05 July 2019

ECA

FINANCIAL SERVICES SECTOR IN NIGERIA:

MEASURING ITS VALUE CHAINS AND

HARNESSING ITS FULL POTENTIALLagos, 04 - 05 July 2019

Measuring value chains – Use of input-output tables

Edem Kossi KLUDZA

Associate Statistician, African Center for Statistics

Introduction

•Two methodological approaches to the study the concept:

- Qualitative approach: based on firm-level interviews as the basis for case studies,

- Quantitative approach: Using multi-region input output tables (MRIOs)

Plan

1. Quantitative Approach

o Motivation

o Input – Output Table

o How to measure the GVC/RVC?

o Application with financial sector and

results

o Data need

o Quality of data

2. Implications for policy making

3. Questionnaire on the baseline

assessment of data availability

4. Conclusion

Trade in Value Added

1. QUANTITATIVE

APPROACH

INPUT-OUTPUT TABLE

Table 1: Simple MRIO example with 2 countries and 2 sectors

Intermediate Use Final Demand Gross Output

Country A Country B Country A Country B

Sector 1A Sector 2A Sector 1B Sector 2B HouseholdsA HouseholdsB

Country A

Sector 1AIntermediate use of

domestic output

Intermediate use by 2A of domestic output

from 1A

Intermediate use by 1B of exports from 1A

Intermediate use by 2B of exports from 1A

Final use of domestic output from 1A

Final use by B of exports from 1A

Production of 1A

Sector 2AIntermediate use by 1A

of domestic output from 2A

Intermediate use of domestic output

Intermediate use by 1B of exports from 2A

Intermediate use by 2B of exports from 2A

Final use of domestic output from 2A

Final use by B of exports from 2A

Production of 2A

Country B

Sector 1BIntermediate use by 1A

of exports from 1BIntermediate use by 2A

of exports from 1BIntermediate use of

domestic output

Intermediate use of 2B of domestic output

from 1B

Final use by A of exports from 1B

Final use of domestic output from 1B

Production of 1B

Sector 2BIntermediate use by 1A

of exports from 2BIntermediate use by 2A

of exports from 2B

Intermediate use of 1B of domestic output

from 2B

Intermediate use of domestic output

Final use by A of exports from 2B

Final use of domestic output from 2B

Production of 2B

Total Intermediate use by 1A

Total Intermediate use by 2A

Total Intermediate use by 1B

Total Intermediate use by 2B

Final use by A Final use by B

INPUT-OUTPUT TABLE

Table 2: Simple MRIO example with values

Focus on Intermediate use

User/Importer

Ghana Nigeria

Supplier/Exporter Finance Insurance Transport Finance Insurance Transport

Ghana

Finance 5 12 0 2 8 1

Insurance 7 31 9 4 25 5

Transport 2 10 19 3 13 7

Nigeria

Finance 4 9 2 10 14 3

Insurance 5 33 8 7 45 15

Transport 9 17 28 9 45 51

Foreign value chainsDomestic value chains

****Mock data

INPUT-OUTPUT TABLE

Two parts: Intermediate Use & Finale Use

Many countries that interact

Production, Exportations, Importations, Value added, GVC participation Index, …

The Intermediate Use is square matrix

Same country-sectors on row and column

Intermediate Use of domestic output on diagonal parts

Off diagonal elements represent exports of intermediates to other sectors/countries

Final consumption from output of each sector

INPUT-OUTPUT TABLE vs SUPPLY USE TABLE

Difference between Supply-Use-Tables (SUTs) and Input-Output Tables

In SUT, there are 2 tables: Supply Table (Production and Importation) and

Use Table (Intermediate and Final Consumptions, and Exportation)

In SUT, exportations and importations are aggregated

In MRIO, exportations and importations disaggregated by using sectors

For intermediate and final uses

The Intermediate Use in SUT is not square matrix

Products on rows and industries on columns

The SUTs are very useful to compile Input-Output table, but not enough.

Additional information are necessary.

HOW TO MEASURE GVC?

Example: Consider 3 countries (G=3) and 4 sectors (N=4) in each country, (G*N = 12)

AX Y X

HOW TO MEASURE GVC?

