Department for Economic and Social Information and Policy Analysis Statistics Division

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1 ST/ESA/STAT/SER.F/66 Department for Economic and Social Information and Policy Analysis Statistics Division Studies in Methods Series F, No. 66 Handbook of National Accounting Use of the System of National Accounts in Economies in Transition United Nations New York, 1996

2 NOTE Symbols of United Nations documents are composed of capital letters combined with figures. The designations employed and the presentation of material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. Where the designation country or area appears, it covers countries, territories or areas. ST/ESA/STAT/SER.F/66 United Nations publication Sales No. E.96.XVII.11 ISBN Copyright United Nations 1996 All rights reserved -iv-

3 FOREWORD Since the 1993 System of National Accounts 1 (SNA) guidelines were released, the member organizations of the Inter-Secretariat Working Group on National Accounts (ISWGNA) namely, Eurostat (the Statistical Office of the European Communities), the International Monetary Fund (IMF), the Organisation for Economic Cooperation and Development (OECD), the Statistics Division of the United Nations Secretariat, the regional commissions, and the World Bank, have initiated work on a coordinated Handbook series. The objective of this Handbook series is to assist countries in the implementation of specific segments of the SNA, to present information on the extension of the SNA to satellite accounting, and also to demonstrate the analytical and policy uses of the System. Some of these Handbooks were published after the 1993 SNA was released, and others are in preparation and will be released in 1996, 1997 or thereafter. 2 The present Handbook forms part of this series of Handbooks. It focuses mainly on implementation in the selection of the issues that are addressed by national accountants in countries in transition. However, it also draws attention to the analytical and policy uses of national accounts data in transition economies. To the extent that high inflation is an important economic phenomenon, the Handbook should be read in close relation with a parallel Handbook published by OECD, 3 which deals with national accounting under circumstances of high inflation in a large group of transition countries. The events that have led to the Handbook's being issued were the economic changes taking place in the so-called countries in transition. These changes then required national accountants to change from the Material Product System (MPS), used in the past during the period of central planning, to the SNA which is geared to market economies. The issues addressed by the Handbook include, among others, the orientation of data compilation, the valuation and institutional organization of production, the economic consequences of privatization, changes in the social benefit system, and general changes in the use of national accounts data in analysis and policy-making. Many of the issues, however, are not confined to so-called transition countries. They may also be faced by national accountants in other countries that are confronted with the consequences of privatization and other drastic shifts in the institutional organization of economic activities. The Handbook has greatly benefited from the practical experiences of the consultant Mr. Yuri Ivanov, who drafted most of the Handbook in cooperation with Mr. Jan W. van Tongeren, Interregional Adviser on Macro Accounting for Policy- Making and Analysis, and Ms. Marina Seglina of the Statistics Division of the United Nations. The Handbook has benefited from a lengthy review process during which many detailed technical comments were received from Mr. Janos Arvay of the Economic Commission for Europe (ECE); Mr. Kevin O'Connor and Mr. Adriaan Bloem of IMF; and Ms. Anne Harrison of OECD. Furthermore, very valuable comments were received from statistical offices in a number of transition countries, -v-

4 including, among others, the Czech Republic, Hungary, Lithuania and the Russian Federation. Nevertheless, the final responsibility for the text remains with the Statistics Division of the United Nations Secretariat. Notes 1 Commission of the European Communities, International Monetary Fund, Organisation for Economic Cooperation and Development, United Nations, World Bank, System of National Accounts, 1993 (United Nations publication, Sales No. E.94.XVII.4). 2 The Handbooks concerned are the following: IMF: Balance of Payments Manual (Washington, D.C., IMF, 1993), Monetary and Financial Statistics (Washington, D.C., IMF, 1996), Government Finance Statistics (Washington, D.C., IMF, 1998); OECD: Handbook on Inflation Accounting (Paris, OECD, 1996); United Nations Statistics Division: Integrated Environmental and Economic Accounting, Studies in Methods, Handbook of National Accounting, Series F, No. 61 (United Nations publication, Sales No. E.93.XVII.12), Input-Output (United Nations publication, forthcoming in 1996), Systems Approach to SNA Compilation (United Nations publication, forthcoming in 1996); Eurostat: Regional Accounts Quarterly Accounts 3 OECD, Handbook on Inflation Accounting, prepared by Peter Hill, OECD consultant, and scheduled to be published in the first quarter of vi-

