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University of the Philippines - Diliman


Extension Program in Pampanga



Underground Economy:
A Sneak Peak
The Underground Economy in the Philippines: Its Economic Impact



Erica V. Abillon
WF 10:00 11:30

Prof. Cynthia Sanguyu






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ABSTRACT
Most of the activities in the underground economy, a big part of our economy that can
never be separated from our culture, are unknown to the government. Even if it is illegal, people
can see and observe that in every part of our country, the underground economy will never be
absent. On the streets, outside the malls or schools, at the terminals, etc., wherever people go,
they can always see that there are many economists that are underground. The researcher finds
this study beneficial, not only because this is a major concern nowadays, but also because this is
included in her interests.
This research paper is a study of the contributions and drawbacks of the underground
economy. Also, this paper tells the problems that people are experiencing on the underground
economy. Lastly, this paper presents the actions or responses of the government with respect to
the underground economy. In connection with these, the researcher will voice out her opinions
and recommendations concerning this topic.

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I. INTRODUCTION
A. Background of the Study
Nowadays, there are many different kinds of businesses in every part of the Philippines.
Whether it is made over a short or a long period of time, it contributes to the growth of the
economy. But even if there are many big time and small time business owners everywhere, there
are some who do not contribute to the growing economy of our country. There are some owners
who earn lots of money but do not pay taxes. There are also those people who do not have
companies, but they earn money in simple ways. Those vendors of ice cream, fishballs, kikiam,
kwek kwek, gulaman, etc. that can be spotted on every street are some examples of those people
who earn money but do not pay taxes.
Even if it is good in the eyes of many, those people with their small or big businesses do
an illegal job because they do not give what is due to the government and in return, the plans and
projects that the government will undertake will be affected. The researcher is interested in this
topic because she wants to know their impact and significance to our economy even if they cause
negative consequences to our country. She wants to know if the underground economy in the
Philippines somehow benefits us and if the government is doing any actions to either stop or
promote underground economy.
B. Significance of the Study
This research will give information about the positive and negative consequences of the
underground economy in the Philippines, the reasons why people enter underground economy
and the reasons why the government is against it. People who dont know about this matter will
now be knowledgeable because they will acquire understanding and will be aware of the impacts
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that underground economy gives in our country. It will unveil how the government deals with
illegal and unrecorded sector which are parts of the underground economy. It will also inform us
about the problems that people are experiencing when they enter the underground economy.
C. Statement of the Research Problem
Even though the underground economy in our country, which is composed of two parts,
has some positive sides that keep the peoples conscience at ease and make the people think that
what they are doing can be justified, it gives more negative effects in our economy thats why the
government is performing some actions for it to be lessened or to be prevented.
D. Objectives
The main goals of this research are the following:
To identify the differences between the unrecorded sector and the informal sector that
are parts of the underground economy
To determine how the underground economy affects the growing economy of the
Philippines, both the positive side and the negative side
To know the problems occurring to the underground economists
To determine the actions of the government to either stop or promote the underground
economy
E. Review of Related Literature
Economics: Theories and Principles by Evelina Viloria, Julia Rillo, Exuferencia Mina,
Purificacion Jacob, Julius Espero and Teofista Vivar; Microeconomics (Third Edition) by David
C. Colander; and Marcoeconomics (Fourth Edition) by Michael Parkin provide an overview
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about the illegal sector or black market as referred to by many. The researcher finds these
books significant because it contributed lots of information for this research paper.
In the Informal Economy: Is it a Problem, a Solution or both? The Perspective of
Informal Business by Omar E. Garcia-Bolivar and in the Philippine Journal and Industrial
Relations by Isagani Antonio F. Yuzon on his article Globalization and Human Resource
Development for the Informal Sector, the contributions of the underground economy in our
country are stated. They also provide the possible negative consequences of the underground
economy.
An Overview of the Lurking Economy: The Underground Economy and the National
Accounts of the Philippines by Mary Ann Toyoken enumerates some of the programs of the
government that can help people in the underground economy. This manuscript is important for
the researcher because it shows that the government somehow is doing some actions towards the
underground economy.
The Supporting Workers in the Informal Economy: A Policy Framework by the Women
in Informal Employment Globalizing and Organizing (WIEGO) and The Philippine Urban
Informal Sector by Reginald M. Indon provide some valuable information about the problems in
the underground economy. These are helpful to the researcher because they give helpful
information in connection with this study.
Finally, there are also internet articles that the researcher used in her research. These
articles are Consequences of the Underground Economy by San Choon Yin and The
Underground Economy. They gave additional information suited for this research paper.

