The Non-Observed Economy Part II. Supply and Use Tables 1 November 2006 The Non-Observed Economy Bram Edens Statistics Netherlands: National accounts in Practice

Overview What is the non-observed economy? Methods for estimating NOE Example of activity specific method Integration issues Results for Dutch NA revision

What is the non-observed economy? OECD Handbook: Measuring the Non-Observed Economy (2002) Distinguishes 5 problem areas: Underground production “Production from which the revenues are not declared in full to the fiscal authorities, e.g. clandestine production of textiles.” (ESR 2010) Illegal production “Production forbidden by law, as long as all units involved in the transaction enter into it voluntarily” (ESR 2010); Informal sector production; conducted by unincorporated enterprises in household sector which are unregistered/less than a specified size and have some market production (OECD 2002) Household production for own final use Other missed production (due to statistical deficiencies)

Why estimating NOE? Why do we want to measure the non-observed economy? Non-observed activities create imbalances within the system SNA Production boundary is leading (“exhaustiveness”) EU contribution dependent on level of GDP > therefore auditing

Production boundary Outside the production boundary: When there is no transaction (‘mutual agreement’): theft is out, but fencing is in Own consumption of domestic services “Domestic and personal services produced and consumed within the same household, e.g. cleaning, the preparation of meals etc.” “Volunteer services that do not lead to the production of goods, e.g. care-taking and cleaning without payment”. Exceptions are building a church Trade in second hand goods by consumers without profit motive (e.g. e-Bay)

In practice? In reality: difficult to distinguish between NOEs due to overlap Interpretation of illegal is not always straightforward strict sense (penal code) vs broad sense (breaking the law) activity itself vs unauthorised persons International comparability is a key issue (e.g. prostitution is legal in Netherlands) Until recently: underground activities are included but illegal activities not GNI comité gave the advice to include illegal activities ESA 2010: illegal activities will be included

Part II. Supply and Use Tables 1 November 2006 Possible methods Macro models Monetary However these estimates have serious shortcomings Discrepancy methods Production vs income; income vs expenditure; actual VAT vs. Theoretical VAT; theoretical production vs. reported production etc. Surveys Results not always reliable due to low response rate and drop out pattern Useful for identification of scope and other data ietms (e.g. average wages) Other data sets Tax authorities; Eurobarometer survey etc. Sometimes too little detail to be useful Activity specific methods Statistics Netherlands: National accounts in Practice

Example of macro method Source: The shadow economy in Europe (VISA Europe, F. Schneider and A.T. Kearney, 2013)

Example of activity specific method: Prostitution 1 Part II. Supply and Use Tables 1 November 2006 Example of activity specific method: Prostitution 1 In the Netherlands: not illegal Legal: of age, mutual agreement Illegal: underage, forced, no residence permit Statistics Netherlands: National accounts in Practice

Part II. Supply and Use Tables 1 November 2006 Prostitution 2 Total turnover estimated based upon: Number of prostitutes in a base year (Source: 25,000 in 1999) Number of prostitutes follows trend of the male population (15-65 years old) Number of clients per prostitute (assumed 20; 40 weeks per year) Price per client (assumed 50 euros) Consumption = turnover – exports (services provided to non-residents) Flight and Hulshof (2009) conclude that half of the clients of window prostitutes in Amsterdam from abroad. Assume the percentage in the rest of the Netherlands is 10%. The prostitution sector in Amsterdam is about one third of the total sector in the Netherlands. Import of prostitution services comes from non-resident prostitutes who move back abroad within a year. This percentage is set on 33%. Intermediate use in 2001 (De Heij) based upon three kinds of expenses Clothing (1500 euros a year) condoms (1.1 condoms per visit; 45 cent per condom) transportation costs (for escorts only; 7 euro per visit; the escort sector is 15% of the total prostitution sector (Eysink Smeets et al., 2007), escorts have 10 clients per week and work 40 weeks a year) Value added Statistics Netherlands: National accounts in Practice

Prostitution 3

Integration issues Double counting: “illegal” value added is not equal to GDP Some revenues already included in National accounts Cleaning ladies Nail saloons Need to reallocate some expenses? Different possible impacts on National Accounts Understatement of revenues production + value added + intermediate consumption + Overstatement of costs intermediate consumption –

Part II. Supply and Use Tables 1 November 2006 Integration issues 2 Some underground activities are only estimated implicitly (e.g. agriculture when estimated using crop harvest data) Technical issues: how to integrate such estimates in the Supply Use Tables? Separate activities Separate products Consistency with labour accounts Statistics Netherlands: National accounts in Practice

Results Netherlands Estimates for illegal activities, 2010 Estimates for underground activities, 2010 Source: Statistics Netherlands 2014 (UNECE)

Results Netherlands Effect on GVA by ISIC by type of NOE including cost fraud, 2010 Source: Statistics Netherlands 2014 (UNECE)

Questions?