28 September, 2022

Blog

Purchasing Power Parity

By Kumar David

Prof. Kumar David

Why is the Russian economy not crumbling despite sanctions? In an analysis carried in Quora.com French economist Jacques Sapir wrote: ‘The reason for this miscalculation is exchange rates. If you simply convert Russia’s GDP from rubbles to dollars, you see it as an economy only as large as Spain’s. However, such comparisons are spurious without adjusting for Purchasing Power Parity (PPP) which accounts for productivity and living standards, and thus per capita welfare and resource use. In fact, PPP is the preferred metric of most international institutions from the IMF to the OECD.

Note by this columnist. [A very good plate of rice and curry for a worker costs Rs 600 in Sri Lanka, that is about US$1.62 at the official exchange rate of Rs 370 to the US$. But you cannot get an equivalent meal at that price in the US; it will cost at least $5. But if you take the exchange rate as Rs 120 to the US$ you get $5 for your Rs 600. Therefore, the PPP exchange rate is Rs 120 to one US dollar, not Rs 370 to a dollar].

When you measure Russia’s, GDP based on purchasing power parity it is like Germany’s in size; Russia about $4.4 trillion versus Germany $4.6 trillion. From a small sickly-looking economy to the largest European and one of the largest in the world, this is not a comparison that can be ignored. Sapir also encourages us to ask: “What is the share of production and industry compared to services?” In his view, today’s services sector is grossly overvalued compared to industries and commodities such as oil, gas, copper and agricultural commodities. If we deduct the role of services as a proportion of the global economy, Sapir says, “Russia’s economy is much bigger than Germany’s, maybe 5 or 6 percent of the world economy”, more like Japan’s.

This makes intuitive sense. When times are tough we know it’s more valuable to provide people with the things they need, like food and energy, than intangible things like entertainment or financial services. When a company like Netflix trades at a price-to-earnings ratio three times higher than Nestle, the world’s largest food company, that is a reflection of frothy markets not reality. Netflix is a great service company, but when 800 million people in the world are undernourished Nestle offers more value. The current Ukrainian crisis helps clarify why what were regard as “archaic” parts of the modern economy, such as industry and commodities whose prices have soared this year are more important than overvalued services and “technology” companies whose values have declined recently.

The scope an economy is further distorted by ignoring global trade flows, of which Mr Sapir estimates Russia “may account for 15 per cent”. For example, while Russia is not the world’s largest oil producer, it is the largest oil exporter, surpassing even Saudi Arabia. The same is true of many other basic products, such as wheat, the world’s most important food crop, of which Russia controls about 19.5 per cent of global exports, as well as nickel (20.4 per cent), semi-finished iron (18.8 per cent), platinum (16.6 per cent) and frozen fish (11.2 per cent). Such an important position in the production of so many basic commodities means that Russia, along with several other similarly placed countries are linchpins in the global production chain. Maximum sanctions” on countries like Iran or Venezuela trying to cut Russia of world markets are phoney and likely bring about rearrangement of the global economy to the disadvantage of the West.

Much of this has been proved by the war in Ukraine. Controlling oil, gas, food and other commodities, the war of sanctions waged by the United States and its Allies in Europe and Asia has become a headache for the West. Corroborating this view JPMorgan says Russia’s economy is stronger than expected and will only suffer a shallow recession despite sanctions. The Wall Street bank said business sentiment surveys from the country “are signalling a not very deep recession in Russia and therefore imply an ‘upside risk’ to our growth forecasts. The Russian economy has so far fared better than expected under tough sanctions and is likely to suffer only a shallow but drawn-out recession according to JPMorgan. The bank told clients last week that the country’s economy is in better shape than expected, judging from business surveys and indicators such as electricity consumption and financial flows. “The data at hand therefore does not point to an abrupt plunge in activity at least for now. GDP in the second quarter would likely be better than predicted in March”.

Purchasing power parity (PPP) is the rate of currency conversion that equalises the purchasing power of different countries by eliminating differences in price levels of essential goods. According to this concept two currencies are in equilibrium—known as the currencies being at par—when a basket of goods is priced the same in both countries taking into account the said PPP exchange rates. The importance of this point is emphasised in the Table below and has significant implications for Sri Lanka.

