The politics of measurement

Alan Freeman

Passions, politics and povertyPoor people are passionate about being poorRich people are passionate about being richPolicy is influenced by both feelings and evidenceEvidence is a political footballWe have to think critically about evidence

Don’t take anything as ‘true’ because it sounds convincing. Maybe you wanted to be convinced.Don’t take anything as ‘true’ because you trust the person who says it. People trusted Bernie Madoff.

Critical thinking = examine presuppositionsWhat must we assume, if we accept this evidence?What other viewpoints are there?Do they lead to different answers, or the same?If different, what assumptions lie behind the difference?

Hot contests

“The big lie of global inequality”Martin Wolf (2004)

“Labour’s New Internationalism”Jay Mazur (2000)

Some issues among many‘Appears to be’

Does ‘appearance’ justify the title ‘Big Lie?

‘The World Bank Argues’ (Wolf); ’The UNDP documents’(Mazur)

These sources differ. Does evidence reduce to authority?

Are the comparisons comparable?What is being compared with what? Wolff: ’60th to 80th percentile’. Mazur ‘200 richest people’Countries or people?Per capita or total?Growth or absolute level?Assets or income?Wages or income?

$64m: What do the protagonists mean by income?

A causal story is at stake: does globalisation work?

Firebaugh and Gosling 2004“Following nearly two centuries of growth, global income inequality

declined in the last decades of the 20th century … the major equalizing force is faster-than-world average income growth in China and South Asia, industrializing regions where 40% of the world’s people live. Apparently what matters most about economic globalization thus far is its role in the

spread of industrialization throughout populous poor regions of the world. If so, then globalization most likely has reduced global income inequality.”

Similar arguments from Sala-i-MartinWade, Milanovic, Reddy responses (see bibliography) on accuracy of measurementHowever, a bigger issue is lurking

Digging deeper

Are we concerned with poverty or inequality?Absolute or relative poverty?Is there such a thing as absolute poverty?Is a person without a car a poor person?Was that true in 1920? Is it true in Bangladesh?

The ‘rights’ approach: United Nations charter, Millenium Goals, Amartya Sen (capabilities), Elson/Radhakrishnan

All suppose a ‘world’ standard of rightsIf we suppose a uniform standard then

poor=unequal and unequal=poor

Cause, or effect? If we reduce inequality will that reduce poverty?If we reduce poverty will that reduce inequality?Is there some third cause that will reduce both?What was the ‘effect’ of globalisation?

Inequality, using Purchasing Power Parity (PPP)

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Third World excluding China Third World including China

Source: International Comparison Project (ICP)Note: data not available for 2004-2008

Inequality, using MEPP

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1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

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Third World excluding China Third World including China

Source: International Monetary Fund (World Economic Outlook), World Bank (world Development Indicators)

MEPP = ‘Monetarily Effective Purchasing Power’ = current prices and market exchange rates

Two stories, one world

• Two factors determine what the story is•Is China included?•Do we use PPPs or MEPPs?

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1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

Including China, using PPP

Excluding China, using MEPP (current)

What do the charts tell us?

On both measures, there is a downward trend from 1980 followed by an upward trend. The issue is the relative size of these effects:

If we miss out China, the trend is unequivocally down – using both measuresIf we use MEPP, the trend is unequivocally down – with or without China

‘Good times’ story requires we use PPP measures, and ascribe China’s success to globalisation. But:

Is the ‘globalisation effect’ in fact a ‘China effect’?Do PPP measures convey how the world economy is actually evolving?

What’s on the tin: origins of the PPP approach

Prewar: UK board of trade, real wages of workers compared with Belgium, France, Germany, UK and US. Then ILO-Ford UK-US

What wage to give UK workers for comparable living standard?

Colin Clark 1940 Conditions of Economic ProgressCompared of real expenditure for 29 countries. Expenditure in ‘international units’: quantity of goods that can be purchased in each country for one US dollar from 1925-34. Only for consumer goods and services.How can we compare living standards between 2 countries, when prices are ‘lower’ in one than in another.

Heston and Summers, Penn World Tables (http://www.pwt.econ.upenn.edu/)

“the number of currency units required to buy goods equivalent to what can be bought with one unit of the currency of a base country”

Rapidly adopted1992 IMF, World Bank, OECDICP now an international project, over 130 subscriber countriesSOURCE is ICP and World Bank, also OECD and ICOP

Note 1: became very popular at the same time that the IMF and World Bank needed to demonstrate their policies were workingNote 2: statistical bodies attached to IMF/World Bank are not independent

Data shortages

Eg: India, China did not take part till 2005

IMF then revised estimates of Chinese GDP down by 15%

Representativity

what is ‘cheese’? (Roquefort Monterey Jack)

Transitivity

US/India X India/Mexico US/Mexico

We can make them transitive by averaging

The ‘average’ price is not a price that you actually find anywhere

Aggregation

GDP of Europe (UK+France+Germany+Italy+…)

Question: what is really being measured?

Claim: we are measuring ‘true consumption’

Analogy: the ‘Big Mac’ index

Problems, problems, problems

A critical approachAccept the argument behind PPPs for now

The difference between PPP and MEPP measure of income is then a ‘price index’

If the MEPP measure of a country is 3 times smaller than the PPP measure, this is interpreted as ‘prices are 3 times lower in that country’

So what has actually happened to prices, in the third and first world?

The ICP price index (PPP/MEPP)

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Third World excluding China

Third World including China

(Larger= lower prices): prices have halved, and more, during ‘globalisation’

What’s in the basket?

