The number of people living in dire poverty has fallen by roughly half in the past half-decade, at least on paper.
Newly released price data suggest that about 600 million people around the world were living on $1.25 a day or less in 2010, down from roughly 1.2 billion in 2005.
The same ICP price estimates led to recent news reports that the Chinese economy is about to surpass the U.S. economy in size.
In general, economists compare countries' economies by converting one country's nominal gross domestic product into the other country's currency using prevailing exchange rates. It's thought, however, that such comparisons can be misleading when the exchange rate is influenced by factors unrelated to the value of the currencies -- for instance, in the case of China, which the U.S. says artificially holds down the value of the Yuan.
To address this problem, the ICP constructs prices indices to equalize the cost, in one country’s currency, of a basket of goods in both countries. Using the index, the exchange rate can be adjusted to reflect the differential in the cost of living between two countries — what is known as the Purchasing Power Parity, or PPP, exchange rate. In some cases, PPP figures can present a better comparison of material well-being between countries with different costs of living. And in general, it makes low-cost developing nations appear richer.
Updated ICP data shows that in PPP terms, China’s economy grew from 43 percent of America’s in 2005 to 87 percent in 2010, indicating that China’s output will eclipse that of the U.S. sooner than thought, if it hasn’t already.
In exchange-rate terms, Chinese GDP was just $7.3 trillion in 2010. But adjusted for PPP, that figure rose to $13.5 trillion, near the U.S.’s $15.5 trillion economy. Of course, the U.S., with its drastically smaller population, remains far ahead on a per-capita basis. Chinese GDP per capita is just over $10,000 in PPP terms, 20 percent of the comparable figure for the U.S., and roughly just half that in regular GDP per capita.
The steep drop in measured global dire poverty is as dramatic as China's rise. A Brookings Institution analysis of the new ICP data shows that the number of humans under the global poverty line of $1.25 (in 2005 dollars) fell to less than 600 million because prices in their countries were lower than previously thought.
The $1.25 line was set in 2005 by taking the average poverty line of the 15 poorest countries.
It is important to note that this measured drop in poverty reflects a change in the unit of measurement, rather than a change in the prevalence of poverty itself. Furthermore, the ICP data collection is an enormous undertaking, involving numerous pitfalls.
Nevertheless, Brookings scholars Laurence Chandy and Homi Kharas wrote following the data’s release that the goal of ending extreme poverty is “highly ambitious but eminently achievable. The new price data reinforce this belief, and indicate that we are even closer to the finish line.” Chandy and Kharas note, however, that updating the poverty baseline brings it up from $1.25 to $1.55, and the number of global poor to just under a billion.