Captured: The economic cost of informality
Nobel laureate Mancur Olson argued that prosperity depends on secure property and contract rights protected from predation from within and without.
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Nobel laureate Mancur Olson argued that prosperity depends on secure property and contract rights protected from predation from within and without.
Early in my career with a major multilateral institution, I resisted the language of “capacity building” and “reducing informality.” It sounded like Western condescension: a demand that emerging markets copy institutions the West built only after centuries of conflict and exploitation.
Over time, however, I came to see the dangers on the other side. Without formal institutions strong enough to protect rights, contracts, and citizens from predation, informality becomes an economic trap.
Nobel laureate Mancur Olson argued that prosperity depends on secure property and contract rights protected from predation from within and without.
The Philippines shows what happens when both erode. Criminal interests no longer influence politics from the margins. In many places, they have captured public authority, turning the state from a platform of growth into a mechanism for extraction.
The cost is measurable. They reflect a governance discount: when rules are uncertain and enforcement is for sale, legitimate investors go elsewhere. When illicit money funds campaigns, purchases loyalty, and installs compromised officials in courts, regulatory agencies, and enforcement bodies, markets stop rewarding productivity. They reward proximity to power.
Entrepreneurs learn that success depends less on innovation or agility than on naked political protection. Capital becomes defensive, honest firms scale down, and corruption turns into a hidden tax on workers, consumers and taxpayers.
A generation ago, public office was often held by war heroes, lawyers, academics, and traditional elites who generally observed a code of honor. Today, a thieving elite — fed by illegal gambling, smuggling, ghost projects, and rigged procurement — have learned to convert the state into a feudal delivery system that deepens inequality and destroys electoral discernment.
Government becomes the milking cow of criminal syndicates. The damage compounds across the economy. Public works are overpriced, delayed, or undone. Customs becomes a tollgate. Land titling becomes an auction, and initiative is stifled.
Infrastructure gaps persist because leakage eats up the budget before any concrete is poured. The result is slower productivity growth, fewer formal jobs, and a wider gap between those within the patronage network and everyone else.
This is why informality is not merely sociological; it is an insidious macroeconomic handicap.
Reversing this infection requires more than outrage. The financial lifelines of capture must be cut through transparent beneficial ownership rules, forensic audits of procurement, and stronger coordination among audit, anti-money laundering, and anti-graft bodies.
Government workflows must be made harder to manipulate through digital land registries, automated customs processes, open bidding platforms, and blockchained public records.
Courts, law enforcement, and anti-graft agencies must also be insulated from political pressure through secure funding, independent oversight, and merit-based appointments. A dozen high-profile convictions with finality and swift asset forfeiture would send a market signal as powerful as any investment promotion campaign: the law is not a suggestion, and “public service” must no longer be a business model.
Good governance has mostly been the exception in human history, but that is no reason to surrender. Restoring trust will require two to three presidential cycles of integrity-driven leadership, backed by vigilant citizens, civil servants, lawyers, reformist officials, and civic groups. Without trust, nothing moves — not investment, not jobs, not national confidence.
Dignity, merit, and rule of law are not elite abstractions. Filipinos are among the most productive workers outside their country and should cease to be export commodities. They are the foundation of a working economy and must be protected from predators in public office.
