Towards a four-sector model of the Philippine political economy

Amado M. Mendoza, Jr., Ph.D. ammendoza@up.edu.ph

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 four-sector model of the Philippine political economy that only

characterizes its principal features and also suggests the possibilities for future change. The Philippine political economy is composed of four—formal, informal, criminal, and war—economies, with these categories

understood as Weberian ideal types. Qua ideal types, these economic sectors can be construed either as separate spheres of distinct economic

activities or as interlocking sets of economic actors that could possibly undertake all four kinds of economic activity. The article also inquires into the variables affecting the size of each economic sphere. It 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 can emanate from it.

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Towards a four-sector model of the Philippine political economy1

Introduction

This article is a think-piece that started as a column in the online edition of the Philippine

Daily Inquirer in 2001. For this reason, I have purposely refrained from a systematic

review of the relevant literature. At best, a cursory reading of some theoretical papers

was done. This reading, however, reveals that the literature covers each of the economies

(I allude to) either separately or amalgamated into a single category. For example, there

is substantial literature that consolidates the informal, criminal, and subsistence

economies into a single category labelled either as informal, shadow, parallel, black, grey

or underground economy (Centeno and Portes 2003; Chen nd.; Fleming, Rowan and

Farrell 2000; Friedman, Johnson, Kaufmann and Zoido-Lobaton 1999; Johnson,

Kaufmann and Zoido-Lobaton 1998; and Standing 2003). On the other hand, a distinct

body of literature, following the classic work of Becker (1968), focuses on the economics

and political economy of crime (Andreas 2004; Block and Heineke 1975; Chambliss

1975; Cohen 1996; De Haan and Vos 2003; DiIulio 1996; Ehrlich 1973 & 1996; Fletcher

1985; Loftin and McDowall 1982; Machin and Meghir 2004; Myers 1983; Witte 1983; ).

Murphy (2004) skilfully discussed the connection between crime, rent-seeking, and

government activity. A separate literature covers the political economy of internal or

civil wars in the developing world (Bates, Greif and Singh 2002; Blomberg and Hess

2002: Carbonnier 2001; Collier 2000 & 1999; Collier and Hoeffler 1998; Gates 2002;

Regan and Norton 2005; Sambanis 2002; and Snyder 2006). Sidel (1999), meanwhile,

consolidates political violence, crime, and local politics to create a model of local

bossism for the Philippines. Sidel‘s work offers a corrective for previous writings on

Filipino political culture and patron-client relations, which have ignored the role of

coercion in shaping electoral competition and social relations. For this paper, I mined the

1 This paper is a revised version of an earlier paper entitled ‘The tri-sectoral model of the Philippine

political economy’ presented at the 2003 annual meeting of the Philippine Political Science Association and the

Centre for East and Southeast Asian Studies, Lund University, Sweden in March 2007. Comments are welcome

and could be forwarded to ammendoza@up.edu.ph or amado.mendozajr@gmail.com.

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rich literature for conceptual purposes and will sketch the rudiments of a four-sector

model of the Philippine political economy that will not only characterize its principal

features but also suggest the avenues and ways through which it could be transformed.

The objective is to develop a theoretical model that will be applicable to the Philippines

and other similarly-situated developing states in Southeast and South Asia (such as Timor

Leste, Thailand, Aceh, Sri Lanka, and Afghanistan) and elsewhere.

Reflections on a corruption expose‘ epidemic since mid-2001 up to the third quarter of

2003—alleging the involvement of the First Gentleman, ‗Big‘ Mike Arroyo, in several

shady deals; participation of senior police officials in the illegal drug trade; and the

reported collusion of army officers with the criminal Abu Sayyaf Group2—first led me to

develop the notion of a three-sector Philippine political economy model composed of the

formal, informal and criminal economic realms. Of course, an earlier realization of the

criminalization of the state apparatus during the aborted presidency of Joseph Estrada

also contributed to its development. However, further reflections on the matter up to July

2006, after a flurry of news reports on ‗revolutionary taxation‘ by elements of the

communist- led New People‘s Army (NPA) led to the inclusion of a fourth economic

sector—the internal war economy—to the rudimentary model.

