2009 Purchasing Power Parity Update for Selected Economies in Asia and the Pacific

A Research Study

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• Publisher: Asian Development Bank
• Year: 2012
• Print ISBN: 9789290928607
• eBook ISBN: 9789290928614
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

This report presents the research initiative to explore an alternative methodology for extrapolating purchasing power parities (PPPs) for 21 participating economies in the Asia and Pacific region. The 2009 PPP Update provides an intermediate benchmark and more firmly based real expenditures and price level indexes for 2009 than would have been possible using the conventional extrapolation technique. The results include PPP-based gross domestic product and its major aggregates of actual final consumption; collective consumption expenditure by general government; gross fixed capital formation; changes in inventories and net acquisitions of valuables; and, balance of exports and imports.

Introduction

1

The Role of Purchasing Power Parity

Economic information is crucial in formulating policies and programs to improve human lives—the ultimate goal of economic development. However, the different social and institutional arrangements in different countries create difficulties in comparing levels of economic development. Comparisons of economic aggregates such as gross domestic product (GDP) are further complicated when economic variables are expressed in different currencies.

The challenge, therefore, is to convert economic aggregates such as the GDP into standard currency units that are comparable across countries. The most common method of converting economic data from a national to a common currency is to use exchange rates such as the US dollar. However, comparisons based on exchange rate—converted GDPs frequently yield results inconsistent with actual economic growth and level of development in terms of GDP in the countries being compared.

Awareness in the international community of the problems associated with exchange rate conversions gave rise in the 1960s to the International Comparison Program (ICP), which was intended to generate purchasing power parity (PPP) data. In their simplest form, PPPs are price relatives, which show the ratio of the prices in national currencies of the same good or service in different countries. PPPs, however, are calculated not only for individual products but also for product groups and for each of the various levels of aggregation up to and including GDP. Hence, the main purpose of PPPs is to obtain rates of currency conversion that eliminate the differences in price levels between countries and thus, permit volume comparisons.

The International Comparison Program

The first round of the ICP was conducted in 1970. It covered 10 countries and collected price data for a small range of goods and services. Since then six rounds of the ICP have been conducted—in 1973, 1975, 1980, 1985, 1993, and 2005—with each round becoming bigger and better, with more countries participating, a wider range of goods and services priced, and continuous improvements made in the methodology. The 2005 round of the ICP has been considered the most extensive and carefully monitored comparison, covering 146 countries from six regions: Africa, Asia and the Pacific, Latin America, Western Asia, Commonwealth of Independent States, and the Organisation for Economic Co-operation and Development (OECD)/Eurostat.

The 2005 International Comparison Program for Asia and the Pacific Region

In 2001, at the invitation of the World Bank, which served as global coordinator of the ICP, the Asian Development Bank (ADB) took the lead role in the coordination and management of the 2005 round of the ICP in Asia and the Pacific region. ADB implemented the regional technical assistance (RETA) Strengthening and Collection of Purchasing Power Parity Data in Selected Developing Member Countries¹ to carry out the 2005 ICP for Asia and the Pacific from 2003 to 2007. The outcome was the 2005 PPPs for Asia and the Pacific and comparable PPP-converted expenditures for major national accounts aggregates, including GDP for 23 regional economies² expressed in a common currency (Hong Kong dollars [HK$]) and at constant price levels. Importantly, the estimates of final consumption expenditure included expenditure categories, such as those on food, that were relevant to policy making, and enabled details to be derived for expenditures on staple products.

The results of the 2005 ICP in Asia and the Pacific region were released in a detailed publication, 2005 International Comparison Program in Asia and the Pacific: Purchasing Power Parities and Real Expenditures.³ The World Bank released the global results in Global Purchasing Power Parities and Real Expenditures: 2005 International Comparison Program.⁴

The success of the 2005 ICP in Asia and the Pacific region was a major achievement, not only for ADB but also for the national statistics offices (NSOs) and other national agencies of participating economies. The 2005 ICP was a statistical milestone in scope and coverage, and in the region-wide collaboration involved. Data obtained from the ICP were valuable input for comparing levels of activity and per capita income across regional economies, estimating a new poverty line to determine poverty levels, and assessing progress toward the United Nations Millennium Development Goals relating to poverty reduction.

Apart from coordinating the region’s ICP activities in 2005, ADB assisted in building statistical capacity in the region’s NSOs and developed statistical expertise in its own Economics and Research Department. Hence, the 2005 ICP was a major statistical project that provided an ideal opportunity for collaboration between ADB and the national implementing agencies toward the development and appreciation of ICP in the region.

