2. Methodology

2.1 Introduction

2.1.1 This chapter describes the methods used to construct the Western Isles regional accounts for 1997, the most recent year for which comprehensive data could be obtained within the study time-scale. It begins by describing the structure of the accounting framework and the way in which it presents the flows of incomes and expenditures around the regional economy. The construction process involved the collection of local data from Western Isles businesses, households, tourists and key organisations. Section 2.2 presents details of the nature of each of these surveys, including sample coverage, whilst Section 2.3 briefly describes how the survey information was combined with information from other sources and processed into the format required. Technical details relating to the construction process are provided in Appendix 2 of this report. The chapter concludes by presenting the final balanced Western Isles regional accounts and the occupation-employment matrix.

2.1.2 As with any economic technique, the limitations of the SAM approach should be recognised.

· Data collection has necessarily been restricted by the resources available, and is likely to be incomplete in certain areas such as "black fish" landings. Evidence for a significant barter economy (the non-monetary exchange of goods and services) was sought but not found. The choice of a base year (1997) for the SAM necessitated adjustment of earlier or later data to that year.

· The structure of the SAM (choice of sectors, household groups, etc.) involves simplification of the almost infinite variety found in the real situation, and limits the nature and detail of possible applications.

· Use of the SAM and its multipliers to assess the outcome of an economic impact or scenario involves rather simple assumptions about economic behaviour by sectors and households etc., basically that all maintain the general recorded expenditure patterns. More complex economic behaviour could have been simulated through the use of computable (or applied) general equilibrium (CGE or AGE) analysis, but this would have gone beyond the resources available to the study.

· The study is essentially of a cross-sectional or "snapshot" nature, in that it has measured the Western Isles economy as at (or near) 1997. It has not explored changes in incomes and expenditures, in relative prices or in technologies over time, either in the past (except for comparisons with the 1988/89 I-O study) or to the extent that some of the impact scenarios may be judged to resemble projected changes.

2.2 The Accounting Framework

Structure of the accounts

2.2.1 Given the nature of contemporary issues affecting the Western Isles and the changes that have occurred, the accounting framework adopted for the present study differs somewhat from that used in the 1988/89 input-output study of the Western Isles (Scottish Office Industry Department, 1991).

2.2.2 The 1997 regional accounts take the form of a so-called Social Accounting Matrix or "SAM". In common with the 1988/89 Western Isles input-output table, the accounts provide a complete picture of the flow of products around the economy. However, in addition to the accounts contained in a traditional input-output framework, the SAM contains factor accounts which distribute value-added payments from the production sphere of the economy to a number of different household groups in the region. For example, payments to employees in the textile sector are recorded as a payment to the "labour" factor account and are then distributed as wages and salaries to the households providing the labour. Also, a SAM gives greater attention to the source and destination of transfer payments to and from an economy than an input-output table. Like most peripheral rural areas, the Western Isles are dependent on substantial transfers from more prosperous regions, and thus the additional attention given to such flows is valuable.

2.2.3 Figure 2.1 presents, in schematic form, the structure of the Western Isles SAM. Entries in the columns of the SAM represent expenditures, entries in the rows of the matrix represent receipts. Thus the matrix is a single entry accounting system reflecting what Pyatt (1988) refers to as "the only fundamental law of economics", that for every income there is a corresponding outlay or expenditure. By including every type of monetary transaction that takes place, the Western Isles SAM provides a comprehensive, consistent representation of the full circular flow of income around the economy in 1997, as well as the flows to and from the Isles through imports and exports of goods and services, and governmental and non-governmental transfer payments.

2.2.4 The SAM contains five sets of accounts that are fully articulated in the sense that the basic accounting identities relating to those accounts are satisfied. These are:

production sector accounts, for which the total value of gross output equals the total value of gross input,

factor accounts, and forms of income accounts, for which the total value of factor payments from production equals the total value of factor receipts,

household accounts, for which total income equals total expenditure, and

the local government account where total incomings equals total outlays¹.

2.2.5 The matrix also includes accounts which either make payments to (or collect payments) from the Western Isles. These relate to Central Government activity and transfers, payments to and from a capital account (GFCF), stock changes, savings, payments and receipts from visitors in the Western Isles, and finally payments to and from trade with the rest of Scotland, the UK and the rest of the world.

