Download Statistics on SDGs: Accounting for Informal Sector in National

LESOTHO BUREAU OF
STATISTICS
Statistics on SDGs: Accounting for Informal Sector in
National Accounts
Measuring Informal economy through Establishment
surveys and Establishment censuses.
Khetsi Mokone
15
Contents
Acronyms ................................................................................................................................................ 2
(i) Introduction ...................................................................................................................................... 3
(ii) Background...................................................................................................................................... 3
(iii) Methodology .................................................................................................................................... 4
Output ................................................................................................................................................. 4
Intermediate Consumption (IC) ................................................................................................... 5
Value Added ....................................................................................................................................... 5
Compensation of Employees (CoE) ............................................................................................. 6
(iv) Result ................................................................................................................................................ 7
(v) Discussion ........................................................................................................................................ 8
References .............................................................................................................................................. 9
Acronyms
BOS
GDP
SNA2008
1993 SNA
ILFS
ILO
SDGs
ISIC
activities
IC
CoE
-
Bureau of Statistics
Gross Domestic Product
2008 System of National Accounts
System of National Accounts 1993
Integrated Labour Force Survey
International Labour Organization
Sustainable Development Goals
International Standard Industrial Classification of all economic
-
Intermediate Consumption
Compensation of Employees
(i) Introduction
Gross Domestic Product (GDP) definition by production according to 2008 System of
National Accounts (SNA2008) is that; GDP is the sum of gross value added of all
resident producer units. In other words, this is the measure of how an economy
performs in a certain period of time, normally a quarter or a year. In production
process, some activity is carried out in order to produce outputs. During this
process, inputs are used, and they are referred to as intermediate consumption (IC).
The difference between Output and IC is the value added.
Chapter 25, paragraph 25.1 of SNA2008 states that no economy is completely
regulated and captured perfectly by statistical enquiries, which means that steps
have to be taken to attempt to cover unregulated activity and survey imperfections
as special exercises. These unregulated activities that are not easy to capture are
normally known as hidden, underground or informal. This chapter of SNA2008
highlights the details of capturing these unregulated activities of the economy.
Apart from that, the International Labour Organization (ILO) concept of defining
informal sector is that informal sector is a subset of household unincorporated
enterprise. In details, the ILO defines that the informal sector may be broadly
characterized of consisting of units in the production of goods and services with the
primary objective of generating employment and incomes to the persons concerned.
Also production units of the informal sector have the characteristic features of
household enterprises. The assets used do not belong to the production units as
such but to their owners. Expenditure for production is often indistinguishable from
household expenditure.
In Lesotho, 25.3 percent of the population in the work force is unemployed (2008
Integrated Labour Force Survey), so the assumption is that most of the unemployed
population earns their living through informal sector, as SNA2008, Chapter 25,
paragraph 25.9 illustrates that the motivation behind informal activities is purely
survival strategy or flexible work arrangements. Hence a proper measurement of the
magnitude and contribution of the informal sector and informal employment to
Gross Domestic Product (GDP) is needed to attain a comprehensive GDP estimate.
The paper is intended to outline methodology in measuring informal economy in
national accounts through establishment surveys and establishment censuses. The
reason for measuring informal economy through establishment surveys, in addition,
is analysis at establishment level for policy formulation reflecting Sustainable
Development Goals (SDGs).This topic has been chosen and/or is important because
it gives my country’s experience, to share with other African countries.
(ii) Background
The discussion is based on the practices and experiences of national accounts
statistics division of Lesotho Bureau of Statistics (BOS) in measuring the informal
economy in national accounts through establishment surveys and censuses.
A business register survey was undertaken of all establishments that were
operational (formal or informal) in 2004 for benchmarking national accounts
statistics.
All informal establishments were grouped and analyzed according to their
characteristics defined by ILO in the introduction part of this paper, and indeed they
were mostly household-based. The reason for this was to account for the informal
economy contribution to Gross Domestic Product (GDP) for each industry. The
establishments’ activities were classified according to the International Standard
Industrial Classification of all economic activities (ISIC).
