In response to:
Gloomy About Globalization from the April 17, 2008 issue
To the Editors:
There is much to think about in Professor Skidelsky’s review of Making Globalization Work, by Joseph Stiglitz [NYR, April 17], but there is just one point on which I must comment. Skidelsky tacitly accepts the World Bank’s criterion for extreme poverty, as an income of less than a dollar a day. No one lives on a dollar a day. If the dollar is your currency, you will be dead in a matter of weeks. The criterion, of course, applies not to the poorest in the US but to families in developing countries whose currency, if indeed they use one, is not the dollar. I refer to the rural poor, who mainly subsist on what they produce, either for their own consumption or for local barter. Monetary earnings will be no more than minimal. National income accounts, to capture the subsistence sector, must rely on estimates of output gathered by local officials, which statisticians then value at the local prices operating where markets do exist. There is wide scope for error.
That aside, it is the method of converting local prices into dollar values that must be questioned. The applicable exchange rate used for intercountry comparisons is obtained by estimating “purchasing power parity,” as given by the ratio of the total value of a common basket of goods and services priced in the two currencies. This method works well enough when average consumers in the two countries purchase similar baskets. In developing countries, the monetary economy is concentrated in the urban areas. In India, for example, this means comparing the average basket in Mumbai and other big cities with that common across the US. It cannot be a very close comparison, but it may well be closer than that between the urban and rural parts of India. The relative price of a meal out, a new suit, or a television in the respective cities is irrelevant in the valuation of what subsistence farmers produce.
The “dollar a day” slogan must have been adopted by the World Bank as a way of dramatizing world poverty. Professional economists should never use it without a severe health warning. The mischief it can cause is in giving totally misleading measures of success in tackling poverty, and in making spurious comparisons between countries. The basket of the malnourished in Equatorial Guinea will differ in significant detail from that for the poorest in northern China. Valuing either basket by the exchange rates of those who use money and purchase totally different items results in numbers that are literally meaningless. The only relevant numbers are those that compare, geographically or over time, the basic components of survival in a specific environment: calories to feed the body; health to keep the body working; and education to give the chance to rise above abject poverty. The World Bank has these numbers; it should tell their story in these real terms.
Sherborne, Dorset, England
Robert Skidelsky replies:
Mr. Tipping is quite right to propose a “severe health warning” for the “dollar a day” slogan. As he says, it was a popular, easily understood way of dramatizing world poverty and measuring progress in raising living standards. The substantive question is whether the measure does capture changes in real consumption. If there is a decline in the number of people living on less than one dollar a day, does that mean that poverty has gone down or merely that the dollar has gone down?
Theoretically it could be the latter. However, it should be noted that the data on poverty used by Stiglitz and those quoted by me from the World Bank relate to the twenty years before 2001, when there was no trend in the international value of the dollar, but a substantial decline in the number of those living below one dollar a day. The updated World Bank figures show that the percentage of the world’s population living on less than one dollar a day fell from 28.7 percent in 1990 to 22.3 percent in 1999 to 18.4 percent in 2004. The largest fall was recorded in China, whose currency was pegged to the dollar in this period. The decline of the dollar since then has distorted the figures, but not altered the underlying conclusion that poverty is going down faster than the dollar is depreciating.
The irony is that in the last year some of the poverty reduction achieved may have been reversed by the soaring cost of food —a new development which was not covered by the data in Stiglitz’s book or in my review of it.