27 May 2014 - The World Bank’s International Comparison Program (ICP) released new estimates of purchasing power parities - estimates that are used as currency converters to compare the size and price levels of economies around the world.
Why is this important? This will impact not only our understanding of whether there are fewer numbers of poor people, but can also determine aid for these countries. For example, health financing in high disease burden countries could change, if countries are found richer.
The full results of the ICP report will be released in July 2014. As many as 199 economies participated in the 2011 International Comparison Program.
Established in the 1960s, "the purpose of the ICP is to compare the gross domestic product (GDP) of economies to determine those economies’ relative size, productivity, and material well-being."* Without estimates of PPPs, it is not possible to compare GDPs of various countries because they are estimated at national price levels and expressed in national currencies. The ICP exercise, values GDPs of countries at a common price level, in a common currency. As a result, GDPs of economies can be compared in real terms by removing the price level differences between them.
To arrive at these estimates, worldwide surveys are conducted regularly to collect comparable price and expenditure data for goods and services that make up the GDP. (The expenditure on GDP is accounted for by the total consumer goods and services, government services, and capital goods in an economy.)
PPPs show the ratio of the prices in national currencies of the same good or service in different economies.
PPPs are also used for poverty assessment. The World Bank’s international poverty threshold of $1.25 per day per person is derived using PPP estimates. The World Health Organization uses PPPs when comparing per capita expenditures on health care across economies.
Just as GDP numbers across countries cannot be compared, national poverty assessments cannot be compared since national currencies differ, authors of the ICP report say. Therefore, the international poverty line "equalizes" purchasing power needs across economies. (This is carried out by converting the international poverty line of $1.25 to national price levels with consumption PPPs. Data from household surveys are then used to determine the number of people whose per capita consumption is below this poverty line.**)
A catchy headline Global Absolute Poverty Fell by Almost Half on Tuesday, caught our attention. The authors of this article suggest that as per these new PPP estimates 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 8.9 per cent. They also suggest that many poor countries are richer than previously thought.
The article also draws attention to challenges with these conclusions. It says, development economists like Angus Deaton have expressed concern over PPP, which aims to "equalize the power of a rupee to buy what (especially poor) Indians buy, with the power of a dollar to buy what an American buys". But poor and rich fundamentally buy different things, hence this many be misleading.
While the figures generated self-congratulatory headlines in developing economies, the news may not be all good. Take health financing, for instance. Change in GDP per capita numbers will certainly affect "aid eligibility designations" since many donor organizations base their decisions on country income classifications.
So although middle income countries have more poor people than low income countries, they might be elbowed out by poorer competitors for aid. However, as we know, some of the middle income countries have the highest diseases burdens in the world.
Commentators such as Amanda Glassman at Center for Global Development are of the view that there is a mismatch between health aid eligibility and country income status. She says, "Donors give arbitrary income lines a lot of power in determining funding allocation". This discussion will continue to evolve.
Here is a map that plots development assistance received and disability adjusted life years (DALYs), a tool developed by the Institute of Health Metrics and Evaluation.
While these numbers may put greater emphasis on raising domestic financing to address high disease burdens in middle income countries, donor organizations must calibrate and gradually determine decisions on aid. The goal should be to reach large numbers of poor people lacking health services irrespective of where they live.
Text by Priti Patnaik
* Purchasing Power Parities and Real Expenditures of World Economies, Summary of Results and Findings of the 2011 International Comparison Program, pg 1
** Purchasing Power Parities and Real Expenditures of World Economies, Summary of Results and Findings of the 2011 International Comparison Program, pg 9