5 CONTENTS Paragraphs Page Foreword... Explanatory notes... iii xii INTRODUCTION A. Scope, objectives and orientation of the Handbook B. Characteristics of transition countries and issues to be addressed C. Strategy to implement the System of National Accounts (SNA) in transition countries D. Organization of the Handbook I. SHIFTS TO MARKET PRODUCTION AND OTHER FACTORS AFFECTING CONCEPTS USED IN PRODUCTION ANALYSIS A. Scope and valuation of output Output classified by industries, market and non-market producers Basic and producer's prices, taxes and subsidies on production and imports B. Issues in the estimation of output of selected industries of transition economies Measurement of output in agriculture, including agricultural services Output of construction and the treatment of capital repairs Computation and allocation of output of research and development Valuation of output of housing services Estimation and allocation of output of health services v-

6 II. SNA CONCEPTS IN EXTENDED INPUT-OUTPUT (I-O) ANALYSIS A. Issues in the compilation of asset accounts Gross fixed capital formation Consumption of fixed capital Change in inventories CONTENTS (continued) Paragraphs Page 4. Acquisitions less disposal of valuables Acquisitions less disposals of non-produced non-financial assets Treatment of capital and recurrent losses B. Issues in the measurement of consumption Final consumption of households (a) Coverage (b) Valuation, imputation and time of recording (c) Classifications Final consumption of general government and non-profit institutions serving households (NPISHs) C. Issues in the measurement of exports and imports of goods and services Free-on-board (f.o.b.) valuation of imports and the treatment of transport services Exports and imports of other services Valuation of external trade and output of external trade monopolies vi-

7 III. SECTORING TRANSITION ECONOMIES A. Institutional units and sectors B. Scope of non-financial corporations versus that of general government; distinction between market and non-market units C. Scope of financial corporations D. Households and the distinction between private unincorporated and quasi-corporate enterprises E. Scope of non-profit institutions serving households versus that of corporate and government units F. Boundary of the total economy CONTENTS (continued) Paragraphs Page IV. SOCIAL BENEFITS IN TRANSITION ECONOMIES A. Wages and salaries B. Social contributions, benefits and transfers in kind Social contributions Social benefits other than social transfers in kind Social transfers in kind provided by government Social benefits and social transfers in kind to be distinguished from subsidies C. Social benefits provided by enterprises to employees and others Accounting treatment of social transfers in cash and in kind by enterprises Cultural and social services supplied by -vii-

8 enterprises to employees and others D. Taxes and other current transfers Current taxes on income, wealth and so forth Other current transfers V. PRIVATIZATION AND THE EMERGING FINANCIAL MARKET A. Accounting for privatization Privatization of enterprises Privatization of dwellings Examples of privatization in countries B. Identification and scope of capital transfers C. Transactions in an emerging financial market Identification and scope of property income Financial intermediation services indirectly measured (FISIM) and other output of financial intermediation services CONTENTS (continued) Paragraphs Page 3. Output of insurance, pension funds and lotteries Some examples of financial transactions VI. REORIENTATION OF DATA SOURCES A. Orientation of data development B. Statistical sources in countries of the Commonwealth of Independent States (CIS) C. Data sources for analysis of production, intermediate consumption and value added Main data sources viii-

9 2. Data sources on output, intermediate consumption and value added by industries (a) Agriculture (b) Construction (c) Transport trade and communication (d) Housing services (e) Business, personal, recreational, social and domestic services (f) Financial intermediation services (g) Non-market services of general government Data on value added components (a) Wages and salaries (b) Social contributions by employers (c) Taxes and subsidies on production and imports (d) Consumption of fixed capital D. Data sources on final uses Data sources on capital formation and asset accounts (a) Data on gross fixed capital formation and asset accounts for produced fixed assets CONTENTS (continued) Paragraphs Page (b) (c) Data for the compilation of changes in inventories Data on non-produced (non-financial) assets ix-

10 2. Sources of data on consumption Sources of data on exports and imports E. Data sources on property income and transfers Data sources on property income Data sources on social and other current transfers Data on capital transfers F. Data for integrated sector accounts Business accounting records Government records Household survey and other data on households Administrative records on NPISHs Balance-of-payments records Annex. SNA-MPS LINKS TABLES 1.1. Industries of the material sphere and the non-material sphere identified with the help of the categories of the International Standard Industrial Classification of All Economic Activities, revision Coverage of non-material activities in terms of the International Standard Industrial Classification of All Economic Activities, revision Scope of material and non-material inputs Proposed allocation of non-material services to market and non-market services Taxes and subsidies included in (+) or excluded from (-) gross domestic product (GDP) and value added of industries and sectors 17 -x-