GDP by Purchasing Power Parity vs Nominal GDP

GDP by PPP which is based on a basket of goods is a fairer comparison between countries. In the table below Tr stands for trillions of US$.

The difference is very big in the case of countries outside the global capitalist market system. In the case of India GDP in PPP terms is an astounding 3.87 times (10.5/2.71) larger than the conventional GDP. This is a bit of a paradox because India is visibly very poor so where is all the wealth hiding? The answer lies in the huge disparity of wealth and income between the filthy rich and the dirt poor. This disparity in India is much larger than the disparity between the top 10% (or 1%) and the average person in the US. I am not smart enough nor adequately statistically well informed to make anything but broad generalisations about Sri Lanka. My view is that; (a) in terms of living standards the true exchange rate is about Rs 120 (not Rs 370) to a US$, (b) the importance of domestic finance-capital (investment and mutual funds etc.) should be heavily discounted in policy decisions, (c) the hard-core productive sectors must be given far more attention and (d) other productive sectors like SMEs and the informal economy must be supported far more than now.

These economic factors will play out through the political dimension. Ranil Wickremesinghe (RW) has made himself a pariah in the eyes of every strand of democratic and liberal opinion, the diplomatic community in Colombo and international human and democratic rights movements. The Catholic Church is known for conservatism, when its Cardinal sees the RW and the previous government as cussed curs what more is there for anyone of us to say? Concurrently Batalanda Ranil, his other avatar, has unleashed his military on protestors, journalists (local and foreign), reappointed alleged human rights violators in the Defence Ministry and deployed unlawful goon squads. Reactionaries in the State machine have trapped him into a spiral of violence. Ranil blundered when he played his Batalanda card for a second time; his baton wielding goons spared neither protestor nor public. Meanwhile the Mahinda clan which cut a path to the top for RW, basks in their billion-rupee (or $?) sunshine. Ranil must be criticised mercilessly till he is compelled to reverse course on democratic rights. He may then be able to chug along as a compromise president.

We the people have to exercise the utmost vigilance till Ranil is house-tamed and he has capitulated on the danger he poses to a free society. An early election will clear the decks of a lot of crap and let the people know were every political actor and party stands. After that the country can decide how it will adjust to inevitable belt-tightening (we have consumed for 70 years without producing the equivalent) and decide how to deal with our internal fiscal deficit and our foreign account indebtedness. The two are intimately interconnected; we do not have two problems but one tightly interconnected problem. And there is the related matter of how much to relax exchange controls in order to attract FDI and capital flows. This is in the face of the 10-year Treasury Bond yield exceeding 25% at this moment and interest rates having to be correspondingly high. The IMF has demanded Central Bank independence, it has also demanded future debt sustainability and wants China on board for a haircut. These are tough issues to be addressed in their own right at another time in this column.

Ranil has decided to fly a kite about turning Sri Lanka into a Social (sic!) – he seems unaware that the accepted usage is ‘Socialist’ – Market Economy. What on earth is a “Social Economy” anyway? Does he appreciate what he is pontificating? I have been long been engaged with the topic and published a paper in the Hector Abhayavardhana 80th birthday celebration volume issued in year 2000. After 22 years it still remains relevant and can be purchased from Marshal Fernando’s Ecumenical Institute on Havelock Road.

Print Friendly, PDF & Email

Latest comments

  • 6
    4

    “Ranil Wickremesinghe (RW) has made himself a pariah in the eyes of every strand of democratic and liberal opinion, the diplomatic community in Colombo and international human and democratic rights movements.”
    *
    If that is true, which diplomat has refused to endorse him?
    Has the Trotskyist comrade VB Karunaratne abandoned him?
    The author uses the word ‘every’ even when the validity of ‘most’ is in doubt.
    *
    Our dislike of any should not stand in the way of reasoned judgment of a situation. I fear that most of the quantities listed above have come to terms with the reality that RW is President.

