1993 SNA Updating - Issue 32
Informal Sector
Giovanni Savio
Statistics Coordination Unit, UN-ESCWA
Workshop on National Accounts
Cairo, 19-21 December 2006
Objectives of
presentation
1.
Background on informal and illegal activities
a.
b.
c.
NA quality and NOE: coverage and exhaustiveness
NOE definitions
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: 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)
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
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
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)
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
Background: NOE
definitions
 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 subsectoring of the household sector” (1993 SNA, § 4.159)
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”
Background: analytical
framework

From a statistical/operational point of view, the
Resolution considered three criteria to define the
informal sector:
1.
2.
3.

Legal status (selective, enterprise-based criterion)
Type of employment (instrumental)
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
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
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 nonregistration 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
Background: analytical
framework
15th ICLS Resolution: Framework for informal sector definition
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
Background: analytical
framework
UNDERGROUND
For statistical reasons
INFORMAL
ILLEGAL
For economic reasons
Nonresponse
Not
updated
Not
registered
Under
reporting
Not
registered
Not
registered
Not
registered
T1
T2
T3
T4
T5
T6
T7
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
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.
2.
3.
4.
in terminology
in segmenting the economy
in the use of enterprise-based criteria
in the universe of household enterprises
Why is the informal sector
relevant?
REGION
Contributions of informal sector as %
of non-agricultural
Employment
48
GDP
27
Sub-Saharan Africa
72
41
Latin America
51
29
Asia
65
31
Northern Africa
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 UNECE 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 owneroccupied 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.
2.
3.
4.
5.
Introduction
The informal sector: a broad statistical perspective
(terminology, importance, statistical challenges, etc.)
Definition of informal sector
Other concepts (including other forms of NOE)
Measurement issues
Measuring the informal
sector

Direct methods for estimation of the informal sector
include:
1.
2.
3.
4.
Labour Force Surveys
Household Income and Expenditure Surveys
Informal Sector Enterprise Surveys
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