1 Exhaustiveness- Non-Observed Economy – Informal Sector Accounting Ramesh Kolli.

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Exhaustiveness-Non-Observed Economy – Informal

Sector Accounting

Ramesh Kolli

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 drugs2

Approaches for Exhaustiveness

• NOE handbook

• Eurostat tabular approach

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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

Eurostat tabular approach to exhaustiveness

N1 Producer deliberately does not register (underground activity) – avoid tax or social security obligations

N2 Producer deliberately does not register (illegal activity)

N3 Producer not required to register (unregistered)

N4 Legal producers not surveyed (newly registered or excluded from the surveys due to wrong coding or classifications)

N5 Registered entrepreneurs not surveyed (special surveys or income tax records)

N6 Misreporting by producers (under reporting of output or over reporting of IC – tax audits, IO ratios

N7 Other 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)

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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

Introduction

• Informal economy contributes significantly to employment and GDP in developing economies

• In 2004-05, 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 2008-09, excluding agriculture – 12%, Employment - 90%, excluding agriculture – 19%

• Therefore, measuring informal sector is important for

– GDP exhaustiveness

– Policy and decision making7

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CONCEPTUAL FRAMEWORK

• The following are some important sources:

– 15th ICLS on informal sector ,17th 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 documents on informal sector

– UN-ECE publications NOE in National Accounts: Survey of Country Practices (2003, 2008)

– Project “Interregional Programme of Technical Cooperation on the Measurement of the Informal Sector and Informal Employment” by the UN regional commissions

Informal sector

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15th 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 "

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15th 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

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15th 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

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15th 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

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1993 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 15th ICLS

– Other than this Annex, there is no methodological recommendation per se on the informal sector in the 1993 SNA

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Brief differences between 15th 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

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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)

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

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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

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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

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2008 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

Informal employment

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17th ICLS• Conceptual framework of informal employment comes from 17th

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

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Presenting data

on informal sector and informal employment

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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.

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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

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.

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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

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Case Study-India

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Sources of data

• To measure informal sector employment and GDP and informal employment, following are main sources :

– Household Employment and unemployment surveys, Population census, administrative data on employment in the organised sector, informal sector survey

– enterprise surveys on unorganised manufacturing and services

Informal sector and Informal employment

• From India’s employment and unemployment surveys conducted in the NSS 55th round (1999-2000) and 61st round (2004-05) and the enterprise surveys, it is possible to compile the estimates of value added and employment in ‘informal’ sector, as also on informal employment, as per the guidelines provided in 15th and 17th ICLS.

• The first comprehensive survey of ‘Informal Sector’ using the criteria laid down by the Delhi Group was conducted in the NSS 55th Round during July 1999 to June, 2000, alongwith the periodical labour force survey. This was followed up by introducing a module on informal employment in the subsequent labour force survey undertaken during July, 2004 to June, 2005.

• Using these sources, attempt has been made to measure informal sector

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Definitions adopted for ‘informal sector’ and ‘informal employment’

In this study, the following definitions have been adopted:

i) Formal sector: All enterprises in the public sector, private corporate sector, and household enterprises employing more than 5 workers.

ii) Informal Sector: All household enterprises having less than equal to five workers.

iii) Formal Jobs: Principal Jobs which are regular salaried or wage employee and are subject to written contracts for more than one year.

iv) Informal Jobs: All subsidiary jobs and principal jobs other than those classified as formal jobs

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GVA per worker estimates

• From the enterprise surveys of NSSO

– ratio of the gross value added to the total employees in the particular compilation category gives the estimate of GVA per worker

Table 4: Labour Input Matrix for 2004-05 for the overall economy

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Year

Institution/Sector Number of Jobs in ‘00000) % to total Jobs

% to total Jobs within institution

Formal Jobs

Informal Jobs

Total Formal Jobs

Informal Jobs

Total Formal Jobs

Informal Jobs

Total

2004

-05

1.

Form

al Sect

or

1.1 Public Sector 166 84 250 3.0 1.5 4.5 66.4 33.6 100.0

1.2 Private Corporate Sector 51 86 137 0.9 1.5 2.5 37.4 62.6 100.0 1.3 Household Sector excluding Informal Sector

25 440 465 0.5 7.9 8.4 5.4 94.6 100.0

total formal sector 242 609 852 4.4 11.0 15.3 28.5 71.5 100.0

2. Informal Sector 7 4,707 4,713 0.1 84.6 84.7 0.1 99.9 100.0

Total 249 5,316 5,565 4.5 95.5 100.0 4.5 95.5 100.0

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Table 4.2: Labour Input Matrix for 2004-05 at the industry level – shares (%) Sl.N

o.

