Lies, Damned Lies, and World Poverty Statistics

♠ Posted by Emmanuel in at 2/22/2008 12:58:00 AM
Global poverty and inequality numbers are among the most controversial of statistics. Sometime ago I featured the work of Branko Milanovic on global inequality. Until now, I consider his work the most authoritative on the subject. That he is quoted a lot by both the "globalization is deepening poverty and inequality" and "globalization is reducing poverty and inequality" camps shows the respect he is accorded by the partisans. Just when you thought we had safely escaped from this controversy for a while, the World Bank completed the results of its International Comparison Program (ICP) to accurately estimate price levels across various countries. It is especially important because Chinese and Indian price levels have not been subject to price basket comparisons since the mid Eighties, causing distortions when measuring purchasing power parity (PPP) incomes in these two huge emerging countries with a combined population of 2.4B persons. PPP concerns what folks living in these countries can actually buy domestically as opposed to their international buying power based on prevailing market exchange rates.

If you will recall, I noted that the World Bank "shrunk" the Chinese and Indian economies by about 40% on a PPP basis in light of the ICP's results. In other words, goods and services that Chinese and Indians buy on a regular basis were more expensive than previously thought. Hence, estimates of their purchasing power were revised downwards and together with it their PPP outputs. In light of these changes, our good man Branko Milanovic weighs in on the implications of these new findings. One which many should find dispiriting is his belief that global inequality is higher now than ever before. I suggest that you read the whole article from Yale Global Online--it's not that long and it's very informative. Needless to say, there are many changes in store for the dark art of poverty statistics. Here are some excerpts:

These new estimates will have far-ranging consequences. Literally hundreds of scholarly papers on convergence or divergence of countries’ incomes have been published in the last decade based on what we know now were faulty numbers. With the new data, economists will revise calculations and possibly reach new conclusions.

With the study’s release, our view of the world has changed. While economists previously thought that US GDP per capita was 6 or 12 times higher than that of China and India, respectively, these numbers have been revised to 10 and 20 times. Until last month, economists thought that China accounted for 15 percent of world economy; it’s now revealed to represent less than 10 percent...

Implications for the estimates of global inequality and poverty are enormous. The new numbers show global inequality to be significantly greater than even the most pessimistic authors had thought. Until the last month, global inequality, or difference in real incomes between all individuals of the world, was estimated at around 65 Gini points – with 100 denoting complete inequality and 0 denoting total equality, with everybody’s income the same – a level of inequality somewhat higher than that of South Africa. But the new numbers show global inequality to be 70 Gini points – a level of inequality never recorded anywhere.

Similarly, until last month, the number of people living at less than $1 PPP per day was estimated at just under one billion. The call to action issued at the Davos World Economic Forum still speaks of “980 million people who live on less than 1 dollar a day.” But this was based on old estimates of price levels. Now, we know that the price levels in these and many other poor countries are higher, and the measured number of the poor will jump...

The most famous set of estimates of countries’ historical PPP-adjusted GDP, made by Angus Maddison, is based on the old data. Maddison’s numbers, the only data series of GDP per capita that include practically all the countries in the world, providing estimates for most as far back as 1820, is extensively used by econometricians and economic historians. Its revision will be massive. Much of what we think we know about comparative economic history will be reexamined.