, I introduce a trisectoral model of the Philippine political economy that not only characterizes its principal features but also suggests the possibilities of change. The Philippine economy is seen as composed of three sectors�formal, informal, and criminal�with these categories to be understood as Weberian ideal types. As categories, these sectors can be construed either as separate spheres of distinct economic activities or as interlocking sets of economic actors that could possibly undertake all three kinds of economic activity. The article also suggests that the dynamics of the model depend largely on the strategic direction of specific economic actors. The proposed model seeks to complement and not replace existing theories on the Philippine political economy. It is presented in its rudimentary form to solicit comments regarding its robustness and if a respectable research program and policy agenda can emanate from it. The tri-sectoral model of the Philippine political economy [1] Introduction This article is a think-piece and a work-in-progress. It started as a short column in the online edition of the Philippine Daily Inquirer. For this reason, I have purposely refrained from a systematic review of the relevant literature. At best, a cursory reading of some theoretical pieces was resorted to. In this paper, I introduce a tri-sectoral model of the Philippine political economy that not only characterizes its principal features but also suggests the avenues and ways through which it could be transformed. Based on your responses, I will revise the paper. Reflections on a corruption expose� epidemic since mid-2001 up to the third quarter of 2003�alleging the involvement of the First Gentleman, Mike Arroyo, in several shady deals; participation of senior police officials in the illegal drug trade; and the collusion of army officers with the criminal Abu Sayyaf Group [2]�led me to develop the notion of a tri-sectoral Philippine economy. Of course, an earlier realization of the criminalization of the state apparatus during the aborted presidency of Joseph Estrada also contributed to its development. As I see it, the Philippine economy is composed of three sectors: the formal, informal, and criminal. These categories are construed as Weberian ideal types. They could be understood in two ways. First as spheres of economic activities, that is, activities pursued for gain or wealth. As economic activities, these sectors are distinct from each other. Secondly, these categories can be seen as composed of economic actors, that is, agents who undertake economic activity. As sets of actors, these sectors are not hermetically sealed from each other and, in fact, interact with each other. This is so since a given economic actor can engage in all three�formal, informal, and criminal economic activity. To extent, however, that an economic actor is predominantly engaged in or derives the greater bulk of her income from a particular type of economic activity, he may be referred to as a formal, informal, or criminal. The tri-sectoral model can be graphically represented in Venn diagrams (see Figures 1a and 1b). In this diagram, the universal set, that is, the Philippine economy, is represented by an enclosing rectangle. Inside the rectangle, we find three circles that are apart from or do not intersect each other. Each of these enclosed circles represent a distinct sphere of economic activities. Expressed in other ways, these circles, as they represent distinct economic activities, are independent sets. They do not share identical elements (see Figure 1a). In contrast, the Venn diagram for these categories, understood as economic actors, consists of three circles that intersect with each other (see Figure 1b). In this diagram, one can see the intersection of any two of the circles as well as the intersection of all three circles indicating shared economic actors. In these Venn diagrams, not all of the rectangle�s area is covered or accounted for by the three circles. This means that not all of the economic activities or economic actors within the Philippine economy are contained within the three sectors. These residuals include household and subsistence work. There are two kinds of economic activity: gainful or for-gain activity; and non-gainful activity, that is, economic activity not directed toward earning a gain. Household and subsistence work are instances of non-gainful activity. As explained in subsequent sections of this paper, the tri-sectoral model is concerned with gainful economic activity. For this reason, household and subsistence work are excluded from the model�s coverage. The formal sector The formal sector is best defined 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 [3] and transfers. [4] These transactions can occur between economic actors within a specific national economic territory or could involve domestic actors and economic actors located outside the national territory (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 and/or other public entities and instruments. 