Transcript www.conference-board.org 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
Bridging Theory and Practice
in National Accounting
… with a focus on growth, productivity and intangibles
Bart van Ark
November 17, 2008
The Link between Theory and Practice
in National Accounting is the Key to Its Relevance

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:

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
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
One Bridge Between Theory and Practice of National Accounts
Is Measurement of the Knowledge Economy



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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
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
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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
GDP
growth
(%)
Source: Jorgenson and Vu, 2005 (updated)
Unmeasured intangible capital is hidden in MFP
a) Physical Capital
a1) ICT capital (IT hardware, communications equipment)
a2) Other capital (plant, machinery, buildings)
b) Human Capital
b1) Formal Education
b2) Company training
c)
Knowledge Capital
c1) Research and Development
c2) Patents
Asbrands,
long as
intangibles
c3) Licenses,
copyrights
c3) Other technological
innovations, not related to b1) to b3)
capital remain
[c4) Software]*
unmeasured, its
c5) Mineral Exploration
productivity effects
c6) Experience
are hidden in MFP
d) Process Capital
d1) Engineering design
d2) Organisation design
d3) Construction and use of data bases
d4) Remuneration of innovative ideas
e)
Customer Capital
e1) Marketing of new products
f)
Multi Factor Productivity (residual)
a) Physical Capital
a1) ICT capital (IT hardware, communications equipment)
a2) Other capital (plant, machinery, buildings)
b) Human Capital
b1) Formal Education
b2) Company training
c)
Knowledge Capital
c1) Research and Development
c2) Patents
c3) Licenses, brands, copyrights
c3) Other technological innovations, not related to b1) to b3)
[c4) Software]*
c5) Mineral Exploration
c6) Experience
d) Process Capital
d1) Engineering design
d2) Organisation design
d3) Construction and use of data bases
d4) Remuneration of innovative ideas
e)
Customer Capital
e1) 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)
The bridge to practical measurement has been
made by Corrado, Hulten and Sichel
Source: Corrado, Hulten and Sichel (2005)
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
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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The Building Stones for the Bridge Between Theory and
Practice in National Accounting

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)
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