11 CONTENTS (continued) Page 1.6. Other taxes on production based on 1994 data for the Russian Federation Alternative valuation at producer's and basic prices Illustration of how to estimate value added by industry, when subsidies on agricultural products are given to agricultural products procurement organizations Supply and disposition of agricultural goods Balance of production and use of livestock Illustrative example of valuation of housing services at basic and producer's prices Production account of housing services, Russian Federation, Production account of general government health services, Russian Federation, Classification of capital outlays Two illustrative examples of annual changes in inventories and their valuation Illustrative computation of changes in inventories, using monthly data Classification of final consumption expenditure of households Computation of output and final consumption expenditure of general government Calculation of final consumption expenditure of NPISHs Goods and services account for Belarus, Cross-classification of gross value added by sectors and economic activities in Belarus, Characteristics of the institutional sectors in the SNA xi-

12 4.1. Social benefits paid out to households in the Russian Federation, Derivation of adjusted disposable income from disposable income of households, government and NPISHs based on 1994 data of Belarus CONTENTS (continued) Page 4.3. Socially oriented expenses of enterprises in transition economies, allocated to SNA accounts and transactions SNA accounting treatment of cultural and social services supplied by enterprises to employees and others SNA accounting treatment of a state-owned enterprise based on issuing of vouchers by the government and shares by the enterprise SNA accounting treatment of the termination of a state-owned enterprise and the subsequent sale of its assets SNA accounting treatment of privatization of a public enterprise through outright sale of its assets SNA accounting treatment of the privatization of dwellings Derivation of profits transferred to the state budget Output of financial intermediation services indirectly measured Output of life and non-life insurance Example of a financial account used by insurance companies in the Russian Federation Output of insurance service in the Russian Federation for Series available for the compilation of national accounts in member States of the Commonwealth of Independent States (CIS) Derivation of intermediate consumption as defined in the SNA from data on costs contained in statistical reports xii-

13 6.3. Derivation of gross fixed capital formation from data on capital investments, based on CIS practices Data contained in business accounts submitted by enterprises in the Russian Federation to the statistical authorities Data content of the register on income and expenditure submitted by farm households in the Russian Federation to the tax authorities Data included in a Russian sample survey of religious organizations, xiii-

14 EXPLANATORY NOTES Reference to "tons" indicates metric tons, unless otherwise stated. A full stop (.) is used to indicate decimals. The following abbreviations have been used: BOP CBNE CCIS CIS CMEA COFOG CPC CPE EBRD ECE Eurostat FAO FISIM f.o.b. GDP GNI IARIW ICP IEA INSEE IMF ISIC balance of payments Classification of Branches of the National Economy cross-classification by industries and sectors Commonwealth of Independent States Council of Mutual Economic Assistance Classification of the Functions of Government Central Product Classification centrally planned economy European Bank for Reconstruction and Development Economic Commission for Europe Statistical Office of the European Communities Food and Agriculture Organization of the United Nations financial intermediation services indirectly measured free on board gross domestic product gross national income International Association for Research on Income and Wealth International Comparison Programme integrated economic account Institut national de la statistique et des études économiques International Monetary Fund International Standard Industrial Classification of All Economic Activities ISWGNA MPS n.e.c. NPI NPISH OECD Inter-Secretariat Working Group on National Accounts Material Product System not elsewhere classified non-profit institution non-profit institution serving households Organisation for Economic Cooperation and Development -xiv-

15 PIM R and D SINS SNA SOE SUT USSR VAT perpetual inventory method research and development system of indicators of non-material services (MPS module) System of National Accounts state-owned enterprise supply and use table Union of Soviet Socialist Republics (former) value added tax -xv-

