Handling the modern economy

Handling the Modern Economy- is the National Accounts Framework Broken?

Chair:Professor Martin Weale

Kings College London

Dame Kate BarkerSociety of Business Economists

Peter van de VenHead of National Accounts, OECD

Sanjiv MahajanHead of International Strategy and Co-ordination, ONS

Peter van de VenHead of National Accounts, OECD

International Economic Statistics ConferenceNewport, 21 – 22 February 2017

MEASURING GDP IN A DIGITALISED ECONOMY

As noted by Martine Durand, there is often confusion between:

• Conceptual vs. Empirical issues

• Production vs. Consumer Surplus vs. Welfare

• Volumes vs. prices

Recent OECD work reviews these issues more systematically

The digital economy and the mismeasurement hypothesis

Example 1: New forms of intermediation of peer-to-peer services

From a conceptual point of view:• These types of intermediation are not new, but more

pervasive and provided differently• (Occasional) self-employed providing the relevant

service• Delineation between occasional seller of

second-hand goods and small-scale trader

Example 1: New forms of intermediation of peer-to-peer services (cont.)

From a measurement point of view:• Relatively small, but growing fast• Possible under-declaration of output

by occasional self-employed, but … • … in case of AirBNB existing imputation

for owner-occupied dwellings … and output ≠ value added (final consumption => intermediate consumption)

• Treatment of consumer durables, e.g. cars used for taxi-services to be (partly) treated as investments (note: no impact on GDP)

Example 1: New forms of intermediation of peer-to-peer services (cont.)

Possible solutions:• Digital intermediaries are

increasingly called to disclose turnover from clients

• New approaches to measurement, directly from intermediaries:– AirBNB charges VAT on its service

fees, or collects an occupancy tax– Use of credit card data– Big Data

• Blurring of the production boundary, movement from dedicated market producers out of market

• Generation of free assets by households (Wikipedia, Linux, etc.)

• Not captured in GDP => joins traditional discussion about unpaid household activities, such as childcare, preparing meals

• Unlikely to resolve productivity puzzle• Further elaboration in a satellite account

type of framework

Example 2: Consumers as producers

Example 3: Free and subsidised consumer products

• Financing of provision of services via advertisements or data sales (Google, etc.)

• Accounting issue: who produces what for whom? => imputation of additional output and value added of “information services”?

• Very old problem• Order of magnitude (Nakamura et al. (2015)):

• less than 0.5% of world GDP, but …• … fast growth of 7.6%• impact on GDP-growth: 0.019%

• Partly a shift in advertising arrangements• Further elaboration in a satellite account

• IPPs that give rise to royalties or licencing agreements are significant

• Associated income flows tend to be captured but:– International location of use and ownership of

assets – what is payment for service, what is current transfer?

– Allocation to countries biased by MNEs’ tax considerations/optimisation

• Case in point: Ireland’s GDP growth in 2015

Example 4: Cross-border flows of intellectual property products

Example 5: Prices and Volumes

• Price measurement may be a major challenge:• customisation• new goods problem• quality levels and change,

e.g. AirBnB versus hotels

• But also problematic to capture the impact on the quality of e.g. health and education

Example: software deflators

Source: OECD Annual National Accounts

11

• GDP is a measure of (market) production, not an indicator of welfare; as such, it does not take into account consumer surplus => Need to complement GDP with indicators on well-being and welfare

• Conceptually, national accounts appear up to the task, and …

• … mismeasurement unlikely to explain productivity and growth slowdown, but …

• …measurement in some areas may require improvement, especially in the area of volumes and prices

Conclusions

• OECD’s project “Going Digital”, making the transformation work for growth and well-being

• Active involvement in G-20 work, jointly with IMF• OECD WPNA has carried out a survey on country

practices• Planned work of the OECD and the Advisory Group on

the Digital Economy:– Assessing the effects of possible bias in price indices on

measured productivity and growth– Assessing the effects of partial use of consumer durables as

business assets– Assessing the impact of “free goods and services”– Developing indicators to monitor the digital economy

Way forward

Thank you for your attention!

Are the National Accounts fit for purpose?

