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Purchasing power parities as example of international statistical cooperation

From Statistics Explained

When preliminary results of the 2005 round of the International Comparison Programme (ICP) were released in December 2007, these were the first new global estimates of the size of economies and of countries’ price levels for nearly two decades. The development of the ICP and the successful implementation of the 2005 round can serve as an example of large-scale international statistical cooperation that goes beyond the mere harmonisation of existing national statistics.

International statistical cooperation

National statistical institutes (NSIs) were initially established to serve the nation state, in response to a demand from governments for data on their people and economies. Still today, the needs of domestic policymakers are, not surprisingly, an important guideline for NSIs in determining what statistics to produce and how to allocate resources.

However, policymaking is no longer the exclusive domain of the nation state. Increased interaction among nation states in fields like trade, investment and migration since the mid-20th century has created a number of global and regional political bodies, like the United Nations, the European Union (EU), the World Bank and the International Monetary Fund (IMF). In an increasingly globalised and interdependent world, policymakers can no longer restrict themselves to their own countries. This has given rise to substantial demand for statistics that allow reliable comparisons of economic and demographic indicators across countries.

To this day, the standardisation and harmonisation of statistics initially produced by national statistical institutes remains perhaps the most dominant aspect of international statistical cooperation. The aim of these standardisation and harmonisation efforts is to allow international comparisons of national statistics. Typically, this form of cooperation involves harmonising concepts and definitions, developing common classifications, and unifying the format of dissemination, leaving each country in charge of the actual production of the statistics within the mutually agreed methodological framework.

Some fields of statistics, however, require not only a common conceptual framework, but also a high degree of centralised management and supervision. These are statistics that by their very nature are multilateral, that is, they are not or cannot be produced by each National Statistical Institute unilaterally. This may be so because the results for one country depend on the results for another, or because the predominant user community is located outside the nation state, for instance, in international organisations and agencies.

For the remainder of this article, a closer look will be taken at a very comprehensive and demanding statistical undertaking that serves as an example of global statistical cooperation in a field that cannot be appropriately surveyed within the context of national statistics. The International Comparison Programme (ICP) and its European counterpart, the Eurostat-OECD PPP Programme, are both aimed at producing price-level adjustment factors, or Purchasing power parities (PPPs), applied primarily in international comparisons of national accounts. The main task for the participating countries is to carry out price surveys for a regionally determined sample of consumer goods and services, and to provide the other input data required, notably expenditure weights, price data on non-market services and on investment goods. This requires highly harmonised methodologies and practices, and a substantial degree of overall coordination.

Special attention will be paid to the organisation of the recently completed 2005 round of the ICP, with some selected results of the exercise included for the sake of illustration. The Eurostat-OECD PPP Programme will also be discussed, focusing in particular on its internal structure and integration with the ICP.

The International Comparison Programme

The origins of international price and volume comparisons of GDP can be traced back to the experimental comparisons carried out by the Organisation for European Economic Cooperation (OEEC), the forerunner of the OECD, in the 1950s. At first, this programme covered just five countries, but was later expanded to nine.

Building on the OEEC experience, the International Comparison Project (later to become the International Comparison Programme) was launched in the late 1960s. Begun as a research project, its goal was to create a framework for worldwide PPP-based comparisons to be carried out on a regular basis. The United Nations Statistics Division (UNSD) and the University of Pennsylvania shared responsibility for the project, with the latter taking the lead role. However, the first three rounds of the ICP (1970, 1973 and 1975) remained essentially experimental in character.

Following the 1975 round, four major developments occurred. First, the ICP became a regular part of the work programme of the UNSD, with the University of Pennsylvania advising on methodological issues. Second, Eurostat started to play an increasingly important role, organising the comparisons for the EU Member States and providing technical and financial assistance with regional comparisons in Africa. Third, the OECD became involved in the work. Fourth, and most significantly, the ICP adopted a regionalised management structure.

Regionalisation placed a greater share of the work on the regional organisations of the United Nations, like the United Nations Economic Commission for Europe (UNECE) and similar agencies in other regions. This left UNSD at the centre to coordinate the regional comparisons and to ensure that they could be linked into a global comparison. Two rounds of the ICP were completed after regionalisation. By 1985, 64 countries took part worldwide.

