China's poverty line: Life at the bottom of the middle kingdom | The Economist
This week China raised its rural poverty line to 2,300 yuan a year. It's about time. China's official definition of poverty has traditionally been quite
miserly. In a 2008 paper Shaohua Chen and Martin Ravallion of the World Bank noted that
China's rural poverty line was "one of the lowest lines in the developing world".
So how generous is 2,300 yuan by international
Some news reports (see here) implied that China's new line still falls below the World Bank's global poverty standard of $1.25 a day. That seems obvious: 2,300 yuan per year is 6.3 yuan
per day, or a little less than $1 at today' exchange rate.
But the World Bank's poverty line is not set at
market exchange rates. It's $1.25 in 2005 Purchasing-Power-Parity (PPP) dollars. By the World Bank's definition, you are poor if your
purchasing power (ie, your command over
goods and services) is less than that of an
America subsisting on $1.25 a day in 2005.
That's simplifying a bit, because international
comparisons of purchasing power are fraught
with difficulties. Fish, for example, is an abundant
staple in coastal countries but an expensive treat
in landlocked, mountainous regions. If you found
a Bolivian enjoying the same amount of fish as a
Chilean, you should not conclude that the two are
equally well off. Likewise, the hilsa is a middle-
class favourite in Bangladesh, but an out-of-stock
specialty item in America. Only rich Americans
can eat as much hilsa as middle-class
Bangladeshis. Nonetheless, in theory, the
international poor consume the same amount as
an American living on $1.25 a day in 2005.
This point is I think still poorly understood. When
people hear that almost 1.4 billion ( 1,374m) people
live on less than a $1.25 a day, they comfort
themselves with the thought that a dollar
stretches much further in a poor country than it
does in America. They may have fond memories
of backpacking around India or Guatemala on a
shoestring during their younger days. But that is
false comfort. The World Bank knows full well
that a dollar packs more punch in a poor
country. When it says someone is living on $1.25
a day, it means they are living on what that
would buy you in America in 2005, not what it
would buy you in Guatemala, India or China.
Once that's understood, how does China's new
poverty line stack up? To make the comparison,
you have to account for differences in purchasing
power over time, as well as between countries.
China's poverty line is set at 2010 prices. Thanks
to inflation, 6.3 yuan in 2010 bought only as
much as 5.46 yuan in 2005.
That adjusts for time, what about place?
According to the World Bank, 5.46 yuan in China
in 2005 stretched about as far as $1.33 in America
in the same year. (That's using the 2005
consumption PPP rate of 4.089.) So by that
calculation, China's new poverty line is eight cents
higher than the World Bank's.
However, China deems a person poor if
their income is less than $1.33 (at 2005 PPP) a
day. The World Bank says they're poor if
their consumption is less than $1.25 a day. The
difference between income and consumption is
saving. So if someone consumes $1.24 and
saves 9 cents, they are poor by the World Bank's
definition, but not by China's. That might make
China's definition of poverty more stringent than
the World Bank's.
But that's not the end of it. In China, the PPP
estimates are biased. They are based on an
international comparison of prices overseen by
the World Bank but carried out by China's
National Bureau of Statistics. It looked at prices in
11 Chinese cities. But China's cities are much more
expensive than China's villages. Some effort was
made to correct for this, but not enough.
Shaohua Chen and Martin Ravallion argue that the
price level the NBS reported was 37% higher than
the rural prices China's villagers face.
If that's the case, then China's new poverty line is
equivalent not to $1.33 per day, but to $1.83 per
day (1.334*1.37) in 2005 $PPP. That is
comfortably higher than the World Bank's global standard. But it's still a miserable existence.