1/4/2017
A Memoir of My Work with the International
Comparison Program (ICP) and the Penn World Table (PWT
Alan Heston*Preface
Chapter 1: Phase 1: Antecedents and Early Meetings
Background of the ICP
A. ICP Predecessors(1) Before Colin Clark’s 1940 The Conditions of Economic Progress(2) The period 1940-65(3) Early Methods of Comparing PPP
B. Phase I of the ICP: 1968-70(1) Some Early Decisions on the Framework of the ICP Comparisons(2) New Bolton Meeting, June 1969
(3) Bellagio I, October 1969
Chapter 2: Organization and Implementation of ICP Phase I
A. Phase I Activity 1970-71(1) Division of Labor with the UNSO
(2) Robert Summers on Board in 1970
(3) Gathering and Processing Prices and Expenditures: 1970-71(4) Extended Visit to India and Short Visit to Japan(5) Obtaining US Expenditures and Prices(6) Equipment Goods(7) Construction
B. Experimenting with Aggregation Methods on Preliminary Data: 1972-4(1) Below the Basic Heading Level(2) Aggregating the Basic Heading PPPs: GEKS and Geary-Khamis(3) To Obtain More Support You Need to Show Results(4) A digression on Men of Affairs(5) Organization of Phase II and Completion of Phase: SOEC
(6) The Rest of the ICP World(7) A Digression on the 1967 Comparison
Chapter 3: Responses to the Phase I Report
A. Response of Reviewers. Scholars and the Media(1) Book Reviews(2) The Media
B. Response of the International Organizations1(1) The World Bank
(2) The European Union(3) The International Monetary Fund
(4) The Regional Banks and Economic Commissions of UN System
Chapter 4: Completion of the Phase II Report
A. Measures of Imprecision
B. Putting Together the 1970 and 1973 ICP Estimates
C. Consistency Over Time of ICP Estimates
D. Geary International Prices
Chapter 5: Signing Off- Phase III Report
A. Services in the ICP
B. The Contributions of in-kind Aid in the form of Advisors
C. Augmented Binary Comparisons
D. Analysis of the 1975 Results(1) Bridge Country Binaries(2) Demand Analysis
E. Estimates for non-benchmark years
F. A Digression on 1980
(1) China’s Purchasing power(2) The Hill Report(3) Other Meetings(4) The Latin American Region(5) The 1975 EU Report
Chapter 6: Estimation of GDP of Non-benchmark Countries and Sectoral Output
A. Origins of the Penn World Table (PWT)
B. The Beginnings of the ICOP Studies at Groningen
Chapter 7: ICP after Penn - Regionalization and 1980 and 1985 ComparisonsA. The Integration of the OECD into the 1980 ICP(1) The Problem Posed by the US CPI Revision in 1978
(2) Putting Together the OECD and the 1980 ICP World
B. The 1985 ICP Round; Plans and Implementation(1) The Best Laid Plans(2) The Latin America Problem(3) Leadership(4) Picking up the pieces of the 1985 ICP
Chapter 8: Exit and Voice
A. The World Bank and the ICP in the 1980s2

B. The Philadelphia Meeting, August 1990
C. A Digression on Kravis, Summers and Penn
D. The Unhappy Life of the Phase VI Global Comparison(1) The Regional Comparisons(2) Official Global Report on 1996 ICP: a no-Show
E. The Castles and Ryten Reports of 1997
(1) The Castles Report(2) The Ryten Report
Chapter 9: Finding a Home for PWT, Part I
A.
B.
C.
D.

Initial Efforts to Pass the Torch
China and the International Monetary Fund: Any Port in the Storm
Rise of Empirically Tested Growth Theories
Aside on the Big Mac Index

Chapter 10: Getting the 2005 ICP Aloft and Landed
A. The First Two Years: Reality Sets In(1) The Initial TAG Members(2) The Coding Issue
B. Price Validation in the Regions(1) The World Bank Price Validation Software(2) The Tool-Pack
C. Linking the Regions at the Basic Heading Level in ICP 2005
(1) The CPD and GEKS Methods at the Basic Heading Level(2) Using the Ring Country CPDs to Link the Regions(3) Aggregating the Regions in the 2005 ICP(4) China’s 2005 Participation
D. The Final Results of the 2005 ICP(1) The Form of Presentation(2) The Ikle Method of Aggregation used in Africa(3) Did the 2005 ICP Results Produce Surprises?
Chapter 11: Reflections on the ICP and the PWTA. Transferring the PWT to Groningen
B. The 2011 ICP(1) Digression on Regions(2) The 2011 Results and the Poverty Fracas(3) China Redux
C. Moving the ICP Towards Annual Updates(1) You’ve Come a Long Way Baby
(2) Rolling Benchmarks(3) Governance
D. In Good Hands
3

*Emeritus Professor, University of Pennsylvania

ABBREVIATIONSADBAsian Development Bank

AfDB

African Development Bank

BEA(US) Bureau of Economic Analysis

BLS(US) Bureau of Labor Statistics

CAR

Country Aggregation and Redistribution (method)

CPD

Country Product Dummy (method)

CPI

Consumer Price Index

CSO(Indian) Central Statistical Office

DDG(World Bank) Development Data Group

DGINS

Directors General of Institutes of National
Statistics

DGTT(Indian) Director General of Technology and
Trade

ECA

(UN) Economic Commission for Africa

ECE(UN) Economic Commission for Europe

ECIEL

Program of Joint Studies on Latin American
Economic Integration
4ECLAC(UN) Economic Commission for Latin America andthe Caribbean

ECSC

European Coal and Steel Community

EKSÈltetö Köves Szulc (method)

ELIs

Entry Level Items

ESCAP(UN) Economic and Social Commission for Asiaand the Pacific

ESCWA(UN) Economic and Social Commission forWestern Asia

EU

European Union

Eurostat

Statistical Office of the European Communities(SOEC)FAO

Food and Agricultural Organisation

GDP

Gros Domestic Product

GEKS

Gini Èltetö Köves Szulc (method)

GGDC

Groningen Growth and Development Centre

GK

Geary Khamis (method)

IADB

Inter-American Development Bank

IARIWInternational Association for Research on Income
and Wealth

ICOP

International Comparisons of Output andProductivity (program)

ICP

International Comparison Program

ICSC

International Civil Servants Commission

IMF

International Monetary FundINSEEInstitut national de la statistique et des étudeséconomique

5

ILO

International Labor Organisation

MPS

Material Product System

NSF

National Science Foundation

NBER

National Bureau of Economic Research

NSS(Indian) National Sample Survey

OEEC

Organisation for European Economic Cooperation

OECD

Organisation for Economic Cooperation andDevelopment

OU

Oriental (currency) Unit

PISA

Programme for International Student Assessment

PPP

Purchasing Power Parity

PPS

Purchasing Power Standard

PWT

Penn World Table

SNA(UN) System of National Accounts

SOEC

Statistical Office of the European Communities

TAG

Technical Advisory GroupUN

United Nations

UNESCO

United Nations Educational Scientific and Cultural
Organisation

UNSC

United Nations Statistical Commission

US

United States

USAID

US Agency for International Development

UNSD

United Nations Statistical Division

WWI

World War I

WWIIWorld War II

6

WDI

World Development Indicators

WHO

World Health Organisation

7

Preface
My children, Alex and Laura, called the International Comparison Project (ICP)1
The Project because it was my principal research activity during their school years andsince. Their mother, Wilma Heston, (Pic 1)2 contributed to the first report on the ICP
before she pursued a series of translations from Persian and Pushtu literatures, both
popular and literary. The first ICP report was authored by Irving B. Kravis, Zoltan
Kenessey, Alan Heston and Robert Summers (1975) with the assistance of many others
named in that volume and discussed below. There are two related aspects of the projectthat had caught my interest prior to 1968 when I joined the ICP.
I had taken a course on the Russian Economy at the University of Washington
taught by Frank Holtzman in 1956. Frank did his undergraduate work at the University ofNorth Carolina on a tennis scholarship graduating in 1940 and stationed in World War°II
in a US air base in Poltava, Ukraine, where his interest in Russian studies began. He thendid his graduate work at Harvard where he was a student of Alexander Gershenkron andWassily Leontief, both experts on the Soviet Economy. Leontief received the Nobel prizein 1973 for his work on input-output tables and Holtzman was associated with that project
while finishing his Ph.D.
I mention Holzman and tennis because he was a frequent partner on the University
courts while I was in Seattle. He was a better player but the points were always
competitive and where he was nip and I was tuck. An East Coast product after taking a
position at Tufts, he spent part of each summer on Cape Cod where my colleague
Summers and son Larry came to know him on the tennis court. What I remember mostfrom Holzman’s course was the Gershenkron effect that illustrated the inherent index
number problem that weighting matters if you are computing measures of change overtime. Gershenkron had compared the differences in the growth in the Production Index of
Russia from 1919 to 1939 using the official version employing 1919 sectoral weights withthe his version using 1939 weights. Neither is a true measure but the differences werelarge.
A second study that caught my attention while doing my graduate course work at
Yale was that of William Hollister (1958) on the size of the Chinese Economy circa 1952
when the United States did not recognize the new Communist government. Mainland
China was supporting the North in the Korean War and the US Defense agencies wanted
to know the size of the Mainland economy. Hollister carried out his study with intelligence
financial support and gave an answer that they liked but Hollister, being well trained, also
gave an alternative answer they would prefer not to have seen. Essentially Hollister
estimated sectoral PPPs weighting them first by US weights, which made the Mainland
economy to be significant in size relative to the United States, the result wanted by the1

It was renamed International Comparison Program in 1989.

2

In a file labeled Images Memoir there are images of individuals with an annotation filedescribing the people and the context.

8

US defense establishment to justify larger military budgets.3 But Hollister also provided
estimates using Chinese weights placing China’s total GDP as relatively small comparedto the United States, much less attractive to his sponsors. None of this changed the focusof my dissertation which was in Monetary Economics.4 But the index number problem
remained in the back of my mind as something to which I would like to return one day.
My qualification for writing this history is that I was there at the beginning of boththe ICP and the Penn World Table and I am still on the Advisory Group of the current
2017 round of the ICP. During this almost 50 years the number of countries participatingin the ICP has risen from ten in 1970 to almost 200 in 2011. Two data sets evolved as
offshoots of the ICP, namely the Penn World Table that was the inspiration of my latecolleague, Robert Summers and with which I have been directly associated; and theInternational Comparisons of Output and Productivity program of the University ofGroningen, a vision of Angus Maddison (Pic 2) that is celebrating its 25th year in 2017.
Fortunately I do not need to rely solely on my memory in undertaking this memoir.
Our ICP mentor, Irving or Irv Kravis, had us all write file memos about meetings, pricecollection, national accounts problems, issues in construction, rents and public
consumption, visits to participating countries, methods of estimation and other subjects.
We divided up the work between a unit at Penn and a unit at the United Nations Statistical
Division (UNSD)5 so these memos were crucial to keeping everyone informed. These
memos were filed by subject matter and chronologically and along with the publishedreports the eight binders written between 1970 and the early 1980s have been a principal
source. Unfortunately there are some time gaps along the way, notably the years 1970
and 1974 where only part of the record made it from Philadelphia to Albuquerque where
I now live. It is a personal history because I have given my impressions as well as
provided images of some of the participants. It is not exhaustive because there have been
decisions and discussions in Europe, New York, Washington and elsewhere not known
to me. The memoir offers my take on some of the issues faced and decisions made along
the way, and gives my perspective on some of our questionable decisions as well as highfives to a few of our small triumphs.
Chapter I begins with a discussion of some of the applied studies prior to 1968 andthe intellectual background to the ICP. Succeeding chapters cover the methods chosen
and implementation of the 1970 Phase I of the ICP and reactions to the 1974 draft reporton Phase I and to its publication in 1975. Phases II (Kravis, Heston and Summers 1978)and III (Kravis, Heston and Summers 1982) are the last rounds of the ICP in which the
3

The CIA during the Cold War carried out parallel studies for the USSR GDP but only
reported US weighted estimates, substantially overstating the real size of the Soviet
economy. Coming full circle Holzman continually pointed out the errors of the CIA
methodology designed to mislead Congress and the Administration in op-ed pieces andother publications particularly in the 1980s.

4

However, during my period at Yale our family spent a year in India while I was teaching at
the University of Bombay based upon my interests in monetary economics.

5

At that time it was United Nations Statistical Office but its present title, United Nations
Statistics Division, is used throughout this memoir.
9group at Penn were directly involved. Around the time Phase III was published in 1982
we had moved on to extending the country coverage at an aggregate level in a research
effort termed the Penn World Table or PWT. Throughout this document Phase I will bereferred to as the 1970 benchmark or ICP 1970 interchangeably, in part to distinguish itfrom extrapolations, like the PWT. The remaining chapters sketch the story of the ICP
and the PWT up to 2016 from a personal perspective. An Appendix provides images of
early ICP meetings in various locales and many of the players in The Project.
I would like to thank Sultan Ahmed for providing me a number of pictures and forfilling in some dates and events when he was at the World Bank. Wilfred Beckerman
kindly supplemented my memory with respect to early events at the OECD, when Gilbert
and Kravis undertook their 1950 comparisons. And my daughter Laura and my partner,
Bettina Aten for their gentle, supportive and frequent encouragement. A very special
thanks goes to David Roberts (Pic 9) who has firmly edited my early drafts and as staff of
the OECD a witness to much of the action from 1980 until his retirement in 2009. His
continued encouragement and good humor have been invaluable. Fred Vogel and Angus
Deaton have also kindly commented on an earlier draft leaving full responsibility forremaining errors with me.

Chapter 1: Phase I Antecedents and Early Meetings
Background of the ICPThe United Nations Statistical Commission (UNSC) meets every year (prior to2000 it was every two years) bringing together staff from national and international
statistical offices to give priority to various activities of the UNSD. The UNSD submits
papers to the UNSC reporting progress on different projects, like manuals on international
trade statistics, on the system of national accounts, on trade, expenditure and production
classifications and the like. Discussions ensue, a summary of the discussions is provided
to the delegates, and a final draft of the decisions is made, often after a good deal ofwordsmithing. In 1965 the UNSC approved some research that would report on thesuitability of the often over-valued exchange rates of that era for converting economic
aggregates of member countries. Potentially this report could raise contentious issues
because country contributions to the UN budget were based on exchange rate converted
per capita Gross Domestic Product (GDP).
The resulting report, International Comparisons of Production, Income andExpenditure Aggregates, was submitted to the 15th Session of the UNSC in early 1968. It
recommended that a project be initiated by the UNSD beginning with a small but
economically diverse set of countries. The UNSD was able to fund some staff with thehelp from the World Bank, USAID, and country contributions; the Ford Foundation madea significant grant to fund a unit at Penn. 6 Irving B. Kravis was director of the project and6

The support of these economic statisticians from the United Kingdom, Canada and theUnited States respectively was crucial for getting the ICP off the ground. They were visionary
in their views of international economic statistics at the time. Eurostat, then known as the
10the unit at Penn and Zoltan Kenessey was associate director overseeing the operations
at the UNSD. In terms of overall management of the ICP the Director of the UNSD,
beginning with Patrick Loftus (1962-72) and Simon Goldberg (1972-79), was responsible
for organizing the first three phases of the work. Abraham Aidenoff was Assistant Directorof the UNSD and took part in a number of meetings during the completion of the 1970
ICP. The UNSD was within the Department of Social and Economic Affairs and under the
direction of Jacob L. Mosak during Phase I of the ICP.

A. ICP Predecessors(1) Before Colin Clark’s 1940 The Conditions of Economic Progress
If the Nobel Prize in Economics had been awarded in the 1920s, Paul Samuelsonreflected that one of the winners would certainly have been Gustav Cassel (Pic 3), theSwedish economist who wrote,“I propose to call this parity ‘the purchasing power parity’. As long as anything
like free movement of merchandise and a somewhat comprehensive trade
between two countries take place, the actual rate of exchange cannot deviate
very much from this purchasing power parity." Gustav Cassel (1918, p. 413).
This became known as the Purchasing Parity Doctrine and was a major contribution to
the understanding of the international economy at the time. It strongly supported thenotion of a world where prices would tend to converge to one common level, as transport
costs and other obstacles to trade declined both within and between countries. The lawof one price, an implication of Cassel’s doctrine, remains a powerful basis for modeling avariety of international and domestic explanations of price differences across space.
It is important to keep in mind the context in which Cassel was writing. Major
trading countries went off the gold standard in the World War (WW) I period during which
they also experienced significantly different rates of inflation. At the end of WWI countries
had to decide if and when they would return to a precious metal standard, and at what
price they would set their currency in terms of gold or silver. In his article Cassel wasaddressing a very important policy question and his answer was that Sweden (and other
Statistical Office of the Economic Communities or SOEC, was also an important source of
support because its predecessor, the European Coal and Steel community had carried out
price and expenditure comparisons and were familiar with the issues. (De Micheiis andChantraine, 2003). Much of the activity of the UNSD through the 1980s was to prepare
manuals of different types of statistics, to request data from country statistical offices in astandard form, and to bring together country tables for dissemination, a useful enoughprogram. The ICP was different in that it required countries to submit price data and national
accounts in a specified form that were in turn processed centrally into statistical outputs thatwere outside the control of the countries except for the two-yearly sessions of the UNSC.
This potential conflict between ICP and the countries was, and remains, a continuing tension
from the beginning of the ICP until the present.
11

countries too) should set the price of their currency in terms of gold and silver based on
the purchasing power of their currency relative to its trading partners. The important point
here is that Cassel stressed the purchasing power parity (PPP) was a guide to setting theexchange rate; not that the exchange rate should determine the PPP by dragging
countries through unsettling periods of deflation/inflation if the exchange rate wasovervalued/undervalued.7
International trade text books describe the Purchasing Parity Doctrine in its
absolute and its relative version. The absolute version suggests that the price ratio of all
goods in two countries would equal the exchange rate, truly the law of one price. While
this is a useful starting point, in the real world it can be misleading. With the introductionof the Euro some argued that there would be no reason to carry out PPP research likethe ICP.8 But a single currency does not assure that prices will be similar. Witness thelarge regional price differences within China and the United States, or countries like Costa
Rico that use the US dollar but have prices well below those in the United States.
The absolute version found little support after WWII for many reasons. First, there
were barriers to trade across countries that impose wedges between national and world
prices of tradables. Second, in the 1950s, most countries maintained capital controls
under Bretton Woods fixed exchange rate system. Third, as the regime of fixed exchange
rates and restrictions on capital flows gradually dwindled in the early 1970s, the world
became much more financially integrated than it was when Cassel wrote. Exchange rates
in the short-run began to be more influenced by relative interest rates than by trade ingoods and services. The volume of capital movements across countries today is over fifty
times larger than the international trade in goods and services.
Today the relative version of the Purchasing Power Parity Doctrine prevails in mosttrade models and in extrapolations of PPPs. If prices in a reference currency, A, increase
for some aggregate like GDP by 10 percent and only 5 percent in country B then the7

Keynes was the editor of the Economic Journal where Cassel’s article, which fit his views,
was accepted for publication. Keynes was heavily involved in the debate over whether theUnited Kingdom should return to its pre-war exchange rate of $4.80 per pound or a lower
rate. Proponents of the pre-war rate primarily made the case that it was important tomaintain the United Kingdom’s reputation in international finance. Keynes argued that the$4.80 rate should not be maintained and if it was maintained it would force a downward
adjustment of prices and production. The chair of the Committee said if you ask fiveeconomists a question, you get six answers, two from Mr. Keynes. The United Kingdom did
maintain the pre-war rate in 1924 and the UK economy did not enjoy the prosperity that
other countries did in the remainder of the 1920s.

8When the Euro was introduced Denmark recommended abandonment of the PPP programin Eurostat precisely on the grounds the prices would be the same in the Euro zone. It waspointed out that within a single currency zone in the United States consumption prices variedby 30 to 40 percent between cities of the South and Midwest compared to the Northeast orWest Coast. And within the Euro zone price levels today have diverged, not converged after
the Euro was introduced.
12

relative version says the PPP of B will fall by about 5 percent. In addition much modellingassumed that in the medium run there would be tendency for the PPPs and exchange
rates to move together. There are many advantages to analysts working with theseassumptions. And they are the most common assumptions made when organizations likethe World Bank make extrapolations between benchmark studies.
Long before the development of Cassel’s contribution to the literature on
international trade and regional science there were anecdotal and more systematicreferences to price differences across space. A watershed event was the influx of
precious metals into Spain, and subsequently Northern Europe and even more gradually
Asia over the period 1500-1700. Silver was the main import/plunder sent back to Spain,
the European price of gold in terms of silver rose from 9:1 to 15:1 as New and Old World
monetary stocks merged. Spain’s leading export to its European trading partners became
silver devastating its traditional export industries like wool, at the time a puzzling
phenomenon analogous to present day Dutch Disease.9 The Dutch and British East India
companies in turn found that their most profitable export to Asian markets was silver
where the price of silver to the price of gold was initially 9:1. The law of one price is aconvenient model for thinking about the arbitrage incentives that gradually drove the priceof gold in terms of silver to the same level around the world. In the centuries from 1580
to 1800 the gold-silver arbitrage worked slowly through the world system10; today, it would
take seconds.
The trading companies used Bazaar Walkers to obtain prices in Middle East
markets to send back overland to the European ports to inform the home offices whatsuitable items to ship out and home on new voyages. The systematic collection of prices
became common but records are often episodic. Cities and business journals began tocollect prices over time in the 19th centuries that permitted some spatial comparisons ofprice differences. The Aldrich (Nelson Aldrich, Statistician) Report to the US Senate
Finance Committee in 1893 examined wholesale prices, wages and transport rates within
the United States over the period 1840 to 1890. In addition price statistics from similarreports for the United Kingdom and continental cities, including for example Hamburg andVienna, were appendices to the Report. The Board of Trade surveys in the United

9

Explanations for the decline in former export industries in Spain ranged from the loss ofmoral fiber of the population as illustrated by the outrageous dress of the women and men to
the general laziness of the working class.

10

The Flaw of One Price is an article in the Economist (October 18, 2003, p. 73) reporting on
the Euro-price of a number of items in Euro-area countries. Clearly the expectation was thatone price should prevail, but in fact very significant discrepancies remained for years after
the Euro was introduced. The percentage difference between high and low prices across thecountries was 160 percent for a cinema ticket and 100 percent for a cup of coffee (nontradables), and 75 percent for milk and jeans and over 50 percent for Pampers and Nurofen,some typical tradables. The consistent message of empirical studies is that the law of one
price does not even prevail for tradable goods.
13Kingdom similarly covered different cities within the United Kingdom and other countries
including the United States.11
Time series on consumer prices, wages and wholesale prices became common
before WWI. By the late 1930s economic statistics collected by governments were more
systematically reported within a national accounting framework with respect to output andexpenditures. Price and wage statistics became formalized, frequently on a national basis
including both larger and smaller urban areas. Catalogue sales became an increasing
share of the market for durable items complementing regular price collection surveys bygovernment statistical agencies.

11

A very good survey of source materials is provided by R. C. Allen (1994).
14

(2) The period 1940 to 1965
One of the major contributors to the national accounts literature in the 1930s wasColin Clark (Pic 4), then serving as a statistician for the Economic Advisory Council from
1929-31 and as a Lecturer in Statistics at Cambridge from 1931-37. Keynes was on the
Economic Advisory Council when Clark was there and was instrumental in obtaining Clark
his position at Cambridge. Keynes used the national income framework of Clark andKuznets and some of their estimates in The General Theory of Employment, Interest andMoney.12 Clark’s 1937 book National Income and Outlay covered the year 1924 andquarterly estimates for 1929-36 using the now common identity that national income canbe calculated from the income, product and expenditure sides. It became the model forthe national accounts of the United Kingdom and also traced them back to the 1688
estimates of Gregory King. Keynes was influential in the founding of the Department ofApplied Economics at Cambridge and Richard Stone became its first Director where Clark
was a researcher. Clark left Cambridge in 1937 eventually taking an advisory position in
the Department of Industry of the Labor Government of Queensland in Australia where
he remained until 1952.
In the midst of those responsibilities, Clark managed to complete The Conditionsof Economic Progress in 1940 without any research assistance and only a slide rule andan adding machine as computational aids. This was a very influential study that made abinary comparison for consumption between each or a number of countries in Europe,
Asia and elsewhere with the United States. The sources of data ranged from “reasonable”
for 16 countries to “quite scratchy” for the other 34 countries. He converted national
currency totals to a common international unit that was conceptually similar to theinternational dollar in Phases I-III of the ICP.13 The PPP for consumption was used forthe conversion of totals that included investment and government. With the benefit ofhindsight this approximation of the GDP PPP is not far off for many countries in various
ICP rounds. Clark went on to create a world total of income for his 50 countries. And, in
terms of welfare measures, he chose as his denominator hours of work when available
and otherwise per capita income.
WW II was an economic shock for most economies, so it was not propitious timing for
Clark’s book to receive the attention it deserved. He would subsequently bring out a second editionin 1947 and an updated edition in 1957 that used a reference year of 1950. The 1957 edition
introduced the notion of an Oriental Currency Unit (OU). Clark came to view the international unit
(IU) as only appropriate for countries relatively close economically: a total of 26 economies with areference year of 1929, which Clark felt was an improvement over an average of years that wasused in his 1940 edition. Countries from Asia, Africa or Latin America were not included among
the twenty-six.
12

For a very rich discussion of Clark’s career and contributions, see Angus Maddison (2004).

13

The ICP international dollar was defined as having the same purchasing power as the US$over GDP in a benchmark and other years. Clark’s international unit had a similar definition
but over a series of years, 1925-34, was the reference period for his analysis of economic
growth of the 16 countries with the more reliable data.
15

In Table XV (Clark, 1957, pp. 58-59) he provides estimates for 19 countries for1950 and an additional four countries for 1948 using the OU.14 A main feature of the OU
was that it excluded investment and all government services except education and health,and allowed a flat 6 percent for house rent expenditures in all countries. He extended
these estimates in OU to 102 countries in Table XIX in the following way. M.K. Bennett(1951) had used a set of physical indicators for a set of 102 countries to derive an index
of development. Clark estimated a regression for the 23 countries that had a value of theBennett index and OU value and used it to estimate OU values for the remaining countries
for which Bennett had provided an index. This procedure is a good example of theingenuity Clark displayed in deriving the most from limited available data. His efforts totranslate his OU results to international unit measures are reported but apparently were
not viewed with enough confidence to total up the results to a total for the 102 countries.
The European Coal and Steel Community
The Treaty of Paris of 1951 established the European Coal and Steel Community(ECSC) consisting of six countries: France, Italy, West Germany, Belgium, Luxembourg
and the Netherlands. It introduced a common market in 1953-4 for coal and steel in partto remove from post-war Europe a catalyst for conflict and to create an institution thatwould be one step towards the European Economic Community created by the Treaty ofRome in 1957.15 An activity of the ECSC was to survey prices and wages in the member
countries that were aggregated to overall measures of real consumption across theirmembership.16 Jan Van Yzeren (1956) was hired as a consultant to the ECSC to look atways to aggregate the price and wage surveys. Van Yzeren produced several different
methods, one of which, his preferred balanced method, was illustrated, but not ultimately
used in the first ICP report. (Kravis, et. al., 1975, pp.67-8 and Table p.75).

14

The 1957 edition runs to 720 pages and is less focused than the 1940 edition with manydifferent threads running through the different chapters including a very thoughtful treatmentof the agricultural, industrial and service shares in production, income distribution, Russia
and an Excursus on economies in the ancient world. In contrast to the 1940 edition the 1957
edition does number its Tables. However, the former had a summary chapter, but the latter
did not. It should also be noted that the Gilbert-Kravis (1954) study published when the 1957
edition was in press, so Clark was only able to note that it had much better data coverage forits countries.

15

The European Economic Community became the European Union with the signing of theMaastricht Treaty in November 1993. European Union is used throughout the rest of thememoir.

16

Bert Balk kindly pointed out that the ECSC surveys were not mentioned in an earlier draft ofthis section. For a fuller treatment, see Balk (2008). Pp. 42-4. Balk (Pic 30) was a thesis
advisor to van Yzeren, who late in his career was awarded a Ph.D. that was very wellcelebrated.

16

The Bretton Woods Regime
The Bretton Woods agreement established the International Monetary Fund (IMF)
and a system of fixed exchange rates that ruled from 1947 to 1971. Many at the timerealized that those exchange rates were further from PPPs than at the time Cassel firstused the term purchasing power parity in 1918. This was because there were morebarriers to the free flow of trade, capital and people compared to WWI. In addition, mostcountries instituted foreign exchange controls during WWII that remained in effect longafter the IMF was established. But comparisons among countries were needed to makeassessments to the various parts of the United Nations (Food and Agriculture
Organization (FAO), World Health Organization (WHO) and the like), for quotas for the
IMF and World Bank (then known only as the International Bank for Reconstruction andDevelopment or IBRD). Outside of Clark’s work, the exchange rate was the only wheel intown circa 1947.
The Council of Mutual Economic Assistance
The Council of Mutual Economic Assistance (CMEA) was established in 1949.
From 1960 it included a Working Group to undertake binary purchasing powercomparisons between the USSR and other members. The comparisons were conductedwithin the Material Product System (MPS) of national accounts.17 The Working Group
completed comparisons for 1959 and 1966. Beginning in 1971 the Standing Commissionof the CMEA on Statistics took over this work. Four comparisons were carried out by thisbody: for 1973, 1978, 1983 and 1988.18 Some of this work is described in Syzilagi (1966)
and Ivanov (1978) (Pic.6,7). The experience and advice of statistical staff in Hungary and
Poland became an important input into the initial ICP round.
The Gilbert-Kravis Study
Because exchange rates among their member countries were often artificiallymaintained, the Statistics Division in the Economics and Statistics Department of theOrganisation of Economic Cooperation and Development (OECD)19 under the leadershipof Milton Gilbert initiated PPP binary comparisons between the United States and Italy,

17

The MPS differed in two major ways from the UN System of National Accounts (SNA): it did
not include services in their total as does the SNA and it did not net out purchases fromother firms in totaling up gross sales of enterprises as in the SNA. Often the totals of MPS
and SNA were not greatly different from each other.

18

Youri Ivanov, formerly at CISSTAT where PPP comparisons are carried out across theCommonwealth of Independent States and who currently teaches Statistics at the Universityof Moscow, kindly provided background on previous comparisons.

19

At the time it was the Organisation of European Economic Cooperation (OEEC). It became
the Organisation of Economic Cooperation and Development (OECD) in 1961. It is referred
to as OECD throughout this memoir.
17

the United Kingdom, France, Belgium and Germany in the early 1950s.20 Gilbert invited
Irving B. Kravis from the University of Pennsylvania to join him in the study.21 The work
was initiated in 1952 and published in 1954. (Gilbert and Kravis, 1954).22 This wasfollowed up with a study of nine European countries (the six original countries plus
Belgium, Denmark and the Norway) and the United States (Gilbert and Associates, 1958).
The Economic Commission for Latin America
Another set of cross country comparisons was carried out by the UN Economic
Commission for Latin America and the Caribbean or ECLAC (1967, then ECLA) and
S.N.Braithwaite (1968). These studies priced the same items in all cities employing thesame team in the capital cities of each country. Further the prices were aggregated using
average expenditure shares of all countries, the Walsh (1910) method, which is also
illustrated in the first ICP report. A linking was made to the United States through a set ofprices for Houston obtained from the US Bureau of Labor Statistics (BLS). These methods
are discussed further in the next section.
20

In this period expenditures were grouped into categories for which there were expenditure
weights or shares. Price comparisons were then made for specified goods and services
within a category that were summed and averaged first to the category level and then tovarious aggregate levels like all meats, food and beverages, or household consumption. On
the production side, comparisons would be for productive sectors like agriculture orconstruction using both direct and indirect quantity comparisons to arrive at aggregates likemanufacturing or all of GDP.

21

Two aspects of this initial study stand out from my conversations with Kravis. First, in their
discussions Gilbert always focused on the quantity comparisons and Kravis the price side ofpurchasing power comparisons. Necessarily they would end up with the same conclusion,
but they always argued from a different starting point. A second recollection provides asense in which Kravis always gave great attention to detail and to checking results, muchdue to Simon Kuznets, a mentor to both Gilbert and Kravis at Penn. The initial results
became available few days before Kravis was to return to Philadelphia to begin teaching. He
was so surprised by the Paasche-Laspeyres spreads for Italy and the United States of 75
percent that he postponed his return from Paris several days to redo the calculations.
Happily there were no mistakes, and the Italy-United States spread turned out subsequently
to be unremarkable for many pairs of countries. However at that time Kravis was familiar
with Paasche-Laspeyres spreads from time to time price indexes where differences over
several years were rarely over 5 percent, hence his initial surprise at the Italy-US result.

22

Wilfred Beckerman, who worked on (and in fact, authored) the update of Gilbert-Kravis(Gilbert and associates, 1958) kindly provided some background on the roles that eachplayed in the work. Gilbert had more of a conceptual role while Kravis saw throughimplementation and both shared in the writing. Angus Maddison was also at the OECD at
the time and was later to pursue PPP studies from the production side at the University ofGroningen developing international comparisons of productivity. He established theGroningen Growth and Development Center (GGDC), where he mentored a number ofgraduate students. The GGDC is currently involved in many projects such as KLEMS, supply
chains, a center of an international consortium, the Maddison Project that continues his
tradition of historical output and productivity studies.
18

(3) Early Methods of Comparing PPPs
Country comparisons are of interest to assess the total and per capita volume ofgoods and services that each economy is producing and consuming. Direct quantity
comparisons can often be made, like hospital bed days or kilograms of meat consumed.
In both these examples, there can be differences in quality that do not make direct
quantity ratios very comparable as measures of volume. Moreover for much of GDP wehave only expenditures for a diverse set of items within a basic heading23. Examples arehousehold textiles, condiments and spices, and restaurant meals. In these basic headings
quantity comparisons are indirect as in (1) below, where Q is quantity, E refers to
expenditures in a basic heading and PPP is the purchasing power parity for a basic
heading. The subscripts A and B refer to countries.

(1)

QB/ QA = (EB/ EA)/ (PPPB/ PPPA)

In a two country comparison the basic heading PPP is the geometric mean of thethe price ratios of each matching item within a basic heading.24 Above the basic headinglevel countries typically have different expenditure shares so it does matter whether thebasic heading quantities of country A or B or some average of the two are used. Whenthe quantity weights of A, the reference country, are used the resulting PPP is called a
Laspereyes price index and if the quanties of B are used, a Paasche price index. Usually
the Laspereyes price index is larger compared to the Paasche price index.25 In time totime indexes it has been common to publish a Laspereyes price index or a chain index
where weights change each year. Across space it is common to use a Fisher index, thesquare root of the product of the Paasche and Laspereyes indexes.

23

A basic heading is the lowest level of aggregation in the breakdown of expenditure on GDP
for which PPPs are calculated. This level of aggregation is generally determined by thelowest level of final expenditure for which explicit expenditure weights can be estimated.
Hence, while in principle a basic heading would consist of a group of similar well-defined
goods or services, in practice it can cover a broader range of products than is theoreticallydesirable. Basic headings are the building blocks of a comparison. It is at the level of thebasic heading that expenditures are defined, products selected, prices collected, pricesedited and PPPs first calculated and averaged.

24

The geometric mean is preferred because the result is independent of which country is taken
as the reference. Where the average is unweighted these basic heading PPPs are referred
to as elementary indices in the price index literature. In general there are no item weights
below the basic heading. In the 1980s the EU countries began to distinguish between goods
and services that were more or less representative. For a more detailed discussion see the
ICP Handbook (2008, Ch. 11) and the EU Methodological Manual (2012).

25

In time to time indexes A would be the early year and B a more recent year. Using earlyyear weights for headings where prices have risen will push up the Laspereyes price index
compared to the Paasche index using later year weights to the extent relative quantities godown when prices go up. This law of demand is rarely violated in empirical studies. The
same principle applies when A and B refer to countries.
19

The approach of Gilbert and Kravis was to make binary comparisons of Fisher
indexes for each European country with the United States in what is called a starsystem.26 The reason for putting the United States at the center was that the dollar was
not subject to exchange controls as opposed to the European countries. The indirect
relation between say the United Kingdom and France could be easily derived from
France/United Kingdom = (France/United States) / (United Kingdom/United States). The
CMEA countries also used a star system with the USSR as the country conducting binary
comparisons with members like Poland or Bulgaria. It is important to keep in mind thatthe indirect comparisons will only equal a direct comparison under special conditions27 sothere was always an interest in producing multilateral results that were independent of
the reference country.
An important set of Latin American comparisons were carried out under the
auspices of ECLAC from 1955-62 with a reference year of 1950 (Braithwaite, 1968). In
the late 1950s many countries in the region had multiple exchange rates, most frequently
for different export and import groupings. This made choosing an exchange rate forcomparing consumption or other aggregate between Latin American countries fairly
arbitrary. ECLAC made a number of simplifications to balance data availabilities,
computing capacity, and resources to produce their estimates.
One simplification was to have each country provide capital city prices for each
item so that basic heading PPPs were simply the geometric means with respect to any
reference country. To simplify the aggregation an average of the expenditure shares weretaken for the countries weighted by their per capita GDP converted at exchange rates for
1950, an assumed normal year.28 The aggregation of the basic heading parities became
quite straightforward even with just electric calculators. Another important aspect of thestudy was to link the results for 1960 and 1962 with the United States using special pricesurveys conducted in Houston and Los Angeles to obtain a better item overlap with Latin
American countries. This allowed the results of the studies to be expressed in US dollars,

26

I did not know Milton Gilbert personally so I asked another survivor, Wilfred Beckerman, his
recollections of working at OEEC and elsewhere with both Gilbert and Kravis. He likened
Gilbert to the composer who has the conceptual framework, Kravis as the conductor seeing
the performance through to the end, and Beckerman who was in the violin section of theorchestra, first violinist, of course.

