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1 United Nations Economic and Social Council ECE/CES/2011/2/Add.1 Distr.: General 18 March 2011 English only Economic Commission for Europe Conference of European Statisticians Fifty-ninth plenary session Geneva, June 2011 Item 6 of the provisional agenda Manuals, guidelines, recommendations, frameworks etc. prepared under the auspices of the Conference Impact of globalization on national accounts Note by the secretariat Summary The document presents a draft Guide aiming to help users and producers of national accounts statistics to understand how globalization affects the measures of national accounts. It is intended for the use of both economic statisticians in the broadest sense (those concerned with national accounts and the balance of payments, but also with labour market and price statistics) and those who use the data for policy analysis and research. The Guide brings together a description of the effect of globalization on national measures, and highlights those areas that will increasingly need attention and resources to maintain the quality of national accounts. The Guide was developed by the joint UNECE/Eurostat/OECD Group of Experts on the Impact of Globalization on National Accounts (GGNA) established in The aim of the work was to review the main distortions in the compilation of national accounts and related source statistics, as caused by globalization". In February 2011, the CES Bureau reviewed the draft Guide and requested the UNECE secretariat to send the document to all members of the Conference of European Statisticians (CES) for electronic consultation. Subject to the positive outcome of the consultation, the Guide will be submitted to the CES 2011 plenary session for endorsement. The deadline for comments is 29 April Please send your comments using the attached comment form to national.accounts@unece.org (with a copy to tihomira.dimova@unece.org). The draft Guide and the comment form are also available at the GGNA website:

2 ECE/CES/2011/2/Add.1 PREFACE Globalization, as we understand it nowadays, is a centuries old phenomenon of growing interaction between national economies. During the last decades, this phenomenon got a new momentum, because of political changes and because of technological changes in the field of ICT and communcation. The traditional interrelations, e.g the interconnectness of the the financial markets, grew considerably. On the other hand, one could also see a deepening of globalisation through, for example, international value added chains. More and more, production processes are spread over the whole world. These developments certainly had a positive impact on worldwide income and prodctivity. However, the banking crisis, started in the USA in 2008 and rapidly affecting other parts of the world, revealed the major risks associated with the growing interconnectness of national economies. When looking at globalization from a statistical perspective, one is confronted with a number of challenges. These challenges can be grouped into four broad categories: The measurement of the phenomenon itself. How can we measure (the further development of) globalisation? Which indicators capture the further growth of the international interdepencies of national economies? The description of the behaviour of multinational enterprises (MNEs). The driving forces behind globalization are of course the MNEs. Question is how and why MNEs act and behave as they do? What are the reasons behind the division of activities and the subsequent allocation of these activities to countries? What are the comparative advantages of national economies? The impact of globalization on traditional indicators. Globalization can have a significant impact on all aspects of societal progress: economically, socially as well as environmentally. Especially in the domains of significant impact, it is important to have available more (detailed) information to support further analysis and research. The impact of globalization on the compilation of traditional indicators. The increasing share of enterprises running affairs on an international scale and the growing mobility of people, financial capital, goods and services pose specific problems when compiling national statistics. In April 2007, the UNECE led Expert Group on the Impact of Globalization on National Accounts (GGNA) was established, following a decision of the Conference of European Statisticians (CES). The Group was organized jointly with the OECD and Eurostat. At that time, a framework of indicators for measuring the magnitude and pace of economic globalization was already agreed, as a result of the work of a number of international organizations. However, little was known about the impact on the compilation of existing national statistics. There was a need to examine how globalization affects the compilation of economic statistics in general and national accounts in particular, and to outline the areas where further efforts are needed in order to maintain the quality of the data. Under its terms of reference, the objective of the GGNA is to review the main distortions in the compilation of national accounts and related source statistics, as caused by globalization. In doing so, the Group should put forward proposals on how to deal with these distortions in order to improve the quality of national accounts. The GGNA held three meetings, in April 2008, May 2009 and April 2010, to address the tasks mandated by the CES. It agreed on a list of globalization aspects with an impact on the compilation of national accounts, and commissioned and reviewed chapters describing each of these aspects. This Guide The Impact of Globalization on National Accounts is the outcome of the work of the GGNA. It focuses on the main aspects of globalization and recommends solutions and best practices on how to improve the design, processing and use of the data and how to achieve better international consistency with respect to the identified problem areas. It showed not to be possible to find solutions and to make clearcut recommendations for all problems related to the everchaging phenomenon of globalization. In these cases, proposals for future research are included in chapter 14. ii

