Bridging Theory and Practice in National Accounting

… with a focus on growth, productivity and intangibles

Bart van Ark

November 17, 2008

www.conference-board.org

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As economic policy priorities change, (national) accounting needs to find a balance between a sound theoretical basis and flexibility in applications

In other words: the house needs to be build so that it can serve many different dwellers

The foundations of SNA (production, income and expenditure) are strong

But some key elements are still missing in SNA: A complete production account

A complete wealth account

Without those elements the “real” and “financial” sources of growth, as well as their relationship, cannot be adequately analyzed

The Link between Theory and Practice in National Accounting is the Key to Its Relevance

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In building a complete production account for growth analysis we need to accept some basic principles from economic (growth) theory neoclassical growth principles are a good benchmark

growth account can be derived from production account

Reach out to bring intangibles into the accounts “Any outlay than is intended to increase future rather than current

consumption is treated as a capital investment”

Innovation theory will push concept much further than current accounts

“Link growth account to national accounting system by way of complete production account

Improve measurement of services output: is current theory and practice adequate to capture it? price * quantity * quality

non-market vs. market services

One Bridge Between Theory and Practice of National Accounts Is Measurement of the Knowledge Economy

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Do the Official Statistics Capture the Knowledge Economy?

Knowledge economy is based on the production, distribution, and use of knowledge as the main driver of growth, wealth creation, and employment

Is the knowledge economy accurately represented in official statistics on national income and productivity? “You can see the computer age everywhere but in the productivity

statistics” Solow (1987)

Official statistics “miss the most important technological revolutions in history.” Nordhaus (1997)

Hence: “Whilst the knowledge economy is all around us, it is still hard to see it in the official statistics”

Skepticism about GDP, CPI and productivity statistics capturing key components of the knowledge economy

EU KLEMS Growth and Productivity Accounts Complements National Accounts

EU KLEMS is analytical research database, based on national accounts and complementary official sources (LFS and production statistics)

Long time coverage 1970-2005, with greatest detail for post-1995

Harmonized industry classification, capital and labour input, deflation and industry aggregations (e.g. market economy, market services)

Decomposition of capital and labour input: Capital assets in 7 asset types Labour input in 18 categories (3 x skill; 3 x age; gender)

Broad coverage of EU countries and comparisons with U.S. and Japan

Public database: www.euklems.net (latest update March 08)

Differences between EU and United States show decisive role for multifactor productivity growth & labor input growth

GDP growth

(%)

Investment and multifactor productivity accounted for accelerated growth from 1995-2005

Source: Jorgenson and Vu, 2005 (updated)

GDP growth

(%)

Unmeasured intangible capital is hidden in MFPa) Physical Capital

a1) ICT capital (IT hardware, communications equipment)a2) Other capital (plant, machinery, buildings)

b) Human Capitalb1) Formal Educationb2) Company training

c) Knowledge Capitalc1) Research and Developmentc2) Patentsc3) Licenses, brands, copyrightsc3) Other technological innovations, not related to b1) to b3)[c4) Software]*c5) Mineral Explorationc6) Experience

d) Process Capitald1) Engineering designd2) Organisation designd3) Construction and use of data basesd4) Remuneration of innovative ideas

e) Customer Capitale1) Marketing of new products

f) Multi Factor Productivity (residual)

As long as intangibles capital remain unmeasured, its productivity effects are hidden in MFP

a) Physical Capitala1) ICT capital (IT hardware, communications equipment)a2) Other capital (plant, machinery, buildings)

b) Human Capitalb1) Formal Educationb2) Company training

c) Knowledge Capitalc1) Research and Developmentc2) Patentsc3) Licenses, brands, copyrightsc3) Other technological innovations, not related to b1) to b3)[c4) Software]*c5) Mineral Explorationc6) Experience

d) Process Capitald1) Engineering designd2) Organisation designd3) Construction and use of data basesd4) Remuneration of innovative ideas

e) Customer Capitale1) Marketing of new products

f) Multi Factor Productivity (residual)

The theoretical issues in measurement of intangible investment in national accounts framework

Inherent measurement difficulties of intangible capital going beyond those of tangible capital as follows: The knowledge-input problem The knowledge-investment problem The quality improvement problem The obsolescence problem

(Howell, 1996)

But no clearcut distinction between tangibles and intangibles that justify a distinction between capitalizing and expensing

“Any outlay than is intended to increase future rather than current consumption is treated as a capital investment” (Hulten, Corrado, Sichel, 2005)

Source: Corrado, Hulten and Sichel (2005)

The bridge to practical measurement has been made by Corrado, Hulten and Sichel

Large differences in absolute and relative proportions of intangible investment

Sources: Corrado, Hulten and Sichel (2005); Marrano and Haskel (2006); Jalava, Aulin-Ahmavaara and Alanen (2007); Van Rooijen, van den Bergen and Tanriseven (2008), Hao, Manole, and van Ark (2008), The Conference Board

Large differences in absolute and relative proportions of intangible investment

Sources: Corrado, Hulten and Sichel (2005); Marrano and Haskel (2006); Jalava, Aulin-Ahmavaara and Alanen (2007); Van Rooijen, van den Bergen and Tanriseven (2008), Hao, Manole, and van Ark (2008), The Conference Board

Intangibles are important driver of growth

Source: Hao, Manole, and van Ark (2008), The Conference Board

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The Role of the Statistical Community to Integrate Growth, Productivity and Innovation in the SNA

Growth accounts can be linked to national accounts through development of full-fledged growth account

Intangible accounting is in early days, but statistical description of knowledge economy is too far removed from reality to ignore

NSI’s could help to: develop concepts of intangibles

set (international) standards for measurement

provide value metrics of intangibles, e.g., survey metrics on innovation with quantitative magnitudes.

Transfer experimental and research based measures into national accounts satellites or analytical modules that can help to move the measurement agenda forward

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Make the System of National Accounts fit the needs of policy makers, business and academic users …

… and let them communicate

Official statistics need to be as precise as possible

… but it is sometimes better to be “imprecisely right than precisely wrong” (Keynes)

… requiring a balance between research and official statistics

Strengthen international comparability

Transparency is key !! (also in national accounting)

The Building Stones for the Bridge Between Theory and Practice in National Accounting