1993 SNA Updating - Issue 32 Informal Sector Giovanni Savio Statistics Coordination Unit, UN-ESCWA...

1993 SNA Updating - Issue 32

Informal Sector

Giovanni SavioStatistics Coordination Unit, UN-ESCWA

Workshop on National AccountsCairo, 19-21 December 2006

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

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

Background: NOEdefinitions

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)


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


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


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)


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


An international definition of the informal sector has been given in the framework of the 15th 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)


§ 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”

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


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


• 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


Informal own-account enterprises

Other own-account enterprises

Own-account enterprises

Enterprises of informal employers

Other enterprises of employers

Enterprises of employers

Informal sector enterprises Other household unincorporated enterprises

15th ICLS Resolution: Framework for informal sector definition


UNDERGROUND

For statistical reasonsILLEGALINFORMAL

For economic reasons

Non- response

Not registered

Not updated

Underreporting

Notregistered

Not registered

Not registered

T1 T2 T3 T4 T5 T6 T7


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

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

Why is the informal sector relevant?

REGIONContributions of informal sector as %

of non-agricultural

Employment GDP

Northern Africa 48 27

Sub-Saharan Africa 72 41

Latin America 51 29

Asia 65 31

Source: ILO (2002), Women and Men in the Informal Sector: A Statistical Picture

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)

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

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

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

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)

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

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)

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

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

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

1993 SNA Updating - Issue 32 Informal Sector Giovanni Savio Statistics Coordination Unit, UN-ESCWA...

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