27

A sufficient but not necessary condition is that all countries price the same items and theexpenditure shares are the same across countries.

28

The average expenditure shares used by ECLAC is similar to that of Walsh (1910). The
Walsh method was a simple average of the shares of all countries participating in acomparison for each basic heading. A follow up comparison (Salazar-Corrilla, 1978) was
carried out under the auspices of the Program of Joint Studies of Latin American Economic
Integration (ECIEL). ECLAC carried out its studies normally with the statistical offices of themember countries whereas ECIEL worked with research organizations in each country, alater source of irritation to the countries. Members of ECLAC included the United States thatat that time regarded ECLAC as too far to the left, which led the United States to support
ECIEL economic studies in preference to ECLAC’s.
20

which were well understood at the time, as opposed to the currency of any particular Latin
American country.
A few other studies attempting to measure volumes across countries prior to the
ICP should also be mentioned. Cost of living and labor productivity studies for autos,
and textiles were carried out between WWI and WWII by the International Labour
Organization (ILO), country statistical offices and industry associations. Paige andBombach (1959) undertook a detailed comparison of productivity from the output side
between the United Kingdom and the United States under the auspices of the OECD.
Beckerman (1966) and Beckerman and Bacon (1966) attempted to make volume
comparisons across a wide variety of countries based on physical indicators in a similar
way to Bennett (1951). This approach was especially designed to include developing
countries where conventional national accounts were not well developed but where
many physical indicators were available. The Beckerman-Bacon method was one of anumber of short-cut type approaches that have evolved to estimate real product acrosscountries.
B. Phase I of the ICP: 1968-1970
The year 1968 is cited as the beginning of the ICP because the UNSC approved
this activity in their February session. A lot of groundwork went before in which I did notparticipate. The groundwork included a paper to the UNSC in 1965 that recommended
that the UNSD consider how the problem of developing comparable measures of income
and production across member countries could be addressed and to draw up a project
proposal for presentation at the 1968 UNSC. The interim period was devoted todeveloping a plan and to obtaining resources for such a project. Some countries werewilling to contribute resources in kind, usually seconded statisticians, who it turned out,
proved quite effective. Other countries contributed money most of which went into a trust
fund administered by the World Bank.29
Leadership of the ICP was the next issue. While Patrick Loftus, the UNSD Director
at the time, would be overall supervisor, what was needed was intellectual leadership forthe project. In the end Irving Kravis agreed to direct the project with a counterpart at the
UNSD, Zoltan Kenessey of the Hungarian Statistical Office. Hungary and Poland had
been involved with purchasing power comparisons with the USSR and their staffs were
up to date on methodology, an important input for the ICP. The unit at Penn was headed
by Kravis and financed by a grant from the Ford Foundation to cover the first years of the
ICP. This gave the project an academic input that was important in formulating a basic
framework for the initial comparison but also subsequent phases of the work. 30

29

There was some reluctance of donors to give grants directly to the United Nations. Thisapplied to the Ford Foundation, some country donors and the World Bank. In retrospect thisprovided some beneficial checks on all groups involved.

30

I once asked Irv why he took on the project, given how highly regarded the Gilbert-Kravis
report had become. If not his exact words, in effect he answered he thought he could do a
better job than Colin Clark. However, Kravis envisaged the ICP taking less of his time than it
21

The UNSC approved the plan for comparisons on the expenditure side of GDP,the framework for Phase I of the ICP. But it also endorsed comparisons from theproduction side as had been carried out by Paige and Bombach (1959). The advantage
of production side comparisons is that they permit productivity comparisons for sectors of
the economy as well as for all of GDP. Kravis agreed with this point but argued that the
production side, if done thoroughly, required collecting not only all the prices needed on
the expenditure side, but also additional collection of input prices into production. Donethoroughly meant double deflation of final output values, which did require collection ofmuch more data. In the end, the ICP adopted the expenditure side approach and did not
attempt to collect data on the production side. However, others did assign selected ICP
expenditure heading PPPs to output sectors to make productivity comparisons, an ad hoc
and rough method. Happily Angus Maddison and his group at Groningen observed thebenign neglect of the output side by the ICP. And they did not make the “best the enemyof the good” but rather began to implement more pragmatic output side comparisons thathave become much firmer over time.
Initially a select group of countries were invited to participate, Colombia, Kenya
and India to represent developing countries, Hungary and Poland to represent planned
economies, France, Germany and Italy from the European Union, Japan, the United
Kingdom and the United States to represent the developed countries. Because theNetherlands, Belgium and Luxembourg were also in the Economic Union, there wasalways the possibility that they would participate. At the time the project began, it wasrecognized that some potential countries had major statistical issues, for example
expenditures in the rural sector of Colombia. In addition it was not clear that Poland would
participate. It was originally planned that there would be comparisons for at a minimum
six countries for 1967 as well as for the 1969 benchmark price comparison. In retrospecta benchmark for 1969 was a quite unrealistic expectation. Further, six additional countries
were contacted during the planning period about participation if not immediately, relatively
soon thereafter. They were Belgium and the Netherlands from the European Union, andIran, Korea, Malaysia, and the Philippines from West and East Asia.
I joined the project in spring 1968 and took part in an early meeting with a Japanesedelegation of Sadanori Nagayama, Tsu-tomu Noda and Mitsuru Ide who visited Penn. Ide
was an academic and both Nagayama and Noda would teach when they retired fromgovernment. All three had been involved with binary comparisons of Japanese cities withthose in China and India. The Japanese were enthusiastic about comparisons forhousehold consumption, but they were reluctant to do all of GDP. Kravis strongly pushed
for all of GDP and the Japanese delegation agreed to think further about government andcapital formation, and all agreed to move forward on consumption first. The capitalformation discussion with Japan was in effect postponed to a later time.

did. He had hoped that his long-time collaborator, Robert Lipsey, who taught International
Economics at Queens College and was to head the National Bureau of Economic Research(NBER) office in New York, would do the day to day running of the ICP at Penn. In the end
Lipsey chose not to give up his Greenwich Village way of life.
22

(1) Some Early Decisions on the Framework of the ICP Comparisons
One major decision was discussed above, namely to undertake the Phase I
comparison from the expenditure side. In striking contrast to the ICP rounds in 2005 and2011, Phase I was a very top down affair with representatives of the UNSD or Penndealing directly with countries, the exception being members of the European Union. The
Statistical Office of the European Communities (SOEC) in Luxembourg was responsiblefor determining the cost of living relative to Brussels of EU employees in various localesin Europe, such as the European Centre for Nuclear Research (CERN). So a pricecollection mechanism already existed for member countries, although their specifications
were not necessarily the same as would be used in the ICP. Kenessey and Kravis visitedmany of the countries during 1968 and 1970 establishing a time line for country
submission of consumption prices, and discussing the worksheets being developed forcapital formation and government.
Another decision that impacted the resources available to the UNSD related topost-adjustment allowances. Prior to 1974 the UNSD provided cost of living adjustments
relative to New York for the various locales of employees of FAO, UNESCO, WHO, theRegional Commissions and related organizations. The resources available in this unit
were complementary to the ICP and might have been better coordinated with other pricework of UNSD, like the ICP. When this activity was transferred to the International Civil
Service Commission (ICSC), not only did the UNSD lose some staff familiar with pricing
in different countries, they lost the increased budget that ICSC received accompanying
the transfer. The fact that the European Union did carry out these surveys was a major
reason that SOEC had budgets for price work that in turn was important for early ICP
work to gain momentum.
(2) New Bolton Meeting, June 1969
During the 1968-70 period there were two important meetings devoted to
discussing implementation issues and overall methodology of the project: the first June
1-4, 1969 at the New Bolton Center of Penn and the second at the Rockefeller Center at
Bellagio in Italy in October 1969. The New Bolton Center is Penn’s Veterinary facility in
the Pennsylvania countryside that caters small workshops, and is conducive to working,walking and talking. The purpose of the meeting was to obtain reactions from the various
countries or regional representatives to initial proposals on the expenditure classificationand treatment of issues like own production. A quick review of the Minutes of the meeting
will give a flavor of these early discussions. Loftus, Kenessey, Kravis and I were therewith 13 others of whom Mrs. Mod, director of the Hungarian Statistical Office should be
especially mentioned because of her background in international comparisons. Andrew
Flatt represented the UN Economic Commission for Africa (ECA), and would later be at
the UN Economic and Social Commission for Asia and the Pacific (ESCAP), and Philip
Goybet the European Union. Ms. Maurice represented the United Kingdom, Janet
Norwood, Milton Moss and J. Rottenberg, the US government and J. Salazar, theBrookings Institute.

23

One perennial issue, including planning for the 2017 ICP, is whether one size fits
all in terms of the number of basic headings for which countries provide prices andexpenditures. The conclusion at New Bolton was that countries or regions may reduce or
increase the number of basic headings so long as the overall framework of basic headings
was preserved. The point was raised as to whether triangles of countries, like India, Japanand the United States might pursue a common list. The United Kingdom indicated that it
would like to pursue a common list with the United States. In terms of timing it appearedthat Hungary, the European Union, Colombia and the United States might be able tosimultaneously prepare a list and all agreed that would be useful. In the end India, Japanand Kenya were to develop their pricing lists somewhat later than the other countries.
Some typical classification and pricing questions.


Should food consumed in hospitals and restaurants be removed from theirexpenditure group and transferred to food? Consensus was no, but they could be
separated within hospitals, say, and anyone could add together all food.

Should the service and food part of restaurant meals be separated? Consensus
was to try pricing comparable meals in national chain restaurants. As an aside, the
BLS at the time collected restaurant menus on a quarterly basis.

Should expense account meals, which loom large in Japan, be added to GDP?
Strong objections to changing GDP were expressed by the United Kingdom andthe United States but no consensus was reached.

How should subsidies be handled? Mrs. Mod carried the day arguing strongly thatthe price used for comparison should include both consumer expenditures and the
housing subsidy, but she was more skeptical about this adjustment for otherexpenditure headings.

Should an imputation be made to government for the implicit return on governmentbuildings? Thought feasible except for the military.

Other decisions at New Bolton included asking countries for annual average prices
including seasonal items. Substitution of comparable items where there are known
national differences, for example, sporting events might be baseball and basketball in the
United States and cricket and soccer in the United Kingdom. In construction, substitutionof materials may be acceptable and price per square meter for different building types commercial, institutional and residential - should be the unit. For roads, different types bygrade and terrain were recommended, again different materials may be substituted. To
conclude on New Bolton, it was very much focused on issues of implementation.
(3) Bellagio I, October 1969
The first meeting of the ICP Advisory Board was at Bellagio in the Lake country of
Italy where a document, Plans for International Product and Purchasing Power Parity
Comparisons, was discussed. The Rockefeller Center at Villa Serbelloni on a hill above
the village of Bellagio overlooking Lake Como was a major contrast to New Bolton. At thetime Villa Serbelloni provided rooms and meals for small workshops and conferences as24

well as longer stays for writers and scholars working on particular projects. The rooms
themselves were large and had ceilings I would guess that were fifteen feet high including
the bathrooms that had floor to ceiling windows that had no curtains as I remember
because nothing could be seen from the ground. Those attending meetings had lunch
together and in the evening all residents shared a cocktail hour and dinner and wider
ranging conversations. The Villa grew some of its produce and had its own vineyard andwinery.
Among the Advisory Board members, Milton Gilbert, Simon Kuznets and Richard
Stone could not attend. Nor could S.Tsuru from Hitotsubashi University, nor Loftus andMosak from the United Nations because the opening of the General Assembly
corresponded with the only dates that Villa Serbelloni had available. Mrs. Mod from
Hungary, Madam Kreczkowska from Poland, Uttam Chand from India, Wilfred Beckermanfrom the United KIngdom, Guy Bertaud from the European Union and Kenessey, Kravis
and Heston were in attendance. Between the New Bolton meeting and Bellagio, thereference year for Phase I of the ICP had moved from 1969 to 1970.
A great deal of the time was spent on wording, which was appropriate because thedocument would receive wide distribution and would be a background paper at the 1970
UNSC. There was an extended discussion on what was meant by representative item as
opposed to an item that was available in the market but with a price that might be highbecause of low volume. This difference has subsequently become part of the EU-OECD
methodology and was introduced in a more limited form in the 2011 ICP. Beckerman
raised the question of whether countries should be encouraged to choose items that had
less price variability within and across countries, even if the item was not a volume seller.
This consideration arose in the context of footwear in India where sandals (chappals)
were most commonly worn but much less so in Europe and the United States. In practice
Bata shoes were chosen for comparison in 1970 because India exported Bata shoes to
Canada and other countries so even if much less common in India, the prices wererepresentative for men’s shoes.
Several exchanges occurred dealing with the own production for own consumption
as well as own production that the household sold like home spun cotton thread. The
consensus was to treat own production as recommended in the 1968 UN System of
National Accounts (SNA), namely to value such production at the prices in the first stageof marketing. A major departure of the ICP from the SNA was in the treatment of healthand education services paid for by governments or non-profit institutions. In the SNA only
education and health expenditures paid for by households was counted in household
consumption. Mod, Kenessey and Kreczkowska argued that this would lead to major noncomparability of the quantities of these services consumed between the Socialist
countries and the United States. This discussion led to the distinction between private
and public provision of education and health services labeled ICP and SNA concepts ofconsumption in Phase I of the ICP. The ICP distinction was subsequently adopted in the1993 SNA where the two concepts are termed Actual Consumption of Households andHousehold Final Consumption Expenditure.

25

Additional discussion of health services centered on whether quantity measures
like hospital bed days (Beckerman) should be used or (as Kravis argued) attempts should
be made to get closer to consumer valuation by making some price comparisons. Forty
years later in 2011 the European Union and the OECD moved towards the Kravis position
but the data demands remain beyond most of the other ICP countries.
In discussing equivalent products Uttam Chand pointed out that it was common inIndia to have a tailor make clothes for a family because it was cheaper than buying readymade clothing at a store. In this case it was agreed to use a price for a given specificationthat was most common in a country, in the Indian case, cost of materials plus tailoring
charges. Put another way, in 1970 it would make no sense for India to price a ready-madeshirt specification or for the United States to price a tailored shirt. This type of substitution
was common in construction specifications involving type of material, and in a number ofconsumption items.
Short-cut and simplified methods of comparison were discussed at some length. 31
Previous work concluded there was considerable error in using these methods for low
income countries, so that at least for getting the levels of income right, it will be necessary
to complete purchasing power studies that provide a benchmark. Kreczkowska pointed
out that while indicators may not get levels right, they may still be useful for moving
benchmark PPP estimates over time between benchmarks. Simplified methods ofobtaining PPPs would aim to work within the SNA framework to make estimates for a
relatively small number of aggregates. Mod suggested trying a larger number of countries
collecting as few as 30 prices covering main aggregates of expenditure. This is a type of
reduced information approach that is gaining support for the 2017 comparisons. The
conclusion of this discussion was that the physical indicator approach had promise, but
until benchmark PPP estimates are available it will not be possible to judge the merits of
one short-cut or simplified method of estimation versus another.

31

Beckerman (1966) and Beckerman and Bacon (1966) made estimates of real product using
physical indicators on the right hand side and per capita consumption at exchange rates on
the left for 22 industrial countries. Estimating equations were generated using from 1 to 5
indicators, and depending on indicators available in less developed countries estimates ofreal product were made for another 60 countries. Researchers in Eastern Europe also usedindicators but the regressions were typically time series of national output on a single
indicator, generating an estimating equation for each indicator. This procedure generated foreach country real product estimates equal to the number of countries and indicators of whichsome average was taken. See for example, Janossy (1963) and Szilagyi (1964).
26

Chapter 2 Organization and Implementation of ICP Phase I
This chapter covers a period when the broad framework of the ICP was establishedin terms of the expenditure classification, the detailed item price list and the special
worksheets for education and government but many details had to be worked out. A
multilateral comparison was not new, per se, but because there were alternative methods
that could be used, each with its merits and limitations, there were important decisions to
be made. The organization of the work between New York, Philadelphia, Luxembourg(the European Union) and the countries was a continuing work in progress.
A. Phase I Activity 1970-1(1) Division of Labor with the UNSD
There was an agreed upon division of responsibility between the group that
Kenessey supervised in New York and the group that Kravis supervised at Penn. In termsof the collection of prices New York worked on public expenditures and equipment goods.
The Penn group worked on consumption and construction. Contacts with countries were
not rigid but New York concentrated on Hungary and Poland, when its participation was
still not decided, as well as Kenya and Colombia while Philadelphia did Japan, India, andthe United States. With respect to the EU countries both groups were involved which was
also the case for the United Kingdom. Because of Kravis’ previous work Penn took thelead in matters of methodology and computation. Visitors from participating countries
typically visited both New York and Philadelphia. On country visits all aspects of the dataneeds would be discussed with those responsible, sometimes at several offices including
central banks, planning offices, and ministries of construction and the like.
The staff in New York included Alphonso Pardo-Gutierrez who worked on public
expenditures and national accounts and Michael McPeak who worked on equipment
goods. Both took part in most discussions with visitors and shared work on Colombiandata. McPeak would later join the Inter-American Development Bank (IADB) . Donald andKaren Woods worked in Kenya on developing both the expenditure side of their national
accounts and their consumer price list. Don would later join the BLS. Alfonso Uong andAntonio Yu took on a variety of tasks including national accounts.
Woods and Yu both began at Penn and then were added to the staff in New York.
Alicia Civitella was an important member of the Phase I at Penn who became an authority
on specifications of goods and services working with commodity specialists in the UnitedStates and other countries. She also was an all-rounder in terms of inputting prices andexpenditures into the computing framework that had been developed at Penn. And as
results began to emerge from the batch processing of that period she would share in our
gloom or glee as the output warranted. She also worked closely with three others who
contributed greatly to Phase I: Samvit P. Dhar, whose background was national accounts
at the Central Statistical Office (CSO) in New Delhi, Sultan Ahmad (Pic 39), a graduate
student from Bangladesh, who completed his dissertation on reduced information
methods, and Lorenzo Perez (Pic 39), who took part in visits by visitors from Colombia
and Venezuela. Alicia’s skills were appreciated by the ICSC where she would eventually27

end her career. Samvit worked at Penn for about 20 months in 1970-71 on leave from the
CSO in India. He returned to India for a period, still involved in ICP work and would
eventually work at the UNSD on Phase III of the project. Sultan Ahmed was heavily
involved in the programming and computing for Phase I. Sultan went on to join the WorldBank where he worked until his retirement, and did consulting in various countries during
the 2005 ICP.
(2) Robert Summers on Board in 1970
Two of the Advisory Board Members who were not able to attend Bellagio met with
Kravis and me earlier in 1969, namely Simon Kuznets and Richard Ruggles. Kuznets
taught both Gilbert and Kravis as graduate students at Penn before he moved to Johns
Hopkins32 and eventually Harvard. I knew Richard and Nancy Ruggles at Yale prior tojoining Penn. They had both been involved with Latin American PPP comparisons throughthe Brookings Institute with Jorge Salazar and were supportive of the ICP. After thesemeetings and Bellagio, Irv wanted to bring in someone who could better deal with theeconometric problems of moving from binary to multilateral comparisons. And that is how
Robert Summers (Pic 11) came to join the Penn group in 1970, a fortuitous development.
The first problem that Bob tackled was at the basic heading level where in two
country comparisons the issue was simple, price comparisons were done for items thatboth countries thought were representative. In Phase I the initial item list for consumption
was built up from a set of BLS specifications that were modified in discussions with eachcountry. In the end there was for each basic heading a matrix of prices and countries that
had lots of blanks, but also lots of overlap.33 Bob liked the idea of using all the priceinformation that was available and that led him to develop the country-product-dummy(CPD) method for dealing with the issue of missing prices. He assumed the missing prices
were randomly distributed as if someone had spilled coffee on a full price matrix so thatsome were missing, an assumption that was convenient econometrically, but often
contested.34 The CPD equation is:

32

Another student of Kuznets at John Hopkins, Robert Fogel (2013), has written a fine book on
the Kuznets tradition. One point that Kuznets pushed in correspondence and at Penn wasthat there was a tradeoff between covering a lot of countries using physical indicators anddoing the type of detailed price comparison envisioned for Phase I of the ICP. My memory isthat Kravis paid lip service to this idea, and suggested I write a paper on indicators for theInternational Association of Income and Wealth meetings in Ronneby, Sweden in 1971 thatwas published in 1973.

33

When all countries provide all prices then the CPD and binary geometric means are identicaland the results are the same as the CPD or GEKS (discussed later) methods. As noted
earlier the Latin American comparisons imposed the condition that all countries provide all
prices, therefore reducing the multilateral comparison to a set of binary comparisons.

34

Bob’s modeling of CPD meant the error term was log-normally distributed which wasconvenient. However, a more plausible explanation of why there are missing prices is thatthe item was not representative of what was consumed in a country for that basic heading. If
this is the reason, the implicit estimate that CPD provides for the missing price would be less28

(4) Ln PRICEij = αi P+ βj C + lnεij ,where log price is regressed on dummy or class variables P for the product and C for
country and ε is the error term.
The coefficient on country, βj, is of interest. If prices are in national currencies the
exponent of βj, is the PPP relative to the reference currency; or if all prices are divided by
the exchange rate then the exponent of βj is the price level of the country to the reference
currency or currencies if a group of countries is the referent.35 So long as there are atleast two countries pricing each item, all prices enter into the estimation process. CPD
will be discussed further below as will Bob’s contribution in sorting out aggregation
methods and in the development of the PWT.
Bob also was involved in the work on hedonic regressions that were used in workon automobiles, rents, and some machinery items. In his previous work with Robert
Lipsey, Kravis had experimented with estimation of prices of items with a number of welldefined price determining characteristics. Transport equipment or pumps of various
capacities are types of equipment goods for which a small number of characteristics, likeweight and horsepower, capture most of the variation in price. Estimation of a regression
equation where log of price is on the left hand side and a set of continuous or classvariables (dummies taking on the value 0 or 1 as in a CPD) are on the right hand side.
The coefficients of such a regression can be used to estimate the price of a standard
specification for a given item, say automobiles, from the price data for a single country.
The estimates of the standard specification can then be directly compared acrosscountries.
Alternatively country prices may be pooled into a single equation, where thecountry coefficients provide the desired PPP or price level for the heading, like a CPD.
Typically pooled equations require that all countries provide data on all characteristics,
not the usual situation for the ICP. The basic headings where hedonic equations wereused in Phases I to III of the ICP were house rents, automobiles, both for consumption
and investment, and one or two equipment goods.

than what the actual price would be in that country. While CPD was criticized for this reason,in fact, I think the resulting country coefficients, the βjs, are what we want.
35

This second way of estimating the CPD equation is what is called price-level form. If theUnited States is 100 then the anti-log of the βjs will be numbers ranging from perhaps 60 to
130 for a basic heading like rice. A value of 60 would mean the price of rice in that country
was 60 percent of the US price. We found the price level form to make the CPD resultseasier to compare than if they were in PPPs. And circa 1970 when rounding could cause theloss of significant digits, use of the price level form reduced the variance of output compared
to using PPPs that varied between less than two for the United Kingdom to over 1000 for
Italy.
29

House rents are illustrative of some of the issues faced.36 The basic framework
was to estimate rental PPPs by type of structure, size, age and available amenities. In
Phase I, 38 combinations of year built (from 1910 to 1960), size (from 15 to 90 square
meters), and availability of amenities (including none) were used. Rarely do rental surveys
have the same characteristics across a set of countries unless there has been some prioragreement to use a common survey as was the case for the European Union. Size ofdwelling is most often in square meters, but in the United States and many Latin Americancountries it is number of rooms, which were converted roughly into square meters.
Countries typically ask if there is running water, electricity and an indoor toilet, but in the
United States it is number of toilets that is an important indicator of rent differences forthe same size dwelling. In the case of the three EU countries in Phase I, their surveys
asked rents for a given specified dwelling. There were seven EU specifications in the 38
combinations of which six were comparable with the United States.
The BLS survey of market rents had a large enough set of characteristics that it
was possible do binary comparisons of the United States with the other countries to obtain
PPPs for many of the 38 combinations by size, age, and available amenities.37 In addition
multilateral PPPs were estimated. For each cell in this ten country by 38 matrix of rents,
there were also weights that were used to obtain an aggregate PPP for rented and owneroccupied dwellings using a weighted CPD.38 However, even if the PPPs are wellestimated, they will only produce good volume estimates if the PPPs on rents and owneroccupied housing along with the appropriate quantities of housing are imbedded in thereported expenditures on housing services.
One way to check on this is to compare direct quantity estimates from housing
stock surveys that are typically a part of the population census, but were not available forColombia or Kenya. However, housing stock estimates usually capture only a small partof the quality variation in the dwellings of countries and overestimated volumes for India,
Japan and the United Kingdom. The bottom line is that more effort on housing in Phases
I and III of the ICP was devoted to this relatively large share of consumer expenditures
than has been devoted in subsequent phases, the EU-OECD comparisons excepted.
Countries are able to supply rental surveys but the quality detail available in housing
censuses is weak in many countries and the national accounts expenditures are often
based on these housing quantities with little allowance for quality. This remains an area
36

Chapter 9 of the Phase I report is devoted to dwelling rents, which includes both market
rents and implicit rent of owner occupiers. Owner-occupied dwellings are typically larger insquare meters than rental units and range from 20 percent to 60 or 80 percent of housing
stock. Market rents are applied to owner-occupied units allowing for differences in size andamenity differences.

37

Robert Gillingham (1983) had associations with Kravis at Penn and had carried out somehedonic rent estimates at the BLS assisted us with the understanding the BLS rent surveys thatwere used in Phase I.
38

In the end we used the multilateral estimates because their differences from the binaries
were not large and the number of bridges between countries in the 38 by 10 rent matrix used
more information from the countries.
30

of the ICP where plausible PPPs can be estimated, but they are not necessarily consistent
with the total expenditures on dwelling services so the volume estimates are notnecessarily comparable. Experiments using just direct quantity estimates have not beensuccessful either, usually because housing censuses capture very few quality differences.
This remains a continuing issue for improving ICP.
(3) Gathering and Processing Prices and Expenditures: 1970-71
By 1970 worksheets had been developed for the expenditure classification, foreducation, public employment, population and exchange rates, and a specification bookwith codes and descriptions for consumption, capital formation, and public sector
employee grades. These were essential to making clear the scope of the work requiredby participating countries. Specifications of items to be priced were continually being
developed during the period 1970-71, with price collections being carried out. Countries
had provided an initial set of consumption specifications based on the BLS specifications
converted to the metric system and supplemented by early additions and deletions.
Countries were consulted on the items they thought could be priced based upon theirconsumer price index (CPI) collections and visits to their markets.
It is fair to say that most of our contacts in statistical offices were not familiar in any
detail with what was actually in their CPIs. Since a CPI is concerned with changes inprices over time, so long as the same item is priced in two periods, the needs of a CPI
are met. Typically collectors know what they are pricing from month to month, but theactual item priced is not necessarily recorded at higher levels. When at all possible visits
to markets were made with a collector often with staff of the Statistical Office for whom it
was typically a learning experience.
A large part of visits to countries was taken up developing item lists forcomparisons. A flavor of the these discussions within the European Union is recalled by
Donald Murphy, a former Director-General of the Central Statistical Office of Ireland, whorecalled in 2000 a meeting on PPPs he attended in 1972.
“This was a three-day meeting of the ‘Prices’ working group in Luxembourg chairedby Silvio Ronchetti, who was a Statistical Office Director at the time andsubsequently became Director-General. I remember staying in the exotic-sounding
former El Dorado Hotel next door to the Luxair building near the railway station.
The meeting was conveniently held in a conference room at the top of the Post
Office building across the road. It was also the first meeting for colleagues fromthe UK Department of Employment (Finn Forsyth) and Statistics Denmark (John
Jensen).
The purpose of the meeting was to scrutinize the comparability of the individual
prices collected for over 700 consumer goods and services for each of the six
original Member States to estimate purchasing power parities (PPPs). The
painstaking approach adopted was quite a shock and raised worries about thephysical endurance that would be needed in this new Community work
environment. On the first day the prices for each item were scrutinised in laborious
31detail. I recall ‘strawberry jam’ taking more than half a day — there were long
discussions about the comparability of the quality of jam priced in different
countries! This scrutiny process speeded up on the second day and then there
was a mad sprint on the final day to finish all items.
In retrospect, this working party proved to be an enjoyable introduction to theEuropean statistical system. Good friendships were formed as the group met
frequently (as it still does) and members participated directly as observers in thenational price surveys. Some of the national representatives at the time wereSiegfried Guckes from Germany, Hugues Picard from France, Jan Vollebregt fromthe Netherlands, Luciana Tappi Giovannini from Italy. Richard Kuhner was thehead of the relevant Statistical Office unit at the time. To ensure strict
comparability, a complex system of overlapping multinational pricing teams
operated at the time including the use of two chauffeur-driven Commission
Mercedes for suburban pricing in each capital city — resources appeared to be
more freely available in those days!
My main initial contribution to the PPP project was the addition of ‘Guinness Stout’and ‘Irish Whiskey’ (insisting on the inclusion of the letter ‘e’) to the pricing list toensure Irish representativeness! My family was young at the time and I also noticed
that the list did not then include ‘baby food’, ‘baby clothing’ and ‘nappies’, whichfeatured significantly in my household budget at the time!”
From De Michelis and Chantrain (2003, p.61)
I quote Murphy at length because he captures much of nature of such ICP
meetings. In Europe they could bring the top country CPI personnel to a three day meetingfor such a purpose, whereas in our country visits we were trying to accomplish the samething in less time by being much less detailed in our specifications. Two of those named
above were to work for the ICP. Hugues Picard was at the UNSD for Phase IV of the ICP
a decade later and Finn Forsyth who, after retiring from the UK Department of
Employment, visited a number of Phase IV countries for the UNSD as ICP foreignassistance by the UK government. Denmark, Ireland, and the United Kingdom had joined
the European Union in 1967 to become effective in 1969 and to be implemented over the
next few years.
Developing a classification system for basic headings and item prices was a major
piece of infrastructure for the project. At Penn we developed software for the 700 IBM
mainframes of the time, programming in FORTRAN. Inputs were punch cards, both forprograms and data. Programs were submitted manually and output was put in bins
anywhere from five to fifty minutes later depending on demand on the mainframe, a great
improvement over the early 1960s, but a far cry from today. Each new price or correctionof a previously entered price would require one punch card, with ample chance of humanerror. The programs CLEANSER and COMPARE were used to check the printouts ofprices in US dollars at exchange rates and price ratios between countries. These checks
turned up unit price errors and prices that were inputted incorrectly or that had to bereferred back to the countries. We thought we were doing a good job, and maybe we
32were for the time, but verification procedures now employed by the European Union, theOECD, the World Bank and the ICP Regional Coordinating Agencies have been much
improved.
Our initial classification divided expenditures into 152 basic headings: 109 in
consumption, 5 in government, 10 in construction, 26 in transport equipment and otherequipment goods, plus one for change in inventories and one for the net foreign balance.
Few countries had this kind of detail in their national accounts at the time, so a lot of
consultation was needed, especially for countries estimating GDP only from theproduction side, like Colombia, Kenya and India.
(4) Extended Visit to India and Short Visit to JapanI spent spring semester 1970 on a separate grant working at the CSO in New Delhi
on the Indian price specifications and detailed expenditures and national accounts. For atime I worked closely with Samvit Dhar before he joined us at Penn for almost two years.
It made sense for India to build up its GDP from the production side because estimatesof agriculture, forestry and mining were relatively well developed. Censuses ofmanufacturing provided estimates of production for large scale firms. Construction
expenditures were difficult for the expenditure or production side; government was easier
because there were budgets at the state, center and local levels. The ICP asked forbreakdowns of construction into type of structure and roads and other non-structures.
These breakdowns were often difficult when the total of construction was estimated from
inputs like concrete and structural steel and labor from employment or census surveys.
When GDP was obtained from the production side the total of consumption wasoften a residual after deducting investment and government. Breaking down this total
consumption into basic headings is usually done on the basis of consumer expenditure
surveys, often using the commodity flow method as a check on surveys or as alternative
to expenditure surveys. India’s National Sample Survey (NSS) circa 1970 had a verystrong sampling frame, especially compared to other low and middle income countries.
But even in India, the NSS expenditure surveys, while criticized for the length of theirquestionnaire, had less detailed expenditures than called for in the ICP classification.
When this was true and commodity flow could not offer more detail, then countries
supplied more aggregate groupings of expenditures to the ICP.
During my semester at the CSO I had my own office and typically dealt witheconomic statisticians in National Accounts either asking questions concerned with Indian
expenditures or with facilitating my visits to other government offices. Early on I met
periodically with a Mr. K.L.Geethakrishnan, Deputy Secretary of the Department of
Statistics. He was in the Indian Administrative Service, the successor to the Indian Civil
Service of the British Raj. Since he was not a statistician I did not have much occasion toseek his help, and in fact did not understand his interest in my activities. Finally, I learned
Mr. Geethakrishnan had the responsibility of obtaining approval for me to be visiting CSO
and to be undertaking the work that I had been doing for eight weeks already. And I
learned that a Secretary or an Assistant Secretary were paid better and had more
influence than the Director of CSO. Did I mention I am a slow learner in such matters?
33

Why would Mr. Geethakrishnan need approval for me to be doing ICP related workat the CSO? The issue appears to have been this. At the time the official exchange rate
in India was.7.5 rupees per US dollar, while the secondary market was 10 to 15 rupees
per dollar. Apparently the Finance Ministry or others were afraid that the result of Phase
I of the ICP would be that the PPP would be larger than the exchange rate. Fortunately
one of India’s abler statisticians, Moni Mukerjee of the Indian Statistical Institute in
Calcutta, explained to his colleagues at meetings of an ICP Advisory Board in New Delhi
that the PPP will be less than the exchange rate, closer to 3.0 was his guess. In fact itturned out to be 2.2. Whether Mukerjee carried the day I do not know. What I was told is
my file went up to the cabinet meeting chaired by Indira Gandhi, and my research work
was approved, this in the last week of my stay.
Wilma and I took part in discussing specifications and going to shops. One strong
memory is the degree to which our counterparts generalized their own regional
preferences to all India for food items. In going over specifications it would have saved agreat deal of time if the list began with transport equipment or personal care when minds
were fresh, rather than with food and rice. Everyone in India and many Asian countries is
an authority on the kinds of rice that are eaten, at least in their region. This carried overto many types of fruits and vegetables as well as clothing and footwear. To represent
India it was essential to have staff from at least north and south India sitting in on thediscussions.
For items like footwear we chose to go with Bata, a Canadian company that had
shops in many outlets in India cities and also exported shoes from India to a number ofcountries. At the time Bata supplied footwear to Sears under a different name so their
shoes were quite representative of footwear pricing, though not of quantities sold in India.
We also collected cloth samples to compare with the type of materials produced by millsin the United States. As mentioned earlier, this was to build up the price of a shirt, blouseor trousers from the cost of materials and tailoring charges since the price of shirts in astore at the time were quite expensive.
During this period in New Delhi, our two children attended the Woodstock schoolin Mussoorie (Queen of the Hills), a hill station a few hours from Delhi at 2000 metersrising fairly steeply from the plain. The school was founded in 1854 to provide a Protestanteducation for girls, the founders included American missionaries. By 1970 it was coedand quite international with very fine freshly ground peanut butter, a hit with son Alex.
Woodstock became a family tradition for many missionary families, with offspring often
going back to India to work with non-governmental organizations and the like. The Alters
were one such family some of whom I came to know at Penn.
The CSO staff arranged appointments with trade associations, importers, dealers
and manufacturers to cover the private sector. Even in 1970 India manufactured a variety
of appliances, pumps and machinery often under the protection of import quotas orforeign exchange restrictions. India exported a variety of relatively simple products likefans, electric motors, sewing machines and the like. There were also a number of central
government enterprises like Bharat Heavy Electricals, Hindustan Petroleum and Steel
Authority of India who were consulted on prices. For construction we sought the help of34

the National Building Organization, the Public Works Department and several privatearchitectural firms.
Whether in the private or public sector the responses from our contacts were very
cooperative whether or not they could help. The one notable exception was the
Directorate General of Technology and Trade (DGTT), a world on to itself (Bhagwati and
Srinivasan, 1975). With the power to grant licenses to import technically advanced
machinery and to produce specific items in India, many sought their favor to enjoy therents created by the limited number of permits and licenses. Not surprisingly we weremade to wait the better part of an hour to learn that they would not be able to supply thekind of information we wanted. Large enterprises had permanent staff visiting various
offices within the DGTT, a common situation under permit raj. The chance that small firms
would get permits was small indeed.
Most CPIs have a target group for whom prices were being collected, like urban
workers in the United States. In India in 1970 there were several consumer price indexes,
one for rural agricultural laborers, a second for manual workers in mining andmanufacturing and the third for non-manual workers. The price survey for the rural index
was run by the NSS, the price survey for the manual workers index was organized by the
Department of Labour. The Labour Department was located in Simla, the former summer
capital of India under the British, and currently a popular site for Bollywood movie
producers, as well as a UNESCO heritage site as a narrow gauge mountain railroad. The
price survey for the non-manual workers index was the responsibility of the CSO.
For manual and non-manual workers rents were also collected and I did visit twoapartments in Delhi sampled by the Labour Department with their enumerators. The
accommodations were minimal but adequate. Later I processed a survey of middle classrents in various cities in India and found sensible coefficients on rents and thecharacteristics of the rental unit like size and availability of shared or private toilet. In theend my Indian counterparts did not believe the different city coefficients that I estimatedand chose to use other estimates, the source for which I know not, to obtain national
average rents of India for 1970.
To get some sense of differences in type of outlet and variety of product available
I visited the different types of markets surveyed for the three indexes. Both the pricesurvey for manual workers and the price survey for non-manual workers sampled somegovernment shops where basic grains, soap, kerosene, cooking oils and the like wereavailable on a ration basis. These fair price shops sold grains with a fair amount of dirt,
pebbles and broken kernels, meaning that the differential in price for say, rice, between
the fair price shops and free markets was overstated because quality was higher in thelatter. The free-market outlets were somewhat higher quality for the non-manual workers
at least in New Delhi. A rural market I visited in Eastern Andhra Pradesh was an eyeopener in the sense that the variety of produce available was really minimal, grains,potatoes, onions and some pulses but little more. Items like cooking oil were dispensed
from larger containers into vessels brought by the customer. Clearly many purchases
were made at bigger weekly markets or in nearby small towns.