2.2.6 Through the inclusion of all these accounts, the SAM presents a complete and consistent picture of the flow of income to, around and from the Western Isles economy. For example, reading across the first row, Figure 2.1 indicates that production sectors can potentially earn income from eight different sources: sales to other production sectors, sales to Western Isles households, sales to both local and central government, or through fixed capital formation, increases in the value of stocks, sales to tourists, or finally export earnings. The first column of the table indicates that production sector expenditures fall into five categories: expenditure on the goods and services produced by other sectors, value-added payments (including gross profits

Figure 2.1 Schematic Form of Western Isles SAM

Note: " - " denotes submatrices within which no transactions take place. "*" denotes submatrices which were not estimated as part of this study.

GFCF = Gross Fixed Capital Formation

and/or trading surpluses), payments to local government, net taxes to central government, and finally payments for imported inputs used in production. The total expenditure of each production sector (the column sum) must, by definition, balance with the total receipts of that sector (the row sum).

The classification system

2.2.7 The classification system adopted in the SAM is important for two reasons: Firstly, it influences the extent to which it is a useful descriptive device for highlighting the overall nature of the regional economy and the role of important industry sectors and/or economic transactions by social groups. Secondly, the choice of accounts has a bearing on the usefulness of the database for economic modelling, in the case of this study, multiplier and scenario analyses.

2.2.8 Keuning and Ruijter (1988) argue that the classification of every account should meet certain requirements, viz. That it should:

· distinguish groups/sectors which are relatively homogenous

· correctly reproduce the variety within the economy

· be composed of groups/sectors which are recognisable for policy purposes and useful for socio-economic analyses, and

· be based on comparatively stable characteristics which can be measured easily and reliably.

In relatively small economies such as the Western Isles, the classification system used in reporting clearly also has to respect the confidentiality of the households and businesses involved in the data collecting process.

2.2.9 Nineteen industrial sectors were distinguished in the 1988/89 I-O study of the Western Isles. In order to facilitate comparisons, the same sectors were adopted for the present study. However, several sectors were further disaggregated either because they had grown in importance or because more insights into the nature of production activity were required. After some consideration and iteration, a total of 26 production sectors were distinguished in the 1997 accounts. Appendix 3 indicates the composition of each sector according to the 1992 Standard Industrial Classification or "SIC92" categories.

2.2.10 In most SAMs, the choice of household categories is based on income, household composition or locational factors. For example, low-income households are split from high-income households to emphasise different income and expenditure patterns, or rural households are split from urban households etc. In the case of the Western Isles SAM, the choice of household groups was determined only after having carried out some initial analysis of the household survey data and having reviewed the key issues affecting the region.

2.2.11 Three types of households are distinguished:

· households with one or more adults and no dependants,

· households with at least one dependant, and

· retired households.

As well as having distinctly different expenditure and income patterns, these categories provide the SAM with the potential for investigating the impact on the economy of changes in the population structure through in- or out-migration.

2.2.12 By including factor accounts, a SAM differs from an input-output table and adds a further dimension to the type of analysis that is possible if the matrix is to be used for planning purposes. The factor accounts are split into two subcategories, factors of production and forms of income. Within the Western Isles database, the latter collects value added payments from the former and then distributes them to the three household types in the SAM.

2.2.13 Two types of factors of production are distinguished: payments for labour services, called "income from employment", and "gross profits and other trading surplus". These map into the following five different "forms of income" accounts before distribution to households:

· wages and salaries

· employers contributions to national insurance etc.

· self-employment income,

· investment income, and

· rental income.

2.2.14 Two points should be borne in mind when interpreting the data relating to the factor accounts of the SAM. Firstly, income from self-employment is initially included within the gross profits as opposed to the income from employment account of the matrix. It is then mapped into a separate "forms of income" account before being distributed to each of the three household categories in the matrix as appropriate². Secondly, employers' contributions to national insurance and pensions are included within the income from employment account since they are an unavoidable cost associated with the use of labour in production activity. The total value of these contributions are then `leaked' from the Western Isles via the column entries of the factor accounts to central government.

2.3 Data Collection

2.3.1 The construction of a SAM is extremely data-demanding. Whilst the availability of a previous input-output study of the Western Isles was a useful starting point, the aims of the present study were such that a large amount of primary data collection was required. A total of four different surveys were involved:

· a survey of businesses

· a survey of households

· data provided from a survey of visitors to the Western Isles carried out by Macpherson Research³, and

· a survey of key organisations and public bodies.

