METAC Workshop March 14-17, 2016 Beirut, Lebanon National Accounts Compilation Issues Session 13: Non- observed economy

Topics Definition Production boundary Reasons Classification Measurement issues – Informal – Economically hidden – Illegal

Definition The term “Non-Observed Economy” (NOE) refers to those economic activities which should be included in the GDP but which, for some reasons, are not covered in the statistical surveys or administrative records from which the national accounts are compiled.

The SNA production boundary … all economic activities that fall within the production boundary, whether: … market or non-market for sale or own use legal or illegal hidden or not formal or informal recorded or unrecorded

The SNA production boundary Implications of incomplete coverage of GDP: Biased growth rates Misleading information on the structure of the economy Misleading information on the level of GDP Biased international comparability Distortions in the internal consistency of the national accounts

Reasons Activities carried out in a clandestine fashion to avoid paying taxes or social charges or to avoid the costs associated with legislation on safe working conditions or protection of consumers’ rights: – known as “underground” or “hidden” economy; – in some cases the transactions are only partly concealed and may be reported to the tax authorities or to the statistical office at lower than true values so as to reduce rather than entirely eliminate taxes

Reasons Illegal goods and services - narcotics and prostitution for example – will also be carried out in secrecy; Production of goods for own use: – perfectly legal, but may be omitted from the national accounts only because there are no observable transactions between sellers and purchasers since they are one and the same.

Reasons “statistical underground”, statistical surveys and the administrative records that provide the basic data for the national accounts are incomplete: – by design; – poor statistical practices; The business register used for the survey is out of date or incomplete; The questionnaires are not returned or come back with missing answers; Treatment of non-response is inappropriate

Problem areas

Classification Eurostat’s types of non exhaustiveness: – … classification used in standard tabular approach for systematic reporting of the estimates ensuring exhaustiveness of national accounts – … in four major categories: Not registered Not Surveyed Misreporting Other

Eurostat N1-7 Not registered N1 - Producer deliberately not registering – underground – … to avoid tax and social security obligations. Refers to small producers with turnover not exceed the threshold levels above which they should register; N2 - Producers deliberately not registering – illegal – … as an economic entity, or as an entrepreneur because it is involved in illegal activities; N3 - Producers not required to register – … because it has no market output. These are household producing goods for own consumption, for own fixed capital formation, and construction of and repairs to dwellings

Eurostat N1-7 Not surveyed N4 - Legal persons not surveyed – … due to outdated business register; – the classifications (activity, size or geographic codes) are incorrect; – the legal person is excluded from the survey frame because its size is below a certain threshold etc. N5 - Registered entrepreneurs not surveyed – a survey of registered entrepreneurs is not conducted; – incomplete list of the registered entrepreneurs, etc.

Eurostat N1-7 Misreporting N6 - Producers deliberately misreporting – Gross output is under-reported and/or intermediate consumption is overstated, in order to evade income tax, value added tax (VAT), other taxes, or social security contributions; – Misreporting often involves maintenance of two sets of books, payments of envelope salaries which are recorded as intermediate consumption; payments in cash without receipts, and VAT fraud.

Eurostat N1-7 Other N7 - Other statistical deficiencies – N7a – incomplete data, not collected or not directly collectable – N7b - incorrectly handled data, processed or compiled by statisticians. Examples: – handling of non-response; – production for own final use by market producers; – tips; – wages and salaries in kind

Measurement issues Be clear on what is to be measured Assess the existing national accounts compilation Evaluate existing statistical sources Analyze the unrecorded economy Increase the efficiency of existing data collections Develop procedures for measuring unrecorded economy using available source data, supplemented with ad-hoc collections, indirect techniques and adjustments Develop new data sources

Measurement issues Underground/Misreporting Fiscal audits (personal and corporate income tax systems) Comparison of detailed data/ ratios of income and expenses for similar type of establishments from business surveys Demand side data to verify and correct production estimates Specific study of under- or miss-reporting VAT fraud Expert knowledge Suitable methods vary for different kinds of under- reporting and for different activities

Measurement issues household production Establishment surveys – requires economic censuses that identify household (informal) units to develop sampling frame, costly operation; – may cover only the upper segment (probable exclude units without fixed location, business inside house, etc.) Household surveys – Household budget survey – Living conditions monitoring survey – Labor force survey

Measurement issues Labor input method … compares two data sources on labor obtained from: – Economic: business surveys and administrative sources – Demographic: labor force surveys on households Both sources should provide comparable data, in terms of standard labor unit: employees hours worked, or full time equivalent. The target: determination of the labor participation not covered in business surveys The assumption: the HH survey give a comprehensive estimate of labor participation

Measurement issues Labor input method Determination of output/value added per labor unit Analyze the characteristics of units excluded from the business surveys Derive output/value added per labor unit on the basis of ad-hoc studies If not feasible, use information that is closely related to unrecorded activities Determine ratios at a detailed level

Labor Input method Countries practice … method varies across countries –depending on the availability of data. Some countries follow a detailed compilation – activity specific Labor Inputs (LI) are compiled for urban and rural segments separately for male and females (normally from labor force surveys) – these LIs for four categories are multiplied with respective value added per LI (available from enterprise / informal sector surveys) and added to obtain VA for each activity Some countries assume that for each economic activity LI is equal for all segments (rural/urban- male/female) – in the absence of detailed data

Labor Input method

Statistical underground Dealing with non- response Reasons: – Entities tend to hide some of the transactions they are involved – The accounting capacity is low, for most of small businesses – Not well designed samples and questionnaires – Incomplete statistical register of the businesses Approaches for reducing the rate – Post census surveys – Using other available sources Statistical Administrative Companies’ annual reports

Illegal activities Direct observation is obviously out of question Possible indirect sources… – Administrative and law enforcement records – Data on key inputs – Data on major uses – Special researches Part of illegal production may have been included implicitly – Enterprises over-report legal activities to legalize income from illegal activities

Production, distribution and consumption of drugs Importance for METAC countries – Major global producers of opium: Afghanistan and Myanmar, World Drug Report

… drugs, production and distribution prices

Production, distribution, consumption of drugs

References 2008 SNA, Chapter ILO Informal activities World Drug Report

Thank you