Measuring the digital Economy 32nd Meeting of the Voorburg Group on Service Statistics 23 – 27 October 2017 Jennifer Ribarsky Head of Section, National Accounts Division, OECD Marshall Reinsdorf (also contributed) Senior Economist, IMF

Where is the digital economy in macroeconomic statistics? Digital transformation is critical to success of national economies, as a source of growth, enabler of trade, and key to competitiveness… Yet, economic evidence in official statistics is limited. U.S. International Trade Commission estimated that in 2011, digital trade increased U.S. GDP by between $517 billion and $711 billion (3.4 percent to 4.8 percent); increased average wages by 4.5 to 5.0 percent; and was the catalyst for the creation of up to 2.4 million jobs. (USITC, 2014) There is a growing recognition that the role of digitalisation in our statistics is not sufficiently visible, which appears, at least in part, to explain the current hypothesis that mismeasurement of digitalised transactions is occurring. It would be good to better identify the part of the digital economy that is already within official statistics so that indicators can be created.

Background Market capitalisation of Airbnb (£ Billions) Increased prevalence of ‘new’ transformative (digital) technologies But…. …. Declining productivity Trend labour productivity growth You are probably familiar with the background of this discussion. Recent years have seen a rapid emergence of disruptive technologies involving new forms of intermediation, services delivery, and consumption. These new platforms that facilitate peer to peer transactions such as Airbnb and Uber. So in essence we have seen rapid technological change but we have seen in many countries a decline in productivity. Is it a transitional phenomenon, longer-term condition, or…

The mismeasurement hypothesis

Very present in the public debate Charles Hulten: “Valuing the Net and the wide range of applications… is challenging…. and their omission or undervaluation surely affects GDP.” Why we’re measuring the digital economy in the wrong way The U.S. Underestimates Growth Charles Bean: “statistics have failed to keep pace with the impact of digital technology” Some optimists argue instead that the problem is one of measurement. Technological progress often raises productivity in ways that statistical agencies struggle to detect Diane Coyle: The pace of change in OECD countries is making the existing statistical framework decreasingly appropriate for measuring the economy Measuring the digital economy is very present in the public debate. One of the reasons is that economic policy depends on the available statistics. Two of the most closely watched measures are the growth of gross domestic product (GDP) and productivity. These macroeconomic statistics have come under criticism lately for not appropriately capturing the digital economy. And some have argued that mismeasurement may be the cause of the downward trend in labour productivity growth seen in many countries. Part of this criticism is that GDP is not able, nor was it indeed designed to measure, consumer surpluses, or benefits that may accrue to consumers through receiving free services (such as e-mail). As a consequence current statistics appear to mask the full contribution and benefits that digitalisation, and digital intermediaries, can bring to societies. The internet and the productivity slump

Response: Background OECD Paper presented at the 2016 CSSP Conceptual vs. Empirical issues Production vs. Consumer Surplus vs. Welfare Volumes vs. prices Work at IMF Statistics Dept. Paper for the IMF Executive Board on measurement issues and data needs in macroeconomic and financial statistics

OECD-IMF Joint Work Digital Economy measurement G20 requests Joint OECD-IMF paper on the impact of digitalisation on measurement of GDP: March 2017 Most of the concerns reflect misunderstandings of GDP or involve effects that are small But some deflators may be overestimated More data are needed on the importance of e-commerce, the sharing economy (e.g. Uber, Airbnb), digital trade and other aspects Alternative measures in the context of “Beyond GDP” could shed helpful light on welfare gains that are out of scope for GDP Joint OECD-IMF follow-up work on impact on other macroeconomic statistics, in particular on CPIs: March 2018 Conduct surveys to determine country practices

Going Digital Horizontal Project OECD’s project “Going Digital”, making the transformation work for growth and well-being Multidisciplinary, cross-cutting initiative to help policymakers better understand the digital transformation that is taking place Measurement is a key horizontal module: Developing new tools and a longer-term agenda for measuring the digital transformation Co-leads: STD, STI, and TAD Other directorates: CTP, ELS,GOV CSSP mandate to create an Advisory Group on Measuring GDP in a Digitalised Economy

Potential mismeasurement issues GDP is an adequate concept to measure market production, but concerns have arisen over a number of areas… Prices and volumes New forms of intermediation service Free and subsidised consumer products Consumers as producers Certain assets not being measured Cross border flows