16 INTRODUCTION A. Scope, objectives and orientation of the Handbook 1. The present Handbook focuses on the use of the 1993 SNA 1 in studying issues affecting transition economies in countries that formerly had centrally planned economies (CPEs) and were referred to as socialist countries. The issues include those that are a consequence of the change in the nature of institutional structures - from those supporting the central economic control of the past to those characteristic of a more decentralized economy with a market orientation. Introduction of the SNA in these economies requires an adaptation of the concepts and classifications of the System, a revision of the concepts and classifications of the basic economic statistics supporting the national accounts, the alignment of classifications and basic statistics with international standards, changes in the process of collecting primary data, a revision of business accounting standards and practices, and so forth. In order to assist national accountants and also users of national accounts statistics in those countries, the Handbook: Identifies the accounts and tables of the SNA that are most relevant in addressing selected high-priority issues of policy analysis in countries in transition, and suggests priorities in implementing the SNA in stages; Clarifies the use of SNA concepts and accounting treatments related to the issues selected, identifies the most appropriate treatments when the SNA includes alternatives, for instance, on the valuation of output and the allocation of financial intermediation services, and, where necessary, suggests a further adaptation of concepts to make them more useful and applicable to countries in transition; Suggests sources of data needed for compiling the relevant accounts and tables. 2. The special characteristics of transition economies, and the rapid changes over time that they are experiencing, present two types of challenges in the application of the 1993 SNA. The first challenge concerns the actual application of SNA standards to determining the scope of production, the sectoring of the economy, the valuation of product flows and the valuation of stocks and changes therein, and, in general, the treatment of transactions in the national accounts of those economies. The second challenge entails how to deal with these varying aspects of accounting in economies that are not static but are actually changing rapidly in the direction of market economies. This raises the question how best to structure the accounts so that data comparability over time is secured, while maintaining those accounts as an effective means of studying the process of transition to market economies, as -1-

17 well as the question how to restructure data sources so that the sectors and transactions reflecting the increasing importance of market mechanisms are well captured in the underlying statistics. 3. The Handbook is specially designed to clarify, to prioritize and, where needed, to adapt the SNA to face these challenges. Hence, the relevance of the Handbook may be gradually reduced when the transformation to a market economy is advancing, and the countries in question have adapted their institutional structures and the supporting statistical system. They will then be in a position to make comprehensive use of the 1993 SNA in their statistical practices to support a variety of policy analyses. 4. The Handbook may not serve all countries with transition economies in the same manner. During recent years, many countries in transition took steps to introduce the SNA into their practices. However, so far full implementation of the SNA has not been achieved by any country, though some countries may lay claim to faster progress than others. None of the countries in transition have yet managed to implement the SNA as a unifying framework for generating macroeconomic information. The issues dealt with in the Handbook also respond to the needs of the newly independent States with transition economies that have been created as a consequence of political developments. Some of the independent States that belonged to the former Union of Soviet Socialist Republics (USSR) are members of the Commonwealth of Independent States (CIS). Some of these have already taken certain steps towards the compilation of selected accounts of the SNA, while others are at very early stages of the process. Furthermore, most of the conceptual issues and some of the datarelated issues dealt with in this Handbook also apply to other countries with large non-market activities where similar changes are taking place in the direction of a market economy. Therefore, when the special features of national accounting in economies in transition are mentioned in this Handbook (see particularly sect. B below), they might apply to a larger group of countries than that normally signified by this terminology. 5. Clearly, detailed discussion of topics associated with the transformation of the entire statistical systems of the former CPEs is outside the scope of this manual, but some of the issues pertaining to the collection of primary data are of paramount importance for the compilation of national accounts, and will therefore be dealt with. The discussion of data sources is based on the assumption that during the transition period both old data sources based on a compulsory reporting system, and new sources of data sources including censuses, sample surveys and so forth, will be used in parallel for the compilation of national accounts. The Handbook does not deal with such matters concerning new data sources as the organization of registers and the organization of family budget surveys, nor does it discuss in any detail the many complex accounting issues resulting from inflation which is rampant in some transition economies; for the latter topic, the reader is referred to a parallel Handbook to be published by the Organisation for Economic Cooperation and Development (OECD) -2-