Kate Barker

ONS Economic Statistics Conference

February 2017

UK GDP revisions relatively large

Source: Goldman Sachs (with thanks)

Too much manufacturing – too little servicesShare of sectors in GVA and number of SIC 4-digit categories, 2015, %

SOURCE: ONS Annual Business Survey; McKinsey analysis

55

2100

4

Non-financial business GVA

100% =

Other services

Construction

Professional, scientific and technical activities

100

Manufacturing

Wholesale and retail

Agriculture, mining, utilities

Administrative and support services

Information and communication

Number of 4-digit codes

▪ Manufacturing accounts for 14% of non-financial business GVA, but 44% of the 4-digit SIC codes

▪ The average size (GVA) of a 4-digit SIC category was £670m in manufacturing but £4,900m in services

Problem of intangibles exclusionGross Fixed Capital Formation as a share of GVA, 1995-2010, %

SOURCE: Corrado, Carol, Jonathan Haskel, Cecilia Jona-Lasinio and Massimiliano Iommi (2014). "Internationally comparable macro-estimates of investment in intangible assets at the industry level: INTAN - Invest" available at www.INTAN-Invest.net; Eurostat; ONS; McKinsey analysis

National Accounts currently (ESA2010) include

▪ Computer software

▪ Entertainment, Artistic and Literary Originals

▪ Mineral Explorations

▪ R&D

National Accounts currently (ESA2010) exclude

▪ New architectural and engineering designs

▪ New productivity costs in financial services

▪ Market research

▪ Advertising expenditure

▪ Training

▪ Organisational capital

With additional intangibles

Existing National Accounts

UK

Germany

Spain

France

The User Perspective

• Well-known user critiques:

- revisions

- double deflation

Users also misuse – or expect too much

Questions increasingly posed at sub-national and sector level – change of ONS emphasis?

Importance of communication tone

Are the National Accounts fit for purpose?

Kate Barker

ONS Economic Statistics Conference

February 2017

Handling the Modern Economy - Is the National Accounts Framework Broken?

Sanjiv Mahajan

Head of International Strategy and Coordination, ONS

An overview• Major international drivers for change

• How quickly is the world changing? (posing new challenges)

• Digital theme• What are these platforms?• UK “eGDP”?

• National Accounts infra-structure and challenges it faces• Near for clear terminology, definitions and improved understanding• Households as producers blurring the production boundary• Digital economy impact?

• A few thoughts for your consideration …,

• Any questions?



Major international drivers for change

• Consistency, coherency and comparability of statistics

• Implementation of international guidance manuals, e.g. SNA etc.

• Impact of globalisation

• Impact of technological change and digitalisation

• Sustainability - human, social, nature and economic capital

• G20 - IMF Data Gaps Initiative (Phase 1 and 2)

• Development of Beyond GDP and Well-being

• Data expansion for the financial sectors - post-credit crisis

• Measurement of government deficit and debt

• Competitiveness indicators

• Others …,


How quickly is the world changing?

World population

5,263m

1990

6,070m

2000

6,909m

2010

7,750m

2020



Evolution of human knowledge

In 1900 human knowledge doubled every 100 years

In 1945 human knowledge doubled every 25 years

In 2014 human knowledge doubled every 13 months

In 2020 human knowledge will double every 12 hours



Appetite for information

Over 5.9 billion searches on Google every day

(this is 100 times than in 2000)

Over 5.9 billion searches on Google every day

(this is 100 times than in 2000)


Technology

738m

5,000m

20006

,000m

2010 2020

Mobile phone users Internet users

394m

2,000m

5,000m

2000 2010 2020

Development ofsecurity beyond

physical protectionis “key”

PRIVACY Issues?

Digital Universe C

LOUD

Digital Number of Internet devices

1984

2014

2008

1992

<100

10,000,000,000

1,000,000,000

1,000,000

Mixing of differences between the physical world and digital world will affect

mobility and … provides challenges for economic measurement




Globalisation is not new but continues at an “increasing pace” … and traditional boundaries are becoming unclear

Impact of Globalisation (MNEs, IPPs, Digital, BEPS, etc.) poses the single largest

‘measurement’ challenge to National Accounts and Balance of Payments



Time taken to achieve a market audience of 50m people

38 years .… Radio

13 years …. Television

4 years …. Internet

2 years …. Instagram

35 days …. Angry Birds Space

3 years …. iPhone

75 years .… Telephone

Pokemon Go19 days


What are these digital platforms?