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, under-measured , under-reported or unreported economic activity is either informal or criminal. Formal economic activity supposedly enjoys the state�s protection since the latter�s authority is recognized through the payment of registration dues and licenses, and a myriad of taxes. The informal sector Qua sphere of economic activity, the informal sector includes economic activities that are similar to those undertaken within the formal sector. [5] One can also acquire legal goods and services such as food products, clothing, and footwear within the informal sector. The legal nature of the goods and services and the voluntary nature of the exchanges and transfers are shared features of formal and informal economic activity. However, informal economic activity is technically illegal since informals do not pay taxes and other registration dues, among other things. Yet such illegality, according to DE SOTO (1989), is not antisocial in intent, like drug trafficking, theft, kidnapping, and murder. If informals were to live, trade, manufacture, transport, or consume, they may have to do so illegally. State regulations are often complex and cumbersome and are too difficult or expensive to comply with. Thus, informals do not bother to register with the authorities or pay taxes. Nor are receipts issued in this sector. Informals are therefore fair game for enterprising agents of the law and criminals. In truth, they pay an implicit �tax� to these entrepreneurs so they could go about with their livelihood. However, not all of the goods and services offered within the formal sector are available in the informal sector. Apart from legal considerations, there are structural barriers to entry into the formal sector. These may include minimum capital and skills requirements. For example, it would be inconceivable for an informal enterprise to be able to offer checking accounts or credit card services. In general, the consumers of informally-provided goods and services are from the lower-income groups in the cities and the rural areas. The informal enterprise is generally small (in terms of capitalization, number of employees, etc.) and its small size enables it to successfully evade the attention of predatory entrepreneurs. How about the subsistence work of economic agents such as slash-and-burn farmers (kaingineros) and small fisherfolk? Should their work be considered as informal economic activity? If they are unable to produce a surplus and use all their produce to feed their families, then these activities are similar to household activities and are excluded from the category. Should these economic agents pursue other activities in order to obtain cash incomes/balances, then they interface with any of the aforementioned economic sectors. For instance, they may obtain credit from informal moneylenders. Then they may use the funds to purchase goods and services either from formals, informals, or criminals. They may also obtain temporary employment in either informal or criminal enterprises. For instance, they may produce handicrafts during the off-season and travel to sell them elsewhere or sell them to itinerant buyers (who then resell the same products elsewhere). In other cases, they may be drawn toward criminal activity. For example they cultivate marijuana for criminal syndicates or accept bets for the illegal numbers game (jueteng). The criminal sector The criminal sector covers all activities carried out in pursuit of economic gain that cover the production and/or provision of illegal goods and services. These may include gambling, prostitution, firearms, and narcotics. These activities may also include the illegal production/provision of otherwise legal goods and services. For example, a pack of imported cigarettes is a legal product. But a criminal entrepreneur may find it profitable to smuggle it into a country. In the process, the smuggled pack becomes an illegal good. The illegality of goods and services is the primary distinction of criminal economic activity from formal and informal economic activity. While there may be overlaps in some of the commodities sold within the formal and economic sectors, criminal commodities are exclusive to the sector. Demanders of these commodities can satisfy their requirements only in this sector. Obviously, no taxes are paid or could be levied on criminal economic activity. Similarly, no receipts are issued nor are contracts drawn to cover specific transactions. However, a criminal entrepreneur may find it necessary to pay an implicit �tax� to an agent of the state for protection or tolerance. While transactions in the formal and informal economic sectors are voluntary, we see a mix of voluntary and involuntary exchanges in the criminal sphere. For example, the transaction between a prostitute and her/his trick may be voluntary. However, the �exchange� between a robber and a victim is obviously involuntary. The same is true with the money given by a shopkeeper to the �friendly� neighborhood toughie or policeman for protection. In these cases, violence (its actual use or the threat of its use) is an essential element in the �transaction�. Not all crimes can be included within the sphere of the criminal economic sector. It must be criminal activity directed toward acquiring a gain. For example, a homicide committed in a fit of passion is not a gainful activity while an assassination for a fee is. Rape is not a gainful activity unlike white slavery. The essential features of the different types of economic activity are summarized in Table 1. 