Illegal foreign workers

ACCORDING to a study by Dr Jeyapalan Kasipillai, who is chair of the Malaysian Business Unit at Monash University Sunway Campus’ School of Business, construction is likely to be the sector in Malaysia that generates the highest hidden income.

Others on the list are the professionals, cuts and kickbacks from contracts, multinational companies, and smuggling and under-invoicing.

The building industry’s No.1 position may be partly due to its heavy reliance on foreign labour. The legal process of recruiting foreigners can be time-consuming and costly. As such, hiring illegal foreign workers is yet another unlawful cost advantage.

Other sectors with large numbers of foreign workers include plantations, manufacturing and services.

News reports say there are 2.1 million registered foreign workers in Malaysia and they make up 20% of the Malaysian workforce. It is anybody’s guess how many more foreigners are employed here without going through the official channel.

An indication of the extent of the problem is the fact that whenever there is an exodus of illegal foreign workers, either due to intense crackdowns or amnesties – certain businesses suffer.

This extends beyond the employers. For example, food companies and gaming operators have been known to blame the decline in the foreign worker population for slower sales.

Malaysia has thrice offered amnesty to illegal foreign workers in recent years. Some 140,000 foreigners went home in 1998, 290,000 in 2002 and 1.2 million in 2004.

Unlicensed moneylending

EVERYBODY knows about the Ah Longs, the loan sharks who charge excessive interest rates and who are not shy to use strong-arm tactics to get back their money.

Following a spate of cases of family tragedies and acts of intimidation linked to Ah Longs, illegal moneylending has been highlighted in the media last year and there were plenty of discussions about their role, the factors that encourage the business, and the ways to reduce their activities.

In 2007, the MCA Public Service and Complaints Department handled 520 cases of entanglements with unlicensed moneylenders. The figure would have climbed closer to 600 last year.

It has been argued that borrowers are forced to turn to loan sharks because the banking system cannot or will not help them. However, most people agree that unlicensed moneylending is a problem because of the lopsided repayment terms and the sometimes shocking loan recovery methods.

The lean economic times may dampen the moneylending business. Just like the bankers, the loan sharks will rather not lend if the risk of default goes up.

Prostitution

DESPERATION may see a rise in sex services industry. As it is, it is common to hear complaints about an increasing number of foreign women who come here to offer sexual favours, massage centres and karaoke lounges that offer extra services, and lively Internet discussions on the prostitution scene.

The perception is that if the economy worsens, livelihoods will be threatened and people may turn to offering sex for money.

Prostitution in Malaysia is not confined to seedy joints and back alleys. For one thing, mobile phones have made it easy for freelancers to operate without pimps and being tied to a place of business. The mushrooming of massage outlets has created another avenue.

The Internet has become a rich source of information, and knowingly or otherwise, the sex workers have expanded their reach because customers exchange details of the workers in online forums.

WASHINGTON (Reuters) - The U.S. recession will probably be the longest since World War Two and could worsen without heavy government spending, according to a closely-watched survey of economists released on Saturday.

The Blue Chip Economic Indicators poll of 52 economists from top financial firms, major companies and academia found that most expected a tepid recovery to begin later this year, with growth returning to more normal levels in 2010.

A majority of those polled thought the recession would officially end in the third quarter of 2009, which would make this the longest downturn since World War Two.

However, more than half of respondents thought unemployment would peak no earlier than 2010, suggesting that economic pain may linger long after the recession is technically over.

For 2009, the consensus view was that real gross domestic product would fall 1.6 percent, gloomier than the previous month's forecast for a 1.1 percent decline. A drop of that magnitude would be the worst yearly performance since 1982.

Merrill Lynch held the most pessimistic view, predicting a 2.8 percent decline, while Fedex Corp was the most optimistic of the bunch, forecasting just a 0.2 percent dip.

"Much likely will depend on the relative success or failure of ongoing and prospective stimulus measures applied by government," Blue Chip's monthly newsletter said, adding that absent a stimulus package, "prospects would be much darker."

The consensus opinion was that the stimulus plan would total $778 billion, with estimates ranging from $635 billion to $900 billion. President-elect Barack Obama has encountered some resistance in Congress, but a large spending package is widely expected to be approved next month.