Rapidly increasing world of “free” Apps ….,


These digital platforms are essentially an “interface”

World’s largest taxi firm owns no cars

World’s most popular media company creates no content

World’s most valuable retailer carries no stock

World’s largest accommodation provider owns no property

Is this phenomena affecting GDP and productivity? (Yes, assuming it is captured)

These companies have small costs but charge consumers - lucrative in terms of profit.

(act as intermediaries providing a margin / fee type service - concept already exists)


UK “eGDP” is leading the world in terms of % of GDP

Major challenge - relevance and timeliness of official statistics?Will NSOs fill this space? What definitions will be used?

Development of key international guidance manualsPre-1930s ..…1930s ..… 1940s ...… 1950s ..… 1960s ..… 1970s ..… 1980s ..… 1990s ..… 2000s ..…

2010sUN SNA 1953 1968 1993 2008

Eurostat ESA 1970 1979 1995 2010

IMF BPM 1948 1950 1961 1977 1993 2008

Examples of international (and national) guidance … and many more available.



Need for internationally agreed terminology, definitions and improved understanding of specific issues

and others ...?

All

have a social,

environmental

and

economic

impact

globally

Digitalisation

Customisation

Free servic

es

Free

assets E-business /

e-comm

erce

Consumer

to consumer

transactions

Peer to peer

transactions

Digital

economy

Collaborative

economy

New econo

my

Knowledge

based econo

my

Internet /

web

economy

Sharing

economy

Role of Households is changing? (not new)

• HHs production • Some activities recorded in GDP (e.g. imputed rental, self-build dwellings, etc.). • Some activities not recorded in GDP (e.g. meals, child care, gardening, etc.). • Production v leisure and pleasure, e.g. grandparents child care, preparing meals, etc.

• Impact of production of free products / subsidised products / free assets? • Internet, Wikipedia, advertising, downloading free apps/services, travel web-sites, etc. • Consumers / businesses benefit from “no” economic transaction. (lower costs)

• HHs acting as unincorporated enterprises “and” consumers.• Switches of assets from HHFCe to GFCF, e.g. motor vehicles. (zero impact on GDP)

• Should there be final consumption for corporations? (impute flows to HHs?)

• Pricing • Consumer’s marginal utility, e.g. time spent link to opportunity cost of time spent. • Impact on consumer surplus?

Households as producers blurring the production boundary

Developing / utilising new channels for market sales / income

Producers and / or Consumers?


Digital economy impact?• All social, economic and environmental aspects:

• Need to understand how these “supplying” businesses operate.• Affect all industries and all sectors (from GVA to productivity). • Services - HHFCe, imports and exports of services, etc.

• MAJOR substitution affects:• Booking on-line holidays versus visiting a travel agent (these are disappearing!)• On-line banking as opposed to visiting a bank branch (branches / staff gone!) • “Fully owned” property - paid rental v imputed rental already recorded (latter decreases)• Is the “quality” of the “new” service(s) received comparable?• With greater competition - lower prices?

• Financing:• Via advertising (e.g. media, newspapers, Internet, etc.)• Via data (e.g. Big Data)

• Drivers for international institutions:• Micro data sharing / data exchange amongst NSOs/NCBs across countries is essential. • Any changes to SNA, BPM, SEEA and ESA need to be consistent and coherent.



A few thoughts for your consideration …,• Coverage of “digital” units (yes, possible self-employed under-coverage)

• Industry and product classifications - are they adequate? (yes)• Need to reflect functional concepts like digital economy, creative sector, etc.

• Is the “core” National Accounts framework fine? (yes)• Measurement of prices and volumes for “free” products and stock of free assets?• Greater use of hedonics to reflect “quality” change, in particular services. • Need to develop new HH “Digital” Satellite Account and related supplementary tables.

• Data measurement challenge? (yes, massive!) • Global activity - MNEs, IPPs, cross-border flows, asymmetries, etc. (data sharing needed)• Digitised assets - GFCF, capital stock and consumption of fixed capital. • Need to be creative and use other data sources, e.g. credit cards, web scrapping, etc.

• Users (official economic statistics need to remain relevant?)• Need to “substantially” improve communication and understanding with users. • Extend the focus to variables other than GDP, e.g. RDHI, Well-being, etc.

.… a continually changing, challenging and fascinating future !

Sanjiv MahajanHead of International Strategy and Coordination, [email protected]

Any questions?

#econstats

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