The great underground

Whether it’s drugs, jueteng, smuggling, prostitution, or the like, there’s a lot going on in the illegal underground economy that gives jobs and livelihoods to thousands, probably millions, of Filipinos. Along with them are a host of balut, fishball, taho and other vendors of various items; tricycles, pedicabs and jeepneys and the little shops that repair them; and manicurists, masseuses, barbers and household helpers — all legitimate occupations, but no less “underground.”

Economists use the more technical term “informal sector” to refer to these types of economic activities that do not pay taxes or submit regular reports to the government, and even routinely violate rules on minimum wage, child labor, and so on. Most assume these activities to be excluded from the economic statistics reported by the government in the gross domestic product (GDP) data released every quarter. Whether legal or illegal, what they have in common is that they are not readily captured in the statistics, as they may not even be keeping any formal records to begin with. But not all informal sector activities are necessarily “underground” in the sense of being illegal; the latter forms only part of the former.

Every economy has a significant informal sector. Many studies have attempted to assess its magnitude, a task that is understandably difficult and imprecise given the very nature of the sector. A 2002 World Bank Study estimated its size in 104 countries, with Georgia topping the list at 67.3 percent of GDP, and Canada at the bottom with only 3 percent. The Philippines, which was 22nd on the list, had 43.4 percent. Thailand was even higher (9th) on the list with 52.6 percent, while Malaysia and Indonesia were farther down with 31.1 and 19.4 percent, respectively. Note, though, that approaches to measurement differ, limiting the usefulness of comparing these numbers across countries.

How do we measure the size of ours? Years ago, our then statistics czars explained to me the approach as follows: The Annual Survey of Philippine Business and Industry (ASPBI) yields a measure of total employment in the “organized” production sector. It also makes it possible to calculate average output per worker in various major sectors of the economy. Meanwhile, the quarterly Labor Force Statistics (LFS), which is based on household interviews, provides data on total employment, whether in the organized (formal) or unorganized (informal) sectors. The difference between total employment from the LFS and organized employment from the ASPBI gives an estimate of informal sector employment. This can be further categorized into the major economic sectors based on the nature of employment reported by survey respondents. For example, smugglers and drug pushers along with ambulant vendors will probably indicate that they derived employment from trading, while prostitutes may describe themselves as masseuses or waitresses, and so on. Applying average output per worker computed from the ASPBI data, one can estimate the total value of output of informal sector workers. This comes out to be 43 percent of our entire GDP, once the measured output from the organized production sector is combined with that of informal sector, derived as described.

Contrary to the common impression, then, economic output from the informal sector, including from the illegal underground economy, actually gets captured somehow in our GDP accounts. They are not, and cannot, be measured directly the way output from the formal organized sector is, but neither are they left out. One may question the accuracy of the approach, but former statistics czar Dr. Romulo Virola once told me that our own estimation methodology was considered among the best approaches around, that other countries have in fact copied it. There is in fact a “Delhi Group,” composed of statistical agencies from Asian countries, which actually meets regularly toward improving the measurement of the informal economy, where we had been a pioneer.

So, it turns out that if our economy has been growing faster than most of those around us, at 6.4 percent so far this year, we also have shabu, jueteng, and smuggling to “thank” for that.

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