World Bank: Not telling it like it is

Written by Surjit S Bhalla | Updated: Oct 11 2014, 06:57am hrs
Policy-makers, and politicians, are justifiably concerned about the level of absolute poverty in developing economies. But there are strong indications that the institution in charge of assessing global poverty trendsthe World Bankis acting like a dirty monopolist in order to survive. The rules of the game suggest that this manipulation needs to be checked. [Full disclosure: I am a former World Bank staff member and loved the work, and the institution, when I was there in the 1980s.]

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The problem is as follows. The World Bank both defines absolute poverty as well as measures it. And it also defines the benchmark for the success or failure of individual country policies. In World Bank language, India has not been a good performer on poverty reduction, especially with regard to China. That may or may not be truewe can only know for sure if there is transparency, and an honest debate on the methods, and the data, used by the World Bank.

There is no mystery about the methods or the data, and indeed, there has been considerable transparency. In my 2002 book, Imagine Theres No Country, I pointed out that a major reason for the poor performance of India on poverty alleviation (relative to China and relative to any other country) was because of the suspect data collection on individual consumption expenditure in India. Surveys in all countries capture only a portion of "actual" consumption expenditures. In China, this fraction is around 80%, while in India it is below 50%! Correction for this survey data anomaly in India increased its performance in the fight against poverty to almost equal that of the record-breaker China.

This debate has continued since 2002. But today, with the publication of the Global Monitoring Report: Ending Poverty and Sharing Prosperity, the World Bank (and its co-author, the IMF) have shed all claims to be objective readers of the poverty scene.

This is revealed by the following fact. Comparison in living standards across countries, and over time, is best done with recourse to Purchasing Power Parity (PPP) estimates reported by the World Bank, jointly with other international institutions like the UN and IMF. PPP estimates are the gold standard for comparing standards of living. In May 2014, PPP 2011 data were released to the public.

This week, the IMF reported the incomes of the world in its latest World Economic Outlook (WEO). In this report, the IMF completely replaced all PPP 2005 income figures by the 2011 PPP estimates. However, the World Bank, in charge of estimating poverty on the basis of these 2011 data, chose to completely ignore them and instead reverted to the old, and extremely controversial, PPP data constructed in 2005 (and released in 2008). In Shakespearean language, the World Bank spurned the new data like a cur out of its way. (In the World Bank GMR-Poverty report, there isnt even a reference to the existence of the PPP 2011 survey!)

Normally, new PPP figures do not change ones estimate, or understanding, of world poverty. But 2005 PPP was different, and because 2005 was suspect, use of 2011 versus 2005 data makes a huge difference to ones understanding of world poverty.

But first, some background. The PPP estimates are released approximately once a decade but the 2005 PPP figures were shocking for most observers. How shocking Well, the aggregate price level for India for January 1, 2005, was approximately 52% higher than what we knew on December 31, 2004. How did this happen India has more price surveys than there are economists, so how did they all go so horribly wrong on the night of December 31, 2004 For an explanation, you have to look at China, because its consumption price level was also raised by a higher 84% on the same night! Speculations abound about the origins of this mother of all changes; my favorite and preferred explanation is that China dictated this change. And what possible reason could it have to change the price level by an outlandishly extravagant amount To show to the world that it was not being a currency manipulatora stylised fact of development is that a currency can be cheaper for poorer countries. By manipulating its price level, China was able to prove to the world that it was actually a lot poorer than otherwise believed and hence, accumulating more than $ 3 trillion in reserves was economically justified!

For China, the World Bank officials had a ready explanation for the price revisionChina had never participated in a PPP survey, so the earlier PPP estimates were wrong. A fair point. But India has been a participant in each of the PPP surveys including the original 1970 survey which consisted of only 12 countries. So, why was there any change in the Indian price level, and especially such a large one There is no explanation; if ever international officialdom was grotesquely wrong, it was in the construction of the PPP 2005 survey.

Good sense eventually prevailed (checks and balances) and, in super-fast time, a new PPP survey was commissioned for 2011. Among the major results of this survey: First, very little change in the price and, therefore, per capita consumption estimates of countries in the developed world. Second, per capita consumption in China was raised (relative to 2005 PPP) by 25%, and in India by nearly double that amount (46%)!

Given that the two countries India and China are the two most populous poor countries in the world, it is easy to infer why the World Bank, a major sponsor and executioner of the PPP project, has chosen to completely ignore the existence of the 2011 PPP survey. Because ending poverty will arrive sooner than the World Bank would like, and then what are its bureaucrats supposed to doapply for jobs at the IMF or the UN

The PPP data that one uses makes a considerable amount of difference to estimates of poverty, and evaluation of poverty declines. Three sets of poverty figures are reported: The GMR-Poverty estimates (page 19 of the Report), our estimates using the same definition and methods as the World Bank, and the same with PPP 2011 data, as shown in the accompanying table. That our reproduction of the World Bank data is reasonably accurate is indicated by the fraction of the world in absolute poverty in 2011 (World Banks 17% vs. Oxuss 18.3%).

The 2005 figures are with the poverty line of $1.25 per day. While different methods can be used to derive an equivalent poverty line in 2011 prices, most such methods converge on PPP $1.45 a day. Rather than use this, I have reported poverty figures for the world with a very conservative upper bound estimate of the poverty line (PPP $1.6 per day). This suggests that poverty in the world in 2011 was 14%; and estimates are that this ratio will decline to 10% in 2015.

Moral of the story World poverty is a serious problem, and honestly we must face itboth in applauding progress and in criticising the failure to reduce it. How can the World Bank be honest and still exist Raise the absolute poverty line by 60% of the change in per-capita consumption of the poorest 15 countries. If you do that, the suggested poverty line is PPP $ 0.23 higher in 2011 than in 2005, i.e., around PPP $ 1.7 a day. This will yield approximately the same number of poor in 2011 as revealed by the World Bank.

The author is chairman, Oxus Investments and a senior advisor to Zyfin, a leading financial information company. Twitter: @surjitbhalla