In discussing this topic, concentration will be on measuring informal activities of
Manufacture of basic metals and metal products (ISICD28), and Manufacture of
other non-metallic mineral products (ISICD26) (1993 System of National accounts)
through establishment surveys. The years 2004 (Base year) to 2012 are referenced.
(iii) Methodology
Output
According to SNA2008, paragraph 6.89, output is defined as the goods and services
produced by an establishment. Output can be goods and services produced for
market, non-market or own final use. Also these goods and services can be produced
hidden, underground or informally.
The output at current prices of the informal activity in ISICD28 was estimated as the
turnover of all informal establishments in this industry in 2004. This was deflated by
the implicit deflator for metal products of formal establishments to get output at
constant prices. Then an annual volume increase of 2 percent was assumed to
extrapolate for 2005 and other years until next bench-mark year.
The same procedure was followed for ISICD26, but here output was extrapolated
with the formal establishments’ output at constant prices, and then output prices
were used as deflators to get the current prices.
Table 1 and 2 below show the output figures (Values in Million Maloti), and deflators
for the informal activities of ISICD28 and ISICD26 respectively.
Table 1. Output and Deflators for Informal Activities of ISICD28
2004
2005
2006
2007
2008
2009
2010
2011
2012
Output at current prices
4.0
4.3
4.5
5.1
5.9
6.1
6.2
6.8
7.8
Output at constant prices
4.0
4.1
4.2
4.2
4.3
4.4
4.5
4.6
4.7
100.0
104.4
108.7
120.3
137.4
137.7
137.6
148.8
166.8
Deflators
Table 2. Output and Deflators for Informal Activities of ISICD26
2004
2005
2006
2007
2008
2009
2010
2011
2012
Output at current prices
11.4
12.8
11.6
13.0
14.9
17.2
18.9
21.1
21.8
Output at constant prices
11.4
12.0
10.4
10.7
11.1
11.5
12.0
13.2
12.9
100.0
106.9
111.8
121.5
134.6
149.5
157.4
159.1
169.3
Deflators
Intermediate Consumption (IC)
During the production process, there are those goods and services that are
consumed as inputs and these goods and services are known as intermediate
consumption (IC). Also in the informal, hidden or underground production of goods
and services, there are inputs consumed during production of final goods and
services.
Intermediate consumption of the informal activities for ISICD28 was calculated as
the contribution of the intermediate consumption of the formal establishments to its
output at current prices. At constant prices, intermediate consumption was
estimated with the movement of its output at constant prices.
The same procedure was followed for ISICD26 to estimate the intermediate
consumption at current prices, except that, input prices were used as deflators to get
constant price figures.
Table 3 and 4 below show the intermediate consumption figures (Values in Million
Maloti) for the informal activities of ISICD28 and ISICD26 respectively.
Table 3. Intermediate Consumption for Informal Activities of ISICD28
2004
2005
2006
2007
2008
2009
2010
2011
2012
IC at current prices
1.7
1.8
1.9
2.2
2.5
2.6
2.6
2.9
3.3
IC at constant prices
1.7
1.7
1.8
1.8
1.8
1.9
1.9
2.0
2.0
Table 4. Intermediate Consumption for Informal Activities of ISICD26
2004
2005
2006
2007
2008
2009
2010
2011
2012
IC at current prices
8.0
9.0
8.1
9.1
10.5
12.0
13.2
14.7
15.2
IC at constant prices
8.0
8.4
7.3
7.5
7.8
8.0
8.4
9.3
9.0
Value Added
It has been explained in the introduction part of this paper that value added is the
difference between output and intermediate consumption. Value added measures the
value created by production. This means that value added represents the
contribution of labour and capital to the production process. In other words, value
added is the balancing item in the production account, as indicated below;
Production Account
Uses
Resources
Output
Intermediate Consumption
Value Added
The table below shows the value added for the total industries, formal and informal,
under discussion (Values in Million Maloti) at both current and constant prices.