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F. Methodology
In completing this research paper, the researcher has performed several steps. First, she
did some research on the internet after finalizing her topic. She gathered information and read
several blogs and articles regarding the underground economy to have more background and
understanding in her topic. After the approval of her proposed topic, she started collecting more
information in the Angeles City Library and in the library of University of the Philippines
Diliman Extension Program in Pampanga. She also used the internet to get some additional
information.
When she had all the data she needed, the researcher started sorting out the information.
She used notecards for organization purposes. Next, she compiled all the information and did a
draft. Lastly, she revised the draft to correct some mistakes and rechecked it for some careless
errors.
II. PRESENTATION AND ANALYSIS OF DATA
A. What is the Underground Economy?
The underground economy has many definitions and interpretations based on different
authors. One of them defined the underground economy as the informal economy. When harmful
activities are associated with it, it is often referred to as the black market. The underground
economy that helped out countrymen during the 1980s was a combination of these two, but the
bigger part was the contribution of the unregistered, blue-collar workers who work hard on
different places (SEAsite, 1997).
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In the website http://choonyin.tripod.com/consequences (n.d.), it states that the
underground economy is composed of the unrecorded sector where the legal activities that are
unknown to public authority are going into actions, and illegal sector both criminal and non-
criminal based activities.
Just like what those two stated, the underground economy has two parts, the unrecorded
sector and the illegal sector. After knowing this fact, it is only right to differentiate these two.
First, the unrecorded sector is the part of the underground economy that is not known to
the government to avoid taxes and regulations. It may also be hidden because the goods and
services that it offers are illegal. It is not counted from the GDP because it is unreported (Parkin,
1998). Examples of those who are in the unrecorded sector are the different kinds of street
vendors and the repairer of broken things at low cost.
Meanwhile, those who are engaged in prostitutions and drug smuggling are part of the
illegal sector. The illegal sector of the economy is composed of actions that are still being done
even if it is against the law. Examples are drug trafficking, illegal currency transactions, illegal
gambling, prostitutions, and pornography (Viloria, Rillo, Mina, Jacob, Espero, & Vivar, 1998). It
includes the production and distribution of illegal drugs, production that uses illegal labor that is
paid less than the minimum wage, and jobs done for cash to avoid paying income taxes (Parkin,
1998). Sometimes, it is also referred to as the black market. A black market, which involves
trades of a good that cant legally be traded, is a natural result of government price restrictions.
Often the government knows that such trading goes on and chooses, for political reasons, not to
enforce its own laws strictly. And when a black market is unofficially approved and the deals or
trades become more open, it is called a gray market (Colander, 1998).
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B. The Contributions and Drawbacks of the Underground Economy in the
Philippines
The underground economy has a few positive sides that make the people think that what
they are doing can be justified. First, it gives job opportunities to poor families. What the
Philippine Journal and Industrial Relations by Isagani Antonio F. Yuzon (2008) says is that the
informal sector or the underground economy is a safety net. It catches all the victims of
globalization. Even if it doesnt offer jobs, it still offers income opportunities. Furthermore,
Mary Ann Toyoken in her paper An Overview of the Lurking Economy: The Underground
Economy and the National Accounts of the Philippines states that underground economy
provides a way of earning money to poor people in the country and it also offers opportunities to
those who have jobs but still need extra income.
Aside from that, the prices of the products in the underground economy are cheaper than
the products of the formal sector. The informal sector suppresses the effects of globalization on
the formal sector. It offers cheap labor, cheap raw materials, and cheap domestic products to the
wage sector (Yuzon, 2008).
Another benefit of the underground economy is that it makes the product of the formal