The subsequent round of the ICP was planned for the reference year 1993. Although some regions did eventually publish their regional results, the 1993 round was widely regarded as a failure. Poor management and insufficient resources at all levels — central, regional and national — were identified as the principal reasons for this lack of success. The ICP was judged unable to meet user demands, especially with regard to reliability and timeliness of the results. Under these circumstances, the main recommendation for future rounds was that the ICP, to improve its credibility, needed to undergo thorough organisational reform.

The 2005 ICP round

In 2002, after several years of preparation, the United Nations Statistical Commission (UNSC) finally decided to re-launch the ICP. Following the failure of the 1993 round and based on professional recommendations, a very explicit organisational framework was created. At central level, a corporate-style management structure was adopted, with an Executive Board in charge of strategic decisionmaking, a secretariat (“Global Office”) with several full-time employees responsible for day-to-day coordination of the programme, both administrative and technical, and a Technical Advisory Group to advise on methodological and technical issues. The Executive Board included representatives of the World Bank, IMF, UNSD, Eurostat, and OECD, plus all the Regional Coordination Offices, while the Technical Advisory Group consisted of highly qualified professionals in the field of PPPs and statistical methodology in general, appointed on individual merit.

At regional level, Regional Coordination Offices were established with existing agencies. These were the African Development Bank, the Asian Development Bank, the Interstate Statistical Committee of the Commonwealth of Independent States (CISSTAT) and the Federal State Statistical Service of the Russian Federation (ROSSTAT), the UN Economic Commission for Latin America and the Caribbean, Statistics Canada, and the UN Economic and Social Commission for Western Asia. The focal role of the Regional Coordinators was to coordinate and supervise the conduct of price surveys and the provision of other data in the participating countries, to lead the inter-country validation of the survey results, and to function as a link between the participating countries and the Global Office.

In addition, the ICP maintained close links with the Eurostat-OECD PPP Programme, which, while maintaining its status as a separate statistical undertaking, was simultaneously included as a region in the ICP.

The new management structure brought about considerable improvements over the previous rounds. In the organisation of surveys, the participating countries were involved in the whole process of planning and executing surveys, and validating the regional results in close cooperation with their Regional Coordinator. Furthermore, at regional level, several training workshops were held, while the Global Office provided handbooks, manuals and standardised software to assist countries and Regional Coordinators in the collection and validation of data. The Technical Advisory Group provided useful input on methodology, contributing substantially to increasing the reliability of the results.

The number of countries taking part in the exercise (146) was much higher than in any previous round. The lack of a sense of “ownership” of the ICP by the participating countries had previously been identified as a weakness, and the need for increased capacity building and coordination with other parts of countries’ national statistical programmes were thus given considerable attention. In particular, close integration with national accounts and with the consumer price index data collection was encouraged in order to improve the quality of results while simultaneously incorporating the ICP into the regular work of National Statistical Institutes.

The countries participating in the Eurostat-OECD PPP Programme conducted their exercise independently, according to their established work plan. However, great efforts were made to ensure methodological consistency between the two programmes.

The Eurostat-OECD PPP Programme has a long history independent of the ICP. With advancing economic integration in Europe, the need gradually arose for reliable price and GDP volume measures for the member states of the European Communities. Eurostat undertook its first comparison of price levels and National Accounts in the then nine EC Member States in 1975. Since then, the Eurostat programme has expanded to include, as of 2008, a total of 37 countries: the 27 EU Member States, three EU candidate countries, three Member States of the European Free Trade Association (EFTA), and four further countries in South-Eastern Europe that are not included in any of these categories. The OECD coordinates eight further countries, most of them non-European OECD Member States. The Eurostat group and the OECD group of countries adhere to the same methodological framework, and, with a few minor exceptions, to the same practices.

