The Economist
By Sakiko Fukuda-Parr
The Economist
Sir,
Prof Sala-i-Martin’s paper, on which you base your article ‘Convergence, period’, makes a number of errors. He notes that the 1999 Human Development Report, produced by the United Nations Development Programme (UNDP), highlights increases in inequality both within most (not all) countries and between countries, findings confirmed by his own study. But he then imputes to the HDR the invalid argument that these two increases imply an increase in global interpersonal inequality. The 1999 HDR makes no such claim. It’s observation of “increasing concentration of income, resources and wealth among people, corporations and countries” (regrettably your article misquotes this line) refers to the increasing gap between the richest and poorest countries, the richest and poorest people, the increasing size and power of the largest corporations, and other clearly identifiable increases in numerous aspects of inequality. Sala-i-Martin’s paper makes no attempt to undermine these observations and hence does not undermine the Report’s argument.
Turning to the use to purchasing power parity exchange rates, your article correctly observes that the gap between the richest and the poorest countries has increased whether one uses market exchange rates or PPP rates. PPP rates, by factoring in differences in prices across countries, do a better job of determining the economic welfare of individuals. HDRs appear annually, and since 2000 they have reported inequality in PPP terms for this purpose. But since international markets function with market exchange rates, it is wealth measured in these terms that matters for bargaining in multilateral and bilateral power structures, and poverty in these terms that leads to the marginalisation of poor countries. So both types of exchange rate are of interest.
Sala-i-Martin finds that global interpersonal inequality has decreased slightly. Some other studies agree with this conclusion, others disagree. But no measured change in any study is statistically significant. The real message of global inequality is that it is extremely high: in 1993 the richest 5% of the world’s people had incomes 114 times those of the poorest 5% in PPP terms; in market exchange rates, 84% of the world’s people received just 16% of world income. And the only certain conclusion is that it is not decreasing fast enough.
Sala-i-Martin’s observation that global poverty rates have declined, due largely to growth in China and India, is uncontroversial, as is his concern with stagnation in Africa: both the UN and the World Bank have been making both points for several years. Estimating the actual numbers is more controversial, and his methodology here is seriously flawed. He estimates poverty within each country on the basis of an estimate of income distribution, applied to the per capita GDP of each country. But GDP includes savings that do not contribute to personal income, and government expenditures that typically do not reach the very poor. He therefore over-estimates national personal incomes and thus under-estimates poverty.
Yours sincerely,
Sakiko Fukuda-Parr
Director
Human Development Report Office, UNDP
and Director
Human Development Report 1999
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