Bridging Theory and Practice in National Accounting … with a focus on growth, productivity and intangibles Bart van Ark November 17, 2008 www. conference - board. org

Page:2 As economic policy priorities change, (national) accounting needs to find a balance between a sound theoretical basis and flexibility in applications In other words: the house needs to be build so that it can serve many different dwellers The foundations of SNA (production, income and expenditure) are strong But some key elements are still missing in SNA:  A complete production account  A complete wealth account Without those elements the “real” and “financial” sources of growth, as well as their relationship, cannot be adequately analyzed The Link between Theory and Practice in National Accounting is the Key to Its Relevance

Page:3 In building a complete production account for growth analysis we need to accept some basic principles from economic (growth) theory  neoclassical growth principles are a good benchmark  growth account can be derived from production account Reach out to bring intangibles into the accounts  “Any outlay than is intended to increase future rather than current consumption is treated as a capital investment”  Innovation theory will push concept much further than current accounts  “Link growth account to national accounting system by way of complete production account Improve measurement of services output: is current theory and practice adequate to capture it?  price * quantity * quality  non-market vs. market services One Bridge Between Theory and Practice of National Accounts Is Measurement of the Knowledge Economy

4 Do the Official Statistics Capture the Knowledge Economy? Knowledge economy is based on the production, distribution, and use of knowledge as the main driver of growth, wealth creation, and employment Is the knowledge economy accurately represented in official statistics on national income and productivity?  “You can see the computer age everywhere but in the productivity statistics” Solow (1987)  Official statistics “miss the most important technological revolutions in history.” Nordhaus (1997)  Hence: “Whilst the knowledge economy is all around us, it is still hard to see it in the official statistics”  Skepticism about GDP, CPI and productivity statistics capturing key components of the knowledge economy

EU KLEMS Growth and Productivity Accounts Complements National Accounts EU KLEMS is analytical research database, based on national accounts and complementary official sources (LFS and production statistics) Long time coverage , with greatest detail for post-1995 Harmonized industry classification, capital and labour input, deflation and industry aggregations (e.g. market economy, market services) Decomposition of capital and labour input:  Capital assets in 7 asset types  Labour input in 18 categories (3 x skill; 3 x age; gender) Broad coverage of EU countries and comparisons with U.S. and Japan Public database: (latest update March 08)

Differences between EU and United States show decisive role for multifactor productivity growth & labor input growth GDP growth (%)

Investment and multifactor productivity accounted for accelerated growth from Source: Jorgenson and Vu, 2005 (updated) GDP growth (%)

Unmeasured intangible capital is hidden in MFP a) Physical Capital a1) ICT capital (IT hardware, communications equipment) a2) Other capital (plant, machinery, buildings) b) Human Capital b1) Formal Education b2) Company training c) Knowledge Capital c1) Research and Development c2) Patents c3) Licenses, brands, copyrights c3) Other technological innovations, not related to b1) to b3) [c4) Software]* c5) Mineral Exploration c6) Experience d) Process Capital d1) Engineering design d2) Organisation design d3) Construction and use of data bases d4) Remuneration of innovative ideas e) Customer Capital e1) Marketing of new products f) Multi Factor Productivity (residual) As long as intangibles capital remain unmeasured, its productivity effects are hidden in MFP

a) Physical Capital a1) ICT capital (IT hardware, communications equipment) a2) Other capital (plant, machinery, buildings) b) Human Capital b1) Formal Education b2) Company training c) Knowledge Capital c1) Research and Development c2) Patents c3) Licenses, brands, copyrights c3) Other technological innovations, not related to b1) to b3) [c4) Software]* c5) Mineral Exploration c6) Experience d) Process Capital d1) Engineering design d2) Organisation design d3) Construction and use of data bases d4) Remuneration of innovative ideas e) Customer Capital e1) Marketing of new products f) Multi Factor Productivity (residual)

The theoretical issues in measurement of intangible investment in national accounts framework Inherent measurement difficulties of intangible capital going beyond those of tangible capital as follows:  The knowledge-input problem  The knowledge-investment problem  The quality improvement problem  The obsolescence problem (Howell, 1996) But no clearcut distinction between tangibles and intangibles that justify a distinction between capitalizing and expensing “Any outlay than is intended to increase future rather than current consumption is treated as a capital investment” (Hulten, Corrado, Sichel, 2005)

Source: Corrado, Hulten and Sichel (2005) The bridge to practical measurement has been made by Corrado, Hulten and Sichel

Large differences in absolute and relative proportions of intangible investment Sources: Corrado, Hulten and Sichel (2005); Marrano and Haskel (2006); Jalava, Aulin-Ahmavaara and Alanen (2007); Van Rooijen, van den Bergen and Tanriseven (2008), Hao, Manole, and van Ark (2008), The Conference Board

Large differences in absolute and relative proportions of intangible investment Sources: Corrado, Hulten and Sichel (2005); Marrano and Haskel (2006); Jalava, Aulin-Ahmavaara and Alanen (2007); Van Rooijen, van den Bergen and Tanriseven (2008), Hao, Manole, and van Ark (2008), The Conference Board

Intangibles are important driver of growth Source: Hao, Manole, and van Ark (2008), The Conference Board

15 The Role of the Statistical Community to Integrate Growth, Productivity and Innovation in the SNA Growth accounts can be linked to national accounts through development of full-fledged growth account Intangible accounting is in early days, but statistical description of knowledge economy is too far removed from reality to ignore NSI’s could help to:  develop concepts of intangibles  set (international) standards for measurement  provide value metrics of intangibles, e.g., survey metrics on innovation with quantitative magnitudes.  Transfer experimental and research based measures into national accounts satellites or analytical modules that can help to move the measurement agenda forward

Page:16 Make the System of National Accounts fit the needs of policy makers, business and academic users … … and let them communicate Official statistics need to be as precise as possible … but it is sometimes better to be “imprecisely right than precisely wrong” (Keynes) … requiring a balance between research and official statistics Strengthen international comparability Transparency is key !! (also in national accounting) The Building Stones for the Bridge Between Theory and Practice in National Accounting