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.
 2

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.
 3

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 accumulation 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.
 4

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

Formal Informal Criminal

War

U
 6

Figure 1b

The four-sector model: interlocking sets of economic actors

Formal Informal

War Criminal

U
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.

These exchanges are voluntary in the context of a prevailing distribution of

4

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.

Transfers are payments made without any corresponding production,

5

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.
 8

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.

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.
 9

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
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.
 10

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
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
 11

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
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
 12

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

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.
 13

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
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

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.
 14

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
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 Object of Nature of Tax Receipts/contracts Transacts

economic transaction transaction status with
activity ROTW
Formal Legal goods & Voluntary Paying Yes Yes
services exchange
Informal Legal goods & Voluntary Non- No Yes
services exchange paying
Criminal Illegal/exclusiv Voluntary Non- No Yes
e goods and and paying
services involuntary
“exchange”
War- Illegal/exclusiv Voluntary Non- No/Yes Yes
related e goods and and paying
service involuntary
“exchange”

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

Balabagan escaped execution and returned to the Philippines when the

10

murdered victim’s family agreed to accept an undisclosed amount of so-called ‘blood

money’.
 15

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;
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

Ong surfaced as a major witness during hearings conducted by the Senate

11

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

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.

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.
 17

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
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
12
Interview with police officials, NCRPO, 15 April 2006, Quezon City.
 18

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
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

Some of these remittances are actually made without compensating the

13

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.

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

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

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.

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
 20

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.

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
 21

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
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
 22

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.

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
 23

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
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

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.
 24

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
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
 26

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 Informal economy Informal economy Informal
prices (current in % of GNP, (current US$, economy
US$, billion) 2000 1999/2000 billion) GNP per capita
2000 (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)
 27

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.
 28

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.
 29

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