As in the ICP, the main task facing the participating countries is the provision of national input data into the PPP calculation. Until 1999, Eurostat itself undertook the task of preparing, coordinating and validating the surveys, in cooperation with the countries. With the number of countries in the programme steadily increasing, this task became more and more complex, and for this reason, it was decided to reorganise the price surveys for consumer goods and services. These surveys are now carried out relatively autonomously in three geographically defined country groups. Each of these regional groups has a group leader country, which leads and supervises the price surveys among the countries in the group, and coordinates the intra-group work undertaken with that of the other groups, in order to maintain comparability at the European level and secure the reliability of the overall European results.

An important advantage of this organisational model is that the group leaders are themselves participant countries in the process, and thus familiar with the challenges facing the NSIs in the process of providing the input data required. Another factor contributing to the quality of the survey results is that the regional sub-groups are in many ways more homogeneous with regard to consumption patterns than the entire group of 37 countries taken as a whole. In addition, group leaders have over time developed substantial knowledge of the product markets in “their” countries, knowledge that is of considerable value when it comes to establishing a comparable and representative product sample for each price survey.

PPPs are of great operational importance for the EU. This is particularly so in the field of regional policies, where the regions eligible for support from the Structural Funds are determined by the regional GDP of each region, expressed in Purchasing power standard (PPS). Furthermore, PPPs are used in analyses of price convergence in Europe, and in a variety of other, sector-specific analyses. Since the results of the Eurostat PPP programme have immediate budgetary consequences for the EU, it was deemed necessary to formalise the procedures of the PPP production process and clarify the rights and obligations of all parties involved. For this reason, the methodology and procedures of the Eurostat PPP programme are laid down in a separate Regulation 1445/2007 of 11 December 2007 establishing common rules for the provision of basic information on purchasing power parities and for their calculation and dissemination.

As stated above, the ICP is divided into six regions, each one responsible for the coordination of the price surveys conducted in the countries of the region, and for the provision of other input data. The Eurostat-OECD PPP Programme, while maintaining its status as a separate entity, is also one of the six regions in the ICP. However, the participation of the Eurostat-OECD region in the ICP does not affect the day-to-day operation of the Eurostat programme or cause more work for the countries. As pointed out in the previous sections, Eurostat and the OECD also plays an important role in the ICP in their capacity as members of the Executive Board, and by providing technical and practical support on a more informal basis, drawing on their experience from their own, long established PPP programme.

Spatial comparisons of National Accounts

The availability of PPPs is of the utmost importance in global comparisons of income and expenditure levels. While the main focus of national accounts (NA) has traditionally been to measure the development of economic aggregates over time, there is substantial and increasing demand for indicators of the relative size of economies, and of per capita estimates of gross domestic product (GDP) and various NA sub-aggregates, like actual individual consumption (AIC). In comparing these indicators across countries, that is, in a spatial dimension, several factors must be taken into account.

First and foremost, strict adherence to the common rules and standards of NA is required of all countries that take part in the comparison. Specifically, the United Nations System of National Accounts (SNA) lays down a conceptual framework that must be adhered to by all countries. The development and implementation of the SNA and its European counterpart,the European System of Accounts (ESA), are prime examples of international statistical cooperation that aims at harmonising existing practices and further developing statistics along a common methodological path.

Second, countries’ NA data needs to be expressed in a common currency. For example, it is fairly obvious that the GDP of the United States, expressed in US dollars, and the GDP of Germany, expressed in euros, are not directly comparable. In order to ensure formal comparability, one could choose to just convert the GDP figure for the United States into euros at the nominal exchange rate, and compare this figure with Germany’s.

However, the fact that countries have different price levels implies that a spatial comparison based on nominal exchange rates as outlined in the previous paragraph will systematically overestimate the GDP, or any other NA aggregate, of countries with high price levels, relative to countries with low price levels — and vice versa. This is because a country’s GDP expressed in national currency can be seen as the product of a volume component and a price component. If the volume component is of identical magnitude in countries A and B, while the price component is substantially higher in country B, the latter will appear to have a higher GDP than the former, even though the real volumes are identical. PPPs are applied in lieu of nominal exchange rates in order to achieve comparability of real volumes across countries. In other words, PPPs are indicators of relative price levels that enable us to express each country’s GDP in a common currency and at a common price level. The following section illustrates the importance of applying PPP-based figures in comparisons of countries’ GDP.