3 ECE/CES/2011/2/Add.1 Of course, the compilation of this guide was not possible without the contributions of many people. First and foremost, the principal authors of the various chapters have to be thanked for. Their committment, their patience and their willingness to include suggestions made during several rounds of discussion are remarkable. Also the reviewers and other contributors to the chapters have to be acknowledged. Furthermore, all the other participants to the meetings of the GGNA have to be thanked for their active contributions to the discussion on the various chapters. All together, they have made it possible to achieve the very high quality of the final product. A full and hopefully complete list of the authors and main contributors has been included on the next page. In the steering of the whole process, the organization and preparation of the publication, the reporting on the progress of work to the Conference and its Bureau, the so-called leadership group played a very important role. Apart from myself, the leadership group included: Art Ridgeway (Canada, vice-chair), Jan Heller (Czech Republic), Eeva Hamunen (Finland), Marc Vancauteren and Anne-Peter Alberda (Netherlands), Robin Lynch (United Kingdom), Steven Landefeld, Obie Whichard and Brent Moulton (United States), Francis Malherbe and Daniela Comini (Eurostat), Lucie Laliberte and Ralph Kozlow (IMF), Nadim Ahmad and Paul Schreyer (OECD), Tihomira Dimova and Lidia Bratanova (UNECE). A vital role in the compilation of this guide was played by the UNECE Statistical Division: Lidia Bratanova for taking forward this initiative and for her support during the whole process, Tihomira Dimova and all her staff, particularly Rami Peltola and Katarina Dikic for their relentless and high quality work in organising meetings, bringing together all contributions, setting up and maintaining the website, finalising the guide, etc., etc. Their efforts and their commitment during the whole process were indispensable. In relation to the orgnisational work, also the contributions by Anne-Peter Alberda and Mark Vancauteren (Statistics Netherlands) have to be acknowledged. Last but certainly not least, Peter Bull (ECB) has to be mentioned as the editor of this publication. His enthousiasm and his engagement were much, much more than we could have hoped for. Peter van de Ven Chair of the GGNA iii

4 ECE/CES/2011/2/Add.1 List of contributors to the various chapters Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 The impact of globalization on national accounts Principal authors: Robin Lynch and Peter Bull (UK) Lead reviewers: Peter van de Ven and Piet Verbiest (Statistics Netherlands) Other contributors: Tihomira Dimova, Rami Peltola (UNECE) MNEs and the Allocation of Output and Value Added to National Economies Principal authors: Steve Landefeld, Brent Moulton and Obie Whichard (BEA, USA) Lead reviewer: Art Ridgeway (Statistics Canada) Other contributors: Robin Lynch (UK) Contributors to annexes: Michael Connolly (Statistics Ireland), Hen Pustjens, Marcel Wieser (Statistics Netherlands), Kristian Taskinen, Tarja Hatakka, Eeva Hamunen (Statistics Finland), Göran Svensson, Per Ericson (Statistics Sweden) MNEs, Foreign Investment and related Income Flows Principal author: Ralph Kozlow (IMF) Lead reviewer: Eeva Hamunen (Statistics Finland) Contributors to annexes: Lidia Troshina (Bank of Russia) Special Purpose Entities Principal author: Bob Groot (Statistics Netherlands) Lead reviewer: Marc Origer (STATEC, Luxembourg) Contributors to annexes: Michael Connolly (Statistics Ireland), Balint Murai (Statistics Hungary) Goods for Processing Principal author: Michel Girard (Statistics Canada) Lead reviewer: Nadim Ahmad (OECD) Other contributors: Brent Moulton (BEA, USA), Ann Lisbet Brathaug (Statistics Norway) Merchanting Principal author: Michael Connolly (Statistics Ireland) Lead reviewer: Francis Malherbe (Eurostat) Other contributors: Anne Harrison (SNA editor), David Hobbs (ONS, UK) Contributors to annexes: Leslie Tang (Census and Statistics Department, Hong Kong Special Administrative Region) Transactions in Intellectual Property Principal author: Nadim Ahmad (OECD) Lead reviewers: Robin Lynch (UK) and Francis Malherbe (Eurostat) Other contributors: Michael Connolly (Statistics Ireland), Obie Whichard (BEA, USA), Soli Peleg (CBS, Israel) Global Manufacturing Principal authors: Peter Bull (UK) and Mark de Haan (Statistics Netherlands) Lead reviewers: Tihomira Dimova (UNECE) Other contributors: Rob van der Holst (Statistics Netherlands), Nadim Ahmad (OECD) Contributors to annexes: Soli Peleg (CBS, Israel), US Office of Management and Budget Quasi Transit Trade Principal authors: Daniela Comini (Eurostat) and Tjeerd Jellema (ECB) Lead reviewers: Piet Verbiest and Jeanet Exel (Statistics Netherlands), Ghislain Poullet (National Bank of Belgium) Contributors to annexes: Sandor Csizmazia (Central Statistical Office Hungary) iv

