Non-observed economy and methods of its measurement and assessment in statistical practice of Azerbaijan.

 

 

 Introduction

 

Some elements of non-observed activity (NOE) take place in all countries irrespective of their social-economic structure and level of economic and social development. As the NOE is integral, and in some cases rather significant part of the country’s economy, it is necessary to measure its general amount and use this in any possible economic and statistical researches all over the world.

 

2.      History of the issue

 

Before the Soviet Union collapsed, at the command system of management in Azerbaijan, as well as in other allied republics, the number of economic units was limited and all of them were under the control and property of the state. It creates possibility to use the full-coverage statistical reporting to have enough data for statistical estimates as well as for planning and observation of their activity. At the same time, hidden economic activity in some specific for this social formation form existed as early as during the centralized economy. The most widespread kind of NOE was the performance of unregistered extra-works by people working at state enterprises or people not working at all. It was the activity in construction, apartment repair, supply of various domestic services, childcare services, teaching, tailoring etc. Besides that, some goods were  illegally manufactured at state enterprises and “underground” facilities, to be sold in “black market” which was quite common at that time.

 

However, the general level of this phenomenon in scales of economy on the whole was insignificant, so it did not represent big interest for statistic survey. Only investigatory and law-enforcement bodies called to struggle with plunder of the “socialist property” and other illegal activity were engaged in revealing and suppression of “underground” economy in Soviet time.

 

3.      Non-observed economy in the transitive period and factors influencing its scales

 

In the period of transition from the centralized to market economy, social and economic environment in the country was completely changed and shadow economy and NOE on the whole grown up. This growth is partly caused by economic reasons connected with development of the market-style economy, but also with the inefficient performance of financial and tax systems, customs institutions and weak normative and legal regulation, which were not always in line with the rapidly changing economic conditions.

 

With transition to free market economy and emergence of private sector, a number of the economic units in Azerbaijan sharply increased. In these conditions, the full-coverage methods become ineffective to data collection due to their high cost. So, the other methods based on sampling and indirect estimates were accepted.

 

Though the Law of the Azerbaijan Republic “On statistics” has established the obligatory order of reporting for all resident economic units in country irrespective of their kind of the property, part of units still avoid statistical reporting for some reasons. The other part of the enterprises giving reports to tax and statistical bodies try to understate information about their incomes in order to reduce their tax payments and social contributions, this is the very typical form of hidden activity in Azerbaijan. Concealment of incomes is promoted also by huge number of payments in cash in all business activities.

 

Another important element of NOE in Azerbaijan is unregistered labor activity. The people not working officially anywhere carry out certain work at enterprises, are engaged in hawking, construction, repair and other activity in the field of goods and services manufacture. Most of them are villagers engaged in agriculture and having come to the city in search of a job, but for whatever reasons, not finding job or not wishing to work in the village. The scales of this factor are strongly increased by presence of refugees from the territories of the republic occupied during military actions; they have been torn off from their houses and habitual activity.

 

One more factor of NOE intensification in the transitive period is connected with opening of the country to external world and expansion of international relations. Along with positive influence on economy this process had also negative consequences by way of occurrence of mass smuggling on commercial level.

 

In this situation, in connection with increase of its scales, NOE could no more remain out of the sight of statistics. Several times the problem of its measurement was the point at issue at the Management Board of State Statistical Committee of Azerbaijan Republic (SSCA).

 

4.      Arrange of works on non-observed economy measurement

 

Taking into consideration the little experience in this field, National Accounts Department (NAD) together with other Departments of SSCA have started their study of sources, scale and different forms of this phenomenon in the all branches of economy. Since 1998 the initial evaluates of NOE are produced in branch SSCA Departments began to be used at accounting of the gross domestic product (GDP) of Azerbaijan, but unfortunately, up to this day for the absence of good methodological basis and single program on the NOE studies and measurement, these estimations couldn’t present the full picture of this phenomenon.

 

Recently SSCA prefers the term “Non-observed economy” as it was recommended by the European Union and reference on which may be found at the Decision of the European Committee 94/168/ЕС, where it is written down that “national accounts provide exhaustive measurement of manufacture in accordance with borders of manufacture, when they cover manufacture, primary incomes and use, data on which contained in statistical or administrative sources, are gathered with the help of direct and indirect survey”.

 

The term “non-observed economy” represents convenient name for description of the manifold of activity types included in SNA-93 in manufacture borders, which should be measured to get full set of national accounts, but on this or other reason have remained outside of statistic system. 

 

 It includes concepts of illegal economic activity, hidden (shadow or underground) and informal (including home, not market activity) activities in combination with any other activity stayed outside of the basic statistical program. 

 

Today during economic transformations statistical experts of Azerbaijan have confronted with the problem of upgrading statistical estimation and accounting of non-observed economy for correct formation of macroeconomic parameters.

