When a dollar a day means 25 cents

from the BBC

By Mukul Devichand
Reporter, BBC Radio 4's More or Less

The struggle to reduce the number of people living on "a dollar a day" tops the list of Millennium Development Goals and trips off the tongues of political leaders.

But how much is "a dollar a day" really worth? How badly off are the world's poor really?

I've just returned from an Indian slum and was shocked at how cheap things were.

At Mumbai Airport, I got around 40 rupees for each US dollar I changed. And when I walked the lanes of the bustees - the slums where the urban poor congregate - I felt like a millionaire.

Round of teas and coffees for all your friends? Cross-town hop in a three-wheel auto rickshaw? Plate of street food? Shave at a roadside barbers?

They all cost around a US dollar.

Normal exchange rates

So it seems a dollar goes pretty far in the poorer parts of Mumbai, and no doubt even further in rural India.

When politicians promise to lift the world's poor above the dollar a day thresholds, it sounds like a reasonable aim.

But after investigating the subject for the BBC, I found the cruel truth is that in India, and other poor countries, a "dollar a day" is actually worth much less than first appears.

In fact, because of the way the measure is calculated, people living on less than a dollar a day couldn't afford any of the things listed above.

The reason is that a "dollar a day" is not in fact a dollar as we would understand it using normal international exchange rates.

Big Mac Index

Instead it is a specially adjusted dollar using something called Purchasing Power Parity, or PPP.

One of the easiest ways to understand this is the so-called "Big Mac Index," says former World Bank economist Michael Ward, who explained the way it works over a cheeseburger.

The concept is that the Big Mac is an almost identical product no matter where in the world you buy it - bread, cheese, meat, lettuce and labour costs.

But in fact, Big Macs end up costing much less in places like Beijing or Mumbai than London or New York.

So economists use the different prices of Big Macs across the world to judge the relative buying power of people in different countries.

For example, if a Big Mac costs a dollar in America, but only 25 cents in Mumbai, then a PPP "dollar" in Mumbai is actually worth only 25 cents.

The World Bank's "dollar a day" system uses a similar calculation.

So in this system, an Indian living on less than "a dollar a day" is actually living on less than 25 cents a day, or just 9 Indian rupees - because that's how much it would take an Indian to buy the same thing as an American would buy for a real dollar.

So in fact the 320 million Indians who live on less than a dollar a day couldn't afford any of the things I could in the Mumbai slum with the real US dollars I had changed at the airport.

"The intention was really to have a measure that would give you the equivalent amount of goods and services for that same currency," explained Mr Ward.

Comparisons

The aim is that using this system, the World Bank can judge how poor people really are in terms of what they can afford in different countries.

But because the system is based on the spending power of just a single dollar in America, it doesn't actually give the poor very much to live on.

According to the World Bank's idea, a "dollar a day" actually translated into 60p in the UK - more than the real exchange rate, because the UK is a more expensive country.

Even so, a quick round of the aisles at my local supermarket showed that I couldn't get much for that 60p. Tinned Soup was 75p, and the cheapest loaf of bread was 85p.

In the end, I found bagels were 39p each - so I could get one and a half for my 60p.

Absurdly low?

I asked Martin Ravallion, the economist who behind the original "dollar a day" concept at the World Bank, whether he thought this poverty level target was too low.

He explained that the original "dollar a day" benchmark was based on the poverty lines set by governments of several very poor countries.

According to his data, even at the frugal 25 cents a dollar is worth in India, the very poor could just about afford to eat 2100 calories for this amount, with a couple of rupees to spare for non-food items.

But he accepted the line was very frugal. "You've just got to realise that a lot of people are very poor in the world," he said.

Reversal of fortunes

The final twist in the tale is a shocking "discovery" last month in China of 200 million people living on less than a dollar a day.

This takes the total in China up to 300 million, and is a huge blow in the fight against poverty which the world had previously thought it was winning.

Martin Ravallion explained that this is another effect of using the PPP system, rather than exchange rates, to calculate the value of a dollar.

But the Chinese have not traditionally been part of the World Bank's system and the data on their PPP has been unreliable.

The bank recently calculated China's PPP thoroughly for the first time and realised that the Chinese currency, the renminbi, had less buying power than originally thought.

The result is an extra 200 million people below the dollar a day line.

China is such a populous country that its poverty statistics are a huge part of the global total.

Nevertheless, Martin Ravallion welcomed the change