5 ECE/CES/2011/2/Add.1 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Addendum International Labour Mobility Principal author: Soli Peleg (CBS, Israel) Lead reviewer: Jan Heller (CSO of Czech Republic) Other contributors: Andreas Maurer and Joscelyn Magdeleine (WTO) Contributors to annexes: Jan Heller (CSO of Czech Republic), Wolfgang Eichmann (Statistisches Bundesamt, Germany), Ghenadie Cretu (IOM), National Bureau of Statistics of the Republic of Moldova, State Statistics Committee of Ukraine (SSCU) and the Ukrainian Centre for Social Research Remittances Principal author: Obie Whichard (US BEA) Lead reviewer: Daniela Comini (Eurostat) Other contributors: Anne Flatness (US BEA) Contributors to annexes: Jan Heller (CSO of Czech Republic), Bank of Russia, SSCU and the Ukrainian Centre for Social Research, Liliana El Haddad (Bulgarian National Bank), Henk Lub, Pim Claassen (De Nederlandsche Bank) Second homes Principal authors: Ann Lisbet Brathaug (Statistics Norway) Lead reviewer: Robin Lynch (UK) Contributors to annexes: Tore Halvorsen, Wenche I. Sterkeby (Statistics Norway), National Institute of Statistics Geography and Informatics of Mexico, Michael Connolly (Statistics Ireland), Brent Moulton (BEA, US), Antonio Massieu (UNWTO) E-commerce Principal author: Mark Vancauteren (Statistics Netherlands & Hasselt University) Lead reviewer: Marshall Reinsdorf (US BEA) Other contributors: Erik Veldhuizen, Eugene van der Pijll (Statistics Netherlands), Carsten Hansen (UNECE) Concluding Remarks and Future Research Principal author: Peter Bull (UK) Lead reviewer: Tihomira Dimova (UNECE) Other contributors: Robin Lynch (UK) Impact of the financial crisis Principal author: Peter Bull, Jean-Marc Israël and Reimund Mink (ECB) Lead reviewer: Ralph Kozlow (IMF) v

6 ECE/CES/2011/2/Add.1 List of abbreviations and acronyms AEG Advisory Expert Group AMNE activities of multinational enterprises BIS Bank for International Settlements b.o.p. balance of payments BNB Bulgarian National Bank BPM5 Balance of Payments Manual, fifth edition BPM6 Balance of Payments and International Investment Position Manual, sixth edition CBFSAI Central Bank and Financial Services Authority of Ireland CBS Central Bureau of Statistics (or Centraal Bureau voor de Statistiek) CBSAXA Center for Sociological Investigation and Marketing (Moldova) CCC centralized customs clearance CDIS Coordinated Direct Investment Survey CDS credit default swap CESTUR Center of Higher Studies in Tourism (Spanish acronym) CIS Commonwealth of Independent States CLN credit-linked note CMFB Committee on Monetary, Financial and Balance of Payments Statistics CNB Czech National Bank COPC current operating performance concept CPI consumer price index CPIS Coordinated Portfolio Investment Survey CRM customer relation management CSDB centralised securities database CSI complexity and statistical impact CSO Central Statistical (or Statistics) Office DNB De Nederlandsche Bank EBOPS Extended Balance of Payments Services Classification ECB European Central Bank EDI electronic data interchange EGR EuroGroups Register EHS English Housing Survey EMEA European, Middle Eastern and African ESA European System of Accounts ESRB European Systemic Risk Board FDI foreign direct investment FGP factoryless goods producer FILOCOM Fichier des Logements par Communes FISIM financial intermediation services indirectly measured f.o.b. free-on-board FR fiscal representative FTS foreign trade statistics FTZ free trade zone FVC financial vehicle corporation vi

7 ECE/CES/2011/2/Add.1 G-8 Group of Eight G-20 Group of Twenty GATS General Agreement on Trade in Services GDP gross domestic product GFCF gross fixed capital formation GNI gross national income GRWG Global Remittances Working Group GVA gross value added HBS Household Budget Survey HCSO Hungarian Central Statistical Office IAG Inter-Agency Group on Economic and Financial Statistics IASB International Accounting Standards Board IC intermediate consumption ICPF insurance corporations and pension funds ICBS Israeli Central Bureau of Statistics ICT information communication technology IFRS international financial reporting standards ILO International Labour Organization IMF International Monetary Fund IMTS International Merchandise Trade Statistics INEGI Instituto Nacional de Estadistica y Geografia INSEE Institut National de la Statistique et des Etudes Economiques IO input-output IOM International Organization for Migration IPP intellectual property product i.p.p. international investment position IRTS International Recommendations for Tourism Statistics ISIC International Standard Industrial Classification ISWGNA Inter-Secretariat Working Group on National Accounts ITRS international transactions reporting system LTCM Long-Term Capital Management MFI monetary financial institution MMF money market fund MNE multinational enterprise MSITS Manual on Statistics of International Trade in Services MSP manufacturing service provider MTO money transfer operator NAICS North American Industry Classification System NBH National Bank of Hungary NPISHs non-profit institutions serving households NTSA Norwegian tourism satellite account system OECD Organization for Economic Cooperation and Development OFBV own funds at book value OFIs other (non-monetary) financial intermediary OMB (US) Office of Management and Budget PGI principal global indicators vii

