They’re everywhere! You see them in the streets, on the bus, at home and in almost every nook and cranny of any city or town. They are the street vendors; our stay-out household helpers, nannies and tutors; your neighbor who makes and sells cupcakes from her home kitchen; the lady down the street who augments her family’s meager income by selling cosmetics or clothes on the side; the manicurist-pedicurist who goes to your house once a week…the list goes on. These are the many faces and facets of the people who eke out a living in the “shadows.”
Our financial institutions periodically report the country’s growth in GDP, but does this reportage truly reflect the nation’s economic health?
I believe not because it does not measure the value of the country’s underground economy, which operates off the data grid.
These shadow merchants go their merry way, buying and selling wares without any transaction records. They do not pay taxes, even if some are believed to earn as much as regular businesses do.
It is impossible to even make an exact accounting of the size of the underground economy, which has offered various goods and services through the years.
An article published a year ago by Bloomberg Business listed the countries with the biggest “shadow economies.” Top on the list was the former Soviet Republic of Georgia, where 72.5 percent of the GDP is untaxed. The Philippines was believed to be 26th on the list, with 48.4 percent of GDP underground. The World Bank also estimates that around 40 percent of the Philippine economy is beyond the economic radar.
If we removed illegal goods and services, such as drugs, smuggling and prostitution, we can define the underground economy as the business of exchanging currency for all legal goods and services, the transactions of which are deliberately hidden from government accountants to avoid the payment of taxes and/or compliance with related regulations. Businesses that are in the underground economy, in other words, do not support government programs through taxes and other fees.
But underground business serves a purpose. It has been a lifesaver for the unemployed, and contributes vibrantly to consumer spending, which, in turn, boosts the country’s economy.
Economic analysts differ in their valuations of the real size of the shadow economy. They, however, agree that the size of the underground economy affects to some degree the GDP figures and other key economic indicators. This alters GDP and other economic metrics, such as unemployment, and makes them inaccurate.
It is projected that the underground economy accounts for as much as one-third of the total economy in developing countries and slightly more than 10 percent of the total economy in developed countries. The worldwide underground economy adds up to trillions of dollars, and has grown considerably as an offshoot of the 2008 financial crisis.
Does the underground economy pose a threat to the country’s overall economic health?
Definitely not! In fact, it serves as a pacifying agent to moderate political dissent. With food on their table, these entrepreneurs find little time to talk about politics and express their discontent with any administration occupying Malacañang. Is it any wonder then that, despite several government mismanagement issues and regular egging from the Left, widespread unrest to turn the situation into a powder keg remains under the rug?
This is why President Duterte’s move to go after the so-called 5/6, or the lending scheme offered mostly by Indian immigrants, could cause a stir among shadow merchants. After all, the 5/6 scheme serves as an invaluable source of financing to them; unless, of course, the government could match the ease with which they can secure financing from these 5/6 lenders.
Without the lifeline being provided by these 5/6 lenders, the usually placid underground entrepreneurs may now be politically conscious, no longer oblivious to the wrongdoings of the occupant of Malacañang. They may view the move as repressive, which could be a source of concern to whoever is in power.
There may be other ways by which the government can bring more of the underground economy above the radar. Discounts in personal income-tax rates can entice individuals to report income more accurately and completely. Increased tax-evasion penalties can also discourage underreporting. Another means is for the government to legalize underground economic activities. Of course, a stronger economy overall with more good-paying jobs would be more effective in leading these shadow entrepreneurs into the light.
For comments and suggestions, e-mail me at mvala.v@gmail.com