Globalisation and the system of national accounts

1. Globalisation and the system of national accounts Jennifer Ribarsky Head of Section, National Accounts Division OECD 32nd Meeting of the Voorburg Group on Service Statistics 23 – 27 October, 2017

2. Globalisation: Have They Gone Mad?

3. Have They Gone Mad? Irish GDP up by 26.3% in 2015!

4. Some quotes from the press • “This Tax Haven Just Revised Its 2015 GDP up From 7.8% to 26.3%” (Fortune) • “Handful of multinationals behind 26.3% growth in GDP” (Irish Times) • “Ireland’s Economists Left Speechless by 26% Growth Figure” (Bloomberg) • “Why GDP growth of 26% a year is mad” (Economist) • “It’s complete &#%!@?!, it’s Alice in Wonderland economics” ColmMcCarthy, University College Dublin) • “World Economies Watch As Ireland Reaps 26% GDP Windfall On Tax Inversions” (Business Insider)

5. Irish Case a Blessing in Disguise? Before, it used to be a statistical problem; now it’s everyone’s problem! Brings together various problems: • Growing intangibility of the economy • Global production arrangements • Minimisation of global tax burden by Multinational Enterprises (MNEs)

6. Global Production Arrangements

7. Increasing globalisation: apparel, cars, toys, planes, electronics… Source: Rivoli (2005), WTO (1998), Feenstra (1998), www.newairplane.com, Linden et al. (2009)

8. Increasing globalisation Significant value-added is generated by foreign affiliates, with a large share of value-added repatriated to parents as property income: Value-Added of Foreign Affiliates – share of national total 2009 (ISIC B-N, ex K)

9. Processing (1) = information Manufacturing services on physical inputs owned by others = products = money Material inputs Principal(domestic economy) Processor (abroad) Material outputs Processing fee turnover productioncost Recording in national accounts: import of services

10. Processing (2) = information Manufacturing services on physical inputs owned by others = products = money Processor (abroad) Material inputs Material outputs Principal(domestic economy) Processing fee turnover productioncost

11. Merchanting Country A (G) 50 Trader (physical flow) Country B (G) 80 Recording in national accounts: negative exports of goods from country A, with subsequent exports of goods to country B

12. Global production (3) = information = products = money Contractproducer(abroad) Material outputs Principal(domestic economy) Material inputs Blueprints ofproduction productioncost turnover productioncost

13. Global production (3) = information = products = money Trader or Manufacturer? fee or purchase of products? Contractproducer(abroad) Material outputs Principal(domestic economy) Material inputs Blueprints ofproduction productioncost turnover productioncost economic ownership of material inputs?

14. Price and volume measurement (1) • Key concern in national accounts: deconstructing value changes into price and volume (e.g., economic growth) • Processing services • Ideal is to deflate with SPPI for processing service: usually not available • How to collect data to calculate a price index for the service fee? Particularly in the case where the good is exported without ever physically returning to the country of the manufacturer who owns the inputs?

15. Price and volume measurement (2) • Merchanting services • Ideal treatment would be to deflate the purchases and the sales of the product under merchanting • Represents the volume of the merchanting margin • Known as “double deflation” • Might be difficult in cases where the value of the traded good is high and the margin is relatively small (erratic time series might appear) • Preferred data source is enterprise surveys of the country where the merchant is resident. An alternative or complementary source is the balance of payments statistics.

16. Measurement issues related to global production • Major inconsistencies across national statistics and between countries, e.g. enterprise statistics versus cross-border trade flows • More detailed surveying and micro-balancing of data on large internationally operating enterprises necessary • International exchange of information on asymmetries may be needed to solve the puzzle • Economic ownership of Intellectual Property Products may not always be clear cut (and relatively easy to relocate from one country to another) • Eurostat-OECD Task Force on measuring non-financial assets is looking at the issue of economic ownership of IPPs.