    • 10
      0

      “Our dislike of any should not stand in the way of reasoned judgment of a situation.”

      Look who’s talking.

      Hope you are going to be at Hambantota on 16th with Mao’s picture in hand, ….. and ready to prostrate …… while remembering Zheng He Treasure Ships, and Vira Alakeshvara’s involuntary trip to China,…..

      • 0
        0

        Oh, the glass ball seems depressed that the Indians made asses of themselves.
        Cheer up. They have got a few consolation prizes, including the shady deal for Adani.

  • 11
    0

    “Purchasing Power Parity (PPP)”

    Prof,

    Good piece …… I learned.

    A long time ago, I can remember reading somewhere …… they measured the informal exchange-rate from the price of a Big Mac in McDonalds in various countries …….. wonder if it still holds true. …….. If the price of a Big Mac has gone up in McDonalds in Colombo, it’ll tell us about our real exchange-rate comparison. :))

    You seem to be thinking of Ranil in more benevolent tones than I’m at the moment

    Let’s face it ……. for Ranil, this is not about the country/people ……. but about his wounded ego/pride. ……… I’ll be gobsmacked if anything good comes out of Ranil’s current antics of corruption/dishonesty/immorality. Very rarely, something good comes out of something bad.

    • 1
      0

      continued

      I suppose, I’m still in love with one of Old Codger’s two ……. I believe Ranil, elected in his own right with 6.9 million votes, is still the best president we never had. Not because Ranil is a paragon of virtue or a stellar talent ……. but just compare him to all others in politics …… he, at least, has a bird fluttering in his brain: there’s no one home, in others. ……. We’ll, hope, I’m slightly more capable of forming somewhat nuanced opinions ……. than Native Vedda’s sledgehammer ………

      • 0
        0

        nimal fernando

        “Not because Ranil is a paragon of virtue or a stellar talent …….”

        I suppose you have a short memory. Ranil was denied his victory in 2005 presidential elections. Your hero the Tamil National Leader Right Honourable psychopath Thiruvengadam Velupillai Prabaharan enforced an election boycott in North and East hence Ranil lost the elections.

        If you believe in (depending on) Good or Bad Karma he is somehow been selected to being President.

        • 0
          0

          Native,

          “I believe Ranil, elected in his own right with 6.9 million votes, is still the best president we never had.”

          How Ranil became president now …….. I won’t wish on my worst enemy!

          Not that I have enemies. :))

    • 10
      0

      Nimal,
      PPP can be distorted by local conditions. For example, an egg costs 60 LKR currently, but the same egg costs 25 LKR in India. But. on the other hand, petrol is more expensive in India. But tuk tuk rides are cheaper.

      • 5
        0

        OC,

        True ….. it’s hard to measure …… but I feel people in some countries have easier lives than others. In a recent visit, I found life in England is very tough ….. even for people earning good salaries. Rents in London is absurd and gasoline is expensive. Switzerland is expensive, you notice as soon as you cross the border from another country. I am surprised how many countries depend on tourism as a major source of income.

        Manel,

        Sorry, the time to reply in the other thread has elapsed ………. if you are reading “Hit the Road” ……. https://yts.proxyninja.org/movies/hit-the-road-2021

        • 2
          0

          Nimal,
          I think KFC , Coke, and Big Macs are all cheaper in Colombo than NY. But they aren’t affordable (a different matter altogether). A Singaporean told me the other day that the most affordable food is in Metro stations.

          • 2
            0

            OC,

            The ideal of an egalitarian society is fast disappearing ……. in most countries, the gap between the rich and the poor is massive.

            You won’t believe the number of homeless people in the USA …… and their living conditions/plight


            ” I think KFC , Coke, and Big Macs are all cheaper in Colombo than NY. “

            In Peru, they have Inca Cola just for them ………… made by Coca Cola company and appropriately priced.

            Time to have our own Vedda Cola and Sinhala_Man burger/scone ……. or dare I say scorn?