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 code 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 effectively de-criminalized. In this regard, we can cite the case of the so-called biyaheras (or literally, 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 (or trip) to these destinations, traders can either stock their established shops (e.g. in the Greenhills or Cartimar districts or any other PX enclave) or sell informally to their relatives and friends (usually on an 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 and do 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 criminal gangs to augment their banks� loanable funds. Or they can set up legitimate businesses as fronts for criminal activity. So we have countless lounges, massage parlors, beer gardens�all registered with city hall�where prostitution flourishes. Or, as Mary �Rosebud� Ong attests, we have money changers registered with the Central Bank engaged in dollar salting and money laundering. [6] 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? At this point, I would tend to think that rent-seeking is criminal activity. 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, 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 capture 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, and other illegal businesses without fear of persecution or harassment in exchange for a cut of the proceeds. 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 illegal numbers game). Informals can be employed by criminal groups at the retailing end. We hear of balut (duck egg) and fishball vendors who also double as resellers of shabu (or �crack�). The jueteng cobrador (the person who takes jueteng bets and pays out winnings) 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 underworld of crime can entice 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 (cheap noodles), shampoo packets, cheap sardines, and junk food. Economic actors normally employed in the formal sector sometimes engage in informal activity, especially during difficult times or to supplement incomes. The stereotyped example is the public schoolteacher who sells tocino (cured meat procusts), RTW clothes, and toiletries on the side. A country�s economic sectors relate to the rest of the world. It is safe to surmise that the informal sector is the least integrated with the global economy. But one could 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. [7] 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 (head of the armed forces intelligence service) and �Rosebud�, the Philippines is a major link in the international drug trafficking chain as well as a major consumer of prohibited drugs. [8] In sum, the strength of the state and the competence of its institutions are the most important factors behind the existence of a tri-sectoral economy. The ideal is an economy that is wholly, or at least predominantly, formal. And the smallest sector should be the criminal sector. While the Venn diagrams in Figures 1a and 1b seemed to imply equality in the size of the three economic sectors (because of the convention of using equally-sized circles), these sectors are actually unequal in size. [9] What determines the size of these different economic sectors? As shown in Figure 2, the strength of the state is a major determinant. Where the state is weak, criminal activity flourishes. Formals and informals will also be tempted to participate in lucrative crimes. Where the state is incoherent and incompetent, you will also have a large informal sector. Informals, like all economic actors, are rational. When the costs of complying with state regulations exceed the benefits of compliance, informal activity is rational even if it is technically illegal. This means that laws that foster informal activity could be considered as irrational or inefficient. --Insert Figure 2 here� Nonetheless, state capacity is too crude a variable for our purposes. One should deconstruct this variable along several dimensions since state capacity or competency is not uniform through various governmental levels or lines of activity. For instance, some city governments may exhibit greater competencies than national line agencies in certain activities such as registration of commercial enterprises and the collection of appropriate fees. Or the national government may be better in the issuance of passports than in the apprehension of criminals. One can reasonably imagine that if state capacity is defined as the ability to collect income and other taxes, then the size of the formal sector may go down and those of the others may increase as rational economic actors will migrate from the more-taxed to the less-taxed economic realms. Should state competencies in criminal detection, prevention, apprehension, and punishment get enhanced along with its tax collection, then perhaps the beneficial relation between enhanced state capacity and reduced criminal and informal sectors will hold. In Figure 2, I have drawn two informal sector curves to indicate possible situations where the informal sector is either smaller or larger than the criminal sector. [10] Ideally, the informal sector should be larger than the criminal sector but should be smaller than the formal sector. Possibilities for