On Tuesday night, the International Comparison Project released the latest purchasing power parity numbers for the world’s economies. The vast majority of the planet slept right on as if nothing had happened.* And they were right. But the new numbers still suggest the size and distribution of world income looks considerably different than we previously thought. The World Bank will produce new official estimates in the coming days, but our preliminary estimates suggest the share of people in the developing world living below the absolute poverty line of $1.25 per day in 2010 “fell” by nearly half, from about 19.7 percent to 11.2 percent, thanks to the revisions.
Poor countries are somewhat richer than we thought…
Global poverty numbers involve two sets of data: national income and consumption surveys (collated in the World Bank’s PovcalNet) and international data about prices around the world. The ICP is in charge of this second set of data. It compares what people buy and at what local currency price they buy those things to come up with a ‘purchasing power parity’ exchange rate, a ratio that is designed to equalize the power of a rupee to buy what Indians buy with the power of a dollar to buy what an American buys. Tuesday, the ICP released their estimates for what those purchasing power exchange rates looked like in 2011.
In short, the new PPP numbers suggest a lot of poor countries are richer than we thought. For example, The Economist now estimates that China’s economy will be bigger than the US economy by year’s end. (This much to the delight of Eclipse author and colleague Arvind Subramanian, whose forecasts now look better than anyone else’s.) But it isn’t just China. India’s 2011 current GDP PPP per capita from the World Bank World Development Indicators is $3,677. The new ICP number: $4,735. Bangladesh’s 2011 GDP PPP per capita according to the WDI is $1,733; the ICP suggests that number should be $2,800. Nigeria goes from $2,485 to $3,146.
… and a lot fewer people are living on less than $1.25 a day…
The new purchasing power estimates also have an impact on the number of people under the international poverty line. If poor people in India can buy more with their rupee than we thought, that means they’re richer than we thought. We can use the poverty dataset Sarah and Justin recently scraped from PovcalNet to work out an estimate of how many fewer absolute poor people there are than we previously thought. We take the most recent PovcalNet survey data and looks at the number of people under $1.25 a day based on ICP2005 compared to ICP2011 numbers (in each case adjusted to the survey year using national CPI data).
To come up with a global 2010 estimate for the impact of the new ICP numbers on poverty, we use the approach that PovcalNet takes to ‘line up’ data based on national surveys done in different years — adjusting the income numbers by the change in private consumption per capita from national accounts data (more on the practice and pitfalls of this approach from Shaohua Chen and Martin Ravallion here). Note that a 2011 international dollar isn’t worth what it was in 2005. Allowing for US inflation, a 2005 $1.25 poverty line would be closer to $1.44 in 2011, so we set a ‘new’ international poverty line for 2011 US dollars of $1.44. The figure below (with a log scale) shows the ‘lined up’ data for countries — how much their estimated 2010 poverty (measured as $1.25 in 2005 dollars) increased or fell thanks to the ICP revisions.
The estimated number of $1.25 poor in India in 2010 falls from 396 million to 148 million, thanks to the revisions. The number of poor people in Nigeria goes from 88 to 60 million. And pretty much every country is sloping downward — using the same national survey data the new ICP numbers suggest much lower rates of absolute poverty.
The new numbers also suggest that Africa is home to considerably more poor people than any other region — the pie chart below shows the old and new regional breakdowns. South Asia’s share of the world’s absolute poor was estimated at about 49 percent on Tuesday. By Wednesday morning it had declined to 34 percent.
…But estimating poverty numbers is hard.
It should be noted that the estimates of global poverty based on the 2005 ICP and PovcalNet data we produce are not the same as the 2010 numbers reported on the World Bank website, but they are close: when we match latest survey data country numbers for poverty using the 2005 ICP our estimate is 19.7 percent and the World Bank estimate is 20.6 percent. (Two reasons for the discrepancy: (i) we cannot follow the World Bank in estimating poverty for the Democratic Republic of Congo and Central African Republic because the WDI doesn’t have the national accounts data for us to do it and (ii) we use a more recent income survey for Nigeria.) The Stata code and data we used for the calculation are available here. We hope that people check — and extend on — our estimates.**
What lies behind the dramatic changes in calculated GDP and poverty rates? A big factor may be that the national inflation rates used to convert incomes into 2005 PPP dollars in the last few years appear to be higher than the rate of inflation reflected in the baskets of goods and services measured by the two rounds of ICP surveys: Pakistan’s PPP conversion rate for GDP was 19.1 Rupees to the dollar in 2005 and 24.4 in 2011 — a gentle increase of 28 percent. The Consumer Price Index in Pakistan has gone up 102 percent over that same period. That might reflect changing or inadequate ICP commodity baskets or consumption data in one or both years, or mismeasurement of prices by Pakistan’s statistical agencies. But whatever the reason, it appears to apply to a lot of countries. Very few places saw PPP conversion rates climb close to or more than CPIs between 2005 and 2011, which is why poverty rates based on the 2011 PPP numbers tend to be lower.
And that leads to a caution — any exercise in calculating global income and poverty numbers has to come larded with caveats. Angus Deaton’s big concern with purchasing power parity is that it isn’t very meaningful to say we are equalizing the power of a rupee to buy what (especially poor) Indians buy with the power of a dollar to buy what an American buys because (especially poor) Indians and Americans don’t buy very much at all of the same stuff. Poor people and rich people consume different things. There are also worries that countries (and China in particular) may be economical with the truth when reporting their survey data. And lining up data to measure poverty in a common year using private consumption per capita data from the national accounts is a highly imperfect approach.
Perhaps most importantly, it is worth repeating what didn’t change between Tuesday and Wednesday. The people who have just been classified as “not absolutely poor” don’t actually have any more money than they did yesterday, and will still struggle in terms of getting a decent job, and many still face grim daily tradeoffs between buying school supplies or ensuring their kids are well nourished. In fact, if the new PPP numbers suggest anything it is that the quality of health or education or access to services associated with a given income has just gone down.
The new numbers are good news for people who care about poverty, but they matter much less for people who are poor.
* They were all sleeping if you adjust for geographic solar-facing parity.
** Don Sillers at USAID is producing a new Visual Basic tool to allow everyone to make their own poverty calculations — including the impact of PPP changes — more easily.
Edited for style and re-published with permission by the Center for Global Development. Visit the original article.