WS MoreOrLess: Did global poverty halve overnight?
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What is the main topic discussed in this episode?
This is the short edition of More or Less, first broadcast on the BBC World Service. Thank you for downloading from the BBC. For details of our complete range of podcasts and our terms of use, go to bbcworldservice.com slash podcasts.
Hello and welcome to More or Less on the BBC World Service, your weekly look at the numbers in the news and in life. I'm Tim Harford. On a Wednesday morning in late April, the worthy people over at the International Comparison Programme, which is housed at the World Bank, published a new set of estimates for purchasing power parity. James Fletcher's here to help me explain why this is actually a fascinating story.
Yes, Tim, it is fascinating, even if it does sound a bit like a tedious piece of geekery. But it's a piece of tedious geekery that's changing the way we understand the world. For example, when these ICP numbers came out, some researchers in a Washington DC think tank did what they're paid for and started thinking and calculating. And pretty soon they produced this headline.
Global absolute poverty fell by almost half on Tuesday.
So what happened there? It's not that anybody was hungry the night before and woke up with food in their belly, or people are any less poor in any real sense. Just categorised differently on paper.
That's Justin Sandefur. He works for the Centre for Global Development, and he and his colleagues have come up with some rough and ready calculations, suggesting that the number of extremely poor people is much lower than previously thought.
So how did they do that? First, they took the World Bank's definition of extreme poverty. This is the famous dollar a day poverty line, although these days the line is set at $1.25 a day.
To find out how many people across different countries earn less than $1.25, data on incomes and prices have to be converted to dollars, but not to ordinary dollars. Instead, they're converted to an artificial type of dollar, which reflects the purchasing power of money in any given country.
Now, this purchasing power parity business, PPP, it's complicated. Let's try and explain.
Imagine there are two friends from the United States. Sarah.
Hello.
And Jane.
Hi. We both go to China to teach English for a week and we are paid 1,200 renminbi each.
What new ICP purchasing power parity figures were published and why do they matter?
At the end of the week, I fly back to the United States with that money while Jane stays in China.
Sarah goes to Bureau de Change in the United States and gets US dollars.
With that money, I go to my local shopping mall and I'm able to buy a new leather jacket.
And Sarah is relatively happy with her new purchase. That is, until she hears about Jane.
I'm still in China and I was able to buy two of the same leather jackets with the money I earned teaching.
This shows you that if you just convert a country's currency using conventional exchange rates, it hides the fact that the same amount of money has different purchasing power. To be able to compare the incomes and prices between countries, you have to create a new currency. This is what the International Comparison Programme does. It creates an artificial dollar.
So in the made-up world Jane and I inhabit, you could say that the income we earned in China went twice as far in China compared with that in the States.
Using the old set of PPP figures, the World Bank had estimated that there were more than a billion people in the world living in extreme poverty on less than $1.25 a day. The rough estimates from the think tank suggest that using the new PPP figures, the number of people under that extreme poverty line has almost halved.
And this has got development policy wonks hopping around because reducing the number of extremely poor people is one of the Millennium Development Goals agreed by the United Nations. This suggests we've made a lot more progress on that goal than we previously thought.
But hang on a second. Are we sure that this quick estimate from a think tank is correct? One issue is that the ICP wasn't specifically looking at the price of goods bought by very poor people. Here's the Chief Economist of the World Bank, Kaushik Basu.
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Chapters
4 chapters
1
What is the main topic discussed in this episode?
0:00–2:27
2
What new ICP purchasing power parity figures were published and why do they matter?
2:27–6:07
3
How did the Centre for Global Development conclude global extreme poverty 'fell by almost half'?
6:07–8:42
4
What is purchasing power parity (PPP) and how does it differ from exchange rates?
8:42–9:31