18 dealing with national accounting under circumstances of high inflation Two final observations are needed so as to avoid any misunderstanding about the nature of the present Handbook. First, the 1993 SNA provides the conceptual framework for the Handbook. Therefore, instead of repeating or paraphrasing what is contained in the SNA on the accounting framework, classifications and concepts, extensive references will be made to the System. This may be seen as an inconvenience, insofar as readers will be required either to be intimately familiar with the SNA or to consult extensively the sections and paragraphs that are referred to; the advantage, however, is that full attention can be paid to the specific issues in transition economies and the possibilities for misinterpretations of the SNA kept to a minimum. Second, as the discussion about the accounting treatment of the issues dealt with this Handbook has not reached a final consensus in all respects, the Handbook's presentation should not be regarded as constituting a definitive statement, but rather as reflecting the present state of the art and as contributing towards the reaching of a further consensus in the future. B. Characteristics of transition countries and issues to be addressed 7. Most of the transition countries have committed themselves to reforms aimed at transforming their system of central planning, with large-scale non-market activities, into a market-oriented economic system. The reforms have been under way for a number of years and much has been done to alter the administrative methods used in the central management of the economy and to instal marketoriented mechanisms and institutions. At the same time, it is obvious that the long-term objectives of the reforms have not been fully achieved in most of the countries in transition, that is to say, in most of those countries genuine markets of capital and labour do not yet exist, transformation of the financial system into a two-tiered banking system has not yet been completed, the currencies are not fully convertible, and large-scale privatization has not been completed. The other important characteristic of countries in transition relevant to national accounts involves the relatively fast growth of foreign investments and substantial humanitarian assistance from abroad. These features require clarification of the treatment of many of the transactions recorded in the national accounts, such as reinvested income from foreign direct investments, for example. There is a general consensus that the intermediate position of the transition economies will not change in any major way for a relatively long period of time, though in some countries the movement towards the market will be faster than in others. 8. While in many respects countries in transition do not represent a homogeneous group, they have some general characteristics in common. Most of these economies were characterized in the past by large-scale production by government units or public enterprises at prices that had been administratively -3-

19 determined and often set at levels far below cost, with public enterprises not only assuming considerable social cost with respect to their employees but also often covering family members and even the community at large, and with a financial system that was very little developed. These characteristics are changing rapidly over time, resulting in mixed economies in which some of the characteristics of the former central management of economies are still holding, while at the same time in an increasing number of sectors of the economy, prices are being determined by market forces, and production is in private hands and often carried out on a small informal scale. Accompanying these transformations of the economies are changes in the way in which social benefits are being provided to the population, and funds are being allocated to investment uses through an increasingly developed financial system. At the same time, some of the countries are plagued by high rates of inflation that were non-existent when prices were set by decree in the time of central planning. In particular, mention should be made of the following structural economic features that characterize these economies in transition: There is still a high degree of monopolization of production; in some countries many industries are concentrated in one or two enterprises; In some countries, anti-monopoly legislation has been adopted but it will take a long time before it has an impact on reality; In spite of the relatively fast growth of the private sector, the role of the government sector remains significant in many countries; this is reflected above all in the role it plays in the allocation of resources; in many cases, privatization did not change the methods of management; Reforms of the price systems are not yet completed in many countries and production of many goods and services is still subsidized or regulated in one way or another (for example, by regulations that establish a certain level of profitability for trade organizations); Many administrative rules and financial regulations are still in effect in many countries in transition; they distort market forces and hinder the process of adaptation of enterprises and households to the requirements of the modern market system; The financial system and financial instruments are underdeveloped; a system of multiple exchange rates still exists in some transition economies; There is still a relatively high degree of isolation from the world economy. 9. The other characteristics of countries in transition that were formerly -4-

20 CPEs concerns the general organization of the statistical system. While they have adopted programmes of transformation of their statistical systems according to international standards, implementation of these programmes may take a relatively long time. In the recent past, these statistical systems were characterized by the following common features: The Material Product System (MPS) was used as the system of national accounting and some may continue to compile both the SNA and the MPS during the transition period; The major socio-economic classifications differed from international standards; Predominance of data pertaining to real flows related to production, rather than to income and financial flows; Statistics were collected with the help of a compulsory and comprehensive reporting system; Development of branch statistics was not, as a rule, properly coordinated and integrated. C. Strategy to implement the System of National Accounts (SNA) in transition countries 10. The System of National Accounts (SNA) is a very broad and comprehensive system. It includes information on flows of products, incomes and expenditures, flows and stocks of produced and non-produced assets and financial assets and liabilities, input-output data and so forth. It systematizes and coordinates data that refer virtually to all aspects of the economic process. The Handbook through its organization (see sect. D below) suggests that the SNA be implemented in response to issues of policy analysis relevant to transition countries, and thus provides guidance as to which parts of the System to compile to address those issues. From the point of view of policy analysis, it is not relevant to attempt to introduce the SNA in its entirety, and there are also many statistical limitations. 11. The most reasonable approach during the transition period may consist in gradual compilation of those accounts and tables of the SNA that are relevant for addressing the policy issues that are considered to be of the highest priority. An important restriction on determining what to compile, of course, is the availability of statistics. This restriction may be of particular importance in the beginning of the transition process, insofar as the orientation of the statistics is still determined to a large extent by the policy issues of the past and by the experience with compiling MPS balances that responded to policy issues of that time. However, new policy orientations based -5-