Initial OECD-IMF work on some of the (potential) mismeasurement issues

Price indices for ICT assets and communication services Average annual growth rate in percentage, 2010-2015 (or latest available year) UK showed increases of nearly 3% per year Australia and France showed declines of more than 3% per year Notes: Data reported for Spain for ICT equipment and Computer software and database correspond to the period 2010-2014. Data reported for Austria for Communication services correspond to the period 2011-2015. Source: OECD National Accounts Statistics, OECD Productivity Database, OECD Prices and Purchasing Power Parities database, Australian Bureau of Statistics, U.S. Bureau of Economic Analyses and Statistics Canada, February 2017

Impact on GDP growth, using alternative ICT & communication prices Belgium shows largest impact 0.4%-points Most countries show around 0.2%-points The impact depends on whether the affected products are for final or intermediate uses, and on whether they are imported or domestically produced. Graph only shows the growth rate adjustment implied by the lower bound price indices because the usual mismeasurement concern is that the official price indices under adjust for quality change. Scenario I assumes that imports prices are measured well, so that the adjustments made to the price indices affect only volume estimates of final demand. (Shown by red square- this shows the largest impact on GDP growth (upward revision to GDP growth rates). Scenario II assumes that only import prices are mismeasured and that final demand prices are measured well. (Shown by green triangle- this shows the smallest impact on GDP growth (downward revision to GDP growth rates) Scenario III gives results in between these 2 extremes by adjusting both the final demand and import price indices. (Shown by purple asterisk- shows upward revision to GDP but not as much as in scenario I). Under rather strong assumptions Belgium shows that overall growth rates could be adversely affected by price mismeasurement by as much as 0.4 percent per year (unadjusted GDP growth rate was 1 %, adjusted GDP (red square) 1.4 %). Implied adjustment are only around 0.2% for most countries.

Estimated impact of “free” media activities on GDP growth, 2009-2013 Driven by web portals industry, increasing on average 20.6% between 2010 and 2013 Largest impact in the United Sates, the average annual growth rate would increase by 0.07%-points Another reason to have more granular statistics available is to do more detailed analysis through what we call satellite accounting. This allows for showing the impact of say certain changes of what should be included within the framework and see the impact on economic growth… The programming and broadcasting industry a little more than half of the countries experienced declines in inflation-adjusted turnover. The industry that saw the strongest growth in most countries was the web portals industry. In the United States, the country with the largest share relative to GDP (at 0.4%), inflation-adjusted turnover for the web portals industry increased at an average annual growth rate of 20.6% between 2010 and 2013. If free media funded by advertising were added to household consumption expenditures, the largest estimated impact would be in the United States. There, the average growth rate of GDP in 2011-2013 would increase by 0.07 percentage points, driven mainly by web portals. web portals (includes operation of search engines and websites that act as portals to the Internet) Average 2009-2013, percentage points Notes: Data for BEL, KOR and POL refer to 2012-2013, for FRA, GRC to 2010-2013 and for the USA to 2011-2013. Source: OECD calculations based on data from OECD SDBS database, OECD Annual National Accounts database and US Census Bureau data. The GDP deflator was used for deflation purposes.

Consumer durables and investment Use of durables in production e.g. cars used for taxi-services to be (partly) treated as investments No impact on GDP, but MFP may, in theory, be affected (based on initial research impact is small) For example, in the UK, investment would increase by 0.04% and impact on MFP measures negligible.

Services and the Digital Economy The Issues

Services and the Digital Economy: The Issues (1) Digital matching platforms intermediate peer-to-peer transactions in the sharing economy, including resales of goods, ride-sharing, home- sharing, business services, many kinds of tasks for households, lending and crowd-funding Income of services providers may be included in tax data, but without the information to separately identify and properly classify Bundled prices of different services On-demand rentals of the digital platform’s own assets (vehicles, bicycles, … ) are growing in importance Cloud computing: software as a service, infrastructure as a service, platform as a service, … Data as an information service, as an input into market production, and into households’ nonmarket production

Services and the Digital Economy: The Issues (2) Measurement of price change, or of welfare change, when: digitalisation causes substitution to free, or low-cost, alternatives digitalisation or digital technology causes quality changes digitalisation enables self-service to replace market services (travel agents, … ) e-commerce and information from digital platforms enable improved access to variety Measurement of, and dissemination of data on, exports and imports of digitally ordered (e-commerce), platform enabled, and digitally-delivered services, including: Digital downloads/digital streaming Services of households active in the gig economy Households producing content and selling internationally