As I see it, the Philippine economy is actually a complex composed of four—formal,

informal, criminal, and internal war or war-related—economies. These categories are

to be 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 accumulatio n of

wealth.3 As economic activities, these sectors are distinct from each other. Secondly,

these categories can be seen as sets of economic actors, that is, agents who undertake

economic activity. As sets of actors, these economies are not hermetically sealed from

2 The Abu Sayyaf Group or al-Harakat Islamiyah started as a radical Islamic fundamentalist group in

the early 1990s but soon degenerated into a criminal gang that attained international notoriety in 2000 when

they kidnapped a number of European tourists for millions of dollars ransom. Some Manila analysts believe

that group was a ‘project’ of the Philippine army to serve as counterpoint to the more established Moro

secessionist movements—the Moro National Liberation Front (MNLF) and the Moro Islamic Liberation Front

(MILF). 3 This is a definition that may be disputed by the proponents of ‘living economics’ or the ‘economics

that really matters’ since I have excluded subsistence activity. The explanation for this limited definition is

provided later in the paper.

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each other and, in fact, interact with each other. This is so since a given economic actor

can (theoretically and in practice) engage in all four—formal, informal, criminal and war-

related—types of economic activity. To the 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, she may be referred to as a formal, criminal, informal, or a warrior.

The rudimentary model can be graphically represented in two Venn diagrams. In the first

diagram, the universal set U, that is, the Philippine political economy is represented by an

enclosing rectangle. Inside the rectangle, we find four circles that are apart from or do

not intersect each other. Each of these enclosed circles represents a distinct sphere of

economic activities. Expressed in set theory language, these circles, as they represent

distinct economic activities, are independent sets since they do not share identical

elements (see Figure 1a). In contrast, the second Venn diagram for these categories,

understood as ensembles of economic actors, consists of four circles (or sets) 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 four circles. These intersections

represent economic actors that engage in more than one type of economic activity. Again

in set theory language, an intersection between two (or three or four) sets corresponds to

the elements common to the sets in question.

In both Venn diagrams, not all of the rectangle‘s area is covered or accounted for by the

circles. This means that not all of the economic activities or economic actors within the

Philippine economy are contained within the four sectors. These residuals include

household and/or subsistence work. These residuals exist because there are two kinds of

productive activity: gainful or for-gain activity; and non-gainful activity, that is,

productive activity not directed toward earning a gain. Household and subsistence work

are instances of non-gainful productive activity. As explained in subsequent sections of

this paper, the four-sector model is concerned with gainful productive activity, economic

activity. For this reason, household and subsistence work are excluded from the model‘s

coverage.

Figure 1a

The four-sector model: Distinct spheres of economic activity

U

Formal

Informal

Criminal War

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Formal Informal

Figure 1b

The four-sector model: interlocking sets of economic actors

U

Criminal War

The formal economic sector

The formal sector is best defined (operationally) 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 exchanges4 and transfers.5 These transactions can occur between

economic actors within a specific national economic territory or could involve domestic

economic actors and economic actors located outside the national territory (i.e., 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 through its penal code and other laws.

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 or unreported economic activity are either informal, criminal, war-related,

subsistence, or household-related. Formal economic activity supposedly enjoys the

state‘s protection since the latter‘s authority is recognized by those engaged in this type

of activity through the payment of registration dues and licenses, and a myriad of other

taxes.

4 These exchanges are voluntary in the context of a prevailing distribution of assets and incomes in a

given society. This is not to imply that an economic actor willingly chooses to be a worker even if he has an

option of being a capitalist. If that economic actor has no other productive assets save his labor power, then

he has no option but to hire out that labor power in order to survive.

5 Transfers are payments made without any corresponding production, expectations of production, or

exchange of value. They represent one-way movements of economic value between two economic actors. In

contrast, an exchange is a two-way movement of economic value between these actors. The term generally

refers to payments made by government to the household sector. An example is the monthly pension check

that a retired government employee receives from the Government Service Insurance System (GSIS).

However, the business sector can also be the source of income transfers. For instance, a retired private

employee can receive a similar check from a private pension fund.

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The informal economic sector

The informal sector includes economic activities that are quite similar to those

undertaken within the formal economic sphere.6 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 informal entrepreneurs usually do

not register with state authorities or pay income taxes and relevant registration fees and

licenses. 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 register with the authorities or pay taxes. Nor are receipts issued

in this sector. Informals are therefore fair game for both predatory agents of the law and

criminals. In truth, they usually pay an implicit ‗tax‘ (in the form of bribes or

‗protection‘ fees) to these entrepreneurs so they could ply 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

6 Some analysts, especially feminist political economists, include household and subsistence activities,

such as home cooking, child-rearing, horticulture, etc., in the informal sector. I exclude them since they are not

for-gain activities even if they are unarguably productive and necessary. These activities constitute a separate

economic sector—the household and subsistence sector. All activities in the household sector are transfers

while subsistence activity is own-account or own-use work. Value is created but is not exchanged for gain. For

instance, a subsistence economic actor may raise crops but consumes them. He does not bring his produce to

the market for two reasons. He may not have been able to produce a saleable surplus or he cannot afford the

transactions cost of selling the produce. Subsistence activity may be carried out in the context of a household.

