Laws and Legislations

by Paul J. Dejillas

 ILO Consultant


What is the present policy of the government towards the activities of the informal sector? Are there laws and legislation that seek to protect the workers in the informal sector from the negative effects of globalization? Are there agencies that can be approached by workers in the informal sector for help and assistance? What impact do these laws and agencies have on the evolution and proliferation of the informal sector activities in the country in general and on the work conditions of informal sector workers in particular? And, for purposes of this study, do these policies and laws consider the varying gender effects of globalization in the informal sector?

The country's policy towards informal sector activities still remains quite hazy, ambiguous and ambivalent. This explains why in some instances the government may put an all-out campaign against those unregistered enterprises plying their wares along the sidewalks and busy streets and why in other instances it may tolerate their activities. Being unregistered, informal sector activities are illegitimate and their operators can be pressured legally to stop their operations. Law enforcement, however, had not been quite consistent, especially because the informal sector has become another source of income for unscrupulous officials. 


The Philippine Constitution


The Philippine Constitution stipulates some provisions which, although these do not expressly refer to the informal sector, may as well also address their activities. Art. XII states that “private enterprises, including corporations, cooperatives, and similar collective organizations, shall be encouraged to broaden the base of their ownership” (Sec. 1) and shall have the right “to establish, and operate economic enterprises, subject to the duty of the State to promote distributive justice and to intervene when the common good demands” (Sec. 6).

To safeguard these enterprises from unhealthy competition, the Philippine Government encourages small household enterprises to band themselves together and undertake cooperative undertakings. For this reason, the Philippine Congress is mandated to “create an agency to promote the viability and growth of cooperatives as instruments of social justice and economic development” (Art. XII, Sec. 15).


National Economic and Development Authority


The above provisions form the basis for the explicit recognition and support given by the National Economic and Development Authority (NEDA) to these enterprises. As it expresses this in its Medium-Term Philippine Development Plan, NEDA advances that:

… development should proceed primarily from the economic initiatives of communities, households, firms, cooperatives, nongovernment organizations, as expressed in well-functioning markets. Decentralization, deregulation, reliance on the private sector, the encouragement of cooperatives, and the removal of bureaucratic hindrances and penalties to small enterprises are naturally included under empowerment. People empowerment implies a reliance on markets, entrepreneurship, innovation, and effort.


Laws and Legislations


There had been serious efforts in the past to promote the development of small business enterprises. To date, there are at least 175 laws and legislation (excluding labor laws) affecting small business enterprises.

1.       Republic act (R.A.) 3470, passed on 16 June 1962, encouraging the growth of cottage industry as well as the organization and establishment of producers and marketing cooperatives (Sec. 14). An initial amount of P50 million was allocated by the Development Bank of the Philippines for loans to cottage enterprises (Sec. 10). To avail of this benefit and other assistance, any person or business enterprise may simply register with the National Cottage Industries Development Authority (NACIDA).

2.       R.A 6135, or the “Export Incentives Act of 1970,” approved on 31 August 1970, encouraging exports to “hasten the economic development of the nation, and assure that the benefits of development accrue to the Filipino people” (Sec. 2). Small business enterprises could apply to avail of the incentives extended by this law. But again they have to comply with several conditions and requirements (See Sec. 6). The Board of Investments (BOI) requires several supporting documents to substantiate its application form.

3.       Presidential Decree (P.D.) 717, approved on 29 May 1975, providing an agrarian reform credit and financing system for agrarian reform beneficiaries through banking institutions. The law required all banking institutions, government or private, to set aside at least 25 percent of their loanable funds for agricultural credit (Sec. 3). As stipulated, 10 percent of the total loanable funds shall be earmarked for agrarian reform credit to tillers, tenant-farmers, settlers, agricultural lessees, amortizing owners, owner-cultivators, farmers cooperatives and compact farms.

4.       P.D. 1159, or the Agricultural Investment Incentives Act, granting to registered agricultural enterprises substantially the same benefits extended by R.A. 5186 and R.A. 6135.

5.       P.D. 1789, or the “Omnibus Investments Code,” approved on 16 January 1981 integrating R.A. 5186, R.A. 6135, and P.D. 1159 together with R.A. 5455 (or Foreign Business Regulation Act), which laid down specific requirements for export producers, export traders, or service exporters.

6.       Executive Order (E.O.) 226, or the Omnibus Investments Code of 1987,” approved on 17 July 1987, promoting small- and medium-scale industries to encourage competition.

7.       R.A. 6810, or the “Magna Carta for Countryside and Barangay Business Enterprises,” and more popularly known as the Kalakalan 20, approved on 14 December 1989, extends several exemptions and privileges to barangay business enterprises with a total capitalization of not more than P500,000, but only for a period of five years from the registration of the enterprise.