8 ECE/CES/2011/2/Add.1 PPI PSA R&D SBS SCM SDMX SEEA SFGO SNA SPE SPV SSCU STEP STS SU TFFS TSA TSG UAB UBO UNCTAD UNECE UNSC UNWTO US GAAP VAT WEO WTO producer price index production-sharing agreement research and development structural business statistics supply chain management Statistical Data and Metadata exchange System of Environmental and Economic Accounting statistics of finances of large enterprises (Dutch acronym) System of National Accounts special purpose entity special purpose vehicle State Statistics Committee of Ukraine short-term European paper short-term statistics supply and use Task Force on Finance Statistics tourism satellite account (United Nations) Technical Sub-group on the Movement of Natural Persons Autonomous Metropolitan University (Spanish acronym) ultimate beneficial owner United Nations Conference for Trade and Development United Nations Economic Commission for Europe United Nations Statistical Commission United Nations World Tourism Organization US Generally Accepted Accounting Principles value added tax World Economic Outlook (IMF publication World Trade Organization viii

9 ECE/CES/2011/2/Add.1 Table of contents Preface... ii List of contributors to the various chapters...iv List of abbreviations and acronyms...vi CHAPTER 1 Introduction, overview and main conclusions...1 Introduction...1 What is globalization?...1 How does globalization affect national accounts?...1 The purpose of this guide...3 Overview...3 I Multinational enterprises...3 II Some issues concerning trade in goods and services, and global manufacturing...4 III Household-related issues...5 Addendum: Impact of the financial crisis...6 Main conclusions...7 Section I Multinational enterprises...9 CHAPTER 2 Multinational enterprises and the allocation of output and value added to national economies Introduction and background...14 The statistical treatment recommended in international standards...15 Measurement problems and proposals for operational treatment...16 Multinational enterprises and the global allocation of income...16 Multinational enterprises and gaps in the statistical system...18 Recommendations for future work...20 Annex 2.1 Multinationals and their impact on national accounts and balance of payments statistics: the case of Ireland...21 Consistency unit...21 Other activities of multinational enterprises...22 Annex 2.2 A consistency unit at Statistics Netherlands: reducing asymmetries in national accounts and related statistics...24 Introduction...24 What is consistency?...24 Determining the entities to be covered...25 Difficulties in checking consistency and possible solutions...25 The consistency business unit...25 Annex 2.3 Large enterprise statistics in Finland and Sweden...26 Statistics Finland's working group on large enterprises...26 Statistics Sweden s large enterprises management unit...27 CHAPTER 3 Multinational enterprises, foreign direct investment and related income flows Introduction...29 Background...29 The statistical treatment recommended in international standards...32 Measurement problems...33 Proposals for operational treatment in the accounts...35 European initiatives to improve data quality on direct investment...36 Recommended future work on the issue...36 Annex 3.1 List of countries contributing to the December 2010 release of CDIS results...38 Annex 3.2 Enterprise groups and foreign direct investment in the Russian Federation...39 Methodological principles used in the Russian Federation for estimating reinvested earnings from direct investment in non-banking corporations...39 Methodological principles for estimating the effects of production-sharing agreement projects on Russia s external sector statistics...40 CHAPTER 4 Special purpose entities Introduction...41 Background...41 ix

10 ECE/CES/2011/2/Add.1 The statistical treatment in international standards...43 Residence issues...43 Types of special purpose entities...43 Production by special purpose entities...45 Other research on the subject and open issues...45 Measurement problems...47 SPEs and foreign direct investment...47 Proposals for operational treatment in the accounts...47 Recommended future work on special purpose entities...48 Annex 4.1 Treatment of special purpose entities in the Netherlands...50 The Dutch definition of SPEs...50 Compilation of data relating to special purpose entities in Dutch national accounts...51 Estimation of SPEs transactions in national accounts...56 Annex 4.2 Special purpose entities in Ireland...59 Annex 4.2 Special purpose entities in Ireland...60 Annex 4.3 The treatment of special purpose entities in Hungary...62 Characteristics and definition of special purpose entities...62 The treatment of special purpose entities in balance of payments statistics...63 A list of topical, high priority open issues...65 Special purpose entities and GDP in Hungary...65 Annex 4.4 Special purpose entities: classification table by Eurostat...68 Section II Some issues concerning trade in goods and services, and global manufacturing CHAPTER 5 Goods sent abroad for processing Introduction...76 Background...77 International standards...78 The 1993 SNA and 2008 SNA treatments...78 Measurement and analytical problems...79 Measurement problems...79 Analytical challenges...84 Operational treatment...86 Adjusting entries...86 Trade data...87 Sampling...88 Intra-annual surveys...88 Annual surveys...88 Prices...89 Concluding remarks...89 CHAPTER 6 Merchanting Introduction...90 Background...90 Global manufacturing...92 Global wholesaling and retailing services...92 Commodity trading...92 The statistical treatment recommended in international standards...92 International discussions on the 1993 SNA and BPM5 treatment of merchanting...93 Merchanting in the 2008 SNA and BPM Impact of the treatment in the 2008 SNA and BPM Proposals for operational treatment in the accounts: identification and recording of merchanting activities...95 Recommended future work on the issue: extension of the treatment to cover merchanting of services...96 Conclusion...97 Annex 6.1 Merchanting of goods: 1993 SNA and BPM5 treatment compared with the new standards in the 2008 SNA and BPM Holding gains or losses...99 Changes in inventories: transactions that fall into two recording periods...99 Annex 6.2 Country practice: the Irish approach Merchanting of goods and related services Merchanting of other services Annex 6.3 The recording of merchanting in the supply and use tables Annex 6.4 The case of Hong Kong, China Introduction x