Survey of local businesses

A total of 75 personal interviews took place in summer 1999 with businesses located in the Western Isles. In addition, data from an input-output survey of another 104 businesses was made available to the research team⁴. Rather than being random, the survey sample was drawn (with the aid of the Western Isles Business Directory) so as to ensure a high coverage of economic activity in the base year of the study (1997). Particular attention was paid to key local sectors, and sectors that have grown significantly since the previous 1988/89 study. The questionnaire used is given in APPENDICES Appendix 1.

2.3.2 Due to the helpful attitude of local business people, few response problems were encountered. Thus information on the level, pattern and source of inputs and the level, pattern and destination of outputs was available from a total of 179 Western Isles businesses. Secondary data from Scottish Office Agriculture, Fisheries and Environment Department (SOAEFD) was also used to complement the survey data in the estimation of the income and expenditures of the agriculture and fisheries sectors⁵. Table 0.1 indicates the employment coverage of the business survey sample.

2.3.4 Like many rural areas, the Western Isles are characterised by a high degree of self-employment and multiple job holding. To allow for this, the figures relating to total Western Isles employment in Table 2.2 are based on estimates from the 1997 Annual Employment Survey but supplemented by estimates of the self-employment by sector taken from the recent incomes study for the Western Isles (ERM, 1998).

2.3.5 Although the employment coverage varies by sector, it is particularly high in those sectors considered important to the regional economy, including the fishing industry, textiles, construction⁶, hotels and public services. In cases where either the number of survey returns or the employment coverage was low, information from the business survey was supplemented with data from other recent input-output studies and/or the previous Western Isles input-output study. The overall sample coverage of 51% of total Western Isles employment (including self-employment) compares favourably with other studies of this sort.

Table 0.1 Business survey sample and employment coverage

Source: Annual Employment Survey and ERM (1998)

Household survey

2.3.6 A total of 97 face-to-face household surveys were carried out during spring 1999. A sampling framework based on data from the electoral roll data and the Western Isles Council Tax list was used to ensure that the survey picked up a representative range of income levels as well as an appropriate geographical spread of residential locations. This survey proved to be an extremely important source of information in the overall SAM construction process, providing not only necessary information on the level and pattern of household expenditure, but also important control checks for the construction process. Table 0.2 and Table 0.3 indicate the population coverage of the household survey.

Table 0.2 Household survey: geographical coverage

Note: * The council tax band was not recorded in three of the questionnaires (see Table 2.2).

2.3.7 Table 0.2 indicates that the geographical coverage of the sample is good. However, as indicated in Table 0.3, some problems were encountered in persuading households in council tax band A to take part in the study, and this has resulted in the sample containing a disproportionately high number of households in council tax bands E, F, G or H.

2.3.8 Particular attention was paid in the household questionnaire to gauging the level of household income from secondary employment and "unearned" sources such as transfer payments. Also, an attempt was made in the questionnaire to allow for the so-called informal (or "grey") economy within the Western Isles⁷.

2.3.9 Information from the 1991 population census (ONS, 1998b) on the composition of households was used to raise the sample results up to population level. Thus it was assumed that the relative proportions of different types of households distinguished in the SAM did not change between 1991 and 1997. Whilst data suggests that there has been a 4.5% fall in the resident population of the Western Isles between these two years (General Register Office for Scotland, 1998), this is unlikely to have had a significant impact on the pattern of household types.

Visitor/tourist survey

2.3.10 The 1988/89 input-output study had insufficient resources to carry out a tourist expenditure survey and instead relied on indirect estimates of Western Isles visitor expenditure. Given the role that tourism plays in the Western Isles economy, it was felt important that in the present study tourist expenditures were estimated directly from local survey information.

2.3.11 A comprehensive survey carried out by Macpherson Research of visitors to the Western Isles during the 1999 season provided the raw information on the level and pattern of visitor expenditures required in the SAM. A total of 402 questionnaires were completed between early May and the end of July, and 400 were usable for this study. The data was analysed and then converted in the form required for the SAM. This involved converting the data onto the correct classification and valuation basis, e.g. annualising from the survey period, but also deflating the expenditure figures by the Retail Price Index to make them consistent with the price level in the base year of the study, 1997.

2.3.12 In order to aggregate the findings from the tourist survey to sector level, an estimate was required of the total number of visitors in the base year of the study. This estimate was taken from a report by EKOS (1998) which suggested 100,000 visitors stayed in the Western Isles for at least one night during 1997. On the assumption that the ratio of day visitors to total visitors recorded within the 1999 visitor survey is the same as in 1997, the total number of visitors used to aggregate up the survey findings was 104,987.