Table 5. Total ISICD28 and ISICD26 Value Added at both current and constant prices
2004
2005
2006
2007
2008
2009
2010
2011
2012
Total ISICD28 Value Added at current prices
34.2
46.7
68.9
67.7
79.6
87.3
81.7
32.7
66.5
Total ISICD28 Value Added at constant prices
34.2
44.8
63.4
56.5
58.1
63.4
59.2
22.0
40.1
Total ISICD26 Value Added at current prices
12.7
18.1
16.4
18.3
21.0
24.2
26.6
29.7
30.7
Total ISICD26 Value Added at constant prices
12.7
16.9
14.6
15.1
15.6
16.2
16.9
18.6
18.1
The following tables show the value added of the informal activities at current and
constant prices (Values in Million Maloti) of ISICD28 and ISICD26 respectively.
Table 6. Value Added for the Informal Activities of ISICD28
2004
2005
2006
2007
2008
2009
2010
2011
2012
VA at current prices
2.3
2.4
2.6
2.9
3.4
3.5
3.6
3.9
4.5
VA at constant prices
2.3
2.3
2.4
2.4
2.5
2.5
2.6
2.6
2.7
Table 7. Value Added for the Informal Activities of ISICD26
2004
2005
2006
2007
2008
2009
2010
2011
2012
VA at current prices
3.4
3.8
3.5
3.9
4.5
5.2
5.7
6.3
6.5
VA at constant prices
3.4
3.6
3.1
3.2
3.3
3.4
3.6
4.0
3.9
Compensation of Employees (CoE)
Paragraph 25.54 of the SNA2008 stipulates that it has been realized that production
alone is not the only aspect of the economy where a distinction between formal and
informal is informative, it is also relevant for employment, hence the point of
compensation of employees in this sub heading of the paper. However, one should
note that under formal job there can be informal employment, as it can also happen
that under informal job there can be formal employment. Apart from that, one of the
limitations of this paper is that it was not easy to identify informal employment
under formal production of goods and services.
It has been explained above that during the production process, the three primary
inputs are involved; being labour, capital and land, in return, these inputs should be
rewarded. The reward to labour is normally compensation of employees while that of
capital is consumption of fixed capital. In this case, discussion will mainly
concentrate on compensation of employees for the informal activities of the
mentioned two industries. The following is the generation of income account, with
the balancing item as the Operating Surplus or Mixed Income, which means that it
is the residual after subtracting these rewards from the value added.
Generation of Income Account
Uses
Resources
Value Added
Compensation of Employees
Taxes on Production and Imports
Minus Subsidies
Consumption of Fixed Capital
Operating Surplus/Mixed Income
During the benchmark year, compensation of employees was found to be 5 percent
of output in ISICD28. This was assumed to be constant for all other years after 2004
until the next benchmark year. However, compensation of employees for ISICD26
was discovered to be 10 percent of output in the same year, and then the same 10
percent rate was used for all other years until 2012.
The following table shows figures for compensation of employees (Values in Million
Maloti) for the informal activities of ISICD28 and ISICD26 respectively.
Table 8. Compensation of Employees for the Informal Activities of ISICD28 and ISICD26.
2004
2005
2006
2007
2008
2009
2010
2011
2012
CoE for ISICD28
0.2
0.2
0.2
0.3
0.3
0.3
0.3
0.3
0.4
CoE for ISICD26
1.1
1.3
1.2
1.3
1.5
1.7
1.9
2.1
2.2
(iv) Result
During the benchmark year, value added for the informal activities of ISICD28
constituted about 7 percent to the total industry value added, while for ISICD26
contribution was 26.9 percent of the total industry value added in 2004. The table
below shows that the proportion of the contribution of value of the informal activities
made by ISICD26 is much higher than that of ISICD28. Also looking at the time
series for both industries, the trend keeps going down from the base year although
that of ISICD28 recovered fast in 2011, and became steady in 2012. The
contributions of the informal activities stayed constant for many years for both
industries, from 2006 to 2010 for ISICD28 (about 4 percent), and from 2005 to 2012
for ISICD26 (about 21 percent).
Table 9. Value Added, for the Informal activities of ISICD28 and ISICD26, contributions to their
Total industry Value added.