The economists seemed to conclude that government efforts to push down mortgage rates may stall. On average, they expected rates on 30-year conventional mortgages at 5.1 percent at the end of 2009, roughly where they are now.

They forecast that the consumer price index would fall 0.4 percent this year, which would mark the first year-over-year decrease since 1955 and no doubt deepen investors' worries about deflation.

The panelists were split on the outlook for the U.S. dollar, which some economists have warned may be headed for a steep slide this year as the U.S. deficit soars and the Treasury Department issues a record amount of debt.

Nearly 48 percent thought the trade-weighted value of the dollar would end 2009 higher than its current level.

GIVEN its nature, it is no surprise that the black economy has many aliases. Because so much about it is unknown and because there are no universally accepted views on how it should be defined and measured, different people know it by different names.

Substitute black with any word in a long list – hidden, underground, subterranean, irregular, unofficial, submerged, parallel, informal, second, cash, traditional, shadow – and we are talking about largely the same thing.

Says Dr Jeyapalan Kasipillai of the Monash University Sunway Campus’ School of Business: “Essentially, the designation refers to those economic activities that should be reported or measured by the techniques and conventions currently used for measuring economic activity, but are not.”

He adds that these activities are concealed from the authorities because by doing so, those taking part make private gains. These gains may take the form of evaded taxes, non-compliance with costly regulations, income from prohibited and criminal activities, or fraudulent receipt of various government benefits.

However, some definitions exclude the criminal economy, which deals in illegal goods and services.

Arguably, the most widely used term is informal economy, which is interchangeable with the informal sector. However, the popularity of the latter has slipped of late, mainly because it suggests that the informality is confined to a specific sector of economic activity, rather than cutting across many sectors.

Also, “informal economy” is considered a better label because it supports the ideas that the formal and informal parts of the economy are linked, and that the informality encompasses enterprise and employment. English anthropologist Keith Hart claims to have coined the term. In a 1971 conference on urban unemployment in Africa, he argued that many unemployed Africans were in fact working for irregular and often low returns.

“The term I chose is negative, but polite; it names the unnameable, labelling the people by an absence, their lack of ‘form’, as understood by the bureaucracy,” he says in a 2006 paper.

In a 1972, an International Labour Organisation mission to Kenya discovered that the African nation’s traditional sector (comprising petty traders, small producers and casual jobs) had expanded to include profitable and efficient enterprises as well as marginal activities.

Hence, the mission decided that informal sector (instead of traditional sector) is an apt name for the range of small-scale and unregistered economic activities.

With these two developments, the economic and intellectual fraternities realised that the official data did not capture what went on in the black economy. More than three decades later, the experts continue to work on ways to improve the statistics on unregistered economic activities.

This is undoubtedly a major challenge, for how do you properly calculate that which is meant to be hidden?

The Star-Errol Oh

FEW people think that the black economy is all bad. There are certainly some aspects that yield benefits. One pro-consumer view is that the existence of the black economy compels legitimate businesses to be more innovative and efficient so that their products and services are more appealing than those offered by the illegal competitors.

Then there is the macroeconomic defence that it provides employment, boosts economic activity and supports the formal economy.

Among the strongest proponents of the informal economy are those who believe in its capacity to improve the lives of the poor. One of these advocates is a global research-policy network called Women in Informal Employment: Globalising and Organising (WIEGO).

In a 2002 booklet titled Addressing Informality, Reducing Poverty: A Policy Response to the Informal Economy, the US-based WIEGO asserts that governments need to develop innovative and supportive policies that recognise the informal economy’s contributions.

WIEGO also contends that there are a lot of outdated and inaccurate views on the informal economy. Below is how it addresses this matter:

Some people are convinced that the black economy will help reduce poverty

The Old View: The informal sector is the traditional economy that will wither away and die with modern, industrial growth.

The New View: The informal economy is increasing with modern, industrial growth – accounting for more than half of the new jobs in Latin America and 80% of new jobs in Africa. In India, more than 90% of the labour force is in it. It is a feature of economic transition as well as capitalist industrialisation.

The Old View: It is only marginally productive.