35

How does one arrive at a national average price for India? The NSS does provide
unit values for mainly food items and studies have found that rural prices were about 10
percent lower than urban prices. And food prices vary by size of city. The Labour Bureau
sampled many smaller urban areas where there might be a mine, or major industrial
complex, like Jamshedpur, that were not sampled in the non-manual survey. In the end
factors were estimated from price differentials between the cities over 1 million, thosebetween 100,000 and a million, and the remaining large towns and rural areas. For mostequipment goods like automobiles no adjustment would be made since they would bepurchased from the larger cities.
The Institute of Developing Economies in Tokyo was interested in a directcomparison of India and Japan and invited Satish Kansal (1971) to undertake the study
for consumption for the reference year 1965-66. Kansal generally used India’s producers’
prices adding estimates for transport and mark-ups to compare with prices from Japan’s
retail price collection. I had met Kansal in India before he went to Tokyo and met him
again when we were in Tokyo. Wilma and I went to Japan to go over consumption
specifications with their staff for comparisons with the United States as well as India. We
made frequent trips to shops in Tokyo with price collectors checking out specifications.
The back and forth between translation and discussion between the Japanese was by theend of the day quite exhausting. Needless to say, we were well taken care of in theevenings, when we each had our own Geisha attending us.
(5) Obtaining US Expenditures and Prices
Kravis had many contacts in the US government from his work on processing theConsumer Expenditure Survey with his colleagues in the Wharton School and his workwith other agencies. While this made us welcome at the BLS and the Bureau of Economic
Analysis (BEA) it did not necessarily mean that these agencies would do the work. In thecase of the BEA they already published expenditures at a fairly disaggregated level so
the framework was in place. The only price we paid for the data was listening to Bob
Parker tell us how difficult it was to fill in the detailed ICP basic headings and the amountof extra work it meant for his staff. However, Bob was a real professional and when hesaid he could do it, it got done, however unenthusiastically.
With respect to US prices, there are two sources that should be mentioned by way
of background. In 1967 a report on the family budgets of city workers referring to 1966
price collection for 39 urban centers was published. (BLS 1967). The publication provided
prices for selected food items available from the Department of Agriculture, excluding
canned, frozen or processed food (other than bread and corn flakes), a total of 27 items.
In addition prices for 200 non-food items were collected and all were published for all US
urban and for each city. In spring 1967, prices were used to find the cost of budgets formoderate, and lower and higher expenditure levels for families of four persons. (BLS,
1968) Basically this was the last hurrah for this type of estimate by the BLS for ageneration. There was an experimental study of national average retail prices for about
200 non-food items with a reference date of fall 1971 based on collection in 39 urban
centers. This was not issued as a Bulletin but distributed as a non-priced document. (BLS,
1972)
36

These spatial price studies by the BLS were not given priority (and consequently
budget) by the Advisory Committee representing the general public, business and labor.
It was said that labor unions did not really want their rank and file to know whether it wasmore or less expensive to live in the locality of their membership. Similarly business would
prefer to give perks in a paternal way to staff they wanted to retain or newly hire in aparticular location. In addition to the BLS several private firms and non-profit associations
also sold or made available estimates of cost of living in various urban centers in the
United States. In terms of the ICP and the BLS it meant that our source of US consumer
prices should be BLS CPI files. The backing off of the BLS from spatial price statistics
circa 1970 may also have influenced what the BLS felt free to supply to the ICP.
The BLS staff with whom we dealt were highly professional. Our contact was Janet
Norwood who was in charge of price statistics at the time and who was to become
Commissioner of the BLS from 1979-91. The BLS was not willing to estimate national
average prices for all of consumption and left that to us. They remained open to collectingsome additional prices (it turned out to be about 200 items) for purpose of creating
coverage with other countries, but only in one or a few cities, namely Chicago, New Yorkor Philadelphia (Los Angeles and Detroit prices were also occasionally available). Further
their concerns about confidentiality were an important consideration, much more so than
we had imagined.
On a regular basis we worked with Winifred Stone, Mary Lou Drake and William
Berry all of whom knew the specifications very well. They were an invaluable source of
information to Alicia Civitella, and both Drake and Berry carried out technical assistancemissions to ICP countries. Price experts like Stone were very skeptical of the way webroadened the ICP specifications to include BLS items as well as European, Colombianor Indian items for which the BLS would have preferred to create new specifications.
When the ICP would use a specification like local beer without reference to a brand it
made BLS experts uneasy to say the least. Our argument was that comparing US beerbrands in the United States and say, Nairobi, Kenya, where US brands sold at a premium,also presents problems.
In the end Winifred Stone supplied us price sheets with all indicators of outlet
removed. Typically a price sheet covered eight outlets that we averaged in one, three orfive cities depending on the item. I remember showing one of these sheets for an Alligatorbrand rain coat, a fairly upscale item at the time, to one of our Hungarian colleagues, who
was amazed at the amount of price variation by outlet. Another surprise for our Eastern
European colleagues familiar with one common price was the outlet Sam Goody’s, whichat the time was the largest record store in the country. LP recordings were color labeledwhere each color had a price like $3.99, $4.99 and so on.
As discussed with respect to rents, the BLS also provided us the individual
responses to their rent survey in 1966-67 with about 39,000 observations. I continued tointeract with the price experts after the 1978 revision of the CPI which involved a completechange in the way prices were collected and recorded.
(6) Equipment Goods37

We also interacted with BLS in obtaining price quotes for equipment goods. Some
information was available from the wholesale price index for equipment goods and somefrom the import price index. Kravis had independently been involved with moving theimport price index for machinery from unit values to specification pricing. The main
problem of using the value of imports divided by the number of units to obtain unit values
is that often the value figures embraced a wide variety of qualities or range of capacities.
Kravis recommended that BLS move towards representing the prices of important importgroups with fairly tight specifications for a few items as a better method. This change wasbeing developed during the Phase I period and provided another source of prices for
producer’s durables.
In the case of Kenya and Colombia, most machinery items were imported and theirprices could be estimated by importers. As discussed India produced a variety ofequipment goods and also estimated hedonic regressions for a number of items.
However, the many licenses and permits required in India drove a significant wedge
between world prices and Indian prices leading to a high PPP. Matching with Hungary
was difficult because brands were different. The prices of the United Kingdom and the EU
countries, often with adjustments provided from the coefficients on hedonic regressions
for other countries, were modified to more closely match Hungarian specifications. Japanwas finally persuaded to compare machinery prices but only after Kravis took a numberof industry representatives to a very fine restaurant, the meeting orchestrated by ourJapanese counterparts. At that luncheon the industrialists were assured that the ICP
comparisons were not for the purpose of showing that Japan’s machinery exports werebeing dumped on foreign markets at prices lower than in Japan.
The comparison of equipment goods was carried out in New York so I am lessfamiliar with the details. One issue illustrates the limits of computing capacity at the time,in this case at the UNSO where FORTRAN was not supported. As a consequence the
CPD program at Penn could not be used in New York. Instead the geometric mean of theprice ratios of machinery items within basic headings was taken as the PPP for theheading between each pair of countries. The cost of employing this approach was to notuse some third country bridges between countries with probably little effect on the overall
results.
(7) Construction
Most countries have Departments of Public Works that undertake road building
and some building of structures. Actual construction may be done by the private sector
on the basis of bids for projects in which case there are records of costs andspecifications. Costs of actual projects have the disadvantage that specifics of location
within a country, special features of the specifications, and the nature of the site cangreatly affect costs. Further, because actual projects typically are done over several
years, their costs are out of date and updating a specific project by a general construction
price index can be problematic.
An alternative approach is to ask professional bidders to estimate the costs ofconstruction of a particular project. This was done in several countries using architects or38

quantity surveyors familiar with building in a variety of settings. In general costs weresought for more specifications because it was judged that any errors would tend to offset
each other. Quantity surveyors were used in the United Kingdom and Kenya. Samvit Dhar
became important in this work because he had worked with building manuals in the UnitedStates. This made it possible to adjust US cost estimates to make them comparable tothe submitted costs of other countries that departed from specifications.39 For the UnitedStates we employed a private architect in Philadelphia to look over our shoulder regarding
residential and non-residential buildings. For other construction we sought the help ofagencies of the US government in estimating various specifications. One generalization
emerging from the experience of Phase I is that there great variation in residential
housing, whereas industrial, commercial, and institutional buildings were morehomogeneous across countries. The EU countries preferred to cost thoroughly fewer
more detailed specifications using architectural firms, an approach the European Union
has continued through 2011.40 They also accommodated the Global Office and supplied
estimates for a few countries according to the 2005 approach.
The 2005 and 2011 ICP rounds have continued to experiment with different
approaches to construction. Because of the high cost of hiring experts for many countries,
an approach called Basket of Construction Components was used in 2005. A construction
component might be the price of an installed footing that included labor, materials and therental value of any machinery used. Some 22 components were chosen to be priced in
all countries, with some idea of the weight that each component would have in a given
type of construction, residential, non-residential or civil engineering. In general it wasoften necessary to hire construction specialists to estimate some of the components aswell as the weights. In 2011 the estimates basically used an input approach with somefailed attempts to consider markups and labor productivity. In the end the 2005 and 2011
results were broadly comparable largely because most of the same inputs were priced inboth years. Plans for 2017 have not been finalized but it is fair to guess that heavy reliancewill be placed on input prices, not a very satisfactory outcome.

39

We commonly used the Boeckh Building Valuation Manual and the Chicago Building Cost
Manual in Phases I-III of the ICP.

40

Parallel with the EU approach, H.Kinston of the Julio Vargas Foundation in Brazil had
proposed a similar approach for the ECIEL comparisons.
39B. Experimenting with Aggregation Methods on Preliminary Data: 1972-4(1)

Below the Basic Heading Level

The CPD method was described above in the equation in A.(2) and was used in
the 1970 ICP in a somewhat altered form. We chose to weight each price inversely to thenumber of items a country supplied for each basic heading for the reason that the UnitedStates generally tended to have more prices in every heading. Use of frequency weighted
CPD we argued would make sure each country had the same influence within each basic
heading. In fact comparisons of unweighted and weighted CPD revealed very little
difference over the 129 basic headings for which comparisons were made.41
The discussion of CPD thus far has referred to estimation of country PPPs for abasic heading. An alternative to CPD is the method favored by the European Union, theEKS or GEKS method. In the ten country case of the 1970 ICP suppose we calculated all
possible binary indexes for a basic heading, United States with Colombia, United Stateswith India, United States with Japan……and Colombia with United States, Colombia with
Colombia (=1), Colombia with India, etc. The 10 x 10 matrix of binary indexes would besymmetrical with the entry United States/Colombia being the reciprocal ofColombia/United States. However, the entries are only transitive if the same items enter
into all binaries, the case in the Latin American comparisons, otherwise [Colombia/UnitedStates / India/United States] ≠ [Colombia/India]. The method used to make the matrix
transitive was called EKS for Èltetö and Köves (1964) and Szulc (1964), which is thegeometric mean of all the direct and indirect Fishers for each country. The authors makeclear that the method traces to Corrado Gini (1931) and more recently Gini has been
given credit and the method is now referred to as GEKS.42
In general the differences between the CPD and GEKS estimates become smaller
the more entries are in the price matrix becoming zero when the matrix is full. At Penn wepushed for CPD on the grounds that it used all the prices submitted by the countries
where at least two countries price the same item. GEKS by contrast might have Colombia
41

We also used double weighted CPD for basic headings for which we knew the importance to
be attached to each price, most notably for house rents and automobiles. We also used thesame hedonic regression results for automobiles in consumption and transport equipment inproducer’s durables. Double weighted CPD was also used to impute basic heading PPPs for
instances where a country could supply no suitable prices for a basic heading. In this case
we would perform a CPD on the PPPs for the basic headings within a larger expendituregroup, for example pork might be missing for a country within the larger aggregate of meats.
In this example, we would have basic heading weights for each PPP and could impute a
PPP for pork for the country for which it was not available.

42

As usually written the GEKS calculation takes the nth root of the product of all the direct andindirect binaries involving each country. For example India would have 10 direct binaries withall the countries including India, and 10 indirect through the 9 other countries and itself. Gini
(1931) in fact used a least squares regression to produce a transitive matrix and this is a
useful form because allows one to introduce additional variables in the estimation (Aten andHeston, 2009).
40

submitting 10 of 20 prices for vegetables and India submitting 12 of 20 with let us say
only 8 prices for the same item enter the Colombia-India binary, leaving 6 prices unusedin the binary computation.
This became a point of difference between the approach in the European Unionand that at Penn with both sides being fairly stubborn. CPD was criticized because it
appeared to fill holes and estimate prices for items that were not important for the country
missing prices for those items. Our defense was that CPD is used to estimate country
coefficients, not to estimate missing prices of say, country A. The prices of other countries
for the missing items of country A were used as a bridge in the CPD equation and are
representative for those countries. To our knowledge no one has demonstrated there isany bias introduced in the estimation of the country coefficients by use of the CPD.
In the end we thought we were at the cutting edge in the use of hedonics and inusing all the price data that countries provided for the country by item price matrix foreach basic heading. We also felt that our statistician colleagues were slow in the use ofregression techniques in the EU comparisons, especially since others in the European
Union were using them. In retrospect there were a lot of misunderstandings on both sides
and not enough appreciation on our side about the detailed binary comparisons that werebeing carried out among the European countries. What evolved in the European Union
were binary comparisons between each pair of countries at the basic heading level that
attempted to weight the importance of each item.43 Beginning with the 2005 ICP someblending of the approaches took place in the sense that countries and regions tried to
implement the distinction between representative and available products, albeit with little
success. And research suggested that CPD may have some advantages over GEKS.44

43

Each EU country chooses from the list of items to be priced in each basic heading those thatare representative and those that are available but not typical, with the remainder being
those that are not readily available. Items that are representative in country A and are
representative or available in country B would be the binary entry for country A. For B theentry would also include only its representative items with representative and available items
from country B. Only if both countries had identical lists of representative items would theentries be the same. Arguments were also used that if GEKS/CPD were used to estimate
basic heading PPPs then GEKS/G-K should be used to aggregate the basic headings, a
doubtful symmetry in my view.

44

See World Bank (2008). A sad aspect of life and the renaissance of CPD is that Bob
Summers (1922-2012) did not really appreciate its increased use in his last years. The EUprocedure is part of the EU regulations so they use their version of GEKS, which involves
meetings of price experts using more resources than have been available for such detailed
work in Africa, Asia, or Latin America.
41

(2) Aggregating the Basic Heading PPPSThe misunderstandings in the discussions of alternative ways to estimate basic
heading PPPs were small compared to the heat involved arguments over methods ofaggregation above the basic heading level. First, the GEKS procedure can be used toaggregate above the basic heading. In this case the Paasche and Laspeyeres indexes
are computed for each pair of countries using their expenditure weights and the Fisher
index is calculated. A GEKS procedure is applied to the matrix of Fisher indexes to obtainan aggregate PPP for say GDP. Smaller aggregates like consumption, investment andthe like can each be obtained from separate GEKS calculations. The sum of sub
aggregates will not equal the total whether it be for GDP or consumption. This nonadditive character of GEKS is discussed further below.45
At the time we were considering multilateral aggregation methods there were threeother techniques that were known to us from practical applications: (1) the Van Yzeren
method that was used to compare consumption levels in the ECSC prior to formation of
the European Union; (2) the Walsh method that averaged the expenditure shares of all
the countries that were used as the basic heading weights in the comparison, theapproach used in Latin America; and (3) and the binary star method used by the CMEA
and the OECD.46 A method suggested by R.G. Geary (1958) was used in an applicationby the FAO who were interested in an aggregate measure of purchasing power overagricultural output in different countries. S. H. Khamis (1967) proved the existence of asolution to the Geary system and Khamis (1972) and Prasada Rao (1971) establishedthe necessary and sufficient conditions for the existence of a solution. Khamis and Raoboth spent time at FAO where both prices and quantities were available to makeapplications of the Geary system. In the ICP case most of the basic heading quantities
are indirect, obtained by dividing expenditures by PPPs. These indirect quantities are also
called nominal quantities. Summers adapted the Geary system to the case where only
PPPs and expenditures were available, a very important contribution to the Phase I reportand ICP methodology.
The Geary-Khamis (G-K) system estimates an international price that is theaverage across the countries of the ratio for each country of the pppij /PPPj. for each basic
heading. The indirect quantities for each basic heading are valued at these international
prices. The indirect quantity is the expenditure for a basic heading, Eij divided by the PPPj.
In the usual G-K, the indirect quantities are used as the weights in estimating theinternational prices, meaning that larger and richer countries have more influence on the45

As part of his dissertation at the Indian Statistical Institute Prasada Rao (1972) demonstrated
that CPD weighted by expenditure shares was another possible aggregation method thatwas very similar to GEKS in terms of results, and was also non-additive.

46

We reported two variations on the star method, one using as inputs the basic heading
parities from a binary comparison with the United States with each country. The second
used the basic heading parities resulting from the CPD that introduced prices from othercountries into the calculations.
42

average.47 Since PPPj is what all the aggregation methods seek to estimate, it has also
to be estimated. In the G-K system it is the total of the national currency aggregate GDP
divided by the total when valued at international prices. So the international prices foreach basic heading and the PPP of GDP for each country need to be determined
simultaneously. A program was developed called METHODS because it calculated
results for GEKS, Van Yzeren, Walsh, two binary variants with the United States, andexchange rates as well as the G-K. METHODS would eventually provide output of themultilateral tables at the detailed 152 basic heading level and at the 36 summary headinglevel.
(2) To Obtain More Support You Need to Show Results
By the end of 1971 preliminary expenditure distributions were available for all thecountries, consumption prices had been submitted and processed. The EU countries had
pretty much completed all of their surveys, while construction, equipment goods andgovernment remained to be completed for half the remaining countries. The European
Union planned to complete a comparison for all their countries including Belgium(Luxembourg included for this purpose) and the Netherlands, about which more below.
The group at Penn had support through to the end of 1972 even though about eight
additional countries had been invited to participate in Phase II of the ICP with 1973 asreference year. Drafting of a report on Phase I had begun without a firm commitment onwhether the World Bank, the UNSD or perhaps the University of Pennsylvania Press
would publish the book. In short, the Penn participation and the ICP itself could end in1972, or further support could be generated to maintain the group at Penn, or a unit could
be supported in the World Bank, the expressed preference of Kravis.
The major contact at the World Bank after 1971 was John Edelman who was at
the OECD with Kravis and who was one of the associates with Beckerman in Gilbert andAssociates (1958). Hollis Chenery was Chief Economist at the time and was supportiveof the ICP though any funding would go through the research committee where there
were competing projects. Funding from other countries, USAID, and other potential
donors was undertaken by Edelman and staff. During the 1972 Kravis spoke a number oftimes with Edelman. In a January conversation Irv said we would have all the Phase I
data by June 1972. In February Irv said we could provide illustrative results by April for
food, beverages and tobacco that would involve enough summary categories to give an
impression of the effect of different methods of aggregation. Edelman made it clear that
the World Bank would need to see some results before it could make decisions on the
future of ICP support in the 1972-73 fiscal year beginning in June. It was agreed to holda meeting in April, which would allow the World Bank enough time to reach a decision onwhether to create an ICP unit in house and/or the level of support that they could provide,
if any, to Penn after the end of the fiscal year.

47

The G-K system could use other weights, for example, the share of each country in thenominal quantities for each basic heading, as illustrated by Rao (1972).

43

Early 1972 was a very busy time getting ready for the April meeting. The burden
fell mostly on Penn because we were doing the computations on consumption data, thelate night duty falling on Sultan Ahmad and Alicia Civitella. In Phase I we used brute force
to solve the G-K system inverting a large, for the time, matrix, much to the sleep
deprivation of Sultan who wrote the program, METHODS, and did the calculations andAlicia who helped and also brought the sandwiches and orange juice.48 As the meetingdrew nearer, Kravis became nervous and saw to it that we could get access to the extra
memory all day and night on the Friday a week before the meeting. Results came forth at
10 pm that Friday night and Kravis drove in from the suburbs to have them for the
weekend so we could decide by Monday if the meeting would have to be postponed.
Happily the results justified a meeting and the preliminary results were made available tothe World Bank by special delivery three days prior to the April 21 meeting in Washington.
Kravis had suggested that a number of consultants be invited but in the end only Nancy
Ruggles attended as a consultant. Peter de Janosi of the Ford Foundation was anobserver, nine World Bank staff were there for all or part of the meeting. Kenessey andthe three of us from Penn rounded out those attending.
There were many comments, much of it focused on the different methods and theperceived merits of one or the other. The one feature of the GK system that seemed toappeal to the World Bank attendees was that the results were additive across rows anddown columns. Nancy thought that the additive feature of the G-K was a bit of a redherring because other methods could achieve additivity including the Walsh approach,which was her preference. There is a price to pay for additivity, namely the method does
not allow substitution as the international prices change because the nominal quantities
in the G-K system are fixed. In Diewert’s term, the G-K is not a superlative index, nor is
GEKS, but the latter is constructed from superlative indexes/. At the end of this longmeeting Nancy Ruggles in effect said the important thing is not which method of
aggregation is used, but rather that the price collection and expenditure distributions wereactually completed, permitting substantive discussions of results. I still treasure hercomment.
A World Bank decision reported at the meeting is that there would be no ICP unit
in the World Bank in 1972-73 and probably not the following year either. In terms of Penn
support the World Bank would welcome a proposal to the Research Committee and would
seek other support to maintain the same level of our staff until the end of the 1973-4 fiscal
year. In the end this support was mobilized. It was assumed that Penn involvement would
end in 1974 at which time the Phase I report would be published, the Phase II countries
would have submitted their data, and the framework for the Phase III 1985 benchmark
would have been established.

48

The computing capacity at the time had 256k which was not enough to solve the size of theG-K equations with ten countries and 153 headings. However, after midnight Sultan could
obtain an additional 256k which was enough memory to solve the system. Later it wasagreed that the G-K was much easier to solve using an iterative approach that Frank
Orlando developed. It took less storage and generally converged in under ten iterations.
44

(3) A Digression on Men of Affairs
Kravis would often justify the G-K as our preferred aggregation method on the
grounds that Men of Affairs wanted results that add up. At that time Men of Affairs were
pillars of the community, business and government, not, as more recently, well-known
people whose behavior the media found to be sufficiently below accepted norms todeserve publicity. Bob (Larry Summers was still in high school) and I did not know any
men of affairs at the time but Irv did, so we accepted his judgment. Our second argumentfor G-K was that it was in the spirit of national accounts that within a country would add
up production of each geographic entity to arrive at a total. Similarly we would add the
production of each country involved in a G-K to obtain world GDP. So in comparing
country GDPs why shouldn’t each country have a weight according to its economic size?
This logic also led us to use super-country weights so that our ten countries could in fact
represent the world GDP. In contrast the GEKS or related aggregation methods would
give the same importance to Luxembourg as Germany. An appeal of equal weighted
indexes is that they capture what a typical person in a country faces in terms of relative
prices, which for many purposes like post adjustment, is useful.
Another way of highlighting the above difference is to imagine that the GDP ofcountry X in a benchmark comparison were twice its size. Would that affect the results?
For GEKS, Van Yzeren, Walsh and similar methods the answer is No. But for G-K theanswer is Yes because now country X would have a greater weight in determining
international prices. And by tilting international prices towards those of country X, theGDPs of other countries would also change. At the time we thought this was a more
important property of an aggregation method than a method that was invariant to the sizeof each country.
The most frequent criticism of our use of the G-K was that the Gerschenkron Effectled to the overstatement of the incomes of poor countries. Gerschenkron had shown thatusing pre-WWI weights to value the growth of industrial production in the Soviet Union
greatly overstated the growth compared to using pre-WWII weights because their rapid
industrial growth was weighted by the high relative prices of industrial goods circa 1914.
The situation in comparing countries is analogous. Valuing a poor country where services
are cheaper at the prices of a rich country will make the poor country look richer and viceversa. In Phase I in particular, G-K international prices even with super-country weights,
were tilted towards relative prices in the United States. This would tend to raise theincomes of countries like Kenya and India. This is a legitimate criticism and readers were
provided with the results of other methods, exposing the dirty linen so to speak. Again
this was the price of additivity, but the cost has continually declined as the ICP has
included more countries. For example average international prices were closer to Italy inPhase II and to Greece in Phase III to the point that in 2011 if anything international prices
are tilted towards poorer countries, which would lead to overstatement of incomes of thehigh income countries. Further additivity can be achieved by using different weights to45

obtain the international prices in the G-K system, for example each country having thesame weight.49(4) Organization of Phase II and Completion of Phase I: SOECSOEC or, as it now commonly called, Eurostat, was initially spread between offices
in Brussels and Luxembourg from 1953 to 1967, at which time negotiations began for theUnited Kingdom, Ireland, Norway and Denmark to join the original six EU members. Alsoin 1967 the three Communities - Agriculture, Atomic Energy, and Coal and Steel - mergedand Eurostat was relocated to Luxembourg. Vittorio Paretti was a strong force as anadministrator of Directorate A in Eurostat, within which Hugo Krijnse-Locker ran thesection on Intersectoral Relations that included price surveys. While most of Eurostat did
move to Luxembourg, some sections of Paretti’s staff remained in Brussels because they
provided direct support to Finance and other departments of the European Commission.50
In Luxembourg staff were scattered in different buildings including the Staar Hotel that
had been partially bombed but still had a large meeting room and several floors of offices.
In addition to Krijnse-Locker and Paretti another important contact during Phase I
was Phillippe Goybet. One of the early decisions facing Paretti was that all six EU
members had in fact participated in Phase I in anticipation of a separate EU report. Both
Belgium and the Netherlands were ahead of some other Phase I countries in terms ofcompleted surveys and could have been included in Phase I. However, Paretti had two
reservations. First, it would take away from the separate EU publication if all the countries
were also in a UN or other publication. (The status of Luxembourg, which shared currency
with Belgium except for color and country of issue, is unclear at this point, since it did notparticipate, in the ICP until the 1980 comparison.) The second reservation was thatEurostat staff thought the Netherlands prices were too low. In any event Belgium and theNetherlands did participate in the 1973 comparisons with the same Dutch prices.
The Directorate Generals of the Institutes of National Statistics (DGINS) began tohold annual meetings with Eurostat staff. In 1972 the Dutch Presidency submitted adocument to the DGINS that anticipated what Eurostat would codify 25 years later.
Namely that participation in the surveys would have a binding legal basis; themaintenance of secrecy of confidential data; a requirement that the European
Commission present a three year program every year; and decisions on budgets should
be separate from decisions on programs. While these were general principles for all
49

Another additive system developed by Doris Ikle and rendered more understandable by Yuri
Dikhanov of the World Bank was used in the regional comparison of Africa in 2005. Thissystem estimates international prices as the harmonic mean of the ratio of pppij /PPPj.

50

Political considerations also weighed in split of location of Paretti’s sections, namely there
was fear that Brussels would form a separate statistical service. Paretti, himself, bought an
11th century fixer-upper castle on the Belgium border in the village of Septfontaines allowing
him relative easy access to Brussels or Luxembourg. We had the pleasure of staying in the
Chateau de Septfontaines when it had been restored and it was spectacular, with a turret foreach of their two children and medieval furnishings to complement the main rooms of thestructure.
46

statistical programs they became central to the PPP program. (De Michelis and Chantrain
2003, p.66)(5) The Rest of the ICP World
The World Bank and UNSD jointly determined the list of whom the UNSD should
invite to participate in the 1973 comparisons. The thinking was that about eight to ten
countries were to be invited to yield four to six actual participants. Countries like Morocco,
Ghana and Ivory Coast were considered but not actually invited for reasons like statistical
capacity or non-existence of national accounts. Brazil and Venezuela were contacted in
Latin America as well as Costa Rico in Central America. In the end talks and visits with
Venezuela over two years ended with some price submissions but in the end noparticipation. Iran was invited and eventually came on board, while no Arabic speaking
country was invited, mainly because of concerns over national accounts and prices. At
that time, Egypt and many other Arab countries required high level approval to makeprices collected for the CPI available outside their offices. This was not for confidentiality
but rather for political concerns about which I can offer no insight. Singapore was asked
and declined, but Korea, Malaysia, the Philippines accepted bringing the total to 16 with
Belgium and the Netherlands. The plan was the additional six countries would collectprices with a 1970 or 1973 reference year and back cast basic heading parities to 1970.
The original ten countries would update their prices to 1973, typically by using the CPI
price movement for 36 summary headings of expenditures.
Drafts of the Phase I report were written and distributed during 1973-74 as prices
and other worksheet data were submitted on government and capital formation. When
we had the full data set the various binary comparisons with the United States were being
finalized, subject to possible revisions of the control totals for GDP and its main
aggregates. We also began trying different weights, such as per capita or giving eachcountry the same weight in the G-K calculation, both without super-countries. The percapita weights were more subject to the Gerschenkron effect than the national accounts
weighting. We had been using the United States as the reference country in all our
multilateral calculations knowing that the results should be base-country invariant. To
illustrate this we used Germany as the reference country in one of the runs in early 1974
just before we were going to send out drafts of the report to the Advisory Board andothers. This run was carried out in what Bob termed Black February.
The METHODS program showed a summary sheet at the start of a very large
printout giving the per capita GDP of the countries with the United States = 100 using the
G-K. Kravis and Summers looked at the summary result when Germany was thereference, and not only was it different than when the United States was the reference,but the results looked very unstable. They asked to run it again and with other countries
and in no case could they get the same result. We were to include the G-K results in thedraft we were distributing the following week and Kravis was upset enough to simply gowith the binary results. Summers found that unacceptable. Finally I looked at the detailed
international prices and the problem immediately became clear, the net trade balancebasic heading had a very large negative international price when Germany was thereference country.
47

Our mistake was to forget that for the G-K to converge, you could have negativevalues but to guarantee convergence all values had to be zero or greater. Our fix on thiswas to run the G-K on the non-negative headings. The PPP from that run was used tovalue the net foreign balance and net expenditures of residents abroad. Change ininventories was rolled into other investment where any negative entries would be offset
by the size of other investment. This treatment did produce results that were reference
country independent and allowed us to produce multilateral tables into the draft reportthat was distributed as promised. Further, we came to the conclusion that this was thebetter way to value the net foreign balance and net expenditures of residents abroad thanto use the exchange rate, about which not all are in agreement. We ended Black February
in a better mood with a hint of spring in the air.
One feature of the draft report that provided a very rough check on the results was
to extrapolate the binary results from Gilbert and Kravis for 1950 by the growth rate of
GDP per capita for France, Germany, Italy and the United Kingdom to 1970. When
compared with the benchmark binary results for 1970, the extrapolations understated thebenchmark 1970 by 8 or 9 percent for all but Italy where the understatement was 17
percent.
There was no precedent at the World Bank for publishing an ICP type of study, but
after seeing the draft, they were willing to undertake its publication. Although finished in
mid-1974, the book only came out in 1975 because it was still an era when tables had tobe typeset and proofread, a time consuming process in a number intensive publication.
We were quite involved with completing the item lists and expenditure distributions for thefour new countries participating in Phase II, so were not concerned with publication
delays. In trying to move the ICP away from Penn, one argument Kravis would use is that
dissemination of the work by a university is inherently slower than at international
institutions.
(6) A Digression on the 1967 Comparison
Binary comparisons of prices were carried out between the United States andHungary, India, Japan, Kenya and the United Kingdom for 1967. The European Union
chose not to take part in the 1967 exercise and Colombia did not have the necessary
data. India initially said they would not participate but eventually supplied the data. These
comparisons were sent to the countries as sort of a first look at whether the results
seemed sensible. I do not remember nor can I find documentation on whether the binary
comparisons were as detailed as 1970. The results are compared with the 1970 binaries
in Table 1 below.

48

Table 1 Binary Quantity Indexes PC and Paasche/Laspeyres Spreads, 1967- 70
Binary Fishers

Paasche/Laspeyres Spreads

Country
1967

1970

1967

1970

Kenya

5.7

5.9

2.10

2.15

India

5.9

6.1

1.86

1.98

Hungary

35.0

40.0

1.59

1.48

Japan

46.0

61.0

1.32

1.25

United Kingdom

61.0

63.0

1.39

1.18

United States

100.0

100.0

1.00

1.00

The results are fairly close between 1967 and 1970, not too surprising given thatsome extrapolations were probably (a guess) carried out for prices and expendituredetails. The fact that all the countries grew relative to the United States is likely as the US
real per capita growth rate was under 2 percent for these three years. The
Paasche/Laspeyres spreads, the ratio of own versus US expenditure shares, behave as
expected. My view is that more attention should have been given to the 1967 work, but
we were rushed as it was and the multilateral comparisons were the novelty of the report.

