From the China Quarterly Update, January 2008 The International Comparison of Prices (ICP) project recently released improved estimates of different countries’ GDP and per capita GDP calculated on a purchasing power parity (PPP) basis. These new estimates show the Chinese economy to be about 40 percent smaller in PPP terms than previously thought. How do these new PPP estimates affect our understanding of the Chinese and global economies? PPP estimates are useful to compare real living standards in different countries.
The purpose of PPP exercises is to try to correct for these differences in prices.
The new estimate for China’s relative price is closer to that in other countries at similar stage of development.
PPP estimates for economic size and living standards for several developing countries
including China have been revised downwards.
The revised PPP estimates do not change our understanding of real growth.
The new data change the picture of what is happening in the global economy somewhat, but not much.
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But what about poverty? If China as a whole is poorer than we thought, then are there a lot more poor people than we had reckoned? And what has been the trend of poverty reduction? Analysis of poverty reduction is best done with household survey data measured in constant price domestic currency.
PPP conversion factors enter into the analysis if one wants to add up or compare the number of poor people in different countries based on a common monetary global poverty line.
There are three important points to note about this process.
1. The cost of basic needs poverty estimates in the table will not change and are still our preferred estimates for analyzing poverty in China.
2. Because prices are higher in China than previously thought, the new $1 per day poverty line will be higher. The estimated number of $1 per day poor in China will go up – but the estimated number in the past will go up as well. The choice of PPP conversion factor does not affect the trend.
3. The World Bank will not take the GDP conversion factors published by the ICP and directly apply these to household survey data. The poor do not consume a representative basket of GDP. They consume a much more narrow basket in which food dominates. Also, the poor in China arealmost exclusively rural, so we will make a correction for differences between the urban prices sampled in the ICP exercise and rural prices based on other price surveys. So, the World Bank will calculate special conversion factors for poverty analysis, for all countries where the data allow this, not just for China.
That work will take some months to complete, but we can already see in the data that in China’s case the change in the conversion factor for poverty is not going to be that large (as the change in the conversion factor for GDP). So, to avoid misinterpretations based on the new GDP conversion factors, we present here an initial estimate of the range in which the new poverty estimates for China are likely to lie. The $1 per day poverty rate in 2004 is likely to be in the range of 13-17%, rather than the earlier estimate of 10%. Estimates for earlier years will be revised upwards as well, so that based on this new conversion factor the poverty rate in 1981 will be estimated to be in the range of 71-77% of the population.
In summary, the choice of PPP conversion factor does not change the conclusion that China has had the largest and fastest poverty reduction in history. Our old estimate of $1 per day PPP poverty reduction in China was from 64% of the population at the beginning of reform to 10% in 2004. The new estimate will show a reduction from something like 74% in 1981 to 15% in 2004. |
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