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Introduction to International Comparison Program

Regional Course on Price Statistics and ICP Male, Maldives 25-29 September 2005 TIMOTHY LO Statistician, International Comparison Program Asian Development Bank

Why Do We Use PPPs?

• Exchange rates do not measure relative price levels in domestic markets thus, giving inconsistent estimates of income levels.

• Exchange rates are influenced by factors other than changes in relative prices, such as interest rates and financial flows, so they do not move in line with relative prices.

ICP ATLAS

3 How many

goods

your money can buy?

How many

dollars

your money can buy?

Low income countries’ share of world income is higher and increasing in PPP terms

Percentage Share of World Income, by income groups ICP and Atlas: 1987 and 1995

Country Group

Low income Middle income High income World

Atlas 1987 1995

6 5 17 78 100 14 81 100

1987 1995

13 18 26 61 100

ICP

24 58 100

Are the Japanese really richer than Americans?

Yes, if they would spend all their money in the US 175% 150% 125% 100% 75% 50% 1985 1. Japan/US:: Atlas shows Japan richer; PPP estimates show the opposite. (Per capita income US=100) 1987 1989 Atlas Japan PPP Japan 1991 1993 1995 300% 250% 200% 150% 100% 50% 0% 1985 2. Japan/US - While relative growth rate is about the same, Japan's exchange rate appreciates (Japan/US 1985 =100) 1987 1989 1991 Gr. Rate Exch. Rate 1993 1995 5

10 year comparison of the USA and China

12.0% 9.0% 6.0% 3.0% 0.0% 1985 1. China/US - PPP estimates rise to keep pace with real growth, Atlas estimate remains flat (Per capita income US=100) Atlas China PPP China 1987 1989 1991 1993 1995 250% 200% 150% 100% 50% 0% 1985 2. China/US: China's economy grows faster while the exchange rate depreciates Gr. Rate (China/US 1985 = 100) Exch. Rate 1987 1989 1991 1993 1995 6

China not Japan is the second largest economy

7 Chart 2A: Rank order of largest economies in Atlas dollars, 2002 United States Japan Germany United Kingdom France China Italy Canada Mexico Spain India Brazil Korea, Rep.

Netherlands Australia Russian Federation 0 2,000 4,000 6,000 8,000

Billions of US dollars

10,000 12,000 Chart 2B: Rank order of largest economies in PPP dollars, 2002 United States China Japan India Germany France United Kingdom Italy Brazil Russian Federation Canada Mexico Spain Korea, Rep.

Australia Netherlands 0 2,000 4,000 6,000 8,000 10,000 12,000 Billions of US dollars

Why countries participate in the ICP?

PPPs can answer the following:

• How expensive is my country relative to other countries? • How well off are people in my country relative to others?

• What is the incidence & severity of poverty in my country relative to my neighbors?

 PPPs can be used for poverty analysis together with detailed household income expenditure surveys • How different is my economic structure?

How expensive is my country?

PPPs can tell us the following: • What is the price level of Big Mac? • What is the price level of haircuts? • What is the overall price level? PPP/ExRate • How is the relative price level changing over time? • Need PPP as well as good price deflators such as CPI.

• Persistent imbalance of price levels with respect to neighbors & trading partners. • Need PPP to manage trade & tourism policy.

How well off are people in my country?

Furthermore, PPPs give us the following information: • How many goods & services that I can buy with my income relative to my neighboring countries? • How are these relative quantities changing over time?

• Where does my country stand in the HDI index & how is my relative position changing?

What is the incidence & severity of poverty?

• Do the poverty line incomes of different countries have the same purchasing power?

• What is the relative incidence & severity of poverty in different regions of my country? • How is it changing?

What is the incidence & severity of poverty?

ICP can provide the answers but requires the following additional components: • PPP for the poor with “poverty” basket.

• intra-regional poverty PPP.

• mechanism for continuous updating.

• Detailed national level household income expenditure surveys.

How different is my economic structure?

• Are we investing relatively too little? • Is my government too large? • Structure of economy clusters around income levels.

• Helps determine which policies work & which do not.

• Helps determine sign posts for growth policy.

ICP and Statistics

• ICP subjects national statistics to international scrutiny. • Helps spread of international standards & adoption of best practice methods.

• Builds statistical capacity by harmonizing PPP work with other national statistical activity to make ICP cost effective, become part of the routine & be sustainable over time.

Why should International organizations care about PPP?

PPPs give consistent measures of economic performance & economic structures needed to: • Get a better handle on the comparative levels of income, poverty, price levels, economic structure, among member countries.

• Devise essential policy advice to countries. • Help direct scarce resources to where it is needed most. • Monitor progress in meeting the Millennium Development Goals.