Starting from (1) AX + Y = X

X is the gross output matrix,

A is the matrix of input-output coefficients,

Y is the matrix of goods used for final demand

𝑌 = 𝑋 − 𝐴𝑋 = 𝑋 𝐼 − 𝐴

2 𝑋 = 𝐼 − 𝐴 −1𝑌 ≡ 𝐵𝑌

The matrix B is the Leontief inverse. From basic matrix algebra, we know that:

3 𝐼 − 𝐴 −1 = 𝐼 + 𝐴 + 𝐴2 + 𝐴3 +⋯

4 𝑎𝑖𝑗 =𝐴𝑋 𝑖𝑗

𝑋𝑖

Calculating the elements of A in this way makes it possible to recover the whole matrix, and then in turn to calculate the Leontief inverse B.

HOW TO MEASURE GVC?

Calculation of the value added matrix

We define 𝑉 as the matrix value added coefficients.

5 𝑉 = 𝐼 − 𝑑𝑖𝑎𝑔 σ𝑖𝐺𝑁 𝑎𝑖,1⋯σ𝑖

𝐺𝑁 𝑎𝑖,12

6 𝑇𝑣 = 𝑉𝐵𝐸 =ෞ𝑣1 0 ⋯0 ෞ𝑣2 0⋮ 0 ⋱

𝑏11 𝑏12 ⋯𝑏21 𝑏22 ⋯⋮ ⋮ ⋱

𝑒1 0 ⋯0 𝑒2 0⋮ 0 ⋱

B= Leontief inverse, E = matrix with gross exports on the diagonal and zeros elsewhere

The 𝑇𝑣 matrix contains the value added content of production in each country shipped to

each other country

Each diagonal element represents domestic value added in exports (DVA), while the sum of

the remaining elements in each column represents foreign value added in exports (FVA)

HOW TO MEASURE GVC?

Table 2: Value added content of trade matrix

HOW TO MEASURE GVC?

Labor content of export shares (Cali et al. (2016) approach):

𝑇𝑙 = 𝐿𝐵𝐸 (Matrix of labour content of export shares)

We define a matrix L where off-diagonal elements are zero, and the diagonal elements are the

compensation of employees’ shares/jobs inputs.

However, that data requirements for this stage are more problematic in most countries.

Photo: World Bank/Rob Beechey, Dar es Salaam Port, Tanzania.

QUANTITATIVE APPROACH : Application with financial

sector and results

EXERCICE : Use the data provided “Exo_tv_3c by 4s”

For Nigerian financial services in 2015, calculate:

a. DVA.

b. FVA.

c. DVX.

d. Index of GVC participation (FVA+DVX)/(Gross

Exports).

Source of the data : UNCTAD-Eora GVC database.

QUANTITATIVE APPROACH : Example

• Fundamentally, this approach decomposes the gross value of exports into two components:

Domestic origin Value Added (DVA), and Foreign origin Value Added (FVA).

Source : OECD.Stat

Figure 1. Breakdown of South Africa's gross exports of

Financial and insurance services, 2005-2015.

Example of Services :

• There is a general upwards trend in export value over

time, with the exception of 2008-2009, due to the

Global Financial Crisis.

• The proportion of foreign value added in gross

exports, which is a proxy for the degree of GVC

integration, recovered after the crisis.

• Domestic value added very high in the South Africa's

gross exports of financial and insurance services,

2005-2015.0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Domestic VA Foreign VA

US Dollar, Millions

QUANTITATIVE APPROACH : Data requirement

Financial services - EBOPS 2010

1. Commissions and fees associated with financial transactions

2. Financial advisory services

3. Custody services for financial assets or bullion

4. Financial asset management services

5. Merger and acquisition services

6. Corporate finance and venture capital services

7. Credit card and other credit granting services

8. Foreign exchange

9. Regulation and administration of financial markets

10. Credit rating

11. Service charges on purchases of International Monetary Fund (IMF) resources

12. Charges associated with undrawn balances under standby or extended arrangements with IMF

13. FISIM

QUANTITATIVE APPROACH :

Data requirement

Insurance and pension Services - EBOPS 2010

1. Direct insurance

o Life Insurance

o Freight insurance

o Other direct insurance

2. Reinsurance

3. Auxiliary insurance

4. Pension and standardized guarantee services

o Pension services

o Standardized guarantee services

QUANTITATIVE APPROACH : Data qualityData quality dimensions:

1. Relevance: degree to which they meet the user needs.

2. Credibility: confidence that users place in those statistics.

3. Accuracy: the degree of closeness estimates to the true values.

4. Timeliness: length of time between the event or phenomenon they describe and their

availability.

