Purchasing power disparity

The World Bank waves its magic wand, and presto -- 200 million poverty-stricken Chinese appear out of nowhere

Published November 16, 2007 3:36PM (EST)

The phrase, "hundreds of millions of people have been lifted out of poverty in China and India," is a staple of pro-globalization rhetoric. I should know -- variations on the formulation appeared in some early posts in this space.

Thanks to some help from economist Robert Wade, How the World Works later learned how to take a closer look at how the World Bank's all-important "Purchasing Power Parity" statistics are calculated, and decided to be a bit more tentative about repeating sweeping generalizations about the numbers of people living in extreme poverty. (The Purchasing Power Parity measure allows the comparison of incomes between countries of differing levels of affluence.)

But now comes a report in Tuesday's Financial Times, citing a report from the Asian Development Bank telling us that new data crunching by the World Bank indicates that China's economy may be 40 percent smaller than currently estimated.

This more accurate picture of China clarifies why Beijing concentrates so heavily on domestic priorities such as growth, public investment, pollution control and poverty reduction. The number of people in China living below the World Bank's dollar-a-day poverty line is 300 million -- three times larger than currently estimated.

Why such a large revision in the estimates of China's economic condition? Until recently, China had never participated in the careful price surveys needed to convert accurately its gross domestic product into PPP dollars.

The World Bank's estimates based on summary data from the late 1980s probably overstated China's PPP gross domestic product even then. Up to now, the bank has revised its estimate very little. In the meantime, China has repeatedly raised the prices of food, housing, health care and a range of other non-traded goods and services. These reforms should have lowered the PPP adjustment, but the bank left it basically unchanged.

The difference between 100 million living under the dollar-a-day poverty line and 300 million people, is well, hundreds of millions of people who haven't been lifted out of poverty. Somewhere, Robert Wade is manfully restraining himself from saying "I told you so."

(Meta-blogging note: I read the original Financial Times story on Tuesday, and made a mental note of the news item as an appropriate topic to blog about, but then became distracted by Shah Rukh Khan's six-pack abs. In the days following, Trade Diversion, Marginal Revolution, and Free Exchange all successively picked up on the item, reminding me that the data reevaluation was indeed a critically important part of the larger narrative of globalization and prosperity. This is an example of what the blogosphere calls "the echo effect," and it can be very useful in separating out the truly noteworthy news from the chaff.)

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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