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Non-Observed Economy. Clementina Ivan-Ungureanu Training: Essential SNA: Building the basics Addis Ababa, 13-16 February 2012. NOE. The main objective of accounts is to offer an exhaustive description of an economy. Problem due to lack of coverage in NA:

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Non observed economy

Non-Observed Economy

Clementina Ivan-Ungureanu

Training: Essential SNA: Building the basics

Addis Ababa, 13-16 February 2012


Non observed economy
NOE

  • The main objective of accounts is to offer an exhaustive description of an economy.

  • Problem due to lack of coverage in NA:

    – For users: understanding the economy both in terms of levels and trends

    – For national accountants: imbalances in the internal consistency of accounts because some economic transactions are not measured


Why is this important
Why is this important?

  • Comparability of GDP across countries and time

  • Contributions and subsidies based on GDP

  • Growth rates if Unobserved growth ≠ Observed Growth

  • Economic/fiscal policy

  • GDP per capita, emissions, debt, deficit % of GDP


Content
Content

  • Definition of NOE

  • Measurement methods

  • Special issues: illegal activities

  • Plan for strategy implementation



Non observed economy
NOE

Results: using simplistic assumptions, the users understand that the GDP figures published by NSO are underestimates.

How to avoid?

  • Measurement program for improving the exhaustiveness of data, with clear objectives, roles and responsibilities for national accountants and for survey statisticians,

  • Proper quality management for NOE estimation


Terms used
Terms used

  • NOE, black economy, grey, shadow, alternate, clandestine, hidden, invisible, parallel, secondary, unofficial, informal, underground economy

  • often not clear what is meant

  • negative connotation


Conceptual background
Conceptual background

  • The 2008 System of National Accounts

  • Measuring the Non-Observed Economy, a Handbook (2002) – jointly prepared by OECD, IMF, ILO and CIS StatCom

  • Eurostat Pilot Projects on Exhaustiveness in 1998 and 2002 – Guidelines on Tabular Frameworks

  • NOE in national accounts- Survey of Country Practices, UN, 2008


What is noe
What is NOE

  • Non-observed economy (NOE) refers to all productive activities that may not be captured in the basic data sources used for compiling national accounts.

  • The following activities are included: underground, informal (including those undertaken by households for their own final use), illegal, and other activities omitted due to deficiencies in the basic data collection program.

    The term ‘non-observed economy’ encompasses all of these activities and the related statistical estimation problems.

    Source: Non-Observed Economy in national accounts, Survey of Country l Practices, United Nations, 2008


Noe problem areas
NOE problem areas

OECD Handbook outlines 5 problem areas:

  • Underground activities

  • Illegal activities

  • Household Production for Own Final Use

  • Non-Observed Informal activities

  • Deficiencies in Data Collection


1 underground activities
1. Underground activities

  • All legal productive activities that are deliberately concealed from public authorities to avoid:

    • payment of income taxes or VAT

    • payment of social security contributions

    • meeting certain legal standards e.g. minimum wages

    • complying with administrative procedures e.g filling out statistical questionnaires or other forms


2 illegal activities
2. Illegal activities

Those productive activities specifically covered by SNA production boundary that:

– generate goods and services forbidden by law (e.g. production and distribution of illegal drugs) ;

– are unlawful when carried out by unauthorized producers (e.g. unlicensed practice of medicine).


3 production of households for own final use
3.Production of households for own final use

Productive activities that result in goods or services consumed or capitalized by the households that produced them, such as:

– production of crops and livestock;

– production of other goods for their own end use;

– construction of own houses and other own-account fixed capital formation;

– imputed rents of owner-occupiers,

- services of paid domestic servants


4 non observed informal activity
4.Non-Observed informal activity

Informal activities are:

  • conducted by unincorporated enterprises

  • in the household sector that are unregistered

  • and that have some market production.

