Statistics on Sdgs: Accounting for Informal Sector in National Accounts

Contents

Acronyms

(i) Introduction

(ii) Background

(iii) Methodology

Output

Intermediate Consumption (IC)

Value Added

Compensation of Employees (CoE)

(iv) Result

(v) Discussion

References

Acronyms

BOS - Bureau of Statistics

GDP - Gross Domestic Product

SNA2008 - 2008 System of National Accounts

1993 SNA - System of National Accounts 1993

ILFS - Integrated Labour Force Survey

ILO - International Labour Organization

SDGs - Sustainable Development Goals

ISIC - International Standard Industrial Classification of all economic activities

IC - Intermediate Consumption

CoE - Compensation of Employees

(i) Introduction

Gross Domestic Product (GDP) definition by production according to 2008 System of National Accounts (SNA2008) is that; GDP is the sum of gross value added of all resident producer units. In other words, this is the measure of how an economy performs in a certain period of time, normally a quarter or a year. In production process, some activity is carried out in order to produce outputs. During this process, inputs are used, and they are referred to as intermediate consumption (IC). The difference between Output and IC is the value added.

Chapter 25, paragraph 25.1 of SNA2008 states that no economy is completely regulated and captured perfectly by statistical enquiries, which means that steps have to be taken to attempt to cover unregulated activity and survey imperfections as special exercises. These unregulated activities that are not easy to capture are normally known ashidden, underground or informal. This chapter of SNA2008 highlights the details of capturing these unregulated activities of the economy.

Apart from that, the International Labour Organization (ILO) concept of defining informal sector is that informal sector is a subset of household unincorporated enterprise. In details, the ILO defines that the informal sector may be broadly characterized of consisting of units in the production of goods and services with the primary objective of generating employment and incomes to the persons concerned. Also production units of the informal sector have the characteristic features of household enterprises. The assets used do not belong to the production units as such but to their owners. Expenditure for production is often indistinguishable from household expenditure.

In Lesotho, 25.3 percent of the population in the work force is unemployed (2008 Integrated Labour Force Survey), so the assumption is that most of the unemployed population earns their living through informal sector, as SNA2008, Chapter 25, paragraph 25.9 illustrates that the motivation behind informal activities is purely survival strategy or flexible work arrangements. Hence a proper measurement of the magnitude and contribution of the informal sector and informal employment to Gross Domestic Product (GDP) is needed to attain a comprehensive GDP estimate.

The paper is intended to outline methodology in measuring informal economy in national accounts through establishment surveys and establishment censuses. The reason for measuring informal economy through establishment surveys, in addition, is analysis at establishment level for policy formulation reflecting Sustainable Development Goals (SDGs).This topic has been chosen and/or is important because it gives my country’s experience, to share with other African countries.

(ii) Background

The discussion is based on the practices and experiences of national accounts statistics division of Lesotho Bureau of Statistics (BOS) in measuring the informal economy in national accounts through establishment surveys and censuses.

A business register survey was undertaken of all establishments that were operational (formal or informal) in 2004 for benchmarking national accounts statistics.

All informal establishments were grouped and analyzed according to their characteristics defined by ILO in the introductionpart of this paper, and indeed they were mostly household-based. The reason for this was to account for the informal economy contribution to Gross Domestic Product (GDP) for each industry. The establishments’ activities were classified according to the International Standard Industrial Classification of all economic activities (ISIC).

In discussing this topic, concentration will be onmeasuring informal activities of Manufacture of basic metals and metal products (ISICD28), and Manufacture of other non-metallic mineral products (ISICD26) (1993 System of National accounts) through establishment surveys.The years 2004 (Base year) to 2012 are referenced.

(iii) Methodology

Output

According to SNA2008, paragraph 6.89,output is defined as the goods and services produced by an establishment. Output can be goods and services produced for market, non-market or own final use. Also these goods and services can be produced hidden, underground or informally.