However, not all household are subsistence households. Others may be households of formal, informal,

criminal and war-related actors. While subsistence activity is essentially independent and disjointed, households

necessarily transact with the other sectors, especially the formal and informal ones. Households, save for

subsistence households, are not self-sufficient and must source necessities from the other sectors. Households

must also exchange values with the other sectors so monetary incomes needed to purchase necessities could be

earned.

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entry into the formal sector. These may include minimum capital and skills

requirements. For example, it would be inconceivable (though probably not entirely

impossible) 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 state officials and predatory entrepreneurs

at times. Its small size accords mobility to the enterprise such that when agents of the

law or predators come near, an early-warning system alerts the informal entrepreneur to

move his business.

How about the subsistence work of economic agents such as slash-and-burn farmers

(kaingineros), forest product gatherers, 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. When these agents pursue other activities

in order to obtain cash incomes or balances, then they interact with actors 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, criminals or warriors. They may also obtain temporary employment

in either informal or criminal enterprises, or in the internal war economy. 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). Or they

may be conscripted as couriers or spies for the New People‘s Army. In recognition of

their services, the NPA may provide such services as punishment of cattle rustlers and

other petty criminals.

Informality is not confined to informal economic actors identified in the discussion

above. The weakness and/or rigidity of state institutions often lead even formal actors to

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use informal means to achieve economic goals. In many commercial malls in urban

areas, formal enterprises may deploy informal vendors, especially during the Christmas

holidays, to increase sales and evade taxes. However, the recourse to informality often

leads to criminality. A bribe usually clinches a deal reached informally.

The criminal economic sector

The criminal economy 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, gun-running, and extortion, among others. 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

finds it profitable to smuggle it into a country. In the process, the cigarette pack becomes

an illegal good. A video compact disk (VCD) may be a legal good. However, if an

entrepreneur duplicates it without permission from the copyright holder and sells the

same without paying royalties, then the product is illegal. The illegality of goods and

services is the primary distinction of criminal transactions from formal and informal

economic activity. While there may be overlaps in some of the commodities sold within

the formal and informal economies, criminal commodities are exclusive to the criminal

sector. Demanders of these commodities can satisfy their requirements only in this

sector. In the Philippines and elsewhere, the main retailers of pirated products are

formals and informals. In the national capital region, a major source of inexpensive,

pirated DVDs are the stalls near the mosque in the Quiapo district. In this sense, the

criminal sphere includes formal and informal economic actors.

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 agents of the state

or to another criminal actor 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

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is obviously involuntary. The same is true with the money given by a shopkeeper to the

‗friendly‘ neighborhood toughie or police officer for protection. In these cases, violence

(its actual use or the threat of its use) is an essential element that clinches 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 (internal) war economy

Technically, war economic activity is criminal activity. However, since war-related

activity is associated with entities with political or ideological programs and identities

(whether real or purported is not yet of consequence to us at this point), it is useful to set

it apart as a distinct conceptual category. The war economy covers all exchange and

gainful activities carried out in pursuit of a war effort or under the guise of waging a war

as well as those activities made possible by an on-going internal war. Some might object

to the use of the adjective ‗gainful‘ to describe the activities of revolutionary political

movements since they do not have a commercial intent. Nonetheless, it is argued that the

logic of revolutionary economic activity is akin to normal business activity in that the

objective is to realize a gain over the cost of the same activity. To do so is to claim that

the same rationality is shared by normal for-profit entrepreneurs and non-profit oriented

political entrepreneurs. As much as possible, political actors will want to make sure that

a gain is earned when engaged in internal war economic activity. Only political

considerations will over-ride this economic logic and allow political revolutionaries to

sustain an economic loss.

