Overnight Sensation

On April 30th, one of the major problems plaguing the economic world was partially rectified overnight. The International Comparison Project at the World Bank revised their purchasing power parity (PPP) data for 2011. PPP is a measure to balance the exchange rate between countries based on the purchasing power of of their currencies. PPP is calculated through a basket of goods. For example, if the Thai Baht is able to purchase more food relative to the US dollar, the PPP adjusts accordingly.

Graph depicting forecast of United States and China (The Economist)

One of the geopolitical implications of this change is that China’s economy is now larger than anticipated. The Economist reported that China’s PPP exchange rate is 20% larger than previously considered. This tweak of numbers means that, depending on estimates, China is the largest economy or will shortly be the largest economy in the world. Certain caveats need to be remembered, mostly that numbers self-reported by China always need to be taken with a grain of salt. That being said, the rebalancing is a reminder of what the future holds in store.

China’s inevitable rise is not the only news to come out of the International Comparison Project’s report. PPPs for 199 countries were redone, including most of the world’s developing countries. Sarah Dykstra, Charles Kenny, and Justin Sandefur from the Center for Global Development analyzed the numbers in the report and found an astonishing fact. Based on the new PPPs, global absolute poverty in 2010, defined as living on $1.25 a day, dropped from 19.7% to 11.2%. For example, Bangladesh’s GDP PPP per capita increased from $1,733 to $2,800. This revision caused 247.9 million Indians to no longer be below the absolute poverty line. It also means that more of the world’s absolute poor are now concentrated in Sub-Saharan Africa, increasing from 28% of global absolute povery to 39%. The reason for these drastic changes in figures is that inflation rates rose faster than the prices in the baskets of goods used in PPP calculations, which has been adjusted in the new 2011 numbers.

 

Global Poverty Rate (Center for Global Development)

While this may seem incredible, it merely reflects a statistical change in measurement. There is still  no consensus on whether $1.25 a day is the right measure to use for determining absolute poverty, even if it is adjusted for PPP. Other indicators have been proposed over the years. The most famous is the UNDP’s Human Development Index (HDI), attempting to include health and education along with GDP per capita. After examination, this was considered insufficient because it didn’t fully encapsulate the deprivations that poor people in developing countries face. The UNDP developed the Multidimensional Poverty Index, attempting to include things like the percent of the population that lacks a floor or clean water. As this is based on survey data, only 104 countries are included in the Multidimensional Poverty Index.

Another argument is that the difference between somebody with an income of $1.25 a day and $1.26 a day is not even negligible. Many suggest raising the line at which we measure poverty above the $1.25 a day of absolute poverty and the $2 a day of extreme poverty, with Lant Pritchett suggesting using $15 a day as the international line. What people in poor countries purchase is also vastly different from what people in developed countries purchase, negating some of the benefits of PPP. Poverty lines also vary between countries, so there have been advocates to change the global poverty line to be adjusted more frequently and be comprised of an average of developing countries.

Village in Africa, same scene before and after the ICP adjustments

This adjustment through PPP does not change the lives of those who are still living in poverty, whether their measured status changed or not by the new report by the ICP. They will still struggle to buy food and pay for school uniforms for their children, just as before. However, measuring global levels of poverty will remain important, as that which is measured gets fixed.

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When $0.65 and $1.25 Are a World Apart

U.S. $1 Bill | Source: Veer/Getty Images

The issue of poverty lines is widely debated throughout the international development community and government ministries. In fact, it is a hotly debated topic right now in India. What, exactly, is the purpose of setting a poverty line? A poverty line serves two quantitative functions: (1) to allow a country to gauge how many of its inhabitants are living in poverty and (2) to therefore determine how many people are eligible to receive government assistance as a result. The former also corresponds to a country’s level of development—obviously, the poorer a country’s inhabitants, the poorer the country. The latter is slightly more complicated, as it involves a government taking responsibility for its people and giving them, through government and aid programs, an opportunity to live above the poverty line.  Continue reading