    Characterised by:

  • a low level of organisation,

  • informal employment relations (e.g. oral agreements)

  • little or no division between labour and capital as factors of production, on a small scale


5 deficiencies in data collection
5. Deficiencies in data collection

a. Under-coverage of enterprises in whole or in part

- an enterprise is new and has not yet been included in the survey frameworks;

– an enterprise falls below the size cut-off for surveys;

– an enterprise has been incorrectly classified by type of activity or by region and thus improperly excluded from the survey frame;

– an enterprise has not been entered in the statistical register, regardless of its desire to be, because of the lack of efficiency of the statistical system, or due to the fact that registers are not updated, for instance.


5 deficiencies in data collection cont
5. Deficiencies in data collection(cont)

b. Non response by enterprises is depending on the sensitivity of the statistical system: enterprises are included in the sample but no data are collected from them and no imputation is made for the missing observations, because:

– the survey questionnaire was wrongly addressed;

– the enterprise, or part of it, did not return the questionnaire, they do not want to answer.


5 deficiencies in data collection cont1
5. Deficiencies in data collection(cont)

c.Under-reporting by enterprises : data is obtained from enterprises, but is misreported by the respondent, or correct data is received but is inappropriately input or weighted.


Eurostat n1 n7 framework
Eurostat N1-N7 framework

  • Introduced for the Pilot Projects on Exhaustiveness in 2002

  • Starting point the characteristics of producers (registered or not, surveyed or not)

  • Four main categories: Non-registered; Not surveyed; Misreporting; Other


Eurostat n1 n7 framework cont
Eurostat N1-N7 framework(cont)

  • Defines standard set of non-exhaustiveness types (N1 to N7) and presents them in a tabular framework;

  • Provides a comprehensive and systematic assessment to ensure exhaustiveness of NA;

  • Facilitates cross-country comparisons of adjustments and adjustment methods and provides for similar level of coverage of NA.


I not registered
I Not registered

N1 - Producer deliberately not registering – underground: not register to avoid tax and social security obligations. Producers that do not register because they are engaged in illegal activities fall under type N2.

N2 - Producers deliberately not registering – illegal : are involved in illegal activities. Type N2 excludes illegal activities by registered legal entities or entrepreneurs that report (or misreport) their activities under legal activity codes.

N3 - Producers not required to register because it has no market output (non-market household producers that engage in production of goods for own consumption, for own fixed capital formation, and construction of and repairs to dwellings. Or, producer has some market output but it is below the level at which the producer is obliged to register as an entrepreneur


Ii not surveyed
II Not surveyed

N4 - Legal persons not surveyed due to several reasons such as: the business register is out of date or updating procedures are inadequate; the classification data (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 for a variety of reasons: the statistical office does not conduct a survey of registered entrepreneurs; the registered entrepreneur is not in the list of registered entrepreneurs available to the statistical office, or if available, is systematically excluded from it; the registered entrepreneur is not in the survey frame because the classification data (activity code, size code, geographic code) are incorrect.


Iii misreporting
III Misreporting

N6 - Producers deliberately misreporting in order to evade income tax, VAT, other taxes, or social security contributions.


Iv other
IV. Other

N7 - Other statistical deficiencies

  • N7a: data that are incomplete, not collected or not directly collectable;

  • N7b: data that are incorrectly handled, processed or compiled by statisticians.

    Areas : non-response; production for own final use by market producers; tips; wages and salaries in kind; and secondary activities.


Standard tables
Standard tables

The Tabular Approach involves the completion of three standard tables both for output and expenditure approaches:

1. Elements of non-exhaustiveness (detailed breakdown by type of unit, activity, non-exhaustiveness type and adjustment procedure);

2. Exhaustiveness adjustments (including the absolute and relative size of the adjustments listed above);

3. Summary of adjustments (by institutional sector and NACE activity or expenditure component).


Non observed economy

All economic activities of all enterprises

Enterprises not in scope of enterprise survey or administrative source

Enterprises in scope of enterprise survey or administrative source

Enterprise not registered

Enterprise registered

Response or non-response correctly handled

Non-response incorrectly handled

N7b

Enterprise not obliged to register N3

Enterprise should have registered

Legal person

Registered entrepreneur

Enterprise under-reports

N6

Enterprise reports correctly

Underground activities

N1

Illegal activities

N2

Not in register

N4a

In register not surveyed

N4b

Not in register

N5a

In register ,not surveyed

N5b

All required data are collected

Not all required data are collected N7a


Example
Example

  • Country specific : phenomena, legislation, the magnitude of the NOE

  • Analysis of data sources and methods

  • Identification the types of NOE

  • Identification of all possible statistical and administrative sources

  • Defining the methods to estimate



Measurement methods
Measurement methods

The compilation methods for covering non-observed activities rely on indicators. Situations:

  • Coverage is often partial

  • Deficiencies in coverage and content

  • Overlap in coverage

  • Classifications used in various sources may differ

  • Concepts and accounting rules may differ

  • Indicators are often by-products.

  • Information is partial

  • Information is irregular or infrequent


Measurement methods cont
Measurement methods(cont)

1. Statistical methods

2. Methods based on modeling techniques

The choice of an appropriate method depends on the availability and quality of the data that can be used and the phenomenon in the country


1 statistical methods
1. Statistical methods

1.1 Direct methods based on direct surveys (survey on expenditures, income, labor, etc)

1.2 Indirect methods

1.2.1 Supply based methods

1.2.2 Labour input methods

1.2.3 Demand based methods

1.2.4 Income based methods

1.2.5 Commodity-flow method


1 1 direct survey opinion survey
1.1 Direct survey- opinion survey

  • Advantages:

    - The respondents are asking about

    their views rather than about their own behavior;

    - Senior managers and enterprises can be

    addressed directly

  • Disadvantage: no quantitative information that is readily useable


1 1 direct survey opinion survey cont
1.1 Direct survey- opinion survey(cont)

Example: survey by Russian Federation Centre for Economic Analysis (2000)

Type of question:

  • Please estimate (in ranges <5%, 6-15%, 16- 30%, 31-50%, 51-70%, >70%) the approximate shares of unregistered receipts by: large and medium retailers; small retailers; individual entrepreneurs;



1 2 indirect methods
1.2 Indirect methods

1.2.1 Supply based methods

1.2.2 Labour input methods

1.2.3 Demand based methods

1.2.4 Income based methods

1.2.5 Commodity-flow method


1 2 1 supply based methods
1.2.1 Supply based methods

Is based on inputs that are used in producing goods and services.

Input/output and input/value added ratios are used ( calculated previously based on specific survey or IOT frame).

Examples; agriculture and construction output



1 2 2 labor input method
1.2.2 Labor input method

There are three basic steps:

  • obtain estimates of the supply of labour input to GDP, for selected economic activity and size of enterprise, from a household labour force survey and/or other demographic sources;

  • obtain 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;

  • multiply the labour input estimates by the per unit ratios to get output and value added for the activity and size categories


1 2 2 labor input method cont
1.2.2 Labor input method(cont)

Steps:

  • Collection of enterprise data- surveys and administrative data ( use)

  • Collection of household data – LFS, population census ( supply)

  • Comparison supply-use of labor inputs

  • Identification of labor missing from use side

  • Compilation of O and GVA




1 2 3 demand based methods
1.2.3 Demand based methods

Production is estimated by using indicator data on specific uses of goods and services.

They could be

-household final consumption expenditures of a certain commodity (e.g. health and personal services),

  • uses of major products as raw materials (e.g. processing of agricultural products),

  • exports (e.g. major export commodities),

  • administrative data indicating demand for a product (e.g. motor vehicle registrations and building permits).

    After a measure of output has been obtained,VA estimates can be derived using O/VA ratios, as for supply-based methods.


1 2 4 income based methods
1.2.4 Income based methods

Some categories of income are available from administrative sources and can be used to obtain an indication of production covered by the administrative system.

They could be:

  • Income tax paid by self employers

  • Social security taxes

  • Turnover from VAT records


1 2 4 example
1.2.4 Example

Calculation of O, IC and GVA for units in private education activity.