49

Chapter 3: Responses to the Phase I Report
The Phase I report explicitly warned readers of the inherent limitations on the typeof international comparisons that we were reporting. It is only after hearing the views ofothers that other shortcomings of the final product become apparent. Some of thecriticisms of the ICP even 40 years later do not take account of the fact that the results
can be no better than the underlying national accounts of the countries and the quality ofthe price comparisons. We did our best on guiding countries on the matching of items
and undertaking price surveys. However, we were bound to accept the national accounts
that countries submitted to the UNSD, even if they often seemed improbable comparedwith other countries. We could and did raise questions with the countries but in the end
they had the last say on their national accounts. So our results might be questionable insome areas but that was not necessarily an ICP problem but are often the fault of thenational accounts which in turn pose problems for any other type of economic comparison
between countries.
It should be mentioned that Hungary reacted to the initial 1973 draft of Phase I withsurprise, in particular that the results made them look as affluent as it did. Lengthy
communications ensued between Budapest, New York and Philadelphia. We had no priorview on where Hungary sat on the scale of the ten countries and I suppose that the
Hungarian statisticians did. The exchange of correspondence clarified many of thedifferences and one point in particular is worth stressing. Hungary called attention to someof the summary headings like personal care that looked unusually large. We pointed outthat often the expenditure surveys had substantial errors because “not otherwiseclassified” expenditures were often lumped into the wrong categories. This is a general
problem with the detail of expenditures sought in the ICP. When countries do not actually
have the detailed data, it can show up as a large residual under “other expenditures” orbe assigned to a heading that may or may not be appropriate leading to apparent
anomalies.
C. Response of Reviewers, Scholars and the Media(1) Book Reviews
The Phase I report was not an easy read for any reviewer who was not already
immersed in the subject or even someone coming back to it like me.51 One of the firstreviews was by Peter Hill, then at the University of East Anglia. Hill noted in his Economic
Journal review that the ICP project “is perhaps the largest ever undertaken in the historyof economics:” (p.161). Hill went on to the OECD as head the National Accounts andStatistics Division in the Department of Economics and Statistics and become pivotal in
having the OECD take part in the 1980 ICP benchmark. Under the stewardship of Hill,
EU and OECD participation became very important for subsequent ICP rounds. And after

50

D. J. Daly in his review in the Canadian Journal of Economics wrote, ‘The methods arecomplex and there are about 125 tables of results.’ He went on to say the book was
important and suggested the general reader may only want to read chapters 1, 13, and 15.
50

he retired from OECD Hill became an active consultant to the World Bank writing a
number of chapters in the manual developed for the 2005 ICP.
Perhaps the most searching comment on the Phase I report came in the form of apersonal communication before publication to Kravis from Colin Clark, who had readclosely the preliminary draft. Clark was very supportive of the ICP in general but quite
critical of our handling of non-priced services. The gist of Clark’s argument was that hedoubted our estimates for services in our separate aggregations of PPPs for services andfor commodities. Priced services are in personal care, hotels, restaurants, repairs and thelike. Non-priced services are concentrated in education, government and to some extent
health, especially hospitals. During the methodological discussions for Phase I it was
decided to consider both direct and indirect estimates of volumes for non-priced service.
Direct quantities might be hospital bed days, or number of teachers. Indirect volumes
might be derived by dividing expenditures on educational staff by relative wages ofteachers in each country. We considered educational staff by level of education ofteachers at different levels of teaching to narrow the range of human capital.
But in the end we made the equal productivity assumption at whatever degree of
disaggregation we could obtain data. For example, we broke down the government
expenditures on staff into unskilled blue collar, skilled white collar staff, and higher level
civil servants and made wage comparisons that included all benefits. Salary comparisons
then became the PPPs, which basically assumed that productivity was the same for atruck driver for example, no matter what type of truck he drove. Two decades later acomparison of government clerks would assume the same productivity whether or not theclerk had a PC. Few believed this at the time but there was little basis for making
adjustments by country.
(2) The MediaThe book was covered in the New York Times by Leonard Silk, in his column in
Newsweek by Paul Samuelson, entitled ‘US; Still the Richest’, in the Economist, inCommerce in India and other publications. The two points that caught the attention ofmost writers was that the United States was still number one, and that the gap between
rich and poor had apparently shrunk. The reason that the position of the United States
was emphasized was that Japan, West Germany, and other European countries had
been experiencing an “economic miracle” from 1950-1970. In contrast the growth of US
GDP per capita over the same period was only half that of countries experiencing the
rapid growth associated with reconstruction. So when journalists found a study
demonstrating that the United States was number 1 it was a good antidote to the news
on national growth.
Often Sweden and Switzerland were mentioned as countries that were edging very
close to the United States in per capita GDP but they did not participate in the ICP until
1980. When talking about the results of Phase I Summers would say that the cost of ourten indexes of per capita GDP was $100,000 each, actually more since the United States
was a 100 by definition. He would then go on to explain all the other details behind theten numbers and why that was such a rich set of source materials for economic analysis.
51

Summers also tried to exploit the overhead represented by the ten countries and extend
the number of countries by developing a simple estimating equation based upon therelationship between PPP and exchange rate values of GDP per capita with the help of
Sultan Ahmad. A draft of this paper was presented at the Econometric Society meetingsin 1974. In this paper both Sweden and Switzerland were well below the United States.
When this paper was eventually published (Kravis, Summers, and Heston, 1978a)
Sultan Ahmad’s assistance was acknowledged but not as an author, which I do not think
was fair…the price of being a graduate student.
A second point often made in the media was that on a per capita GDP basis
countries like India and Kenya were 3.00 and 2.04 percent of the United States at
exchange rates but 7.1 and 5.7 percent when converted at PPPs. In fact all the ninecountries rose relative to the United States. This coincided with the accepted view of themedia and the traveler that circa 1970 most countries were cheaper than the UnitedStates and so their real income was higher than at exchange rates. However, we were
frequently asked, are you saying people in Kenya and India are better off than wethought? At which point we would say no, there has been no overnight change in infantmortality, malnutrition, infectious diseases, or illiteracy. Rather PPP based comparisons
are an alternative metric that we believe gives more reliable measures of relative
quantities enjoyed across countries.
Our arguments were not totally convincing, not least to international institutions
that often received funding because the differences in incomes per capita acrosscountries is larger at exchange rates than at PPPs. But between 1970 and 1975 theinternational financial system went through the unpegging of the dollar to gold by theUnited States and subsequent adjustments of exchange rates by many countries. So of
the 34 countries in the 1975 ICP six in Europe had become more expensive than the
United States, quite different than Phase I. As exchange rates began to move freely so
too did their GDP conversions from year to year whereas conversions at PPPs werechanged very little. To insulate their estimates the World Bank used an average of
exchange rates over several years and for difficult countries where the appropriate
exchange rate was not clear, country desks were asked to provide a rate. This fix was
sensible enough but it only made clearer that the more appropriate way to compare
volumes across countries was to use PPPs to make conversions of GDP totals or per
capita.
D. Response of the International Organizations
To quote Mohandas Gandhi, ‘First they ignore you, then they laugh at you thenthey fight you, then you win.’
I had a coffee mug with this quotation that always consoled me after UN or WorldBank meetings typically ended with retention of the status quo. For example, theCommittee on Contributions at the United Nations began considering whether the ICP
results could improve their methodology, which was framed in 1950. That methodology
used exchange rates to convert GDP per capita numbers for most countries and thenused a sliding scale to determine assessments. Very low income countries in unusual52

circumstances, like a civil conflict, received special treatment. Soon after Phase I wascompleted the UNSD was asked to write papers on how PPP results could be used by
the Committee. Over the next 20 years I, among others, wrote papers for the UNSD for
the Committee to consider at their annual meeting. We pointed out that if PPP
conversions were used the assessment scale would need to reworked to obtain thedesired total of contributions. The reason is that with the United States as reference, thetotal GDP of the members at PPPs would be larger than at exchange rates. However, thereal issue was that the relationship between exchange rates and PPPs varies acrosscountries so that some countries would find their assessment rising and others falling.
Once the exchange rate system was in place, any change became a political issue. In
looking at the decisions of the 75th meeting of the Committee in June, 2015 no lip service
is paid to PPPs and only exchange rates are considered for purposes of country
contributions to the budget of the United Nations.
(1) The World Bank
In the 1970s the World Bank was making concessionary loans to member
countries based upon their per capita GDP group. The per capita GDP was based on the
Atlas method which was essentially national currency GDP divided by the exchange rateestimated by World Bank staff. The DDG carried out a study examining whether there
were countries changing positions in the per capita GDP ladder or the lending group. In
practice country rankings changed a fair amount but not so for country lending groups.
Thus nothing in the exchange rate compared to PPP conversion differences suggested apolicy need to change their lending metric.
While supporting the ICP in words and resources there was little support forchanging the Atlas method, despite several meetings devoted to the subject in the 197585 period. Two reasons always mentioned for reluctance to use the ICP numbers werethat the results were not timely and that country coverage was spotty among thosecountries that were eligible for concessionary loans. These were good enough reasons,though my memories are that the discussions tended to have a tone that the PPPs were
inadequate. Put another way, I do not recall any meeting that concluded PPPs were abetter measure of volumes than exchange rates. By maintaining the World Bank Atlaslink to both exchange rates and lending criteria, we felt the DDG was encouraging use of
the Atlas for substantive research.
At Penn we initially pushed the value of PPP over exchange rate conversions if
you wanted to compare volumes between countries. However, we emphasized that for anumber of purposes exchange rates were preferable, like measures of international
financial obligations. And we came to the conclusion that it was better if ICP results were
not tied to the terms of concessionary loans or to contributions to an internationalorganization as with the United Nations. We did not want countries to feel there was afinancial consequence to the prices that were submitted to the ICP that would lead them,for example, to choose high end outlets so their PPPs would be higher and their incomes
lower. The goal of such manipulation would be to end up in a lower income group for
purposes of borrowing or contributions. This has happened over the history of the ICP
and one or two glaring instances will be mentioned later on. (Pic 12)
53

The ICP contact in the World Bank is now called the Development Data Group(DDG) under the Vice President for Research, typically an academic economist on leave
for two or more years. The many persons holding this position have supported the ICP,
but it has not been a priority even when Larry Summers held the position. Most
organizations as data intensive as the World Bank have a Chief Statistician, but that has
not been the case under the Vice President for Research or the DDG, despite
recommendations to create such a post. The Director of the DGD has usually been acareer employee from inside the World Bank-IMF group, an exception is its present
director, Haishan Fu, who was at the Human Development Report and most recently
ESCAP as Director of Statistics.

(2) The European Union
Any response of the European Union was through the individuals with whom weworked and their response was favorable but I think all were surprised by thecomprehensiveness of the Phase I report. It was a much longer report than typical ofgovernments and certainly more academic in terms of providing detailed descriptions ofmethods and of introducing new types of analysis. For example the introduction ofsimilarity indexes of prices and quantities between all pairs of countries and relating theindexes to income differences was not typically the stuff of statistics departments ofinternational organizations.
Our differences remained with respect to use of GEKS versus CPD at the basic
heading level, and over use of country weights in the G-K approach versus an unweighted
system like GEKS or Girardi. In their report on the EU comparisons for 1970, Paretti,
Krijnse-Locker and Goybet (1974) introduced a European currency unit that was anaverage of five countries. This practice has many advantages that were not obvious to us
at the time. In addition to Men of Affairs, the World Bank and the United Nations andothers were so committed to the use of the US dollar in their budgets and their mindset
that alternatives were not on the table.
To illustrate the point we compare the results for 1970 and 1975 with (a) the UnitedStates as the reference country, namely rows 2-4 in Table 1 below with (b) rows 5-7 in
the Table where the reference is the geometric mean of eight countries. The relative
position of the countries remains the same whatever the reference country(s). However,row 4 where the United States is the reference all countries are growing relative to theUnited States. Where as in row 7 the major event is the decline in the United States
relative to all eight countries in Table 1. Again either representation is equivalent but I
think the OECD has made the right decision to present both versions, one using theUnited States as reference country and one using an OECD average.

54

Table 1: Using a Single Reference Country or an AverageCountry/
Row/
Year

UnitedStatesFranceWest
GermanyJapan

UnitedKingdom

Italy

Hungary

Columbia(2) 1970

100.0

75.0

74.7

61.5

60.3

45.8

40.3

15.9

(3) 1975

100.0

81.9

83.0

68.4

63.9

53.8

49.6

22.4

(4) !975/70 %

100.0

109.2

111.1

111.2

106.0

117.5

123.1

140.9

(5) 1970

189.2

141.9

141.3

116.3

114.1

86.6

76.2

30.1

(6) 1975

165.5

135.6

137.4

113.2

105.8

89.0

82.1

37.1

(7)1975/70 %

87.5

95.5

97.2

97.3

92.7

102.8

107.7

123.3

(3) The International Monetary FundWe had little contact with the IMF Department of Statistics during the first 20 yearsof the ICP. IMF sent representatives to meetings at the World Bank on the ICP and one
or two of their staff became directors of DDG. When their representatives spoke it was
generally to argue for the relative version of the law of one price and generally against
their need to know the absolute levels of PPPs for their analytic work. Their assumption
was that the starting point for changes in PPPs was a long run equilibrium. Kravis taught
and carried out much of his research in international trade and came to the conclusionthat PPPs could deviate from their long run equilibrium and pari passu from exchange
rates.
This led Kravis to choose exchange rate deviation index as the term for exchange
rate / PPP that was used in the three reports that were drafted at Penn. In retrospect thiswas not propitious choice of terms for many, especially the IMF, because it could easily
be taken as meaning there was something wrong with exchange rates. When theexchange rate deviation index was plotted against per capita GDP the relationship was
downward sloping and convex. Users did not readily adopt exchange rate deviation index
into their discourse, but its inverse, PPP / exchange rate in percent, termed the national
price level or just price level was quickly adopted. We also provided the price level in thereport but gave it less emphasis. The notion of a price level resonates with travelers who
often speak of countries as being cheap or expensive with respect to say the UnitedStates. Most textbook treatments now use graphs showing that price levels rise with per
capita GDP.
In Phase 1 the price level ranged from 29 percent to 100 percent of the UnitedStates. This was not surprising but it led us to think this might be the usual result with thehighest per capita income country having the highest price level. With hindsight this wasprobably a naïve view given the demise of the Bretton Woods system between 1968 and1973. Prices were rising rapidly in the United States in the early 70s and the dollar was55not tied to gold after August 1971, both sources of disruption. As countries were deciding
whether or not to float their currencies, stability of price levels with respect to the UnitedStates was hardly a sure thing. Even by the Phase II comparison for 1973 France andGermany with lower per capita GDPs had price levels above 100 percent of the UnitedStates.
In spring 1980 the new Director of the UNSD, Svein Nordbotten, had drafted arequest for funds to support the ICP operations in New York to J. de Larosiere, theManaging Director of the IMF. The request was signed by J. Ripert then Under-SecretaryGeneral for International Economic and Social Affairs. After polite comments on theimportance of the ICP work, the response dated May 19, 1980 from Mr. Larosiere wrote,“I am advised that it is unlikely that in the Fund, we would make more than marginal andsporadic use of the data in our current work for many years”. The letter appropriately
pointed out that the ICP results had a publication lag and there were no plans for annual
estimates, but we still took the Fund response, rightly or wrongly, as unnecessarily
negative.
(4) The Regional Banks and Economic Commissions of the UN System
The groups discussed in this section did not really respond to the Phase I report
but are still relevant to the ICP because they were a potential source of technical support,
if not immediately, possibly in the future. They often sent consultants to countries thatwere ICP participants and where feasible we would try to take advantage of theirexpertise.
The African Development Bank (AfDB) and Asian Development Bank (ADB) wereusually consulted with respect to which countries in their regions would be goodcandidates to participate in the ICP. Their main activities in the 1970s were to administrateprojects in member countries and to the extent the technical assistance to their countries
concerned national accounts and price statistics there was room for cooperation with the
ICP. The AfDB and ADB were formed in 1964 and 1966 and so were more likely to follow
the World Bank with regard to projects like the ICP than to make any independentjudgments.
The Regional Economic and Social Commissions of Asia (ESCAP), Europe (ECE)and Latin America (ECLAC) were older being established around 1947 (Africa andWestern Asia were much later). We have mentioned the ECLAC studies covering the
major countries in the region before the ICP. Likewise, ECE undertook a number of PPP
studies, usually binary comparisons often between a western and eastern member likeFrance and Poland. The ECE also undertook production side PPP comparisons. ESCAPin Bangkok had not taken part in any PPP comparisons before its members beganparticipating in the ICP. We worked less with the ECE than ECLAC, partly because ourEuropean contacts were heavily involved with the ECE. The Ruggles worked with ECLAC
and with Jorge Salazar at the Brookings Institute on Latin American multilateralcomparisons. These factors plus proximity led us to be more involved with the work of
ECLAC.

56

Chapter 4: Completion of the Phase II Report
The Phase II report did not include Zoltan Kenessey as an author because he left
the UNSD during 1975-6. The transition included a number of months in which he was
not in the office though officially with the United Nations until he took the position of Senior
Economist with the Board of Governors of the Federal Reserve System in 1976. There
he worked on capacity utilization measures and publication of the Industrial Production
Index. He retired from the Federal Reserve in 1991 and became Director of theInternational Statistical Institute in The Hague until 1997, a year before his death.
His replacement at the UNSD was William Murray a career international civil
servant with no special knowledge of international comparisons or PPPs. When I took
leave from Penn in 1978-79 to work at the UNSD, Bill became my immediate supervisor
and valuable source of information on how to get things done in a large bureaucracy.
Murray was involved with how the Phase II report would be distributed and felt that it did
not justify a separate book as Kravis planned. Murray thought that adding six to theoriginal ten countries, requiring back and forward casting of benchmarks was not muchof an addition. Kravis argued that Phase II would maintain the momentum of the ICP andpermit comparisons of two benchmark comparisons over time. As was often the case,
Kravis won. In retrospect Murray may have been right, in any event my treatment of Phase
II will be fairly brief.
A. Measures of Imprecision
Most users of the ICP focus on the index of per capita GDP with the United States= 100. We reported this index with three significant digits knowing that that the results
were not free of errors. The sources of error include the expenditures, the prices and theaggregation method. In our attempt to get a handle on errors in the country PPP estimates
we used a Monte Carlo type approach based on CPD residual error for the 128 basic
headings where PPPs were directly estimated. The basic heading PPPs were perturbed
299 times and after each round a new G-K aggregation was estimated and error estimates
were generated from this distribution.52 The mean of this distribution was very close tooriginal G-K estimate. The confidence intervals at the 95 percent level were often
substantial, for example, Kenya’s estimate in 1973 was 6.33 percent of the United States
per capita with lower and upper limits of 5.73 and 6.93 percent.
These estimates are over only 128 basic headings where CPDs were estimated,not 152, so the limits may be larger on this account. And more importantly, the confidence
intervals suppose no errors in the expenditures, so the estimates provide only theminimum size of the interval for each country. The lowest income group tends to havewider confidence intervals in percentage terms but the relationship with income per capita
is not that strong. After the 1975 ICP no attempt has been made to continue error
estimates in the ICP reports. However, Deaton (2012) and Hajargash and Rao (2016)52

Today, the number of perturbations would be much larger because of the relative ease ofcomputing compared to the 1970s. Sultan Ahmad did the programming and the code waslabeled BANG because this was the period when East Pakistan became Bangladesh.
57

have provided frameworks for estimating improved standard errors for PPPs and real
product.
B. Putting Together the 1970 and 1973 ICP Estimates
In the end 16 countries participated in Phase II with Poland and Venezuela
probable until the window closed on the data submissions in 1974. From the European
Union, Belgium and the Netherlands were added simply using the revised expenditureand price data for 1970 that were included in the EU report of 1974. All of the EU countries
and the other Phase I countries provided updated expenditure data and aggregated priceindexes for 36 summary headings for 1973 based on a worksheet developed for thispurpose. The basic heading expenditure distributions for 1970 were used to distributesummary expenditures to detailed headings. Similarly it was assumed that the priceincrease for basic heading PPPs within a summary heading was the same as that for thesummary heading.
In a parallel fashion, the additional four countries in greater Asia - Iran, Korea,
Malaysia and the Philippines - collected detailed price and expenditure data for 1973 thatwere backdated to 1970 on the basis of summary heading data for 1970. Exceptions were
Korea that provided prices for both years and Iran that collected most prices for 1970 andadditional prices for 1973. In all cases, some extrapolations were required from the 36
level to the detailed expenditure and PPP level. In addition headings using hedonic
regressions like automobiles and rents were redone to incorporate the new countries.
The question naturally arises as to whether it made sense to go to the basic
heading level versus simply aggregating at the level of 36 summary headings. A test was
carried out using both levels of aggregation. Differences were under 1 percent for all but
three countries. For Korea, Malaysia and the Philippines, all of which provided detailed
price data for 1973, the differences were more substantial, between 2.5 and 5.0 percent
all in the same direction. We argued that including the 113 more detailed basic headinglevel data for these three countries moved us closer to the “truth” without increasing
differences for the other 13 countries.
Our conclusion from this exercise is that retaining detail improves the comparisons,which we think raises a more general point. There is often a temptation in empirical work
across countries to reduce the number of basic headings to the lowest common
denominator. However, there is no evidence that finding ways to fill out a tableau of datain even ad hoc ways will be worse than aggregating at a less detailed level. And there isa clear advantage to using more detailed data when available rather than to consolidate
it into a higher level of aggregation. This issue has arisen more recently in the context ofthe planned 2017 ICP where it is likely that there will be more detail in some regions
compared to others.

58

C. Consistency Over Time of ICP Estimates
With two fairly independent benchmarks it seemed worth examining how close you
could come to predicting 1973 by extrapolating the 1970 benchmark. One approach was
to apply the growth of domestic absorption between 1970 and 1973 to the 1970 domestic
absorption. The reason for breaking growth of GDP into growth of domestic absorption
and growth of the net foreign balance is that export and import deflators are often weak.
GDP deflators and GDP growth rates are affected by errors in the import and export priceindexes. In what we called the international price method the import and export priceindexes of the United States, the reference country, were used to obtain the constantprice net foreign balance to add to the domestic absorption to get the estimated 1973
GDP. India was not included in this exercise because there were no export and importprice indexes.
We also explored a net deflation approach which was to deflate a positive netbalance by its national import price index and a negative balance by the national export
price index. The 1973 estimates using the net deflation approach were further away fromthe actual 1973 benchmark than the international price method for all but Belgium. This
led to us to adopt the international price approach in extending the estimates for the 15
countries to cover the period 1965-75. The actual benchmark values of 1970 and 1973
were used along with binary estimates for six countries, including India, for 1967. We
published this series with United States as 100 in each year, based on current year prices.
D. Geary International Prices
A question about the G-K that was raised by a number of users of the Phase I
report was the exact nature of the international prices. When the FAO used the G-K they
had expenditures, prices and quantities so that an international price would be in acurrency unit like so many dollars for a ton of wheat. When we estimated the G-K the
inputs were the direct and indirect PPPs or price levels with respect to the United States,
and the expenditures for the 153 basic headings. The international price for a heading
was a weight to value the nominal quantities in each basic heading. The weighted averageof the international prices over all basic headings was defined as 1.0 in the way weestimated the G-K.
The question raised was whether these international prices were invariant as to
the reference country. The answer is they are not invariant to the reference country.
However, when the reference country changes so do the nominal quantities because allof the basic heading price levels will be relative to the new reference country. This means
the new nominal quantities will be valued at the new international prices and thecomparison will remain the same regardless of the reference country.
Another question raised was about the way we presented the detailed PPPs forthe net foreign balance in both the Phase I and II reports. For all countries except theUnited States we used the exchange rate. For the United States we presented theinternational price that was the result of estimating the G-K over just domestic absorption.
It is basically the price level of the United States compared to all the countries. It is used59

to value the nominal value of the net foreign balance converted at exchange rates, whichis then added to the real domestic absorption to obtain real GDP. The US price level isrelated to the asymmetrical role of the US dollar in the international monetary system, agood reason to not use the dollar as the reference currency while acknowledging the plus
side like familiarity and that international institutions tend to favor reporting dollar values.

60Chapter 5: Signing Off - Phase III Report
When it was agreed the 1975 ICP report for 34 countries would be published again
by the Johns Hopkins University Press, the Penn group were very, very ready to get outof ICP production, none of us more than Kravis. And the United Nations, the World Bank,
the European Union and other international organizations were not unhappy that the ICP
was leaving a university setting, with its academic niceties and seeming disregard for
deadlines. We did regard the publication of Phase III as our last hurrah and wanted to do
more than produce a repeat of Phases I and II, which partly accounts for the longgestation period, the publication only coming out in 1982.
Several factors contributed to the delay including my stay at the UNSD on leave
during 1978-79. I was essentially transferring our software to the UNSD and taking therole of Kenessey in the sense of meeting ICP visitors and supervising staff. Murray left all
the technical questions to me while he handled bureaucratic details for which I was mostgrateful. The Japanese government provided in kind ICP assistance in the form of three
young staff each for two or three years over the period 1978 to 1985. The first was Shigeru
Kawasaki who had spent a year of high school in California and was well trained instatistics. He was of great assistance to me while at the UNSD and was to have a very
successful career in the Japanese Statistical Office. Shigeru was followed by Fukui and
Watanabe, who were both excellent. I did some of my supervision of the three from Pennthough I got to know Fukui fairly well and to enjoy his subtle sense of humor. I was able
to meet both Fukui and Kawasaki on one visit to Tokyo in the late 1990s when Shigeru
was Director of the Bureau of Statistics and Fukui was a deputy director in charge of pricestatistics. Bettina and I were also entertained at the Kawasaki home meeting with his wife
who I had known in New York, and to meet their daughter and son.
I was on a short-term consultant’s contract and not given high priority with respect
to small things, like office space. When I finally got my office after several weeks at the
UNSD it was very nice indeed, on a high floor in the Secretariat looking over the East
river and up river to Roosevelt Island. It was a two window office reflecting my ambiguous
status as a fixed term consultant. Kenessey and Murray had three window offices and the
Director, Simon Goldberg, had a corner office with four windows. My first tour at the UNSD
was quite pleasant in many ways, security was still easy and the work rewarding exceptthat I did very little towards the publication of Phase III.53
Another factor was that Kravis had a backlog of projects to complete including
those with Robert Lipsey who generally spent a day a week at Penn working with Irv.
Further the three of us were all involved with papers on services (Inman, 1985 and Kravis,
Summers and Heston, 1983) that were relevant to the ICP but made only an indirectcontribution to writing up Phase III. Finally there was the hundred-country-paper (Kravis,

53

A curious practice at the UNSD was that most communication was by letters or telegram, alltypically approved by my immediate supervisor and signed by the Director, all of which tooktime. This could be bi-passed by directly telephoning abroad for which there was noapparent restriction at least not on my phone.
61

et.al, 1978a), which captured our interest at the time and which Summers and I became
more and more involved after 1980.
One application based on the hundred-country paper and on the first two roundsof the ICP was Ahluwalia, Carter and Chenery (1979) that initiated the counts of those inpoverty in poorer countries. The paper was based on thirty-six countries for which there
were Kravis factors and some information on country income distributions. The Kravis
factor was the inverse of the price level, namely the exchange rate deviation index, which
was used to estimate dollar denominated per capita income and consumption values for1970. The Ahluwalia paper was part of the research at the Bank on economic growthand income inequality during the 1970s, much of it stimulated by the development
literature of the 1950s and 1960s especially the work of Simon Kuznets (1955 and 1963).
The Kuznets curve was based on the observed downward relationship between
measures on income inequality like the Gini coefficient or the share of the lowest quintile
in the income distribution and per capita income. Ahluwalia, Carter and Chenery
employed the Kuznets framework using PPP conversions which were only available from
Clark or short-cut procedures before the ICP. They also anchored their poverty line
concept on the definition that the Indian planning commission used when they establishedtheir 2nd Five Year Plan goal of reducing the number in poverty based on a rupee definitionof the Indian poverty line.54 The hundred-country paper and ICP provided the basis forconverting the Indian line to a dollar measure across other developing countries. Withvariations this use of PPPs and country income distributions has become the basis for
future poverty lines of the World Bank including the well-known dollar a day line developed
when Martin Ravillion was heading the poverty group. This application of the ICP and
hundred-country paper to poverty was important in raising the visibility of the ICP among
academics, researchers and policy makers.
A. Services in the ICP
In all three ICP reports we presented three aggregations that we thought were ofanalytic interest: services and commodities, tradables and non-tradables, and priced andnon-priced services. The services-commodity distinction was fuzzy but still produced
consistent results, namely that the PPP for services rose and for commodities fell as
incomes of countries rose. Commodities often have a component of labor in their price,for example purchases of cut up fruits and vegetables at a supermarket, while many
services have an element of commodities, such as take-out or doggie-bags at arestaurant. In the ICP reports we simply assigned basic headings to commodities andservices but in some other work we attempted to break up some basic headings into part
services and part commodities on the basis of input-output tables.
54

India was the first developing country to establish poverty reduction targets using operational
measures like the share of the population or numbers of people to raise above the poverty line.
Estimates of the poverty line were made in 1962 as part of the 3rd Five Year Plan and werebased on rupee budget that would guarantee 2250 calories a day with a small allowance forother expenditures. The Indian Community Development Program was associated with thepoverty goal and both were loosely parts of Lyndon Johnson’s War on Poverty, not an accident.
62

The tradable-non-tradable distinction simply added construction to services toobtain non-tradables, hardly a firm breakdown as construction workers are mobile as aremany overseas contractors. And tradables are not necessarily items that a country in fact
trades. Not surprisingly the relationship of tradables and non-tradables to per capita GDP
is parallel to that of commodities and services.
Priced and non-priced services were described in Phase I as other services andequal productivity services. The latter compared wages for a specified type of labor, likeskilled manual, as an input price used to obtain PPPs. In correspondence Colin Clark in
April 1980 recalled his previous observations that there were large differences between“currency-conversion factors for services valued on price and those valued on labour
input”, for the United States and low income countries. Clark wrote further that priced
services contained both commodity components as well as labor but that it was doubtful
if input-output tables had enough detail to estimate the proportions. He carried out an
exercise assuming commodities formed one third of priced services to see how this would
impact of the Phase II results for India, Korea, Japan and the United States. The total
effect would be to push down the estimates for non-priced services in India and Korea
and up for Japan and the United States. In his illustration the total effect would be to lower
India about 3 percent compared to the United States in 1978, that is 3 percent of 7.4
percent.
We did a number of experiments on alternative ways to value general government,
health and education in preparing the Phase III report. For example, we studied the scoresof foreign nationals taking the examination of the Board of Foreign Medical Examiners, a
Philadelphia based group who administered an examination across many countries. This
exam replaced the pre-WW II practice of certifying foreign nationals to practice in the
United States based upon the rating of medical schools around the world. This experiment
was an attempt to rank countries by their quality of medical training. We reported but did
not use these results because of the issues posed by the exam being used by someforeign medical schools as their terminal exam, and the fact that the exam was in English,
so the playing field was not really even.
In the medical area, the main set of non-priced services were those of hospitals. It
was possible to obtain direct measures of bed-days per 1000 persons in many countries
but it was thought quality of service was highly variable across countries. Robert Barro at
one meeting noted that medical services in Kenya were very inexpensive and asked ifthat is where he should go for his brain surgery, a rather telling way to make the point that
it is hard to hold quality constant. Direct pricing of a hospital bed-day was not simple toobtain because of the mix of payment arrangements in different countries, nor would sucha price necessarily hold quality constant. We did try to control for quality by asking dataon the capital, buildings and equipment per employee, in education, government andhealth, but we only obtained data for a small number of lower income countries, more forhigher income. As a consequence whatever adjustments that were made involved
estimates for countries without data on relationships between income and medical capital,a bit of a tail chase.

63

Measures like time with patients was also considered as a quality measure but thisbecame a slippery slope. A doctor in a rural clinic in India may see 100 patients a day
making rapid diagnoses and dispensing antibiotics and other common pharmaceuticals.
Whereas doctors in the United States might see 10 or 20 a day. Does that make the US
doctor more productive than the Indian doctor? Many would say no, the Indian doctor ismore productive because her immediate impact on the health of her patients is greater.
Primary and secondary levels of education have the input side as well as possible
measures of output in terms of total students at each educational level, number ofgraduates and the like. Eurostat and the OECD now use a quality adjusted measure of
total students where the quality measure is based on the performance of students in PISA
(Programme of International Student Assessment) tests carried out by the OECD. Some72 countries took part in PISA in 2015. However, for most developing countries, there are
a number of issues including enrollment versus attendance (by both students andteachers). Often education budgets are based on enrollment only. Where countries reporttest results, the sample is unclear because there is little information on whether theschools are representative or are mainly urban and private. As a consequence there isno easy way to apply the PISA country results without more knowledge of the samplingframe.
The World Bank took considerable interest in our efforts and some of their staff
wrote memos including Paul Isenman (1979) who questioned the application of ourtechniques to Africa. Isenman noted that poor countries in Southern Africa commanded
higher skill differentials than India where there was more human capital. He also argued
that capital was often complementary with labor and so it was important to take accountof this as we attempted to do in Phase III. In 1976 Robin Marris, whose brother Stephen
had been one of the Associates with Gilbert, left Cambridge to head the Economics
Department at the University of Maryland. The Bank asked Robin to provide a critique ofcomparison resistant services and other aspects of our ICP reports. Marris (1979)
experimented with excluding all medical and government employees and measuring
education by the number of pupils versus number of teachers adjusted for education. He
found these changes had no appreciable effect on the resulting GDP per capita
regardless of country or per capita income. These results were based upon the 1973 dataof Phase II. We made a major effort in Phase III to improve our estimates for thesecomparison resistant services, and we think our estimates were more plausible thanPhases I and II.
B. The Contributions of in-kind Aid in the form of Advisors
We have mentioned the in-kind contribution of Japan to the UNSD in terms ofyoung professionals who brought statistical and computational skills to the ICP. The ICP
also received in-kind contributions from the UK Ministry of Overseas Development in theform of recently retired statisticians who advised participating countries. The contributionsof Angus (Harry) Fell in Sri Lanka and Robert Oswald in Syria, Kenya, Jamaica andMalawi were particularly welcome. The two were very different, Oswald a quiet person by
nature, but very effective in getting the statistical offices to provide the necessary
expenditures, prices and other worksheets in a timely fashion.
64Angus was more outgoing, almost flamboyant but equally effective. I had first met
him in the Bombay Yacht Club in 1960. At that time there was prohibition in Bombay soWilma and I were using up our monthly permit of alcohol (it being allowed because it was
the custom in our country) at the bar where we met Harry. He had just been doing
preliminary tabulations of the Malaysian census on his Kurta calculator.55 We would meetagain in Hong Kong in the mid-1980s where he was consulting with the statistical office
on how to value the investment flow when land was reclaimed. 56 Later Finn Forsyth wasmade available to the UNSD to assist in Phase IV.
This in-kind assistance was especially valuable because 18 new countries werebeing added in the Phase III comparisons, ten from poorer countries. It would have beennearly impossible for the UNSD and the Penn group to adequately cover these additionalcountries without the in-kind assistance. Similarly Fukui and Watanabe who followed
Kawasaki were instrumental in moving software from Penn to New York.
C. Augmented Binary Comparisons
It was planned to have binary comparisons of each country with a regional linkcountry and with the United States. However, as the price data came in some binary
comparisons were very thin in that only one item matched in a basic heading and in somecases there were basic headings where both countries submitted prices for several items
for a basic heading but none matched. So the basis for traditional binary comparisons of
all 561 pairs of countries for 1975 was fairly weak. In 1979 I had returned to Penn frommy year at UNSD, and Hughes Picard from the French National Institute of Statistics andEconomic Studies (INSEE) had been hired by UNSD to direct ICP operations and to helporganize the 1980 comparisons. Picard was a first class statistician and had ICP type
experience representing France at many EU meetings. Picard suggested a way to
overcome this lack of matching prices for a number of basic headings in Phase III.
Picard’s idea was to introduce binary comparisons that were based not just on theprices each country provided, but also on some CPD prices that could be calculated fromthe CPD estimates carried out for the multilateral comparisons. If country A had a pricefor an item and country B did not, then we would add the CPD price for that item for
55

The Kurta calculator was made in Lichtenstein as the company switched after WWII fromwatch making to producing cylindrical precision calculators for engineers, surveyors orcontractors in the field. It was great for tabulating census data at the site of collection fromhand written forms submitted each evening. I bought a Kurta in the early 1960s, which I
occasionally bring out to demonstrate to grandchildren how tough life was in our time.

