A teacher at a government school who seldom shows up for work is supposed to be contributing as much to the average living standard of the nation as someone who’s trying to do his job with some amount of commitment and diligence. Surely this cannot be right? But it is.
The most common economic representation of standard of living – per capita gross domestic product (GDP) – values all public services in terms of what it costs the government to provide them, regardless of the efficacy, or otherwise, of state spending.
Adding “statistical insult to original injury” is how economists Angus Deaton and Alan Heston have aptly describe the common practice of counting even ineffective and wasteful government spending towards an improvement in living standards. A recent paper by Francesco Grigoli of the International Monetary Fund and Eduardo Ley of the World Bank says that a “logical step is to purge from GDP the fraction of government inputs that is wasted.” If such an exercise were ever undertaken at a global level, the results could be startling.
Based on cross-country evidence, the authors of the paper calculate GDP losses associated with wastage of public resources in education and healthcare. Unfortunately, their data set does not include India. But there is every reason to believe that public sector wastage in India will more likely be in the ballpark of the equivalent numbers for Portugal (eight per cent) or South Africa (six per cent), rather than South Korea (1.5 per cent) or Singapore (zero). This is, of course, just my guess. How much is the wastage really? We’ll never know, until there is some serious attempt to measure it.
This is just one pitfall of using per capita GDP as an indicator of living standards. Comparing improvements in well-being over time and across countries requires the data to be cast in real, or inflation-adjusted, terms. Allowances need to be made for the differences in purchasing power of national currencies. All this leads to additional complications and measurement problems. Finally, living standards might be very different in two countries with the same “average” GDP per capita if in one nation income was more equally distributed, and in the other most of it only went to a few.
With macroeconomic aggregates presenting an incomplete, and at times misleading, picture of living standards, an alternative approach may be to look at the nuts-and-bolts picture in a specific sector of the economy. Princeton University’s Orley Ashenfelter employs just such a strategy. He tracks the real purchasing power of the McDonald’s restaurant crew around the world.
“Burgernomics” is not new. The Economist magazine’s Big Mac index of currency undervaluation and overvaluation is 25 years old. Professor Ashenfelter introduced a twist to the story when, in 1998, he began to collect information on “McWages”, or the hourly wage rate of McDonald’s workers. The wage rate divided by the price of a burger led to “Big Macs per hour (BMPH)” — an indicator of how many burgers one hour of work at McDonald’s could buy.
McWages index" title="The McWages index" class="" />BMPH is a crude but powerful indicator of real purchasing power of labour, how it compares across countries and changes over time. It is crude because people buy a variety of goods and services; nobody consumes only burgers. Yet, the gauge is powerful because it is uncorrupted by statistical artefacts.
Professor Ashenfelter’s analysis confirms some of the things that we intuitively know. For instance, in 2007, BMPH levels in the US, China and India were 2.41, 0.57 and 0.35, respectively. Put another way, one hour of work at a McDonald’s in a large city of the US bought about two-and-a-half Big Macs in the same restaurant; in Beijing or Shanghai, one hour of work as part of the McDonald’s crew bought a little more than half a burger, and in New Delhi or Mumbai, the purchasing power of the same hour of work shrank to about one-third of a Maharaja Mac.
One would have perhaps expected Chinese McDonald’s workers to enjoy much higher real purchasing power than their Indian counterparts. But it’s common knowledge that the development model that China has pursued for more than 30 years has emphasised investment over consumption. Hence depressed Chinese real wages are not really a surprise. It is also not a surprise that Big Mac affordability per hour of work at a McDonald’s grew rapidly in China, India and Russia between 2000 and 2007, even as it stalled in much of the developed world. Remember the investor community’s fascination with emerging markets, especially BRIC (Brazil, Russia, India and China), for most of last decade? That wasn’t all hot air: real income growth at the bottom of the economic pyramid was, as it now appears, quite real.
But something strange happened between 2007 and 2011.
By the end of last year, BMPH in the US had slumped to 91 per cent of its 2007 level. Given the intensity of the economic trauma – first, of the subprime mortgage crisis and, then, of a disappointing recovery – it is only to be expected that McDonald’s crew members in the US have lost some of their real purchasing power in the last four years. However, Professor Ashenfelter’s data show that the drop in real purchasing power of McDonald’s workers in India may have been 1½ times bigger than that of their American counterparts: Indian McWages grew, but prices of burgers rose much faster. Incidentally, burger prices rose almost as much at Chinese McDonald’s as well. But wages for the crew there doubled, leading to a gain in the real purchasing power of Chinese workers.
It will be interesting to see how Professor Ashenfelter’s data stack up for this year. India’s economy lost its mojo a while back. China’s slowdown is the scary big news of 2012. Will this lead to a loss of workers’ purchasing power, and show up as a drop in Big Macs per hour of work?
Professor Ashenfelter’s analysis is also a good starting point for those who want a realistic picture of what’s happening to living standards in India, particularly of the lower middle class in urban centres. If one hour of work at a McDonald’s no longer buys even a third of a Maharaja Mac, one has to at least ask what’s gone so wrong in the last four years and who should be held responsible for it.
The writer is a Singapore-based financial journalist.
These opinions are his own