African Centre for Statistics United Nations Economic Commission for Africa Handbook on Supply and Use Table: Compilation, Application, and Good Practices Chapter 9 - GDP exhaustiveness

African Centre for Statistics Outline of Presentation The challenge of GDP exhaustiveness Activities usually under-reported or not reported Causes of under-estimation of GDP Consequences of under-estimation of GDP The Eurostat tabular approach to GDP exhaustiveness The OECD handbook on measuring non-observed economy Informal sector and informal employment

African Centre for Statistics The challenge of GDP exhaustiveness GDP measure should take into account all economic activities undertaken in the economy that are included within the production boundary of SNA. Ensuring the exhaustiveness of GDP is one of the most important challenges faced by national accountants.

African Centre for Statistics Activities usually under-reported or not reported Informal activities Illegal activities Own account construction of dwellings and farm buildings Agricultural produce for own consumption Services of owner occupied dwellings Paid domestic servants Wages paid in kind Local administrative units (at village or block level).

African Centre for Statistics Other causes of under-estimation of GDP Defective sampling frames, especially due to the failure to keep business registers up to date. Non-response. Under-reporting by establishments/enterprises.

African Centre for Statistics Consequences of under-estimation of GDP Loss of international comparability of the data Wrong policies resulting from wrong economic or financial parameters Incorrect estimation of GDP growth rates Distorted PPPs

African Centre for Statistics The Eurostat tabular approach to GDP exhaustiveness The Eurostat tabular approach to GDP exhaustiveness is recommended for ICP 2001 It provides a consistent and complete conceptual framework by classifying adjustments into seven types of “non-exhaustiveness”

African Centre for Statistics N1 ‐ Producer deliberately does not register (underground activity) The producer does not register in order to avoid tax and social security obligations or to avoid losing some social benefits. Adjustment methods: labor inputs (from household-based labor force surveys), commodity flows and supply-use tables.

African Centre for Statistics N2 ‐ Producer deliberately does not register (illegal activity) The producer deliberately fails to register because he is involved in illegal activities such as prostitution, sale of stolen goods, dealing in drugs, smuggling, illegal gambling, etc. The methods that can be used to estimate the adjustments are the quantity-price method, unit per input or use, and expert judgment.

African Centre for Statistics N3 ‐ Producer not required to register Such producers are not required to register because they do not have any market output or it is below a set threshold. No adjustment is necessary if the estimation method for a particular activity (or survey) implicitly takes account of the non-registered activity. The methods that can be used to estimate adjustments are household expenditure surveys, building permits, commodity-flow methods, administrative data and time use surveys.

African Centre for Statistics N4 ‐ Legal producers not surveyed Legal producers who may be registered can still be excluded from statistical surveys. For example: –The producer may be newly registered and not yet recorded on the business register –The producer may be excluded from survey frames because classification data used in developing the frames is wrong –There may be a size cut-off that precludes the producer from being selected to participate in a particular survey. The methods that can be used to estimate adjustments are surveys of the quality of the business register, a review of the lags involved in update procedures and whether they change over time, or cross checking the business register against other administrative sources of businesses.

African Centre for Statistics N5 - Registered entrepreneurs not surveyed Registered entrepreneurs may not be recorded in the business register for many reasons: –Deliberately –because the register updating sources do not include details of such persons. –They may be excluded from statistical surveys either because of errors in details recorded or because of the small size of their individual activities. The methods that can be used to estimate adjustments are surveys of the quality of the register, cross-checking against other administrative sources (e.g. income tax statements) or via specialized surveys.

African Centre for Statistics N6 ‐ Misreporting by producers Misreporting involves under-reporting gross output and/or over-reporting intermediate consumption in order to avoid paying income tax, other taxes such as value added tax (VAT), or social security contributions. The methods that can be used to estimate adjustments are data from tax audits, comparing average salaries and profits with similar businesses, comparing input/output ratios with those of similar businesses, special surveys and expert judgment on the accounting relationships expected to be observed in such businesses.