The New View: Virtually everywhere the informal economy is efficient and resilient, creating jobs. It is a major provider of employment, goods and services for lower-income groups. It contributes significantly to GDP.

The Old View: It exists separately from the formal economy.

The New View: It is linked to the formal economy – it produces for, trades with, distributes for, and provides services to the formal economy.

The Old View: It represents a reserve pool of surplus labour.

The New View: Much of the recent rise in informality reflects the decline in formal employment associated with structural adjustment and global competition. It reflects not only the incapacity of formal firms to absorb labour, but also their unwillingness to do so.

The Old View: Most of those in the sector are entrepreneurs of illegal and unregistered enterprises seeking to avoid regulation and taxation.

The New View: It should not be equated with the criminal or illegal economy. It is made up of non-standard wage workers as well as entrepreneurs and self-employed persons producing legal goods and services, albeit through irregular or unregulated means.

Most entrepreneurs and the self-employed are amenable to, and would welcome, efforts to reduce barriers to registration and related transaction costs and to increase benefits from regulation. Most non-standard workers would also welcome more stable jobs and workers’ rights.

The Old View: Work in the informal economy comprises mostly survival activities and thus is not a subject for economic policy.

The New View: Informal enterprises include not only survival activities but also stable enterprises and dynamic growing businesses. All informal enterprises are affected by economic policies.

The Old View: It comprises mainly unregistered businesses.

The New View: It comprises not only informal enterprises but also informal jobs, including employees of informal firms, casual day labourers, and domestic workers as well as industrial outworkers and other non-standard workers in both informal and formal firms.

The Old View: It comprises mostly street traders and very small-scale producers.

The New View: It is made up of a wide range of informal work arrangements – both “resilient old forms” and “emerging new ones” (temporary and part-time jobs plus home-based work for high-tech industries). Its two basic segments are informal enterprises and informal jobs.

The Old View: It is unregulated.

The New View: Some informal enterprises – such as street vendors – are highly regulated, so much so that regulations are impossible to enforce or comply with and are often not clear either to local authorities or to vendors. Regulations become a tool of harassment and control, not a way to encourage economic contributions of street vendors. On the other hand, the employers of most informal wage workers often seek to avoid complying with labour legislation.

The Old View: Because it is unregulated and untaxed, many working in the informal sector are wealthy.

The New View: Average incomes are lower in the informal economy than in the formal economy. A higher percentage of people working in the informal economy are poor. Most of the wealthy in the informal economy are micro-entrepreneurs who hire others. The poorest are, typically, informal wage workers, especially industrial outworkers.

The Old View: To regulate the informal economy is unnecessary interference with its workings.

The New View: In today’s globalised economy, the active role of government is needed in the regulation of economic activities, including the informal economy. Clear rules and appropriate legislation are needed to regulate the relationship between governments, foreign investors, local enterprises, and the workforce.

The Old View: Street traders are to blame for crime in the inner cities.

The New View: Criminals are a threat to the business interests of both formal and informal enterprises.

The Old View: It does not contribute to economic growth.

The New View: It contributes substantially to the economy and needs to be encouraged and facilitated.

The Star- Errol Oh

In the current global economic downturn, with people losing jobs and businesses suffering shrinking revenues, we may well see a more vigorous black economy

THE black economy is also known sometimes as the hidden economy or the underground economy, but in fact, a lot of it is right there in plain sight. Broadly, the term covers all unregistered and unregulated economic activities. Not all of these are sinister crimes that take place in the shadows.

Your favourite chicken rice stallholder, who has never filed a tax return, is part of the black economy. So are the illegal car workshop just down the road and the factory in Balakong that makes knock-offs.

And what about the handyman you turn to for household repairs, the accounts executive who earns some side income by giving tuition to your kids, and the professional who freelances outside office hours? If the Inland Revenue Board (IRB) knows nothing about the earnings, the trio come under the black economy banner as well.

The foreign worker you see going around housing estates on weekends offering to cut grass? Black economy too. And of course, how can we forget the pirated DVD seller who provides your weekly movie fix?