Under the above-mentioned definition, the ‗revolutionary taxation‘ of local communist

insurgents, which could be defined legally as criminal extortion, is a war-related

economic activity. Similarly, the sale of war materiel by rogue elements of the Armed

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Forces of the Philippines (AFP) and the Philippine National Police (PNP) is war-related.7

This activity is treasonous as the buyer could be the opposing armed insurgent force or

criminal elements. The inflation of military budgets through exaggeration of the armed

strength of insurgencies is a traditional stratagem adopted by military and defense

officials in the Philippines during annual budget hearings since the 1950s. Skimming off

portions of the military budget by higher echelon officers resulting in under-equipped

troops on the fronts is a related usual practice.8 These activities are made possible by an

existing armed conflict. The absence of armed combat makes it difficult for military

entrepreneurs to engage in these activities but peace does not close possibilities for illicit

gain. The over-price of military equipment is rather usual the world over. However, on-

going conflict can help cover up wrong-doing especially if the over-priced materials

(such as ammunition, fuel, food rations, etc.) are used up in battle.

If the point of reference is a state, the actors involved in the internal war economy are

usually but not limited to the armed combatants. This point is important because even

civilians can get involved in various ways such as gun-running and the provision of non-

lethal equipment such as radios, uniforms, footwear, knapsacks, etc. The relative

breakdown of order in war-torn areas also affords entrepreneurs unique ways to profit.

Anecdotal information from Mindanao reveal how local officials, criminals, and military

officers acquired lands and other immobile assets at low or almost no cost as these were

abandoned by non-combatants because of the violence. In this sense, war booty accrues

to non-combatants as well.

Most of the ‗commodities‘ that figure in war-related transactions are intrinsically legal

goods since they are produced or manufactured within the formal economy. It is not

entirely impossible that some ‗war goods‘ such as land mines are fabricated within the

7 The argument that these rogue activities are fundamentally criminal activities is a compelling one

since rogue soldiers are motivated principally by profit rather than ideology or political aims. This does not

rule out the possibility that some of these soldiers have been won over or influenced by the insurgents. Strictly

speaking, the war economy is indeed a subset of the criminal economy given that criminal entrepreneurs are

empowered or encouraged by the on-going internal war to engage in lucrative criminal activity. 8 These criminal activities constitute a major grievance of lower echelon officers and enlisted

personnel and had induced many to join coup attempts in the Philippines since the ouster of the Marcos

dictatorship in February 1986.

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insurgent organizations. Nonetheless, the needed inputs (such as inorganic chemicals)

are most likely sourced from the formal economy. Some transactions in the war

economy may be voluntary or straightforward commercial exchanges. The transfer of

funds from domestic and foreign supporters and financiers to armed insurgencies is a

voluntary transaction. However like criminal activity, most of internal war ‗transactions‘

are involuntary and are mediated through violence or threats of violence. A clear

example is NPA revolutionary taxation: businesses must pay or suffer adverse

consequences such as the destruction of assets and equipment. In recent years,

communications towers of mobile phone companies are the favorite targets for retaliation

and punishment for those who refuse to pay the insurgents.9 Another example is the

permit-to-campaign fees collected by the NPA from politicians allowed to campaign

within NPA-controlled or –influenced areas during electoral campaign periods. The

insurgents even issue receipts to politicians so their travel within the rebel-influenced

zone could be facilitated.

Apart from environmental destruction and population growth, the internal war has caused

migration from the rural areas into the country‘s urban centers and swell the latter‘s urban

poor and informal economic spheres. Some of these internal migrants became victims of

human traffickers serving domestic and international markets. For instance, the

celebrated Sarah Balabagan who almost got executed in Saudi Arabia for killing her

employer, was an internal war refugee from Cotabato province in Mindanao and got hired

abroad through the efforts of an illegal recruiter.10 Nameless others end up as prostitutes

in the country‘s cities and bigger towns. The sizeable Filipino population in Sabah and

9 Industry gossip reveals how a latecomer mobile phone company managed to overtake the pioneer

and market leader through the payment of revolutionary taxes to the NPA. In addition, the latecomer

reportedly gave tax-in-kind—mobile phones and SIM cards—to the insurgents. This is a clever arrangement

since the insurgents got locked into a credible commitment. Since they are using the latecomer’s mobile phone

for their own communications, they could reasonably be trusted not to betray the latecomer and destroy its

towers. Meanwhile, the pioneering company refused to pay (on the say-so of its foreign partners) and

sustained losses of many communications towers through bombings and arson. The latecomer as a result had

better coverage of the archipelago and now commands almost 60% while the pioneer controls just a fourth of

the market. 10

Balabagan escaped execution and returned to the Philippines when the murdered victim’s family

agreed to accept an undisclosed amount of so-called ‘blood money’.

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nearby Indonesian islands of Sulawesi, Celebes, and Maluku is also composed of war

refugees from Mindanao.

The essential features of the different types of economic activity are summarized in the

following Table 1.