55 I met Harry Fell for the third time in 1984 in Hong Kong when we were both visiting theStatistical Office, perhaps 15 years after his retirement from the UK CSO. Harry was there to
consult on a national accounts issue and I to discuss Hong Kong’s participation in the 1980 and1985 ICP comparisons. In a bar at the end of the day Harry asked me if we were still using the“Mighty Genghis Khan” method at which at first I drew a blank. It finally occurred to me that
Harry was asking about something Bob and I had done in the latest version of PWT which was
to do a Geary-Khamis aggregation over both space and time which we had termed the mighty
G-K. I said Harry do you mean when I have been retired as long as you I will still be worrying
about index number problems? He just smiled, which turned out to be a prophetic smile.
65

country B. And if only country B had a price for an item, we would fill in the corresponding
CPD price for country A. When this was done for all possible binaries, then the available
price tableau for the 34 countries would be augmented. The resulting binary comparisons
we termed augmented binaries.
The rationale then was to correct for the sparse matching of available prices foreach binary comparison from the original price submissions of the Phase III countries.
Earlier I have argued that there is not necessarily bias in the use of CPD estimated prices
because they are neutral depending only on the prices from other countries. We didpresent all possible binaries for GDP, consumption, investment and government, but did
not present detailed binary comparisons except with the United States.
Our conclusion was that the traditional and augmented binary comparisons werehighly correlated with each other and with the multilateral comparisons. However, there
is a systematic relationship between binary comparisons and multilateral comparisons,namely binary comparisons for lower income countries were systematically lower thanmultilateral results. The reason is fairly clear. In binary comparisons with the United Stateseach country has equal weight, whereas in multilateral comparisons as we carried themout, the United States had much more weight. The larger weight of US prices would raise
per capita GDP of lower income countries compared to a binary where both sets of prices
have equal weight.
It is fair to say that augmented binaries did not make a big splash and to myknowledge they have not been used since Phase III. However, it is worth pointing out thataugmented binaries have some of the characteristics of the method employed in theEuropean Union. The European Union uses all prices of representative items in country
A so long as country B considers the item representative or commonly available. Further
for non-EU countries augmenting binaries has some possible research interest. For
example, in applying the GEKS approach at the basic heading level and then aggregating
the Fishers by GEKS or a weighted GEKS.
D. Analysis of the 1975 Results
Several simple analytic exercises were carried out in presenting the Phase III
results as the larger number of countries and wider range of economies allowed more
scope for inquiry than in the previous rounds. A schema employed throughout the report
was to group the countries into six income groups and to present variables by country
and group average. For example, Table 1 in Chapter 10 of the Phase III report (Kravis,
et.al. 1982) showed that the average price level for the lowest income group for services
was 16 percent and rose to 33 percent in group II, 41 percent in group IV that included
Italy and Spain, and leveled off to near 98 percent for group V with the United States as
100 in group VI. Parallel tables examine price indexes by summary expenditure groups;
for tradables and non-tradables; and for similarity indexes.
(1) Bridge Country Binaries

66One exercise involved comparing original binary comparisons with the UnitedStates with the same indirect binaries through bridge countries in each region. For
example we used both India and Malaysia as star or bridge countries in the Asia region.
We compared the implied binary comparison of each Asian country with the United Statesusing India as the bridge and then Malaysia as the bridge with the direct binary with theUnited States. The results appeared very sensitive to the reference country. When India
was the reference, the indirect quantity per capita relative to the United States was 24.9
percent compared to the direct binary of 19.5 percent, a difference over 20 percent. Most
differences were closer to 5 or 10 percent in Europe, under 15 percent in Africa and Latin
America. These results were at the GDP level.
When the indirect binaries were carried out at a more detailed level the results
were usually closer to the original binary (37 of 50 observations). This point is importantbecause in the 2017 ICP the plan in early 2016 was to combine both new and extrapolated
prices. Our results suggest that the more detailed level, perhaps 40 summary headings
would be preferable to aggregations at higher levels like consumption. The othercalculation was to see how different were the results using the two different reference
countries for each region at the GDP or more detailed level. Countries had differed lessfrom direct binaries for 22 of the 34 countries consistent with the above results.
(2) Demand Analysis
In the earlier reports we had run individual regressions of real quantities on pricelevels and per capita income with mostly the expected negative elasticities on price (28of 30 summary headings) and all positive on income. These results were gratifying but
hardly unexpected. Usually the outlier headings were residuals where the quantities may
be large because the expenditures have not been allocated to the appropriate headings,
for example “other expenditures”. With 34 countries slightly more ambitious explorationsof demand were possible.
Summers took the lead exploring the possibilities of first moving from single
equations to estimating generalized least squares. With 34 countries only a limited
number of expenditure headings could be used. We tried 4 and 7 large headings like food,clothing, shelter and the like and the results were as expected. The next step was to try
estimating a simple demand model, namely the LES or linear expenditure system, overconsumption. An interpretation of the system in the context of countries is that there is aminimum subsistence bundle and a representative consumer in each country. Equations
are estimated simultaneously for food, clothing, shelter and other so that total
expenditures sum to income and all countries (representative consumers) can purchasethe minimum bundle.
The results allowed us to tell a story and show that the results compared to thecomparable G-K estimates using super-country and equal country weights. The LES isbuilt up from expenditure shares, not totals of consumption, so it is more comparable toequal country weights. We were glad to have carried out these exercises and they were
duly noted by others but did not become a mainstream ICP activity. One standard set of67

indexes that we published were picked up by others were price and output similarity
measures. Let me discuss this with respect to price similarity indexes.
A price matrix was created for each country where the basic heading price level
was expressed relative to the average for each country weighted by the real expenditureof each heading. A correlation matrix was run for all pairs of countries that we termed aprice similarity matrix and that we used for other analysis. It was structured the way one
might expect, namely the closer were countries together in income the higher was theirprice similarity index. Theil (1985) in a review article on the Phase III Report was
supportive of the ICP and detailed empirical work producing the basic heading parities.
However, he was critical of Chapter 9 both for its measure of similarity and the use of thelinear expenditure system as a demand model. Theil thought he had both an alternative
similarity measure and better demand system. Other reviewers of the 1975 ICP weremore sympathetic to our analysis and the underlying price parities and expenditure detailthat were provided.57
E. Estimates for non-benchmark years
As with the earlier reports we compared the benchmark estimates for 1975 forthose ICP countries in 1970 that had adequate deflators for domestic absorption. The
reason to use the sum of domestic investment, consumption and government is because
it is conceptually similar to the benchmark estimates provided in the first phases of the
ICP. That is we aggregated over domestic absorption and then added on the net foreignbalance at the average price level of domestic absorption over all countries, basically its
international price. A conceptually better way would be to further extrapolate PPPs or
price levels for summary headings to a later benchmark year and then aggregate the newdata to domestic absorption. (This was not done in Phase III but did become the approachin the PWT).
We also argued that this method of extrapolation at the level of domestic
absorption was preferable to GDP extrapolations because export and import priceindexes are often subject to large errors that become embodied in GDP deflators. The
principal results show the extrapolations in current prices of the 1970 benchmark to 1975
for 15 countries (Hungary did not have the necessary deflators). The ratio of theextrapolation to the 1975 benchmark was between 98 and 102 percent for three countries
counting the United States; the ratios were less than 98 percent for eleven countries and57

Armstrong (March, 1983 Economic Journal) was kind enough to refer back to Peter Hill’slaudatory review in 1976 of the Phase I report and conclude, “The task of dealing with morecollaborators and processing more data has in no way detracted from the quality of the work
and, of course, the results are all the more powerful and interesting.” Paul Samuelson (1985)
in commenting on the 1984 Nobel Laureate in Economics, Richard Stone, mentions thecontribution of the Stone-Geary linear expenditure system and mentions favorably its use in
the 1975 ICP. In the interest of transparency, Summers and Samuelson were brothers but it
was only later that they acknowledged this in print. Both Bob and his younger brother took
their mother’s maiden name when they pursued economics as they did not want to trade on
the acclaim their older brother had already received.
68Iran was114 percent above the United States. So there was a definite pattern that theextrapolations underestimated incomes compared to the 1975 benchmark on averagewith less understatement for the richer countries. We tried to find a story to tell that would
explain these results, but none seemed satisfactory.
We tried a similar exercise extrapolating from 1970 and 1975 back to 1950 for theseven European countries and the United States. The Netherlands was the only country
differing by over 10 percent when either the 1970 or 1975 benchmark was used. And as
is common, the closer are two years together the less difference between extrapolations
and benchmarks. That is extrapolations to 1950 were on average closer moving from1970 than from 1975. Eurostat had begun building time series for their countries after the1980 ICP (Krijnse-Locker and Faeber, 1984)
F. A Digression on 1980
During late 1979 and early 1981 Simon Goldberg retired and Svein Nordbotten
from Norway replaced him as Director of the UNSO. I returned to Penn from the UNSD
in the summer 1979 and Hugues Picard was hired to be Chief of the ICP section. Picard
was on leave from INSEE where he had worked on many issues including consumer
prices and had participated as a French representative in many Eurostat meetings. By
1980 we had distributed the Phase III report to all the countries for their reactions thatwere shared with the UNSD and Penn. In addition Picard was responsible for
implementing the 1980 ICP and we would often meet to discuss issues particularly thoseconcerning countries with which we had worked or countries we had visited with respect
to their participation in the 1980 round. Another development concerned Eurostat. In
1977 the internal candidate favored to succeed Jaques Mayer as Director General ofEurostat was Paretti but an outsider, Aage Dornonville de la Cour, was chosen. De la
Cour tried to have Paretti appointed Deputy Director General, but that was opposed evenby the Italian cabinet, but he did put him in charge of three Directorates in 1979. This
ended unhappily with Paretti and others leaving Eurostat in 1980.
(1) China’s Purchasing PowerA US economic delegation went to China in October 1979. It included authorities
on China Dwight Perkins and Robert Dernberger as well as Lawrence Klein, who would
receive the Nobel Prize in 1980, and Kravis from Penn. Kravis had flown as a logistics
officer on flights to China during WWII and had a personal as well as professional interestin visiting China as it began to open up.58 At the time the Chinese yuan was pegged at
1.94 per US dollar, and no one knew how close China’s PPP would be to the official
exchange rate. Armed with ICP item specifications and worksheets Irv spent much of his
58

Irv was with logistics for the well-known Flying Tigers commanded by General Claire
Chennault, who was a retired US Army Air Force officer who worked in China as a militaryadvisor to Chiang Kai-shek since 1937. Irv kept an autographed photo of Chennault in his
office and was always happy to answer questions about his experiences with the Flying
Tigers, whose distinguished airplane nose art of a shark baring its awesome teeth was awell-known icon for boys growing up in World War II, like myself.
69

time with guide and translator in China’s shops for consumer goods; or in offices obtaining
national accounts, education and health information, and talking to experts on machinery,
construction, transportation and government.59
Kravis had to wait a few months to obtain some of this information from China but
was able to include a report as an appendix to the main report. The reference year chosen
was 1975 and Chinese prices were stable over the years to 1979 for most items, so it
was not difficult to move prices backward. Kravis had taken specifications for items that
the United States had priced for 1975 in anticipation of doing a China-United States binary
comparison. He circulated that report to a number of economists who worked on China
and did some revisions that appeared the following year (Kravis, 1981). Generally
multilateral comparisons will provide higher estimates for lower income countries
compared to binary comparisons. Adjusting for this factor, Kravis was able to compare
the 1975 Phase III estimates for other low income countries with China.
Most critics regarded the Kravis numbers for China as too high. In any event there
was great interest in the estimates especially at the World Bank where they generated
much discussion. Further, the previous estimates for China by Hollister (1958) were outof date and they were from the production side whereas the Kravis estimates allowed
comparisons with comparable countries. The fact that Irv’s estimates were based on
direct price comparisons reinforced the importance of PPP based comparisons. By thistime Sultan Ahmad (1983) had joined the World Bank and carried out a price collection
experiment in China with a 1980 reference year. It is fair to say that Kravis’s Chinese
exercise was a catalyst for research on both the Chinese economy and PPP
comparisons.
(2) The Hill ReportPeter Hill had been hired as a consultant by the ECE, Eurostat and the UNSD to
make recommendations regarding Phase IV. Hill was to address aggregation methods
and to examine different ways of linking the regions in the 1980 ICP. Around 60 countries
were expected to participate in Phase IV from the different regions and a method, most
likely different than used in Phases I-III, was needed. Hill (1982) in the published versionof the report incorporated the comments on his draft from a meeting in London, October
16-17, 1980 (Hill, Haeder from ECE, Nordbotten and Picard from the UNSD, and Clarke,
la Cour and Krijnse-Locker from Eurostat attending). At that meeting it was accepted thatthe method of aggregation to be used was the G-K though the Eurostat was to review the59

We were amused by Irv’s experience buying towels. As was usual in this period in shops a
crowd would gather to see what a foreigner was buying. Our specification for towels called
for the weight of towel per square meter, about which the shopkeeper had no idea, so Kravis
asked him to weigh and measure it. The crowd was amused but not the shopkeeper
because Irv did not buy the towel. As a further aside, it was at the time it was common in
Kenya for price collectors to actually buy such an item to assure it was a transactions price,and later the goods were donated to charity.
70

matter, perhaps because Paretti, the most important decision maker, had left a vacuum
when he resigned from Eurostat earlier in the year.
Hill was in favor of a weighted aggregation method, a view we were most happy tosupport. A major difference arose due to the practical problem that the European Union
completes and published its comparisons within two years of the completion of its pricecollections. Thus for 1980 Eurostat published its comparisons by 1982, whereas the otherregions would not complete their data collection for several more years. Eurostat did notwant their published results for the European Union to be changed by the addition of nonEU members because they were used for administrative purposes such as the allocationof the structural funds. There might have been more room for negotiation on this issue of
fixity if all countries were on the same time schedule. Kravis (1986, p.8) continued toargue against fixity even after it had been become institutionalized in EU regulations.
(3) Other Meetings
Eurostat made a commitment to comparisons for seven French speaking countries
in Africa for 1980 and held a meeting on February 26-29 in Luxembourg with country
representatives and Picard from the UNSD. Eight English speaking countries from Africa
also participated, typically coordinated through visits from Picard or seconded former staffof the UK Statistical Service. There was a concerted effort to cover the major regions ofeach country including both rural and urban areas especially among the Francophonecountries.
The Japanese government provided funding for a meeting of the ESCAP countries
in October 1980 in Bangalore, India. ESCAP, ESCWA, the ADB, and several aid
organizations were represented. (Pic 44 ) The Indian Central Statistical Organization, theKarnataka State Statistical Organization, ESCAP and I (in place of Picard who was
occupied with other meetings) set the agenda. Twenty countries were represented from
Lebanon to Fiji. Unfortunately only seven of these countries were to participate in the1980 comparison as part of Asia (Australia, Korea and Japan were through the OECD),
one less than Phase III, Syria dropping out. The meeting served the purpose offamiliarizing many statisticians in the region with the results of the Phase III comparison
and with the data requirements and methods of the ICP. Paul McCarthy was therepresentative from Australia and was later to be involved with ICP work at the OECD.
After leaving the OECD he became involved with the 2005 ICP as a member of theTechnical Advisory Group (TAG), and would chair the TAG during the 2011 ICP.
Bellagio again lent its facilities to the ICP in December 1980 for a session on thetreatment of services. I had undertaken much of the research and writing of the chapter
on services in the Phase III report and drafted an agenda. Country representatives were
there from Brazil, France, Hungary, India, Japan, Poland and the United Kingdom. Peter
Hill, Richard and Nancy Ruggles, the Penn group, as well as experts from Eurostat, ECE,ECIEL, the IADB and the UNSD, were also in attendance. Alternatives to the Phase III
methods were discussed for general government, medical and health services. An
attempt was made to obtain cost estimates for different types of hospitals but too few
countries supplied the necessary data so the fallback was made to salary comparisons71

for different medical occupations again using the assumption of equal productivity for thesame job description. For general government and education salary comparisons werealso made by job description with allowance for years of schooling.
(4) The Latin American Region
A meeting was held in Rio-de-Janeiro in January 1979 at the Getulio Vargas
Foundation, which at that time produced price indexes for Brazil while the central
statistical organization, IBGE, did national accounts, censuses and the like. Preliminary
meetings took place in November 1978 in Washington, Philadelphia and New Yorkbetween representatives of the Getulio Vargas Foundation, ECIEL, ECLAC, the UNSD,
the World Bank and the IADB who sponsored the Rio-de-Janeiro meeting. The purposeof the United States and Rio-de-Janeiro meetings was to find a way to integrate the 1979
PPP comparison for Latin America with the ICP Phase IV comparison for 1980. The
meeting was organized by ECIEL with Dinesh and Janos De-Sousa from the Getulio
Vargas Foundation and Jorge Salazar-Carrilla from ECIEL. I was at the UNSD at the timeand attended the sessions with Carl Otto, who had replaced Murray. Proximity of themeetings to the Copacabana beach was a not unpleasant aspect of this mission.
The price collection was organized in a similar manner to earlier exercises in Latin
America, namely urban and with all countries supplying prices for all items. Seven Central
American and Caribbean countries were included with the nine from South America so it
was a bit of a stretch to expect the items chosen to be representative for all the countries.
Because Portugal and Spain were taking part in the Eurostat comparisons in 1980,
consideration was given to linking through these countries. However, that did not provefeasible.
Frank Orlando was the representative of the IADB in Rio-de-Janeiro and had
written his dissertation at Indiana on index methods and had convinced us that theiterative approach was a much more intuitive way to estimate the G-K system. It was
faster to compute G-K iteratively and easier to explain the steps to those unfamiliar withthe system. When all elements of the PPP and expenditure matrices are positive, it
typically took five to six iterations to obtain results differing at the fifth decimal place.
The father of Laura Kingston, a staff member at the Getulio Vargas Foundation,
was a civil engineer who suggested a method of handling construction that was similar tothat adopted by Eurostat. This was the bill of quantities approach that broke down
construction projects into component materials and tasks like land preparation, pouringfoundation, footings, external shell, and the like. Both the Kingston approach and theEurostat approach required professional input of architects, civil engineers or quantity
surveyors to produce their cost estimates per square meter. The approach used at Pennalso employed professionals to estimate unit costs of whole buildings, though in fact when
Samvit Dhar relied on building cost manuals, he in effect built up his estimates from costsof components.
(5) The 1975 EU Report72Earlier we mentioned that the EU comparison for member countries was not
published officially but in the French journal, Analyses, under the names of Paretti,
Goybet and Krijnse-Locker. The 1975 EU report (Eurostat, 1978) covered eight of thenine member countries, the three accession countries, Denmark, Ireland and the United
Kingdom, and five of the six original members, Luxembourg still absent. The majordifferences between the superlative aggregation indexes, like GEKS or Van Yzeren, and
the G-K is that the latter is additive at the cost of ignoring the substitution effect between
basic headings. In estimating the 1975 results Eurostat adopted still another approach,the Gerardi method (1982 and Eurostat, 1978, pp. 26-35).
Greece was an EU associate in the 1960s and gained accession in 1975 andmembership in 1981. Gerardi was an Italian staff member at Eurostat and well trained inmathematics and statistics as was his Greek successor Avdoulous. Gerardi strongly feltthat in judging the PPP between any pair of countries, the importance of either country
should be equal or in his terminology, equal-distant. This was a position of Drechsler(1973) who Gerardi cites as an influence on his ideas. Gerardi was also influenced bymeetings with van Yzeren in 1977 and the two planned to write a joint paper, though that
did not happen (Balk, 2008, pp. 47-8). Balk (2008, p.255) terms the method Gerardi-Van
Yzeren because both characterized their approach as that of tourists or immigrants
looking at different ways to judge the cost of living in two places.
One important aspect of Gerardi’s presentation is that it was in purchasing power
standards (PPS) meaning that no single country was the reference country but rather all
eight EU countries were the reference. There are several ways to compute this, including
taking each country as the reference and then averaging the results. A more general
method is illustrated in Table 2 where we have used the 1975 exchange rates to the US
dollar and PPPs for women’s shoes from the Phase III report for illustration for the EU
countries.

73

Table 2

XR to US $1975

XR/Mean XR
on PPS basis(1) / 5.421(PPS)

Women’sshoes
PPP / US $(PPP)

Women’sshoes
PPP / PPS(3) / (2)

Women’sshoes
PL PPS(4) / 5.997

(1)

(2)

(3)

(4)

(5)

Belgium

36.78

6.785

37.4

5.512

0.922

Denmark

5.746

1.060

5.2

4.905

0.821

France

4.286

0.791

8.25

10.434

1.746

Germany

2.46

0.454

2.53

5.575

0.933

Ireland

0.45

0.083

0.754

9.082

1.519

Italy

652.85120.441

620

5.148

0.861

Netherlands

2.53

0.467

2.77

5.935

0.993

UnitedKingdom

0.45

0.083

0.31

3.734

0.625

5.977

1.000

Country

GEOMETRIC
MEAN

5.421

Column (1) provides the exchange rate to the US dollar for the EU countries andits geometric mean. Column (2) expresses the dollar exchange rates as PPS by dividing
each exchange rate by the geometric mean of column (1). We next take the PPPs per
dollar for women’s shoes in column (3) and convert these to PPS dividing by column (2).
Finally we normalize these by dividing by the geometric mean of column (4). The UnitedStates is convenient but unnecessary in the example and we could have eliminated twoof the five columns.60 The Penn group resisted expressing results as the average of all
countries mainly because as discussed in respect of Table 1, the UNSD and the WorldBank expressed all their tables in US dollars. However, it clearly made great sense for
the European Union because it was not politic to privilege the currency of any one
member country. At first glance one might ask why not make it even easier and average
the PPP of shoes directly across the eight countries and leave out the exchange rates

60

That is we could have begun with country shoe prices for women in national currencies anddivided by the geometric mean of the exchange rates and then obtained column (5).
74

altogether? The answer is that if one of the countries does not have a PPP for a basic
heading, not usually an EU issue, then it becomes less straight forward.61
From the point of view of presentation Gerardi’s approach was more general than
we had used in our ICP publications. In this regard, both the 2005 and 2011 ICPs havepresented their price levels and PPP converted expenditures at both US and world prices.
Turning to the Gerardi additive method, it can be described as follows. For each basic
heading the PPP and price level was expressed relative to all the member countries. The
nominal quantities for Girardi are the national currency expenditures converted at thegeometric mean of exchange rates of all countries. The nominal quantities were thenvalued at each countries PPP for a basic heading relative to the average for that heading.
PPP converted values for each basic heading can then be added to whatever aggregate
desired and aggregates can also be summed just as in the G-K system.
The Gerardi method does not take account of the difference in relative prices
across basic headings. Looking at Column (5) of Table 2 the price level for each basic
heading is 1.0 so the Gerardi-Van Yzeren system allows no substitution between basic
headings arising from relative price variation. In contrast, the Van Yzeren method does
allow such substitution and is not additive. The European Union adopted the GEKS
aggregation method in the subsequent comparisons of their member countries. We did
not include the Gerardi in our comparison of methods in the Phase III report mainly
because it was unknown to us till meetings in Luxembourg in the late 1970s. We didcomment on Gerardi’s paper in print, which sets out our differences (Kravis, Heston andSummers, 1982a). In retrospect we were rather stubborn in our views and in discussions
with our Eurostat colleagues at this time, fundamentally because we were strongly in favorof weighting countries by their economic size, whereas the European Union was for equal
weighting. Along with Peter Hill (1982) we thought that the results of binary comparisonswere given too much importance by many of our critics without justification when thenumber of countries was three or more. Despite the high decibel count at some of ourmeetings, there was always mutual respect and cooperation and many a pleasant dinner
together with our colleagues at Eurostat.

61

Consider estimating basic heading PPPs when the reference country is missing prices for all
items in a heading. Then in the CPD estimates the next reference country will be takenalphabetically and the coefficients estimated for the remaining countries. Those coefficients
will be off by a constant from the coefficients that are in line with other basic headings. In the2011 ICP this situation arose in a number of regions. When prices are converted at the
average of exchange rates of all countries, then the problem does not arise. I am indebted toSergey Sergeev for educating me on this point.
75

Chapter 6: Estimation of GDP of Non-benchmark Countries andSectoral Output
At the same time that Phase III was being published and Phase IV was being put
together, two derivative research activities were being developed. The first was theextension of the expenditure estimates of GDP to countries that had not participated in
ICP benchmark comparisons but had adequate national accounts data. Mention has
already been made of the hundred-country-paper published in the Economic Journal thatwas based on the 16 countries of Phase II and covered one year, 1970. This was followed
by further releases that incorporated the 1975 benchmark and added more years, morecountries and some disaggregation of GDP that became the PWT. The second derivative
set of studies centered at the Groningen Growth and Development Center (GGDC) at the
University of Groningen established by Angus Maddison after he took a Professorshipthere in 1978.
A. Origins of the Penn World Table
Summers liked to squeeze as much knowledge as possible from new informationleaving as little as possible unused. This was the spirit of the CPD method and the raisond’être for developing the PWT. The approach is illustrated from the hundred-countrypaper where we moved from the new information, the price level and real GDP of 16
countries in 1970 to estimates for more than 100 countries based on estimating
equations. Most of the explanatory power of the regression equations came from
regressing ln PPP converted GDP relative to the United States against the ln of exchange
rate converted GDPs, designated r and n. In our preferred version, we used ln n and ln
n2 and a measure of openness of economies (exports + imports)/GDP and a measure ofprice isolation for the period 1963-70. The latter was the mean squared difference
between the inflation rate of a country and the world inflation rate for the period 1963-70.
With only 14 observations (Hungary and Colombia did not have all the variables) it isdifficult for additional variables to obtain much statistical significance when n alreadyexplains over 90 percent of the variance in r. The coefficients on the additional variables
were of the right sign and equal or greater than their standard error which we took as
support for our formulation.
The estimates for the non-benchmark countries were subject to errors of 20
percent or more which are large, but not compared to the errors of using exchange rate
conversions versus PPP conversions. We also tried two approaches to estimating nonbenchmark countries for 1973. One method was to compute a regression for 1973 as wasdone for 1970 and use it to estimate the 1973 non-ICP countries. We also used national
growth rates of domestic absorption from 1970 to 1973 adding on the net foreign balance
for 1973 to obtain the 1973 estimates of GDP. Our arguments for preferring the latterapproach seem less convincing than they were at the time.
In Summers, Kravis and Heston (1980) we broke down GDP into consumption,
investment, government and the net foreign balance. We used an equation to obtain thereal shares based on nominal shares and per capita GDP relative to the United States forthe 16 benchmark countries that assured that the sum of the shares equaled domestic
76

absorption. An important finding of the ICP is that nominal and real shares differ acrosscountries by per capita income, and this is captured in our system of equations. We used1970 as the reference year and presented a constant price series of GDP per capita from1950 to 1977 and a current price series adjusted for changes in the terms of trade. We
then valued the net foreign balance at the international price of domestic absorption in
the constant price series. The methodology employed required that a country havecurrent and constant price national accounts at least at the level of consumption,
investment, government and exports and imports. This totaled 119 countries, excluding
one benchmark country, Hungary.
Kravis was helpful in subsequent versions of the table but had moved on to otherprojects more closely related to international trade. He was especially interested in
exploring further explanations of national price levels now that there were more degrees
of freedom associated with Phase III. This work was done with his colleague, Robert
Lipsey (Kravis and Lipsey, 1983). Kravis was always responsive when asked by theUnited Nations, World Bank or others to advise, participate in meetings or write an article
concerned with the ICP (Kravis, 1986), but by the mid-1980s he was engaged in otherpursuits. One of his many interests was income distribution and we did use ICP data to
examine this issue (Kravis, Heston and Summers, 1984). At the end of the day Bob andI ended up developing the PWT carrying on much of the earlier work with Sultan Ahmad
and of course Irv.
In the 1980s we brought out two new versions of the Table, the first based upon
both the 1970 and 1975 benchmarks (Summers and Heston, 1984 and 1988). Both ofthese versions of the PWT were published in the Review of Income and Wealth which at
the time was edited by Nancy and Richard Ruggles as a labor of love. They also had
been among the founders of the International Association of Research on Income and
Wealth (IARIW) that published the Review and held regular conferences every two years,
typically in Europe where most of member resided. Users wanted digital access to theTables so we took on the thankless activity of selling tapes of the data between 1984
PWT 3 and 1988 PWT 4. The Ruggles were very supportive of dissemination of the PWT
and other data sets and in this regard Richard offered us a deal that we could not resist.
Previously the Review had printed the PWT for all of the countries, variables, andyears covered, that is the 30 years in PWT 3. What Richard proposed for PWT 4 was todistribute the Table in the form of a machine readable diskette in each issue, and only
provide one year of the printed version. In fact, it took three diskettes for the 121 market
economies 17 variables and 26 years covered in PWT 4, which all had to be hand stuffed
into sleeves in the back cover of each issue, a task that involved the two daughters of the
Ruggles.62 Forward looking as this method of data distribution was, it drove librarians up
the wall because the diskettes kept disappearing from their journal issues. Hopefully, theculprits shared the contents of the diskettes with others so Richard’s vision was partially62

I only learned this at a memorial for Bob in 2012 at the first IARIW conference in the UnitedStates in Cambridge in conjunction with the National Bureau of Economic Research summer
workshops. After the dinner and speeches Patricia Ruggles reminded me that the task of
stuffing the sleeves is well etched in her memory 28 years later.
77

realized. Fortunately technology moved right along so by the time the next version of the
PWT was prepared, a less labor intensive version of distribution was available.
PWT 4 utilized the benchmarks for 1970, 1975 and 1980 as the basis for estimating
the reference year per capita figures for 1980. By this time 67 countries had participatedat least once in the ICP and we wished to utilize as much of this benchmark data as
possible. Sixty countries participated in ICP 1980. The seven that did not had participatedin ICP 1975. They were Jamaica, Mexico, Romania, Iran, Syria, Malaysia and Thailand.63
Our approach was to use estimates for consumption, investment and government for1980 for the 60 countries of the 1980 ICP; and, for the 34 in 1975 and the 16 in 1970,
extrapolations to 1980. Bob used an errors-in-variables model to try to assign errors tonational growth rates, to benchmark estimates and to their covariance. The purpose wasto arrive at weights to generate an estimate for 1980 as the reference year from the totalof 110 benchmark observations and extrapolations for each. Bob termed the process
consistentization, which, once she heard it, Anita Summers said that word was not to beuttered in the house again. Son, Larry, was not against the word itself, but as Chief
Economist of the World Bank in 1991 and even before, he did advise his father not tomess with national growth rates.
B. The Beginnings of the ICOP Studies at Groningen
Angus Maddison (1926-2010) was well known to Irv because he was at the OECDat the time of the Gilbert-Kravis project. Maddison was Assistant Director of the Economic
Development Department at the OECD from 1966-71 and held a number of consultant
positions until he moved to the University of Groningen in 1978. Maddison hadcorresponded with Irv and me about the ICP and followed our work. Angus always had
some reservations about (or aversion to) our multilateral approach and our handling ofservices: the former reflecting a strong preference for binary comparisons, and the latter
substantive concerns. His interests were oriented to total production and historicalmeasures of GDP per capita in a comparative perspective. One of the early projects of
his GGDC focused on the International Comparisons of Output and Productivity (ICOP)
program.
ICOP started out with studies that converted sectoral output in different countries
by PPPs to a common unit, beginning with the manufacturing sector. For some sectors
like agriculture the FAO had measures that would allow direct quantity measures, while
for construction, the ICP estimates could be used. The service sectors are difficult for
ICOP and ICP, but ICOP has done a number of service sector studies on retailing andrelated activities. The advantage of a comparison of the manufacturing sector is that itallows comparison of worker and total factor (with physical and human capital measures)productivity because the data source typically provides value of output, units of output

63

In fact Mexico did collect price and other data for 1980 but chose not to have their results
published for reasons that were not explained to me. We felt that the results for Mexico for1980 were superior to any extrapolation so we used them in PWT 4.
78

and labor force. Censuses of manufacturing are a standard data source; they vary infrequency, level of detail with respect to items, and coverage of plants or companies.
The conversion factor for national currency values is a PPP derived from unit
values, that is, the value of production divided by the number of units produced. The usual
criticism of unit values is that often the number of units can cover a wide range of qualities
or capacities that may differ across countries. If the item is broadly defined like electricmotors, then it may contain pieces ranging from 1 to 5 hp. If the mix is roughly the sameacross countries, this type of heterogeneity is not a real problem. But if for some reason
some countries specialize in low horsepower motors and other countries in highhorsepower motors then use of unit values as prices may lead to systematic under oroverstatement of PPPs. Studies have verified that the more detailed the classification ofa manufacturing census, the closer will unit values be to prices.
A number of Ph.D. students and staff at Groningen who worked at the GGDC
carried out productivity studies for particular sectors or countries contributing to the
expansion and improvement of ICOP studies since their initial papers circa 1983 and theirfirst data set in 1987. Adam Szirmai was in the Faculty of Economics when Maddison
joined Groningen and interacted with the ICOP group though his principal focus is onsocial development and inequality which he now pursues at the UNU-Merit and theMaastricht Graduate School of Government. Bart van Ark joined the graduate program in1981 and became a Ph.D. Researcher 1986-87 and spent 1988-90 as a Research Officer
in London at the National Institute of Economic and Social Research continuing researchon productivity. His dissertation compared productivity performance in ten countries from
1950-1990 becoming an important ICOP study.
We had talked of trying to reconcile the ICP and ICOP estimates and Dirk Pilat
spent a semester with us at Penn with that being one item on the agenda. With good faith
on both sides, progress was nil. Dirk’s dissertation work was oriented to productivity
comparisons but at the OECD he soon became involved with the contribution of IT toproductivity as did the ICOP. He now heads the Science and Technology Division at theOECD.
Bart van Ark succeeded Maddison as Director of the GGDC, as Angus became
more involved with historical studies. As the PWT began to build a historical data set backto 1950, Irv would often joke with Bob that he would next want to go back to the Holy
Roman Empire. Angus Maddison of course beat us to it going back to the Roman Empire
and earlier. In later chapters we will touch further on the legacies that Maddison andKravis left in terms of more recent developments of the ICOP and the PWT.

79

Chapter 7: ICP after Penn - Regionalization and 1980 and 1985
Comparisons
The organization of the 1980 and 1985 ICP benchmarks ushered in theregionalization of the program. ESCAP was the center for Asia and the Pacificcomparisons and as mentioned earlier a meeting was held in Bangalore, India, to discuss
the time schedule and data demands on the countries. The Economic and Social
Commission for Western Asia (ESCWA) talked about participation of its countries but fora variety of reasons did not participate in 1980. Eurostat again organized participation ofcountries in Africa as part of their technical assistant missions to improve statistics informer colonies. Eurostat hired a number of African nationals in Luxembourg including
Michel Mouyelo-Katoula from Cameroon who would become Global Manager of the ICP
for the ICP 2011. We have mentioned the ECIEL 1979 and its ECLAC update to 1980
that formed the basis for Central and South America. Eurostat carried out comparisons
for its 13 members with Israel pricing the same product list, Austria coordinated theparticipation of Finland, Hungary, Poland and Yugoslavia, and finally the OECD joined
the 1980 ICP retrospectively bringing in Canada, Japan, Norway and the United States.
Picard had coordinated much of the 1980 comparison at the UNSD, but hereturned to INSEE in 1982 before all of data were processed. I was an Advisor at the
Pakistan Institute of Development Economics in Islamabad from June 1982 to January
1983 and a candidate to replace Picard as Chief of the Price Statistics section at the
UNSD. An offer of a two year appointment with the option to continue arrived in December
1982 and I joined the UNSD again in January 1983. By this time the UNSD had moved
to DC-2, a just completed building on East 44th Street adjacent to the Secretariat. An
office issue arose immediately because my new rank called for three windows and sothey arranged for such an office looking East onto the brick wall of an older building. I
said I preferred an odd shaped but slightly smaller office with only two windows but very
good light and an unobstructed southern view, a battle I easily won because both offices
were vacant at the time. By this time the computer capability of the Division was quite
adequate and most of my time was devoted to completing and writing up the 1980
comparisons and planning for the 1985 ICP round.
Y. Kurabayashi was Director in this period and my immediate supervisor was
Madhu Palekar who primarily worked on national accounts. Samvit Dhar was at the UNSD
at this time along with Roshan Traku, both part of my section. My section also included
work on methodology of time to time price indexes and the principal researcher on thiswork was Wolfgang Schubert, who fortunately did not need my advice or supervision.
I also assisted the Committee on Reduction of Military Budgets (UN Department
of Disarmament,1986) that asked for countries to submit a breakdown of expendituresand prices for some representative items for personnel, equipment, installations (airfields,
ports and the like), fuels and maintenance. The Committee wanted to convert thesenational expenditures by PPPs to estimate comparable quantities across the eight
countries who responded to the survey, Australia, Austria, Finland, Italy, Norway,
Sweden, the United Kingdom and the United States. Of these countries only Italy
practiced conscription which posed an interesting problem. As a consequence of80

conscription the PPP for compensation for Italy was unusually low compared to the othercountries. But also the expenditures on compensation were low so that one got the correct
quantity of personnel dividing expenditures by salaries.
If no adjustment were made, there would be a distortion because the relative sharein lira for Italy would be less compared to other countries with a volunteer military. The
correct way to deal with such distortions would be to raise both the compensation
component of Italy’s military expenditures (and government and GDP) and to adjust
salaries to what Italy would have to pay if there were not conscription. I think theCommittee rightly thought this was an effort not justified by the likely difference it would
make to the numbers or to their audience. Bettina Aten and Heston (1993) were to use
the results of this study to extend the estimates of real military expenditures from theseeight countries to a much larger group of 134 countries, quite a stretch.
A. The Integration of the OECD into the 1980 ICP
Picard was involved with the coordination of the UNSD with the work being donein Austria, Luxembourg and Paris. The hard work of item matching and coding for the
new countries had been completed before I rejoined the UNSD in 1983. The expenditure
distribution and conceptual framework was similar to previous ICP rounds. However there
was one knotty problem that arose for one of the important participants, the United States.
1. The Problem Posed by the US CPI Revision in 1978
In 1978 the BLS introduced the revised CPI that changed the price collection
protocol among other procedures. It was no longer a simple matter of obtaining pricecollection forms (with outlets deleted) from the BLS or of obtaining special collections
outside of catalog prices. In the field the BLS price collectors would have a checklist for
one or more Entry Level Items (ELIs) which are basically ICP basic headings. The
collector would ask a store manager which were the volume sellers, of say soft drinks,and check off the size, type of container, type of drink (sports, carbonated) as well as
location and type of outlet. As long as the same item was the volume seller the next
month, the BLS had the price ratio between time t +1 and t that could be appropriately
weighted to get a time to time index. But only by searching the checklist responses could
one determine what item was actually priced.64
Because the system was fairly new to BLS staff in 1980 and more so to OECD
staff, the method to obtain US consumption prices was a trial and error process that was64

As noted the BLS uses the term Entry Level Item in the same way that the ICP uses basic
heading. Within the ELI there are clusters from which ICP items are described on the clusterchecklist. The checklist provides a set of characteristics or specification for a particular goodor service. One can think of ICP items within a basic heading as a clusters within an ELI anda particular item as a cluster of characteristics.
81left to Michael Ward.65 Ward (Pic 29) had been hired as consultant to work on OECDparticipation in the ICP and was given the task of obtaining US consumption prices fromthe BLS, a task that was also very much in the interest of the UNSD. We undertook thiswork together in a windowless space that the BLS provided for us to extract prices fromthe checklist responses of Chicago, New York and Seattle. As I recall we spent three longdays going through the files and did come up with a large enough number of item priceobservations to permit 1980 US participation. Because Canadian and US markets arevery homogeneous with respect to specifications including brands and outlets, often US
prices were linked through Canada in arriving at OECD parities for some basic headings.
In subsequent ICP rounds the work is done by the BLS essentially matching OECD
specifications with items in the CPI files. The digital access was much improved so thatthe work has become less labor intensive I would guess. One of the ironies of the revised
CPI framework is that it appears at first to make it much more difficult for the BLS to makeplace to place comparisons within the United States compared to the previous CPI.
However, Kim Zeischang (Pic 40) of the BLS saw that a hedonic variation on the CPD
approach would in fact produce estimates of price levels in each of the CPI centers foreach ELI. The variation is that the checklist characteristics are added to the right handside of the CPD equation so as to tighten the specification.
By going through all of the checklists and pulling out prices along with the set ofcharacteristics of the item within a basic heading, one can estimate the basic heading
price level for each CPI center. There are weights to aggregate the basic heading parities
to totals like food, clothing or all consumption. Zieschang had three researchers carry out
this exercise (Kokoski, Cardiff and Moulton, 1994) with Philadelphia as the reference CPI
center. Their work showed that the procedure was feasible but it was not taken up as
continuing activity by the BLS in part because budget requests to do a special survey
were not approved. The reason to request budget for an additional survey was that somein BLS price statistics believed that spatial PPP studies really required a different
sampling frame than was used in the CPI. Since it was highly likely that such an additional
funding request would be turned down based on past experience, perhaps it was morethat the BLS at the time really did not want to be in the business of producing spatial priceindexes.
One thing is clear. Some of CPI items that are quite suitable for time to timeindexes are not suitable for place to place comparisons. A memo of understanding wasreached in 2003 to allow the BEA to begin to make use of the revised CPI data base to
estimate regional price levels to convert state incomes to comparable volumes. The BEA
team led by Bettina Aten (Pic 19) began to estimate hedonic CPD equations of the typethat Zieschang’s group in the BLS estimated a decade earlier. (Aten, 2006 and Aten,
Figueroa (Pic 50) and Martin (Pic 32), 2011) This is when anomalies began to show up.
For example Bar Mitzvah catering for 50 guests could be used in a single center because
65

Michael and I first met when I was invited to give a lecture on the ICP while in Tokyo at theUnited Nations Statistical Institute where Ward was teaching an eight week session on
International Statistics.
82

the collector would be returning to the same catering service each period. However,across the CPI cities it was a checklist specification that apparently leaves room forinterpretation because price differences of several hundred percent could occur across
CPI cities. However, the CPI data base is so rich that such items could be dropped leaving
more than enough overlap across cities of the remaining goods and services that robust
estimates of most basic heading parities could be obtained.
(2) Putting Together the OECD and the 1980 ICP WorldThe ECE holds a Conference of European Statisticians each year and in 1979 they
approved a European Comparison Programme in response to the regionalization of the
ICP. The ECE only provides a forum for discussing methods and results and does notmake estimates themselves. There were 18 European countries in the 1980 ICP, 12 being
the Group I countries that were members (or in line to be) of the European Union. Austria
was included with Group I to provide a link between the Group I and Group II countries
by means of binary comparisons of Austria with each of the Group II countries, Finland,
Hungary, Poland and Yugoslavia.66 With strong encouragement from the European
Union, the OECD agreed to join the 1980 ICP but data collection for Canada, Japan,
Norway and the United States did not begin until 1983. As part of the OECD effort Norway
became the 18th European country in the 1980 ICP. The ECE issued its report in 1985
and the ICP report was published in two parts in 1986 and 1987 (UNSD and Eurostat).
The ICP world comparison for 1980 had to be assembled after most of the regions hadcompleted their work. The arrangement worked out was that the UNSD received basic
heading prices for 20 countries representing all the regions. One aspect of moving toregions was that the classification systems were not standard across regions in 1980 so
it was necessary to standardize them in order to compute CPDs for example, causing still
more delays. The EU system was adopted because the largest number of countries werealready using it.
I was at the UNSD by the time the core price data were received by the UNSD so
we proceeded to estimate CPDs across the core countries. The next step was to linkthese to the remaining countries in each region. For example Kenya and Senegal were
the two African core countries. We took the geometric mean of their price levels withrespect to the United States from the core CPDs and with respect to Africa from theirregional CPDs for each basic heading. If the price level was 40 percent with respect tothe United States for a basic heading then the price level of each African country would
be multiplied by 0.4. The same was done in each region to provide a full matrix of pricelevels for all 60 countries for all basic headings.67
66

The European Free Trade Association was formed in 1960 consisting of Austria, Denmark,Finland, Portugal, Sweden and the United Kingdom. Austria, Denmark, Portugal and theUnited Kingdom were EU members or candidates by 1980. That left Norway and Finland tobe linked to the OECD through Austria.