Selected ICP results

Table 1: ICP 2005 results for selected economies

In the end, 146 countries participated in the 2005 round of the ICP, including the 45 countries in the Eurostat-OECD PPP Programme. This represents a remarkable increase on the ICP rounds of the 1980s and 1990s. The price and other input data were validated in each region, and regional PPPs calculated. These regional results were then linked via a group of countries (the “Ring countries”) in order to achieve a set of PPPs for all countries in the global comparison.

The preliminary, global results of the 2005 ICP round were published in December 2007. Table 1 summarises the results for selected economies. These results deviate substantially from estimates previously published by the World Bank and the International Monetary Fund. For example, the size of India’s economy appears to have been grossly overestimated in previous publications. This does not come as a big surprise, since the previous estimates were based on data that in many cases dated back to the 1980s. These estimates have long been acknowledged to be of questionable accuracy.

Table 1 compares some major economies with respect to their GDP, GDP per capita, and comparative price levels, based on the 2005 ICP results. The table also provides a useful exercise for understanding the vital importance of using PPPs, and not nominal exchange rates, in international comparisons of this kind. For example, while the economy of the EU-27 appears to be 6.1 times bigger than China’s at nominal exchange rates, it is only 2.4 times bigger when the price level difference between the two countries is taken into account: China’s price level is estimated at just 40 percent of Europe’s.

A similar effect can be seen for GDP per capita, a much-used indicator in international comparisons of the general population’s material standard of living. The GDP per capita indices based on nominal exchange rates, containing both a price and a volume component, tend to exaggerate the differences between relatively rich and relatively poor countries and regions. Still, unsurprisingly, the volume of GDP per capita in countries like India, China, South Africa and Brazil remain very substantially below the level of the United States, the EU or Japan, even when PPPs are applied.

Summary

Involving the active participation of the National Statistical Offices of 146 countries, a number of regional development agencies and other international organisations, and with its explicit management structure, the ICP 2005 is certainly one of the most comprehensive and complex exercises in international statistical cooperation ever undertaken.

Until the 2005 results were released, the only PPP data available for countries outside the Eurostat-OECD region were estimates that, in some cases, were based on surveys carried out as much as twenty years earlier. Given the effort put into the re-launched ICP, both in terms of organisational and methodological development, there can be little doubt that the results of the 2005 ICP provide a major contribution to better, more reliable analyses of national accounts data across countries. It is obvious that without the extensive cooperation between the parties involved, this major step forward would not have come about.

Whereas the Eurostat-OECD PPP programme is well established, underpinned by EC legislation, and serves important operational needs of the European Commission, the 2005 round of the ICP was more of a pioneering effort. However, given the need for reliable economic indicators, especially in the major international and regional organisations, but also for research purposes, it seems clear that the 2005 round has established a sound organisational basis for further ICP rounds in the future. From the user communities’ viewpoint, there is an obvious need to establish the ICP as a permanent statistical undertaking, with data collection and new results calculations taking place at regular intervals.

All this does not mean, of course, that there are no challenges ahead. One of these challenges concerns country coverage. Even though far more countries took part in 2005 ICP than in any previous round, truly international statistics must cover all countries in order to be of full value to the user communities. Another, probably even more demanding, challenge concerns the quality of countries’ national accounts data, which in many cases is acknowledged to be less than optimal. Since international comparisons of the kind undertaken by the ICP rest on two pillars, national accounts data and PPP data, efforts must be made to improve the quality of both data sources. So important is the quality of national accounts data for the ICP that synergies for national accounts can be expected to result from a country’s participation in the ICP, provided that the organisational framework promotes it. Positive synergies could also be achieved in relation to the Consumer price index, where a potential for increased coordinated data collection certainly exists with the ICP consumer goods surveys.

The ICP 2005 provides an example of how statistics of vital importance to international economic comparisons come about through close international cooperation, in an interactive process with a multitude of parties involved. It seems clear from the experience of this and previous ICP rounds that these statistics cannot be produced at a sufficient level of quality unless careful attention is paid to the organisation and management of the exercise across countries.

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