In 2005, China participated for the first time in the International Comparison Program (ICP), which collects primary data across countries on the prices for an internationally comparable list of goods and services.

This paper examines the implications of the new Purchasing Power Parity (PPP) rate (derived by the ICP) for China's poverty rate (by international standards) and how it has changed over time.

We provide estimates with and without adjustment for a likely sampling bias in the ICP data. Using an international poverty line of USD 1.25 at 2005 PPP, we find a substantially higher poverty rate for China than past estimates, with about 15% of the population living in consumption poverty, implying about 130 million more poor by this standard. The income poverty rate in 2005 is 10%, implying about 65 million more people living in poverty. However, the new ICP data suggest an even larger reduction in the number of poor since 1981.

Our previous estimates of global poverty measures revealed a substantial contraction in the incidence of poverty in China over the period 1981-2004; the latest update in Chen and Ravallion (2007) indicates that the proportion of China’s population living below an international poverty line of $1.08/day at 1993 prices fell from 64% in 1981 to 10% in 2004; the number of poor by this measure fell by about 500 million.

This international poverty line was converted to local currency using the 1993 Purchasing Power Parity (PPP) rate for China produced from the country-level price surveys done by the International Comparison Program (ICP). The PPP gives the conversion rate for a given currency into a reference currency (the $US) designed to assure parity in terms of purchasing power over commodities. However, these calculations for China rested on an estimate of the country’s PPP for 1993 that was not based on a 1993 price survey, but rather was an updated version of an older (1986) PPP for China.2 China’s estimated level of poverty in 2004 was thus rooted in a PPP rate that was almost 20 years old, and even then was not drawn from the ICP.

In this light, the new estimates in World Bank (2008) of China’s PPP rate for 2005, based on the ICP price survey for that year, are undeniably important new data. The results for China’s first participation in the ICP have already attracted considerable attention, as they suggest that China’s economy in 2005 is 40 percent smaller than we thought. For example, Keidel (2007) claims that the new PPP for China adds 300 million to the count of that country’s poor. Some observers have gone further to claim that the new PPP casts doubt on the extent of China’s, and (hence) the world’s, progress over time against poverty.

All this begs for a more careful scrutiny of China’s new PPP and its implications for the extent of poverty in the country and how much progress it has made against poverty. This paper focuses solely on the implications of the new consumption PPP released by World Bank (2008).

Our analysis combines the results of the 2005 ICP with a new compilation of national poverty lines for developing countries and tabulations of the distribution of consumption and income in China provided by the National Bureau of Statistics (NBS), based on their household surveys, and our interviews with staff of NBS.

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Policy Research Working Paper 4621

Shaohua Chen and Martin Ravallion
Development Research Group, World Bank. May 2008
1818 H Street NW, Washington DC, 20433, USA

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Conclusions

A careful scrutiny of the new PPP for China does not suggest that its implications for the extent of poverty in that country (by international standards) are anywhere near as dramatic as some casual observers have suggested. On a priori grounds, it was plain that the 300 million count for the increase in the number of China’s poor was a gross exaggeration because it ignored the (documented) fact that the 2005 ICP price survey is not representative of the cost-of-living in rural China, where prices (particularly for the goods such as food for which the poor have a high budget share) are appreciably lower than in urban areas. Instead of an extra 300 million people deemed to be poor by the standards of what “poverty” means in low-income countries, our calculations suggest the figure is closer to 130 million for consumption poverty and about half that figure for income poverty.

Of course, there can be no denying that this is a large upward adjustment in our assessment of China’s poverty. Given that China had never agreed to participate in the International Comparison Program prior to 2005, it is possibly not too surprising that the prior estimates of China’s PPP rate from non-ICP sources were so far off the mark. This reaffirms the importance of global participation in the ICP.

However, even if we had not done any of the calculations reported in this paper, it should have been obvious enough that the new PPP rate alone cannot entail the sort of downward revision to China’s rate of progress against poverty over time that some observers have claimed. That is because the real growth rates are unaffected by the change in the PPP, and it is China’s high growth rates that have driven poverty reduction.

Given that the same growth rate can have different implications for the change in the poverty count depending on the initial level of poverty, one may well find an even greater progress. That is indeed what we find when we re-estimate China’s poverty measures over time by our new international poverty line.

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