African Centre for Statistics N7 ‐ Other statistical deficiencies This category can be divided into two parts: –Data that are incomplete or cannot be directly collected from surveys –Data that are incorrectly compiled during survey processing. The items that should be considered in determining the adjustments to be made include how non-response was taken into account, the extent to which wages and salaries were paid in kind, production for own final use by market producers, tips, valuation techniques and adjustments for accruals.

African Centre for Statistics The OECD handbook on measuring non-observed economy Non-observed activities are those that are missing from the basic data used to compile the national accounts because they are underground, illegal, informal, household production for own final use, or due to deficiencies in the basic data collection. The 5 components of the NOE mentioned in the handbook are: –Economic Underground » (1) Underground Production » (2) Illegal Production » (3) Informal Production –(4) Household Production for own final use –(5) Statistical Underground

African Centre for Statistics Informal sector and informal economy Availability of separate data on employment and output in the informal sector is important for policy purposes, besides helping in measuring the GDP exhaustively. The term ”informal sector” is used to denote tiny units, engaged in the production of goods and services but whose activities were not recognized, recorded, protected or regulated by the public authorities 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 The informal employment comprises informal jobs both in informal and formal enterprises and in households.

African Centre for Statistics Characteristics of the informal sector (15th ICLS and 1993 SNA) The broad characteristics of the informal sector outlined in 15th ICLS and 1993 SNA are that these are: Private Un-incorporated Enterprises owned by households: (i) Own-account enterprises (ii) Enterprises of employers Units for which no complete accounts are available that would permit a financial separation of the production activities of the enterprise from other activities of its owners; Produce at least some of their goods or services for market (sale or barter) Produce goods and services using labour as input

African Centre for Statistics Characteristics of the informal sector (15th ICLS and 1993 SNA) (cont.) Refers to a group of production units based on their characteristics, irrespective of: –(i) kind of workplace where the productive activities are carried out –(ii) extent of fixed capital assets used –(iii) duration of the operation of the enterprise –(iv) operation as a main or secondary activity of the owner The employment size of the enterprise is below a certain threshold (to be determined according to national circumstances); And/or not registered under specific form of national legislation.

African Centre for Statistics Presenting data on informal sector and informal employment It is not possible present a full sequence of accounts for the informal sector, according to 2008 SNA. However, since the informal sector comprises a group of production units engaged in industrial activities, it is possible to present the production and generation of income accounts, in the same manner as these accounts are compiled for activities. The 2008 SNA recommends that where possible two supplementary tables should be prepared: –One covering production and the generation of income –One covering employment.

African Centre for Statistics Presenting data on production and generation of income of informal sector Production –of which for own use Intermediate consumption Value added Compensation of employees Gross mixed income Consumption of fixed capital Net mixed income.

African Centre for Statistics Presenting data on informal employment Employment in the informal sector –formal jobs –informal jobs Informal employment outside the informal sector –in the formal sector –in other household unincorporated enterprises.

African Centre for Statistics Direct approach to measuring activities undertaken in the informal economy Direct approach Data on output are collected from the informal sector enterprises through the establishment surveys or mixed household-enterprise surveys Generally, the production approach is considered the best approach to estimate informal sector value added.

African Centre for Statistics Indirect approach to measuring activities undertaken in the informal economy Suggested indirect approach: the labour input method. It involves three steps: obtaining estimates of the supply of labour input to GDP by kind of economic activity and size of enterprise (from LFS for ex.); 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; multiplying the labour input estimates by the per unit ratios to get output and value added for the activity and size categories.

African Centre for Statistics Comments and suggestions Very informative and well-explained chapter Add practical examples for the 7 types of non- exhaustiveness (Eurostat tabular approach)?

African Centre for Statistics Questions for discussion Advantages and disadvantages of direct vs indirect methods for estimation the production of informal sector? Differences between SNA93 and SNA2008 recommendations for the treatment of informal sector?

African Centre for Statistics Thank you!