World suddenly much less equal

‘The economics profession underwent a revolution in December last year, as economic understanding of the world suddenly shifted’, wrote Branko Milanovic, an economist with the World Bank, last February. This may have seemed like a bit of an exaggeration – particularly because these groundbreaking changes seemed to have gone unnoticed by the rest of the development community and others involved in poverty reduction. But, according to Milanovic, spending power in China and India had fallen by 40%, by 17% in Indonesia, 41% in the Philippines, 32% in South Africa and 24% in Argentina.

So what happened to prompt this supposed ‘revolution’? The release of new estimates–based in part on new ways of calculating relative prices–of purchasing power parity (PPP).

The International Comparison Programme (ICP) is a worldwide initiative in which statistical agencies from participating nations, the International Monetary Fund (IMF), Eurostat and several development banks collaborate. The programme collects statistics on prices and purchasing power in 146 countries, which makes it possible to calculate the actual economic welfare of each country. The ICP is coordinated by the Organization of Economic Co-operation and Development (OECD) and the European Commission for European Union member states, and the World Bank for the rest of the world.

The most recent PPP estimates were published as part of an ICP survey in December 2007. It was the first such survey published since 2003, and that version included no data about China. The 2007 survey highlighted the fact that that prices in most Asian countries were much higher than was thought, which implied that the people there had become much poorer than economists had assumed. In countries such as Russia, Nigeria, Egypt and Lebanon, in contrast, incomes had increased, although not by much.

The 2007 PPP data indicates something more than an accounting issue. The new results mean, for example, that many findings of economic research conducted over the last 15 years may no longer be accurate. ‘Much of what we think we know about comparative economic history will be re-examined’, wrote Milanovic. The IMF has had to lower its projected economic growth for 2008 by a half percent on the basis of this new survey. The results have also changed economists’ view of the world economy. According to Milanovic,‘While economists previously thought that the US GDP per capita was 6 or 12 times higher than those of China and India, respectively, these numbers have been revised to 10 and 20 times. Until [the release of this survey], economists thought that China accounted for 15%of world economy; it’s now revealed to represent less than 10%.

Although Milanovic did not refer to the Millennium Development Goals (MDGs) in his article, the realization that the world has more poor people than had been previously assumed will make achieving these goals by 2015 even more difficult than it already is. The first MDG is to reduce the number of people living in poverty by half. Poverty is defined as living on an income of less than one US dollar a day. Accomplishing this goal was already going to be difficult in many African countries, but there was hope for China and India. However, this new PPP measurement standard makes achieving this goal in these countries more difficult.

For those who do not believe in this very one-dimensional, dollar-a-day definition of poverty, there is another consequence of the new PPP estimates. According to Milanovic, there is even greater global inequality than was already known. Measured using the so-called Gini index, in which 0 represents total worldwide equality and 100 means one country has all the wealth, global inequality had been estimated at about 65, before this survey was published. With the new PPP estimates, the global Gini score is at 70, an inequality level that Milanovic says has never been recorded before.

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