11 ECE/CES/2011/2/Add.1 The impact of implementing the new international statistical standards Important issues in implementing the new international statistical standards CHAPTER 7 International transactions in intellectual property products Introduction The statistical treatment recommended in international standards Measurement problems Recommendations and operational treatment in the accounts International trade classification systems and intellectual property products Further research: economic ownership of intellectual property products within multinational enterprises Annex 7.1 Extract from the handbook on deriving capital measures of intellectual property products CHAPTER 8 Global manufacturing Introduction Background The message from the international standards, and their application Types of producer Some examples of global manufacturing Oil refining A more complex example of global manufacturing Measurement issues arising from implementation of the new standards Turnkey projects, and recording the activities of the project vendor International guidelines Some issues related to project deliveries Recommended future work on the issue of global manufacturing Conclusions Annex 8.1 The measurement of global production in the national accounts of Israel Joint production across borders by multinational enterprises Outsourcing across borders Annex 8.2 The industrial classification of factoryless production Introduction Classification guidance Justification CHAPTER 9 Measurement issues associated with administrative trade data and globalization Introduction Background The source of the phenomenon Examples of quasi-transit trade The size of quasi-transit trade in the European Union A similar phenomenon: trade undertaken by entities which are not resident in a country An example of trade conducted by non-resident entities in a country The main elements behind the phenomenon, and possible explanations Statistical treatment recommended in international standards The definition of quasi-transit trade Simple transit trade; direct transit trade; transport transit trade; goods in simple circulation Re-exports and re-imports Merchanting of goods Quasi-transit trade Measurement problems Proposals for operational treatment in the accounts Quasi-transit trade and EU and euro area aggregates A national accounts interpretation of the treatment of quasi-transit trade in the European Union The impact of the 2008 SNA and BPM6 on the proposed treatment Recommended future work on the issue Annex 9.1 The value of quasi-transit trade in selected EU countries Annex 9.2 Total trade in goods in the (national) balance of payments and rest of the world account of selected EU countries Annex 9.3 A valuation problem concerning transactions with the rest of the world: case study by the Hungarian Central Statistical Office Summary Discussion Conclusion Annex 9.4 The collection of data on merchandise trade in the European Union xi

12 ECE/CES/2011/2/Add.1 Section III Household-related issues CHAPTER 10 International labour movements Introduction Background Definitions and statistical recommendations: is terminology consistent? Measurement guidelines in international standards: what are the data sources? Experience with measurement problems Available data on international labour movements The impact of measurement problems Possible solutions to measurement problems Measuring the inflow of labour Measuring the outflow of labour The use of partner country data Distinguishing between compensation of employees and trade in services Analytical problems A proposed analytical framework Conclusion Annex 10.1 Measuring the inflow of labour in the Czech Republic Annex 10.2 Measuring international labour movements into and from Germany Cross-border compensation of employees The mode 4 problem Final remark Annex 10.3 Measuring the inflow of labour in Israel Annex 10.4 Measuring the outflow of labour in Moldova Annex 10.4 Measuring the outflow of labour in Moldova Annex 10.5 Measuring the outflow of labour in Ukraine CHAPTER 11 Remittances Introduction Background: development of guidelines BPM6: a standardized definition The statistical treatment recommended in international standards: conceptual issues Measurement problems Proposals for operational treatment in the accounts Ongoing activities and recommendations for future work Annex 11.1 Cross-border remittance statistics in Russia Introduction Statistics on cross-border transactions of individuals Economic definition of remittances Personal remittances Further developments Conclusion Annex 11.2 Migrant workers' earnings and remittances: results of a labour migration survey in Ukraine Annex 11.3 Estimates of remittances in the Czech Republic Introduction Estimate of foreigners' labour in the Czech Republic and remittances to their countries of origin Conclusion Annex 11.4 The Bulgarian experience in developing estimates for remittances General information Data sources and estimation procedures Future plans Annex 11.5 Estimating remittances in the Netherlands Introduction Estimating outward remittances CHAPTER 12 Second homes abroad Introduction Background Statistical treatment The treatment in the International Recommendations for Tourism Statistics Measurement issues The number and characteristics of vacation homes, and identifying those owned by non-residents Imputed rental xii

