African Centre for Statistics United Nations Economic Commission for Africa Annex B: Informal Economy in the context of GDP exhaustiveness Ramesh KOLLI EN/SUT/2014/Pres/06 Senior Advisor on National Accounts, African Centre for Statistics At Expert Group Meeting on Supply and Use Tables 2-6 June 2014, Port Louis, Mauritius Le Méridien Ile Maurice

African Centre for Statistics Exhaustiveness Main objective of ICP - compare real GDP of countries Need - reliable and consistent estimates of levels of GDP in national currency Conceptual framework is 1993 SNA Comparability is important – therefore, GDP must be exhaustive All economic activities have to be included whether legal or not Need to look into the following for ensuring GDP is exhaustive: –Production for own consumption –Informal sector, street vendors, private tutors, paid domestic servants –Smuggled goods –All government expenditures, incl. local authorities and defence –Own account construction –Illegal activities, such as prostitution and drugs 2

African Centre for Statistics Approaches for Exhaustiveness NOE handbook Eurostat tabular approach 3

African Centre for Statistics 4 NOE OECD Handbook definition of NOE 5 components of NOE –Economic Underground »(1) Underground Production (deliberate concealment of legal activities from public authorities to avoid taxes, etc.) »(2) Illegal Production (forbidden by law, but transactions have mutual consent) »(3) Informal Production –(4)Household Production for own final use (production of crops, livestock, other goods, construction of own houses, imputed rents, and services produced with the help of domestic servants) –(5) Statistical Underground (missed due to deficiencies in data collection programme) Difficult to separate NOE activities, as they mostly overlap

African Centre for Statistics Eurostat tabular approach to exhaustiveness N1Producer deliberately does not register (underground activity) – avoid tax or social security obligations N2Producer deliberately does not register (illegal activity) N3Producer not required to register (unregistered) N4Legal producers not surveyed (newly registered or excluded from the surveys due to wrong coding or classifications) N5Registered entrepreneurs not surveyed (special surveys or income tax records) N6Misreporting by producers (under reporting of output or over reporting of IC – tax audits, IO ratios N7Other statistical deficiencies – accounting for non-response, wages paid in kind, production for own final use by market producers, tips, valuation techniques and adjustments fro accruals) 5

African Centre for Statistics 6 Informal Economy Conceptual Framework for measuring Informal Sector and Informal Employment A case study with India’s data to estimate the contribution of informal sector to employment and GDP

African Centre for Statistics Introduction Informal economy contributes significantly to employment and GDP in developing economies In , informal sector in India accounted for –93 % of total employment including agriculture –82.4 % of employment in non-agricultural economic activities –The sector accounts for almost 50 per cent of India’s GDP The size of informal economy could be of that order in similar developing economies – Ethiopia GDP– 60% in , excluding agriculture – 12%, Employment - 90%, excluding agriculture – 19% Therefore, measuring informal sector is important for –GDP exhaustiveness –Policy and decision making 7

African Centre for Statistics 8 CONCEPTUAL FRAMEWORK The following are some important sources: –15 th ICLS on informal sector,17 th ICLS on informal employment –1993 SNA –OECD, IMF, ILO, and CIS STAT (2002) Handbook, NOE –Delhi Group deliberations and recommendations –Chapter 25 of 2008 SNA ILO Statistical Manual on the informal sector and informal employment: Measuring Informality (2012) UN-ECE publications, NOE in National Accounts: Survey of Country Practices (2003, 2008)

African Centre for Statistics Informal sector 9

African Centre for Statistics 15 th ICLS Informal sector refers to a group of production units Belong to the household sector of SNA as household enterprises or unincorporated enterprises owned by households The production units which make up the informal sector are identified as: –"informal own-account enterprises" or –"enterprises of informal employers " 10

African Centre for Statistics 15 th ICLS (2) The units are identified based on their characteristics, irrespective of –kind of workplace where the productive activities are carried out –extent of fixed capital assets used –duration of the operation of the enterprise (perennial, seasonal or casual) –operation as a main or secondary activity of the owners 11

African Centre for Statistics 15 th ICLS (3) - Characteristics –Units should sell some of their output in market –Not separate legal entities independently of their owners –Do not maintain complete set of accounts –production activities cannot be distinguished from other activities of its owners –size of employment below a certain specified level –Not registered under specific form of national legislation (business register) –Lack of registration of the enterprise/ employees 12

African Centre for Statistics th ICLS (4) - exclusions Household production for own use is excluded as no part of the output is marketed –Own account production for own consumption –Services of owner occupied dwellings –Production of services by households employing domestic workers for own final consumption Confined to non-agricultural activities

African Centre for Statistics SNA –The 1993 SNA mentions the informal sector in Chapter IV (paragraph 4.159) under the subheading The household sector and its sub- sectors (S.14) –It introduces the concept of the informal sector and makes reference to the 15 th ICLS –Other than this Annex, there is no methodological recommendation per se on the informal sector in the 1993 SNA

African Centre for Statistics 15 Brief differences between 15 th ICLS and 1993 SNA Sector –ICLS – refers to group of producing units –SNA – sector refers to an institutional sector Market –The SNA defines market producers as those that sell most or all of their production on the market at economically significant prices. –ICLS - Produce at least some of their goods or services for market (sale or barter) Production –ICLS - Produce goods and services using labour as input –SNA - includes production for own consumption without using labour as output, such as owner occupation of dwellings Exclusion of agricultural activities