      • 0
        0

        KD, PPP and quality of life in South Asian and African countries are not just the difference between very rich and poor but also having uncontrolled inflation rates, Debt to GDP ratios , corruption and a broken system. If we add inflation rate of almost 100 %, in that food 150% and transport 200% , GDP / Debt ratio in NEGATIVE corruption , political instability, and dysfunctional system is what makes us failed and bankrupt. In 2021 ,PPP Lanka among Asian Countries was ranked 25 and 95 in the world
        Today our inflation is so high we are in first 5 worst countries in the world.

      • 3
        0

        old codger

        Ranil in one of his early interview said he wanted the tourist to come and enjoy, …. if they wanted they could join the protest, ….

        What does he have to say to this lawyer:
        If you oppress her “you have to leave this country before she leaves”
        https://www.youtube.com/watch?v=k0Xf0pfPnNA&t=107s

      • 0
        0

        OC
        This is some years back.
        Tuk tuk drivers did not bargain in Kerala and fares were fair. In Tamilnadu, especially Chennai, the meter was an indicator of anything but the fare one paid.
        I cannot see why we cannot have a standard fare scheme and prohibit government servants, especially the police, from any form of ‘ownership’ of tuk tuks.

        • 0
          0

          SJ,
          “I cannot see why we cannot have a standard fare scheme and prohibit government servants, especially the police, from any form of ‘ownership’ of tuk tuks.”
          Easier said than done. Government servants have wives, parents, relatives…….
          Once a mafia forms, it’s difficult to control.

    • 6
      0

      nimal,
      Your, ‘A long time ago’, story is still valid.
      A good that came out of ‘something’ bad is the Aragalaya!

  • 9
    0

    Sri Lanka can live well within her means if the grasping “apitat ona batahira vage jivat venna,” is exorcised. (and they break coconuts with that also)

    Rajapaksas’ fault for building all those highways instead of public transport (besides all the white-elephant infrastructures). Old Ranil has nowhere else to go other than in the same direction as that racoon surrounded by many loud vehicles in Yala …trying to branch off into the forest that is open to him, he dares not even realize.

    Aragalaya must rise up again, kick him out, and bring in the TRUE Socialist-Market economy via JVP. Taxation and implementation is the key.

  • 7
    0

    kumar,you are a bit outdated mate.Here is the latest

    https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

    1.as you can see germany is 5.3 trillion USD economy while russis is a 4.4 trillion economy.So does russia need germany more than germany needs russia.The smaller economy will always need the larger one more.For example do we need the indian market or does india need ours more.If there is a trade war between the larger economy and the smaller one both will suffer but the larger one will suffer proportionately less than the smaller one.You wait and see by the end of the year when germany has weaned itself away from reliance on russian oil and gas which economy will suffer more.Germany will also suffer because it will be paying more for its oil and gas but russia will suffer more than germany because the easy money and profits it gets now from pipelines will be gone.

    2.do you know now why trump could not bring down china with his trade war and had to eat his own soya beans and other agricultural produce piled up with his farmer redneck voters.China is now a bigger economy than the US and in the trade war china suffered but the US suffered more.

    • 3
      0

      Thanks, Kumar and shankar.
      .
      Yes, I get the picture.
      .
      shankar, yours is just an updating, isn’t it, not a disproving of what Kumar says.
      .
      Kumar has played safe by stating that “a very good lunch costs Rs 600/= here. My guess is that workers would manage with about 350 to 500/=, explaining even more clearly how people are still managing.
      .
      Although this appears to be complicated economics, clearing out this farcical government by conducting an election which will install a better government WILL improve matters.
      .
      But accepting simpler life-styles will be necessary. Therefore it is necessary that the opposition doesn’t promise a utopian future.

    • 0
      0

      shankar,

      India might have a larger economic amount, but with its PPP is so out of whack, we can deduce (no, we can see) that the Indian Masses have to live on a PPP far removed from the Indian 1%. Those numbers will remain static in India forevever due to permanently ingrained caste system. It’s quite a different level of PPP in Russia, although people suffer a lot there too…..forced to suffer for the glory of Mother-Russia …..exactly what is up Ranil &/or
      Rajapaksas’ heads.

