Book Reviews

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Bhalla Versus the World Bank: An Outsider's Perspective

Jeromin Zettelmeyer

Surjit Bhalla

Imagine There's No Country- Poverty, Inequality and Growth in the Era of Globalization

Institute for International Economics, Washington, 2002, xix + 248 pp., $28 (paper).

Notwithstanding Joe Stiglitz's tenure as Chief Economist of the World Bank, few would accuse the Bank of aiding and abetting the antiglobalization movement. Surjit Bhalla, a Delhi-based economist and former Bank researcher, does just that. His new book is a frontal attack on the Bank's research on poverty, growth, and income inequality, particularly its measurement of absolute poverty around the world. Not surprisingly, the Bank's poverty guru, Martin Ravallion, has issued a blistering response to Imagine, triggering an equally blistering rejoinder from Bhalla.

Bhalla makes five significant claims.

* First, while the Bank's World Development Report 2000/2001: Attacking Poverty states that the per capita incomes of the richest and poorest countries have significantly diverged over the past three decades, Bhalla claims that the income "ratio of richest to poorest countries declines markedly between 1960 and 2000-from 23 to 9.5. This is not divergence."

* Second, he argues that growth is accompanied by a deterioration in income distribution within countries, whereas conventional wisdom says that inequality within countries has stayed about the same.

* Third, Bhalla claims that worldwide inequality peaked in 1973 and has since declined. According to conventional wisdom-at least as interpreted by Bhalla-the worldwide distribution of individual incomes since 1970 has deteriorated.

* Fourth, he estimates a sharp decline in absolute poverty (the proportion of people living on less than $1 a day in terms of 1993 purchasing power), from 30 percent in 1987 to 13.1 percent in 2000. The World Bank estimates a much milder decline, from 28.7 percent in 1987 to 22.7 percent in 1999.

* Finally, Bhalla argues that growth in the developing world has a much greater impact on poverty than previously estimated. While the Bank's position is that growth is good for the poor but that eradicating extreme poverty will require extra measures, Bhalla concludes that "growth is sufficient, period."

So who is right? Or, less categorically, how can Bhalla's and the Bank's claims be reconciled? In the remainder of this review, I look at each claim, except for within-country equality, which is not central to Bhalla's overall message.

Converging global incomes?

The first point of contention- divergence or convergence-is easy to resolve. The World Bank uses the term divergence to describe the trend in the distribution of unweighted per capita incomes across countries. This is the standard use of the term, and there is no doubt that, by this definition, country income levels have diverged. Bhalla's numbers refer to population-weighted per capita income levels, which yield completely different results because developing Asia-the world's fastest-growing region for the past 40 years-is home to over half of the world's population.

Should country growth rates be weighted by population to determine if international income levels diverge or converge? It depends. If the purpose is to study economic growth, the natural units are countries (or sometimes regions), and not individuals or population-weighted countries. However, if one is studying convergence or divergence in global individual incomes, population-weighted per capita incomes are certainly more informative than unweighted per capita incomes. Changes in global inequality can be attributed to within-country, pure cross-country, or aggregation effects that result from the fact that some countries are much larger than others. Population-weighted income averages merge the last two. Bhalla is right to emphasize that aggregation effects matter, but his use of the term convergence, usually understood to refer to the pure cross-country effect, is misleading.

This brings me to the next point of contention-namely, Imagine's findings on world income inequality. On closer inspection, these turn out to be less contentious than Bhalla suggests. Several previous studies support his claim that population-weighted measures of global income inequality, such as the variance of population-weighted log GDP per capita, have improved since the 1970s. Bhalla's contribution is to point out that this improvement...