2.3.13 Table 0.4 gives an indication of the number of visitors covered by the survey in relation to the estimated total number of visitors in 1997 as well as some other sample characteristics. Some problems were encountered with the data collected on travel costs to and from the Western Isles, with some respondents including the cost of travel from their place of residence even when the Western Isles was not their sole holiday destination. Thus the data had to be "cleaned" using other information collected as part of the survey in order to generate more reliable estimates of expenditure relating to costs accruing to Western Isles businesses alone.

Table 0.4 Sample characteristics of the 1999 visitor survey

Survey of key organisations in the Western Isles

2.3.14 Interviews were held between January and March 1999 with representatives of a range of organisations and public bodies to obtain information on key trends and issues affecting the Western Isles economy and its constituent industries, particularly over the past 10 years. Representatives of the following organisations were interviewed:

· Harris Tweed Association

· Proiseact nan Ealan (Gaelic Arts Agency)

· Royal Bank of Scotland

· Scottish Agricultural College

· Scottish Fisheries Protection Agency

· Scottish Office Agriculture, Fisheries and Environment Department

· Scottish Natural Heritage

· Stornoway Pier and Harbour Commission

· Comhairle nan Eilean Siar

· Western Isles Enterprise

· Western Isles Tourist Board

· Scottish Crofters Union and the Crofters Commission

2.3.15 The interviews proved useful in providing an understanding of the broader framework of the study and identifying any particular events which may have influenced the level of sectoral economic activity in 1997, the base year of the study. In addition, a large range of reports and information relating to the Western Isles were collected and reviewed, providing important background and context for the analysis to be carried out.

2.4 The SAM Construction Process

2.4.1 Figure 0.1 shows the main stages in the construction of the Western Isles SAM. Whilst the process can be thought of as taking place in a number of distinct stages it is in practice iterative, with decisions made at an earlier stage often adjusted to accommodate the findings of a latter stage. For example, initially the classification system split the agricultural sector to distinguish between crofters and other farmers. However, a lack of data at the sectoral level on subsidies and output levels made it impossible to maintain this distinction in the final accounts. Similarly, the final choice of household categories in the SAM was only made following the derivation of initial expenditure and income patterns.

Figure 0.1 Flow chart of stages in the SAM construction process

2.4.2 Within the latter stages of construction, in addition to the 1988/89 Western Isles input-output table, a number of other more recent input-output studies were of great value in guiding the data cleaning process and judging the reliability of sectoral control totals for the balancing process. These were the recently completed studies of the Shetland and Orkney economies (McGregor et al., 1998 and Gillespie et al., 1999), and the most recent (1995) Scottish input-output tables (Scottish Office Industry Department, 1998). All were used to provide indications of the level of output and patterns of demand for sectors where survey coverage was low.

2.4.3 Although not explicit in Figure 2.1, a number of important decisions have to be made at the outset of the construction process and play an important role in determining both the reliability and bearing of the accounting framework. These include decisions relating to the valuation of transactions, how to measure output, how to record foreign and capital transactions and how to balance the accounts given statistical discrepancies. These are discussed in some detail in Appendix 4 of this report.

2.5 The Estimation of the Western Isles Employment Matrix

2.5.1 In addition to the SAM itself, one of the aims of the study was to generate an employment matrix to complement the economic accounts and to allow analysis of the impact of changes in economic activity on different types of employment. Information for estimating the employment matrix came from a number of sources. Firstly, the Annual Employment Survey was used to provide information on the number of employees in each sector by SIC(92) code with the estimates adjusted to allow for self-employment. The Annual Survey also releases information on the type of employment within the Western Isles according to the Standard Occupational Classification (SOC). Appendix 5 provides the detailed SOC categories used later in this report. Thus two vectors were generated showing total employment by sector and total employment by occupation type respectively. Data collected as part of the business survey was used to help identify the pattern of occupation type by sector, as was certain sector-specific information collected from the survey of key organisations. Finally, the matrix was balanced mechanically using techniques described in Appendix 4.

2.6 The Balanced Western Isles SAM and Employment Matrix

2.6.1 Table 0.5 presents the final balanced SAM for the Western Isles economy in 1997, and Table 0.6 the balanced employment matrix⁸. These provide the basis for generating a number of alternative indicators of the performance of the Western Isles economy as described in the following chapter.

Table 0.5 Western Isles SAM, 1997 (£'000) - Part 1