8.       R.A. 6939, passed on 10 March 1990, creating the Cooperatives Development Authority (CDA) to reinforce the above constitutional mandate (Art. XII, Sec. 15) to promote the viability and growth of cooperatives (Sec. 1). With the passage of this law, several programs and assistance given to cooperatives were transferred to the CDA. For example:

·         The Cooperative Development Loan Fund created under P.D. 175, which used to be administered by the Department of Agriculture (DA);

·         Fund for Management Training and Assistance Program granted to the DA by P.D. 175; and

·         Cooperative Marketing Project as created under loan agreements which were then managed by the DA.

9.       R.A. 6977, or the “Magna Carta for Small Enterprises,” approved on 24 January 1991, which is the most comprehensive law on small enterprises so far. The law categorizes small enterprises into micro, cottage, and small enterprises, and provides “various alternative modes of financing … including … direct and indirect project lending, venture capital, financial leasing, secondary mortgage and/or rediscounting of loan papers to small businesses, secondary/regional stock markets (Sec. 11). It created the Small Business Guarantee and Finance Corporation (SBGFC) which guarantees loans obtained by qualified small enterprises, private voluntary organizations, and cooperatives. Equally important, the law requires all lending institutions to “set aside a portion of their total loan portfolio” and “make it available for small enterprises credit.” Small enterprises can simply approach any funding institutions in the country and apply for loans. Again to qualify for this government assistance and incentives, small enterprises are required to comply several conditions and requirements (Sec. 4).


During the 9th Congress, there were at least 23 bills passed affecting small business enterprises. In the 10th Congress, the following bills have been passed:

1.       House Bill (H.B.) No. 9, which seeks to redirect a big portion (75 percent) of the Agri-Agra Fund for use by small entrepreneurs in the rural and agricultural sector, most especially the small farmers, fishermen and agricultural enterprises, whose capitalization does not exceed P500,000.

2.       H.B. 1217, which grants additional incentives to countryside business enterprises in the areas of marketing, technology, and research and, more importantly, exempts small rural enterprises from government regulations concerning assets, income, as well as from building permit fees, specific, value-added and income taxes including other fees being imposed by both the national and local government units.

3.       H.B. 2737, which calls for the creation of the Guarantee Fund for Small and Medium Enterprises (GFSME), in addition to the present SBGFC, in order to provide additional credit assistance to small and medium enterprises and to guarantee banks and other financial institutions the payment of loans extended to small and medium enterprises.


In the 11th Congress, H.B. No 2823, or the "Small Business Location and Incubator Act of 1998," was passed "to promote the development of the small business sector" by establishing "business incubators in strategically-viable locations as well as encourage the formation of private business incubators." It offers tax incentives and several other specific services that could be availed of by household enterprises in the informal sector. Some of these services are flexible rental terms, on-site business assistance, assistance in obtaining financing, shared support services, flexible leases, flexible space arrangements, employee training, clerical services, telephone answering, typing, copying, data processing, bookkeeping, legal assistance, technology transfer, marketing and technical assistance (Sec. 7). More importantly, private business incubators operated by individuals or NGOs and POs may also avail of a loan facility provided for this purpose through the SBGFC. If passed into law, this is another recent landmark legislation that can protect small business enterprises from the wide ranging negative effects brought about by the regional economic crisis now seeping in Asia.


Implementing Agencies


For the implementation of the above laws, several agencies of government have been created. Some of the major agencies include the following:

1.       National Cottage Industries Development Authority (NACIDA) for cottage enterprises;

2.       Philippine Tourism Authority for tourism-oriented enterprises;

3.       Philippine Economic Zone Authority (PEZA) for export-oriented enterprises

4.       The Cooperatives Development Authority (CDA) for cooperatives.


In addition to the above, several departments of the government are given responsibilities that service the needs of small business enterprises. The law (R.A. 6977) identifies more than 13 government agencies. These include the following agencies:

1.       Department of Labor and Employment (DOLE) for manpower needs

2.       Department of Trade and Industry (DTI) for the formation and development of small- and medium-scale enterprises

3.       Department of Science and Technology (DOST) for providing technological services in agriculture, industry, and transport.

4.       Micro, Small, and Medium Enterprise Council (MICSMEC) to coordinate the development and promotion of small and medium enterprises.