Research Study on Poverty-Specific PPPs in 2005 for Asia and the Pacific

A valuable spin-off from the 2005 ICP in Asia and Pacific region was a research study on poverty-specific PPPs in 2005. Before the 2005 ICP, the World Bank had established an “absolute poverty line,” which was the equivalent in local currency of US$1.08 per day (often referred to as “US$1 a day”). On the basis of the 2005 PPPs, the absolute poverty line was raised to US$1.25. Converting this “dollar a day” threshold into local currency will produce significantly different outcomes, depending on whether the conversion is made via exchange rates or via PPPs. International organizations use PPPs to measure the purchasing power in local currency of the absolute poverty line because exchange rates significantly understate the purchasing power of the currency of lower income economies in their own markets.

The expenditure patterns of the poor differ significantly from the overall national average in most economies, including lower income economies. Therefore, in the 2005 ICP round, the Poverty Advisory Group (PAG) established by the ICP Global Office identified the expenditure categories (referred to as “basic headings”)⁵ covering goods and services most important to the poor (e.g., food, clothing and footwear, housing, and health). Recognizing that poverty-specific PPPs are important for the accurate measurement of poverty incidence and the formulation of policies for poverty reduction, ADB did a research study on poverty-specific PPPs in 2005. Sixteen economies participated in this study; they were Bangladesh, Bhutan, Cambodia, Fiji, India, Indonesia, the Lao People’s Democratic Republic (Lao PDR), Malaysia, the Maldives, Mongolia, Nepal, Pakistan, the Philippines, Sri Lanka, Thailand, and Viet Nam.

The study aimed to develop a methodology that would provide significantly improved PPPs for converting the international poverty line (IPL). The main goals of the poverty PPP study were to

(i)	produce a set of poverty PPPs for converting the IPL and implement the methodology proposed by the PAG for the 2005 ICP;
(ii)	collect prices of goods and services considered typical of consumption patterns of the poor and conduct poverty-specific price surveys in the participating economies;
(iii)	compile poverty PPPs using price data collected from poverty-specific price surveys;
(iv)	use various analytical approaches to study the sensitivity of PPP estimates derived from diverse sources of price data;
(v)	identify a poverty line better suited to Asia and the Pacific region than the conventional IPL; and
(vi)	estimate poverty incidence by applying the new IPL, converted using the derived poverty PPPs. To analyze poverty, PPPs were computed for a basket of goods and services typically purchased by poor households, using expenditures as weights to combine basic heading PPPs for those households. The expenditure patterns for households living in poverty were generally obtained from household income and expenditure surveys (sometimes called “household budget/expenditure surveys”).

The poverty PPP estimation was designed to provide important inputs for future compilations of poverty PPP. Aside from compiling PPPs to convert the IPL according to the methodology endorsed by the PAG, the study also looked into the sensitivity of the estimated poverty PPPs to different sources of price data—prices from the 2005 ICP in Asia and the Pacific region and prices from the poverty-specific price surveys. Effects of the different weights and aggregation methodologies were likewise examined to help identify a suitable approach and methodology for compiling poverty PPPs in the future. The results of the study, which was released in 2008,⁶ provides details on the activities undertaken for the poverty PPP study and new estimates of poverty PPPs derived using both the PAG’s methodology and the poverty-specific price surveys.

The 2009 PPP Update

An ICP benchmark provides a snapshot of real expenditures and the relationship between participating economies in a particular reference year. Analysts, however, are interested in obtaining annual estimates for real expenditures. It is not easy to transform data from an ICP benchmark into a time series. In particular, extrapolating PPPs based on GDP growth rates from a benchmark will rarely match precisely with a new benchmark when it becomes available several years later. The longer the gap between benchmark years, the more likely it is for the discrepancy between an extrapolated series and the new benchmark to be significant. Having benchmarks as close together as possible reduces the impact of such a discrepancy. However, conducting an annual ICP benchmark is a costly and time-consuming process.

