PPP-based Stratification of CIS–EU/OECD Economies Interstate Statistical Committee of the Commonwealth of Independent States (CIS-Stat) PPP-based Stratification of CIS–EU/OECD Economies Andrey E. Kosarev IARIW / HSE conference “Experiences and Future Challenges in Measuring Income and Wealth in CIS Countries and Eastern Europe” Moscow 17-18 September 2019

Outline Stratification Purchasing Power Parity Moving Linear Segment procedure Harrod-Balassa-Samuelson stratification Engel’s law stratification Conclusions 2

Stratification Economic policy measures inducing a GDP increase, evoke : Resulting increase of GDPpc provokes changes of any other indicator in a specific proportion This proportion is assessed separately within each group of similar economies Groups of economies are defined by similarity of tendencies in changes provoked by GDPpc – “tendency-groups” Expected changes of an endogenous indicator depend on the tendency-group 3

Purchasing Power Parity Purchasing Power Parity (PPP) – ratio between currencies, which takes into account the price levels in different economies. PPPs are computed within a joint work of countries, a largest international project : Global International Comparison Program (ICP), implemented by the decision of the UN Statistical Commission. 2014 ICP : PPPs for a joint group of 54 countries, CIS–EU/OECD. PPP-based indicators allow to detect tendency groups and to substantiate the stratification within the set of 54 CIS–EU/OECD countries. A special “Moving Linear Segment” procedure (MLS-procedure) was elaborated for these purposes. 4

Moving Linear Segment (1/5) Countries are ranked following the ascending GDP per capita in PPP terms. 5

Moving Linear Segment (2/5) For each group of consequent points a linear function “indicator under analysis” = a0 + a1 * GDPpc is estimated e.g.: for a set of 54 countries 36 linear segments, each including 19 points, are estimated 6

Moving Linear Segment (3/5) Structural break points have to be detected 7

Moving Linear Segment (4/5) Structural break point: sbc(j) = ( a(j+1) + … + a(j+k))  /  (a(j-1) + … + a(j-k) ) j = (k+1), … , (J-k) sbc(j) structural break coefficient at the point j a(j) linear regression angle for the segment with the center at the point j K number of linear regression segments to the right and to the left of the point j J total number of segments If a local extremum sbc(t) exists, then the point t is a break point dividing two neighboring homogeneous “tendency-groups”. Analysis of CIS–EU/OECD 54-points set: 36 19-points segments (J=36), K=3 8

MLS (5/5) – HBS stratification (1/2) The moving linear segment structural break points define the groups each having a different tendency of PLI changes depending the GDPpc. 9

HBS stratification (2/2) PLI = PPP / XR – Price Level Index is the ratio of the Purchasing Power Parity to the eXchange Rate Harrod-Balassa-Samuelson effect: PLI is positively correlated with GDP per capita. 54 CIS–EU/OECD economies, in PPP 2014 terms, three tendency-groups can be considered: GDPpc USD, PPP 2014 Increase of PLI (%) accompanying the USD 1000 increase of GDPpc tendency characteristics t R < 28500 1.6 8.99 86.6% 28500 – 41500 3.1 9.61 89.5% > 41500 0.2 1.23 29.3% 10

Engel’s law stratification (1/3) Engel’s law: as income rises, the proportion of income spent on food falls. Several indicators from PPP publications can be considered in this context, e.g.: - ratio (1) “expenses on clothing & footwear” to “expenses on food & non-alcoholic beverages” increases as GDP per capita increases ; - ratio (2) “expenses on household furnishings, equipment and maintenance” to “expenses on food & non-alcoholic beverages” increases as GDP per capita increases 11

Engel’s law stratification (2/3) Ratio (1) “expenses on clothing & footwear” to “expenses on food & non-alcoholic beverages” increases as GDP per capita increases GDPpc USD, PPP 2014 Increase of “Ratio 1” accompanying the USD 1000 increase of GDPpc tendency characteristics t R < 28000 0.007 3.88 61.3% 28000 – 34000 0.018 4.03 68.9% > 34000 0.005 2.24 42.3% 12

Engel’s law stratification (3/3) Ratio (2) “expenses on household furnishings, equipment and maintenance” to “expenses on food & non-alcoholic beverages” increases as GDP per capita increases GDPpc USD, PPP 2014 Increase of “Ratio 2” accompanying the USD 1000 increase of GDPpc tendency characteristics t R < 29000 0.008 3.19 53.0% 29000 – 45000 0.018 6.36 79.2% > 45000 0.003 1.79 40.9% 13

Conclusions (1/2) 14

Conclusions (2/2) PPP-based stratification: in PPP 2014 terms, economies within a joint CIS–EU/OECD set can be divided into 3 income groups - “low-income” economies having approx. GDPpc < USD 28500 - “middle-income” economies having approx. USD 28500 < GDPpc < USD 40000 - “high-income” economies having approx. GDPpc > USD 40000 Each group has its specific tendency to respond to economic growth. While elaborating economic policy measures, it is important to take into account that expected effects would depend on what group the economy under consideration belongs to. 15

Thank you! 16 16