Pushed to informal sector

Pundits are sounding the alarm of a likely rise in the ranks of the informal sector amid the economic crisis, as the slowdown leads to job cuts. The informal sector is a catch-all term for people who contribute to a country’s economic output, but whose contribution are not captured by official data.

In the Philippines, the National Statistics Office (NSO) estimated the informal sector to have numbered 10.5 million Filipinos last year. Of that number, the NSO said the self-employed ran to 9.1 million, while employers stood at 1.3 million.

By type of economic activity, the informal sector includes vendors, household helpers, neighborhood handymen, public transport drivers, entrepreneurs and small traders, and agricultural workers.

The National Economic and Development Authority admitted that the current economic hardship may cause some Filipinos to opt for the entrepreneurial tack.

But beyond the economic downturn, the difficulty of doing business in the country also contributes to the swelling ranks of the informal sector.

The latest Doing Business report of the International Finance Corp. (IFC) is instructive in this regard.

According to the survey of the World Bank private-sector lending arm, doing business in the Philippines became more difficult this year compared with last year.

The country’s overall ranking fell three notches to 144th from 141st last year.

It is worth noting that the IFC survey doesn’t take into account macroeconomic developments, and so the present global slowdown is not a factor in the Philippines’ slipping performance.

In any event, the current crisis has affected nearly every economy, and yet not all countries in the Doing Business report suffered a drop in the ranking.

Of the 10 factors that the IFC took stock of in coming up with its ranking, the Philippines suffered reversals in all but one of the 10 criteria used to measure performance. In the only criterion that the Philippines didn’t do worse, its performance, however, neither improved.

The country, however, suffered the biggest drops in performance with respect to two critical factors: starting a business and paying taxes.

The Philippines’ ranking in terms of paying taxes fell the most this year by nine notches. Again, this factor has nothing to do with the current global crisis in so far as it has dampened economic output and along with it tax collections.

The paying taxes criterion measures, among others, how often businessmen settle their obligations with the government in a year. In the Philippines, a businessman has to settle his taxes 47 times a year, or way above the East Asia and Pacific average of 24.6.

This means a businessman in the country has to spend more time dealing with tax authorities, thus resulting in more opportunities for corrupt tax officials to mulct the entrepreneur.

Despite dismal collections, the Philippine government also claims a bigger share of business profits as tax. While the East Asia and Pacific average runs to 36.8 percent, the Philippines’ total tax rate reaches 49.4 percent.

No wonder then that businessmen in the country prefer to cheat on their taxes, as the state’s cut is more prohibitive in the Philippines.

Indeed, a University of Asia and the Pacific economist estimates the foregone tax revenues from the informal sector at P100 billion a year, which is enough to plug close to half the government’s budget deficit this year. Foregone income taxes amount to P70 billion, while other taxes such as the value-added tax, business permits and licenses would have brought in another P20 billion to P30 billion to state coffers.

If existing businessmen are forced to cheat because of the country’s poor tax system, then budding entrepreneurs are driven underground because of the difficulty in starting—and maintaining—a business in the country. –Manila Times