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 drugs

Approaches for Exhaustiveness NOE handbook Eurostat tabular approach

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 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)

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 In 2004-05, informal sector in India accounted for 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 making

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

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 "

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

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

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

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

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

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

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

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

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

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

Presenting data on informal sector and informal employment

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.

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.

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

Case Study-India

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

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

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

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

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

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)

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

Ethiopia

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