 

In 2000, the special unit was established inside NAD for the regular NOE measurement. Set of its function also includes arrangement and coordination of works in the field of NOE measurement in other SSCA Departments, development of methodologies and realization of works directed to improvement of analysis and assessment of NOE. Currently, the works on improving of the national concept of non-observed economy, methods of its evaluation, implementation of statistical surveys for necessary data collection are conducted. Besides that, NAD experts are working on drawing up of input-output tables, which are a good tool for analysis and improving of the national accounts statistics. But one thing must be noted that success of improving of the methods for NOE measurement depends in many respects on arrangement of works on identification and correction of weak places in the basic program of economic statistics.

 

 

Generally, following model of non-observed economy is accepted in statistics of Azerbaijan:

 

1.       Unregistered illegal activity;

2.       Informal activity;

3.       Activity solved by the legislation, but not registered officially;

4.                  Distortion of the data connected with scope and updating of statistical register;

5.         Not getting answers at official statistical surveys;

6.         Understatement of data in official statistical accounting.

 

Certainly, branch Departments of SSCA play the decisive role in measurement and assessment of the data on non-observed economy, as they have irrefragable knowledge on:

 

·        NOE components, which should be assessed in their specific branch;

·        Strong and weak features of the data worked out by them;

·        Problems of data collection, connected with NOE measurement.

 

We hope that in near future Azerbaijan statistics will achieve good results in the field of NOE measurement and use improved data for the better national accounts estimates.

 

 

5.      Data sources and some methods used to NOE measurement in Azerbaijan

 

The total amount of hidden and informal activities in industry is formed from:-

 

·              Own-accounted household production;

·              Services of individual producers;

·              Hidden part of legal production in corporative sector.

 

Basic data source on household production and informal activity is the Household Budget Survey (HBS) which provides necessary data on spending on market goods and services as well as self-accounted production inside households, incomes from individual and informal production activities.

 

Since 1996, SSCA takes into account informal activity on bakery manufacture. The accounts are based on parameters of related demand. Presently physiological annual demand of the population of the country for this product is 1 million tons. Thus, each month 83 thousand tons of bread and bakery products are produced to meet this demand.

 

To estimate informal production, the officially reported amount of bread is deducted from the total demand. According this method, informal bakery provides about one half of the total consumption in villages and significant part of the urban consumption.

 

Motor transportation is the part of Azerbaijan economy where the share of non-observed economic activity consisting basically of the activity of physical persons working without licenses and hidden part of output of officially registered units (see Table 1 in the Appendix 1) is great.

 

The data in Table 2 and 3 are taken on the basis of the information of State Traffic Police. The data in Table 4 are estimated as follows: the line “motor cars” disaggregate on models and makes of automobiles, then from 253902 are excluded those makes of automobiles, owners of which are not engaged in paid transportation (for example, owners of foreign make cars, as they are men of means, owners of two-door automobiles (as these models do not suit for transportations at all, or owners of those models of cars, which consume a lot of fuel and consequently, are unprofitable for transportation activity. From the remaining number 206775 of potential transporters by method of expert estimation it is defined that 10339 (5%) of physical persons are regularly engaged in transportations on paid basis.

 

The lines “Buses” and “Trucks” do not undergo changes for the following reason: - today in Azerbaijan there is hardly be a man, who will buy a bus, not speaking of a truck to carry his family. Following this logic it is possible to assert that physical persons, who have got these buses and trucks, did this to get profit from transportation activity.

 

The general data in Tab.5 are received from information of tax bodies and are detailed on types of cars after inspection. From the data given in the table, it is evident that at the moment of inspection number of transportations illegally working in the field is almost 87% of the general number of those regularly engaged in transportations.

 

The estimates of goods turnover in informal trade is also based on data of sample surveys. These surveys are carried out at all food, non-food and mixed informal markets twice a year to get data on number of sellers, quantity and prices by group of goods. Thus, general amount of informal turnover is evaluated and its structure is determined. In agricultural markets monthly sampling surveys are conducted as well as the full-coverage surveys twice a year.

 

Evaluation of total output in commercial services sector is based on officially reported data of registered economic units, but adjusted for informal producers using the expert opinions.

 

Besides, results of various sampling surveys of enterprises and households are used to reveal the volume of hidden, illegal and informal economic activity in the field of construction, agriculture and social services.

 

Appendix 1

 

Table 1: Number of motor cars under personal property of citizens

 

Types of cars	Total number at physical persons	Including those serviceable	From them regularly engaged in transportation	Cars, owners of which have licenses	Non-observed   economy
1	2	3	4	5	6
Motor cars	271977	253902	10339	1330	9009
Buses	3617	2997	2997	757	2240
Trucks	9443	8047	8047	730	7317
Sum	285037	264946	21383	2817	18566

 

 

Table 2: Incomes of physical persons from transportation activity

 

	Total, mln manats	Including:
		Officially registered economy, mln manats	Non-observed economy, mln manats
А	1	2	3
Incomes from load conveyance	132811.0	11983.0	120828.0
Incomes from passenger conveyance	238862.7	46309.4	192553.3
Total	371673.7	58292.4	313381.3

 

 

     Table 3: Calculation structure of non-observed economy under NACER    sections (by the data of 2002)