Dr Jeyapalan Kasipillai

Conventional wisdom has it that in the current global economic environment, with people losing jobs and businesses suffering shrinking revenues, we may well be seeing a more vigorous black economy. The perception is that in such desperate times, legal and ethical requirements are often likely to take a back seat.

Individuals may be forced to moonlight, join the ranks of the self-employed or work outside the law, thus avoiding the income tax net. Companies may cut corners by sidestepping rules and regulations in areas such as taxes and duties, licensing and registration, and employee benefits.

Copyright owners are among those who believe that the infringement rate will rise in tandem with the economic slowdown.

“Obviously, when the economy is tougher, it does give impetus to the pirates to promote their illegal wares to consumers,” says Shamsul Jafni Shafie, executive director of the Malaysian Federation Against Copyright Theft (MFACT), which represents the Motion Picture Association (MPA) and the Entertainment Software Association (ESA).

(MPA is the international counterpart of the Motion Picture Association of America, the lobby group of the American movie, home video and television industries. The ESA is a US organisation that looks after the interests of computer and video game publishers.)

Informal and unfair

Even in the industrialised countries, which typically have lower levels of unreported economic activity than those of the developing economies, there is anecdotal evidence suggesting that during a downturn, more businesses are compelled to operate in the informal sector.

Just ask the Irish Small and Medium Enterprises Association (ISME). Last August, chief executive Mark Fielding warned: “There has been a marked increase in black economy activities during the economic slowdown, with numerous companies complaining to ISME that they are being undercut by rogue operators.”

tan Sri Mohamed Yakcop

The association’s lament is just one view, but it is not a unique one. Many businesses paint themselves as victims of the black economy. For one thing, their illegal competitors do not comply with taxation and regulatory obligations, and therefore incur lower costs.

That gives them an unfair advantage over the legitimate businesses. Nowhere else is this more evident than in the industries that are levied sin taxes.

The alcohol, tobacco and gambling players pay such high taxes – it is the government’s way of discouraging these vices by making the products more expensive – that there is a huge incentive for others to enter the market through the back door.

It is almost routine for the listed cigarette manufacturers, numbers forecast operators and brewers in Malaysia to grumble about losing ground to smugglers, counterfeiters and unlicensed bookies.

The chairman’s review in British American Tobacco (M) Bhd’s (BAT) annual report 2007 talks about the impact of the surprise 25% excise increase in July 2007, which pushed up cigarette prices.

“As expected, consumers downtraded to cheaper alternatives in the form of illegal cigarettes, which reached an all-time high of 25%, a serious increase from 14% just three years ago,” wrote chairman Tan Sri Abu Talib Othman.

In Carlsberg Brewery Malaysia Bhd’s annual report 2007, managing director Soren Holm Jensen points out that only Norway has higher excise duties than Malaysia. He expresses hopes that the current rates in Malaysia will not rise for the next few years and argues that the steep taxes encourage smuggling.

Another group of industries that would love to see the black economy contracting are those that revolve around intellectual property (IP). In this case, perhaps the most unsavoury aspect of the illegal competition is that it gleefully piggybacks on the output of the legitimate businesses for free.

The pirates make gains from movies, music, software and books without having to create the works. The producers of fake goods merely copy and sell stuff. They need not fork out a cent for artistic input, research and development, and marketing. It is yet another unfair advantage.

The damage can be debilitating, like it has been for the music companies in Malaysia.

A wider impact

About a decade ago, they were selling about RM315mil worth of CDs. This has plummeted to an estimated RM60mil in 2008. After adding sales of about RM20mil through online and mobile channels, we are talking about a 75% plunge in revenue.

Recording Industry Association of Malaysia CEO Tan Ngiap Foo asks: “Which industry can withstand such a big drop. We are dying. How to create good music?”

In addition, counterfeiters inflict harm by diluting the reputation of the genuine products. The legitimate businesses risk losing a customer each time a consumer is misled into buying an imitation and gets lower quality than he has bargained for – over-the-counter medicines that lack efficacy, bags and shoes that fall apart soon after purchase, watches that do not tell time accurately, cigarettes with dodgy additives.

When businesses gripe about unjust competition from the black economy, they do not always get sympathy. After all, apart from crime, few facets of the black economy appear menacing and serious enough to warrant special attention from the authorities.