Analytical uses of PPP Data

• Explanation of economic, social phenomena • Convergence of growth & economic structure • Comparative advantage in international trade • Structural adjustment • Assessment of poverty • Analysis of exchange rate behavior

Business use of PPP

• Computation of compensation of headquarters staff stationed abroad • Evaluation of cost of labor & material for use in competitive bidding • Analysis of size of markets in search for profitable direct investment opportunity

Use by international organizations

• World Bank – estimating an international poverty line • UNDP - for the HDI • IMF - assigning country weights in Economic Outlook • EU - distributing structural fund • USAID - assessing aid eligibility In spite of these uses, more substantive use in administrative decisions is hampered by lack of coverage, continuity and poor data quality.

The ICP Process

ICP Methods

• Divide GDP into 155 basic headings of expenditure.

• Formulate the regional product list.

• Collect prices of the same items in each country.

• Compute BH level price parities as average of price ratios of items within the basic heading.

• Compute multilateral PPP as expenditure weighted average of BH level parities.

Data needed for PPP calculation

• National annual average prices of specified items, usually 5 or more per basic heading.

• GDP expenditure broken down into basic headings.

• Population for computing per capita values.

• Exchange rates for comparing with PPP.

• Assorted statistics on CPI, other price indices, and GDP growth rates.

ICP requirements

• Countries do not select products for pricing – Fixed by the regional product list • A sample of places & time is needed – A national annual average price is required • Scope of the survey must be the same in every country – Needed for international comparability • Must use existing infrastructure as far as possible – Too costly to duplicate CPI infrastructure

Brief History of ICP

• • • Global statistical initiative established in the early 1960’s as a joint venture of the UN, University of Pennsylvania & the World Bank to facilitate cross country comparisons of price levels & economic aggregates in real terms.

Since the first round, the program has grown to a global initiative with around 150 countries from all regions of the world participating in the 2005 global round. ICP is now an integral part of national statistical work in OECD & other European countries.

New Global, Regional & National Management Structure

• Partnership-based program • Consultation with Heads of NSO’s as well as price statisticians, price collectors & NA experts • Collective commitment & joint effort of all stakeholders at all levels • Global Office - World Bank • Regional Coordinator for Asia/Pacific - ADB; • National Coordinator - NSO’s

New Global, Regional & National Management Structure

• No single agency plays a dominant role • Bottom-up approach supported by common interests national, regional & international levels

Management & Coordination of ICP

26 • Global level • Executive Board • • • Technical Advisory Group ICP Council Global Office • Regional level • Regional Advisory Board • Regional Implementing Agencies • National level • • National Implementing Agencies National Administrators

Executive Board Council Global Office Tech Advisory Group Africa Asia Pacific

Regional Advisory Board 27

CIS LAC Eurostat/OECD West Asia

ICP Executive Board

• Provides leadership & determine strategic priorities • Promulgates ICP standards • Approves annual work programs & budgets • Oversees activities of the ICP Global Office • Commissions evaluations of the Program • Plays a role in resource mobilization • Resolves conflicts faced by the Program

Executive Board Members

Dennis Trewin, ABS Ifzal Ali, ADB Shaida Badiee, WB Len Cook, Office for Nat’l Stat, GB Enrico Giovannini, OECD Carlos Jarques, IADB Henock Kifle, AfDB Ben Kiregyera, Uganda Bu of Stat Adarsh Kishore, MSPI, India Li Xiaochao, NBS, China Brian Newson, Eurostat Koffi Nguesssan, ENSEA Luis Machinea, ECLAC Jacob Ryten, consultant Vladimir Sokolin, Gokomstat, Russia Mervat Tallawy, ESCWA

ICP Council

• Represents stakeholders of the ICP not represented elsewhere • Composed primarily of sponsors of the program & by invitation, users of its output • Provides an info-sharing vehicle thru which stakeholders can observe & comment on ICP progress; donors can monitor spending of their donations

Technical Advisory Group

• Resolves technical issues comprising conceptual integrity & methodological adequacy • Advises on issues involving standards, methods & procedures required by the Program • Proposes research or analysis necessary if the ICP is to continue evolving in the face of changing circumstances & providing better answers to user concerns

TAG Members

Chair: Members: Alan Heston, Univ. of Pennsylvania Erwin Diewert, Univ. of British Columbia Paul McCarthy, ABS D. S. Prasada Rao, Univ. of Queensland David Roberts, OECD Serguei Sergueev, Statistics Austria Silke Stapel, Eurostat Angus Deaton, Princeton Univ.

