Wednesday, March 26, 2008

GDP/GNI Per Natural: New way of measuring development!

Michael Clemens from CGD and Lant Pritchett from the KSG have come up with a new measure of development to reduce bias emerging from using income per capita (which only focuses on the nationally resident population) measure for economic analysis and policy design.

In a CGD working paper series titled "Income Per Natural: Measuring Development as if People Mattered More than Places," the authors argue that calculating national statistics by taking in consideration all the citizens (both living inside and outside the country) gives a clearer and an unbiased (regarding the policy prescriptions arising from such calculation) picture of the actual income of a person of a certain country.

They use income per natural, which is the annual income of persons born in a given country, regardless of where that person now resides. So what's the advantage of using this measure instead of just GDP or GNP per capita? The authors argue that it will give a systematic source of information on the average income of a person, irrespective of which country s/he resides  i.e. average income of a Turk, or a Nepali, or a Salvadoran.

One policy implication of this approach would be to look critically the way we fund poverty reduction initiatives in the developing countries. For instance, formulating a  wholesale  poverty reduction policy considering that 80% of Haitians live below the poverty line might be a bit misleading and out of touch of the reality because "26 percent of Haitian naturals who are not poor by the two-dollar-a-day standard live in the United States." Poverty reduction policies that take this new factor into account would be more realistic and may be effective as well. This is my wild guess! I really want to know more about the policy implications of designing development and poverty reduction strategies using this approach.

...If income per capita has any interpretation as a welfare measure, exclusive focus on the nationally resident population can lead to substantial errors of the income of the natural population for countries where emigration is an important path to greater welfare. The estimates differ substantially from traditional measures of GDP or GNI per resident, and not just for a handful of tiny countries. Almost 43 million people live in a group of countries whose income per natural collectively is 50 percent higher than GDP per resident. For 1.1 billion people the difference exceeds 10 percent. The authors also show that poverty estimates are different for national residents and naturals; for example, 26 percent of Haitian naturals who are not poor by the two-dollar-a-day standard live in the United States. These estimates are simply descriptive statistics and do not depend on any assumptions about how much of observed income differences across naturals is selection and how much is a pure location effect. Our conservative, if rough, estimate is that three quarters of this difference represents the effect of international migration on income per natural.

...The bottom line: migration is one of the most important sources of poverty reduction for a large portion of the developing world. If economic development is defined as rising human well being, then a residence-neutral measure of well-being emphasizes that crossing international borders is not an alternative to economic development, it is economic development.