The current laws and enforcement measures ought to be enough, should they not? Why fret over petty traders and backyard industries that do not pay taxes and fees, when there are bigger fish to go after?

Also, it is hard for the public to grasp the idea that large and high-spending businesses such as the cigarette, beer and gaming companies and the Hollywood studios are at all troubled by illegal operators.

In addition, it is common for most folks to view IP piracy as victimless, and that the legitimate businesses are partly to be blamed for not lowering prices.

For that matter, there are the arguments that the gray market creates jobs and eases social tensions, and that if allowed to mature, the illegal operators will eventually join the formal economy.

However, this surely cannot be a zero-sum game. There are consequences when the black economy pummels those who conduct business above board, and the effects will ripple through their supply chains. The governments (and by extension, the public) will feel it as well.

Naturally, the industries affected by the black economy are rather persuasive in articulating this point.

The BAT website says the trade in illegal cigarettes may undermine the legitimate tobacco industry, reduce the demand for Malaysian-grown tobacco, reduce the potential amount of taxation that could be collected by the Government and make the tobacco market difficult to regulate.

Says Confederation of Malaysian Tobacco Manufacturers (CMTM) chief executive Shaik Abbas Ibrahim: “The underground economy expands at the expense of the legitimate economy. The Government loses revenue. It cannot fulfil its health agenda because of the availability of cheaper illegal cigarettes.”

Shamsul Jafni of MFACT argues that if video piracy goes unchecked, the output of the film and TV industries may decline, and this will hurt not only those in the creative communities, but also those working in the movie distribution line, including cinema operators and video stores.

The are social costs as well, he says, such as the fact that piracy and sale of pornographic videos often go hand in hand, and that there are links between movie thieves and organised crime.

He adds: “Piracy hurts all Malaysians. The pirates don’t pay tax on the illegal copies they distribute or sell, and thus they don’t contributing to the welfare of all Malaysians.”

The case for extra vigilance

Indeed, there are several big-picture reasons to justify governments taking a deeper interest in the growth of the black economy.

No.1 is that the informal sector is unrepresented in the official statistics and data. This may lead to information gaps and flawed policies.

Says Professor Dr Jeyapalan Kasipillai of the Monash University Sunway Campus’ School of Business, “The existence of the hidden economy has an important implication in determining macroeconomic variables, the functioning of the national economy and the implementation of economic policy.

“From this point of view, some observations of the hidden economy and knowing something about where it occurs is an extremely useful research exercise.”

When the Government decided to give a cash rebate to salve the pain from the substantial jump in petrol and diesel prices last June, it opted to rely on the Road Transport Department’s database to maximise the number of people who ought to receive the rebate.

Some observers say a better way to provide relief to the rakyat is to grant tax credits because this would be based on income levels. The snag is that the reach of the tax system is limited.

In an interview with StarBizWeek in November, Second Finance Minister Tan Sri Nor Mohamed Yakcop acknowledges that the idea is good but difficult to execute.

“We have about 12 million people who work. Only about two million are registered with the IRB, and over one million pay tax. So we have another 10 million of the working population who are not registered taxpayers,” he explains.

Here is a clear argument for doing more to ensure that individuals and businesses are included in the formal economy.

Another drawback of the black economy is that its players are usually small-scale, inefficient and relatively unproductive. They continue to be thus because it is hard for them to be weaned off the dynamics that comes with their illegal status.

More importantly, governments have to realise that factors such as red tape, burdensome taxes and regulatory requirements, and lax enforcement hasten the growth of the black economy.

There is an eternal conflict between the authorities’ instinct to let enterprise find its course and the cold logic that the black economy should be driven to the surface. It’s a taut interplay of many forces. Eventually, something has got to give.

An example: Lately, there has been talk that the copyright owners, frustrated by the rampant piracy, may push for Malaysia to be bumped from the US Trade Representative’s watch list (for IP rights protection and enforcement) to the priority watch list.

That will bring us a step closer to trade sanctions. Although this is a remote possibility at the moment, such a step will be a rude wake-up call for the Government.

The black economy should never have such power to make life difficult for law-abiding citizens.

The Star- Errol Oh