67

In the 2005 ICP a better method was used for the linking of the 18 Ring countries to theirrespective regions. It was developed by Erwin Diewert and is described in the ICP Manualon the World Bank website.
83We next aggregated the price levels and expenditures to GDP using the G-K
method and super country weights as in Phases I to III. The total GDP for each region
was summed up from the G-K results for each country in a region. Fixity within regions
was preserved by allocating the regional total to each country according to the distribution
in the regional aggregation. This procedure was used in the 2011 ICP and termed theCountry Aggregation and Redistribution (CAR) method.
B. The 1985 ICP Round: Plans and Implementation
Plans were developed for the 1985 ICP round in meetings in 1983 and 1984 while
I was still at the UNSD. Regionalization of the 1980 ICP made it clear that linking theregions was a major issue that required advanced planning so that it coincided with theprice collecting activities of countries. In planning the 1985 round it was proposed that
there be a set of 30 core countries that make detailed binary comparisons with partners
in different regions. Ideally this would have provided for two to three binaries between
each pair of regions. In addition Austria would continue to participate in the EU-OECD
comparisons along with the Europe Group II; and Japan would participate fully in the
ESCAP regional comparison and the OECD comparison. Any of the core participantsfrom poorer countries would need separate funding for their special price collections.
(1) The Best Laid Plans
Missing the academic environment I chose to return to Penn in the Fall of 1984.
Fortunately Lazlo Drechsler (1929-1990) joined the UNSD as Chief of the ICP section
from 1985-89. Drechsler had a strong background in PPPs having worked in the
Hungarian Statistical Office and having written several papers on methodology. He coined
the word characteristicity as a criteria for choosing items to match in price comparisonsand the phrase comparison resistant services. Drechsler and I had both participated inplanning for Phase V and he fully understood what was involved in implementation of the
ICP. Further Lazlo knew his way around the UNSD because he had done work for the
ECE in 1964 where he was involved in developing the 1968 System of National Accounts(SNA) and producing correspondences with the Material Product System (MPS) used in
the Soviet Bloc countries at the time. So Lazlo joined the UNSD eminently prepared plus
he had a close relationship with Kravis, who continued as an advisor to the UNSD.
Unfortunately there were a number of constraints facing the 1985 ICP that were notanticipated.
The first problem was UNSD funding for travel by countries to ICP meetings, forassistance to core country candidates for carrying out extra price surveys and for hire of
consultants in technical areas like construction and capital equipment. By 1985 thenumber of possible core countries had gone from 30 to ten and in the end the only binarythat was completed was between Kenya and the United Kingdom. The links of Austria to
the Group II countries and the OECD remained along with the link of Japan through theOECD to ESCAP countries.
(2) The Latin America Problem84

No countries in South America participated in the 1985 ICP in large part becauseof their experience with the 1980 round. The prices and expenditures were collected in1979 by research institutes affiliated with ECIEL and not the statistical agencies in theircountries with whom the UNSD communicated. ECLAC did update the basic heading
parities and expenditures to 1980 but without the national governments participating. So
when the 1980 results were released the countries quite rightly asked questions about
how the results were obtained, questions to which in many cases ECLAC was unable torespond. My view is that there was little enthusiasm in the countries to take part in Phase
V and without their interest ECLAC was in no position to seek funding.
The European Union did support the participation of seven Caribbean countries
and these comparisons were completed. However, despite efforts by Eurostat, linking tothe other regions was not carried out so in the report (UNSD and European Union, 1994)
there were only 56 countries shown in the tables, not the 64 that participated. The seven
Caribbean countries were reported separately; and Nepal, which only reported
consumption, was also not in the final tables.
(3) Leadership
Lazlo worked very hard to complete Phase V and organize Phase VI receiving little
funding from outside the United Nations and also with little support from the then directorof UNSD, William Seltzer. Seltzer, a US demographer, was an internal candidate and weoverlapped briefly during my UN days. Bill faced many pressures in UNSD to accomplish
more with less and he certainly found the open-ended character of the ICP somethingthat was easy to relegate to a low priority. Then in 1988-89 Drechsler contracted cancer
leading him to return to Hungary in 1989. He suffered a painful year in Hungary before
and died in November 1990. An equally tragic loss to the ICP was the death of Hugo
Krinsje-Locker (1928-1990) from acute Leukemia in September 1990. In 1989 Hugo left
Eurostat to join Eurocost, an institution that he had helped establish that would bid forcontracts to undertake price surveys. They began with a contract to undertake the African
ICP price surveys for Eurostat for the Phase VI comparisons, a project that Michel
Mouyelo-Katoula directed. Drechsler’s position was not filled, one further step of the
UNSD away from operational involvement in the ICP. I think by the 1990s there was an
influential group of economic statisticians in administrative positions that were ready to
see the ICP fade away. Eurostat contracting practices68 came under increasing scrutiny
in the late 1980s and 1990s, which impinged on morale. Fortunately this did not affectEurostat cooperation with the OECD and together they were a substantial force forcontinuing the ICP, even if all their member countries were not.

68

The scrutiny came to a head in September, 2003 when Yves Franchet was transferred toanother position, ending his 16 year tenure as Director of Eurostat. It was claimed that a partof some contracts was being set aside in a slush fund with a murky audit trail. The defenseof the practice was that Brussels was so slow in processing payments that some slack wasneeded in order for Eurostat to do its work in a timely fashion. No evidence of personal gain
was provided unless you count purchasing membership in riding and volley ball clubs andexpensive restaurant meals as personal gain.
85

86

(4) Picking up the pieces of the 1985 ICP
The two major difficulties to be faced in putting together the 1985 ICP related tolinking the regions and at what level of detail. With Drechler’s departure the decision wasmade to ask Eurostat to carry out the computations, which sounds straightforward until
one gets to the details. The Caribbean problem was already mentioned and if we had
been consulted, we would have suggested that it would be worth a try to take advantageof the fact that Jamaica took part in both the 1975 and 1985 comparisons, which we didin the PWT. In the PWT we also included Nepal for 1985 at the level of consumption,
investment and government using similarity of real and nominal national currency shares
in GDP and the similarity of the consumption PPP to that for all of GDP. Certainly Antonis
Avdoulous, who replaced Gerardi and did the computations for Eurostat for 1980 and
1985, would not have been expected to make those type of adjustments even if hethought they were sensible.
Linking of Group I and II countries in Europe was at a detailed level but not so forJapan and ESCAP, which was done at the level of GDP, a second best solution compared
to using whatever detailed breakdowns are available. Another compromise in the 1985
report was to provide detailed PPPs and expenditures for 53 headings of which only 40
were not included in other aggregates, whereas much more detail was available for manyof the regions. Probably this decision was made because that number of headings wasleast common denominator available for most countries, a common enough practice.
Our position has always been to use as much detail as is available for each country
but not to show any detail that is implicit in the aggregation procedure that is used. For
example, suppose footwear expenditure and price data is available for men, women andchildren for many countries but only footwear as a total for the rest. We would keep thedetail for all countries, even though the implicit expenditures for some countries will be
imputed proportionately or as in similar countries for those who have provided only totals.
Our argument is that keeping the detail can only improve the comparisons and has noclear downside.
The Phase V report was published in 1994 with even more of a lag than the Phase
I report and about the same time that Eurostat-OECD were releasing their 1993
comparison. Not surprisingly this caused much concern about how the ICP should be
carried on in the future. We address a number of these concerns in Chapter 8 that covers
some other developments of the 1980s and 1990s including the unhappy life of Phase VI
of the ICP.

87

Chapter 8 Exit and Voice
This chapter takes its title from the Albert Hirschman book Exit, Voice and Loyalty(1970) that contrasted reactions to deteriorating quality of service by firms, governments
and non-profit institutions. The complaints, or voice against the United States Postal
Service (USPS) declined when United Parcel Service (UPS) provided an exit for bothletters and parcels. Further the USPS in fact was able to improve the quality of its service
as a result, perhaps by the example of UPS. An historian colleague and I administered amajor in International Relations (IR) at Penn for many years with no home department,
no office, no budget and a program that lacked quality but had a great deal of student
interest and voice because students did not want to exit to another major. One of ourstudents described the lack of administrative support for IR to his parents who rewarded
this voice with an endowed chair and other funding to improve the IR major, which it did.
This chapter pursues the exit-voice analogy with respect to the ICP experience at
the global level, especially in the late 1980s and 1990s. After 1980 when the OECD joinedwith the European Union in PPP comparisons there was a significant number ofdeveloped economies participating. In addition the CMEA countries continued theircomparisons until the breakup of the Soviet Union in 1990. At this time Hungary, Poland
and other countries sought to join the European Union while the OECD was expanding
its technical assistance in national accounts to many of the Commonwealth of
Independent States and Eastern European countries. Even while the scope, quality andfrequency of Eurostat comparisons was increasing and the OECD was becoming more
active, there were core OECD countries that were questioning the program.
A. The World Bank and the ICP in the 1980s
The ICP is directly under the DDG69 which in turn answers to the Vice President
for Development and Chief Economist, a position created for Hollis Chenery in 1972 that
he occupied until 1982. Jean Baneth (Pic 7), a career World Bank employee directed the
DDG from 1980 to 1989. Baneth completed a special international M.A program at Yale
during my time there so we were acquainted. He initiated some in-house studies of theimplications of using ICP results in an operational way and organized a meeting on thesubject in Easton, Maryland, in May 1983 that was mentioned earlier. The setting was avery pleasant inn on the Chesapeake Bay but the meetings themselves were lesscongenial for Summers and myself.
There was a major meeting in Luxembourg in November 1983 on the completionof Phase IV and the organization of Phase V. A similar meeting was held in Bellagio in
September 1984 to insure that the core countries for the 1985 ICP were on schedule tocomplete their binary comparisons. This was my last meeting as a UN staff member
before I returned to Penn. At the meeting Baneth offered me a position at the Bank, which
at one time I might have been interested, but not then. He asked me to suggest someone
else and I immediately recommended Michael Ward since the position among other69

Data Development Group is presently administered by Haisan Fu (Pic 22). It was formerly
known as the Department of International Economics and by other names.
88things concerned national accounts, which happily Michael accepted. It became clear at
this and other meetings that Baneth would continue to say that the ICP was valuable andto provide some resources for related research projects but was quite set against any
practical applications within the World Bank.
As mentioned earlier we were not in favor of country loan status being tied to ICP
results because we thought it would create incentives for countries to manipulate theirprice submissions to make their countries look poorer. However, the position of a country
in the GDP per capita scale in the ICP depends on the price submissions for all countries.
So when one country chooses to price in high end outlets or choose the most expensive
brands as India did in 1985, it can indeed make India look poorer. The 1985 estimate,
however, showed that Bangladesh was 10 percent better off per capita than India, an
unbelievable, unwanted and embarrassing consequence.70
However, Irv in particular thought it was inexcusable for the World Bank to
distribute freely its glossy World Bank Atlas based on exchange rates, sometimes
averaged or adjusted where there were dual markets. We argued that certainly PPP
conversions for benchmark countries or approximations for non-benchmark countries
were much closer to the “truth” than exchange rates. When Stanley Fischer became Chief
Economist in January 1988 Irv’s pleas found a more sympathetic ear. And by Spring of1989 Baneth was out of DDG and instead was director of the Geneva Office of the World
Bank. His successor, John O’Connor, was from the IMF Statistics Office and notparticularly sympathetic to the ICP. He definitely was not friendly to the PWT, which was
being put to use in some international publications like the Human Development Report.
At some time during John’s period as head of DDG a policy was called to my notice that
if available international organizations would only use each other’s estimates and not
those of outside sources.
B. The Philadelphia Meeting, August 1990
Twenty-Five Years of the ICP: A Review and Future Plans was the name of themeeting held at Penn with the support mainly of the World Bank and with some logisticalsupport of the UNSD. Kravis served as meeting convener and the venue was the newly
completed Executive MBA center of the Wharton School that was next to the Economics
Department building so at least for us the arrangement worked well. William Seltzer was
Director of the UNSD from 1986 to 1994 and as mentioned earlier had in our view given
little priority to the ICP. Seltzer attended the meeting along with two other staff while
O’Connor, D.C. Rao, Michael Ward and Sultan Ahmad represented the World Bank.
70

India is but one example. China was not in the ICP at this time, but during the decades when
its reported annual growth rates were 10 percent or higher and in the United States they
were 3 percent or lower China by official figures never gained on the United States. And
when China participated in the ICP they also sought to appear poorer than they were.
Sometimes countries want to appear better off for national pride I suppose. When Italy
revised its national accounts upward by over 10 percent a representative proudly declared
they were now above the United Kingdom per capita to which the United Kingdom
representative replied that Italy could now contribute more to the EU Social Fund.
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Antonis Avdoulos, Pietro Benedetti and Kanti Munnsad of Eurostat attended while David
Roberts was the only representative of the OECD. Munnsad, who coordinated the Africancomparisons of Eurostat, in affect represented Africa.
Loh Mongkow represented ESCAP, Pedro Sainz- ECLAC, Michael McPeak andFrank Orlando the Inter-American Development Bank, and Simon Nocera the IMF.
Katrina Reut and Michelle Vachris of BLS, who provided US prices to the OECD, andHermann Haberman from the Office of Management and Budget, which is the closest
thing to a national statistical office, also attended. Albert Franz from Austria, thecoordinator of the Europe Group II countries in Europe, and Drechsler took an active rolein the discussions. There was an agenda involving a review of previous benchmarks,
reports from the regions, discussions of methods, and issues in linking the regional
results. The ICP handbook draft that Drechsler had initiated was discussed along with the
major issue of funding.
A sub-agenda concerned the overall organization of the ICP and what should be
the role of the UNSD. Phases IV, V and VI all suffered from the fact that the UNSD was
tasked with coordinating the global ICP comparison which required more initiative,
funding and management than the UNSD could muster. When the ICP began to be built
up from regional comparisons, strong central coordination was needed to insure that there
was common coding of items and global ICP basic headings across regions. And if
regions chose to have a smaller or larger number of basic headings than the global norm,
they would be consistent with the global ICP number. These conditions were only
achieved in Phases I-III of the ICP and in the 2011 ICP.
While the meeting endorsed this role for the UNSD, it was not all clear that it would
happen given the leadership in the UNSD and the importance attached to the ICP by the
UN Department of Economic and Social Affairs. Hermann Haberman, who attended only
the last afternoon of the meeting, also expressed a very negative view of the whole
program. Since Haberman was to succeed Seltzer as head of the UNSD in 1994, thiswas not an encouraging omen.
Another tension that became clear at this and many other meetings was between
the statistical offices providing the ICP data and the potential users of the results. Most
potential users were growth or policy economists that normally were unaware of theparticipation of their own statistical offices in the ICP. The argument that the ICP could bejustified in a country because it enhanced their statistical capacity both in national
accounts and price indexes was generally accepted especially for lower income countries.
Another plus for the ICP was the growing number of journalists that began to use PPP
conversions for consumption or GDP comparisons in their articles lending support for thebenchmark comparisons. My overall view of the meeting was that there was reason to be
pessimistic about global ICP prospects including its own self-inflicted wounds, forexample, poor communication with countries and untimely dissemination of results, andthe negative views of some statisticians, who rightly found it a difficult program toadminister in a way as to make their constituents happy. And reason to be sanguine about
the future of ICP because of the very solid programs of the European Union and the90OECD and the growing use of PPP converted aggregates by the media, textbooks, andresearchers.
As noted Drechsler succumbed to cancer just three months after the meeting.
Further Irv Kravis was diagnosed with Parkinson’s disease in 1990 leading to a somewhat
reduced activity level in terms of advising the ICP.71 For example, Irv had been invited toattend a conference in Nagoya, Japan in November, 1990 but elected not to go and I
attended in his place. Kravis had retired from teaching but continued to attend the officeat least three days a week until late in 1992. He was designated a Distinguished Fellowof the American Economic Society in 1992 and died at the airport in Philadelphia where
he was catching a plane to the Annual Meetings to receive the award. The ICP lost its
founding father, Penn and its economics department lost a very good citizen, and all who
knew him lost a warm, congenial and effective human being.72
An ICP Handbook had been given high priority by the UNSC as were all technicalmanuals related to the activities of the UNSD. The ICP Handbook was begun by Hugo
Krijnse-Locker and Lazlo Drechsler and after their deaths Michael Ward had brought
together a first draft that was distributed to a wide group of PPP experts. I was then asked
to revise the Handbook taking into account the comments on the first draft. The Handbook
was published in English in 1992 and subsequently in the other five UN languages. As
events unfolded little use was made of the Handbook because, except for the ECLAC
countries, it was late for the 1990-93 benchmarks and by the time the 2005 benchmark
was underway a much more thorough version began to appear online.

71

Irv and Lilian Kravis had four children, none of whom took up economics, but two did follow
Lilian, herself a distinguished pediatric allergist, into the medical profession. In addition to
standard medications, recently treatment of Parkinson’s has included emphasis groupevents such as singing or dancing, and generally keeping active. Lilian pushed Irv very hardto keep active, which was certainly in the right direction.

72

Irv had a very good sense of humor and knew when to use it, as the following illustrates.
Much to his irritation a group of faculty, including myself, had petitioned to remove the thenprovost for not consulting them on a unilateral change in the rules governing graduate
student fellowships. A typical academic tempest in a teapot. As president of the faculty
senate, Irv, having cut short a meeting in Luxembourg on the ICP, returned to chair ameeting of the Senate to determine the degree of faculty support for the petition. It was atense meeting broadly breaking down into a senior group of faculty supporting the provost,quite a distinguished scholar, and a younger group of faculty. At one point a senior medical
school department chief called out one of his younger colleagues for supporting the petition
at which point Kravis said that we need to talk about the immediate issue as there is notenough time for us to settle within department differences between colleagues. After that themeeting did focus on issue at hand and voted to censure the provost who then resigned.
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C. A Digression on Kravis, Summers and Penn
The University of Pennsylvania today is an Ivy League institution within a group
informally known by that name as early as 1933. Whereas the Ivy League is now known
as an elite group of institutions with high academic standards, this was only partly thecase prior to the 1950s. For one thing standards of admission were much lower in earlier
periods with strong preferences for athletes, alumni and men. Several schools were allmale into the 1960s though often associated with sister schools who similarly began
admitting men. Athletics was a big business with Penn being nationally competitive into
the 1950s and the Game between Harvard and Yale a major athletic event for other thanstudents and alumni.73 In 1954 the Ivy League became a Division I athletic conferencewith the agreement that scholarships were not to be awarded to student athletes. This
meant that top athletic prospects generally went to other colleges and universities andthe Ivy League was no longer competitive in football, the big money sport. From 1948 to1953 Harold Stassen was President of Penn which he used as a stepping stone for his
candidacy for the Republican nomination for President. This reflected the nature of Penn’s
Board of Trustees all of which slowly changed after 1954.
Penn and Philadelphia had some special features notably a Quaker influence but
a history of discrimination as captured by Digby Baltzell in his popularization of the term
WASP (White Anglo-Saxon Protestant) in his writings about Philadelphia. Digby was a
popular member of the Sociology Department at Penn, who I knew and with whom I
played squash from time to time. When I joined Penn in 1962, Digby was incensed that
one of his young colleagues was prevented from joining the Philadephia Cricket Club
because he was Jewish. A number of departments were Waspish at the time but not so
Economics, which thanks to some open and supportive Quaker faculty in the 1930s, had
a number of notable Jewish students and faculty at the time included Kravis, Kuznets,
Summers, Levine, Malenbaum, Weintraub, Bloomfield and Larry Klein.74 As noted, Milton
Gilbert had been a graduate student at Penn, and before going to OECD, had shaped the
National income program at BEA with much support from Kuznets.
It was a small social faculty in the 1960s and Wilma and I and other WASPs werea part of weekend dinners and other events all of which slowly faded away in the 1970s
73

Penn played football at Franklin Field which for many years also hosted the professional
Eagles of Philadelphia. Lest one think all was athletics, contemporary with construction ofFranklin Field the University built a large museum across the street housing majorarcheological artifacts from Alaska, Sumer and other Middle East sites as well as Central
American excavations.
74

During the McCarthy witch hunts in the 1950s Dan Thorner an economist specializing inIndia had been a victim who left Penn in 1952 for India pursuing research, publishing 3
books on Indian Agriculture, teaching in India as well as advising the Planning Commission.
In 1962 he joined the École des hautes études en sciences sociales in Paris where hefinished his career. Klein, who had joined the communist party in the 1940s, and was forthis reason was denied tenure at Michigan in 1954 after which he joined Oxford. Kravis was
instrumental in recruiting Klein to Penn in 1958 where he was awarded the Nobel prize in
1980.
92

as the faculty grew larger. I was also half time with a South Asia department that had
been created almost single handedly at partition and Indian independence by a wellknown Sanskrit scholar, W. Norman Brown.75 Norman and his wife Helen, who had spent
several years in France during and after WW I, were both Quakers, and their cocktail
parties brought together a very diverse group. Norman was well known for his capacity todrink martinis and his great knowledge of baseball.
As I got involved with the ICP, I came to know Bob and Irv much better both sociallyand in a research environment. Irv, if not a mentor, was a model of the focus needed tosee research through to its completion. Irv would be willing to hear out some of thesuggestions that Bob and I would offer, but never lost sight of the goal and when it shouldbe met. When Irv and Lilian Kravis traveled with the Summers, Bob and Lilian were quite
laid back about time whereas Anita and Irv would display anxiety or even some irritation
with the others if they thought they might be late. Opposites attract I suppose.
When the research was going badly as it did in Black February, Irv had acharacteristic mannerism. He would slowly take off his glasses and systematically rub hiseyes and then slowly return them to his face. If a meeting was moving toward a decision
he was against or someone made a proposal that he thought unacceptable he would go
through the same ritual. I never knew whether this was Irv’s way of stifling an outburst,
his way of collecting thoughts, or simply an automatic reaction to an unpleasantdevelopment.
Bob and I did our share of university service but nothing like Irv who I do not believe
ever turned down a request to serve on or more often chair committees outside thedepartment. He was also instrumental in moving the economics, political science andregional science departments outside of the Wharton school in 1970. When Wharton was
founded in 1881 it was the first business school in the United States and included an
economics department, a geography department (becoming regional science under
Walter Isard), and a political science department. Irv’s argument was that the three
departments mainly taught students in Arts and Sciences with perhaps 20 percent in
Wharton, with undergraduates applying separately to each school. Kravis’s position was
it made educational sense for the departments to be in Arts and Sciences. Wharton
colleagues responded that it would be a costly move for our pocket books, and they wereright.

75

When I joined Penn there was a great deal of collegiality across schools and departments
and members of the Wharton Faculty and the Department of Oriental Studies, for example,
often had lunch with each other. George Taylor in the Wharton industry department, who
was nationally known in part for negotiating the settlement of the national steel strike of
1959, once was attending a University Museum lecture by Samuel Kramer, who was aneminent Sumerian scholar and an entertaining speaker. At the reception after the talksomeone cornered Taylor and asked George why isn’t a famous labor specialist like you
called “eminent” like your friend, Kramer? Alas, this kind of interaction also faded away
during the 1970s as the faculty grew in size.
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There are many stories about Bob’s way of illustrating points in his lectures that
often stuck in the heads of students. He liked to illustrate moving to a limit by likening it
to emptying a tube of tooth paste where no matter how much you squeezed there wasalways an iota left in the tube. One engineering student long after graduation sent him atube that she claimed had been vacuumed empty. He would also illustrate tradeoffs ineconomics by saying on the one hand this, and the other that, where he would place one
hand under his suit ala Napoleon.
Bob and I had many discussions together with our research assistants and he had
two pedagogical tools that he used to get the assistants more involved in the research.
One was to ask a new recruit to carry out some calculation and when they discussed it
Bob would compare it to the result that another assistant had previously carried out. Not
surprisingly this irritated some new recruits but usually they came to appreciate theimportance of checking their results. The other ploy was to ask an assistant to carry out
a calculation and to sit down with Bob and the results. Bob would not look at the output
but rather ask the assistant what they expected to find, and why, which typically requiredconsiderable discussion. Only then would they both look at the output together. In theseconversations and many other contexts he would often say “I would have thought…,”
which usually meant that what you previously said was at best partly right or outrightwrong.
The three of us had a pretty good sense of when a result was doubtful or simply
could not be correct, which Bob referred to as the sniff test. In the Making of Index
Numbers, Irving Fisher (1922, p.353) lists a criterion for the plausibility of an index number
formula as Absence of Freakishness, which when dealing with a very large number offormulas, as Fisher did, is like Bob’s sniff test. The value of emphasizing the plausibilityof results has become more important because students tend to think that if a result
comes from a computer computation then it cannot be wrong. Whereas data input, output
statements and coding are but a few sources of freakishness.
Bob described some of his experiences growing up when he and his brother Paul
(Samuelson), who was seven years older, were together. Paul would ask Bob to argue
one side of a debating question and after he had lost, they would switch sides, and Bob
would lose again. Tough brotherly love. Bob and Anita instilled in their three sons at dinnerand other occasions the notion that they needed to be able to argue for their ideas, andthe notion that when something is big or small they needed to ask the question, compared
to what?76 The eldest, Larry, was on the debate team in high school, and I got to knowboth Larry, and the youngest, Johnny, in those years playing tennis. As Larry became
known for his economic skills, Bob described being introduced to George Schultz at an
economics conference where Schultz said “oh yes, you are Larry’s father”. In relating thisit was clear Bob was proud of Larry but also thought it humorous he was no longer justPaul’s brother but had a new distinction. Not many could wear both hats so gracefully.

76

Nancy Birdsall gave an endowed lecture at Penn in honor of the Summers’, and referred totheir sons saying one became a doctor, one a lawyer and the third went into the familybusiness.
94

Ending this digression on a personal note, my marriage to Wilma (1935-2016)broke up in the late 1980s. By the early 1990s Bettina Aten and I had begun living
together and became domestic partners ten years later. We met on the squash courts
and I was later to learn after multiple defeats that she had been five times Brazilian
women’s champion. After completing her MBA at Penn she returned for a Ph.D. inregional science and began an academic career before joining BEA in 2003. While inacademia she continued to work on PWT and did all the programming and computing of
PWT 6.0 in 2002.
D. The Unhappy Life of the Phase VI Global Comparison
In the planning stage of Phase VI the reference year was to be 1990 but it soon
became apparent that only the European Union and the OECD would make that date.
(The 1990 comparison was the last of the five year EU-OECD comparisons. The threeyear comparison cycle started in 1991.) There had been a major effort to develop a core
set of prices that would be collected in all the regions. Sultan Ahmad and I were involved
with drawing up a core list and codes. However, there had never been an agreement
about countries providing their prices to any entity other than the region. The UNSD was
supposed to be the central coordinating office, but no initiative was taken to obtain prices
directly from the countries or regions as far as I can remember. Perhaps this was because
prices were never available for all regions for the same year. So despite building a
blueprint for having a large number of item prices for common items collected by countries
across all regions, Phase VI essentially became a series of regional comparisons.
1. The Regional Comparisons
The sequential character of the regional benchmarks posed major problems for
producing a global comparison. That said, the regional comparisons represented a larger
and more balanced group of countries than any previous benchmark, a total of 115. For
the first time ESCWA was able to complete comparisons for nine countries, counting
Egypt and Palestine. And the ECLAC region was well represented by eight countries from
Latin America, Panama and twelve from the Caribbean. Conveniently EU-OECD
comparisons were on a three year cycle so their results could be used for either a 1993
or 1996 global comparison.
The African Comparison for 1993
The report for Africa (Eurostat, 1996) provides approximately 200 basic heading
deflators and about 50 aggregations to summary headings. The basic headings follow
Eurostat’s for EU countries with one or two exceptions like own construction. The
aggregations are carried out using both the GEKS and G-K methods and the results areprovided at the level of 50 aggregations. The authors were Michel Mouyela-Katoula andKantilal Munnsad.
The ESCAP Exercise
The ESCAP office in Bangkok was the operational center for the 1993 regional
ICP. Fourteen countries were full participants in the 1993 benchmark, while Malaysia and95

Laos only partially participated. China participated in some city comparisons and India
did not take part, I suspect because of results of the 1985 comparison where Bangladesh
had a higher per capita income than India. As mentioned earlier India appeared to haveprovided some unusually high prices in certain basic headings that had the effect oflowering India’s 1985 PPP converted GDP. The Japanese government provided financial
assistance for the 1993 comparisons and provided a consultant to ESCAP. The WorldBank and the ADB both provided support for meetings and travel. And China hosted two
meetings, the last to discuss the initial results of the comparisons in Beijing in August,1997.(Pic 49)
In the initial ESCAP planning, Shanghai was to make a binary comparison with
Tokyo and Guangdong province with Hong Kong. The price collection was completed forboth cities but neither the representative from China or Japan approved of the results sothey were not reported.77 The comparison of Hong Kong and Guangdong was completed
and included separately as a binary comparison in the report. (ESCAP, 1999, p.35). This
comparison is affected by the how well the provincial income accounts reflect the weights
of consumption and capital formation. The published price level of Guangdong was 63
percent of Hong Kong in 1993, which is probably too high.78 Readers should probably
know I was heavily involved in the preparation and writing of the report.
The European Union, the OECD and Associates
Fortunately EU-OECD comparisons were on a three year cycle so whether thereference year was 1993 or 1996 for Phase VI was not of great moment. In fact the only
attempt to produce a global result was carried out at the World Bank for 1996. An
advantage of a later year was that the OECD was incorporating comparisons with thecountries of the former Soviet Union that comprised the Commonwealth of Independent
States (CIS). And between Eurostat and the OECD many of the former CMEA countries
were also incorporated in the comparisons. All of these countries were adapting to market
versus state set prices and to the SNA versus MPS system of national accounts so theexperience they were gaining each year was likely to improve the quality of theircomparisons within the OECD. A total of 51 countries, including Israel, were covered byEurostat and the OECD in 1996.

77

Because the consultant that Japan provided ESCAP had to return to Japan before all the
prices were received, I was asked to undertake most of the calculations and write-up for all
the comparisons. As a consequence I had seen the Shanghai-Tokyo binary and thought itshould have seen the light of day.

78

The estimated price levels of consumption, 58 percent, government, 27 percent andinvestment, 77 percent show the relative variation that one would suspect. However, theinvestment share in Guangdong and most of China was regarded as too high by manyoutside observers. Further, in consumption goods there were some anomalies, for example,
reported clothing prices in Guangdong were higher than Hong Kong, the former being anexporter and the latter an importer. Interestingly, China reported relatively high prices for
clothing in the 2005 ICP too.
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The Economic Commission for Latin America and the Caribbean
The Caribbean was well represented in the 1996 comparisons, in part because of
substantial support from the European Union and the World Bank. I attended meetings in
Kingston, Jamaica, and Port au Prince, Trinidad, and was impressed with the competenceof many of the statisticians. However, because the countries are so small, statistical
offices are always spread thin across a number of projects. The only Central Americancountry to participate was Panama, which took part in the Latin American comparison for1996. With the addition of these 21 countries and those of EU-OECD over 60 percent of
the countries had a reference year of 1996.
The Economic and Social Commission for Western Asia
The 1993 regional report (ESCWA, 1997) was a first for the region and a significant
joint statistical effort of the participating countries. It helped of course that all participants
were Arabic speaking and that the World Bank contributed to support for meetings andpublication. As was the case with Africa the aggregations were done with both theG EKS
and G-K methods which produced some anomalies. The countries in Western Asia thathave high per capita GDPs have small populations like Qatar and Bahrain, whereas Egypt
has by far the largest population followed by Yemen and Syria. In Western Asia the total
GDP of these three countries is larger than the more affluent per capita income countries
so the international prices are closer to the less affluent countries. As a consequence thedifferences between the G-K and GEKS aggregations show no consistent pattern.
2. Official Global Report on 1996 ICP: a no-Show
The World Bank staff in DDG made an effort to put together a global ICP tablefrom all of the regional PPPs that had been developed from 1993 to 1997. To do this it
was necessary to update PPPs for Africa, Asia and Western Asia from 1993 to 1996.
Then the ECLAC countries had to be linked in with other regions. With the cooperation of
the BLS, US prices were obtained for most of the consumer items priced in ECLAC
countries thereby providing a link at the basic heading level. Next, the basic headings
were collapsed to the lowest common denominator, 31 basic headings, which forcountries with more detailed aggregations were often summary headings built up fromseveral basic headings. Again, PPP and expenditure detail was lost for some regions bycollapsing basic headings with no obvious gain in precision at the global level.
We jointly carried out with the DDG some aggregations with the PPP and
expenditure data for all 115 countries at the 31 basic heading level. Our calculations weredone by Bettina Aten using code she had written and tested for some years. However,for reasons we could never fully resolve the results obtained by the DDG did not matchwith our results. In some instances the DDG staff had made new assumptions or updated
the input data often with more recent national accounts. In the end, with what weunderstood to be a data set on which no more revisions would be made, we still did notmatch. In any event, at the DDG or higher level it was decided to only use their input datafor internal use or to supplement the World Development Indicators, a widely used database provided by the World Bank.
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Thanks to easy digital access and the burgeoning growth modelling literature, thePWT was enjoying increased usage not only in academia but also by researchers within
the World Bank and the IMF. John O’Connor and others in international organizations
were not comfortable with a data set like the PWT being preferred by many for theirresearch needs. Various attempts were made to reconcile the differences between the
PWT and the time series of GDP published by the DDG, so as to make the PWTredundant, or at least that is my interpretation. In any event, the fact that the PWT, for the
better we thought, broke down GDP into consumption, investment, government and the
net foreign balance, was not something DDG was ready to do, no rapprochement
occurred. As to the fate of Phase VI, we used the DDG data base in aggregations
underlying PWT 6.0, and as was our practice, we provided the DDG generated 115 by 31
matrices of PPPs and expenditures on our website. This 1996 data set has had a large
number of downloads between its availability and the distribution of the 2005 ICP resultsin 2008.
E. The Castles and Ryten Reports of 1997
Personally, I was not acquainted with anyone involved with instigating either of thereports so my account relies on unnamed but, of course, reliable sources. C. Louis
Kincannon became the first Chief Statistician of the OECD in September 1992 until hereturned to the US Census Bureau as director in 2000. Hermann Habermann was the
Director of UNSD from 1994 to 2002, when he returned to Washington to join Kincannon
at the Census Bureau. For reasons never clear to me, Habermann had a very negative
view of the ICP which he shared with Kincannon. My understanding is that both men
would have been happy to see the OECD and the UNSD programs scuttled. To repeat,
my interpretation of their antagonism (and that of Seltzer) is that the ICP requires adifferent type of cooperation between countries than do other statistical activities. Thereare common statistical practices across countries with respect to censuses and surveys
and their analysis but in the end it is a national activity. By contrast the ICP is aninternational activity requiring cooperation between countries, particularly with respect toprice collection. A related point is very well formulated in Ryten (1997, p.29), “In the caseof PPPs, there can be no knowledgeable domestic critic, for the simple reason that it is
only from an international perspective that the data can be critically appraised.”
Another reason that the ICP was a difficult sell to country statistical offices wasthat the staff tended to have strong backgrounds in statistics but less so in economics.
We often found that planning ministries, finance ministries, central banks were not familiar
with the ICP program nor that their countries were participants. Put another way
government economists who might be interested in the ICP results in terms of actual use
were not in the same network as those producing the results. And perhaps more importantis the point made by Angus Deaton that the results are most used by the internationalorganizations and researchers, so there is good reason for country skepticism aboutclaims for the value of the ICP to the countries.
1. The Castles Report98Within the OECD there were frequent questions by member countries about thequality and value of the PPP program that supported the idea of appointing a consultant,to review and evaluate the EU-OECD program. While Kincannon thought it a good idea,
he was hardly alone, just as Habermann could find country support for a review of the
ICP for the UNSC. The consultant chosen for the EU-OECD review was Ian Castles(1935-2010), who had served with the Australian Treasury in 1958, became Secretary of
the Ministry of Finance in 1979 and was appointed Australian Statistician in 1986. Castles
was a very well qualified consultant from a country that had questioned its participation in
the OECD program, so the appointment was generally welcomed.
Castles interviewed national statisticians in Australia, the United Kingdom, Canada
and the United States, and staff at the World Bank, Eurostat, the UNSD, various
departments within the OECD, and Bob Summers79. He agreed with many of the common
criticisms of the ICP with respect to handling of government services including educationand health, construction and machinery. Overall, Castles (1997) concluded that theOECD program should be continued but with more resources and with the aim of
improving problem areas. One surprise to those less friendly to the ICP was the strong
support within the OECD of staff in departments outside of statistics. In terms of the EUOECD comparisons the Castles report was supportive.
2. The Ryten Report
The 1995 meeting of the UNSC it was “(a) Agreed on the need to conduct anevaluation of the International Comparison Programme (ICP) to address the reservations
held by some countries about ICP implementation and the uses of ICP results, and toseek ways to improve the credibility of ICP data;” and “(b) Appointed a steering committee
to supervise the evaluation process.” Subsequently, a document (E/CN.3/1997/3/Add-1)
was prepared for the 1997 UNSC setting out the terms of reference for the evaluation
drawn up by the UNSD, Eurostat, the World Bank and the IMF.80 These organizations
financially supported the consultant who was chosen from a short list drawn up by thesame organizations. Further they requested that the evaluation take into account theCastles report.