sector be distributed. It gets its capital from the formal sector because the informal sector cant
buy its capital or non-labor inputs elsewhere. Unlike the formal sector, products of the informal
sector are offered at a cheaper price. This activity makes a huge benefit to the formal economy
because it makes the goods of the formal sector be distributed (Toyoken, 2012). It enlarges the
domestic market by distributing the purchasing power among the poor. It offers the products of
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the formal sector to different parts of the society, especially on the areas where there are many
poor families (Yuzon, 2008).
On the other side of the coin, even if it has positive sides, the underground economy still
has more drawbacks or negative effects and consequences. First, the projects of the government
are affected negatively because of the unpaid taxes. According to the Informal Economy: Is It a
Problem, a Solution or Both? The Perspective of Informal Business by Omar E. Garcia-Bolivar
(2006), they government cannot finance some of their projects because they cannot collect taxes
from the underground economy. The government then increases the rates of tax to those who
belong to the formal economy. Because public authority cant monitor the underground
activities, the recorded economic statistics has a possibility to misrepresent the true economic
statues of our country. The government that was supposed to measure and to record the activities
has failed ( Yin, n.d.). The researcher also believes that it may result to the manufacture of
products that are of low quality because the government is not able to monitor the activities
inside the underground economy.
Underground economy also promotes corruption. The informal sector entrepreneurs end
up paying bribes to government inspectors, kotong or protection money to the police, and
goodwill money to business cartels just to carry out their day-to-day activities (Yuzon, 2008).
In additional, the informal sector employees somehow suffer. Informal sector encourages
child labor and lack of formal work contracts among employers and employees. Because of that,
those employees in the underground economy can be easily targeted for exploitation. Also, there
is no assurance that the jobs in the underground economy will be permanent. And unlike the
formal sector employees, employees in the underground economy have no benefits. They do not
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experience health benefits and other compensations that the formal sector employees are
experiencing (Toyoken, 2012). Furthermore, the informal sector suffers from the lack of social
protection because it is not covered in the regulatory coverage of the government. Because they
do not almost contribute taxes, government in return gives them less attention, like policies,
services, social insurance, unless election time (Yuzon, 2008).
C. Problems of the Underground Economy
According to the Supporting Workers in The Informal Economy: A Policy Framework by
Women in Informal Employment Globalizing and Organizing or WIEGO (2001, November), the
issues and problems of those who work in the informal economy differ based on their
employment status, by the industry or trade in which they are engaged, and by the wider social
economic and political context in which they live and work. Those in the formal and informal
economies face the same general risks, but the informal workers have the greater exposure to
these general risks. The other two are the work-related risks and the problem in fewer
mechanisms.
The first issue or problem is the productivity. Productivity is low because of limited
knowledge of modern ways of production. According to The Philippine Urban Informal Sector
by Reginald M. Indon (2002), the income suffers because the level of productivity is low.
Theres a low productivity because informal economy entrepreneurs lack modern skills,
technology, and resources. They are also exposed to limited educational background and
organized skills training. They only depend on basic technologies and resources
The next issue is that employees are usually exposed to harmful environment. Some
activities of the informal economy are done with exposure to harmful and toxic materials for the
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production of goods or services, risking their health and safety. Also, because most informal
economy entrepreneurs do their jobs on streets, some suffer from other hazards like urban
pollution (Indon, 2002).
Lastly, there is an inconsistency in work and income. Fifty percent or less of those
informal sector entrepreneurs has assurance in their job. Theres also an unfair giving of what is
due to them. They work for long hours without safety equipment and social security, but they are