The output at current prices of the informal activity in ISICD28 was estimated as the turnover of all informal establishments in this industry in 2004. This was deflated by the implicit deflator for metal products of formal establishments to get output at constant prices. Then an annual volume increase of 2 percent was assumed to extrapolate for 2005 and other years until next bench-mark year.

The same procedure was followed for ISICD26, but here output was extrapolated with the formal establishments’ output at constant prices, and then output prices were used as deflators to get the current prices.

Table 1 and 2 below show the output figures (Values in Million Maloti), and deflators for the informal activities of ISICD28 and ISICD26 respectively.

Table 2. Output and Deflators for Informal Activities of ISICD26

Intermediate Consumption (IC)

During the production process, there are those goods and services that are consumed as inputs and these goods and services are known as intermediate consumption (IC). Also in theinformal, hidden or underground production of goods and services, there are inputs consumed during production of final goods and services.

Intermediate consumption of the informal activities for ISICD28 was calculated as the contribution of the intermediate consumption of the formal establishments to its output at current prices. At constant prices, intermediate consumption was estimated with the movement of its output at constant prices.

The same procedure was followed for ISICD26 to estimate the intermediate consumption at current prices, except that, input prices were used as deflators to get constant price figures.

Table 3 and 4 below show the intermediate consumption figures (Values in Million Maloti) for the informal activities of ISICD28 and ISICD26 respectively.

Table 3. Intermediate Consumption for Informal Activities of ISICD28

Table 4. Intermediate Consumption for Informal Activities of ISICD26

Value Added

It has been explained in the introduction part of this paper that value added is the difference between output and intermediate consumption. Value added measures the value created by production. This means that value added represents the contribution of labour and capital to the production process. In other words, value added is the balancing item in the production account, as indicated below;

Production Account

The table below shows the value added for the total industries, formal and informal, under discussion (Values in Million Maloti) at both current and constant prices.

Table 5. Total ISICD28 and ISICD26 Value Added at both current and constant prices

The following tables show the value added of the informal activities atcurrent and constant prices (Values in Million Maloti) of ISICD28 and ISICD26 respectively.

Table 6. Value Added for the Informal Activities of ISICD28

Table 7. Value Added for the Informal Activities of ISICD26

Compensation of Employees (CoE)

Paragraph 25.54 of the SNA2008 stipulates that it has been realized that production alone is not the only aspect of the economy where a distinction between formal and informal is informative, it is also relevant for employment, hence the point of compensation of employees in this sub heading of the paper. However, one should note that under formal job there can be informal employment, as it can also happen that under informal job there can be formal employment. Apart from that, one of the limitations of this paper is that it was not easy to identify informal employment under formal production of goods and services.

It has been explained above that during the production process, the three primary inputs are involved; being labour, capital and land, in return, these inputs should be rewarded. The reward to labour is normally compensation of employees while that of capital is consumption of fixed capital. In this case, discussion will mainly concentrate on compensation of employees for the informal activities of the mentioned two industries. The following is the generation of income account, with the balancing item as the Operating Surplus or Mixed Income, which means that it is the residual after subtracting these rewards from the value added.

Generation of Income Account

During the benchmark year, compensation of employees was found to be 5 percent of output in ISICD28. This was assumed to be constant for all other years after 2004 until the next benchmark year. However, compensation of employees for ISICD26 was discovered to be 10 percent of output in the same year, and then the same 10 percent rate was used for all other years until 2012.

The following table shows figures for compensation of employees (Values in Million Maloti) for the informal activities of ISICD28 and ISICD26 respectively.

Table 8. Compensation of Employees for the Informal Activities of ISICD28 and ISICD26.

(iv)Result

During the benchmark year, value added for the informal activities of ISICD28 constituted about 7 percent to the total industry value added, while for ISICD26 contribution was 26.9 percent of the total industry value added in 2004.The table below shows that the proportion of the contribution of value of the informal activities made by ISICD26 is much higher than that of ISICD28. Also looking at the time series for both industries, the trend keeps going down from the base year although that of ISICD28 recovered fast in 2011, and became steady in 2012. The contributions of the informal activities stayed constant for many years for both industries, from 2006 to 2010 for ISICD28 (about 4 percent), and from 2005 to 2012 for ISICD26 (about 21 percent).

