Wednesday, 27 January 2016

A Satellite Account for the Built Environment Sector

While official statistics on the output of the construction industry capture on-site activities of contractors and subcontractors, the role of the industry linking suppliers of materials, machinery, products, services and other inputs is also important. These two views have been called broad and narrow, with the narrow industry defined as on-site work and the broad industry as the supply chain of materials, products and assemblies, and professional services. There are, however, surprisingly few studies that have quantified the relationship between the narrow and broad definitions of construction.

Based on the three studies that have quantified the relationship between the narrow and broad definitions of construction it is reasonable to conclude the wider construction industry is around twice the size of the narrow industry. Ive and Gruneberg in The Economics of the Modern Construction Sector were the first to argue a narrow definition of the construction industry includes only those firms undertaking on-site activity whereas a broad definition includes many firms from other industries involved in production of the built environment. They then went through the SIC classification to identify the other industries involved at the four digit SIC group level and found 11.2 percent of all employees are engaged in production of the built environment, compared to 4.7 percent in the construction category alone.

The 2003 UK report by David Pearce on The Social and Economic Value of Construction used their methodology and found, in the five industry groups included in the broad definition, contractors accounted for around half the total of employment, the number of firms, their turnover and value added. An Australian study in 1999, Mapping the Building and Construction Product System in Australia by the Australian Expert Group on Industry Studies, found the narrow industry is 51 percent of income and 48 percent of employment in the broad industry.

While it would be preferable to have regular, detailed data on the size and scope of the wider construction industry/sector/system, at present that is not available. Therefore a general rule of thumb is an alternative approach. Based on the studies above it would be reasonable to conclude the wider construction industry is around twice the size of the narrow industry. Note this is not an accurate measure of the wider industry, but a rough and ready estimate of its approximate scope and size. While this rule needs to be tested, it is likely to apply across many or most countries most of the time.

This rule of thumb is a useful yardstick for four reasons:
1. It does not have to be exact to convey the importance of the wider construction industry to the economy;
2. It is based on regular and readily available data on (the narrow definition of) construction industry output, thus avoiding the infrequent nature of the input-output data used to calculate multipliers and study industry linkages;
3.  It naturally varies over time with fluctuations in both the business cycle and the building cycle, emphasising the macroeconomic importance of the industry; and
4. It is not sensitive to local conditions, in that the share of the different industries included in the total will vary across countries, and the output shares of residential and non-residential building and engineering construction will vary over time, but the cumulative contribution of these industries to economic activity can still be estimated.

There is a way to turn this rough estimate into a more credible measure, and that would be through the preparation of what is known as a satellite account, which reclassifies expenditures usually presented in different industry groupings into a single sector. These are used to provide more detail on sectors that are not adequately represented in the national accounts. The System of National Accounts published by the UN (2008), which provides guidelines for national statistical agencies, in Chapter 29 explains the reasons for preparation of satellite accounts gives examples of their presentation. The process is similar to that used in Pearce (2003) where SIC data across industries is aggregated, but is done at a higher level of detail using the supply and use data from the national accounts.

At this time the most widely found satellite account is for tourism (nine countries, all irregular, often jointly funded by industry and users), but they have been produced or proposed for a range of other industries such as health, the environment, R&D, information technology, infrastructure, non-profit institutions, human capital and households. 

While these are not produced annually, and are sometimes not feasible at high levels of disaggregation, these accounts allow re-use of existing data and thus maximise its usefulness. With the funding restrictions facing statistical agencies it would be important to focus on the most important contributors to the construction industry. A version of satellite accounts known as key sector accounts selects a group of products or industries that are economically important and aggregates their data, and that could be tried as another approach.

The construction industry can be depicted in a variety of ways, but emphasising how the built environment is created and managed  through the planning, project initiation, design, fabrication and construction, operation and management stages is the most representative of the built environment sector as a whole. The complexity and number of activities involved in the built environment has, to date, prevented a coherent view of the industry developing. In turn, this has made efforts to improve the performance of the industry largely ineffectual.

The term that arguably best encompasses the broad industry, and includes the extraordinarily large number and diverse range of participants involved in the creation and maintenance of the built environment, from suppliers to end users, is the built environment sector. This would also be the obvious choice of a name for a set of satellite accounts.

AEGIS, 1999. Mapping the Building and Construction Product System in Australia. Australian Expert Group on Industry Studies, Department of Industry, Science and Resources, Canberra.

Ive, G.J. and Gruneberg, S.L. 2000. The Economics of the Modern Construction Sector, London: Macmillan.

Pearce, D. 2003. The Social and Economic Value of Construction: The Construction Industry’s Contribution to Sustainable Development, nCrisp, London.

Sunday, 24 January 2016

Economics Rules by Dani Rodrik


This is a great book, and given the post financial crisis criticisms of mainstream economics it is relevant and timely. It is also accessible and easy to read for anyone interested in how economists actually think and work, rather than the stereotypes of unrealistic assumptions and ideological biases typically found. Most of the topics would be understood by interested non-economists, and be particularly useful for people who are unclear about how economics progresses by developing new models that generally complement, not replace, older ones.

The first part of the book explains economic thinking, and the role of the models that economists use. The basic idea is that there are many valid models, and the challenge is to know which is applicable to a specific problem or issue. This is the main point of the book and is a message worth repeating: different models have different applications, there are no wrong models, only badly and inappropriately applied models. Rodrik thus regards contemporary economics as a collection of models, not as single grand theory (or a quest for one). The economist’s craft lies in knowing which model is appropriate to the task at hand.

Another important point is that all the big, ultimate answer type models have proved to be disappointing when confronted with economic conditions they do not incorporate. Thus Keynesian models didn’t work in the 1970s with stagflation, and new classical models led to the 2007 financial crises and had little to contribute to policy responses. It is not necessary to discard these models, but there are others that are more appropriate for the circumstances. There are a number of good examples of how this works in practice.

Rodrik’s writing style explains things in a way that is both illuminating and sensible. There were moments when I found myself seeing economics from a new perspective, something that does not happen often, and there were many new ideas I hadn’t come across before. Also, there was nothing I disagreed with, despite the book’s wide scope and the range of topics covered. I recommend it to anyone interested in economic policy, or economic theory.

A video of him presenting the ideas in Economics Rules is at