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In the middle of December 2007 a catastrophe shook the world economy. As from 17 December, about five hundred million people fell below the absolute poverty line. China and India saw their economies, previously considered to be the “new locomotives” of globalization, reduced by half overnight and the whole world became a much more unfair place. "The World Bank’s International Comparison Programme and the Organization for Economic Cooperation and Development (OECD)’s PPP Programme released new world tables on the purchasing power parity benchmarked to the year 2005, substituting the previous 1993 and 1980 tables".

In the middle of December 2007 a catastrophe shook the world economy. As from 17 December, about five hundred million people fell below the absolute poverty line. China and India saw their economies, previously considered to be the “new locomotives” of globalization, reduced by half overnight and the whole world became a much more unfair place.

Fortunately the cataclysm did not cause any deaths and went by unnoticed, both by the countries involved and by the press. The epicentre occurred in Washington DC, more precisely at H and 19th Streets, where the World Bank and the IMF have their headquarters. No windows were broken there and the official communiqué only recorded in its cryptic language that “the World Bank’s International Comparison Programme and the Organization for Economic Cooperation and Development (OECD)’s PPP Programme today released new world tables on the purchasing power parity benchmarked to the year 2005, substituting the previous 1993 and 1980 tables”.

That is to say, nothing changed in the real world and no child went to sleep more or less hungry just because the World Bank updated the tables that compare the local price of milk and other products all over the world.

However according to Branko Milanovic, the World Bank Research Department’s lead economist, the publication of these new tables “represents a revolution for the economist profession” and a “sudden change in our understanding of the world.”

Since Adam Smith wrote about the wealth of nations, in the XVII century, economists have been comparing countries. In order to compare, a common measurement is needed, but it is not easy to convert everything into dollars, because as any tourist knows what a dollar can buy in one country can be very different from what it can buy in another. And, just like the traveller who compares how much he can buy here or there with his or her dollar, economists do not use currency exchange rates for their comparisons but purchasing power parity (PPP).

Thus, for example a tourist gets forty-four rupees per dollar in India, but with these rupees he can purchase a lot more than he could with one dollar in the United States. PPP tables tell us that fifteen rupees are equivalent to one dollar and therefore, India’s “real economy” is three times bigger than the result of calculating it in dollars at the exchange rate. When in the year 2000 the Heads of State from all over the world committed themselves “to halve, by the year 2015, the proportion of the world’s people whose income is less than one dollar a day,” they were referring to PPP dollars. Hundreds of academic studies on the world economy are based on PPP. Practically all we read about globalization and its impact on poverty and development involves comparisons based on the PPP.

Now we learn that it was all wrong.

The PPP tables that economists have been using since 1970 (known as Penn World Tables) were based on data last updated in 1993. From then on the figures published were extrapolations and estimates. In the case of India, the base studies were made in 1984 and in China, price surveys had never been made and the PPP was estimated on subjective opinions and beliefs.

The new tables consider the prices of over one thousand different goods and services (previously they were far fewer) in one hundred and fifty countries (previously they were under one hundred) and one hundred and forty-six national statistical agencies, the United Nations, the development banks, the IMF, the OECD and other institutions took part in the process. Thus a new economic map of the world was drawn, quite different from the one of last year.

The economies of China and India, the two most populated countries in the world, are forty per cent smaller that what we were told. South Africa’s economy shrunk by thirty-one per cent and in Argentina the gross domestic product fell by twenty-four per cent, a drop similar to the one that resulted from the 2003 crisis! Russia, Nigeria, Egypt and Lebanon became richer with the new calculation, but most of the poor countries turned out to be poorer than what was previously believed. However, most of the developed countries, where more reliable statistics were already available, did not change their positions in more than five per cent upwards or downwards.

Faced by the new evidence that the real economic weight of China and India is much less that what was previously believed, the IMF reduced by one and a half per cent its prediction regarding world economic growth for 2008. Both countries will continue to grow, but their impact on the rest will be smaller than previously estimated.

Paradoxically, China received these new figures with pleasure: a lighter weight in the world economy also means less responsibility for the generation of climate change. Furthermore, it now seems that with less real purchasing power, Chinese currency is not as undervalued as stated by the IMF and the United States. Therefore, the possibility of dollar devaluation increases, and a revaluation of the renminbi becomes unlikely.

In the new snapshot of world economy, the total number of poor people (measured by the line of one PPP dollar income per day) increased from one thousand to one thousand five hundred million and the promise of achieving the so-called “millennium goals” by 2015 has evaporated. Even worse, the planet is much less equal than previously thought. If we consider the world as a whole, inequality between poor and rich measured according to the “Gini index” has reached a record of 70 (on a scale of 0 to 100), much worse than the internal inequalities of South Africa or Brazil which, with a Gini index of close to 60, are socially the more unjust countries in the planet.

In a language similar to the labels on medication, the World Bank now warns against the improper use of the data it has just released: “Like all statistics they are subject to sampling errors, measurement errors, and errors of classification. Therefore they should be treated as an approximation” for which “it is not possible to provide a precise estimate of their margins of error.”

This precaution is welcome. But, why were we never told this before, when with worse data (now shown to be false), the World Bank researchers assured us that liberalization of the economies was beneficial to the poor?

Instead of being a “tide that lifts all the boats, big or small” as desired by the Washington consensus economists, the new official figures tell us that globalization has been like a tsunami for the poor, one that nobody saw coming because the radar was damaged.

Related Information:

New figures cast shadow over Bank poverty reduction claims, by Bretton Wodos Project

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