1. 1993 SNA Updating - Issue 32 Informal Sector Giovanni Savio Statistics Coordination Unit, UN-ESCWA Workshop on National Accounts Cairo, 19-21 December 2006

2. Objectives of presentation 1.Background on informal and illegal activities a.NA quality and NOE: coverage and exhaustiveness b.NOE definitions c.Analytical framework for NOE 2.Analysis of 1993 SNA updating 3.References to estimation of informal sector

3. Background: NA quality  Good quality NA are essential for policy-making, analysis and research, and an important aspect of their quality is the extent to which they cover all relevant economic activities  Lack of coverage causes problems:  levels are underestimated;  rates of growth give false signals; and  imbalances in the internal consistency of the accounts  An important objective is to have an exhaustive estimation of NA. That means having as many productive activities as possible observed and recorded - directly or indirectly - in the basic data of production, incomes and expenditures

4. Background: NOE definitions  The group of activities most likely to be non-observed are those that are 1. underground, 2. illegal, 3. informal, 4. undertaken by households for their own use, or 5. not covered because of deficiencies in the data-collection process  Activities not included in the basic data because in one or more of these 5 problem areas are said to comprise the Non-Observed Economy (NOE)

5. Background: NOE definitions  From the statistical viewpoint, measuring NOE is difficult because of the elusive nature of the phenomenon and the approximations and hypotheses to be made in the measurement process  Then, an analytical framework is needed in order to distinguish NOE activities into groups that help their identification and proper measurement

6. Background: NOE definitions  1993 SNA (§ 6.34) defines the “underground economy” as composed by the activities of producers engaged in productive and quite legal activities, but deliberately concealed to avoid: payment of income, value added or other taxes, social security contributions; meeting legal standards (minimum wages, safety, health, etc.); and complying with administrative procedures (filling statistical questionnaires or administrative forms)  The borderline with illegal production may not be clear, though illegal activities are associated to criminal actions which violate the penal code

7. Background: NOE definitions  Underground and illegal productions are both included in the production boundary of the system, so that it is not necessary to fix a precise borderline (§ 6.35)  Illegal productions are classified by 1993 SNA, § 6.30, in two categories: production of goods or services whose sale, distribution or possession is forbidden; and production activities which are usually legal but which become illegal when carried out by unauthorized producers, e.g. unlicensed medical practitioners  Such activities can be either productive (direct impact on level of GDP) or distributive (involving redistribution among the various institutional sectors)

8. Background: NOE definitions  Changes in the definition of illegal production may occur across countries, i.e. prostitution and production of alcoholic beverages, and over time, i.e. abortion  The informal sector production represents an important part of the economy and the labour market in many countries, especially developing and transition economies  Therefore, its measurement is a key issue for an exhaustive estimation of NA  But 1993 SNA does not contain any methodological recommendation per se, hence the need for inclusion of a new chapter on the informal sector in the revision process

9. Background: NOE definitions  An international definition of the informal sector has been given in the framework of the 15 th International Conference of Labour Statisticians (ICLS) Resolution on Statistics of Employment in the Informal Sector, Jan. 1993, and included as annex in 1993 SNA, Ch. 4  It has been considered for: “the benefit of those countries that wish to introduce the distinction between formal and informal sectors into their sub- sectoring of the household sector” (1993 SNA, § 4.159)

10. Background: NOE definitions  § 5.1 of the Resolution states that (analytical/political definition): “The informal sector may be broadly characterized as consisting of units engaged in the production of goods or services with the primary objective of generating employment and incomes to the persons concerned. These units typically operate at a low level of organisation, with little or no division between labour and capital as factors of production and on a small scale. Labour relations – where they exist – are based mostly on casual employment, kinship or personal and social relations rather than contractual arrangements with formal guarantees”

11. Background: analytical framework  From a statistical/operational point of view, the Resolution considered three criteria to define the informal sector: 1.Legal status (selective, enterprise-based criterion) 2.Type of employment (instrumental) 3.Additional enterprise-based criteria (selective)  According to the legal status, ICLS states that the informal sector is a sub-sector of the household sector. To be considered as part of the informal sector, the household enterprise would not be independent of its owner, and would not have a complete set of accounts. This criterion is thus consistent with the SNA concept of unincorporated enterprise in the household sector

12. Background: analytical framework  The ICLS then separates household enterprises with employment by two types of employment: –Own-account enterprises: household unincorporated enterprises that do not employ employees on a continuous basis –Enterprises of informal employers: household unincorporated enterprises that employ one or more employees on a continuous basis

13. Background: analytical framework Finally, to define the informal sector enterprises within household enterprises with employment, the ICLS uses two additional enterprise-based criteria: –Market production: All or at least some of the goods or services produced are meant for sale and barter and thereby excluding production exclusively carried out for own final use –Size and/or registration: Size of employment should be under a determined threshold, and/or non-registration of the units or non- registration of employees under factories or commercial acts, tax or social security laws, professional groups’ regulatory acts, or similar acts, laws or regulations established by national legislative bodies