      US-China is impossible to compare as US has already-established economic bases around the world to spread its wealth more democratically. China is suffering like mad to establish the B&R- initiative.

  • 6
    0

    Thank you. We learn every day.

  • 8
    1

    JM

    Thank you. We learn every day.

    We proud Lankans of Sri have habit of forgetting on the same day or next

  • 6
    0

    We thank India of course for giving us the USD-billions to help us sustain in these terrible times. Yet it’s sad to see their huge income depravity.

    Guess that’s just what Ranil has in mind : Force the masses to work HARD for their sustainance, scolding them and preaching to them at every turn. Then concentrate the wealth at the very top for the 0.01%….only way for Sri Lanka to look grand on world stage with the diplomatic corps. Lanka’s economy will build up very well then, with large difference in PPP doing the trick. Rajapaksas at least intended a broader base for 5%.

    In view of the above intended atrocities, it’s time for the JVP to even out the PPP to 99% Lankans! If we let this chance go, it will become so ingrained that there will never be a way out. Now is the golden chance!

    • 2
      0

      ramona

      this time in the budget next month ranil hood is going to take from the rich and give to the poor.The people coming out on to the streets like the arab spring has frightened the politicians it seems.ranil hood says the budget has to have a welfare boost by cutting ministry allocations and transfering to welfare.Ranil hood will become popular.

      • 5
        0

        shankar,

        No way! Ranil will do the bare minimum of taxing the rich. He does not have it in his Dna to care for the Masses. His can’t see beyond his social circle that he feels needs to be maintained at all costs. To him, mothers looking after their children are a joke. Therefore leaving their children to work as maids in the ME is justifiable to promote the modernization of the country via highways for rich people to drive on.

        In the meantime, he’s not sure whether to work with China or the West, but trys to use smart talking rethoric in an attempt to get the better of each, like they are stupid. Rajapaksas also thought they could use so-called savvy diplomats. It’s just a matter of time before they become sick of our antics.

        • 1
          0

          ramona

          robin hood felt for the poor and took from the rich,but ranil hood will take from the public sector and give to keep his job and stop people rioting.

          so his DNA and feelings don’t matter.Ranil unlike robin is not taking from the rich and also he is unlike robin not giving to the poor because he feels sorry for them.

          however even though this subtle difference is there the end result is good.

          more than 80 % of our revenue goes on paying public servants salaries and super.

          • 0
            0

            shankar,

            Nonsense…..the public sector deserve their salaries and supper. The revenue spent to finance the public sector and other subsidies, comes from people from public sector families working at hard-labor jobs in places like the Middle East. Public sector jobs can be called a safety-net also, except that our Masses work hard for their hand-outs. Ranil might be very disappointed that he can’t use that money to pay for the infrastructure the Rajapaksas splurged on, but yes, he will have to go that way to prevent mass uprising.

  • 4
    0

    A search for Fundamentals by Prof: David.
    ………..Therefore, the PPP exchange rate is Rs.120 to one US.dollar,not Rs.370 to a Dollar…….
    Q.E.D
    very much on the same lines as Two sides of a Triangle are greater than the third…….
    This essay is a must read by the Governor of the Central Bank.

    A very good plate of rice and curry for a WORKER is Rs.600………….
    At the Parliamentary canteen this same plate of Rice and Curry with EXTRAS and a choice of Desserts would most probably cost two dollars @ Rs.120.
    The systemic change is a must…………

  • 3
    3

    Reading most of the Comments posted it is not difficult to see where the scales tilt of the Ranil Bashers. All seem to Hallucinate their fears that Ranil Wickremasinghe will pull the Rabit out of the Hat, now that he has become President when most of his Critics believed that Ranil Wickremasinghe has been relegated to the Political Dustbin. These JOKERS simply cannot stomach his guts and the best Strategist he is, to become the President with a single seat representation in the Parliament. If one bothers to read his Manifesto of 2020, he has clearly stated of the events that unfolded of Power Cuts and the Country going Bankrupt. Only thing RW has not mentioned is that Power will fall on to his lap in the end. When it did many of these Critics challenged him to restore the supply of Gas, Fuel, Manure and Medicine, claiming that he never can and neither he will have any support from the International Community. None believed that Ranil Wickremasinghe can take the Country out of Power Cuts of over 13 hours a day. Hardly two months time lapsed, Ranil Wickremasinghe, has restored the supply of Gas, Fuel, Manure and Medicine to the suffering masses and have reduced the Power cuts, just for an hour of the day .