Kimberly Zieschang, IMF 32

ICP Global Office

33 • Overall coordination & implementation of ICP • Preparation of annual budgets & work programs • Provision of secretariat functions to the EB • Development of ICP standards to be promulgated by the EB • Liaison with & technical backstop for the regional implementing agencies • Global aggregation, analysis & dissemination • Networking & coordination with TAG, Eurostat, OECD & other agencies

Role of Regional Implementing Agencies

34 • Maintain close relationship with the GO including regular & extensive exchange of info • Design & implement regional programs, database mgt standards, guidelines & procedures as agreed with the GO • Coordinate efforts of participating countries in the region thru info dissemination, training, promoting ICP standards & guidelines, and use of ICP software • Strike a workable compromise with the countries on pricing of items in the product list and estimation of expenditure weights

Role of Regional Implementing Agencies

• Ensure that inter-regional link countries carry out their respective duties • Provide technical guidance & effective leadership to countries with advice from the TAG where necessary • Monitor implementation of the Program in the countries • Aggregate national results to calculate PPP indices & apply them to derive GDP volume measures • Analyze regional results

Role of National Implementing Agencies

• Ensure correct estimation of GDP expenditure weights for ICP • Ensure full understanding, by ICP staff, of Program objectives & standards & how these objectives affect collection of necessary data • Maintain contact with participating countries about consistency & understanding of regional targets & methods • Ensure that data collection is carried out according to agreed product specifications, classifications & time intervals 36

Regional Advisory Board

• Sets regional goals, priorities & objectives • Approves work programs & provide guidance to the regional coordinating agency • Keeps all parties involved & informed • Reviews annual reports on ICP progress • Supports the sustainability of the program, & shapes the vision for its future direction

RAB ICP Asia Pacific – Members

Chair: Co-chair: Vice Chair: Members: Commissioner, Nat’l Bureau of Stat, HK, China Chief Economist, ADB Director General, Stat Bureau, Japan Director General, CSO, India Director General, Statistics Indonesia Administrator, NSO, Philippines Deputy Chief Statistician, ABS Director, Statistics Division, ESCAP Director, SIAP Director General, NBS, PRC 38

RAB ICP Asia Pacific – Members

The remaining members of RAB Ex-officio Members: ICP Global Coordinator, WB Member Secretary: Assistant Chief Economist, ADB Regional Coordinator, ICP Asia Pacific, ADB 39

Role of National Adminstrators

• Implement ICP in the country • Liaise with the Regional Coordinator

Framework of Partnership

• Establishes the general framework to guide the program of work between the Regional Implementing Agency (ADB for ICP Asia Pacific) & the NSOs • Enumerates the activities & responsibilities required for the ICP activities in 2003-2006

Participating Countries in ICP Asia Pacific

•Bangladesh •Bhutan •Brunei •Cambodia •Fiji Islands •Hong Kong, China •India •Indonesia •Iran •Lao PDR •Macao •Malaysia •Maldives •Mongolia •Nepal •Pakistan •People’s Rep. of China •Philippines •Singapore •Sri Lanka •Taipei,China •Thailand •Viet Nam

Objectives of ICP Asia Pacific

• To establish the ICP as a continuing program with a sustained capacity & funding.

• Establish a system of comparing GDP & its components based on purchasing power of currencies in domestic markets.

• Establish methods & network of surveys to estimate PPPs.

• Build capacity so ICP becomes a routine & sustainable part of ongoing statistics.

Short Term Objectives of ICP Asia Pacific

• To provide international price & volume comparisons of GDP & its component expenditures • To mainstream ICP with national statistical work by integrating it as far as possible with the national accounts & price collection programs • To support the harmonization of ICP with data collection systems for the CPI & other prices 44

Short Term Objectives of ICP Asia Pacific

• To assist NSOs in conducting specific surveys for collection of additional data not covered by existing surveys • To assist countries in identifying a comparable & representative list of items across the countries • To provide advisory services to NSOs as required in carrying out the above activities • To organize regional workshops & training 45

Strategies to Achieve Objectives

• Development of a comprehensive & standardized survey framework • Regional seminars • Regional workshops to share best practices in the production, dissemination & use of data • Financial assistance to enhance capacity building

ICP Outputs:

For GDP, its various sub-aggregates, down to each basic heading: • Expenditure in national currencies • PPP in terms of a standard currency • “Real values” in PPP terms (standard currency) • Time series for GDP only for now; other indicators later • Various derived statistics: price level, structure, etc

Capacity Building of ICP Asia Pacific

48 • Mainstreaming ICP with national statistical work • Supporting the harmonization of ICP with data collection systems for the CPI & other prices • Assisting NSOs in conducting ICP price surveys • Assisting countries in identifying a comparable & representative list of items across countries • Providing advisory services to NSOs in carrying out ICP activities • Organizing regional workshops & trainings • Preparing manuals & handbooks to institutionalize ICP methodologies in the ADB DMCs