transformation Notwithstanding the technically-illegal nature of informal activity, informals never look at themselves as criminal. Street vendors swept off the sidewalks by mulcting cops often complain: Bakit kami ang hinuhuli ninyo? Ang daming mga kriminal diyan? (Why are you arresting us? There so many criminals around? Why not them?) Informals are informals not because they want to but because they have to. One cannot fully accept the notion that they choose to be informal because they do not want to pay taxes. Some informals may really want to evade taxes. However, they actually �pay� implicit taxes�the lagay (bribe) to the cops, and the �5-6� interest premium to the Indian (Bumbay) moneylenders, among others. If regulations were rationalized, informals would rather pay regular taxes to the state than endure their unprotected status. On the basis of the foregoing discussion, we submit that the informals can supply the �swing vote� for change. Ultimately, we understand reform of the Philippine political economy as a process where mass poverty is alleviated through the growth of the formal economic sector and the consequent shrinkage of the informal economic sector. Similarly, we also see it as the growth of a law-governed state (Reichstaat) and the necessary contraction of the criminal economic sector. The possibilities for change can be surmised from the strategic direction of typical actors in each economic sector. The formal, even if she may dabble in both the informal and criminal economic sectors, will prefer to stay in the formal sector. In that sector, she enjoys higher and more stable income and a more secure socio-political status than informals and criminals. On the opposite side of the spectrum, it is may be safe to assume that most criminals want stay that way�the dangers of the criminal life are offset by the fantastic (psychic and material) returns on nefarious activity. Nonetheless, it may still be necessary to disaggregate the actors into diehards and reluctants�the latter being those members of the under-classes who had to engage in petty crime because of extreme poverty. If this is the case, then the reluctants, if given the chance may want to be informals, or better yet, formals. For the informals, we do not doubt that strategically, they want to be formals rather than continue as informals or slide down as criminals. In this case, however, we do not have a chicken-and-egg situation. Informals will decisively tilt the balance in favor of reform and side with the formals against the criminals only if some improvements have been achieved by earlier reform efforts that promise a better life for them or for their children. (Figure 3 is a graphical representation of the possibilities of transformation as it maps out the strategic directions of the three different types of economic actors). On the other hand, one may argue that the behavior of the formals may be the key to systemic change. Formals usually occupy the higher rungs in the social ladder and serve as society�s exemplars. If they refrain from dipping their fingers in the informal and criminal pies, then they may help deter others from doing the same. The key in achieving this swing is a comprehensive policy/program intervention that raises enough resources to finance an anti-poverty program in the country. The state�s capacity to raise adequate revenue will be dependent on developing other competencies and strengths such as bureaucratic quality. The reform of our political system, including the way we choose our political leaders, is crucial so our leaders could effectively lead the country out of poverty. Strategic partnership between the state and the modernizing/reformist elements from the formal and informal sectors must be forged so a progressive political coalition can triumph. For example, the urban ghettoes can be transform into modern low-cost high-rise housing complexes that can be initially financed by public monies but could generate a whole line of upstream and downstream economic activity that could be profitably and productively participated in by for-gain (banks, construction companies, hardware manufacturers, etc.) and voluntary (not-for-gain) actors (such as the Habitat for Humanity movement). At the start of a new presidency, the germ of such a comprehensive proposal is contained in the expanded usage of TIN proposal. Concluding remarks Admittedly, the theoretical model presented in this paper is rudimentary. To find out whether it has promise or should be consigned to the basurahan (garbage can) is the main reason why I chose to present it to this conference. If indeed it is promising, I also like to find out if a robust research program and policy agenda can emanate from the model. Towards these ends, I await your comments with eagerness. References DE SOTO, Hernando. (1989). The Other Path: The Invisible Revolution in the Third World. New York: Harper & Row. FLORES, Nelson. (2003). �UN: Filipinos 3rd biggest �shabu� illegal drug users.� Philippine Daily Inquirer. 30 September 2003. MURPHY, Kevin, Andrei SHLEIFER and Robert VISHNY (1993). �Why is Rent-Seeking So Costly to Growth?� American Economic Review Papers and Proceedings 83(2): 409-414. SHLEIFER, Andrei and Robert VISHNY (1993). �Corruption.� Quarterly Journal of Economics 108(3): 599-617. |