21 on the introduction of a market-oriented economic system in the transition countries should determine the introduction of new types of statistics and this in turn should reduce the statistical restrictions that are currently being faced when compiling parts of the System that are particularly relevant to the current policy issues. 12. In view of the above, it is proposed that the SNA be introduced in two stages. During the first stage, those accounts and tables of the System may be compiled that can be based roughly on such existing types of statistics as might have been used in the past in a different policy context. At a later stage, compilation of the parts of the System may be extended to those accounts and tables that address issues that can be addressed only with the help of new types of statistics. Roughly, the implementation may be carried out in line with the implementation stages developed by the Inter-Secretariat Working Group on National Accounts in a recent report prepared for the Statistical Commission. 3 This implies that, during the first stage, priority should be given to the compilation of production and generation of income accounts for industries, and to the establishment of accounts for the total economy and counterpart external sector, so that major aggregates such as gross domestic produce (GDP), national income, national disposable income, and saving and net lending for the total economy may become available. Thereafter, attention may be given to the government sector accounts and subsequently to accounts for other sectors, covering production, income generation, income and use of income and capital accounts. It is believed that in the majority of countries in transition there is a solid statistical basis for the compilation of these accounts in the immediate future. Financial accounts, balance sheets and data on stocks of produced and non-produced (non-financial) assets may be introduced later. However, in some transition countries, earlier priority may be given to the compilation of produced asset accounts including estimates of consumption of fixed capital, as such a compilation can be based on their past MPS experiences. 13. Introduction of the SNA into the regular statistical practices of countries in transition requires a radical transformation of the entire system of socio-economic statistics which until recently was used primarily for monitoring implementation of the plans of economic development and as a basis for compilation of the plan for the next planning period. As a result, statistical methodology in the former CPEs was predetermined to a considerable extent by the content of the indicators devised by the planners. These indicators reflected not only concepts and definitions elaborated by the agencies responsible for planning but also peculiarities in the organization of the economy, administrative methods of distribution of resources, and so forth. Transformation of the statistical system of the former CPEs on the basis of international standards will have to be carried out in parallel with the work of introducing the SNA in the narrow sense. This will first of all require radical changes in the areas of macroeconomic statistics that are close to the SNA or integrated with it: government finance statistics, money and banking statistics and balance-of-payments (BOP) statistics based on International Monetary Fund (IMF) guidelines, price and labour statistics, statistics based on household -6-

22 surveys, and so forth. In many countries in transition, BOP statistics were practically not compiled in the past, and the parts that were compiled were not consistent with the international standards. Therefore, introduction of the SNA, including the important interaction between the operation of the resident economy and the rest of the world, will have to be accompanied by, and placed on, with high priority parallel statistical work on BOP statistics. 14. Transformation of the statistical system requires furthermore introduction of new economic classifications that are closely linked to the SNA: the International Standard Industrial Classification of All Economic Activities (ISIC), the Central Product Classification (CPC), the Classification of the Functions of Government (COFOG) and so forth. Considerable changes and modifications are needed in the underlying concepts and definitions of the statistics of major industries (manufacturing, construction, trade and so forth). D. Organization of the Handbook 15. The issue orientation of the Handbook is reflected in the organization of the material by chapter. Each chapter deals with a selected group of issues and identifies the accounts and tables of the System that support policy analysis of those issues. The content of the chapters is broken down as follows: chapters I and II deal with the concepts used in analysis of production and use. Chapter I focuses on the items that are included in the production accounts of the SNA. It deals in particular with the consequences for the measures of production, intermediate consumption and value added of increasing shifts from non-market to market production. Chapter II extends the limited production analysis to full-fledged input-output (i-o) analysis based on the supply and use tables of the SNA, and shows in particular how a number of conceptual innovations affect the measures of final demand. Chapter III discusses how the changes in the institutional organization of production from public to private control could be best captured in an economic sectoring of the economy and how the SNA sector criteria should be interpreted within the specific circumstances of transition economies. Chapter IV deals with the accounting treatment of social benefits and corresponding contributions, how these are changing and how such changes should be recorded in the accounts, in order to facilitate studies based on time-series analyses. Chapter V discusses how the accounts would analyse the effects of privatization of enterprises, dwellings and other units and examines the consequences of privatization and the emerging financial system for the identification and measurement of capital transfers and property income and also the treatment of newly emerging financial instruments such as options. Finally, chapter VI deals with data sources, indicating their present status and how they should be changed in order to capture more accurately the changes taking place in the transition economies. In addition, the Handbook includes an annex on conceptual and data links between SNA and MPS which might be useful for those national accountants who are familiar with the work on the MPS in the past -7-