2004
2005
2006
2007
2008
2009
2010
2011
2012
ISICD28
6.7%
5.2%
3.8%
4.3%
4.3%
4.0%
4.4%
12.0%
6.8%
ISICD26
26.9%
21.3%
21.3%
21.3%
21.3%
21.3%
21.3%
21.3%
21.3%
Moreover, in 2004 which is the benchmark year for Lesotho’s national accounts,
compensation of employees for the informal activities of ISICD28 and ISICD26
contributed about 1 and 9 percent of their total industries’ value added respectively,
as the table below indicates. Although we have stipulated above that one the
limitations here is that, we were unable to identify whether all the employment
under these informal activities was informal, the contributions to the total industries
value added of the informal activities of these two industries is significant, especially
ISICD26 where the proportion of the contribution was higher than that of ISICD28.
Table 10. Compensation of Employees, for the informal activities of ISICD28 and ISICD26 to
their Total Industry Value added
2004
2005
2006
2007
2008
2009
2010
2011
2012
ISICD28
0.6%
0.5%
0.3%
0.4%
0.4%
0.3%
0.4%
1.0%
0.6%
ISICD26
9.0%
7.1%
7.1%
7.1%
7.1%
7.1%
7.1%
7.1%
7.1%
Establishments involved in informal activities of ISIC D28 and ISIC D26 were found
to be household-based which means they were classified under the household sector
of institutional units in national accounts.
According to the results, it seems there are more jobs in informal activities of
ISICD26 than in ISICD28, because the proportion of the informal compensation of
employees of ISICD26 is higher than that of ISICD28, besides the limitations that
have been explained above.
(v) Discussion
The benchmark year (2004) in which informal economy was estimated is too far, the
recommendation is that establishment surveys be conducted as frequently as
possible in order to improve quality of the informal sector estimates. This is because
from the base year, looking at the time series, figures keep going down. In essence,
this is not the case because unemployment rate is increasing, people should attempt
all means in which they can survive, and one of them is getting involved in informal
activities.
Business Register was not a relevant survey to use in measuring the informal
economy because it does not include as many variables as possible, more especially
on intermediate consumption and compensation of employees. Hence many
assumptions were used in order to incorporate the informal results of the business
register into national accounts. Lesotho Bureau of Statistics is now benchmarking
and rebasing its national accounts statistics to 2012, so the plan now is to use the
2010/2011 Household Budget Survey (2010/2011HBS) results in order to account
for or measure the informal sector in national accounts.
Apart from that, paragraph 19.35 of the SNA2008 explains that national
accountants are particularly concerned about ensuring that the whole of economic
activity (formal or informal) within the SNA production boundary is measured
comprehensively. This is often referred to as exhaustiveness of the coverage of
national accounts.
Therefore, in the late 1990s Eurostat developed a systematic method called the
Eurostat Tabular Approach to Exhaustiveness that was designed to identify potential
sources of under-statement in the national accounts due to omissions from the
statistical source data used. The seven sources of non-exhaustiveness were
identified, which include misreporting, under-ground and illegal activities. For
instance, misreporting involves under-reporting of output and/or over-reporting of
intermediate consumption in order to avoid paying income tax, while illegal activities
include sale of stolen goods, prostitution, dealing in drugs, etc.
The Eurostat Tabular Approach to Exhaustiveness suggests that data from tax
audits, comparing input/output ratios with those of similar establishments,
quantity-price method, commodity flows and supply-use tables, or even expert
judgment can be used to adjust for misreporting and illegal activities. During the
2004 benchmarking of Lesotho national accounts, adjustments for exhaustiveness
were made by expert judgment for formal and informal activities of the economy. It
was mentioned above that Lesotho is now benchmarking and rebasing its national
accounts statistics, and then other methods of adjusting for exhaustiveness, other
than just expert judgment, are being considered.
In conclusion, informal economy plays an important role in Lesotho as one of the
sources of employment, income, goods and services, as has been seen in the two
industries discussed, that it is a significant contributor to the country’s value added.
Therefore, Lesotho should fully, implement the SNA2008 in order to accommodate
these new improvements in measuring informal economy so as to develop and
advance the comprehensiveness of its GDP estimates.
Apart from that, informal economy should not just be ignored; rather policies should
be designed that reflect the Sustainable Development Goals (SDGs) so that no one is
left behind whether operating in a formal or informal economy.
References
System of National Accounts 1993
2008 System of National accounts
2008 Lesotho Integrated Labour force survey
Lesotho System of National Accounts