13 ECE/CES/2011/2/Add.1 Tourism as an internationally traded service and the particular case of importing and exporting own account vacation home services Moving the second homes agenda forward Annex 12.1 Vacation homes owned by non-residents in Europe Overall results The case of France The case of Spain The case of the United Kingdom Estimating imputed rent: the Spanish methodology Appendix A Time-share arrangements in BPM Appendix B Tourism statistics and the 2010 census of population Appendix C Visitors to Spain and overnight stays by type of accommodation Annex 12.2 Vacation homes in the balance of payments and national accounts of Norway The development of Norwegian balance of payments statistics Estimating the value of the stock of second homes abroad Estimating cross-border income flows Estimating consumption expenditures abroad Conclusions Annex 12.3 The use of administrative data to identify and compile statistics on foreign owners of second homes in Ireland Background The non-principal private residence tax Statistical estimations Conclusions Annex 12.4 Vacation homes and tourism in Mexico Introduction The approach Application of the approach in the case of Mexico Annex 12.5 Imputing the rental for owner-occupied vacation homes in the United States Seasonal or occasional use of vacation homes Filling gaps in the data on valuation of vacation homes CHAPTER 13 E-commerce Introduction Definitions Economic rationale of e-commerce Statistical treatment in international standards Measurement Classification, identification and coverage Additional data challenges Challenges for national accounts Concluding remarks Annex 13.1 Data relating to e- commerce in the Netherlands Annex 13.2 Measurement of e-commerce in the Netherlands Survey of automation and ICT The Statistics Netherlands definition of e-commerce Business statistics CHAPTER 14 The way ahead and a research agenda Suggestions for further work Continuation of initiatives already started Further conceptual work Measurement issues Data collection and presentation Exchanges of data and of best practice Addendum: Impact of the financial crisis Introduction Background: origins of the financial crisis Revisions to international statistical standards meeting needs revealed by the crisis Update of the System of National Accounts Subsectoring of financial corporations The balance sheet approach Aligning the work between international accounting standards and statistical standards xiii

14 ECE/CES/2011/2/Add.1 Main gaps in statistics and measurement issues identified by the financial crisis - the Issing Committee and G-20 reports The Issing Committee report The G-20 report Progress made since October The Principal Global Indicators website Annex A.1 Recent and planned developments in ECB/ESCB statistics relating to the impact of globalization and the financial crisis The development of euro area accounts by institutional sector Euro area accounts for financial stability analysis Enhancing euro area accounts ECB/ESCB statistics related to financial institutions and markets from the perspective of filling data gaps Annex A.2 The financial crisis and government finance statistics in the European Union References xiv

15 INTRODUCTION, OVERVIEW AND MAIN CONCLUSIONS CHAPTER 1 Introduction, overview and main conclusions Introduction What is globalization? 1.1 Businesses once confined their production activities to the national economy, apart from exporting part of their production and importing part of their intermediate inputs. People were employed locally. Investment was funded within the economy and financial transactions were also largely domestic. For the most part, the national accounts were a measure of a self-contained domestic economy, with a greater or lesser amount of foreign trade in goods and services. 1.2 In national accounts terms, globalization is the process of replacing national economic structures and transactions by international ones. Corporations organize their production and marketing at a global level, with vertical production processes spanning several countries. Capital such as intellectual property can be used simultaneously across the world in a multinational enterprise (MNE). Labour is mobile, and income returned to the home country can be an important part of its national (disposable) income. Household and business spending becomes more international as the worldwide web expands spending opportunities. The increasingly global nature of economic transactions and arrangements presents a challenge to the application of national accounts concepts and the use of data collection and compilation systems for measuring developments in the domestic economy. Features of globalization which directly affect national accounts measures include the following: a. MNEs organizing their business across national boundaries to maximize production efficiency and minimize their global tax burden. b. Far more foreign direct investment (FDI) relationships, and the need to identify and allocate direct investment flows. c. Transfer pricing between affiliated corporations (pricing of imports and exports between affiliated companies in the absence of a market transaction). d. The use of offshore vehicles (special purpose entities (SPEs)) to arrange finance for global activities and for other purposes. e. The increase in international trade in services, including the practice of sending goods abroad for processing with no change in ownership. f. An increase in international merchanting, where the merchant arranges the export of goods from country A to country B, without the goods ever crossing the borders of the country where the merchant is resident. g. The trade in and use of intellectual property products (IPPs) across the world. h. The limitations of administrative data in capturing economic transactions in the context of complex enterprise groups and globally organized production processes. i. International labour movement and the labour income arising from it, and remittances and other flows going to the country of origin of the nonresident workers. j. An increase of household travel and investment abroad (including in residential property). k. International trading via the internet by corporations and households. How does globalization affect national accounts? 1.3 Table 1.1 sets out a list of globalization factors and the main national accounts items (including financial accounts and the balance of payments and international investment position) which are most affected by them. 1.4 Measuring a national economy in these circumstances requires coordinated and seamless international activities to be split up into those parts which occur within the borders of a country 1