African Centre for Statistics 16 Expert Group on Informal Sector Statistics (Delhi Group) The Delhi Group held 11 meetings since its inception Concludes that informal sector manifests itself in different ways in different countries, therefore, national definitions of informal sector can not be fully harmonised. It recommended that –international agencies should disseminate informal sector data according to the national definitions used. –All countries use the criteria of legal organisation (un-incorporated enterprises), of type of accounts (no complete set of accounts) and of product destination (at least some market output)

African Centre for Statistics Delhi Group (2) Specification of the employment size limit of the enterprise in national definition of the informal sector is left to the country’s discretion –For international reporting, countries should provide data separately for enterprises with less than five employees Countries using the employment size criteria provide –disaggregated data for Registered and non-registered enterprises Countries using the criterion of non-registration provide –disaggregated data for enterprises with LT5 and GE5 employees Countries, which include agricultural activities, provide –Data separately for agricultural and non-agricultural activities 17

African Centre for Statistics 18 Delhi Group (3) –Countries should include persons engaged in professional or technical activities if they meet criteria of informal sector definition –Countries should include paid domestic services unless these are provided by employees –Countries should follow paragraph 18 of the Resolution adopted by the 15th ICLS regarding the treatment of outworkers/home-workers. Countries should provide figures separately for outworkers/home-workers included in the informal sector. –Countries covering urban as well as rural areas should provide figures separately for both urban and rural areas. –Countries using household surveys or mixed surveys should make an effort to cover not only persons whose main job is in the informal sector, but also those whose main job is in another sector and who have a secondary activity in the informal sector

African Centre for Statistics 19 NOE OECD Handbook definition of NOE 5 components of NOE –Economic Underground »(1) Underground Production (deliberate concealment of legal activities from public authorities to avoid taxes, etc.) »(2) Illegal Production (forbidden by law, but transactions have mutual consent) »(3) Informal Production –(4)Household Production for own final use (production of crops, livestock, other goods, construction of own houses, imputed rents, and services produced with the help of domestic servants) –(5) Statistical Underground (missed due to deficiencies in data collection programme) Difficult to separate NOE activities, as they mostly overlap

African Centre for Statistics SNA 2008 SNA notes that ICLS always regarded informal sector as a subset of household unincorporated enterprises operating within the production boundary of the SNA For identification of informal sector, it divides household sector into: – households containing an unincorporated enterprise that is registered or has more than a given number of employees; – institutional households, such as prisons, retirement homes etc.; – households with no unincorporated enterprises; – households only undertaking production for own final use; – Informal sector enterprises (Households containing unincorporated enterprises that are not registered and/or have less than given number of employees) Provides operational guidelines to identify informal sector activities through exclusions from the SNA household sector

African Centre for Statistics Informal employment 21

African Centre for Statistics 17 th ICLS Conceptual framework of informal employment comes from 17 th ICLS Job-based concept of informal employment, as a person can engage in multiple jobs with formal/informal characteristics Emerged due to the development of more casual arrangements between owners of enterprises and those contributing labour services in the form of informal employment. Informality of employment is characterized by absence of contracts, social protection, entitlement to certain employment benefits and not being subject to labour legislation or taxation. Broadly, the informal employment comprises informal jobs both in informal and formal enterprises and in households 22

African Centre for Statistics Presenting data on informal sector and informal employment 23

African Centre for Statistics 24 Contd… Presenting the data –Not possible to present full sequence of accounts –two supplementary tables should be prepared »production and generation of income Production –of which for own use Intermediate consumption Value added Compensation of employees Gross mixed income Consumption of fixed capital Net mixed income. »Employment Employment in the informal sector – Formal jobs –Informal jobs Informal employment outside the informal sector –formal sector –other household unincorporated enterprises.

African Centre for Statistics 25 Measuring informal economy Direct or indirect approaches to measure the informal sector, through the following surveys –Household surveys »Mainly labour force surveys –Establishment surveys –Mixed household-enterprise surveys »1-2 surveys

African Centre for Statistics Direct approach Generally, the production approach is considered the best approach to estimate informal sector value added. data on output (if possible by products), intermediate consumption and changes in inventories is collected from the informal sector enterprises, through –establishment surveys or mixed household-enterprise surveys. 26

African Centre for Statistics Indirect approach labour input method suggested in the Handbook on NOE This procedure involves three basic steps –(i) obtaining estimates of the supply of labour input to GDP, for selected economic activity and size of enterprise, from a household labour force survey, population census and/or other demographic sources; –(ii) obtaining estimates of output per unit of labour input and value added per unit of labour input for the same activity and size breakdown from regular or special purpose enterprise survey; and –(iii) multiplying the labour input estimates by the per unit ratios to get output and value added for the activity and size categories. This approach has advantages of a more complete coverage of labour input to GDP than do the enterprise surveys, and therefore, would provide a basis for GDP exhaustiveness and consistent estimates between employment and output Requires preparation of a labour input matrix 27

African Centre for Statistics The chapter provides a case study with Indian data 28

African Centre for Statistics United Nations Economic Commission for Africa Thank you Ramesh KOLLI Senior Advisor on National Accounts, African Centre for Statistics At Expert Group Meeting on Supply and Use Tables 2-6 June 2014, Port Louis, Mauritius, Le Méridien Ile Maurice