To facilitate its drive to upgrade the national economy, China needs to renew its national economy accounting system according to the new international standard. A road map and timetable has to be worked out, the R&D accounting needs to be upgraded and tax incentives be improved, so as to change the economy growth model into an innovation-driven one.
Zhang Monan
The United States, European Union and Japan have mapped out their timetables for adopting the new international standard, or SNA-2008 (System of National Accounts 2008), announced by the United Nations, World Bank, International Monetary Fund, Organization for Economic Cooperation and Development and European Union in 2009.
On July 31, the US Department of Commerce’s Bureau of Economic Analysis announced a new statistical method for GDP measurement, which will include costs of R&D, entertainment and cultural expenditure and pensions, marking the first attempt in the world to adopt SNA-2008. The move heralds the trend of global economic development.
Statistics of 2010 indicates that knowledge-intensive industries contributed more than $5 billion to the US economy, accounting for 34.8% of the country’s GDP. The new standard the US has adopted for GDP measurement reflected changes in the driving forces for the country’s economic growth. The US Bureau of Economic Analysis adjusts the national accounts every five years. The current adjustment is the 14th. The significance of the current adjustment is that it can make the intangible assets, which have been unrecognizable with the traditional method of GDP accounting, become tangible and capitalized. This embodies the country’s new economic model featuring innovation economy and its new economic structure featuring technology-intensive and service industries, indicating that the US has opened up new sources for its economic growth.
The latest change in the US GDP measurement was part of the new trend in the world in national economic accounting. The 2008 version of the System of National Accounts promulgated by the aforementioned five international organizations made a major change to the classification of productive assets and extended the definition of asset. The largest change is the capitalization of R&D, the direct results of which are extended scope of fixed assets, smaller range of non-productive assets, enlarged size of assets in knowledge-intensive industries and higher percentage of innovation-active areas’ assets. For example, in 2013, the US chose life science, information technology, energy sources and new materials as key areas for R&D investment. Assets in these areas will account for larger percentages in all fields.
As changes have happened in the global economy, the currently method for GDP measurement can no long accurately represent the growth of national wealth, the differences in the quality of economic development, or the improvement of social welfare. Nor can it reflect the consumption of resources, losses in environment, or such intangible assets as the investment in human resources and advancement of technologies. That’s why the new System of National Accounts was initiated.
The renewal of the accounting system is not only a change in the statistical methods and standards; it also represents a change in the world’s outlook on economic development and understanding of wealth. The current method of national economic accounting calculates tangible wealth only. Intangible wealth, however, has proven to be more and more important than before in a country’s economic development. The size and composition of intangible wealth matters significantly to a nation’s productive force; more importantly it affects the country’s future output and sustainability. In the US, for example, its natural resource makes up only a tiny part – usually 1-3% — of its total amount of wealth, but it generates a much larger value once it joins forces with machinery equipment, human capital, technology and intellectual property.
By renewing its method for GDP statistical accounting, the US is aligning its economy to the future orientation of the global economic growth and will most probably retain its dominant position in the post-crisis global competition. What will China do confronted with the new situation? China’s national accounts system is obviously behind the international standard in renewal. China needs to give up the GDP-leads-all mindset and set up a new framework for national accounts.
First, a roadmap and timetable need to be drafted for reforming the system of national accounts. The new international SNA2008 contains 44 major revisions, covering almost all aspects of the system. China must move quickly to catch up with these changes. When calculating the total amount of fixed capital in GDP, China’s current accounting method considers factors in seven subdivisions, namely housing, non-housing buildings, machines and equipment, cost of soil amelioration, mineral resource exploration, computer software, and others. But it does not count in R&D, data bank, entertainment, literature or art creation and transfer of non-productive assets. This mode of division is far too behind that suggested by the SNA2008. Classification of assets should be further subdivided.
What is particularly important is the economic accounting of R&D. Efforts should be made to analyze the internal rules governing the growth of R&D capital stock and macro economy. Methods of accounting R&D and assessing commercialized results of technological innovation should be improved. A system for calculating the full cost of scientific researches should be established. And there should be a mechanism for intellectual property capital census and management. On the basis of these efforts, a complete R&D economical accounting system will take shape that will survey R&D activities throughout China and find out all about the investment, results and commercialization of R&D resources.
Zhang Monan is a fellow of the China Information Center, a fellow of the China Foundation for International Studies, and a researcher at the China Macroeconomic Research Platform.