16 IMPACT OF GLOBALIZATION ON NATIONAL ACCOUNTS Table 1.1 Globalization factors and the most affected main national accounts items Global phenomenon National accounts items most affected Arrangements within MNEs, including transfer pricing Allocation of GVA/GDP across countries; international trade in goods and services; investment income and financial flows FDI relationships Investment income and financial flows; i.i.p. Special purpose entities (SPEs) Goods sent abroad for processing Merchanting IPPs Quasi-transit trade International labour movement and remittances International trade in services; investment income and financial flows; i.i.p. GVA/GDP; international trade in goods and services International trade in goods (and possibly services) GVA/GDP; capital formation; international trade in assets and related services GVA/GDP; international trade in goods GNI, gross national disposable income, international transfers Ownership of property abroad Internet trading International trade in services; investment income and financial flows; i.i.p. International trade in goods and services; household consumption and those parts which are to be allocated to the rest of the world. Furthermore, the relevant transactions between the domestic economy and the rest of the world need to be appropriately measured and recorded. Looking at the activity of multinational enterprises 1.5 Measuring the activities of MNEs is the most serious challenge faced by statisticians. Where firms organize activities on an international basis, national statistical compilers will see only parts of their global activities. For the whole picture the parts of the MNE need to be viewed in relation to each other in order to present a consistent view of how business inputs relate to outputs. 1.6 The treatment of local entities in countries as individual enterprises can hide the real relationships between units in MNEs. Within countries there is concern to identify the real dimensions of enterprises, for competition regulation, to check on intra-firm transactions and transfer pricing and to understand structural market effects. These considerations lie behind the statistical definition of enterprise groups as associations of enterprises bound together by legal and/or financial links which imply control. While most national business registers identify membership of foreign-controlled enterprise groups and the country from which the control is exercised, few capture economic data on activities outside the domestic economy. Problems of assembling data for use at national level 1.7 Much of the activity of MNEs is difficult for national statisticians to capture and/or for users of the data to interpret for policy purposes. Capturing some of the activity (e.g. the business of SPEs) may pose practical difficulties, and the results may severely distort some parts of national statistics (in the case of SPEs, gross flows in the balance of payments, and the international investment position; trade in services; flows of property income; and GDP in relation to GNI). Other activities may be difficult to record accurately in conformity to international standards, at least if international trade statistics are used as a primary source. Examples of these are the practice of sending unfinished goods abroad for processing, and merchanting. Particular difficulties concern the use of intellectual property products within an MNE. R&D is just one example of the shared use of intellectual capital across multinationals. An even more difficult problem is posed by the use of shared software across global firms. For example a major software corporation probably assembles much of its own system software which will be attributed to investment in software capital. But attempts to assign software investment activity or payments for its use to reporting units by country will be difficult particularly if some of the software is written in other countries. In effect the MNE behaves as if it has a stock of intellectual capital - in software and other aspects of management 2

17 INTRODUCTION, OVERVIEW AND MAIN CONCLUSIONS systems - which is freely shared across its enterprise activities. 1.8 The implications for measurement of capital services of this effect are significant, and pose severe problems for statisticians. This extends beyond the software example quoted earlier. The need to measure software capital formation by an MNE accurately at national level is a significant challenge for national accounts. The purpose of this guide 1.9 For a number of years national accountants were conscious of the impact of aspects of globalization such as those just described on the compilation and on the quality of statistical measures. The Joint UNECE/Eurostat/OECD meeting on national accounts, held in Geneva in 2006, devoted a full day seminar to discuss the topic. In view of the high level of interest, it was proposed to consider follow-up work to explore how national accounts are affected by globalization and propose operational guidelines to address these effects Further a Rapporteur Report on Globalisation Statistics, prepared by Statistics Canada and Office for National Statistics, United Kingdom was discussed by the CES in June The CES decided to establish a body to review the main distortions in the compilation of national accounts and related source statistics, as caused by the growing globalization of economies. As a result the Group of Experts on the Impact of Globalization on National Accounts (GGNA) was established. This guide is the outcome of the work of the GGNA The purpose of this guide is to help users and producers of national accounts statistics to understand how globalization affects the measures of national accounts. It is intended for the use of both economic statisticians in the broadest sense (those concerned with national accounts and the balance of payments, but also with labour market and price statistics) and those who use the data for policy analysis and research. The guide brings together in one place a description of the effect of globalization on national measures, and highlights those areas that will increasingly need attention and resources to maintain the quality of national accounts. It draws extensively on national experience, mostly in the form of case studies annexed to various chapters Much of the work underlying this guide was undertaken to facilitate the adoption of the revised international standards for measuring economies: the System of National Accounts 2008 (2008 SNA), the IMF s Balance of Payments and International Investment Position Manual, sixth edition (BPM6) and the proposed European System of National Accounts 2010 (2010 ESA). The new international standards are consistent with each other. This is a great strength, and this report describes the effects of globalization as part of this consistent framework In terms of globalization, the main changes in the international standards are: a. The application of the principle of change in ownership of goods has been made universal, resulting in changes to the recording of merchanting and of goods sent abroad for processing and then returned to the owner. b. In recognition of the changing structures of production and finance in many economies, guidance is now provided about when SPEs, which can be created by corporations or governments, should be recognized as institutional units, how they should be classified and how their operations should be treated. c. The treatment of remittances from the movement of persons abroad has been expanded, with coverage of the flows being closer to the economic reality. d. Research and development (R&D), like other types of intellectual property, is recognized as a capital asset, and the income generated by R&D is recorded as production of services. Overview 1.14 The guide covers the main factors of globalization listed in table 1.1. Each chapter describes a particular aspect of globalization, and explains how it can affect estimates in national accounts. Guidance is given on how national estimates can be produced, or how statistical collection systems might be improved to maintain the quality of the accounts. Although common threads run through the whole guide, the chapters are arranged in three thematic sections. A summary by section and chapter is given below. I Multinational enterprises Chapter 2: Multinational enterprises and the allocation of output and value added to national economies 1.15 This chapter describes in general terms the measurement problems associated with the global nature of the production process as exercised by MNEs. MNEs can lower their global tax burden by a number of structural arrangements affiliates overseas to act as income recipients, holders of 3

