Research

Comments on Chapter 8 “The general government sector” of the World Bank ICP Handbook

1. The chapter deals with a number of theoretical, methodological and practical issues of comparison of non-market services rendered by institutions of general government sector to households and society as a whole. The conceptual problem of comparison of these services is associated with the fact that since they are provided free of charge or at prices which are not economically significant the standard method of comparison based on PPPs reflecting ratios of market prices can not be applied for their comparison. For this reason the price input method is used for comparison of non - market services; the components of inputs are compensation of employees, intermediate consumption ,consumption of fixed capital and net other taxes on production. The shortcoming of this method is that it does not reflect the differences in quality and productivity between the countries. This problem was numerously discussed during several past decades at the meetings of experts on international comparison of GDP and at the pages of specialized editions, however, no noticeable progress has been achieved. Nothing fundamentally new in this respect is suggested in this chapter. In respect of some types of non-market services a possibility of using extrapolation method with the help of selected indicators in physical units is discussed.
   
   This method was also discussed many times in the past by the experts in this field and the prevailing view was that this method is not perfect from theoretical point of view, that the sphere for its use is a rather narrow and achieving international comparability of indicators in physical units is problematic.
   
   
2. Many sections of the chapter contain theoretical discussion of the above problem but do not contain specific recommendations (which can be expected from the manual) intended to secure unified solution of the methodological issues which is essential for achieving international comparability of indicators. This refers, in particular, to discussion of the methods of introduction of adjustments for differences in productivity and quality of non-market services between the countries. Some approaches to the solution of this problem, their advantages and disadvantages, are considered at some length, however, since the proposals are intended largely for discussion it is not clear whether in practice the countries or regions are expected to introduce any adjustments to take into account the above differences. Many proposals in this context are rather vague and not specific, for example, in par.64 it is suggested to introduce productivity adjustment to the value of collective services using overall measure of productivity for economy as a whole, however the methods of computations of such indicators are not clarified. Therefore there is apprehension that solution of this problem can be different in different countries and regions. It appears that the proposals to solve this conceptually complex problem have not been discussed in detail in the context of the current round of ICP; in any case this topic was not discussed at the meetings of regional coordinators at which the earlier versions of this document were introduced.
   
   
3. The chapter contains many inconsistencies with the SNA 93. For example, in par.27 it is stated erroneously that services of NPIs serving enterprises should be regarded as collective services rendered by general government whereas according to the SNA 93 these institutions belong to the sector of non-financial (or financial) corporations and their output is allocated to intermediate consumption of these sectors. In par.7 it is stated that both current and capital outlays are undertaken by the general government institutions in order to secure the purposes of individual and collective consumption.
   
   This statement seems to require at least clarification since according to the SNA 93 only current outlays are associated with final consumption. The category “Net taxes on production” is used in the chapter to describe the components of cost of production of non-market services whereas in the SNA 93 the category “Net other taxes on production” is used; the latter in contrast with the “net taxes on production” does not include taxes on products which do not have anything to do with the cost of production of collective services.
   
   
4. The chapter contains classification of expenditures of general government sector on production of various non-market services, however, there are no explanations of the links between the production of non- market services and final consumption expenditure which is a component of the GDP to be compared. The linking of these categories should take into account that output of general government sector may include not only non-market services but also sales of goods and services by market establishments of general government institutions and own account construction; besides it is necessary to take into account purchases of goods by general government intended for direct distribution to households; these purchases are not part of the output of general government sector but they are included in final consumption expenditure of this sector.

Youri Ivanov
Doctor of Economics

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