  • For these units there are available data from:

  • financial statements ( complete balance sheets)

  • Mini balance sheets( for small units)

  • VAT declarations

  • Data from social security ( wages and number of employees)




1 2 4 example estimation of indicators for with vat and social contribution cont1
1.2.4 Example- Estimation of indicators for with VAT and social contribution (cont)

  • For the units with VAT declarations, the IC was calculated based on the declared turnover and the ratio IC/O of similar units with balance sheets and mini-balance sheets ( as main activity, size, region).

  • For the units with social security declarations, the VA was estimated based on the ratio of wages in VA from the similar units; the other indicators were estimated based on the same assumptions as for VAT.



1 2 4 example estimation of indicators for missing units cont1
1.2.4 Example-Estimation of indicators for missing units social contribution(cont)

  • The indicators were estimated based on the data from similar units ( as activity, size and region) with balance sheets and mini balance sheets.


1 2 5 commodity flow methods
1.2.5 Commodity flow methods social contribution

Involves balancing total supplies and uses of individual products.

It is used to estimate the output or an expenditure element by balancing the supply and use of that commodity, based on the following equation:

output = the sum of all intermediate consumption, final consumption, changes (positive or negative) in inventories, GFCF and exports minus imports


1 2 5 commodity flow methods cont
1.2.5 Commodity flow methods social contribution(cont)

Example of the use :

  • Estimation of the trade output

  • Estimation of the GFCF in construction

  • Estimation of the hotel and restaurant output


2 macro model methods
2. Macro-model methods social contribution

  • produce and estimate of NOE based on one single model

    • monetary methods – based on stocks or flows of money;

    • global indicator methods, e.g. electricity consumption

    • latent variable methods – two groups of variables: one determining the size and the other the evidence of missing activities

  • not recommended to use for measuring NOE - declaration by ISWGNA (signed by UN, Eurostat, OECD, IMF, World Bank)


2 macro model methods cont
2. Macro-model methods social contribution (cont)

They tend to produce spectacularly high measures, which attract much attention from politicians and newspapers.

It is often, but entirely wrongly, conjectured that the difference between these macro-model results and the official estimates of GDP is non-measured production


2 macro model methods cont1
2. Macro-model methods social contribution (cont)

Main types of macro-models methods:

2.1. Monetary methods, which assume that the non-measured production can be modelled in terms of stocks or flows of money.

2.2.Global indicator methods, in which non-measured production is modelled in terms of a single variable (usually a physical indicator) with which it is believed to be highly correlated, electricity consumption being the most commonly used.


2 macro model methods cont2
2. Macro-model methods social contribution (cont)

  • 2.3.Latent variable methods, in which modeling is in terms of two groups of variables, one group that is assumed to determine the size and growth of non-measured production and a second group that provides the “trace” (i.e., evidence) of the missing activities


Concluding remarks for macro model methods
Concluding remarks for macro-model methods social contribution

Unsuitable for compiling NA because

  • activities not precisely defined

  • underlying assumptions too simplistic

  • results not stable – change in assumptions produces different results

  • many models that give different results

  • provide only global estimate for GDP, not by industry

  • results can not be combined with other measurements based on data


Concluding remarks for macro model methods cont
Concluding remarks for macro-model methods social contribution (cont)

  • provide only global estimate for GDP, not by industry

  • results can not be combined with other measurements based on data

  • lack of transparency in describing the procedures used to compile the national accounts is the main reason why outsiders resort to macro-models and produce estimates that undermine the credibility of the national accounts


Other issues
Other issues social contribution


1 illegal activities
1. Illegal activities social contribution

General types of illegal production:

• production and distribution of illegal goods, such as banned drugs or pornographic material;

  • illegal services, such as prostitution (in countries where this is illegal);

  • production activities which are usually legal but which become illegal when carried out by unauthorised producers, such as unlicensed medical practices, unlicensed gambling activities, unlicensed production of alcohol;illegal fishing, hunting, tree cutting;

  • production and sale of counterfeited products, such as watches and other products

  • smuggling, in particular of tobacco, weapons, alcohol, food, people, both wholesale and retail;

  • fencing (resale) of stolen goods;

  • bribery;

  • money laundering.


