Life at the bottom of the middle kingdom

Discussion in 'China' started by JAISWAL, Jan 30, 2012.

  1. JAISWAL

    JAISWAL Senior Member Senior Member

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    China's poverty line: Life at the bottom of the middle kingdom | The Economist
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    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
    standards?
    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.
     
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