Table 1

Essential Features of Different Types of Economic Activity

Type of

economic activity

Object of

transaction

Nature of

transaction

Tax

status

Receipts/contracts Transacts

with ROTW

Formal Legal goods & services

Voluntary exchange

Paying Yes Yes

Informal Legal goods &

services

Voluntary

exchange

Non-

paying

No Yes

Criminal Illegal/exclusive goods and

services

Voluntary and

involuntary “exchange”

Non-paying

No Yes

War-

related

Illegal/exclusive

goods and service

Voluntary

and involuntary

“exchange”

Non-

paying

No/Yes Yes

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 body 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 de-criminalized. In this regard, we can cite the case of the so-

called biyaheras (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;

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nowadays, it is Bangkok and Jakarta. Through their biyahe (trip) to these destinations,

traders can either stock their established shops (e.g. in Greenhills or Cartimar) or sell

informally to their relatives and friends (usually on pay-by-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 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 crime lords and politicians to augment their

banks‘ loanable funds. Or they can set up legitimate businesses as fronts for criminal

activity. So we have countless lounges, karaoke bars, massage parlors, beer gardens—all

registered with city hall—where prostitution flourishes. Or, as Mary ―Rosebud‖ Ong

attests, they can operate money changers registered with the Central Bank engaged in

dollar salting and money laundering.11

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? 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 unpro-

ductive 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.

11 Ong surfaced as a major witness during hearings conducted by the Senate in mid-2001 regarding the

involvement of the Philippine National Police (PNP) in various crimes, particularly drug trafficking, during the

administration of President Joseph Estrada (1998-2000).

16

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, the concept of 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 corner 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, illegal logging, and other

illegal businesses without fear of persecution or harassment in exchange for a cut of the

proceeds (Sidel 1999). 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 popular illegal numbers game in the Philippines.

The different types of rent-seeking discussed above straddles all four economies. Most of

the rent-seekers are formal economic actors and as well as institutionalized political

agents. For example, businessmen spent time and resources to obtain preferential

treatment and favors from the state. They do not only abide by laws but they also resort

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to informal (e.g., ‗gentlemen‘s agreements‘ reached on golf fairways) and criminal (e.g.,

paying a bribe) means. The criminal rents are usually earned by various actors from the

four economic spheres through informal and criminal means. Nonetheless, violence is

inextricably linked with criminal rents. The NPA used to earn ‗protection‘ rents from

concessionaires cutting trees illegally even in environmentally protected areas before it

discovered the lucrative cell-phone towers. Local civil and military officials share in the

criminal rents ‗earned‘ by these illegal businesses by tolerating or protecting the latter.

Informals can be employed by criminal groups at the retailing end. We hear of balut

(salted duck eggs) and fishball vendors who also double as resellers of shabu (‗crack‘)12.

The jueteng cobrador (collector of jueteng bets) 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

criminal underworld can absorb some of the 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 (Chinese noodles), shampoo packets, cheap sardines, junk food, and what have

you. Economic actors normally employed in the formal sector sometimes engage in

informal activity, especially during difficult times to supplement household incomes.

The stereotyped example is the public schoolteacher who sells tocino (cured sweet

meats), ready-to-wear (RTW) clothes, and toiletries on the side.

New thinking (e.g. Chen, n.d.) stresses the systematic relationship between the formal

and informal sectors of any given political economy. Informals undoubtedly expand the

market reach and increase the sales revenues of formal enterprises. To the extent that

informal enterprises are unregulated, their existence helps lower production costs in

several formal enterprises that enter into sub-contractual arrangements with them. The

informal economy is thus a useful appendage to the formal economy since it subsidizes

the latter through lower costs of production. It is not a mere vestige of a traditional and

12

Interview with police officials, NCRPO, 15 April 2006, Quezon City.

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obsolete economy. It will in fact continue to thrive and grow as the formal economy

grows. Thus, one can conclude that the growth of both the formal and informal

economies is correlated.

A country‘s economic sectors relate to the rest of the world. It may be safe to surmise

that the informal sector is least integrated with the global economy. But one can 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.13 In addition, 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 and

Rosebud, the Philippines is a major link in the international drug trafficking chain as well

as a major consumer of prohibited drugs.14 The internal war economy is similarly not

insulated from the rest of the world (ROTW). Armed insurgencies gather material and

moral support both from domestic and international sources—including diasporas,

international arms merchants, sympathetic states, and other foreign actors. Similarly, the

challenged state also relies on domestic and international supporters, including foreign

governments. However, its war-related transactions do not have a criminal character

since it defines what is illegal and criminal. However, the free-lance activities of rogue

state agents in pursuit of private gain are by nature criminal activities.

