Tuesday, January 17, 2006

Underground economy and flea markets

I'm due for a post tomorrow, but I'll be on travel again (to Tawi-Tawi, southernmost part of the Philippines, my first trip there!), so I'm posting early. A reader, Michelle Go, a student from UP Diliman, asks me the following questions:

1. What do you think does this tiangge (flea market) popularity says about the state of Philippine economy and consumer behavior?

Flea markets are a fixture in the Philippine (and many other) economies. As a matter of routine, they do not give receipts, hardly any sort of registration, and hence belong to the underground economy. The underground economy as a whole constitutes over forty percent of Philippine output. Fancy that.

What the undergroundization of the economy tells us (and flea markets is one sign of that) is that cost of going formal is high. According to the World Bank, the Philippines is ranked 113 out of 155 countries in terms of the ease of doing business. Incredible. Who are the best? New Zealand, Singapore, US, Canada, Norway, Hong Kong, in that order. We are 89th in terms of starting a business, 91st in terms of dealing with licenses, 82nd in terms of ease of hiring and firing workers, 92nd in terms of registering property, and a whopping 121st in terms of getting credit. Just to start a business, the average waiting time is 48 days, whereas in developed countries it is only 19.5 days; the cost of starting is up to one-fifth of per capita income, whereas in the latter it's below 7%. Now should we wonder why the informal economy is so large? And why the informal economy in New Zealand is less than 13% of its national output?

2. Does this rise in tiangges reflect a harder life for most Filipinos with buyers and sellers opting for cheaper (although sometimes lesser quality) goods and the informal economy?

Harder life? Hardly. I'm one of few people who think that social well being correlates roughly with per capita income, so since the latter has been going up, well... It's not a demand side thing. It's a supply side thing, as I argued above. Is the cost of going formal getting higher? Not really - the cost of not going formal is getting lower. The risks facing tax avoiders, the risk of getting caught without the right papers and licenses, is going down. I think this is a sheer case of deteriorating governance.

3. Does this rise in flea markets bode well or ill for the economy? (seeing that it provides jobs, income and brings cheap good s to those who can't afford expensive ones but also that a lot of the goods are cheap, imported Asian products and the BIR is claiming the government is losing millions in taxes)

It's not really what's wrong; it's a symptom of what's wrong. In general as the economy becomes more formalized, the better, subject to low cost of formalization. Of course we can get cheaper goods from the informal sector, but it's should not be because bureaucracy is artifically driving the price of formal goods up.

4. Do you think this rising trend will continue in the next years? Or will it all depend on the performance of the Philippine economy?

The BIR is cracking down on flea markets. Well and good; but government should realize it's not just a victim here, but also a perpetrator. In short, it will all depend on how government reduces the cost of formalization and raises the cost of informalization. We need government, but we do not need all of these procedures and fees and regulations from slow motion bureaucrats, who are apt to play favorites (or finagle the entrepreneur for grease money). I am not portraying business as the hero here; very often it is big business that lobbies for all these regulations to keep competition out. Why is it so hard to import identical drugs from India or other countries in ASEAN, like Malaysia and Vietnam, where drugs are much cheaper? No real medical reason - just good (or bad, depending on your viewpoint) old commercial interest. It sucks.

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