1. Introducing Guidebook on Informal Sector accounting

1. 1. IntroducingGuidebook on Informal Sector accounting Ramesh KOLLI African Centre for Statistics At Expert Group Meeting on Statistics for SDGs: Accounting for Informal Sector in National Accounts 11-14 January 2016, Addis Ababa, Ethiopia

2. Outline of the presentation • Introduction • Why GDP exhaustiveness is important • Production boundary • Informal sector accounting as the key focus of guidebook • Purpose and structure of the guidebook

3. Introduction • The objective of this chapter is mainly to provide a brief outline of the guidebook, its purpose and structure. • The chapter discusses the concepts of GDP exhaustiveness and the corresponding production boundary as defined in the System of National Accounts, 2008. • The chapter identifies the informal sector as the key area in improving GDP exhaustiveness among the developing countries, which is the main focus of the guidebook.

4. GDP Exhaustiveness (1/5) • By GDP exhaustiveness, we mean that all economic activities within the production boundary of 2008 SNA, legal or not, are included in GDP estimates • Achieving GDP exhaustiveness is important, since • It represents economic performance and is the most frequently quoted indicator • Widely used by government, businesses, researchers, international agencies, etc. for monitoring the economy, macro-economic analysis, forecasting and international comparison of economies; • Ratios, such as tax-GDP ratio or current account deficit to GDP ratio, are unit free and can be compared across the nations. • For example, current external balance and the fiscal deficit expressed as a ratio of GDP provide critical ratios for monitoring the economy. • Tax-GDP ratios provide information on the extent of taxation levied on production and income, and can be compared with the corresponding ratios of other countries.

5. GDP Exhaustiveness (2/5) • Exhaustiveness primarily refers to the production approach, in which gross output and intermediate consumption of goods and services are considered, by activities and sectors • Since all the three approaches to measure GDP are conceptually consistent, exhaustiveness on the production side reflects on the expenditure side as well, when supply and use tables and commodity flow methods are applied • For example, output of own account construction of dwellings can be included on the use side under GFCF. Similarly, output of paid domestic servants and services of owner occupied dwellings can be included under HFCE • Exhaustiveness achieved on the production side also normally ensures consistency with the income approach GDP estimates, since income side data is mostly derived from the same set of data sources that are used in the production approach. Operating surplus is normally derived as a residual

6. GDP Exhaustiveness (3/5) Achieving exhaustiveness involves addressing the following main problem areas • General government units: Local administrative units or local governments in decentralised government structure; Extra-budgetary units and NPIs that are non-market producers and controlled by a government • Registered units: All registered units not in the survey frame, as the frame is not updated, mainly new units; Some of the registered units did not respond to the survey. • Unregistered units: Survey frame does not include small/unregistered units (for example, informal sector units). • Common problems: Units deliberately under report production or over report intermediate consumption; Illegal units or producers of illegal goods and services (drugs, narcotics, prostitution, etc.); Household production for own consumption • Data issues: Statisticians failed to make conceptual adjustments (for example, wages paid in kind, secondary activities, own account GFCF, etc.); Non-response is not properly handled; CFC estimates not included in government output.

7. GDP Exhaustiveness (4/5)

8. GDP Exhaustiveness (5/5) • The most common problem area in achieving GDP exhaustiveness is the informal sector, and its under-coverage in GDP estimates. • Few other problem areas exist besides informal sector in achieving GDP exhaustiveness. The two documents that deal with exhaustiveness are “Measuring the non-observed economy: A handbook” (OECD, et al, 2002), and the “Eurostat’s Tabular Approach to Exhaustiveness: Guidelines” (Eurostat, 2005). • However, non-observed activities or non-exhaustiveness types, do not mean that in practice, the national accountants are not accounting for them. • Some non-exhaustive activities, like owner occupied dwelling services, paid domestic services, subsistence agriculture, etc. are included in GDP. • Informal sector, though not fully, is estimated either directly or indirectly • Some NOE activities may not be significant in some countries. • Therefore, it is important for countries to identify the NOE areas that are significant and target the available resources on them.

9. Production boundary (1/4)

10. Production boundary (2/4): few points • Illegal production is not excluded from the production boundary • Non-market production of goods, and bribes, tips, etc. which are made in return for services are within the production boundary. • Own account production of goods include: • agricultural products and their subsequent storage; gathering of berries or other uncultivated crops; forestry; wood-cutting and collection of firewood; hunting and fishing; • other primary products such as mining salt, cutting peat, the supply of water, etc.; • processing of agricultural products; production of grain by threshing; production of flour by milling; meat and fish products; preservation of fruit by drying, bottling, etc.; dairy products such as butter or cheese; beer, wine, or spirits; baskets or mats; etc.; • other kinds of processing such as weaving cloth; dress making and tailoring; production of pottery, utensils or durables; making furniture or furnishings, etc.