paid below minimum wage (Indon, 2002).
D. Governments Responses to Underground Economy
The government is offering programs for the people involved in the underground
economy. One of those programs is the 4Ps or the Pantawid Pamilyang Pilipino Program. It is
one of the programs by the Department of Social Welfare and Development (DSWD). It is a
human development program based on the CCT or Conditional Cash Transfer that aspires to
provide social assistance and social development (Toyoken, 2012).
Moreover, the government is also offering National Household Targeting System for
Poverty Reduction. It is a statistics management system that identifies who are the poor in our
country and where can they be located. It is being done to recognize the potential recipients of
the social protection programs (Toyoken, 2012).
KALAHI-CIDSS, which means KApit bisig LAban sa kaHIrapan, is also offered by the
government. It is a project by the Department of Social Welfare and Development or DWSD. It
is a comprehensive and integrated delivery of social services that aims to alleviate the poverty
in the Philippines. The World Bank also aids in this project (Toyoken, 2012).
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Tindahan Natin Program is also in line with the projects of the government to aid in the
multiplication of the underground economy. It is a national government program by the DSWD
that distributes low priced noodles with good quality to families who have low incomes. These
products are offered with the help of the LGUs and the provincial and municipal social welfare
and development officers (Toyoken, 2012).
III. CONCLUSION AND RECOMMENDATIONS
A. Conclusion
The underground economy, with its unrecorded and illegal sector, is everywhere in the
country. Even if it is illegal because members of the underground economy do not pay taxes, it is
can still be justified in the eyes of many because of its certain positive effects. It also somehow
helps the daily living of the people involved in the economy. But even though it has several
positive sides that make the peoples conscience at ease, it is still against the law. It also has
more negative than positive effects in our countrys economy because of several factors.
Aside from those, the people connected to underground economy experience certain
problems because of certain reasons. Lastly, even though the underground economy looks like
invisible to the government because of their appearance everywhere, it is not completely hidden.
Somehow, the government is doing some actions to help them.
B. Recommendations
Because the underground economy is not legally acceptable, the researcher thinks that it
should be prevented. Yes, it is not easy, but it is possible. The researcher recommends that the
government should not only make laws but also perform those laws. The researcher also thinks
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that if the government gives proper attention to the underground economy, and they can give
supplemental training and educational programs, most of the people with respect to the
underground economy can be knowledgeable. If they obtain certain knowledge based on those
programs, they can use it to have a formal and legal business. And if that can happen, the
researcher thinks that the underground economy can somehow be lessened or be prevented.
REFERENCES
Colander, D. C. (1998). Microeconomics (Third Edition). The McGraw-Hill Companies, Inc.
Garcia-Bolivar, O.E. (2006). Informal Economy: Is it a Problem, a Solution, or both? The
Perspective of Informal Business. The Berkeley Electronic Press.
Indon, R. M. (2002). The Philippine Urban Informal Sector. Loyola Heights, Quezon City:
Ateneo de Manila University.
Parkin, M. (1998). Macroeconomics (Fourth Edition). Addison-Wesley Publishing Company,
Inc.
SEAsite. (1997). Retrieved March 10, 2014, from The Underground Economy:
http://www.seasite.nio.edu/tagalog/Modules/Modules/PhilippineEconomy/underground_
economy.htm
Toyoken, M. A. (2012). An Overview of the Lurking Economy: The Underground Economy and
the National Accounts of the Philippines. Unpublished manuscript.
Viloria, E., Rillo, J., Mina, E., Jacob, P., Espero, J., & Vivar, T. (1998). Economics: Theories
and Principles. Metro Manila: Vibal Publishing House, Inc.
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Women in Informal Employment Globalizing and Organizing (WIEGO). (2001, November).
Supporting Workers in The Informal Economy: A Policy Framework.
Yin, S. C. (n.d.). Consequences of the Underground Economy. Retrieved March 10, 2014, from
Tripod.com: http://choonyin.tripod.com/consequences/
Yuzon, I.A. (2008). Globalization and Human Resource Development for the Informal Sector.
Philippine Journal and Industrial Relations, 248-250.