5.       Department of Finance (DOF)

6.       Department of Budget and Management (DBM)

7.       Department of Agriculture (DA)

8.       Department of Agrarian Reform (DAR)

9.       Department of Environment and Natural Resources (DENR)

10.    Department of Transportation and Communication (DOTC)

11.    Department of Public Works and Highways (DPWH)

12.    Department of Interior and Local Government (DILG)

13.    National Economic and Development Authority (NEDA)

14.    Bangko Sentral ng Pilipinas (BSP)


Enforcement and Availment


At this juncture, several observations can be raised in relation to the objectives of this course. In general, one still finds no concrete policies and laws that exclusively address the plight of workers and operators in the informal sector, or consistent policies and laws that protect them from the adverse effects of the external environment.

While the above policies and laws do not expressly distinguish activities undertaken in either the formal or informal sector, these laws are enforced upon those employers and self-employed in the informal sector who desire to avail of the government's protection and incentives. Furthermore, there is certainly nothing yet in the present policy environment that touches on the gender and globalization effects on the informal sector.

The availment of the protection and privileges extended by the above laws also pose as another important issue to consider. Very few entrepreneurs are attracted by these laws because of stringent requirements and conditions. First, operators in the informal sector must register their enterprise under the Philippine laws. But registration requirements are hard to comply, tedious to follow, and involves some costs and technical expertise, and requires several supporting documents and records, which the informal sector does not have.

Moreover, the offices of these departments and agencies are beyond the reach of the ordinary fisher folk, farmer, or homeworker who are not even accustomed to entering big buildings, much less transact business in formal attires. Aggravating the situation is that each of these agencies and departments have their own bureaucracies and procedures to follow which are complicated and time consuming. Small entrepreneurs feel it a waste of time going to these agencies and would rather stay at home with their work and solving problems by themselves. In fact, it is not difficult to understand why small enterprises prefer not to register their enterprise. This partly explains the growing explosion of small businesses in the informal or underground economy. Why is this so is not very difficult to comprehend.

Let us take the case of registering business organizations and applying for permits to operate. There are various requirements and fees imposed by local governments, e.g. mayor's permit, fire inspection, health inspection, sanitary inspection, electrical inspection, and garbage collection. To register, one has to go from one office to another. The registration does not stop there. Others are required to go to the Social Security System (SSS) as well as the Bureau of Internal Revenue (BIR) in addition to the Security and Exchange Commission (SEC) or Department of Trade and Industry (DTI) and the city of municipal government. The experience of many is that it takes one week or even more to process one's registration and complete all the required papers. Applicants are referred from one person to another and back and from one office to the other, ending up usually frustrated and discouraged at the end of the day. After successfully trying this entire process, very few small entrepreneurs go back the following year to renew their business permits and licenses.

Second, most, if not all, of the privileges and incentives cited are applicable only to enterprises operating above the P500,000.00 total capitalization limit, thus biased in favor of large enterprises. Some incentives and privileges apply only for a period of five years, after which small enterprises will be subjected to strict regulations and requirements as are imposed on large firms.

Finally, small business enterprises are overwhelmed by the number of agencies handling their sector. The activities of these agencies are not properly coordinated, since each is independent of each other. Informal sector operators end up not knowing where to go at all and would rather prefer to do their own business outside the fold of the government. Then, there is the inefficiency, red tapes, too much bureaucracy, and corruption plaguing the government, including abuse of discretion and power by some public officials. All this discourages, rather than encourages, small household enterprises from approaching the government.

In addition, while there are laws on minimum wages and minimum work standards, these laws are hardly applicable to informal sector workers, many of whom are paid below the legally-stipulated minimum wage and are working under substandard conditions.

All this explains the ever-growing number of small entrepreneurs, homeworkers, self-employed, household employers and paid employees in the informal sector. Existing laws tend to discourage entrants into the mainstream economy. On the contrary, they tend to drive small workers into operating informal sector activities and even promote the giving and receiving of sub-standard wages and working conditions.




                Dealings with the government bureaucracy have become political in nature, where informal-sector operators are best served when they know or are close to somebody in public office who actually decides and delivers the services needed (palakasan). They have become likewise moral in character, since many of these dealings can be facilitated in return for some shady considerations.

                Moreover, due to the ambiguity of the policy and the unpredictability of the actions of local authorities, informal-sector operators are practically involved in “guerilla” type of operation. They “hit” the road to sell their wares during peak seasons and when authorities are “looking the other way around;” they “run” away and hide underground when authorities are out to drive them away from their stalls or places of work. Many in the informal sector live in continuous insecurity, instability, dislocation, and are continually haunted, as a result, by worries, frustrations, depression, mental anguish, and fear of what the uncertain future may bring to them. 

                In the final analysis, the issue confronting the informal sector is not only economic or financial in nature; it has become largely political, social, psychological, and moral.