14. Background: analytical framework Informal own-account enterprises Other own-account enterprises Own-account enterprises Enterprises of informal employers Other enterprises of employers Enterprises of employers Informal sector enterprisesOther household unincorporated enterprises 15 th ICLS Resolution: Framework for informal sector definition

15. Background: analytical framework UNDERGROUND For statistical reasons ILLEGALINFORMAL For economic reasons Non- response Not registered Not updated Under reporting Not registered Not registered Not registered T1T2T3T4T5T6T7

16. Background: analytical framework  Non-registration and lack of updated information (T2-T3, T5-T7): Due to missing or incorrect updating information from statistical and administrative sources  Non-response (T1): Response implies wasting time, or units are afraid that information is used for administrative purposes, or because the questionnaire is badly designed or burdensome  Underreporting (T4): Even if all units are included in the survey frame and the questionnaires have been completed there may still be a problem of misreporting. The respondent is understating income for tax purposes, either by overstating costs or understating revenues, and decides to make the same false declarations to NSO

17. Work done for the revised 1993 SNA chapter  Clarification of reasons why the informal sector is important and need for an additional chapter in the revised 1993 SNA  Identification/rationalization of sources for the new chapter  Identification of differences between ICLS and SNA: 1.in terminology 2.in segmenting the economy 3.in the use of enterprise-based criteria 4.in the universe of household enterprises

18. Why is the informal sector relevant? REGION Contributions of informal sector as % of non-agricultural EmploymentGDP Northern Africa4827 Sub-Saharan Africa7241 Latin America5129 Asia6531 Source: ILO (2002), Women and Men in the Informal Sector: A Statistical Picture

19. Developments since 1993 SNA  Developments include:  Activities of the Delhi City Group since 1997, and work on informal employment by ILO (i.e. 17th ICLS, 2003)  UN (2000) Handbook on Households Accounting: Experiences in Concepts and Compilation, Vol.1, Household Sector Accounts  Work carried-out within the framework of EU Medstat I Project, MED-NOE, up to 2001  Release by OECD, IMF, ILO and CISSTAT of Measuring the Non-observed Economy: A Handbook (OECD, 2002)

20. Developments since 1993 SNA  Developments also include:  Survey of country practices in 29 countries summarized by UN- ECE in the manual on Non-observed Economy in National Accounts  Feedbacks from regional UN Workshop in 2005 (ECSAP, ECA, ECLAC) and UN DA regional Project on Informal Sector

21. Differences in terminology  The ICLS use of “sector” does not match the definition of 1993 SNA:  ICLS: enterprise-based concept, built around production, income and employment and thereby mainly on the elements of the production account  SNA: refers to the presentation of a complete set of accounts of production, income, accumulation and balance sheets  The word “informal” has several meanings:  may imply a formal-informal sector distinction between household enterprises  can refer to exhaustiveness of data collection practices as well as a production unit with specific characteristics

22. Differences in terminology  ICLS use of “households” is narrower than the meaning in the national accounts framework. In NA the term not only refers to households as producers, but also as consumers, lenders and borrowers  Then, the different meanings of sector, informal, households and formal will be clarified and explained in the updated SNA

23. Differences in segmenting the economy  ICLS uses non-registration to identify informal enterprises within household enterprises; in many countries this may coincide with lack of legal status and of accounts  ICLS refers only to production units that engage labor as input; national accounts refer also to those that do not use labor inputs such as owner-occupied dwellings, trusts and other funds  Then, the updated SNA will describe the differences between the ICLS and SNA definitions of the types of production units and, where possible, reconcile the differences (via bridge tables)

24. Differences in the use of enterprise-based criteria  Criterion for market production SNA: market producers are those that sell “most or all” of their production on the market at economically significant prices ICLS: uses the phrase “some or all”  The ICLS definition of market producers broadens the universe of household enterprises with market production as compared to the SNA. If the SNA definition of market production had been applied, a large segment of the household enterprises in many countries should be classified as producers for own final use and therefore excluded from the informal sector

25. Differences in the universe of household enterprises  ICLS refers to the universe of household unincorporated enterprises that use labor inputs. Consequently, household enterprises in the SNA universe that have no labor inputs in the production process (mainly owner- occupied dwellings producing housing services for own final use) are excluded from ICLS  All economic activities (SNA) versus non-agricultural activities (ICLS)

26. Draft outline of the 1993 SNA chapter 1.Introduction 2.The informal sector: a broad statistical perspective (terminology, importance, statistical challenges, etc.) 3.Definition of informal sector 4.Other concepts (including other forms of NOE) 5.Measurement issues

27. Measuring the informal sector  Direct methods for estimation of the informal sector include: 1.Labour Force Surveys 2.Household Income and Expenditure Surveys 3.Informal Sector Enterprise Surveys 4.Informal Sector Mixed Household-Enterprise Surveys

28. References 1.OECD, IMF, ILO and ISCCIS (2002), Measuring the Non-Observed Economy: A Handbook, Paris: OECD available at: http://www.oecd.org/dataoecd/9/20/1963116.pdf http://www.oecd.org/dataoecd/9/20/1963116.pdf