Economic differences between rich and poor countries shrinking
Are the world’s poor better off now than 30 years ago? The answer has varied with the method of calculation used. But now, “Poverty, prices and international inequality”, a project carried out at the Norwegian Institute of International Affairs (NUPI), has concluded that since 1980, the disparity between rich and poor countries has indeed been diminishing.
The project was headed by economist Arne Melchior.
For decades, general economic indicators have indicated strong growth in parts of the world considered the poorest. Yet figures relating specifically to poverty in those same countries have not inspired much optimism.
Have the figures for economic growth been exaggerated or are the poverty estimates too pessimistic? What is the true picture?
Difficult to measure poverty
If you have a dollar to spend in Lesotho, you can get more for your money than in Norway. To correct for this discrepancy, economists have always adjusted their figures for local purchasing power in one way or another; this is known as purchasing power adjustment. In essence, all our knowledge about economic growth in different countries is based on these adjusted figures.
How should purchasing power be measured? (Photo: Shutterstock)
In this way a dollar’s wages in Lesotho could, for example, be calculated to have the purchasing power of 2.5 dollars, if we compare what the spender could get for that same amount had she bought something in Norway.
But it is more complicated than that. Because of the many different factors involved, the World Bank, for example, found in 2005 that it needed to lower its average income estimates for countries such as India and China by nearly 40%.
“The new figures adjusted for purchasing power that were collected in 2005 indicated that the number of people in the world defined as poor, according to the accepted definition at the time, increased from 0.9 to 1.75 billion people. After that the poverty line was moved up so that the final figure came to 1.4 billion,” explains Arne Melchior. “This example illustrates how measuring poverty has been a very approximate science and that more knowledge is needed.”
Dr Arne Melchior conducts research on the differences between the world’s rich and poor countries. (Photo: Privat)
Income figures and purchasing power
“Another way to measure poverty is to analyse the difference in average income in various countries by using the usual exchange rates, a method that does not take into account that price levels vary. The results yielded by this method show widening disparity between rich and poor countries throughout the entire 1980s and until 1993. But when the figures were adjusted with the Purchasing Power Parity (PPP) index, we concluded the opposite: that the differences had decreased during that entire period. This shows just how strong an impact adjustment for purchasing power can have,” says Dr Melchior.
But how do we arrive at the correct figures? Arne Melchior has been searching for the answer to this question. One of his important findings was that through the 1980s and until 1993, prices in the wealthy countries rose comparatively more than in the poor countries. On the basis of this, Dr Melchior concludes that it is the price-adjusted figures that best indicate changes in the gap between poor and rich countries up to 1993. In other words, the gap between the wealthy and poor countries was narrowing during this period.
China and India weigh heavily
From 1993 to today there has been no significant difference between the two calculation methods for rich/poor inequality figures, whether based on exchange-rate comparisons or adjusted for purchasing power. Both methods indicate that disparity between wealthy and poor nations is steadily diminishing.
However, Dr Melchior emphasises that the findings apply to the poor countries as a group and points out the huge impact that strong economic growth in China and India over the last 15 to 20 years has had on the figures.
Outdated theories
Although measuring poverty produces knowledge of global importance, few researchers have become involved in this field of research. Dr Melchior, who maintains close contact with colleagues abroad, has been testing new approaches in this field, with funding from the Research Council's major development programme Norway – A Global Partner (NORGLOBAL).
“Explanations of pricing differences between countries have long been based on research literature from the 1960s. The theories were good, but it was time to incorporate new knowledge about international trade into the analyses,” says Dr Melchior.
Dr Melchior’s studies have focused on how price (purchasing power) adjustments of income have affected international disparity estimates. It was this approach that led him to conclude that the differences between the world’s rich and poor had been reduced in each of the last 30 years.
Globalised, but unequally
“In the project I also wanted to examine how globalisation affects price differences between countries,” Dr Melchior explains.
Conventional wisdom long held that price differences between countries are due to differing prices for services, since services are traded between countries only on a limited scale. That same theory is based on the fact that the price of goods being traded between countries should be equal in the countries concerned. In other words, a car should cost the same in Lesotho as in Norway, if taxes are not included in the calculation. A visit to the hair stylist, on the other hand, will be priced differently in the two countries.
The gap between rich and poor countries has narrowed. (Photo: Shutterstock)
“We now see that the picture is far more complicated than that,” explains the international economist. “Modern theories on trade between countries, such as those based on the work of Paul Krugman, winner of the 2008 Nobel Prize in Economics, reveal that there is only partial competition in various markets, due to several factors. This limits the degree to which prices of goods traded internationally can be seen as equal.”
Income levels adapted
“Systematic price differences between countries can also result from differences in market access, economies of scale, trade bloc membership, and the fact that some countries simply have an advantageous geographic location. All this can then affect both wage levels and prices,” Dr Melchior explains.
As part of the project, Dr Melchior has constructed a model for price developments of goods traded between countries. The model supports his conclusion: across much of the world, globalisation of trade does not necessarily lead to equal prices. Instead, prices are almost systematically correlated to the income level of different countries. So not only hairstyling and other services, but also industrial goods are cheaper in Lesotho than in Norway.
| About the NORGLOBAL programme |
|
The NORGLOBAL programme seeks to strengthen Norwegian research on and in cooperation with countries in the South. The programme has incorporated the former research programme Poverty and Peace Research (POVPEACE) and cooperates with the Consultative Group on International Agricultural Research (CGIAR) Fellowship Programme. The NORGLOBAL programme also funds activities in the areas of: Economic Growth, Poverty Reduction, Reproductive Health and Population Dynamics (ECONPOP); Women’s Rights and Gender Equality in Development (Women and Gender); Globalisation of Environmental, Energy and Climate Research (GLOBMEK); and the NORGLOBAL networks. Additional research topics related to development may be incorporated under the NORGLOBAL programme. |
- Published:
- 09.09.2010
- Last updated:
- 02.09.2010
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Contact
- Inger-Ann Ulstein Director (department) +47 22 03 73 43 iau@forskningsradet.no
