Why are there formal and informal ways of getting things done, and how do we know which is which? Think about how communities settle disputes through either customary laws or formally established courts of justice. Consider attending public or private schools or being homeschooled. Consider buying and selling in grocery stores, the public market, and talipapa by the roadside, or buying and selling on the Internet.
Consider corporations that manufacture cars and the motor shops that assemble local jeepneys; middle-class subdivisions and slum settlements; restaurants, fast-food chains, bazaars, variety stores, sari-sari stores, street vendors, and carinderias; the government and corporate employees, the mall contractual employees, and the “on-call” service employees. Think if there are no state institutions that govern the rules of doing all these things, or if the governing authority is weak, challenged, and contested.
Formal ways of doing things are society’s norms and practices codified into laws with state institutions to regulate and monitor the rules of practice. Societies will continue to establish norms of practice in getting things done, for this is how civilized and rule-based societies are founded. State institutions are formed as representations of the collective authority to regulate practices according to codified laws supposedly agreed by consensus for everyone’s benefit.
Formalizing an activity into law that is either socially unacceptable, unfair, unaffordable, and beneficial only to a few, will be met with resistance through widespread informal ways of doing the same. Examples of these abound in our history, as well as in current times, such as the land titling system (formalizing land ownership) and the jeepney modernization program (formalization of our public transport). A gridlock of laws that define formal from the informal characterizes our society where informal practices dominate, and a large informal sector of the economy prevails.
In some industries, the informal sector reigns supreme, yet in others, the formal sector dominates. The mainstream conception in existing literature of the informal economy defines it as any form of economic activity that operates beyond the legal framework of the state. However, the gray area in between is vast, as there are no clear-cut boundaries defining what is formal and informal. The informal economy is thought to comprise from 30 to 50 percent of gross domestic product (GDP), where an estimated 70 percent of the country’s workforce is employed.
If you work in a registered office with a regular wage, less government taxes and mandatory contributions to GSIS, SSS, and Pag-IBIG, then you belong to the formal sector of the economy. If an establishment is registered, generally following processes and reporting rules regulated by a mandated government agency, then that belongs to the formal sector as well. Unregistered establishments whose operations are unregulated by any government agency belong to the informal sector. Receiving compensation for work with no binding legal contracts, even with a registered firm, is somewhat in the gray zone. Many sort of sit in between the formal and informal divide.
Formalization of social and economic activities is ideal, assuming it is widely acceptable, affordable, and beneficial to the individual participants and to society at large. In this respect, formalization of informal economic activities has development objectives in mind. Think about putting up a formal town public market structure and register business operators with taxes levied for upkeep and maintenance while promoting public security and health. The larger the operations, the better to formalize to effect industry standards for the benefit of everyone.
The ideal process of formalization is to engage informal firms and workers in policy dialogues and decision-making processes to ensure that their needs and concerns are addressed. Their politics are far from the liberal democratic ideals in getting things done because of the precarity of their economic conditions and their struggle to conform to formal rules, given their meager resources and capabilities. The elderly generation have mostly given up, and they are ever ready to strike a bargain to bend the rules in their favor. But they struggle to put their children in school so they can join the formal sectors of society in the future.
The informal sector establishments, practices, and workers are not to be glorified nor they should be frowned upon as illegal. They normally occur as natural as human existence to cope, survive, conform, and resist the norms, laws, and practices of society.
Where widespread informality prevails, formal rules are often trampled, and the politics of an exasperated self-made middle class yearn for the rule of law. Thus, populist authoritarian leaders thrive because they bend the rules in favor to those informal sectors striking a political bargain, but at the same time appeal to the self-made middle-class for a strict and rule-based environment.
Mr. Joselito T. Sescon is Assistant Professor at the Department of Economics of Ateneo de Manila University.