13 Some of these remittances are actually made without compensating the transmission channel. In

the padala system, for example, an emigrant worker may entrust money to a fellow worker who is travelling

back home. The first worker then instructs his family members at home to get in touch with the incoming

worker to get the remitted amount. To lessen the risk, the remitting worker may tap the services of more

organized informal fund transfer systems (IFTs) for a fee. In the Arab world, the system is known as the

hawala or hawallah system. The hawala has counterparts in other regions of the world.

14 According to the United Nations Office on Drugs and Crime (UNODC), the country ranks third

in the world in the consumption of amphetamine-type stimulants like shabu. Illegal drugs have reportedly

become a P216 billion to P432 billion industry. Philippine drug authorities reported that there are 3.4 million

regular and part-time drug users in the country, up from only 20,000 in 1970. About 13 transnational drug

rings and 175 local drug syndicates operate in the country where there are some 45,000 drug-pushers (Flores

2003). After three years, the industry’s value has doubled to the P700 billion mark as of September 2006

largely due to the increase in the street price of the most popular drug, shabu, from P2000 to P5000 per gram.

Drug users have increased to around 9.3 million. The typical drug user is male, around 29 years old, and earns

an average of P30,000 monthly (Porcalla 2006).

19

Criminal and war-related activities are essentially predatory and the other economic

sectors are the victims. While saleable products can be created both by the criminal and

internal war economies, these products (esp. those of the criminal economy) are not

goods but are undoubted ‗bads.‘ The jury may still be out on the social utility of anti-

state warfare especially when existing states are themselves predatory and corrupt.

However, the opportunity cost of resources diverted to warfare in any given economy is

quite substantial.

The state and the four economies

Weber and other scholars, following Hobbes‘ lead, valorized the state as the source of

political order and stability given its legal monopoly over means of violence. Charles

Tilly teaches us that while there is technically no difference between a state and

protection racket, the state‘s monopoly of violence is considered necessary and

legitimate. North and Weingast meanwhile add that the state must be powerful enough to

be able to protect and enforce property rights and contracts. However, it must also have

limited power so asset holders are not preyed upon. Sovereigns need to assure asset

holders so the consequent economic activity generated will yield tax revenues adequate

for their purposes. This is the so-called ‗commitment problem‘ often cited in the

literature. The said problem concerns how sovereigns or governments can make credible

commitments to assure the sanctity of citizen‘s property rights. Sovereigns must be

powerful enough to protect and enforce property rights. The state‘s power is largely a

function of its control over means of violence. However, asset holders must be

convinced that a powerful Leviathan will not use its power to prey on them. Hence, a

sovereign must be able to make a credible commitment to restrain itself from predation.

Thus the state itself is the key public good that provides derivative public goods. In

many developing countries like the Philippines, the demand for such a competent and

limited state is quite apparent but its supply is not forthcoming.

20

In reality, however, as Bates, Greif, and Singh (2002) remind us, the state is not the only

societal agent with assets for violence. This is especially true in the developing world.

Consequently, it is also not the only agency that can protect and enforce property rights

and contracts. Therefore, security of life and property are not intrinsic public goods that

only a state can provide. They can also be private goods since they can be provided by

private agents or non-state actors. Like the state, private actors must have control over

some means of violence to be able to secure life and property. Absent the state, private

agents will have the monopoly over means of violence and security is a pure private

good. When states and non-state actors have access (even if unequal) to means of

violence, then they become rival suppliers of security to private actors without such

assets.

The protection and enforcement of property rights is one of the single most important

failures of the Philippine state. The Spanish colonial state sought to impose property

rights regimes that were alien to those instituted by the indigenous peoples of the

archipelago, which included stewardship, usufruct, and communal assets. In the process,

massive asset theft typical of all colonial ventures occurred in the country. The main

object of theft and ownership was land (esp. arable land) as well as labor power. Given

the paucity of the colonial state bureaucracy, the Spanish colonialists sought to corral

indigenous Filipinos in settlements so surpluses could be extracted through tributes,

forced labor, and taxes in kind. The American colonial state introduced the distinction

between public and inalienable land and privately-owned and alienable real estate. In the

process, several indigenous minority peoples in the highlands were disenfranchised of

their so-called ancestral domains. The 1946-1972 post-colonial state continued these

Western-originated property regimes even as the asset structure diversified over time. In

general, access to political power guaranteed security of property rights and elites at

various levels consolidated their political and economic positions.