Shortly after the results of the 2005 ICP were published, ADB started working on initiatives to address the issue of extrapolation, improve the operational aspects of the ICP, and minimize costs faced by member economies in collecting ICP price data.⁷ Harmonizing ICP price collection with price collection for consumer price indexes (CPIs) in member economies was one such initiative. ADB held a workshop in January 2008 to discuss the possibility of integrating ICP requirements into the regular price collection activities of NSOs. Among the issues that were brought up during the workshop were the difficulties involved in fully integrating ICP price collection into the CPI price surveys. The main problems related to (i) whether the ICP products fully represented the economy, particularly across a range of store types and in all localities within an economy; (ii) the incompatibility of ICP requirements for obtaining a national average price with the CPI procedures related to pricing locality-specific products for the CPI; (iii) the identification of appropriate products in rural areas (and their pricing); and (iv) the resource demands imposed on NSOs by the additional data collection. Concerns were also expressed about the usefulness of ICP data for national purposes, with the main users being international organizations rather than agencies within any of the participating economies.

As part of the lead-up to the workshop, eight economies⁸ participated in a survey of their CPI price collection procedures. The outcomes were an important input into the workshop discussions. Fully incorporating ICP requirements into ongoing price collections was considered not feasible because of the costs involved. Therefore, three means of integrating the ICP and CPI data collection were discussed at the workshop.

The first was to use a “rolling benchmark” approach to collecting ICP prices. It involves pricing approximately one-sixth of the products in each of the 6 half-years during a 3-year period. The ICP prices are then estimated by using changes in the corresponding CPI product prices to adjust them to the price level of the benchmark year. This procedure is being used successfully by the OECD and Eurostat in their joint PPP program. An important advantage is that the workload during the ICP price collection period is spread evenly over time rather than concentrated in a single year. In addition, estimates of PPPs and real expenditures for the years between benchmark years become more accurate.

The second approach considered was to develop the lists of products to be priced on a subregional basis rather than for Asia and the Pacific region as a whole. The advantages of subregionalization are that the product lists for each subregion could include a smaller range of products than the current regional list, and quality differences in the products priced are likely to be less significant than those in a regional list. As a result, it would be easier to use prices of products collected for the CPI. However, the subregional results would have to be linked together in some way to produce the PPPs and real expenditures for the region as a whole—a major disadvantage, given that regional linking proved to be one of the most difficult issues to resolve in the 2005 ICP.

The third method discussed was to develop a core product list, which would be priced regularly and supplemented by some specially collected product prices in an ICP benchmark year. Full details of the outcomes of the study as reported during the January 2008 workshop can be found in the ADB Economics Working Paper series entitled Integration of Consumer Price Indices and the International Comparison Program for Asia and the Pacific Region: How Can They Be Achieved?⁹

In consideration of the 2005 ICP recommendations, ADB implemented the research initiative under RETA 6482 to provide an alternative methodology for extrapolating PPP. The research initiative, termed “The 2009 PPP Update” (the Update) provides an alternative to the extrapolation methodology. It provides an intermediate benchmark for 2009. The Update would have a more firmly based real expenditure for 2009 than would have been possible via the commonly used extrapolation technique. The aim was to update the 2005 PPPs to 2009 but in a limited way so that the costs involved would be much less than those for a full benchmark ICP. In addition, it provided a firm step-off point for collecting and compiling the data required for the 2011 ICP.

Compared with the full 2005 ICP, the Update was a small-scale data collection exercise in terms of products priced, frequency of price collection, and geographic coverage within the region’s economies. A core list of items was developed from the full list that had been specified for the 2005 round. The price collection surveys for products in household final consumption expenditure were carried out once in each quarter of 2009 in each economy’s capital city (plus some major cities when products could not be priced in the capital city), rather than across all localities. However, the PPPs and real expenditures estimated from these prices related to the full scope of economic activity as defined in the 1993 System of National Accounts (1993 SNA). Apart from providing PPPs that will allow comparisons of activity levels for economies in the region in 2009, it is also intended to improve existing methodologies and develop new ones that could be adopted for the 2011 ICP.

2	Overview of Purchasing Power Parities

Introduction

This section gives an overview of the conceptual framework ...

Table of contents

• Front Cover
• Title Page
• Copyright Page
• Contents
• Foreword
• Acknowledgments
• Abbreviations
• Executive Summary
• 1. Introduction
• 2. Overview of Purchasing Power Parities
• 3. The 2009 Purchasing Power Parity Update in Asia and the Pacific
• 4. Major Results and Findings
• 5. Governance, Organization, and Implementation
• 6. Uses and Applications
• 7. Lessons Learned and Future Directions
• 8. Detailed Results
• Appendixes
• Appendix 7 List of National Implementing Agencies in the 2009 Purchasing Power Parity Update
• Glossary
• Bibliography and References
• List of Tables and Figures
• Back Cover