23 and thus may get a better understanding of the SNA by comparing its features with those of the MPS. Also, knowledge of the links between past MPS and present SNA concepts and practices is important as a means of linking data over time and thus establishing long time series, particularly for the main aggregates, that could be used by analysts. 16. Underlying the structure of the Handbook are the accounting framework, concepts and classifications of the 1993 SNA. However, the Handbook does not deal explicitly with all parts of the System. Only those segments of the 1993 SNA will be dealt with that are relevant to the issues discussed. They include the following accounts and tables, which are briefly identified in the context of the issues addressed: Production and generation of income accounts, which are used in chapter I to explain how the shifts from market to non-market production affects the analysis based on production functions. For details, the reader should refer to the SNA, chapters VI and VII, in particular tables 6.1 and 7.1; The supply and use table (SUT), which presents in further detail the goods and services accounts and generation of income accounts of the SNA, and will be used in the discussion of chapter II dealing with i-o analysis in transition economies (the SNA, chap. XV, in particular table 15.1); Integrated economic accounts (IEAs), which are used in chapter III to explain what role institutional sectors play in the economic sectoring of the economy. Separate institutional sector accounts including all flow accounts and the balance sheets are referred to when explaining the accounting treatment of social benefits in chapter IV and the effects of privatization in chapter V. For more details on the IEA, the reader is referred to the SNA, chapter II, in particular table 2.8; for the concepts and classifications of the sector accounts, reference may be made to the SNA chapters VI-XIV; and for the integrated presentation of those accounts per sector the tables in annex V, part II, may be used; Cross-classification by industries and sectors (CCIS) of items of the production and generation of income accounts, which is used in chapter II to show how production is reorganized institutionally (the SNA, chap. XV, in particular table 15.3); Asset accounts for produced and non-produced non-financial assets, which are introduced in chapter II, as part of extended (that is to say, dynamic) i-o analysis in which not only data on (static) supply and use tables are needed, but also asset accounts that include the data on capital stock and changes therein (flows) for produced and -8-

24 non-produced non-financial assets (the reader is referred to SNA, chap. II, in particular table 2.7); Transaction accounts covering all details of transactions of selected accounts for all sectors of the economy, which are used to explain in chapter IV the accounting treatment of flows resulting from changes in the social benefit system and in chapter V the effects of the privatization of the economy and the emerging financial system (the SNA, chap. II, in particular table 2.6). 17. Below is a list of specific accounting issues that the Handbook will deal with, including references to the chapters and sections in which they are discussed. These issues may arise in all countries in transition when implementing the 1993 SNA: Sectorization of the economy including subsectoring (chap. III); Distinction between market and non-market producers/output, valuation of own account production, treatment and allocation of non-market services provided to market producers (chap. I, sect. A.1); Treatment of subsidized goods and services (chap. I, sect. A.2); Distinction between property income and taxes received by government (chap. V, sect. C.1); Distinction between subsidies and social transfers (chap. IV, sect. B.4); Valuation and allocation of output of financial intermediation services indirectly measured (FISIM) (chap. V, sect. C.2); Treatment of foreign trade monopolies and conversion of transaction values to local currency when multiple exchange rates are in effect (chap. II, sect. C.3); Treatment of central banks (chap. III, sect. C; chap. V, sect. C.2); Treatment of insurance companies and computation of their output (chap. V, sect. C.3); Estimation of output in agriculture (chap. I, sect. B.1); Estimation of consumption of fixed capital at replacement values (chap. II, sect. A.2); Treatment of losses (chap. II, sect. A.6); -9-

25 Estimation of gross output of external trade activities (chap. II, sect. C.3); Treatment of capital and financial transactions and other flows resulting from privatization of public property, including the treatment of losses due to sales of public property at reduced prices (chap. V, sect. A). 18. Furthermore, the Handbook highlights new features of the 1993 SNA that are particularly relevant for conditions and institutions of countries in transition. These refer to: The special treatments elaborated in the revised SNA for social and cultural services provided free or almost free by enterprises to their employees (chap. IV, sect. C.2); The distinction introduced into the System between actual final consumption and final consumption expenditure (chap. II, sect. B); The treatment of holdings gains and losses aimed at removing the impact of inflation on measurement of output, changes in inventories, and so on (chap. II, sect. A.3); The introduction into the System of so-called asset accounts that are close to the balances of fixed assets in the MPS (chap. II, sect. A). -10-