Up to the eve of the declaration of martial law in September 1972, the property rights of

rival elite factions were generally secure regardless of the political cycle‘s outcome.

Ownership rights were not extinguished by an electoral loss. The elites were organized

21

into two political parties that alternated in power at the national level. The ability of an

elite faction to regain power in the next election deterred the faction in power from

erasing the property rights of the ‗outs.‘ Elite factions, therefore, were prevented by the

possibility of electoral defeat from disrespecting the property rights of their rivals. The

default behaviour was for the ‗ins‘ to plunder the state treasury instead of confiscating the

property of the ‗outs.‘ Notwithstanding a constitutional provision for two presidential

terms, no president has been able to win re-election until 1969 when Ferdinand Marcos

won an unprecedented second term.

The balance of power between the rival elite factions shifted decisively in favour of his

faction after Marcos‘ unprecedented re-election in 1969. Apart from Marcos‘ own

manoeuvres (including packing the military of officers from his region to ensure their

personal loyalty), the Cold War interests of the United States afforded his government

access to substantial foreign monies (in the form of US military aid, loans from multi-

lateral financial institutions, and private commercial banks bulging with petro-dollar

deposits). External funding allowed Marcos to rely less on credible domestic property

rights commitments to extract the necessary resources that he could use as patronage to

consolidate his political position. He monopolized political power through the

declaration of martial law in September 1972 and proceeded to erase property rights of

his political opponents (Kushida 2003).

The demise of the dictatorship in February 1986 saw the post-Marcos elites attempting a

restoration of pre-martial arrangements with respect to property rights and access to

political power. The properties of the anti-Marcos elites (such as the Lopez, Lopa, and

Jacinto families) were returned to their former owners while a new constitution adopted

in 1987 provided the ground rules for political contestation and all but forestalled the

possibility of new dictatorships. After an initial lock-out period, even the Marcoses were

allowed back into the country and managed to win electoral posts or stand for elections.

Despite the formation of a presidential commission mandated to recover the so-called ill-

gotten wealth of the Marcoses and their cronies, these properties got entangled in a

quagmire of unresolved law suits filed within and without the country.

22

The violation of elite property rights by Marcos during the dictatorship‘s heyday is like a

genie let out of the bottle. Despite all efforts to date, the mess created by the initial

massive cancellation of property rights has not been sorted out to everybody‘s

satisfaction. The ownership of substantial portions of the equities of major Philippine

corporations (including the top-ranked San Miguel Corporation and the Philippine Long

Distance Telephone Company) remains contested. The fall of the dictatorship also led to

the recognition of new asset claimants—the thousands of human rights victims who were

tortured or murdered by Marcos‘ security forces and the coconut farmers disenfranchised

by the so-called coconut levy. The claims of the human rights victims against the Marcos

estate had been repeatedly recognized by US courts while the Philippine Supreme Court

had repeatedly ruled that the coconut levy was a public fund and must be taken from the

control of businessman Eduardo Cojuangco, who used the money to wrest control of the

country‘s premier business firm—the San Miguel Corporation (SMC). To date, however,

none of these judicial decisions have been enforced since rival claimants have managed

to secure restraining orders against them.

The fundamental point to be made with the above digression is the fragility of property

rights in the Philippines. If the properties of elites are not even sacrosanct, could we

expect the assets of non-elites and less-powerful to be more secure? Nonetheless, legal

advances in property reform since 1986—including the Comprehensive Agrarian Reform

Law (CARL), Urban Development and Housing Act (UDHA), Indigenous Peoples Rights

Act (IPRA)—have created new property rights for the under-classes. While these

property rights for the poor are still limited and imperfect (largely due to the opposition

of adversely-affected parties and state agency capture), the rights-based instruments

generated by these reforms have generated a new set of informal commercial transactions

over these assets. For example, an agrarian reform beneficiary is prohibited by CARL

from transferring or conveying the acquired for a period of 10 years or until the land is

fully paid. This legal prohibition has not stopped needy farmers from selling or from

using the asset to obtain informal credit. In other cases, the weakness of state agencies

and legal empowerment due to these new property reform laws have enabled informal