17. Minimisation of Global Tax Burden

18. Minimisation of Global Tax Burden • Transfer pricing • Channelling funds through SPEs • Optimisation of recording economic ownership and use of IPPs • Optimisation of the organisation of global production arrangements more generally • Allocation of value added and operating surplus, generated by MNEs, at least partly, if not mainly, governed by tax considerations • Economic rationale, but it hampers analysis and policy from an economic substance point of view

19. Special Purpose Entities (SPEs) • SNA 2008: Explicit recognition of Special Purpose Entities • Definition: • Ultimately controlled by non-resident parent • No or few employees • Core business: group financing, holding activities, channelling funds from non-residents to other non-residents • Examples: holding companies, royalty and licensing companies, securitisation companies, financial leasing companies, etc. • In some countries very large • May significantly affect certain financial indicators, e.g. debt-to-income ratios

20. Special Purpose Entities (SPEs) SPEs in The Netherlands (2010): • Value Added -390 • Compensation of employees -660 • Operating surplus (gross) -1050 • Property income received 117350 (19.9%) • Property income paid -114480 (19.4%) • Primary income (gross) 1820 • Taxes on income -1820 • Disposable income (gross) 0 • Capital formation (gross) -570 • Net lending -570 • Total financial assets (*1,000 mln Euro) 2060.1 (349.9%)

21. International transactions in IPPs • Research among 8 MNEs • Share of business expenditures on R&D (BERD): 45% • Only 1 MNE reports substantial R&D-exports • Other 7 MNEs only report zero or very small amounts of R&D-exports • Very limited amount of funding received from ROW • Use (or change in economic ownership?) of IPPs within MNEs often implicit part of income flows => may (significantly) affect productivity analysis • Often SPEs involved in worldwide IPPs • More generally: hardly any cross-border transactions in IPPs

22. The Irish Case Revisited • Massive relocation of IPPs (and aeroplanes) to Irish territory => No impact on GDP • IPPs used in global production arrangements • Also noteworthy labour input involved • Irish firms considered as economic owner of the IPPs

23. Globalisation and Measurement: Way Forward

24. Further Guidance • Guide on the Impact of Globalization on National Accounts (2012) • Guide to Measuring Global Production (2015)

25. Way Forward • Get the measurement right and consistent: • Micro-balancing of data for large internationally operating enterprises => coordinated survey at national level? • International exchange of (confidential) data • Coordination of the enterprise population between countries (e.g. Euro Groups Register) • Creating a ‘Large Case Unit’ with the NSO • SNA > GDP • More focus other NA-indicators • Breakout of multinational activities in supply and use tables and in sectoral accounts • Alternative types of analysis: Trade in Value Added

26. Trade in Value Added

27. TiVA: Background • A world of increasing international fragmentation of production • Explosion of trade in intermediates as firms specialise in stages (tasks) of production • Gross trade flows increasingly embody components (and so value) created elsewhere • …meaning that gross trade statistics may create ‘misleading perceptions’ and imperfect policies

28. TiVA: Background Raises question on, for example … • Where are our export markets? • Which sectors create most value and jobs? • What is our competitive edge? • Does protectionism work? Is it counter-productive? • How should we interpret bilateral trade balances?

29. Country Country Country Gross exports (110) B Gross exports (intermediates) (100) C A Value - added (10) Value - added (100) TiVA: Response Measuring the value that is added by individual firms in the production process … … using a global Input Output Table

30. TiVA: OECD Global Input Output Table 57 economies + RoW, 37 sectors, 1995-2009

31. TiVA: Highlights Exports require imports Services matter

32. TiVA: China’s Trade surplus with the USA Source: TiVA database and OECD illustrative estimates based on FATS data

33. TiVA: Concluding remarks • An alternative view on the competitiveness of countries: more related to stages in the production process, instead of products • An alternative view on trade flows and bilateral balances • Importance of services for international trade flows • A different perspective on the potential impact of protectionism

34. Thank you for your attention!