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The underground economy provides a source of livelihood for
many Indonesians. But at the same time it may actually be a drag on the
formal economy. Thus, efforts need to be made to reduce the size of the
underground economy by creating more job opportunities in the formal
sector.
Only recently, we saw heated discussions in the media about Indonesia's
underground, or unrecorded, economy. The discussions started after a
government official was quoted as estimating that potential tax
revenues of up to more than Rp 263 trillion -- about one third of the
government budget -- could accrue from the underground economy.
No one knows for sure how big the underground economy really is, which
is why it is called "underground" in the first place.
Estimates by different sources vary widely, from 25 to over 70 percent
of gross domestic product (which reflects the formal economy). However
one thing's for sure, the underground is the backbone of their incomes
for many, if not the majority, of the population.
The underground economy came to prominence after the financial crisis
of 1997. Jobs in the underground have acted as a social safety net
following the waves of layoffs during the crisis. Even today, according
to figures from the statistics office, nearly 70 percent of the
country's labor force works in the informal sector.
What actually is the underground economy? For the layman, the term
"underground" often produces a negative image. When one hears the term,
what comes to mind is often activities with negative or even illegal
connotations, such as prostitution, gambling, illegal logging and so on.
However, the underground economy is not necessarily criminal. It simply
refers to commercial activities that are not recorded. Some may be
illegal, but many more may not.
Included in the underground economy are incomes earned from honest but
informal jobs, such as part-time farming, selling cigarettes at traffic
lights, pedicab driving and the like.
So, should the underground economy be loved or loathed? The problem is
that most of those who work in the informal sector are engaged in
low-tech and low value-added jobs. For some activities, value-added is
so low that the incomes received from them are virtually tantamount to
transfer payments, i.e., "charity" in layman's terms.
This is the case with jobs we pay people to do, but which we really
could do ourselves with virtually no hassle. For example, we may hire
someone to carry our groceries from the cashier to the parking lot,
although we suffer virtually no opportunity loss by carrying them
ourselves.
Sometimes these "charities" are obligatory, making them virtually a tax
or distortion in the economy. For example, we might pay a self-employed
parking attendant to "mind" our vehicle. But, often we know that we're
actually paying the attendant to leave our car alone. Payments such as
these may look minuscule, but on a national scale they are significant.
If a truck carrying cargo to the market has to pay for the services of
say 1) the self-employed intersection police (preman tikungan) 2) the
assertive laborers who insist they unload the cargo for a fee (kuli
turun), and 3) the guard who insists he will provide "security" during
the unloading process (preman pasar), all these costs eventually will
be passed on in the
higher prices for goods charged to the consumer.
To the extent that people become discouraged to engage in commerce due
to the increased costs arising from such "taxes", the underground
economy actually presents a drag on the formal economy.
The significance of this problem depends, of course, on how large one
believes the underground economy really is, and what portion of it
actually involves transfer payments.
But regardless of that, it is clear that the focus of government policy
should be on creating enough jobs in the formal sector so as to move
those employed in the informal sector into higher value-added jobs.
Of course, this is easier said than done as a lot has to be done to
improve the investment climate -- especially in the agricultural and
manufacturing sectors, which tend to be more labor intensive. But then
again, consider the options: would collecting taxes in an elusive
economy be any easier?.
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