Informal sector: bane and boon

Where the informal sector (aka underground economy) is large, the ongoing pandemic will especially take a heavy humanitarian and economic toll, the World Bank tells us.

Like most everyone else, the global financial institution has just downgraded the world economic outlook in its latest edition of “Global Economic Prospects.” It now projects world GDP to fall by 5.2 percent this year, with a deeper contraction (-7 percent) to happen in advanced economies.

The problem with having a large informal sector—estimated in the Philippines to account for around 40 percent of GDP—is that those firms and workers are by definition not registered with, and therefore invisible, to government. Thus, remedial measures and assistance put together by government to help firms and their workers in times of need are not likely to reach participants therein.

The World Bank, with its unique access to economic data across almost all countries spanning the globe, has documented the close association between informality and underdevelopment, seen in a wide range of attributes. These include widespread poverty, lack of access to formal finance, inadequate public health systems, and weak social safety nets.

These vulnerabilities magnify the direct and indirect impacts of the COVID-19 crisis on people’s livelihoods and overall welfare, and threaten to throw large numbers of people into extreme poverty. What is sad is that impressive gains had already been made around the globe in the last three decades to bring down the scourge of poverty; now it’s all unraveling again, all because of a microscopic enemy no one saw coming.

Our experience since the latter half of March through to the end of May, when the most economically active areas of the country were immobilized to control spread of the virus, bears out the drawback with having a large informal sector. The immediate but severely limited government assistance first to be rolled out was deliberately aimed at and could only reach workers in formally organized enterprises, and even so, reached but a tiny fraction of them.

The budgets allocated to the Department of Labor and Employment’s COVID-19 Adjustment Measures Program and the Department of Finance’s Small Business Wage Subsidy were a pittance, compared to actual need.

When the better-funded social amelioration program funds came out from the Department of Social Welfare and Development coursed through local government units, most LGUs apparently asked beneficiaries to produce a certificate of employment (COE).

I’ve written about our occasional plumber and carpenter who had to ask me for such COE, which was completely unwarranted, only further discriminating against informal workers with no regular employer, arguably the ones more desperately in need of help.

Now comes the very real prospect of at least 5 million workers in our economy losing their jobs permanently—the April Labor Force Survey already reported 7.25 million jobless. Add to this possibly hundreds of thousands of Filipino workers whose jobs overseas are dissolving in the wake of COVID-19, especially due to the now rock-bottom price of crude oil, on which their host economies in the Middle East stand.

With domestic jobs drying up and jobs from foreign direct investments not forthcoming because we have great difficulty in attracting them for a host of reasons, we’re basically left with two options to cope with the problem: One, government acts as employer of last resort and creates jobs for them the way past administrations did, sweeping streets, digging ditches, and doing other odd, mostly menial jobs—not quite appropriate for skilled workers and college graduates who make up a sizable part of the new jobless.

Or two, help these people get into some form of entrepreneurship, which in all likelihood would be in the small-scale informal sector.

Like it or not, the informal sector will continue being around in a big way, and now is not the time to stifle it with threats of new rules, taxes, and restrictions. That could amount to killing the only goose we may have to give us much needed eggs our economy and our people badly need at this most difficult time.

cielito.habito@gmail.com