Table 9. Value Added, for the Informal activities of ISICD28 and ISICD26, contributions to their Total industry Value added.

Moreover, in 2004 which is the benchmark year for Lesotho’s national accounts, compensation of employees for the informal activities of ISICD28 and ISICD26 contributed about 1 and 9 percent of their total industries’ value added respectively, as the table below indicates. Although we have stipulated above that one the limitations here is that, we were unable to identify whether all the employment under these informal activities was informal, the contributions to the total industries value added of the informal activities of these two industries is significant, especially ISICD26 where the proportion of the contribution was higher than that of ISICD28.

Table 10. Compensation of Employees, for the informal activities of ISICD28 and ISICD26 to their Total Industry Value added

Establishments involved in informal activities of ISIC D28 and ISIC D26 were found to be household-based which means they were classified under the household sector of institutional units in national accounts.

According to the results, it seems there are more jobs in informal activities of ISICD26 than in ISICD28, because the proportion of the informal compensation of employees of ISICD26 is higher than that of ISICD28, besides the limitations that have been explained above.

(v) Discussion

The benchmark year (2004) in which informal economy was estimated is too far, the recommendation is that establishment surveys be conducted as frequently as possible in order to improve quality of the informal sector estimates. This is because from the base year, looking at the time series, figures keep going down. In essence, this is not the case because unemployment rate is increasing, people should attempt all means in which they can survive, and one of them is getting involved in informal activities.

Business Register was not a relevant survey to use in measuring the informal economy because it does not include as many variables as possible, more especially on intermediate consumption and compensation of employees. Hence many assumptions were used in order to incorporate the informal results of the business register into national accounts. Lesotho Bureau of Statistics is now benchmarking and rebasing its national accounts statistics to 2012, so the plan now is to use the 2010/2011 Household Budget Survey (2010/2011HBS) results in order to account for or measure the informal sector in national accounts.

Apart from that, paragraph 19.35 of the SNA2008 explains that national accountants are particularly concerned about ensuring that the whole of economic activity (formal or informal) within the SNA production boundary is measured comprehensively. This is often referred to as exhaustiveness of the coverage of national accounts.

Therefore, in the late 1990s Eurostat developed a systematic method called the Eurostat Tabular Approach to Exhaustiveness that was designed to identify potential sources of under-statement in the national accounts due to omissions from the statistical source data used. The seven sources of non-exhaustiveness were identified, which include misreporting, under-ground and illegal activities. For instance, misreporting involves under-reporting of output and/or over-reporting of intermediate consumption in order to avoid paying income tax, while illegal activities include sale of stolen goods, prostitution, dealing in drugs, etc.

The Eurostat Tabular Approach to Exhaustiveness suggests that data from tax audits, comparing input/output ratios with those of similar establishments, quantity-price method,commodity flows and supply-use tables, or even expert judgment can be used to adjust for misreporting and illegal activities. During the 2004 benchmarking of Lesotho national accounts, adjustments for exhaustiveness were made by expert judgment for formal and informal activities of the economy. It was mentioned above that Lesotho is now benchmarking and rebasing its national accounts statistics, and then other methods of adjusting for exhaustiveness, other than just expert judgment, are being considered.

In conclusion, informal economy plays an important role in Lesotho as one of the sources of employment, income, goods and services, as has been seen in the two industries discussed, that it is a significant contributor to the country’s value added. Therefore, Lesotho should fully, implement the SNA2008 in order to accommodate these new improvements in measuring informal economy so as to develop and advance the comprehensiveness of its GDP estimates.

Apart from that, informal economy should not just be ignored; rather policies should be designed that reflect the Sustainable Development Goals (SDGs) so that no one is left behind whether operating in a formal or informal economy.

References

System of National Accounts 1993

2008 System of National accounts

2008 Lesotho Integrated Labour force survey

Lesotho System of National Accounts