Services and the Digital Economy: The Issues (3) E-commerce Is their confusion as the whether e-commerce transactions are limited to sales of digitally ordered products made via wholesale and retail trade activity? Margin revenue of digital platforms included in measures of the digital economy; and of the value of goods and services that are sold via the digital platforms reported as supplementary information Underestimation of trade flows due to e-commerce transactions below the reporting threshold OECD-IMF survey on digital trade identified possible improvements in estimations for trade below de minimis threshold CSSP WPTGS survey on cross border trade… de minimis cross-border transactions facilitated by e-commerce transactions remain small so far (1-3 % of total trade) (based on current estimates)

Cross border flows Significant measurement challenges E.g., intra-firm transactions in data, intellectual property, and digital services Relocation to low tax jurisdictions of intellectual property and associated relocation of production of (digital) goods/services Challenges include distinguishing from distributions of income Cross-border flows of advertising-supported free digital media, free data, and free services used as intermediate inputs Inter-Agency Task Force on International Trade Statistics, chaired by the OECD and WTO Developing a framework for measuring digital trade Input into G20 Trade and Investment Working Group

Results from surveys sent to NSOs

Digital intermediaries (1) Gross or net recording of transactions facilitated by digital intermediaries varies Depends on business operating model (receives intermediation fee or the full amount and deduct costs) Probably varies by type of activity Classification does not appear to be consistent across countries Some classify with the provider of the services Some said it depends on how the transaction is arranged

Digital intermediaries (2) Digital intermediary is often resident abroad Identified as an important data gap Many noted currently not reflected in trade data Difficult to obtain relevant information because countries do not collect information from non- resident providers Possible sources: credit card information, household surveys, and administrative records

Price measurement: Streaming Services Few take into account the change in the offered contents as a change in quality (5 yes; 13 no) Why not take into account? This type of service is not included in the national price index (e.g. CPI) No data availability to make a quality adjustment Country simply prices the monthly subscription fee. NL questioned whether this should be considered a quality change. Does the consumer have a choice or not? Israel, Korea, New Zealand, Sweden, UK -- yes

Price measurement: Accommodation Services Few include accommodations booked through digital platforms in their CPI (Yes: 4; No: 15) Denmark noted that these transactions are considered as transactions between households and thus not included. Sweden said that these are not currently included, but that it is being considered The transaction (apart from the digital based facilitation services) is C2C Depending on how the transaction is recorded, the bulk of the value remains within the same sector (HH) Australia, Israel, UK ?, Us

E-commerce transactions in CPI Profile CPI Prices CPI weights Number of OECD countries Domestic e-commerce Cross-border e-commerce Profile 1 Yes 13 Profile 2 No 9 Profile 3 7 Profile 4 1 Profile 5 Profile 6 6 country profiles among OECD countries can therefore be identified according to whether or not CPI prices and/or CPI weights for domestic and/or cross-border e-commerce are covered. Table 3 summarizes these e-commerce transactions country profiles for CPI. Profile 1: E-commerce transaction is covered for both prices and weights and for both Domestic and cross-border e-commerce (13 OECD countries); Profile 2: E-commerce transaction is covered for both prices and weights for Domestic e-commerce only (9 countries); cross-border-commerce is excluded (9 OECD countries); Profile 3: E-commerce transaction is covered for both prices and weights for Domestic e-commerce; Cross-border e-commerce is covered for CPI weights only (7 OECD countries); Profile 4: E-commerce transaction is covered by CPI weights only for both Domestic and cross-border e-commerce; No price data collection (1 OECD country); Profile 5: E-commerce transaction is covered by CPI weights only for Domestic e-commerce only (1 country); No prices data collection (1 OECD country); Profile 6 – E-commerce transaction is not covered (1 OECD country)

E-commerce transactions in PPI Profile PPI Prices PPI weights Number of OECD Countries Domestic e-commerce Cross-border e-commerce Profile 1 Yes 8 Profile 2 No 4 Profile 3 1 Profile 4 6 Profile 5 Profile 6 10

Way forward

Way forward Further research into potential sources of mismeasurement: Active involvement in G20 work, jointly with IMF Country presentations on the digital and sharing economy at WPNA 9-10 November 2017 Work plan of OECD Advisory group: Typology of digital economy Meeting of the AG 10 November 2017 Proposal for an agreed satellite account Research into potential data sources Indicators to better highlight the digital economy

Thank you!