79

80

For reasons forgotten, I was not at Penn the day Castles came to Philadelphia. Bob said heasked good questions and he enjoyed the interview but was not at all sure what Castle’s
review would say. I never met Castles but corresponded by email with him and David
Henderson, who became active supporters of PPPs with respect to valuing the economic
effects of climate change. I had written a paper for a conference on the International Panelon Climate Change that was critical of the use of exchange rates in judging the costs ofclimate change that Castles and Henderson liked. We kept up a correspondence that I havecontinued with Henderson, who it should be noted was chief economist of the OECD
Economics and Statistics Department from 1984 to 1992 after an academic career at Oxford
and University College London.
The new interest of the IMF is discuss below.

99

The consultant chosen was Jacob Ryten, who did his graduate work in economic
statistics at the London School of Economics and spent most of his career at Statistics
Canada where he retired as Deputy Chief Statistician in 1997. Neither Bob nor I met
Ryten prior to completion of the report though we had been advised to expect the worse.
Indeed the Report was highly critical of recent ICP rounds and of the ICP manual, which
in retrospect seem appropriate. His style was often dramatic in the sense that there might
be dire consequences of not following his advice, which was often quite specific. And
some have suggested that the report was a little self-serving in that it proposed there bea high level global coordinator of the ICP, a position coinciding with his retirement. But
his recommendations were much like Castles in that they advocated continuation of the
ICP with more resources, more communication with the countries, a manual directed at
the operational needs of countries, and strong support for regional coordination. And
above all to not let the ICP languish as it had done the previous decade at least.
Needless to say, Bob and I were most pleased with the bottom line of both reports.
The Ryten report in particular, must not have been well received by Habermann,
particularly its call for UNSD to play a major role in a renewed ICP. Subsequent UNSC
sessions beginning in 2000 were annual and most had documents on ways for the new
ICP to be organized.81 I was not privy to all that took place in response to the Ryten report
until a major meeting took place at the World Bank in 2002.82

Chapter 9: Finding a Home for the PWT, Part I
By the 1990s and Bob and I began to seek new blood to take over the PWT at thesame time the use of our table began to enjoy much wider use. In fact, what had begun
for us as an academic exercise had become a data bank that was being sourced byacademic and other researchers so we began to feel a responsibility for maintaining the
PWT. Bob was near retirement from teaching and quite ready to leave day-to-day
maintenance of the PWT to others. Beginning in the 1980s we received research grants

81

The UNSC has 24 members, five from Africa, four each from Asia, Eastern Europe and Latin
America, and seven from Western Europe and others. Members serve four year terms andevery two years a new chair, three vice chairs and a rapporteur of the UNSC are chosen.
There evolved a group called Friends of the Chair of the UNSC, with special interest in the
ICP that was important in establishing a framework for the 2003 ICP.

82

David Roberts was privy to these events and notes, “There is an important difference
between Castles and Ryten. Castles was pro PPPs and when Australian Statistician
supported Australia’ participation. Ryten when in Statistics Canada was very anti PPPs anddid much to hinder Canada’s participation. When he was appointed consultant we assumed
the ICP would be given the kiss of death. His Damascene conversion confounded many.”
Subsequently Castles and David Henderson a former Head of Economics at OECD wereboth very active in promoting use of PPPs in studies on the consequences of climatechange. They liked a paper that I had written on the subject and I came to know their views
after that and certainly agree with Roberts’ evaluation.
100

from the National Science Foundation (NFS) that supported research assistants, traveland summer stipends for about 30 years.83
The ICOP program at Groningen expanded during the 1980s and 1990s with anumber of graduate students doing dissertations related to productivity levels and growth
in OECD countries, Asia and Latin America.84 Marcel Timmer joined the Groningen facultyin 1988 working closely with Bart van Ark, a protégé of Maddison. Bart began his affiliation
with the Conference Board in New York in the 1990s finding another home for productivity
studies.
A. Initial Efforts to Pass the Torch
Daniel Nuxoll (Pic 7, 17) wrote his dissertation at Brown University, which had used
ICP data to investigate some index number issues. He was teaching at Virginia Techwhen we invited him to be included in an NSF grant and to see how well we worked
together. He took part in PWT 5.5 in 1993 and we wrote a joint article on the BelassaSamuelson effect (Heston, Summers and Nuxoll, 1994). However, Dan was not that
enthusiastic about life in Blacksburg, Virginia, especially when his prospective wife lived
in Washington. So he chose to work with the Comptroller of the Currency in Washington
on loan risk and moral hazard, a long way from the PWT.
We had also had informal discussions in the late-1990s with the World Bank andthe IMF about their interest but we concluded they did not want to make the necessarycommitment at that time. Even so in their presentation to the UNSC in 2000, the WorldBank paper said that they would be absorbing us into their work program. I believe thisdocument was written by Yonas Biru, who had taken over from Sultan Ahmad after hisretirement the previous year.85

83

Bob’s son Larry kidded us as NSF awardees we were the Hoyt Wilhelm, a very goodknuckleballer who pitched well into his 40s; and George Blanda, who was a quarterback andplacekicker for 26 years in professional football. These awards were of course a validation of
our work that we warmly welcomed.

84

While the Penn economics department once had faculty like Kuznets and Richard Easterlin
who were well known for their empirical research, the faculty beginning in the 1970s had
begun concentrating on game theory and other specialties well removed from ICP-PWT typeconcerns. So by the time our research assistants were at the stage of choosing a
dissertation topic, any work related to our research was not an attractive choice. And it isdoubtful if any new faculty member would want to be part of our team if they did not alreadyhave job security. Mention should be made of two of graduate assistants Mark McMullen(Pic 16) and Sean Dougherty (Pic 51), who did not finish the Ph.D. program but of whom we
had a high opinion and both have successful careers.

85

Biru was quite ambitious and initially received support from the Director of DDG, Shaida
Badiee (Pic 47), who herself had only been appointed in 1997. When he joined DDG, thestaff included Michael Ward, Sultan Ahmed, and Yuri Dhikanov. Yuri was hired as aconsultant in 1997 by way of Penn. Andre Schleifer, his advisor at Harvard, called Summersin spring 1997 and said he had an offer we could not resist, namely to take on Yuri for thesummer because he could not get enough of PPPs, not an interest of anyone at Harvard,101

We also tried to sell PWT to the National Bureau of Economic Research (NBER)
and the then President, Marty Feldstein, suggested involving Robert Feenstra (Pic 24,25)
at the University of California at Davis, which we did. Subsequently Feenstra and I
organized a cooperative annual workshop beginning in 2004 termed simply PPP
Workshop. The first session included Feenstra, Bob and I, and Bart van Ark, Marcel
Timmer and of the University of Groningen. In addition, Prasada Rao at Queensland inAustralia, John Romalis (Pic 32,33) then at Chicago, and Robert Hill at Graz University inAustria were included in our NSF proposals and funding. Marshall Reinsdorf and Bettina
Aten of the Bureau of Economic Analysis, and Erwin Diewert (Pic 30,33,40) of the
University of British Columbia also attended the first PPP Workshop, which is now in its
thirteenth year.
B. China and the International Monetary Fund: Any Port in a Storm
As criticisms rained down for slow implementation, poor linking of the regions inPhases V and VI, lack of an adequate manual, and a weak leadership structure at the
UNSD, the global ICP ship appeared to be taking on a lot of water. The European Unionand the OECD did a lot of bailing, the World Bank somewhat less, and the ICP ship did
not sink in the 1990s, but it needed help. And the first rescue vessek on the horizon flew
an IMF flag.
The IMF disseminates each year the World Economic Outlook (WEO) thatprovides estimates of economic growth in the previous year and estimates for a few
following years. Up to spring 1992 the growth rates were aggregated for regions and theworld using exchange rate (a three year average) converted GDP as weights for eachcountry. The IMF staff were aware that growth rates in Asia seemed very low given thevery high rates of GDP growth that were observed for China since 1978 and weregenerally confirmed by the media and other observers. Further the very low rates ofgrowth in Europe and the United States were receiving a very large weight in the index
for the world. Their conclusion was that the country weights should be the national GDP
converted at PPPs, which was initiated in the May 1993 WEO. Did Bob and I agree? Yes,
yes, yes! Were Bob and I surprised? After the lukewarm support of the IMF staff to PPPs
in the past, we were not just surprised, we were astonished. Was this a game changer?
Yes, particularly because the DDG at the World Bank had little choice but to give more
prominence to PPPs.

except perhaps Larry Summers. We did so and during that summer he met John O’Connor
who offered him a consulting position at the World Bank. Yuri was not interested insupervisory work and Michael Ward was quite involved with national accounts advising, sowhen Sultan retired in 1999 Yonas became the face of the ICP. In fact when the position of
Global Manager of the ICP was advertised in 2002, Ward among others was advised not toapply because of his age, but Yonas did apply though he was not really considered becauseof his lack of managerial experience. In fact an agricultural statistician, Fred Vogel, who
incidentally was older than Michael Ward, was selected. I received the impression that thedecision makers at the time wanted few if any voices from the past involved in the 2003 ICP,
and it was only through the persuasion of Michael Ward that I was asked to be on the TAG.
102

Where did the IMF obtain its PPPs? IMF (1993, p. 165) says, “The PPP-based arederived from PPP estimates of GDP from the International Comparison Program (ICP),
supplemented by World Bank and IMF estimates for countries not covered by the ICP
and for China.” 86 Bob Summers did inquire further with IMF staff and did not receive any
more details about countries other than China. To illustrate the magnitude of the change,
the weight of the industrial countries declined from 73.2 to 54.4 percent while the shareof Asia went from 7.3 to 17.7 percent when moving from exchange rates to PPPs. Overallwith this change WEO world growth estimates rose by over half of one percent.
C. Rise of Empirically Tested Growth Theories
Ironically, we came to the view that the PWT and the ICP were much more
complementary than competitive with each other especially in the 1990s when usage of
the PWT greatly expanded. What was the source of this expansion? First was the
publication of PWT 5 (Summers and Heston, 1991) that covered 1950 through 1988 using
data from the 1985 ICP for 56 countries. Only the reference year 1985 was published in
the article and diskettes were freely available from the NBER so it was much easier forusers to access directly to their computers. Coincidentally, or we like to think because of
the availability of the PWT, Robert Barro published in the same journal issue (Barro,1991)
his much cited article on economic growth and convergence of countries.87 There followed
too many papers testing models of convergence on versions of the PWT so that claimsof significance to any particular growth formulation became questionable.88 We were notcomplaining of course, and were duly rewarded by being designated as Distinguished
Fellows of the American Economic Association in 1998.

86

The estimate for China was criticized in the Wall Street Journal (6/1/1993) where Bob
Summers was quoted as saying “It ain’t science with a capital S”. The IMF number increased
China’s GDP by 3.5 times its exchange rate number or a price level of 28 percent. It placed
China with the third largest output in the world, while the PWT estimate had China above
Japan at number two. We re-examined our sources and concluded with Angus Maddisonthat China’s growth rates were too high producing extrapolations of estimates for 1975 andthe 1980s that were in turn too high. In our data appendices to the PWT we provided
extensive write-ups of our treatment of China in each revision of the data.

87

Both papers were based on presentations at a conference in spring 1990 in Park City, Utah.
Kim, Morse and Zingales (2006) tabulated citations of articles published in 41 leading
journals between 1970 and June 2006. Of the 146 articles receiving more than 500 citations,
Barro’s article was number 33 and PWT 5 was 37 with 1111 and 1070 citations respectively.
No articles above these ranks were published after 1990.

88

To give some idea of the excesses of academe, (Wall, 1995) published a note with the title,
Cricket versus Baseball as an Engine of Growth. The term, Engine of Growth appeared in alarge number of papers using the PWT in the 1990s so the spoof begins with the title. The
results for 95 economies showed that cricket playing countries grew 43 percent less andbaseball countries 80 percent more from 1960 to 1990 than countries playing neither sport.
Policies like subsidies and baseball instruction were called for in countries with no history of
the game but getting cricket playing countries to give up the game loomed as a more difficult
task.
103

This development made the PWT competitive with the data sets of the World Bankand other official organizations. According to a study by Simon Johnson and colleagues(Johnson, Larson, Papageorgiou, and Subramanian, (2013)) two thirds of all publishedarticles through 2006, including by staff at international institutions, cite the PWT in their
publications on economic growth and related topics as their data source.89 Further, wider
use of the PWT made acceptance of using PPPs as conversion factors to compare realquantities across countries more common among financial journalists and other media.
The 1990 World Development Report was devoted to poverty and its correlates
including education, health and mortality, indebtedness and location. Poverty line
estimates were based on the 1975 ICP with 1985 as the reference year. The reportcame up with a line of $275 for the extremely poor and $370 for the poor following theearlier methodology of Ahluwalia. Carter and Chenery (1979). When Martin Ravillion
headed the poverty group a dollar a day was introduced as the poverty line. The dollar a
day line was often misunderstood especially when updated. But it was very successful
as a simple easily grasped number that conveyed to those in richer countries a very
important world problem.
The United Nations Development Programme introduced another way of looking
at world welfare based on their Human Development Index (HDI) that provided a rankingof countries. The initial Human Development Report in 1990 included the HDI that was
attributed to Mahbub al Haq in collaboration with Amartya Sen. The HDI was an
unweighted average of an index of literacy, life expectancy and per-capita income at
PPPs.90 The HDI was subject criticism for its lack of weighting and other limitations but it
gained quite a bit of publicity and which carried over to the ICP and PWT.
By the 1990s both the ICP and the PWT had led to the use of price levelcomparisons not just in textbooks on economic development and international trade but
also college texts on economic principles. Undergraduate statistics, development andeconometric courses might assign papers based upon using PWT data to examine someissue like income inequality across countries, or the demographic correlates with GDP,or the Adam Smith question of why some countries are richer than others. A whole newgeneration of college students entered the 21st century familiar with the use of price levels
and PPPs, provided of course they had some economics. The Big Mac index of the
Economist also played a role for younger and older readers, about which more below.

89

Their article pointed out an important problem in using different versions of PWT with respect
to our series on growth of GDP. The method used in PWT 8.0 and beyond takes care of thatproblem.

90

The HDI was not really a new idea as we have seen in our discussion of physical indicatorsthat were used in the 1950s and 1960s by Hungarian researchers and by Beckerman andBacon. The Overseas Development Council headed by Jim Grant encouraged Morris D. Morris
to produce a Physical Quality of Life Index (PQLI) in the 1970s that gained some traction
because its underlying data series, child mortality, life expectation at age one and basic literacy
were readily available. The most striking finding was how poorly some high per capita GDP oil
states did on the PQLI index compared to some poor states of India like Kerala.
104

Our view was that these developments made the job of selling the ICP easier for the
UNSD, the World Bank, Eurostat and the OECD.
When we were ready to introduce new versions of the PWT that would integrate
the EU-OECD comparisons with the 1996 benchmark results, an undergraduate research
assistant asked me why we did not put the PWT online? There followed a tutorial trying
to bring me up to date on creating a website and how users would access it. Bettina Aten
created PWT 6.0 in October 2000 and it was available on the web soon after. We began
tracking usage of the PWT about the same time that Google and other search engines
were making it easier to find us under PWT.91 The Table below indicates the power ofthe web in expanding access to a research data set like the PWT. The column on hits is
not an indication of real usage but is included to show how rapid was the growth in thisperiod. More meaningful columns in terms of usage are Unique Visitor and Pages
downloaded. Even Unique Visitor is probably an overstatement because tracking is byapparatus used so that if I access PWT at home and in an office, my understanding isthat it counts as two unique visitors. In any event we were pleasantly surprised by theusage in the years after 1991.

Tracked Annual Use of PWT 2004-09
Year

UniqueVisits

Pages

Hits

Visitors

Hits per
Visit(000’s)
2004*

11.1

15.3

70.3

160.7

10.5

2005

92.2

139.0

712.5

2986.6

21.5

2006

117.3

174.8

910.7

3887.1

22.2

2007

129.2

196.1

1054.24503.2

23.0

2008

139.1

209.0

1078.34508.7

21.6

2009

142.5

215.9

1057.84474.821.6* 7 months

Our self-serving view is that most of the non-European OECD statistical offices
were unaware of the research uses made of their PWT data even within their own
countries. Results of the ICP benchmarks were clearly essential to the existence of the91

It turns out that PWT has other meanings. For example, it is the symbol of Pawtucket, Rhode
Island, and according to another informant it would connote “poor white trash” in Oklahoma.
105

PWT which in turn contributed to the recognition of the value of PPP and real volume
estimates. There was a feedback to statistical offices and support, if reluctantly, tocontinue the ICP. At an official level the fact that the IMF came to the decision in about
2000 to use per capita PPP converted GDP as a basis for country contributions wasanother important factor.
D. Aside on the Big Mac Index
The Economist magazine introduced the Big Mac index of Pam Woodall in
September 1986 as a semi-humorous examination of the relationship between PPPs andexchange rates.92 The Big Mac was available as a standardized item in a comparable
physical setting in eighty countries by 1997. There were still local variations like use ofhalal meat in Islamic countries, but by and large, the Big Mac was a similar combinationof services and commodities in all countries. Though the weights are different it
represents non-tradable and tradables like GDP and consumption. The Economist has
maintained the Big Mac index for 30 years now and it has stimulated associated researchthat has kept the index in the news and in our view contributed to acceptance of the viewthat it was important to maintain the ICP.93
The Big Mac index inspired many competitors including a blue jeans index thatwas maintained for a few years in the Netherlands, later a Tall Latte index using Starbucks
coffee, an Australian I-pod index and there are probably others. The use of one
commodity, like wheat or gold, as a measure of value across time and space has a long
history. In the case of the Big Mac early criticism was that consuming a Big Mac in the
United States where it was such a common practice was very different than in say, India,
where it was it was a sign of status to be served in an air-conditioned, clean restaurant
and a well maintained bathroom. It is likely that when McDonalds first entered a country
there was a price premium due to their novelty but time and local competition soon drove
down such premiums.
Early on comparisons of the Big Mac index were made with the PWT by Pakko
and Pollard (1996, p.6). The simple correlation was .85 in 1991. Poorer countries withlower PWT price levels tended to be lower than Big Mac indexes and the opposite forhigher income countries with higher PWT price levels. Of more interest was that the Big
Mac index was persistently above or below the exchange rate over the years, with the
exception of Canada. The Big Mac index appears closer to the PPP of the PWT or the
ICP than to the exchange rate which suggests that is a fair approximation of the PPP for
consumption.

92

In fact Howard Banks (1984, pp. 110-11) wrote an article in Forbes with the title, The Big
Mac index. In that article Banks looked at how many Big Macs a days’ wage would buy invarious countries, a theme in the work of Orley Ashenfelter and Stepan Jurajda to be
discussed below. See Ashenfelter (2012).

93

In the 2005 ICP report (World Bank, 2008, p. 4) the Big Mac is used as an introduction to theconcept of purchasing power parity.
106Big Mac prices were also compared within the United States by Anthony Landry(2008 and 2011) with consistent results as one moves from neighborhoods within the cityof Dallas to other cities in Texas and then to other cities in the United States. Leary (2008)
reports the standard deviation of Big Mac observations within Dallas is 0.19, within Texas
0.21, and within the United States, 0.31, where the unit is a dollar. For the world cities
that are covered by the Economist the standard deviation was 1.43. As expected thedispersion of prices is greater the larger the geographic area. This remains a problem for
the Global ICP and for large regions like Africa and Asia.
In another context, Landry (2011) examined the variation of the prices of Big Macs
within Manhattan and across neighborhoods of the other boroughs of New York City. The
distance from Penn Station in New York was recorded for each location, the average
being 2.6 miles in Manhattan and 9.6 miles in the other boroughs. In June 2011 theaverages were pennies lower in Manhattan with a standard deviation of .20, about thesame as Dallas in 2008. The standard deviation for the other boroughs was 0.34 slightly
more than Landry obtained for other US cities in 2008. A plausible explanation is thatmost consumers drive to their McDonalds, but in New York City most are on foot. The
difference in prices across cities in 2008 ranged from $2.24 in Adel, Georgia, to $3.84 in
Philadelphia, over 50 percent. Within Manhattan in 2011 it was $3.59 to $4.24, about 17
percent while in the other boroughs the range was $3.29 in Brooklyn to $4.56 in Queens,
about 32 percent.
The Big Mac is a standard item sold in a standard physical outlet that shows
substantial price variation within large cities. Clearly location is a major price determining
factor within an urban center like New York affecting rents on business properties andconvenience for customers. Moving from within city to across city comparisons one has
to also factor in differences in wages, local business laws regulations, and transport costs
of inputs on the supply side and average incomes on the demand side.94 Studies on theprices of service items as standardized in production and final product as the Big Mac areuseful productivity differences. The continuing work of Ashenfelter and Jurada on theirindex of McWages, the number of Big Macs that the wages of a McDonalds’ server can
buy in a day, is being extended from across countries to within countries. When we look
into the future of the ICP it may very well be that Big Mac prices will have a role.
As to the PWT it became clear that Feenstra was not ready to take it over alone
circa 2006 because of his other commitments and because his main interest with respect
to the PWT was from the international trade perspective. In fact, we did work on thisproblem the next few years and a framework was developed and published (Feenstra,
Heston, Timmer, and Deng, 2009). Bart van Ark was actively associated with The
Conference Board in New York since 1997 and moved from Groningen to New York in2007 and is now a vice president and Chief Economist. At various times we discussed
possibility of housing the PWT at the Conference Board but in end it did not appear agood fit. So Bob and I were left to search again for a home for the PWT.

94

Landry (2008) shows a weak positive relation between personal income and Big Mac prices
in different neighborhoods of Dallas.
107

Chapter 10: Getting the 2005 ICP Aloft and Landed
As discussed in Chapter 8 the 1990s was a good news/bad news period for the
ICP with some positive momentum by the end of the decade. The UNSC in 2001
endorsed a new round of the ICP but recommended that implementation be put off foranother year until financing of a new round was further spelled out with options as tocountry coverage being discussed at the next session of the UNSC. The World Bank
document presented at the UNSC 2002 session proposed country coverage of 70, 80
and 100 countries with budgets up to $15 million, all representing a quantum leap infinancing. In fact 146 countries participated in ICP 2003 so in contrast to previous
benchmarks the number of participating countries exceeded early plans. The reference
year was to be 2003 with a meeting in Washington later in March 2002 to get input from
Eurostat, the OECD, the IMF and others.
A governance structure was to be established which in the interim would be the
Friends of the Chair. It was decided there would be an ICP Executive Board from
representatives of some country statistical offices and of the concerned internationalorganizations. A Technical Advisory Group (TAG) was to be established that would advise
the Global Office and indirectly the Executive Board on methodological issues and tooversee the writing of a new ICP manual. Finally there was the group of regional
coordinators who were hires of international organizations like the AfDB and the ADB,
with the exception of Latin America where Canada played an important role. The regional
coordinators were in direct contact with the countries and hosted meetings on pricecollection and national accounts, and special areas like construction, rents, education,
government and health. The position of Global Manager was posted in Spring 2002 andFred Vogel joined the World Bank in early November 2002 on a five year contract. Vogelis a statistician by training and previously was a senior manager in the US Department ofAgriculture supervising a large staff, and often directing major field surveys. His work
provided him a number of international contacts through country visits, specialized
meetings and through the International Statistical Association.
A. The First Two Years: Reality Sets In
When Fred Vogel took charge the two principal staff members with ICP experience
were Yuri Dikhanov and Yonas Biru who have been mentioned previously. An immediate
issue was to assemble staff even though they could not immediately be hired on apermanent basis. A number of short term contracts were issued and a number of outside
consultants were hired, some from the BLS familiar with consumer price specifications.
The short term contract applicants were predominantly recent graduates from abroad
whose employment at the World Bank would permit them to work in the United States forthe immediate future. This was a good thing in that a number of them were well trained
but with no ICP experience of course. Fred was justly proud of one of his initial
appointments, Nada Hamedeh from Lebanon, who was fluent in at least Arabic, English,
French and Spanish. In this latter respect, as well as her affability that was very effective108

in personal and larger meetings, Nada reminded me of Krinjse-Locker. Too bad they
never met.
Edwin Dean was appointed the Chair of the TAG in 2003 after a long career at
BLS where he was head of productivity measurement in the United States as well ascomparisons with other countries. Ed was very active in the Committee on Income and
Wealth, a research group holding meeting with topics related to measurement of national
accounts, wealth, and price adjusted changes over time. We had met a number of times
over the years and were familiar with the other’s work. It was a considerable surprise tome when I learned in 2004 that Ed had resigned as Chair of the TAG apparently because
he understood the TAG would report directly to the Executive Board rather than the Global
Office.
Bettina Aten and I had moved to Washington in the fall of 2003. I had retired fromteaching at Penn and Bettina had just left academe to take a position at the BEA to starta program in measuring price differences across the United States with the aim ofmeasuring real personal income in different cities and states. (Aten, 2006) Living in in
Washington made me a convenient candidate to replace Dean, but I am sure there were
the same reservations to doing so that existed when I was not initially considered for the
TAG. In any event I was asked to chair the TAG and agreed. The main tasks were to
consult with the Global Office and to sit in on staff meetings as necessary and plan theagenda with Fred Vogel and run the two day meetings of the TAG twice a year.
Sometimes there were meetings with the regional coordinators that were scheduled totake place before or after the TAG meeting, which I often attended.
(1) The Initial TAG Members
The first TAG included Ed Dean as chair, David Roberts from the OECD, Silke
Stapel and later Paulus Kojijn from Eurostat, Kim Zieschang from the IMF and Sergey
Sergeev who at the time was working at the Statistical Office of Austria and carrying out
many of the computations for Eurostat.95 I had met him one or two times before but was
not really aware of what an asset he would be. The academics included myself, Prasada
Rao from the University of Queensland, Brisbane, and Erwin Diewert from the Universityof British Columbia.
At the time the Global Office was not only to carry out the PPP comparison but
also take account of the use of the PPP results by the Poverty group in the Bank, which

95

Sergey was a protégé of Yuri Ivanov of CISSTAT in Moscow, the agency that coordinatedeconomic comparisons between the Commonwealth of Independent States. Among the TAG
members Sergey was legendary for the speed with which he responded to emails or the
distribution of new papers or minutes of the TAG. Any response after 24 hours must mean
Sergey was traveling where internet was not readily available or he was sick. His knowledgeof the literature was extraordinary and sometimes a bit embarrassing when he would remind
me of what Kravis, Heston and Summers had written in one of their volumes.
109for the next decade was headed by Martin Ravillion.96 A special committee of the TAG
was assigned to look into poverty line measurement consisting of Prasada Rao, Angus
Deaton, a Global Office member, Dipankor Coondoo for a short time, and myself. At thetime Angus was carrying out poverty studies using detailed household expenditure
surveys from India and Indonesia with Olivier Dupriez of DDG. When I was asked torecommend to the DDG a replacement for Ed Dean on the TAG, it was natural to suggest
Deaton and happily he agreed. In addition to the TAG members and staff from the Global
Office, several consultants attended most meetings. One was Peter Hill who was primarilytasked with overseeing the new ICP manual including working with those writing chaptersand also drafting a number of chapters himself.
The other was Derek Blades who had recently retired from the OECD where hehad been heavily involved in national accounts and the ICP. I had met Derek when hewas with the National Accounts branch at the UNSD during my first appointment there in
1979. I had known of his work on estimating the value of subsistence activities in a varietyof economies and over the years had always enjoyed his company at various meetings.
David Roberts (2015) has written a moving Memorial that I will not try to replicate. Suffice
it to say the fun we had arguing, the many meals we enjoyed together, notably with Angus,
David and Bettina, the talk of boarding schools in England, and jogs together are a sampleof the wonderful memories he left. He always made contributions to TAG meetings thatwere thoughtful, well-reasoned, and full of good humor.97
The 2005 TAG got along very well with each other and with the Global Office staff
with one or two exceptions.98 The DDG asked the TAG in 2007 to suggest additional
names of younger colleagues that would be passed on to the Executive Board as future
TAG members. A number of persons were suggested and eventually Robert Hill (Pic 29)
and Marcel Timmer (Pic 43) were added. Robert was Peter’s son who had studied at the
University of British Columbia and did his dissertation with Erwin Diewert on a novel
method for linking and aggregating countries using minimum spanning trees. Timmer had
96

The most common adjective to describe Martin by the Global Office and most of the TAG
was arrogant. He had little use for the ICP group, and usually found reason not to attend
meetings to which he was invited, or to show up for a few minutes to say his piece andleave. I attended an annual World Bank meeting in the late 1990s when Deaton was
critiquing the methodology of how the Poverty Group was updating their Dollar a Day poverty
line. This was my first introduction to how Martin and Angus would talk past each other, or
rather how Martin would not acknowledge that he did not really understand PPP estimation
and/or that he could be wrong.

97

In one interaction Derek introduced a way to modify the raw number of housing units to try toindicate the quality of the flow of housing services from the existing housing stock. In pastwork the proportion of units of electricity, running water and toilet were averaged to obtain an
index of overall quality. Derek presented an impressive argument for age of dwelling as
detracting from quality of housing to which Deaton asked whether Windsor Castle should be
downgraded because of its age. Everyone had a good laugh including Derek.

98

With respect to the staff, Yonas Biru became a problem at a personal level for many of the
TAG and all of the staff by 2007. Yuri Dikhanov presented different issues about which more
below.
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joined the Groningen faculty when Bart van Ark was there and expanded the ICOP
program and was at home with international comparisons. These were two very good
additions. Unfortunately, it was decided to expand the TAG for the 2011 ICP to include
many country representatives, who were often new to the ICP, so to several of us elders
from the original TAG felt it lost the easy give and take of the good old days.
The original plan to produce a 2003 benchmark soon slipped to 2004 andeventually 2005. Some regions had to start from scratch, for example Africa, which had
previously been coordinated out of Luxembourg by Eurocost. The AfDB did hire Michel
Katoula-Moyela, who was familiar with the Eurocost comparisons for Africa, as acoordinator, a positive step. And a number of country representatives had worked on
previous African ICP exercises, which was also helpful. But the number of participating
African countries nearly doubled (from 22 to 40) compared to previous rounds so there
was much country learning to be done. And the bureaucracy at the AfDB was not efficientin channeling outside funds to the countries. By contrast, almost all the countries in Latin
America and Asia had participated in previous ICP rounds. ESCWA started with few
countries and no staff with ICP experience, but an excellent liaison in Hamadeh, who
herself was from Lebanon. Further the fact that eventually 146 countries participatedmeant that the total size of the 2005 ICP was almost a third larger than envisioned. The
lack of synchronization across the regions had major implications for how thecomparisons were carried out eventually leading to changes in methods of how theregions were linked, hardly a new feature of ICP rounds.
(2) The Coding Issue
The first problem was to agree on the number of basic headings for expendituresand second to draw up the specifications for the items to be priced. The starting point on
expenditures was naturally previous ICP rounds requesting expenditure detail for about
150 basic headings. A list of item specifications was supplied to the regional coordinators
who in turn asked countries in the region to indicate the items or variations of the items
they could price and whether they had items to add to the list. In this way a global list wasassembled, applying the Eurostat expenditure codes that were already being used in 51
countries.99
While there was a common coding for the expenditure headings in the otherregions, the item codes within a basic headings were usually different. So all regions
would code an item beginning with its basic heading number but then assign a regional
number to an item. So tomatoes would always be in the basic heading of fresh vegetables,
it would not necessarily have the same item number in the Africa as in Asia-Pacific. Thiswas partly due to the fact that Latin America and Asia were ahead of the Global Office inproducing a final list of items to be priced. This in turn occurred because funding in eachregion was on its own time line, with the ECLAC comparison, which was being carried out
99

The EU-OECD comparisons included members of one and/or the other organization plus a
few countries more loosely affiliated with either organization. Two examples are Israel andRussia with the OECD. Russia provided the binary link between the OECD and the othernine countries in the Commonwealth of Independent States, bringing the total to 51.
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with substantial assistance from Statistics Canada, needing to complete its report a goodyear or more before Africa and West Asia. The ADB also needed to produce a report wellbefore the Global Office received all the country and regional data submissions. Since
countries in the regions wanted to preserve the regional results through fixity, the Global
Office was left with the problem of linking the regional results, but with no easy way to
use the regional prices because of the lack of common item coding across regions.
It was decided to approach this problem in the manner of the 1996 comparison by
singling out a set of core or ring countries in each region. In practice, the Global Office
was not free to simply draw up a list of the best set of countries based on coverage andstatistical capacity because being a ring country was totally voluntary. One moreadministrative problem that was dropped in Fred Vogel’s lap.100 He had some resources
to assist poorer countries but in the end the 18 ring countries were a mixed bag. In orderto have a common coding system for the ring countries it was necessary to draw up a
new ring list starting with the EU-OECD codes and list. Input from the ring countries added
a few items, eliminated others and altered some details like packaging and size. But
basically it was a Western European list and the ring countries generally provided prices
whether it was a representative item or not.101 This led to the conclusion of Deaton andAten (2016) and Inklaar and Rao (2016) that the price levels for Africa and Asia forhousehold consumption were 20 percent too high, understating their real consumption.
B. Price Validation in the Regions
Validation here assumes that countries have already edited the price observations
they have collected to ensure that the average price they submit has not been affectedby unusual observations or clerical errors. In the 1970 ICP we had developed sensible
100

I remember several conversations with Fred when he would speak nostalgically about his
time in the Department of Agriculture when he could implement a program effectively
because his colleagues were on a payroll that he administered. In DDG he had very little
leverage to get countries to do what he asked. If they had a major survey scheduled forexample, they could not simply set it aside and undertake an ICP ring country survey thatwas not part of the original terms of their participation. In the end the ring countries included
at least two in each region, Oman and Yemen in Western Asia and Brazil and Chile in Latin
America. Africa had five countries, while Asia-Pacific and EU-OECD each had four. Egypt iscounted in Africa but it is also in Western Asia for many purposes.

