Underground economy

HIDDEN AGENDA - The Philippine Star

The Global Entrepreneurship Monitor (GEM) has conducted the first regional Asean entrepreneurship study among six countries, namely Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam.

These six countries, namely Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, comprise around nine percent of the world’s population and 3.17 percent of the world’s gross domestic product.

According to the study, entrepreneurship may be Southeast Asia’s ticket to prosperity, being the primary driver of sustainable economic growth and job creation.

It added the region is ripe for entrepreneurship, as neighbouring countries in Asia and in the Pacific Rim see the Association of Southeast Asian Nations (Asean) as providing good opportunities for trade, business and economic partnerships.

The GEM study shows the extent and nature of entrepreneurial activity in the region, along with similarities and differences between participating countries. It includes evidence-based recommendations to empower policy makers to build appropriate policies for the regional promotion of entrepreneurship, job creation and inclusive growth.

GEM executive director Mike Herrington noted Asean is well positioned to play an increasingly important role on the global economic stage, as he emphasized that an Asian Economic Community (AEC) is no longer an abstract but a reality the regional governments are urged to embrace.

The report indicates the region is among the most entrepreneurial in the world, with 66 percent of people in the region viewing entrepreneurship as a positive career choice, above the GEM global average of 62.46 percent.

GEM measures entrepreneurship rates as a percentage of the adult population between the ages of 18 and 64 who are in the process of starting or who have started a business. It differentiates between nascent entrepreneurship (businesses less than three months old), new businesses (businesses between three months and 42 months), and established businesses – those that have survived their first three-and-a-half years. 

Herrington said the data coming out of the Asean-6 region is positive. Although the nascent entrepreneurship rate for the region is low (just five percent compared to 7.6 percent GEM average), this is offset by a new business rate of 10 percent, which is the second highest regional average globally and is almost double the GEM 2014 average. The established business rate (14.1 percent) is the highest regional average and is also significantly above the GEM average of 8.4 percent.

 Within the region, Malaysia and Singapore lag with lower levels of entrepreneurship across all stages of business, while Thailand and Vietnam lead the pack, followed by Indonesia. The established business rate in Thailand is a healthy 33.1 percent. In Singapore it is just 2.9 percent, GEM said.

 I haven’t seen the complete study, but I guess with that statement, the Philippines is at the bottom of the list. I believe though the level of entrepreneurship here is better than the study revealed because most of our entrepreneurs belong to the underground economy.

In fact, an article from Bloomberg Business listed the countries with the biggest “shadow economies” (meaning business avoid paying taxes by operating off the data grid). The worst offender, according to the article, is the former Soviet republic of Georgia where 72.5 percent of the GDP is untaxed. The Philippines is 26th on the list, with 48.4 percent of GDP in shadow economy.

The World Bank also estimates around 40 percent of the Philippine economy is underground, meaning in the shadows or off the books.

According to Washington-based think tank Global Financial Integrity, since 1990, smuggling has cost Filipino taxpayers at least $23 billion or nearly 10 percent of annual economic output.

The GEM report also noted the moderate levels of innovation, with over half of Asean entrepreneurs saying their products/services are not new to customers. About 60 percent of businesses in the region believe there is high competition, which poses a significant challenge to business viability.

 It added that few businesses are generating significant job numbers. The report found that more than half of entrepreneurs in the region expect to generate no jobs and 35 percent expect to create only between one and five jobs. Ironically Singapore, which has low entrepreneurship rates, is the only country that reported significant job creation.

Singapore is also the only country to have a significant percentage of entrepreneurs in financial intermediation, communications, professional and government services. The majority of entrepreneurs in the region are in low-growth retail, hotel and the restaurant businesses, the study revealed.

While there is no one formula for the diverse economies of Asean, the GEM report recommends 10 key focus areas to boost entrepreneurship and innovation across the region. These include building the professional ability of government to better understand and serve entrepreneurs, meaningful media communications, investing in good IT infrastructure and creating tailored development programs for entrepreneurs.

Herrington said entrepreneurial capacity could be built through concerted mutual effort, with governments focusing on reforms that help to create enabling environments that foster innovation, facilitate more productive economies and, critically, open up new and better job opportunities for all segments of the population.

Commendable work

A report published in The STAR recently revealed excise tax collections from tobacco and alcohol products hit a historic high in October, with collections surging almost 80 percent to P14.55 billion.

The collections rose even as the volume of cigarettes and liquor products present in the market posted “slim” increases year-on-year during the first 10 months, the Department of Finance (DOF) said.

A total of P105.53 billion in “sin” taxes was collected from January to October, up 22.06 percent from last year’s P86.46 billion, based on data from the Bureau of Internal Revenue.

Cigarette tax take rose 27.5 percent to P72.24 billion, while the combined revenues from distilled spirits and fermented liquors reached P33.29 billion, up 11.71 percent.

The double-digit revenue rise was realized despite smaller increases in volume of products in the market.

Based on BIR data, the volume of tobacco products increased 6.55 percent year-on-year to 3.17 billion packs sold. Those for fermented liquors inched up a slower 1.16 percent to 1.15 billion liters.

Distilled spirits, meanwhile, recorded a drop of 5.02 percent to 314.98 million proof liters as of October.

Republic Act 10351 increased excise levies in tobacco and alcohol products. Under the law, 85 percent of incremental revenues generated by the reform will go to the Department of Health budget. Of the amount, 80 percent was earmarked for the universal healthcare program. The remaining 15 percent was allocated to support tobacco farmers who may be displaced by the reform.

The DOF said revenues are bound to increase further as the law approaches full implementation by 2017 when unitary tax rates are imposed on tobacco and liquor products.

According to BIR commissioner Kim Henares, they will continue to strengthen tax administration and enforcement capacities to build on the gains earned with sin tax reform.

As I always say, we should give credit where credit is due. In this case, the BIR has been doing a very good job in collecting the right taxes from our tobacco and liquor manufacturers.

For comments, e-mail at [email protected]

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