Industry

Public Sector

Pvt. Corp. Sector

Household Sector excl. infl. sector

Informal Sector

Total Economy

Forml jobs

Infl. jobs

Forml jobs

Infl. jobs

Forml jobs

Infl. jobs

Forml jobs

Infl. jobs

Forml jobs

Infl. jobs

Total

1 Agrl. & allied 0.02 0.04 0.00 0.01 0.00 0.4 0.00 60.4 0.02 60.9 60.9

2 Non-agrl. activts. 3.0 1.5 0.9 1.5 0.45 7.5 0.12 24.2 4.5 34.7 39.1

2.1 Manufacturing 0.12 0.06 0.4 0.8 0.2 2.9 0.02 6.4 0.7 10.1 10.8

2.2 Construction 0.02 0.3 0.01 0.13 0.01 2.4 0.00 2.9 0.04 5.7 5.7

2.3 Trade and hotels 0.02 0.02 0.05 0.10 0.06 0.8 0.03 8.6 0.2 9.5 9.7

2.4 Others 2.8 1.1 0.48 0.53 0.2 1.3 0.07 6.3 3.5 9.3 12.9

3 Total 3.0 1.5 0.92 1.5 0.45 7.9 0.12 84.6 4.5 95.5 100.0

Table 5: Estimates of GVA for formal/informal sectors and formal/informal jobs

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Year Institution/Sector

GVA at current price (in Rs.10bn.) % to total GDP

% to total GVA with in institution

Formal Job

Informal Job Total

Formal Job

Informal Job Total

Formal Job

Informal Job Total

2004

-05

1. F

orm

al S

ecto

r 1.1 Public Sector 587 94 682 19.8 3.2 23.0 86.2 13.8 100.0

1.2 Private Corporate Sector 572 39 611 19.3 1.3 20.6 93.6 6.4 100.0 1.3 Household Sector excluding Informal Sector 51 200 250 1.7 6.7 8.4 20.2 79.8 100.0

total formal sector 1,210 333 1,543 40.8 11.2 52.0 78.4 21.6 100.0

2. Informal Sector 156 1,268 1,424 5.3 42.7 48.0 11.0 89.0 100.0

Total 1,367 1,601 2,968 46.1 53.9 100.0 46.1 53.9 100.0

1999

-200

0

1. F

orm

al S

ecto

r 1.1 Public Sector 435 15 450 24.3 0.9 25.2 96.6 3.4 100.0

1.2 Private Corporate Sector 296 24 320 16.6 1.4 17.9 92.4 7.6 100.0 1.3 Household Sector excluding Informal Sector 23 64 87 1.3 3.6 4.9 26.0 74.0 100.0

total formal sector 753 104 858 42.2 5.8 48.0 87.9 12.1 100.0

2. Informal Sector 95 834 929 5.3 46.7 52.0 10.2 89.8 100.0

Total 848 938 1,787 47.5 52.5 100.0 47.5 52.5 100.0

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Table 5.2: Estimates of GVA for 2004-05 at the industry level – shares (%) Sl.N

o.

Industry

Public Sector

Pvt. Corp. Sector

Household Sector excl. infl. sector

Informal Sector

Total Economy

Forml jobs

Infl. jobs

Forml jobs

Infl. jobs

Forml jobs

Infl. jobs

Forml jobs

Infl. jobs

Forml jobs

Infl. jobs

Total

1 Agrl. & allied 0.61 0.00 0.51 0.00 0.00 0.1 0.00 17.7 1.11 17.8 18.9 2 Non-agrl. activts. 19.2 3.2 18.8 1.3 1.68 6.6 5.26 25.1 44.9 36.2 81.1

2.1 Manufacturing 2.16 0.03 7.2 0.4 0.1 1.7 0.00 3.6 9.5 5.8 15.3 2.2 Construction 0.54 0.3 1.89 0.13 0.00 2.3 0.00 2.7 2.43 5.3 7.7 2.3 Trade and hotels 0.20 0.03 3.27 0.13 0.07 1.1 0.03 11.2 3.6 12.5 16.1 2.4 Others 16.3 2.8 6.40 0.61 1.5 1.6 5.22 7.6 29.4 12.6 42.0

3 Total 19.8 3.2 19.27 1.3 1.72 6.7 5.26 42.7 46.1 53.9 100.0

Some key findings

• Contribution of informal sector to GDP in 2004-05 is about 48%

• The government and corporations account for 43.6%, balance HH formal

• This is much smaller than the informal sector share in employment (85%)

• Share of informal jobs in total GDP is 53.9%, as against the share of 95.5% in total jobs. On the other hand, formal jobs contributed as much as 46.1 per cent to the GDP, as against their employment share of just 4.5 per cent.