‘Prices’ have fallen in the third worldDo PPPs register poverty – or just price changes?

A country needs not just to eat but to feed itselfNeeds capital goodsNeeds manufacturing inputs and technology

Reproduce not just humans but the means by which they reproduce themselves

‘Give a man a fish and he will eat: give him a fishing rod and he will feed’. Blah.

Consumption goods are cheaper in the poor countries – because wages are lowBut technology is relatively expensivePoor countries specialise in labour-, resource-intensive products, relying on rich countries for high-technology, capital-intensive products - typically capital goodsDo capital goods figure in PPP measures?

The iPod Index

Brazil $327.71 Germany $192.46 India $222.27 China $179.84 Denmark $208.25 Mexico $154.46 France $205.80 US $149.00 UK $195.04 Japan $147.63 Spain $192.86 Canada $144.20

US dollar cost of an iPod Nano, January 2007

The ‘iPod index’ and the Big Mac Index

http://www.comsec.com.au/public/news.aspx?id=809

Machinery and consumption good prices compared

Table x: Price of Machinery and Capital Investment, relative to domestic consumption

First world Third world Country Capital Investment Machinery Country Capital Investment Machinery

Portugal 144% 205% Sri Lanka 94% 389% Korea 135% 170% Pakistan 264% 353% New Zealand 136% 169% Bangladesh 304% 352% Hong Kong 155% 164% Egypt 332% 323% Greece 126% 158% Morocco 237% 321% Spain 129% 158% India 211% 300% Canada 97% 120% Mauritius 369% 290%

Divergence, Big Time

The two measures are divergingThe statistics are telling us something else

Labour is cheaperTherefore, locally produced goods are cheaper

Typically low in the value chain, low-technology‘Resource-exporting’ model of growthGoods required for industrialisation are expensiveDoes this make industrialisation – required to escape and permanently reduce poverty – easier or more difficult?

BRIC: Industrialisation has occurred in some countries, but is the cause globalisation or its opposite?A further issue: vulnerability to price shocks

What will happen when the price of food goes up?

Are prices and poverty linked?

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(double-click to activate spreadsheet and scroll through the charts)

Check it out!

Prebisch and SingerDependency SchoolModernity of backwardness

www.hetecon.academia.edu/AlanFreeman

Not covered here

Milanovic/PovCal on ‘household incomes’ vs territorial measuresMeasures of inequality (Gini, etc)

Quick References

ideas.repec.orghetecon.academia.edu/AlanFreeman … ‘Poverty of Statistics’ forthcoming, in Third World Quarterly.‘Crisis of Globalisation’ (Freeman and Kagarlitsky 2004).Bailouts and Bankruptcies’ , Fernwood Press – out soon!

Penn World Tables 6 Technical Documentation, October 2002. http://pwt.econ.upenn.edu/Documentation/Doc-tech.pdf.

Bart van Ark. International Comparisons of Output and Productivity: Manufacturing Productivity Performance of Ten Countries from 1950 to 1990, http://www.ggdc.net/dseries/totecon.html, chapter 2

Ipod Index http://www.comsec.com.au/public/news.aspx?id=809

Colin Clark 1940 Conditions of Economic Progress

Heston and Summers, Penn World Tables (http://www.pwt.econ.upenn.edu/)

Firebaugh, G. and B. Goesling (2004). "Accounting for the Recent Decline in Global Income Inequality." American Journal of Sociology, Volume 110 (Number 2 (September 2004)): 283–312.

Robert Hunter Wade. Debate about Income Inequality. UC Atlas of Global Inequality. http://ucatlas.ucsc.edu/income/debate.html.

Wade, R. (2004). "Is Globalization Reducing Poverty and Inequality?" World Development 32(4): 567-589.

Sala-i-Martin, X. (2001). “The Disturbing "Rise" of Global Income Inequality” http://www.columbia.edu/~xs23/papers/GlobalIncomeInequality.htm.

Mazur, J. ‘Labour’s New Internationalism’, Foreign Affairs Vol 79, No. 1, Jan-Feb 2004

Milanovic, B. “The Ricardian vice: why Sala-I-Matin’s calculations are wrong”, typescript, Development Economics Research Group, World Bank, 2002, available www.ssrn.com.

Wolf, M. ‘The Big Lie of Global Inequality’, Financial Times 8 February 2004

References

“As John Maynard Keynes is alleged to have said: ‘When the facts change, I change my mind. What do you do, sir?’

I have changed my mind”

[‘It is time for comprehensive rescues of financial systems’ – Financial Times October 7 2008]

Wolf 2004 ‘The Big Lie’“the 1980s and 1990s appear to be the first decades in the past

two centuries in which global inequality declined rather than rose.”

“There appears to have been an improvement in the relative incomes of a large number of people in the bottom 60 per cent of the global distribution, principally those living in Asia, relative to

those between the 60th and 80th percentiles”

“The World Bank argues, for example, that the number of people living on less than $1 a day in east Asia fell from 418m in 1987 to 265m in 1996, before rising to 278m in 1998, in the wake of the

financial crisis.”

“The most recent U.N. Development Report documents how globalization has dramatically increased inequality between and within nations”

“A world in which the assets of the 200 richest people are greater than the combined income of the more than 2 billion people at the other end of the economic ladder should give everyone pause.”

“Only 33 countries managed to sustain 3 percent annual GDP growth on a per capita basis between 1980 and 1996; in 59 countries, per capita GDP declined. Eighty countries have lower per capita incomes today than they did a decade or more ago.”

Mazur 2000 ‘Labour’s New Internationalism