23

transactions among the under-classes even in the absence of official documents such as

titles, patents, and leases. These informal transactions cover housing ‗rights‘ in key

urban poor areas in the country.15

In sum, the strength of the state and the competence of its institutions are the most

important factors behind the existence of a four-sector political economy. The ideal is an

economy that is wholly, or at least predominantly, formal. While the informal economy

is not expected to disappear even with the growth of the formal economy, the status of

informal entrepreneurs should be legally recognized, their incomes should be adequate,

and their working conditions should be decent. The smallest sector should be the

criminal sector. The war economy should not even exist since the ideal situation is one

where the state enjoys unrivalled authority. While the Venn diagrams in Figures 1a and

1b seemed to imply equal-sized economic sectors (because of the convention of using

equally-sized circles), these sectors are actually unequal in size.16

What determines the size of these different economic sectors? The size of a nation‘s

population is directly related to the size of the formal, informal, and household and

subsistence economies. But population size is not the key variable of interest. As shown

in Figure 2, the strength of the state is a major determinant of the size of the various

economies. Where the state is weak and is unable to enforce its own laws, 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

15 These points are fully developed in Mendoza (2007). 16 The size of an economic sector can be measured as the monetary value of all economic activities at

a point in time.

could be considered as irrational or inefficient. Expressed in another way, informals find

that the benefits of illegality exceed its costs. 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?)

But state strength is a large umbrella variable that needs to be disaggregated. One

dimension of state strength may be its capacity to extract resources from society. And

this capacity may be measured either by the average tax rate or average annual tax

collections. And these variables may exhibit a reverse relationship compared to overall

state strength, that is, the higher the tax rate or annual tax intake, then most likely, the

formal economy would be smaller and the informal and criminal economies would be

larger. But the relationship between taxes and sizes of the economies is not

straightforward as it may apparently seem. Even at a high level of average annual tax

take, the size of the formal economy may still be substantial if the ratio of public goods

expenditure to total tax revenues would be high. In other words, if there is a high rate of

conversion of tax revenues into public goods, then the formal economy would be

similarly large compared to a situation where tax revenues are dissipated by state

officials. Another manifestation of state strength is its coordinative and integrative

capacity; the higher this capacity is, the bigger the formal economy and the smaller the

other economies will be. Further work will have to be done so the impact of other

variables such as level of corruption, quality of bureaucracy, costs of property rights

enforcement on the size of the various economies could be studied.

Schneider (2002) reports the size of informal economies of some 110 countries as a

percentage of the 1999/2000 gross national product (GNP). The following table (Table

2) summarizes the statistics for the informal economies of selected South and Southeast

Asian countries including the Philippines. As a percentage share of GNP, the Philippine

informal economy trails those of Thailand and Sri Lanka. In terms of absolute value (in

25

US dollars), the Philippine informal economy is second to Thailand within Southeast

Asia.

Table 2: Size of informal and formal economies of selected Asian countries

Country GNP at market

prices (current

US$, billion) 2000

Informal economy

in % of GNP,

1999/2000

Informal economy

(current US$,

billion)

2000

Informal

economy

GNP per capita

(in US$)

Indonesia 1426.6 19.4 276.8 110.6

Malaysia 823.9 31.1 256.2 1051.2

Philippines 793.2 43.4 344.2 451.4

Singapore 983.7 13.1 128.9 3240.9

Thailand 1205.4 52.6 634.1 1052.0

Vietnam 313.5 15.6 48.9 60.8

Bangladesh 468.9 35.6 166.9 131.7

India 4531.8 23.1 1046.8 104.0

Pakistan 596.0 36.8 219.3 161.9

Sri Lanka 160.0 44.6 71.4 379.1

Source: Schneider (2002)

26

Possibilities for transformation

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 the other economies, 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, more so for

the warriors. However, one cannot safely generalize that all formal actors have this

strategic direction. Some formal actors, especially politically powerful ones, may want to

continue to dabble in the other kinds of economic activity even in the long run. The

political power they wield allows them to behave in this manner. 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 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.

27

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 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.

It is quite difficult to map out on the outset the strategic direction of the warrior. His

endeavors may end in several possibilities: strategic military victory, strategic military

defeat, negotiation and political settlement, and strategic co-existence. Should he attain

strategic military victory, then the state will be reconstituted according to his preferences.

In the event of a strategic defeat, the war economy may disappear. If the combatants

reach a political settlement, the social and political system may be amended acording to

the settlement‘s terms. Strategic co-existence cannot be ruled out as a possibility given

the longevity of the country‘s insurgencies. Strategic co-existence simply means the

combatants are unable to defeat or settle with their counterparts and will mean the

perpetuation of the current situation.

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 dustbin 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 can emanate from the model. Towards these ends, I await your

comments and questions with eagerness.

28

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