Tuesday, 11 July 2017

Measuring the Built Environment Sector

Public Policy and a BES Satellite Account 

The building and construction industry links to other industries in a variety of ways, and an earlier post suggested measuring the extent of the built environment sector in a satellite account is the best representation of the dense network of firms involved in the creation of the built environment. The data required to measure the contribution to GDP and share of the economy of the built environment sector is available, but scattered across separate industry data collections. This understates the macroeconomic importance of the built environment sector and the role it plays in improving the performance of cities.

Because building and construction is so diverse it is hard to get an overview of the industry. With a vast variety of projects in all possible locations made out of materials ranging from primitive to rustic to ultra-sophisticated the industry, particularly on a global scale, is so broad that some system of classification and categorization is necessary. With the development of the Standard Industrial Classification the industry has come to be defined by the data collected by national statistical agencies, but the role of the industry is much wider and deeper than the statistics show.

The typical view of the industry called ‘construction’, is an industry made up of three sectors, residential building, non-residential building and engineering construction. Because statistical data on activity and work done is presented in this form, most of the discussion and reporting of the industry also follows this pattern. This is not a bad thing, but is not truly reflective of an industry as diverse and wide-ranging as building and construction. Industry output statistics represent the industry as a set of functional projects, like detached housing or retail and railways or hospitals, despite the fact that many buildings are mixed use. Also, there are many other ways of classifying and categorizing building and construction projects.

The idea that the construction industry as measured in the national accounts or using the standard industrial classification of industries, is only one part of the creation and maintenance of the built environment and the range of industries that encompasses is not new. David Turin in the 1960s and the Bartlett International Summer School series in the 1980s advocated looking at the sector that produces the built environment in broad and integrative terms. The industry’s extensive linkages with other sectors, measured through the industry’s high multiplier effects gives the industry an important macroeconomic role. Through those linkages the impact of construction activities on other parts of the economy is much greater than their direct contribution.

The Built Environment Sector

The term that arguably best encompasses the extraordinarily large number and range of participants in the creation and maintenance of the built environment, from suppliers to end users, is the built environment sector (BES). Research suggests adding the contributions to economic activity and output from other industries like manufacturing, materials and technical services is about the same as the direct contribution from construction. For example, in most OECD countries construction is between 5 and ten per cent of GDP, so the BES would be between ten and twenty per cent across those countries.

Measuring the BES would help public policy and macroeconomic management for two reasons. Firstly, the macroeconomic contribution of the BES to aggregate demand and employment is large, and possibly the largest in many countries. It is also one of the most volatile components of the economy, with annual rates of growth or contraction greater, and often much greater, than changes in GDP, making the BES a key driver of the business cycle. A satellite account collects those characteristics and thus provides data on trends in activity and output that have a significant effect on the national economy. Perhaps more importantly, changes in the composition of output of the BES would be a leading indicator of future demand as current new work completes, reflecting changes in the early stage project preparation activities required for future work. Through industry linkages and lags, such slowdowns or pickups in project preparation can be strongly procyclical, exacerbating the peaks and troughs of the business cycle. Because of the number of small firms found across the BES, the employment consequences of changes in activity levels are also significant.

Secondly, measuring the BES provides a way to measure the effectiveness of discretionary fiscal policy, when that involves changes in expenditures on building and construction. Discretionary fiscal policy, as a response to the business cycle, is an increase in public spending to counteract a downturn in the business cycle or a recession, typically targeting public investment in both social and economic infrastructure. Tracking the impact of such expenditures through the economy is difficult but would show up in a BES satellite account. This would also allow a finer-grained analysis of the employment effects of different types of projects and programs.

In this context, it is worth noting city policies involve significant infrastructure spending, and is often their main focus. However, it is the associated induced development around the new infrastructure that drives longer-term growth. A satellite account would capture all that activity over time, thus giving a measure of the effectiveness of city policies in promoting urban growth and development. It may be that regional or city-scale satellite accounts would be most useful for urban planning and management.

A satellite account for the building and construction industry would also reflect changes in the range of activities and types of firms that contribute to the built environment. In the broad view of the industry, and in a satellite account, more of these activities would be included, and the role and development of the sector better understood.

Groak, S. 1992. The Idea of Building. London: E. & F.N. Spon.
Turin, D. A 1969. The Construction Industry: Its Economic Significance and Its Role in Development, UNIDO, New York.