Purchasing power may not be India, China’s ticket to more clout at IMF

Purchasing power may not be India, China’s ticket to more clout at IMF
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First Published: Wed, Dec 19 2007. 12 11 AM IST

Stock taking: People shopping at a store in New Delhi. According to the report coordinated by the World Bank, India’s share of the world economy based on PPP dropped to 4.3% from a previous estimate o
Stock taking: People shopping at a store in New Delhi. According to the report coordinated by the World Bank, India’s share of the world economy based on PPP dropped to 4.3% from a previous estimate o
Updated: Wed, Dec 19 2007. 12 11 AM IST
Washington: The economies of China and India are much smaller than previously thought when measured by buying power in US dollars, according to data released on Monday which could weaken their call for more clout at the International Monetary Fund (IMF).
The preliminary International Comparison Program (ICP) report on purchasing power parity—or PPP—was coordinated by the World Bank and based on price data on goods and services in 146 countries, adjusted to reflect local cost and affordability, and converted to dollars.
The report has no bearing on the actual size of those economies, but rather looks at them with a different measuring tool —one that many emerging economies argue is a more accurate representation of their growing global influence since it takes their hefty buying power into account.
Stock taking: People shopping at a store in New Delhi. According to the report coordinated by the World Bank, India’s share of the world economy based on PPP dropped to 4.3% from a previous estimate of 6%.
Many of those countries want the IMF to take PPP into consideration when allocating voting rights, a contentious issue that is expected to be high on the agenda at the fund’s spring meetings in April.
An IMF spokesman said there was “growing consensus” that PPP should play a role in determining voting quotas, which would raise the relative weight of developing countries.
“The impact on individual countries depends on the data for them and this new set of PPP data will ensure that any calculations done for PPP purposes will reflect the most up-to-date situation,” IMF’s William Murray said in an e-mailed response to questions.
PPP is designed to provide an apples-to-apples comparison for the buying power of countries around the world, and also gives insight into the cost of living, consumer spending and investment from country to country.
One of the best-known examples is the “Big Mac Index,” which compares the cost of the same McDonald’s burger in different countries.
The report takes data collected by the World Bank, Eurostat and the Organization for Economic Cooperation and Development to calculate each country’s PPP for 2005.
China’s share of the global economy in terms of PPP fell to 9.7% from an estimated 14%. This was the first time that China participated in the survey, so the prior figure was calculated last year by extrapolating from old data, using a model that has since proved to be faulty.
India’s share of the world economy based on PPP dropped to 4.3% from a previous estimate of 6%. This was the first time India had participated in the survey since 1985.
“These are changes in estimates, the previous ones having been based on very old and very limited data,” the ICP report noted. “The real outputs of their economies have not changed, only the way we measure them has.”
When measured by market exchange rates instead of PPP, China’s share of world GDP is just 5%, and India’s is less than 2%—about half of their size using PPP. That explains why the report may have political ramifications as fast-growing emerging markets fight for more say at the IMF.
Emerging markets argue that the big industrialized countries have too much influence over the fund, in part because voting rights do not take into account PPP—something they hope will change in the IMF’s revised quota system.
But because China and India are smaller than previously thought in PPP terms, they may have a harder time winning support for sizeable increases in their voting rights.
Some industrialized countries worry that China and other emerging markets will surpass them in voting power if PPP is taken into consideration. In PPP, China is the world’s second biggest economy, behind only the US. By market exchange rates, it trails countries such as Japan and Germany.
The report shows that 12 countries account for more than two-thirds of the world’s output, including five emerging economies: China, India, Russia, Brazil and Mexico.
Overall, the results show that the size of the world economy measured in PPP terms is smaller than previously estimated. Asia’s economies are one-third smaller than previously thought, largely because of the downgrades to China and India, while Africa’s are one-fourth smaller.
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First Published: Wed, Dec 19 2007. 12 11 AM IST
More Topics: Purchasing Power | IMF | India | China | ICP |