Ulhas Joglekar writes:
Relative prices in different parts of the world would
have to be considered to obtain a fair picture of
relative incomes. I can buy a banana for 3 cents in my
city (Pop. 15 million). How much a banana costs in New
York?
Thanks for bringing this up. Hold in your mind your point that you are
looking for "a fair picture of relative incomes" between NY and India -
this is a key assumption.
One might make a very rough comparison of the price of bananas in say
Mumbai (I assume?) vs. Manhattan. It is rough partly because as (people
have heard via the WTO complaint) the bananas are quite different. The
large, tough skinned ones in NY have no taste but were chosen for
commercial reasons by the US fruit companies for their US market. These
companies enjoy a US monopoly and protectionism has kept out the more tasty
ones not grown in Central America by US companies. Over time the
protectionism has now created all sorts of non-tariff, non-quota barriers
such as shipping\marketing facilities and consumer "preferences" against
the thin skinned but much more tasty bananas (hysterisis, akin to the
QWERTY keyboard issue). So a comparison that includes price and quality
will not be easy (there is no truly free market) but lets assume, like the
neo-classical economists, that the market is so powerful that it will get
us close enough.
As you know bananas are considered "tradable" but how to handle
non-tradables? Forgive a North American detour for a second. If I try to
compare Manhattan with Alabama (poor, more rural south of US), how will I
compare the cost of a night at the Opera in Alabama (requires a jet plane)
or dining at a fine Japanese restaurant (driving a few hundred
miles)? Conversely, how will I compare the cost in Manhattan of setting up
a good woodworking shop in my car garage (no garages in crowded Manhattan)
or a small backyard pool for the kids ("health clubs" are not the
same)? The different endowments create different possibilities which get
locked into different lifestyles and consumer preferences. [Please excuse
the silly stereotypes.] And there is no reason to assume that the
differences are exactly symmetrical, so it will matter greatly whether I
compare NY in Alabama terms or visa-versa (nor will it suffice to do both
and then split an asymmetrical difference which would be mathematically
impractical for 200 countries anyway).
But some reasonable people do press on with the exercise because (one
hopes) between NY and Alabama there are more things in common than
otherwise: there is "free" trade, many goods are common, if the price of
labour in Alabama gets too low people maybe enough people can migrate to NY
to even things out (and visa-versa if the cost of living in NY gets too
high). And there is an important practical point: these cost of living
calculations are needed to run an national system that has to allocate
salaries, benefits, government grants, etc.
Now we come to Mumbai - and then on to an Indian village. There is no
longer anything like "free trade" with Manhattan and certainly no "free"
migration. The non-tradables vastly outweigh the (theoretically)
tradable. And the effects of history and of differences in available
choices balloon into something that could not be called "lifestyle". We
are no longer comparing bananas and bananas ...but apples and oranges. To
"solve" this dilemma the PPP is deployed. A "basket" is determined
(inherently arbitrary and biased with asymmetries since, as discussed the
different groups "choose" not to consume the same things). The "basket"
has only the few banana-like "tradables" (which we have seen are not truly
"tradable", but this is waived off as "market imperfections") and the price
ratio of this small group is arbitrarily applied to the non-tradables and
to labour which not only can't legally immigrate, but couldn't even
physically fit in Manhattan. This exercise also imagines that countries can
buy imports and pay debts with the imagined adjusted income.
This is truly the statistical tail wagging the statistical dog. BUT NOW
come back to the original purpose of this contorted exercise: to compare
relative incomes NY/India. Maybe (or maybe not) this is a useful exercise
since it is inherently talking of apples and oranges. And maybe or maybe
not this exercise should be tried through a statistic like the National
Accounts which measures something else entirely (the market economy) and
leaves out things like non-market "income". It could also be tried with
several direct measures of life like longevity, nutrition, education.
But - in any event - such an international comparison is NOT the purpose to
which the exercise is put to use. Instead, these contrived and imaginary
numbers ARE used to try to convince Indians that they are better off in
INDIAN terms. The PPP numbers ARE used to show that neo-liberal policies
in India would be better for India. If such an absurd mis-application of a
contrived statistic were used against the interests of the 'powers that be'
- can you imagine how it would be howled out of use?
Hope this gives some response.
Paul
