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Journal number 1 ∘ Gogita Todradze
Scales of non-observed economy and its estimation practice in Georgia

Expanded Summary

Estimation the share of non-observed economy is utmost important for the production of high-quality national accounts and for drafting clear picture of the economy.

Non-observed economies are typical for all countries;however, this is particularly relevant for countries with transitional economies. Definition of non-observed economy is based on the concepts of national accounts, according SNA 2008, butcategories and estimation methods are defined by the Eurostat.

The Non-observed Economy refers to all productive activities that may not be captured inthe basic data sources used for national accounts compilation. The following activities areincluded: underground, informal (including those undertaken by households for their own final use),illegal, and other activities omitted due to deficiencies in the basic data collection programme. Theterm ‘non-observed economy’ encompasses all of these activities and the related statisticalestimation problems.

There are many methods for estimation of non-observing economics, recognized in international practice. However, the estimation techniques adopted spanned the three main approaches: productionapproach, expenditure approach and income approach. Often countries produce two estimates ofnon-observed activities by employing two of the three approaches, mostly the production methodfollowed by the expenditure approach.

Countries use a wide variety of methods to estimate the GDP stemming from the non-observedeconomic activities. The following methods can be mentioned: the labor input method,commodity flow method, balancing input-output and supply-and-use tables, other reconciliationmethods, comparison with norms, use of fiscal data and special surveys.

From above-mentioned methods, a special mention should be made of the labour inputmethod, which is increasingly being used to measure value added and compensation of employees.The method was pioneered by Istat, the Statistical Office of Italy.

Labour supply and demand dataare compared to estimate inconsistencies in recorded labour. Data on labour supply are obtainedfrom the population census and Labour Force Survey while labour demand is obtained frombusiness statistics.

A surplus of labour supply from household surveys over labour demand fromenterprise surveys is an indication of non-observed production. It provides a lower bound as somelabour input may be missing from both sources. Estimates of output and value added per unit oflabour input are calculated and then applied to the data on labour input to account for output byunregistered and hidden labour. 

Together with the above-mentionedmethods, Geostat periodically conducts special surveys in different sectors to assess the share of non-observed economy in Georgia. Usually 2-3 sectors are investigated annually, regular basis.

Priority is given to those sectors, where probability of non-observed economy is high, and during 5-6 years, almost all sectors of economy are covered by similar surveys, which is a valuable resource for improving the quality of national accounts.

Countries used a variety of data sources for the estimation of non-observed activities.Several sources are quite common amongst countries, such as agricultural census, businessstatistics, household surveys, demographic data/population census, Labour Force Survey/labourstatistics, taxation and fiscal data, police records, social security records and foreign trade statistics.

Some sources are used only in one or a few countries, particularly the surveys to capture a specificactivity (e.g. smuggling of tobacco). Other sources like Labour Force Survey and employment data,structural business surveys, household budget/expenditure surveys, and taxation data are widelyused by countries.

In 2019 Geostat has implemented methodological changes in National Accounts, related to transition to the new methodology – System of National Accounts (SNA) 2008.

Transition to the new System of National Accounts (SNA 2008) included the calculation of Gross Domestic Product (GDP) and a number of macroeconomic indicators, in accordance with the new methodology. EU countries have begun switching to the new SNA methodology in 2014. Armenia, Turkey, Ukraine and Belarus have also joined their ranks during 2014-2015. To date, the SNA 2008 has been introduced in about 80 countries around the world.

Implementation of the new methodology caused number of changes related to GDP and other aggregates of the National Accounts. Other changes in the National Accounts were related to the significant improvement in data sources, accounting non-observed economy and processing administrative data.

The main differences between the old (SNA 1993) and the new methodologies refer to changes in measuring Financial Intermediation Services Indirectly Measured (FISIM), capitalization of research and development related expenses and output of owner-occupied dwellings.

Along with the above-mentioned methodological changes, Geostat has introduced Statistical classification of economic activities (NACE Rev 2) in the National Accounts.

In order to keep the historical data harmonized with the updated methodology,Geostat has re-vised also time series of National Accounts from 2010 year.

According data for 2018, the share of the non-observed economy in Georgian amounted 13%. However, its magnitude varies considerably between sectors. The value is much higher in the service sector, namely: over 54% in the hotel and restaurant sector, 17.7% in the arts, entertainment and leisure sector, in education - 17.8%, in the health care sector - 19%, in the other services sector - on average 42%.

The share of the unobserved economy in the agricultural sector is around 16%, between 14 and 15% are in the industrial sector, 15% in trade and 12% in construction.

According to the latest Geostat data, the energy sector (where the share of the economy accounts for only 1.0%), the financial and insurance sector (3.7%), as well as public administration (3.7%) and the professional, scientific and technical sector (0.5%)is characterized by low rate of unobserved economy.