11. Production boundary (3/4) • own-account construction of dwellings • own account production for GFCF includes the production of fixed assets such as construction, development of software and mineral exploration. • Production excludes the production of domestic and personal services that are produced and consumed within the same household (with the exception of employing paid domestic staff and the services of owner-occupied dwellings). • Volunteer activities that result in goods, e.g. the construction of a dwelling or other building are to be recorded as production. Volunteer activities that do not result in goods, e.g. caretaking and cleaning without payment, are excluded. • “Do-it-yourself” repairs and maintenance to consumer durables and dwellings carried out by members of the household constitute the own-account production of services and are excluded from the production boundary of the SNA. In the case of dwellings, purchases of materials for repairs become intermediate expenditures incurred in the production of housing services. Output of such repairs and maintenance is not separately recorded. Major renovations or extensions to dwellings are output and GFCF.

12. Production boundary (4/4) • Not all items included in the production boundary are important to a country. • Efforts should be made to record the output for own final use only when the amount of a good produced within households is important in relation to the total supply. Otherwise, it may not be worthwhile trying to estimate it in practice. • Generally, most countries consider only the subsistence agriculture (including livestock, forestry and fishing) production and leave out other goods and sometimes even own account capital formation. • Some countries do account for own account construction indirectly or implicitly when they adopt commodity flow approaches (based on materials used in construction) • In practice production of manufactured goods by the households for own consumption are generally not included in GDP estimates. They are mostly considered to be insignificant or difficult to estimate.

13. Informal sector • Major component of under-estimation in GDP is the informal sector. • Several African countries have in the past made efforts to collect data on informal sector through the establishment surveys, household surveys, and the mixed household-establishment surveys, in order to improve the coverage of informal sector in GDP. • Although, direct methods based on informal sector establishment surveys provide estimates of informal sector, they may not be exhaustive, since most informal sector units are tiny, invisible, unregulated, do not maintain accounts, etc. • On the other hand, the labour input methods (which use direct estimates of employment in informal sector and productivity ratios from establishment surveys) have been seen to be providing the most practical and exhaustive estimates to GDP. • Labour input methods have application in estimating not only the informal sector, but also for few other NOE activities, such as illegal production (as persons engaged in illegal activities may report as employed), non-response by the formal sector enterprises and under-coverage in surveys • The Guidebook includes the best African country practices to account for informal sector

14. Purpose and structure of the guidebook (1/4) • The informal sector plays a significant role in Africa as a major source of employment, income, and production of goods and services • However, proper measurement of the size and contribution of the informal sector and informal employment has been a challenging task in terms of data collection and compilation in official statistics. • The 2008 System of National Accounts (SNA) has a separate chapter on the informal sector highlighting the importance of incorporating its contribution in GDP estimates • Measuring informal sector and its accounting in GDP has still been a major problem area for several African countries, although few countries have recently taken innovative steps to improve the coverage of informal sector in the national accounts.

15. Purpose and structure of the guidebook (2/4) • Therefore, this Operational Guidebook on Accounting for Informal Sector in National Accounts has been compiled with the objective to • serve as a reference material for the NSOs of African countries • to build capacity, and • to improve their methodologies to measure informal sector • thereby facilitating international comparisons and decision making within the countries. • The guidebook, besides summarising the documents of international agencies on informal economy also contains case studies and best practices from African countries on data collection on informal sector and its use in the national accounts, so that they are available at one place for the benefit of all African countries.

16. Purpose and structure of the guidebook (3/4) • The first four chapters of the guidebook are based on documents of international agencies on informal sector and GDP exhaustiveness, supplemented with illustrative examples and methods to achieve GDP exhaustiveness. • Second chapter discusses concepts and definitions and sources and methods used to measure informal sector production and employment • Third chapter deals with the definitions of NOE and the suggested methods to account for NOE problem areas in the Handbook on NOE. • Fourth chapter presents the Eurostat Tabular Framework approach to GDP exhaustiveness that was developed to assess the comprehensiveness of GDP estimates of new European Union member countries. • Fifth chapter includes African country case studies and best practices on data collection in respect of informal sector and informal employment and how these are used for compiling national accounts.

17. Purpose and structure of the guidebook (4/4) • The guidebook is targeted mainly for use by the national accountants and the staff engaged in data collection in the statistical offices of African countries.

18. Thank you Ramesh KOLLI African Centre for Statistics At Expert Group Meeting on Statistics for SDGs: Accounting for Informal Sector in National Accounts 11-14 January 2016, Addis Ababa, Ethiopia