Tyranny of numbers

Poverty and the PPP

Posted in Poverty by Djavad on April 27, 2009

There appears to be some confusion surrounding the meaning and use of the PPP (Purchasing Power Parity) among some readers of this weblog and of Rastak, where Dr. Davoud Souri published a rejoinder to my comments on his poverty calculations. (I am sorry I cannot participate in Rastak discussions because I am not good in typing or composing in Persian!)

Comparison of poverty across countries is an important subject, and impossible to do without some sort of comparison of purchasing power of different currencies across countries.  Unfortunately, market exchange rates are not generally a good guide for such comparisons, hence the need for PPP comparisons.

A good starting point for a useful discussion of poverty and policies to combat it is to establish common ideas about what is regarded as high and low rates of poverty.  To establish such benchmarks, it is natural to refer to what other countries with similar level of productivity and income are able to achieve in poverty reduction.  It is one thing to complain about poverty if countries with similar incomes to Iran are doing much better and quite another if they are not, in which case the only point of reference is one’s own high and lofty ideals.

What does the PPP mean and how is it used in  poverty analysis?

First, it is only (but widely) used to compare standards of living across countries, not to establish poverty lines (none of the P’s in the PPP refers to poverty!).   The entire empirical growth literature is based on these numbers, so considerable amount of scientific effort goes into making sure the numbers mean what they are supposed to mean. The Word Bank (WB for short) publishes the numbers annually, but for years the real work has been done by researchers at the Penn World Tables at the University of Pennsylvania. Second, the PPP is not to be confused with the equilibrium exchange rate (one reader of Rastak proposes to buy all dollars at the (2007) rate of 3355 rials per dollar; I would too!).   The PPP is about how high prices are in the US relative to Iran, nothing more and nothing less. If anyone has a quarrel with the published numbers the burden of the proof is on them to show that the WB numbers are wrong. Convince the readers that what you can buy with 3355 rials in Iran is less than what you can buy with $1 in the US.  Failing that, ask someone who travels outside Iran or has a child studying abroad.  They know about the PPP.  (Someone I know had his daughter come home from Malaysia for a dental operation, air travel and all.)   Dismissing the World Bank calculations because their people do not live and shop in Iran is not a good substitute for doing the calcuations better.

Third, neither the WB nor I have suggested that the appropriate poverty line for Iran is 3355 rials or $1 per day.  The usual international comparison is based on $3 dollars per person per day (this is the so-called $2 per day rate based on the value of dollar in 1993). No one has suggested that this is the right number to use for Iran. Each country must pick its own number based on what it takes to have a minimum standard of living and in relation to average productivity in the country.  Poorer countries, such as China and India, often use the $1 threshold.   The number that I have picked in my paper on poverty and inequality is higher than $3).

But the problem with picking a poverty line specific for Iran is that it is hard to compare it internationally. For example, according to the World Bank, in 2005 the $2 per day (close to $3 in 2005) poverty rate for Turkey was 9.0%, while Iran’s was 8.0%. If you prefer a higher poverty line — such as the $10 line used in Dr. Souri’s study—chances are that you will find Turkey’s poverty rate is still a bit higher than Iran’s.

A fourth point is about the use of the poverty calculations. They have domestic use if there are government policies that trigger when a person’s income falls below the official poverty line.  Unlike Turkey, Iran does not have a national poverty line, possibly because there are no such policies in Iran. Poverty targeting in Iran is done differently than in many other countries, where a ministry is usually responsible for poverty alleviation. In Iran, the principal agency dealing with the poor is Komiteh Emdad, which is semi-public and relies on its own criteria to identify who is poor, mainly derived from information supplied by the community.

The argument about where the poverty line should be makes sense in politics and policy making but not in science.  I may think that life under $20 per day is very hard, but that is my personal opinion, and policy makers may decide to deliver services only to those below $3.  The point worth discussing is how to measure change in poverty from one year to the next.

When not used for policy and service delivery, poverty calculations can become a matter of taste and a weapon in electoral politics.  Unfortunately, the game of political football played with poverty rates confuses the international observers whose decisions affects Iran in some way.  Knowingly or unknowingly, journalists and commentators in the West use these figures, to paint a picture of a desperately poor population in need of international assistance.  These days Iran is watched carefully around the globe, so throwing half-baked numbers around can have consequences.  It is time to ask those who analyze poverty to document their work and subject it to peer evaluation, so others stop referring to “expert opinion” to push their political agenda.

4 Responses

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  1. Alireza Amini said, on May 31, 2009 at 7:39 am

    Dr. Salehi,
    You don’t have to participate in Rastak’s discussions in Persian. They are all fluent in English.

  2. Keyvan said, on April 29, 2009 at 6:31 pm

    Given that the World Bank revised its PPP figures for most developing countries in 2008, and by doing so statistically increased the number of “poor” people in the world, one should always remain skeptical about these comparisons. Sanjay Reddy has consistently criticized the World Bank data before and after their recent revisions, and other scholars have pointed out the politics embedded within the PPP project. So, while we shouldn’t abandon PPP data, we should always consider other options.

    Other measures of standard of living or well-being that are used in development studies instead of PPP consumption-adjusted income figures are non-income welfare indicators such as life expectancy, infant mortality, and adult literacy. On these indicators, Iran has performed quite well under the Islamic Republic, both in comparison to the previous Pahlavi monarchy and in comparison to other countries at Iran’s level of per capita income.

    I am very excited that this blog is around and kudos to Prof. Salehi-Isfahani for sharing his brain with the rest of us!

  3. Hamid reza said, on April 28, 2009 at 9:33 am

    Well,obviously the case is applicable if you compare the economic performance of the countries (coz the best or the only means to do this is through the Numbers ,which your blogs tilte reminds us how tyrant they could be!),but the PPP doesn’t show the real ingredients of what is called socio-economic facts of countries.The problem in the case of Iranian economy is not the GDP or even what is called PPP converted GDP .I think the sociopolitical core of discussion here lies in the Rentier institutions.For sure the subsidised policies of Islamic Republic has brough some egalitarian opportunities for all members of society (though i don’t believe it really was so), but it produced a very condition for growth of a new elite of Islamist rentiers who are the main sourse of populare discontent which is used by Mr.Ahmadi nejad as a vehicle for his political machine(he propagated himself as a champion and as an angel of justice for millions of needy hands living in marginal world of this rentier core).This people are the main source of general discontent .So poverty for them is not anymore lack of food or real homes made of bricks and mortars.Now they branded themselves poor because they have not access to jobs and rentier opportunies .I believe in today Iran we have a social pressure from downside to make new classes .
    I have a question which I think is worth to disuss .Dear Dr.Salehi ,I know that the componets of GDP are C+I+G+(X-M) so my question is ,will the GDP decrease by the lower oil prices ?

    Agian Thank you
    Hamid Reza

    • Mohammad said, on April 28, 2009 at 11:14 pm

      I think this idea was exactly reflected by a 2006 paper of Dr. Salehi-Esfahani named “Revolution and Redistribution in Iran”, which stated that in the socio-economic context of Iran, more subjective feelings of fairness and poverty may matter more than objective statistics.

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