1 illegal activities measurement methods
1.Illegal activities- Measurement methods social contribution

  • By their nature, illegal activities are very difficult to measure

  • Illegal activities are not included in the conventional data sources used in compiling the national accounts;

  • The most useful approach:

  • basic national accounting identity: supply and uses of goods and services (domestic output plus imports)

  • Direct estimations based on direct specific data sources


1 illegal activities measurement methods cont
1. Illegal activities-Measurement methods social contribution(cont)

For any given illegal activity, data should be collected, as far as possible independently, on each of the three angles:supply, use and generated income

Main sources :

- Provided by police

- Provided by health institutions,

- Provided by NGOs

- Special surveys


1 illegal activities examples drugs
1. Illegal activities- social contribution Examples: Drugs

  • Sources:

  • Police

  • Health institutions

  • NGOs with activity in this field

  • Special studies by universities


1 illegal activities examples drugs cont
1. Illegal activities- social contribution Examples: Drugs(cont)

  • The output is estimated based on the number of consumers and the price street( by categories of drugs)

  • Assumptions have to be made on the value of IC. Assuming that drugs dealers take care of their own transport, IC is rather low in the case of trade in drugs. A higher share of IC has to be assumed in the case of drugs production itself. Often, technical coefficients are available for this purpose.


1 illegal activities examples prostitution
1. Illegal activities- social contribution Examples: Prostitution

The total supply of prostitution services comprises services produced domestically by residents and by non-residents and imported services, i.e., prostitution services purchased by residents travelling abroad.

Main data sources:

-data from from health care organisations,

  • data from police police

  • Data fror prostitutes’ associations;

  • Different university studiees


1 illegal activities examples prostitution cont
1. Illegal activities Examples: social contributionProstitution(cont)

  • Output= number of persons x average number of clients x average price

  • A breakdown into different kinds of prostitutes (call girls, prostitutes in nightclubs, “window” prostitutes, prostitutes in massage parlours, escort services, heroin prostitutes, etc.) is suitable to be done.


Ii other elements
II Other elements social contribution

  • Value of private lessons: number of students, number of lessons in a month, value of the lesson

  • Rent of houses in holiday period: number of tourists, kind of accommodation, price per night

  • Taxi activities: special survey

  • Tips : a fixed % of the restaurant turnover


Strategy implementation
Strategy implementation social contribution


General problem of noe measurement
General problem of NOE measurement social contribution

  • Lack of consultation with major external users

  • Inadequate statement of objectives

  • Inadequate statement of responsibilities

  • Narrow focus

  • Lack of integration of data


Strategy for noe measurement
Strategy for NOE measurement social contribution

Five lines of action:

1.Identify an appropriate conceptual and analytical framework on the basis of which the NOE can be assessed.

2. Assess the basic data and the compilation methods, identifying the extent of non-observed and non-measured activities and establishing priorities for dealing with them, both in the immediate future and the longer term


Strategy for noe measurement cont
Strategy for NOE measurement social contribution(cont)

3.Identify potential improvements in the national accounts compilation process that will reduce the incidence of non-measured activities.

4. Identify potential improvements in the infrastructure and content of the basic data collection programme.

5. Develop an implementation plan


Elements of a noe strategy
Elements of a NOE strategy social contribution

  • Comprehensive programme of users consultation on their needs and priorities;

  • Set of clear, realistic, broad objectives indicating what to achieve in terms of NOE;

  • A well defined conceptual and analytical framework appropriate for NOE measurement;

  • Assessment of the sources and outputs of the and the national accounts compilation procedures;


Elements of a noe strategy cont
Elements of a NOE strategy social contribution(cont)

  • A prioritized set of possible short and long term initiatives for improving the statistical infrastructure and outputs of the existing basic data collection programme;

  • Implementation plan providing clear targets, milestones and an allocation of resources;

  • Data revision strategy for preventing breaks in macro-economic data outputs resulting from NOE related improvements;


Implementation steps
Implementation steps social contribution

Steps:

  • Formulation of aims and consultation with internal and external users

  • Selection of an analytical framework

  • Assessment of the NA and basic data collection programme

  • Identification and prioritisation of NOE improvement initiatives