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.