• It is possible to construct these labour input matrices and GDP shares at activity level from the micro-data of labour force surveys to achieve exhaustiveness

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General procedure of GVA estimation for informal sector

• Indirect procedures

• benchmark-indicator method

• base year GVA estimates – WF X GVA per worker

• For other years – base year estimates extrapolated with proxy indicators

• Compiled at detailed activity level (compilation categories)

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ESTIMATES FOR OTHER YEARS

– manufacturing - IIP

– Trade, Hotels and restaurants - gross trading index

– Road transport - quantum of index of passenger kilometers

– Ownership of dwelling – extrapolated number of census dwellings

– Other services – different indicators like, workforce extrapolated estimates, growth in consumption expenditure, ratio of organised sector (unorganised banking)

Ethiopia

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Statement 3.5: Estimates of Employment, 2001EFY, 2008 /2009 (in numbers )

industry General

Government Public

corporations Private

corporations NPISHs Household/

Unorganised/ Informal

Sector

Total

A. Agriculture, Hunting, and Forestry

0 205104 1026121 0 27322016 28553240

B. Fishing 0 16959 7268 24227

C. Mining and Quarrying 0 0 71776 0 22439 94214

D.Manufacturing 0 45036 139010 0 1990457 2174503

E. Electricity, Gas, and Water Supply

13692 19115 0 0 7819 40625

F. Construction 33969 64737 187462 44333 270901 601403

G. Whole Sale and Retail Trade

11620 5869 170459 1635 2586433 2776016

H. Hotels and Restaurants 5147 2505 113045 377 1034736 1155810

I. Transport, Storage, and Communication

0 26958 212880 0 4000 243838

J. Financial Intermediation 0 68726 16749 2178 0 87653

K. Real Estate, Renting, and Business Activities

56455 5511 28332 1732 42465 134495

L. Public Administration and Defense

487425 0 0 0 0 487425

M. Education 448416 0 131614 20662 0 600692

N. Health and Social Work 59848 0 6373 2796 45944 114960

O. Other Community, Social and Personal Services

39580 14529 137737 27264 803091 1022201

P. Private Households with Employed Persons

0 0 0 0 589831 589831

Total employment 1156151 458090 2258516 100977 34727400 38701134 Agriculture, forestry and fishing 0 205104 1043080 0 27329284 28577467 Mining, manufacturing, electricity & construction 47661 128888 398248 44333 2291615 2910745

Services 1108490 124098 817188 56644 5106501 7212921

Total employment 1156151 458090 2258516 100977 34727400 38701134

Total excluding agriculture 1156151 252986 1215436 100977 7398116 10123667

Ethiopia

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Statement 2.5: Estimates of Value Added, 2001EFY, 2008 /2009 (at current prices)

(Thousand Birr)

industry General Government

Public corporations

Private corporations

NPISHs Household/ Unorganised/

Informal Sector

Total GDP

A. Agriculture, Hunting, and Forestry

0 1152839 5767587 0 153570716 160491143

B. Fishing 0 0 95323 0 40853 136176

C. Mining and Quarrying 0 0 967388 0 302425 1269813

D.Manufacturing 0 3915012 4890973 0 3814780 12620765

E. Electricity, Gas, and Water Supply

1382072 1852547 0 0 802230 4036848

F. Construction 6170837 1535043 513073 595232 7259669 16073853

G. Whole Sale and Retail Trade

21521 0 46424258 0 139058 46584838

H. Hotels and Restaurants 20906 0 10117098 0 21278 10159282

I. Transport, Storage, and Communication

0 8757514 3949280 0 12562 12719356

J. Financial Intermediation 0 3190552 1552870 31274 0 4774697

K. Real Estate, Renting, and Business Activities

2276360 0 19203 19203 22021873 24336640

L. Public Administration and Defense

10320218 0 0 0 0 10320218

M. Education 6167973 0 1305799 205001 0 7678773

N. Health and Social Work 1507218 0 294034 64491 86968 1952710

O. Other Community, Social and Personal Services

133982 0 4314311 904288 4975 5357556

P. Private Households with Employed Persons

0 0 0 0 674240 674240

TOTAL GVA 28001085 20403506 80211199 1819491 188751627 319186908 Agriculture, forestry and fishing 0 1152839 5862911 0 153611569 160627320 Mining, manufacturing, electricity & construction 7552908 7302601 6371434 595232 12179104 34001279

Services 20448177 11948066 67976854 1224258 22960954 124558309

Total GVA 28001085 20403506 80211199 1819491 188751627 319186908 Total GVA excluding agriculture 28001085 19250667 74348288 1819491 35140058 158559588

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Thanks