5. Punctuality: the time lag between the release date of data and the target date on which

they were scheduled for release as announced in an official release calendar.

6. Methodological soundness: the application of the available international standards,

guidelines and good practices in the production of data.

7. Coherence: Statistics are consistent internally, over time and comparable between regions

and countries; it is possible to combine and make joint use of related data from different

sources.

8. Accessibility: the ease with which users can obtain the data.

QUANTITATIVE APPROACH : Main

Indicators for policy making

The Domestic Value Added (DVA) in exports: Value added in

exports produced by domestic industries

The Foreign Value Added (FVA) in exports: Value added in the

national exports produced by foreign industries Known as “VS” in the technical literature.

Known of backward participation in the policy literature

The Indirect Domestic Value added (DVX) in exports: Value Added

that is embodied in the exports of other countries, upstream

contributions of DVA of other industries Known as “VS1” in the technical literature.

Known as forward linkages in the policy literature.

GVC Participation Index = (FVA+DVX)/Gross exports: shows how

the sector involves in RVC/GVC through both backward and

forward linkages.

Plan

1. Quantitative Approach

o Motivation

o Input – Output Table

o How to measure the GVC/RVC?

o Application with financial sector and

results

o Data need

o Quality of data

2. Implications for policy making

3. Questionnaire on the baseline

assessment of data availability

4. Conclusion

2. Some Implications for policy making

Quantify

Domestic value added content of imports

Domestic and foreign value added content of gross exports in the financial sector

Services content of gross exports by exporting industry, by type of service and value

added origin

Participation in global value chains (GVCs) via intermediate imports embodied in

exports (backward linkages) and domestic value added in partners’ exports and final

demand (forward linkages)

Understand

the 'Global orientation' of financial industry, i.e. share of financial valued added that

meets foreign final demand

Inter-regional and intra-regional relationships

Country and industry origins of value added in final demand

Bilateral trade relationships based on flows of value added embodied in domestic final

demand

Questionnaire on the baseline assessment of data

availabilityDATA AVAILABILTYA. Total productsB. Intermediate use of national products by national industriesC. Intermediate use of

1. foreign products by national industries2. national products by foreign industries

D. Final use of1. foreign products by national industries2. national products by foreign industries

E. Is the data available in E and F disaggregated by country?

DATA QUALITY CONTROLF. Data sources on financial dataG. Primary institution(s) responsible of collecting the dataH. When was the most recent data produced?I. How frequently is the data produced?J. What methodology is used to compile the data?K. Is the data publicly available?L. Is the same methodology used year to year to compile the data?M. Dissemination format usedN. Main reasons why data is not available

Photo: UNICEF/Kate Holt

Conclusion

Steps for the quantitative approach:

o Building the Input-Output Table,

o Using algebraic models or application in software,

o Interpret the results

Very important aspect: data quality

Bibliography

• Pasadilla, Gloria O. & Wirjo, Andre, 2016. "Services-Manufacturing Linkage and the Role of

Policy," Philippine Journal of Development PJD 2014-2015 Vol. 41-42 , Philippine Institute for

Development Studies.

• Shepherd, B. GVCs Methodology Paper, Jan 2019,

• Aqib Aslam, Natalija Novta, and Fabiano Rodrigues-Bastos, 2017. “Calculating Trade in Value Added,

IMF working paper, WP/17/178

• https://www.oecd.org/sti/ind/measuring-trade-in-value-added.htm

• https://globalvaluechains.org/concept-tools

Photo: UNICEF/Pirozzi

T H A N K S

N A G O D E

A D U P E

DAALỤ

M E R C I