26 I. SHIFTS TO MARKET PRODUCTION AND OTHER FACTORS AFFECTING CONCEPTS USED IN PRODUCTION ANALYSIS 19. Compilation of production accounts in countries in transition should not pose a serious problem in principle, as in the past countries in transition have placed much emphasis on analysing the process of production. However, a change in emphasis may be needed. Central planning required detailed input-output (i-o) tables that allowed policy makers to make decisions on how to allocate manpower, capital and financial resources among different production processes in order to satisfy a variety of uses. In a market-oriented economy, in which the government influences production and use indirectly through its economic policies, production data remain equally important for an adequate formulation of these policies, as they show how government policies affect production, and analysis of those data may indicate how different effects could be achieved with different policies. As the organization of the production process is rapidly changing in countries in transition to market economies, it is a challenge for any national accountant to capture effectively these changes in production, to analyse the reasons why such changes are taking place and to determine their economic (income, financial and monetary) and also social (for example, employment) ramifications, so that the government may be in a better position to evaluate the effects of alternative policies that are aimed at avoiding unwanted consequences. 20. In measuring production-related concepts, the most important accounting implications arise from the increasing shift taking place in those countries from largely non-market production activities (in which the goods and services were either not sold and therefore had no market prices at all or, if sold, had prices that were considerably below cost) to production for sale in the market. The distinction between market and non-market production activities is an important distinction in the SNA, and is closely related to, and therefore determines, other concepts of the System, including the production boundary and the unit of classification, the valuation of output, intermediate cost and value added, and the scope and accounting treatment of subsidies and also taxes on production. 21. The present chapter deals exclusively with the concepts of production and generation of income accounts in the SNA, which are used in analyses of production functions. The next chapter (II), a continuation of this one, offers an extended production analysis, in which the production functions are broadened to encompass comprehensive i-o analysis based on supply and use tables and asset accounts. Production and generation of income accounts are presented in tables 6.1 and 7.1 of the SNA and discussed in SNA chapters VI and VII. 22. This chapter contains two sections: section A discusses general issues concerning the scope and valuation of output, and section B dealing with output issues in selected industries, covers agriculture and construction, research and -9-

27 development activities, and financial intermediation and health services. A. Scope and valuation of output 23. Output is a starting-point in the measurement of the results of production. The term refers to the value of goods and services produced by resident units during the accounting period, and output itself "consists only of those goods and services that are produced within an establishment that become available for use outside that establishment" (para of the SNA). 24. Discussed below are two issues that are of particular relevance to the measurement and classification of output in transition countries. The first one concerns how to link data based on the distinction between material goods and services and non-material services to the industry and product classifications of the SNA, and how this distinction relates to that made in the SNA between market and non-market production. The second issue concerns the scope of taxes and subsidies on production and imports and the corresponding SNA valuations of output in basic and producer's prices. This chapter does not deal with the changes in prices of output and intermediate consumption for which adjustments need to be made, particularly in periods of high inflation, in order to arrive at "one homogeneous price vector for production analysis" (SNA, paras ). That issue is dealt with in the next chapter (sect. A.3) where changes in inventories are discussed. 1. Output classified by industries, market and non-market producers 25. The industry grouping of identical establishments is a classification underlying the SNA that is used for production analysis. It is applied to the production and generation of income accounts. The groupings are called industries, and the classification is elaborated in the International Standard Industrial Classification of All Economic Activities, Revision 3 (ISIC, Rev.3). 4 The term "industry" refers in the 1993 SNA to both market and non-market producers, and not only to producers of products sold on the market, as was the case in the 1968 SNA. 5 All activities of producers, no matter to which institutional sector they belong, can be classified by industries. It is recommended that countries in transition incorporate on an optional basis in their classification of production a distinction between material goods including material services, and non-material services, in order to ensure links with the MPS time-series of the past. As will be shown below, the latter distinction may be related to the SNA distinction between market and non-market producers. 26. In the past for international purposes, countries in transition used the Classification of Branches of the National Economy (CBNE), worked out by the -10-