18 IMPACT OF GLOBALIZATION ON NATIONAL ACCOUNTS intellectual property rights, and units designed to raise loans for use by other units in the MNE. Transfer pricing can cause GDP to be misallocated between countries if the transfer prices are not true reflections of the market price The chapter notes the considerable significance of MNEs in the United States. A case study of the position for Ireland gives some startling figures which show how the economy has been affected by the increase in MNE activity. In order to tackle the many issues introduced by the growing importance of MNEs in the Irish economy, the Central Statistics Office in Ireland has set up a consistency unit with responsibility for analysing all aspects of data received from MNEs. While it is evident that such units cannot prevent distortions to certain key statistics (the CSO notes that GDP in Ireland exceeds GNI by some 17 percent due in part to the sort of effects mentioned here), they can at least help to identify them and promote consistency across the accounts. Other annexes to Chapter 2 note similar initiatives in the Netherlands, Finland and Sweden. Chapter 3: Multinational enterprises, foreign direct investment and related income flows 1.17 Chapter 3 describes why high quality data on FDI are needed for compiling international and national economic accounts. It also sets out how a coordinated international survey can play an important role in ensuring that the associated relationships can be measured on a consistent basis across different economies. The survey is the Coordinated Direct Investment Survey (the CDIS) organized by the IMF a major statistical undertaking with the express purpose of improving the quality and availability of data on FDI used in international and national accounts. Chapter 3 also notes work under way in the European Union to make recording of MNEs transactions more consistent across Member States. An annex notes work in Russia on the recording of FDI-related transactions. Chapter 4: Special purpose entities 1.18 This chapter describes the main characteristics of SPEs. They are subsidiaries of parents in a different country (and therefore constitute separate institutional units), established to hold assets, incur liabilities, and receive and pay out income on behalf of the parent, often for tax reasons. The new standards make clear that they are to be classified as resident in the country in which they are incorporated or registered even in the absence of a physical presence there. How SPEs are treated in the national accounts is set out, in the light of the 2008 SNA and BPM6, with examples in the annexes from the Netherlands, Ireland and Hungary, all countries with numerous entities of this kind. II Some issues concerning trade in goods and services, and global manufacturing Chapter 5: Goods sent abroad for processing 1.19 Chapter 5 describes the situation where production chains across several countries involve the export and import of goods for processing without a change in ownership of the goods. The 2008 SNA and BPM6 no longer recommend imputing a change in ownership in these cases. The consequence is that, under the new standards, only a service fee for the processing work is to be recorded in the accounts, and not the import and export of goods on a gross basis. This recording complies with the principle of recording trade flows only where ownership of the goods changes, but will be at odds with the gross recording of goods shown in the International Merchandise Trade Statistics (IMTS). The chapter sets out the impact of the update of the standards from the 1993 SNA to the 2008 SNA on input-output (IO) models and other structural indicators. It recommends a series of changes in data collection and compilation methods to handle the changes, and thereby seeks to provide operational guidance for the implementation of the new treatment of goods for processing. The chapter also explains how the revised treatment affects the analytical use of IO tables. Chapter 6: Merchanting 1.20 The IMF s Balance of Payments Manual, fifth edition (BPM5) defines merchanting as the purchase of a good by a resident of the compiling economy from a non-resident and the subsequent resale of the good to another non-resident; during this process the good does not enter or leave the compiling economy. The concept is the same in the new standards, but the 2008 SNA and BPM6 introduce an important change in treatment. In accordance with the principle that a change of ownership (as where a merchant buys goods and later sells them) should be recorded as a transaction, merchanting will be recorded in the country of residence of the merchant as a negative export of goods when he acquires them, and as a positive export when they are sold on. The merchanting margin is the difference between the two entries. The treatment may be difficult to apply in practice, given that the goods concerned never cross the borders of the country of residence 4