Measuring non-observed economy: informal and illegal

1. Measuring non-observed economy: informal and illegal Bálint Murai, HCSO National Accounts department Production Accounts section balint.murai@ksh.hu UNECE Group of Experts on National Accounts6 - 9 May 2014.Geneva

3. Mexico Instituto Nacional de Estadística y Geografía Measurement of Informal Economy under the Framework of the Mexican System of National Accounts

5. Observations • The aim • estimate the performance of Informal economy and include in NA • give a proposal for a satellite account of Informal economy

6. Reference: Key Indicator of the Labour Market Database (KILM)

7. Observations • The aim • estimate the performance of Informal economy and include in NA • give a proposal for a satellite account of Informal economy • ILO conceptual framework, SNA2008 • Labour input are calculated separately: • informal sector and • informal employment outside the informal sector.

8. Observations • Informal Economy, 2008: 25,5% of the GDP (8,7% Informal sector+16,8% Informal employment outside the informal sector) • The method applied here, however is not totallyclear.

9. ENAMIN ENOE „Method of latentVariable” Method? Hussmanns’ MATRIX GVA / Labour Input

10. Questions • Calculation steps for the computation of data from ENOE and ENAMIN is not included. (Overview picture) • GVA calculation scheme from ENAMIN is not totally clear (e.g. the use of IC/GVA ratios) • Use of the Latent Variable method?

11. Questions ENOE: asking the employees about the registration or status (formal/informal) of their employer. • Reliable data for the employers? Different productivity in the formal and informal sector. • Any correction while calculating the informal GVA from formal sector data?

12. Questions Borderline between underground and informal On the informal activity there may be some underground activity (e.g. full time emloyment registered half-time, minimum wage, rest of the money is envelop payment.) In our experience enterprises tend to record the same data in the administrative records and in the survey. Even if we knew the informal employment the survey data could not be taken directly for calculating the informal production. • Any correction for the Underground activity?

13. Canada Statistics Canada The underground economy in Canada 1992 to 2011

15. Observations • Summary of an exhaustive study, lot of information • Long tradition of estimating UE (Almost 3 decades of experience) • Upper bound estimation • Volume measure • All of the 3 GDP Approaches, Expenditure side is dominant

16. Questions Informal sector Boundaries between informal and underground activity. Small businesses with revenues less than $30.000 do not have to charge VAT type taxes and are excluded form BR. • Any studies for examining those who are above this limit, but not registered?

17. Questions Upper bound method Maximum potential amount (Throughout the study, except for alcohol, tobacco, tips and rents) • What’s the idea behind using the upper bound method? • Why don’t you include them in the official GDP?

18. Questions Skimming Skimming occurs when legitimate businesses fail to declare part of their business income. The type of tax evasion can be different by size and type of enterprises even if we rule out the largest companies. • Threshold for potential tax evaders. (Annual revenues less than 2 million) • How did you arrive to chose this threshold? • Is this sub-set of enterprises supposed to be homogenous, or do you investigate them further by the main important indicators of production? (e.g. number of employees; type of activity?) • Skimming rate • How is it validated that the skimming rate is twice as much for the unincorporated enterprise than for the incorporated?

19. Questions Allocation of skimming estimates Final step in the Reassessment estimation of skimming rates is unfortunately not very clear. • How do you use the Tax audit data in the reconciliation process? • Is it used only for adjusting the industrial classification or it changes the level?

20. Questions Over-reporting of cost There are two ways of hiding business income: • under-report revenue or • over-report cost Underreporting of revenues was discussed deeply. • Over-reporting of cost?

21. Mongolia National Statistical Office Of Mongolia Non ObservedEconomyof Mongolia

23. Observations • Considerable effort (several projects) for estimating NOE and incorporate it into NA • EUROSTAT Tabular Approach framework • Data sources: • LFS+Household unincorporated enterprises producing for the market (HUEMs) survey • Informal sector survey • Survey on expert opinion of intentional distortion of business accounting • Establishment census • Tax audit data • Police, Health organisation, neighboringcountries data

24. Questions EUROSTAT Tabular Approach • NOE by industries, but by N1-N7 is not included • Data for • N4 legal person not surveyed • N7 other statistical deficiencies? • Information of the GVA compilation for • Informal sector production (N1, N5) • HH’s production for own final use (N3)

25. Questions HUEM Generally, the results of LFS are not reliable at a lower aggregationlevel. (Relativesmallsampleand ignorance of dataproviders.) 2007/2008 ~7000 HHswereinterviewed, number of HUEMs ~ 2200. • Didyoutakethisproblemintoconsiderationwhen evaluating HUEM’s data?

27. Questions NOE by industry There are 2 areas when one would expect a higher portion of NOE: • Agriculture: 14% of total GVA, NOE: 1% of the total NOE. Unregistered producers, (e.g. estimation of cattle?) • Other services: largest share in GDP: 25%, NOE: 8% Usually direct connection to HH, easiest to avoid tax. Personal services, tips, gratuities, etc.

28. Models

29. Questions Models The results of themodelsinthepresentationareclosein 2010, butthelinesaredivergentintheearlierperiode. • Werethereanystudytoexaminethecauses of thesedifferencesinmacromodels? Characteristics of N1-N7activitiescan be different. Thisbreakdownallowstheinvestigationsfor more detailledanalysis. • ArethereanyconnectionbetweentheNOEcategories and theresults of themodels?

30. Netherlands Statistics Netherlands Inclusion of NOE in Dutch Nationalaccounts after the 2010 ESA revision

32. Observations • Long tradition of doing research on the NOE going back to the 1980s • Very clear paper, logical structure • Production approach; labour input data • Gives an overall view on the calculations • However, the ideas behind the assumptions and the applied ratios are not always presented.

33. Questions Presentationframework • NOEproblemareasinstead of TAE?

34. Questions Costfraud • Part of Underground Activitywhydoyoudealitseparatley? • Youcalculateitforthesmallenterprises (less than 10 employees). Howdoyoucalculatetheshare of costfraudfor (theselecteditemsof) IC?

35. Questions Newspaper articles Based on our experience, data in the newspapers are not always reliable and not suitable for generalisation. • How do you validate the data in the papers? (Or do you use them only for identifying the potential NOE areas picked up by the press?) Expert guesses, estimations, opinions • Do you use expert estimations from outside CBS, (e.g. information from lobby groups, research institutions, accountants)? • How do you chose the experts and in which form are you interviewing them?

36. Questions Potential double counting For illegal activities: 0,1% of the previously estimated data. • Besides SUT what data sources did you apply? • Are there any other area where you have such estimations? Which are the typical activities?

37. PROCESS TABLE

38. PROCESS TABLE Final NA Estimate

39. Questions Question for the discussion Some NOE type of adjustments may be included somewhere else in the calculation, mainly in the green cells. • Collect typical borderline cases where it is particularly difficult to identify the amount of NOE which had already been calculated earlier somewhere else in the calculation. An example is agriculture (cultivated area X average yields)

40. THANKYOUFORYOURATTENTION! Bálint Murai, HCSO National Accountsdepartment ProductionAccountssection balint.murai@ksh.hu