  • 1
    1

    Purchasing power parity of the early 1960s ie- parity in the exchanges between different currencies and their purchasing power, will not apply in the context of today’s economic conditions of larger economies such as the U.S.A., China, Russia, Arab Oil Producing countries are exploiting the smaller countries of the world.

  • 1
    6

    Another speculative article from Kumar not rooted in any kind of reality.
    *
    Rupee is worth zero – all your savings/pensions/EPF/ETF are worth zero. Nobody wants to admit this – but it’s the hard truth.
    *
    Here is something that is important:-
    *
    I have discovered a disturbing fact about Ranil Wickremasinghe – he’s a member of the W.E.F. (World Economic Forum).
    *
    That alone should is sufficient reason for him to thrown out asap. Same for anyone else involved with the W.E.F.
    *
    If you you are not familiar with the W.E.F. – you need to do some research. They are the people behind “The Great Reset” which has been combined with the UN’s “Agenda 2030”. Have a look – a Marxist wealth re-distribution wet dream – nothing good for you there!
    *
    The W.E.F. put out a video that started out with the statement “In the future you will own nothing and you will be happy”. They had to remove this but you can find a copy on the Internet. They also want you to eat insects. You – not them of course! They are Pure Evil – that’s the nicest thing I can say about them.
    *
    Stopping the use of fertilisers is straight out of the W.E.F. agenda – remember that as you run out of food within the next few months.

  • 1
    0

    I’ve re-read this article; in terms of what it says, it looks as though we ought to get back to being a little more like what we were at Independence, although we must educate people on the importance of controlling population.
    .
    We ought to be less obsessed with technology; certainly we can’t have all going in for it. We’re much too cocky about our education which emphasises mere qualifications.
    .
    We must persuade more young people to go in for agriculture and fisheries, and develop fairer marketing of produce.
    .
    The only way to combat corruption is to depoliticise our thinking, and to forge out of our population a sense of co-operation amongst communities.
    .
    All this seems obvious, even without Kumar’s observations, but perhaps what he says puts some heart into us, and it has made me feel bolder in contradicting those who keep talking about the wonderful potential we have to developing technology. That is an area for the few, and depends on inspiration.
    .
    We don’t have extra-brilliant intellects, the author’s brilliance being a different matter!

  • 1
    0

    Thanks Professor for your insightful analysis. It is all wide open now. Who will be the next President after 2024? Who will be in the new government?

    “After that the country can decide how it will adjust to inevitable belt-tightening (we have consumed for 70 years without producing the equivalent) and decide how to deal with our internal fiscal deficit and our foreign account indebtedness. “

    Will the country decide? Correctly?

  • 0
    0

    Thank you, Nimal. I managed to get the screen & did what I thought had downloaded the film but was then asked if my pc or software need to be change — & I abandoned the hunt.
    Do I have to register?

    Manel

    • 0
      0

      Manel
      All downloaded software come with such requests.
      Most of it is innocuous.

  • 0
    0

    nimal fernando

    “Not because Ranil is a paragon of virtue or a stellar talent …….”

    I suppose you have a short memory. Ranil was denied his victory in 2005 presidential elections. Your hero the Tamil National Leader Right Honourable psychopath Thiruvengadam Velupillai Prabaharan enforced an election boycott in North and East hence Ranil lost the elections.

    If you believe in (depending on) Good or Bad Karma he is somehow been selected to being President.

Leave A Comment

Comments should not exceed 200 words. Embedding external links and writing in capital letters are discouraged. Commenting is automatically disabled after 5 days and approval may take up to 24 hours. Please read our Comments Policy for further details. Your email address will not be published.