101

Yonas Biru was quite adamant that in the African ring countries, which had priced almost all
the items on the ring list, these items were commonly available in their markets. I was taking
part in the meetings on the evaluation of the ring country price submissions and was in thecamp that did not believe his claim. My sense is that Yonas was at this point taking his
grievance out on the staff and as well as in substantive discussions affecting the ICP. Hisgrievance was that when Vogel’s five year contract was up, the Executive Board voted torenew it through the completion of ICP 2005. My conjecture is that Yonas was given some
sort of assurance that he would replace Fred when his contract was up. In any event heturned his wrath on the Global Office staff, particularly the decision makers, and wrote aquite unpleasant letter to the Executive Board. When he was eventually dismissed, he went
through a formal World Bank grievance process and was eventually given a generous
settlement that he, of course, thought inadequate. A sad story for all.
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ways to detect prices that were outliers because of incorrect units, clerical errors, unclear
specifications and the like. Let us call these matching errors. With only ten countries andfrequent direct contacts, we may have caught most of these matching errors. We tried tocapture outlet variations and geographical differences in prices but with much lesssuccess. Let us call these sampling errors. By the 1975 ICP our success in obtaining
responses from countries when some prices appeared to have matching errors, was lesssuccessful. In the meantime Eurostat was carrying out price validation at frequentmeetings of all its countries, clearly a more satisfactory approach than we could afford toundertake at Penn. In the early 1990s Eurostat and the OECD started using the Quaranta
Table, named after Vincenzo Quaranta of the Italian Statistical Office who developed it
for Eurostat as a diagnostic tool. The Quaranta Table basically highlights priceobservations that appear out of line with either the average GEKS price level of thecountry for that basic heading or the average price level for other countries.102 The table
comprises a simple spreadsheet and needs no technical support.
(1) The World Bank Price Validation Software
One could well ask why the Global Office needed its own software for pricevalidation when the EU software was available and usable on PCs and laptops with anyof several programs like Microsoft Excel. There are two justifications. First, it could beconsidered as technical assistance to the regional offices providing them with thecapability of validating prices from the countries in preparation for meetings of priceexperts from the countries. Combining technical assistance and the ICP makes the output
more attractive to donors. Second, since the regions were using CPD at the basic
heading level, it would make sense that in looking for price outliers it should be in theframework of CPD, not GEKS. However, Quaranta tables could have been easilytransferred to the countries at a lower cost. Further they are not method-specific, so it
was irrelevant whether GEKS or CPD is used or any other method. Even so, the Global
Office chose to design tables that are CPD specific.
Yuri Dikhanov was tasked with writing a special program for validation of the the
CPD method and he did so incorporating the important features of the Quaranta tables
and collapsing them into one Table per basic heading. The first calculation was toestimate a CPD from the average prices submitted by the countries and calculating theresiduals from the regression. So the table was a matrix of countries and products withan entry for each cell for which a country submitted a price, which was the CPD residual.
The CPD residual combined both deviation of the price from the country basic heading
102

A very clear explanation with illustrative tables is provided in OECD (2012). In the Quaranta
Table all prices are converted to a common currency at exchange rates. In this way a
product price can be compared with the average of all prices for the product. Prices > than
1.25 or < 0.75 are considered questionable and any prices > 1.5 or < 0.5 are consideredhighly questionable. In any case they are referred back to the countries, not discarded. The
process is iterative as there is an initial basic heading PPP calculated for each country thatmust then be recomputed as prices are edited. Because the EU-OECD does editing withgroups of countries, further sets of Quaranta Tables are generated as the process takes inmore and more countries.
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parity as well as the deviation from the geometric average of each product price acrosscountries, a very nice feature.
Yuri left the residuals in logs, not a user friendly version. It would have been much
more intuitive to express the numbers naturally as decimals centering on 1.0 rather thanin logs centering on 0.0. A point made time and time again much to Yuri’s annoyance.
But Yuri is stubborn and his Table is easy enough to use sitting with a group at the Bank
once you are familiar with it, though whether country representatives in the regional
meetings felt the same way I doubt. Potential outliers were flagged by colors so one wasimmediately alerted to a price that posed questions. Yuri’s Table also permitted
comparison of the price level of the basic heading for each country with a preliminary
aggregation over consumption from an initial CPD run as does the Quaranta Table. And
like the Quaranta Table, the Dikhanov Table involves iterations as prices are corrected ordeleted.
(2) The Tool-Pack
Diagnostic tables to catch errors in price collection or entry are very useful inbuilding understanding of the ICP at the staff level in the countries and regions. At thebasic heading level one can see the interdependence of the country prices with the prices
in other countries, which is one of the important insights provided by the ICP. Further the
Quaranta tables and Dikhanov software can be used alone or embedded in a larger
framework. Both require as input the matrix of countries and prices for each basic
headings, the basic heading expenditure if preliminary aggregations are estimated, andany information that provides different weights for the country average prices within abasic heading.
Even before Fred became Global Manager the DDG had assigned
an Information Technology group working with Yuri to develop a data-input
software package labeled Tool-pack. It incorporated the checking procedures
described above as well as a wide variety of aggregation programs. It would allow userinput of individual price quotes that would be averaged within basic headings,
provide measures of dispersion and be aggregated using different multilateralmethods. It could in principle also calculate consumer price indexes. In initiating theTool-pack the vision was that it would provide regions and individual countries withcomputing capability and a ready-made ICP do-it-all calculator. From the beginningwhen it was first demonstrated to the TAG, and subsequently from regional offices,
there was strong criticism of the Tool-pack. It was a black box, handed down from the
Global Office to statisticians in country offices.
Users had a multitude of options at their fingertips, such as CPD, GEKS,
and Tornquist, at the basic heading level and GEKS, Ikle and Geary methods above
the basic heading level, but no idea how the underlying computations were carriedout. Thus it was doomed to fail as a training device and worse, hindered the promotionof transparency and understanding of the ICP computational procedures. The second
criticism was that the inevitable problems that arise from developing software to work ina variety of settings – different versions of multiple operating systems on different
114

platforms in different languages, meant that any glitch had to be referred back to
the Global Office for troubleshooting. When the code is not explicit as to the steps
involved, troubleshooting is not an easy matter. Rather than bundling many different
options into one package my view is that revealing code through comment statements
and the steps along the way provides a better training experience.
The Tool-Pack was promoted by the DDG as an important output of the ICP.
The push came from Shaida Badiee as Director who felt the Tool -Pack would
enhance the image of the DDG, all at a very substantial cost, especially since some ofthe software had to be outsourced. This enthusiasm was not shared by the Global
Manager who had to deal with the problems of trying to scale down the effort. In termsof IT, the Tool-Pack harks back to a view of a computing center that services
requests from clients. This contrasts with the view that the final users or assistants with
substantive knowledge of the desired output write the code and check the results.
In Phase I of the ICP we were pushing the limits of the Penn computing
capacity, whereas by the 2005 ICP most laptops could easily carry out all thecomputations required by the ICP in much less time. There really is no need to have anintermediate level black box, like the Tool-Pack, above the ultimate user of the
ICP computations. Spreadsheets like the Quaranta and Dikhanov Tables are very
helpful but should be independent of other methods and computations.
The second criticism is that there are many slips in getting the system to work in
Washington and to work in the field because of the way computers are configured. Whenthe code is not explicit as to the steps involved, troubleshooting is not an easy matter.
Rather than bundling many different options into one package my view is that revealingcode through comment statements and the steps along the way provides a better training
experience.103 The Tool-Pack was promoted by the DDG as an important output of the
ICP. The push came from Shaida Badiee as Director who felt the Tool-Pack would
enhance the image of the DDG, all at a very substantial cost. It is not clear that thisenthusiasm was shared by the Global Manager and other staff who had to deal with its
problems. In terms of IT, the Tool-Pack harks back to a view of a computing center that
services requests from clients. This contrasts with the view that the final users or
assistants with substantive knowledge of the desired output write the code and check theresults. In Phase I of the ICP we were pushing the limits of the Penn computing capacity,whereas by the 2005 ICP most laptops could easily carry out all the computations requiredby the ICP in much less time. There really is no need to have an intermediate level, likethe Tool-Pack, above the ultimate user of the ICP computations. Spreadsheets like the
Quaranta and Dikhanov Tables are very helpful but should be independent of othermethods and computations.
103

The DDG did not support a software like SAS or Stata, which allow coders to document eachstep in a program. Rather they had programmers in C and C+, or equivalent, that were noteasy to follow even for the initiated. Most of the staff worked with Excel, which is clear
enough for simple sequences of calculations, but is not always easy for someone new tofollow when the number of steps is large.
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C. Linking the Regions at the Basic Heading Level in ICP 2005
It became clear by 2004 that the Global Office would not have direct access to thecountry prices collected in each region for the 2005 ICP. As a consequence the Ring
country method was adopted as the way to link the countries at the item level within eachbasic heading. The TAG was involved in discussing chapters on the ICP Manual thatPeter Hill was editing as well as writing a chapter on elementary indexes at the basic
heading level. In addition several TAG members were writing papers on the methods thatshould be employed in moving from ring country prices to linking regions at the basic
heading level. The TAG was also tasked with recommending methods for the Regions,
except for the EU-OECD countries.
(1) The CPD and GEKS Methods at the Basic Heading Level
A surprising development to me was the degree of support that the CPD approach
had among the TAG members, given that Eurostat and the OECD were committed to the
GEKS approach. At a practical level the results of both methods produced very similar
results so long as the basic matrix of country-item and prices was fairly full. In an attempt
to settle on a recommendation to the regions, several experiments were carried out totest the two methods. The starting point was a full matrix of item prices for a basic headingwhere both methods reduce to a geometric mean that were taken as “truth”. CPD and
GEKS estimates differ when more and more holes are introduced into the original pricematrix. While the differences were not great, the CPD estimates were consistently thesame or closer to “truth” than the GEKS estimates.
This led the TAG to recommend the CPD to the regions but certainly notdiscouraging the use of GEKS. It should be noted that in Latin America all of the basic
headings contained full price matrices so choice of method did not arise. The CPD isslightly easier to compute than the GEKS but even by 2006 this was not an issue in anyof the regions. This discussion covers most of the basic headings in consumption except
housing services, public education and hospitals. In government it includes the various
occupational and skill categories under personnel expenditures. Construction andmachinery were handled differently.
(2) Using the Ring Country CPDs to Link the Regions
When the ring countries submitted their prices a validation exercise was carriedout that raised a number of questions. We have already discussed the flags raised by anumber of items for which African countries provided prices whose common availability
seemed doubtful. Another much discussed issue was whether the submissions of somering countries, like Sri Lanka, appeared especially doubtful. We included in the validation
process the relative position of countries for each basic heading from the ring country
CPDs compared to their position in the regional CPDs. In general these comparisonswere somewhat erratic in Asia and Africa and not that encouraging in the OECD, mainlywith respect to Japan. Consideration was given to dropping some ring countries, or giving
their prices less weight, but in the end only some outliers for which the ring country
provided no response to questions, were dropped.
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The Global Office was really between a rock and a hard place in making thesedecisions because the ring countries agreed to do extra work so it would have seemed
impolitic to not use their prices. During the ring country validation experts were sent toselect Asian countries including China and Malaysia, a ring country. For China thequestion was whether the areas where China priced, fourteen large cities and theirhinterland, really represented the whole country, and whether the outlets chosen to collectprices were typical. These issues are discussed below.
CPDs were estimated providing country price levels for the 18 ring countries foreach basic heading where the United Kingdom was the reference country. Even here thequestion was raised by Sergeev as to whether the CPD should not be weighted so thateach region received the same weight. As it was actually estimated the five Africancountries (six counting Egypt) were receiving more weight in the CPD than the twocountries each in Latin America and Western Asia. I agreed with Sergey on this point but
we did not carry the day.
Diewert (2004) had written a paper on how the ring country price levels for eachbasic heading might be used to provide price levels for all countries in each region with acommon reference country. The paper also outlined how the regional results could thenbe aggregated to produce global results at various levels including GDP. Diewert
presented his paper at a TAG meeting where the light finally went on for me about what
Erwin was proposing at the basic heading level. Taking the two country case of Oman
and Jordan in Western Asia the idea was to first take the geometric mean of theircoefficients from the ring CPD, call it PLRing with the United Kingdom as reference. Thencompute the geometric mean of their price levels from the West Asian CPD, call it PLWA.
Each country price level from the West Asian CPD is then multiplied by (PL Ring/PLWA) toexpress their price levels with the United Kingdom as the reference. 104 Thus there wasfor each basic heading a price level for each country with a common reference thatprovided the necessary data to link the regions at higher level of aggregation. In practice
the price levels were converted to the United States as the reference country using the
UK/US price level at the GDP level from the EU-OECD regional results to make theconversion.
(3) Aggregating the Regions in the 2005 ICP
Diewert (2004) also proposed possible ways to aggregate the regions in 2005. The
essential idea was to estimate a PPP for all the countries in the region for each basic
heading. Basic heading expenditures at exchange rates were multiplied by the price levelof each country (as a decimal) and summed up over all the countries in a region, the real
expenditures. The nominal expenditures were simply the sum of basic heading
expenditures at exchange rates for all the countries in a region. The nominal expenditures
divided by the real was then the basic heading price level (as a decimal) of the region.
104

Both Peter Hill and I had faced this kind of linking issue in the OECD in the case of Peterand the 1980 ICP in my case. And both had made the same type linking calculations but in amore ad hoc way than what Diewert proposed. Our joint reaction to Erwin’s method was‘why didn’t we think of that?’
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Then a GEKS was computed for the six regions at different levels of aggregation. The
TAG (mea culpa) endorsed this proposal.
Even before publication Sergey explained that the technique was not reference
country invariant, to which I, and eventually Erwin and others agreed. However, it waslate in the day and the differences appeared small so the final report went ahead with theoriginal reference countries. However, I came to understand that this was not the only
short-coming of this method of linking the regions. In particular interactions of individual
countries in different regions did not enter into the aggregation procedure, which I saw as
a limitation. For example, comparisons of India or China with other large countries like
Brazil, Japan or the United States used no price level information involving these pairs ofcountries. In any event, the 2011 ICP was not constrained by the need for ring or core
countries because all countries agreed to submit their prices of core products to the
Global Office. This allowed for the use of the CAR method as described with respect tothe 1980 ICP that still preserved fixity in each region. In fact the CAR method could havebeen applied to the 2005 data and is shown in PWT 7.0.

(4) China’s 2005 Participation
In the 1993 ICP China agreed to bilateral comparisons between Shanghai andTokyo and Beijing and Hong Kong. They took their participation seriously enough to hostan ESCAP workshop in Beijing in 1997 to discuss the preliminary results. The ShanghaiTokyo binary comparison did not satisfy either Chinese or Japanese officials and was not
approved for release. However, the Hong Kong binary with Beijing did go forward andwas published as an Appendix in the final ESCAP report (UNESCAP, 1999). For the 2005
ICP China agreed to participate again on a limited basis collecting prices in 14 cities andtheir hinterlands. This limited geographic coverage was finally accepted, after
considerable discussion, by the other 22 countries in the Asia-Pacific region at a meetingat the ADB and formed the basis of the regional report (ADB, 2008).
The Global Office also accepted this arrangement based heavily on a principal
components exercise carried out by Yuri Dikhanov. Prasada Rao, some members of theTAG, and I were not convinced by this exercise and questioned the acceptance of the 14
city survey as representative of all of China. Our dissents were not effective for the ICP
but we did significantly alter the PPPs for household consumption downward by 20
percent in PWT 7.0 released in 2011. The basis for this large adjustment is in Part C of
the Description of PWT 7.0 under PWT 7.0 in the Groningen Growth and Development
website (http://www.rug.nl/research/ggdc/data/pwt/). The treatment of China’s prices andgrowth rates (Part D) runs to 20 pretty dense pages that I will not reproduce here.
However, it is worth making one point clear. The hinterland of the 14 cities in somecases incorporated rural areas but all included suburbs. It was found that for many items
the hinterland prices were higher than the city prices. This is not particularly surprisingsince the pricing was mainly of shop items with very few if any services and no rental
information. Our criticism of the 14 city survey was not that it failed to capture rural-urban
118differences in prices so much as how well were other regions of China represented? My
documentation relied on the work of other scholars and on internal Chinese data, like costof living allowances in different prefectures. The evidence all suggested that the prices
collected for the 14 cities were higher than in other areas of China. Outside observers
generally concluded that China’s Statistical Office did a very thorough job of collecting theprices in terms of obtaining the targeted number of items and matching specifications.
However, in matching specifications it was felt that the outlets used were often high end
and likely reflected well off rather than average Chinese consumers. If true this would
mean the 14 city price level for China would be too high compared to countries pricing in
more typical outlets, the case in most other countries in Asia and Pacific. 105
Having said that Chinese National Bureau of Statistics (NBS) did a goodtechnical job of collecting a large number of price quotes in 2005 there remained a
noticeable use of more expensive outlets and brands for any given specification. In the
United States, for example, the BLS makes point of purchase surveys to find the type ofoutlet in which consumers buy various items. This is not commonly done in the ICP
surveys in Africa and Asia, and was certainly not the practice in China. In fact, the ADB
and other countries in the 2005 ICP asked that the Global Office send pricing experts to
China to go around to the outlets with price collectors to determine what was collected
for various specifications. It was on this visit that the experts agreed that the outlets
were not necessarily typical for non-food items and within an outlet, where there werechoices for a given item, the better brands were priced. As was found in the 1993
ESCAP ICP, Chinese textile prices were higher than those in Hong Kong markets eventhough many of these clothing items were produced in China and exported to Hong
Kong.
Even before ICP 2005 was initiated, the NBS sent staff to many countries tolearn about the ICP, though for most of the delegation this was a foreign visit focusedon tourism as much as substance. Not an uncommon practice with congressionaldelegations in the United States, with parallels in other countries. Paris and the OECD
was a favorite spot especially during the years in which an attempt was made to link
China to the OECD comparisons. David Roberts and Derek Blades eventually threw up
their hands on this effort as it became clear that the NBS was not going to supply
matching prices for items for which mutual agreement had been reached. Prasada Rao
in Brisbane provided ICP lectures for NSB groups after their visit to Canberra, andbefore they went to the Gold Coast. I spoke to different NSB groups in New York,
Philadelphia and Washington and at least two other countries, all with no apparent
impact on how the NSB viewed China’s role in the ICP. It seems clear to me that sincethe 1980s China wanted to claim a rate of economic growth without historical precedent
while their per capita output compared to other countries remained low. The NSB
expressing the views of higher levels of government expressed reservations about theresults of the 2005 round, arguing that their economic level was too high. It would be
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In an OECD-China price comparison exercise David Roberts and team found that the NSO
collected prices from up market outlets and in these outlets priced the higher priced items
that matched the specifications. In the selection of representative items it was clear that
items bought by the urban middle class were chosen.
119nice to say that it was easier to work with the NSB in the 2011 ICP, but as will sadly
become clear below, Global Office and TAG relations with China became even moredifficult.
D. The Final Results of the 2005 ICP
The Global Office faced a great deal of pressure to complete the 2005 Report but
there were time lags because the Executive Board, the Regional Offices and in somecases individual countries were given a chance to review a draft report. The IMF verymuch wanted the results in order to implement PPP based quotas for member countries
in 2008. As a consequence there was not as much time to analyze the results in the final
report as there should have been. However, a major supplement to the 2008 report forthe 2005 ICP was published later, namely Measuring the Real Size of the World Economy(World Bank, 2013) edited by Fred Vogel with some early assistance of Prasada Rao.
The volume runs to nearly 600 pages volume with chapters by the usual suspects.
(1) The Form of Presentation
The Tables of the 2005 report were notable in one respect dear to my heart. While
the United States was the reference country, results were also expressed with the world
average as the reference per capita and total. Botswana’s per capita GDP for 2005 isreported as 28.9 percent of the United States and 134.4 percent of the world average(based on the 146 participating countries). The United States dollar remained thereference currency for both the ICP benchmarks of 2005 and 2011. I had recommended
to Irv and Bob that we also express the per capita GDP for each country relative to boththe United States and a world average in the 1975 ICP report.106 Irv was not sympathetic
nor did I get any support for doing this in the 1980 ICP report. The 2005 report also
calculates a world price level of 81 percent of the United States and a world per capita
GDP as 7291 US dollars at PPPs and 8976 US dollars at exchange rates. 107 The report
also provides the necessary data to calculate the price level of each country relative tothe world average, which is also on my wish list for future reports.
My argument for also expressing country price levels relative to the average isbecause the United States occupies a very asymmetrical position in world financial
markets because of the willingness of individuals and institutions to hold dollars as a safe
currency and asset. The amount of US currency held abroad exceeds that held in the
United States, especially for $100 bills that are convenient for illegal transactions andwhich the Federal Reserve in 2016 quit printing for this reason. The total is well over halfa trillion dollars. In addition to central bank holdings, many bank accounts held abroad
are denominated in dollars, and many transactions are specified in dollars like those in106

This could be the simple average of the 34 countries or preferably the average based on the
PPP converted GDPs of the super-countries.

107

In the early versions of PWT we felt constrained by space and also felt our users were morethan capable of doing the computations themselves. It should be noted if a poorer country
like Pakistan were the reference currency the word price level with respect to Pakistan would
be greater than 1.0.
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oil, the so called petro-dollars. This can produce significant fluctuations in the value of thedollar abroad for no reasons fundamental to the United States economy. This affects ICP
PPP results in different benchmarks as reflected by the price level in the United States
relative to the world average, which has fluctuated between 140 and 120 percent of theworld average between adjacent benchmarks. If price levels are expressed relative to theUnited States these US price level fluctuations show up as price level fluctuations in othercountries where nothing has necessarily changed.
In TAG meetings and in discussions with the staff I pushed for explicitly including
exports and imports as well as the net foreign balance in the tables of national currency
expenditures. The advantage of explicitly showing exports and imports is that users areoften interested in the total volume of trade relative to GDP, and there is no goodreason not to make this information available. Further, even though it could be easily
calculated by users I pushed for explicitly showing domestic absorption, the sum of
consumption, domestic investment and government. One reason for this is that as wehave shown earlier, for purposes of extrapolation, domestic absorption is more reliable
than GDP because of relatively low quality of export and import price deflators in many
countries. Again time was short so this did not happen in the 2005 report but did makethe 2011 publication.
(2) The Ikle Method of Aggregation Used in Africa
Doris Ikle did her graduate work at New York University, Columbia, and Johns
Hopkins. Her initial research was directed at index numbers and she published an article
proposing a new aggregation formula (Ikle,1972). Bob Summers was one of the referees
on the paper and found it tough reading and asked for few substantive but many language
revisions. Yuri Dikhanov became interested in the Ikle index in the 1990s and several
staff at the DDG also liked the idea once Yuri had made it more intelligible. The index
turns out to be additive, a trait favored by the DDG at the time, and is a variation of theG-K index as described by Balk (2008, p. 247) and Cuthbert (2000). 108 Using the G-K
framework in the form used at Penn, the relative price of each country was multiplied byeach countries’ nominal quantity, namely Qi = Expenditures on basic heading at exchange
rates/ Price level of basic heading. In Ikle the relative price of each country is multipliedby the harmonic mean of the Qis.
This definition of the international price provides additive results that are notsubject to the bias associated with the Gershenkron effect. The Africa region wished tohave an additive result in 2005 and chose, with Yuri’s counsel, Ikle. In my view additivity
and equal country weighting within the G-K can as easily be obtained by simply taking anarithmetic unweighted average of the relative prices of each country, an alternative noted
108

Jim Cuthbert and his wife, Margaret, had at one time worked for the OECD as consultants
and made several contributions to the ICP literature. Because they mainly worked on
consultancies and lived in Scotland I only met them a few times, a loss for me because I only
appreciated their work somewhat later. Balk, like Dikhanov, helped make Ikle more visible
proving the existence of a solution for the system. The method is sometimes referred to as
the Ikle-Balk-Dikhanov index.
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by Peter Hill (1982) as well as Balk and Cuthbert. Equal country weighting in G-K using
an arithmetic or harmonic mean produces very similar results.
(3) Did the 2005 ICP Results Produce Surprises?
The answer to this question clearly depends on whom you ask and how much they
believed previous ICP benchmarks and the World Bank’s World Development Indicators.
The major tendencies of previous ICPs were clearly evident in the results, namely thatcountry price levels rose with per capita GDPs whether converted at exchange rates or
PPPs. I thought that the price levels of many African countries were too high and evenmore so for India and China given their recent high rates of economic growth. However,many on the Executive Board and Global Office were quite ready to ignore previous ICP
benchmarks and accept the 2005 ICP as ”truth”. This was nowhere more evident than in
the World Development Indicators of the World Bank. Quoting Deaton and Heston (2010).
“For example, the 2007 version of the World Development Indicators (WDI), WorldBank (2007), lists 2005 per capita GDP for China as $6,757 and for India as$3,452, both in current international dollars. The 2008 version, World Bank
(2008a), which includes the new ICP data, gives, for the same year, and the same
concept $4,088 for China and $2,222 for India. For comparison, GDP per capita at
market exchange rates is $1,721 for China and $797 for India.”
Outside the World Bank there were many comments on the 2005 ICP of a politicalnature that implied that the new results were making the poor countries look poorer so as
to keep the World Bank in business. Others like myself thought that more time wasneeded for users to become familiar with the new results to better judge the 2005 ICP. In
the meantime a familiar ICP problem arose, namely that before moving ahead with a newround it was necessary to have the blessing of the UNSC and to set up governance andsecure funding. While this was being sorted out many of the Global Office consultants
were let go or transferred to other tasks, Vogel remained as a consultant, and Nada
Hamadeh was caretaker of the ICP. Dikhanov was temporarily transferred to other work
and Yonas Biru was in limbo.
Sometime in 2009 I resumed chairing an Interim Tag until a new governing
structure was in place. I made it clear my term as chair would end with the appointmentof a new TAG and Global Manager, a position advertised in 2009. From many applicants
the selection committee chose three candidates to interview: Michel Mouyelo-Katoula (Pic20), formerly of Eurocost in Luxembourg and during the 2005 ICP manager of the staff at
the AfDB; Marshall Reinsdorf (Pic 43) of the BEA and formerly at the BLS, economist;
and Silke Stapel, member of the TAG and manager of the Eurostat comparisons. In theend, Michel was chosen as the new Global Manager starting in 2010.109
109

Reinsdorf was not really seriously considered because Silke and Michel had so much more
ICP experience. The choice between the two was moderately contentious for several
reasons. First, Michel carried some unjustified guilt by association because he had been at
Eurocost when their contracts with Eurostat were being investigated. Further Yonas andMichel did not work well together during the 2005 ICP, not in small part because Michel had
122Chapter 11: Reflections on the ICP and the PWTMy relationship with the ICP is approaching 50 years and not surprisingly somedays, months and years have been better than others. I have been involved with otherresearch during this period, much of it in India and Pakistan on subjects as diverse as
sacred cows, camel transport, corruption and historical estimates of national income inIndia. Beginning with the ICP at age 33 and still dabbling at age 82 is a life that would notappeal to all and not surprisingly a number of family, friends and colleagues have asked
me why. I have played a lot of tennis and still play squash and since moving toAlbuquerque, pickleball (look it up) so I have always had athletic and other interests.
However, like my Scottish statistician friend Angus Fell, I still find the ICP intellectuallyinteresting and almost all involved, congenial.
A. Transferring the PWT to Groningen
One of the reasons I remained involved with international comparisons was that
the PWT was still being supported enough to keep a skeleton staff at Penn to maintain it
while all the while I was trying to pass it on. By this time Bob was not really taking part in
the PWT, so it fell on me to explore possibilities. At one stage Bettina Aten and I tried tosell it to the Philadelphia Federal Reserve, which had an ongoing relationship with the
Economics Department at Penn in terms of joint workshops and seminars. There wassome enthusiasm there, just as there was at the Board of Governors, but in the end nofollow through. One new hire in Economics at Penn had some interest, but not surprisingly
her career agenda did not allow her enough time to take over the PWT. We maintained
our annual international workshop where I would report my lack of progress in finding a
new home.
By 2010 the problem of moving the PWT took care of itself in that Marcel Timmer
by then was secure in his position at Groningen and his younger colleague, Robert
Inklaar, was well on the way. At our 2010 workshop Feenstra, Timmer and Inklar offered
to take over the PWT making some very important improvements, namely explicitly
estimating export and import PPPs and developing constant price series that were notsensitive to each new benchmark, as was the case in the Penn version. I mulled overtheir offer for a full two seconds before exclaiming YES! All thought at this stage that the
PWT was generic enough that the name would be maintained. We produced a final
version at Penn, version 7.0, that incorporated the 2005 ICP with our modifications in2012. Feenstra, Timmer and Inklaar brought out PWT 8.0 in July 2013 also based on thea higher salary than Yonas, a point the latter took personally. I had gotten on well with Silkeand we had dinner the night before her interview when she described her vision as Global
Manager. Silke can come on strong and I am sure it set off some alarms the next day
because her vision involved a large budget for meetings and much emulation of Eurostat (ared flag to a bull for many non-Europeans). Yuri made it clear that he would not stay in DDG
if Silke was chosen. In the end Michel was a good choice because he was a very effective
manager.
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2005 and previous ICP results and thoughtfully compared the differences with PWT 7.0.
(Feenstra, Inklaar and Timmer, 2015)110
It was a transition that fit well into the work of the GGDC because it had alreadybecome the archive for the Maddison Project to quantify economic history of the world
more so after 1800 but also pre-1800 stretching back to BCE. The GGDC is the center ofthe Maddison Project arranging meetings and circulating papers to a loose…I am amember…group of researchers who try to reach a consensus on how to update Angus’s
work using more updated rounds of the ICP. The present proposal jointly authored byBart van Ark is to use the 2011 ICP, which I also support. In addition to their continuing
work on productivity, another major project at GGDC headed by Marcel Timmer is to use
world input-output relationships in order to trace supply chains so that that the import,
export and factor content of products can be estimated. This exciting work does take timeof Timmer, particularly, and Inklaar but bless them, they are young.
The transition of the PWT went smoothly, at least from my standpoint with Inklaar
now answering questions of users. I do not miss the questions, especially those that areclearly answered in the documentation, or those by paid consultants who want you to dotheir work. Bob was always trying to find a way to prevent access to the PWT until a user
had read the documentation or had passed some kind of test, but we were not able tofind a way to pull this off. Bob passed away in spring 2012 just before his 90th birthday,
so he did not get to see the PWT truly become generic and his vision realized. Anita andLarry Summers did not want a memorial service at Penn, especially since many of his
friends had passed. The IARIW that published the Review of Income and Wealth where
early versions of the PWT were published, was holding their meeting in Cambridge thatsummer. The organizers agreed to honor Bob at a dinner meeting during their week longsession which was convenient for both Anita and Larry, who also gave a brief talk. I
shared some of the history of the PWT and its evolution and my memories of how Bob,
who was in charge of public relations and marketing, and I, as production manager,
worked together. We both discussed substantive issues at length and rarely ended indisagreement. Our personalities were quite different, Bob more up front and action
oriented and I was more laid back, but we both enjoyed our conversations and shared
many a good laugh, often at ourselves.
B. The 2011 ICPI was a member of the TAG during the 2011 benchmark and a member of subcommittees, including the Computation Task Force tasked with monitoring the Global
Office estimates. I also worked with Paul Konijn (Pic 23) on housing, and on an ad hocgroup dealing with China. As mentioned earlier the TAG was much larger in the 2011
round with members from a number of governments, Italy, Norway, South Africa and theUnited States for example. Luigi Biggeri (Pic 20) from Italy was both an academic from
Florence as well a former member of the Italian Statistical Office and made many useful
110

The GGDC maintains the PWT website and archives all previous versions of the PWT at
Penn including documentation. Their latest version is PWT 9.0, which incorporates the 2011
ICP results, was issued in June 2016.
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contributions. The Regional Coordinators also attended the TAG meetings because bothwere scheduled in the same week. The number attending from the Global Office was a
bit larger, and included the regularly attending consultants, Derek Blades and David
Roberts (Peter Hill no longer attended). All those attending had useful things to say but
the large size of the group made it a bit unwieldy, especially for those seniors who were
not so good at remembering names or catching all that was said by the speakers in alarger room. (Pic 20)
There were two notable changes in the EU-OECD representation. Silke Stapel had
moved from Eurostat to a more senior position in the European Commission. Silke was
replaced by Paulus Konijn. Both were very competent, and Paul in my view was more
willing to compromise in the sense of not making the best the enemy of the good. On theOECD side Roberts reached retirement age, and his long-time colleague Francette
Koechlin (Pic 20), was his official replacement, though Francette had also attended 2005
ICP meetings. In addition Kim Zeischang was promoted within IMF and so shared
representation with Mick Silver (Pic 21). Mick was known to many from his work on the
CPI in the United Kingdom while teaching at the University of Cardiff so he was a welcome
addition at the technical and geniality level.
The reason for the Computation Task Force arose out of the documentation, or
rather lack thereof, for the 2005 ICP. For example, when researchers began
experimenting with the data set of basic heading expenditures and price levels madeavailable in the summer of 2008 after publication of the 2005 report they found they could
not replicate what was published. This was not the only case where more documentationof 2005 would have been valuable. Michel was strong on transparency so three groups
were to replicate Yuri’s computations for 2011, Sergey and independently Robert Hill inAustria, and Bettina Aten and I in Washington, with Paulus and Francette also on the task
force. This did not always work smoothly, but in the end we all breathed more deeply
when Sergey and Yuri’s results matched. The rough spots were how the regional andGlobal Office results were put together.
The initial computations in the Global Office were to compute CPDs from the
Global Core List prices for the 156 countries supplying them by summer, 2013.111 All got
the same results, hurray! One option would be to simply aggregate these basic heading
price levels and expenditures by GEKS to get a world total and use the CAR approach toprovide regional GDP totals. The regional results would then be used to allocate regional
total GDP to each of the countries. However, this very simple and straightforward
approach that I advocated was not what was actually done
At a meeting of the TAG at which I must have been asleep, a more round about
approach was adopted in words, but without the actual steps written symbolically so thata competent programmer could follow the logic without room for interpretation. In thisapproach use would be made of the country price levels for each region for each basic
111

The 2011 reports there were 199 countries net after excluding countries participating in morethan one region. There were 22 countries in the Caribbean and 21 in the Pacific islands thatwere linked on later, the Pacific islands only at the level of household consumption.
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heading based on the Global Core and regional prices. The argument was that theseregional price levels would be superior to those from the core prices alone because they
were what the regions used in their comparisons. My view remains that the purpose ofthis exercise was only to link the regions and to obtain regional totals of GDP in a common
currency. It is not obvious to me that linking the core and regional price levels to obtain a
new set of price levels for the CAR aggregation would be an improvement on the simple
approach. This is especially so, given the detailed steps involved in the linking.
The three validation groups tended to interpret the guidelines differently giving rise
to voluminous emails between Sergey and Yuri that the Hill and Aten groups found difficult
to follow. One issue was the fact that the PPPs of each country in the regions were
submitted with reference to a regional reference country like Nigeria in Africa. So thesteps included moving from reference currencies to a global reference currency. As
Sergey pointed out it would have been much better to eliminate these steps and begin
with all price levels and expenditures expressed in dollars as the reference currency
where the reference would be the United States or all countries, the preference of Sergey
and me. Agreement was finally reached, but it took time and patience.
(1) Digression on Regions
Calling the EU-OECD a region is increasingly a misnomer. It does have a
European (and Commonwealth of Independent States) core but it includes Japan, Korea,
Australia, New Zealand, Canada, Mexico, Russia and the United States in the 2005
comparison and Chile in 2011. And it removes important countries from North and SouthAmerica and from Asia. So anyone wanting strictly geographical regions needs toconstruct such entities themselves bearing in mind there will be some anomalies adding
the results of Korea and Japan to the results of the Asian region. In 2011 there were also
two single countries, Iran and Georgia, whose results are not strictly comparable withthose of the other countries in their regions, and some notable regional countries
excluded, namely Argentina, because official price statistics at the time were politicallymanipulated.
These issues are likely to grow in the future as geo-political isolation for someindividual countries increases and the OECD includes more countries. The way the EU
and OECD countries are put together is by blocs that are a geo-political mixture
corresponding to no United Nations or World Bank region. Many of the arguments forregarding the regional comparisons as more homogeneous are belied by the OECD.
Africa and Asia are also quite heterogeneous. These comments may have less relevanceas the Global ICP moves to a more flexible format as discussed in section C below.
(2) The 2011 Results and Poverty Fracas
The 2011 Report made clear that there were a number of changes in methods
between 2005 and 2011 that made it important for users to exercise caution in interpretingchanges between the 2005 and 2011 ICPs. For example just applying the CAR method
to the 2005 inputs increased the per capita GDP of China by 12 percent and that of Indiaby 8 percent, removing tens of millions from poverty. Global Office warnings were not126

typically heeded, perhaps because the headlines were so attractive. Most comments
focused on world income distribution, more equal in 2011, and the very large reductionsin the world poverty count. A typical media story was to embrace the reduction in poverty
around the world while there were other stories saying it was too good to be true, and theWorld Bank was tinkering with the numbers. In the 2005 ICP the World Bank was accusedof making the poverty count too high so they would still have an important mission to
improve the world income distribution. Hard to please everyone.
Within countries like India, where the left and right have been squabbling over
trends in inequality since Independence in 1947, the left reacted to the 2011 ICP Reportby saying the poverty count was grossly understated. The then Congress coalition took
the results as evidence that their economic policies were raising incomes of all including
the very poor. India has its own poverty count based upon periodic Commissions, themost recent being chaired by C. Rangarajan, a Ph.D. in Finance and Economics from
Penn in the 1960s, who had been Governor of the Reserve Bank of India. That reportissued in 2014 showed an increase of a hundred million in poverty compared to theprevious Commission. Interestingly this was accomplished by adding to the poverty line
a higher expenditure share for other goods and services more comparable to better off
countries, because that was a goal suitable for India’s economy.
The World Bank’s poverty group faced a problem of whether or how to integrate
the 2011 ICP as it updated its poverty count based upon the 2005 ICP, (Ravallion,
Shaohua, and Sangraula, 2009). When the World Bank seriously addressed this issue
Ravillion had taken a faculty position in the Economics Department at Georgetown
University. In the view of the Global Office and poverty types like Deaton, Rao and me,
ICP 2011 should be used as the basis for any future poverty line. A meeting in January
2015 of both the Global Office and poverty group plus observers from non-profits andgovernment aid agencies as well as Aten, Deaton and I held useful discussions. 112 The
final outcome was for the poverty group to begin implementing a new poverty line of $1.91
a day. This line was based on the results of the 2011 ICP and underlies the World Bank
estimates of the total number in poverty by country, region and world.
The outcome of this review of the World Bank poverty estimation has been areorganization of the work and an increase in the transparency of the calculations. One
criticism of the use of the ICP for estimation of the poverty line is that many of the items
and basic headings are not necessarily relevant for the very poor, for example air fares
and dishwashers. By agreeing to base poverty estimates on PWT 2011 the poverty groupis in a position to estimate their own consumption PPPs using the core price list,
eliminating questionable items or basic headings from the list. As will be discussed below,
it is not clear this will be an option in the future versions of the ICP.
Another improvement that I think should be made in poverty line estimates
emerges from the work of Deaton and Dupriez (2009) and Deaton (2010). They point out
USAID under the guidance of Steve O’Connell (Swarthmore and previously Penn) took a great deal ofinterest in the poverty results based on the 2011 ICP. O’Connell’s colleague, Don Sillers, undertook anumber of simulations using the 2011 results that helped inform the January meeting.
112

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there is an interdependence between the poverty line and the number in poverty that has
not been taken into account in previous World Bank work, including the current $1.91
poverty line. Previously an unweighted average of the national poverty lines of the tenpoorest countries were converted at household consumption PPPs from the ICP. As astarting point many of these national poverty lines were higher than countries not in thebottom ten, like India, where the numbers in poverty are in the 100s of millions. Second
the average would be more convincing if weighted by the number in poverty in eachcountry. Third the per capita GDPs from the ICP used to determine the poorest countries
are subject to errors of 20 percent or more, so picking a bottom ten countries introduces
further uncertainty around the initial line.
A better procedure would start with a larger sample of poverty countries based
upon total numbers in poverty from previous World Bank estimates and ICP per capita
incomes. An initial poverty line would then be estimated by taking an average of national
PPP converted poverty lines weighted by number in poverty of the larger sample. From
this initial poverty line new estimates of the numbers in poverty can be calculated andused to re-weight the national poverty lines to begin a new iteration until there isconvergence. In my experience the convergence requires just a few iterations. More
importantly, taking account of the interdependence between the poverty line and counts
appears to make a difference.
(3) China Redux
The economic media picked up many stories about the size of the Chinese
economy emphasizing that it had the world’s second largest economy in the 2005 ICP,
though only roughly half the economic size of the United States. However, some China
enthusiasts thought that the 2005 ICP estimates were low and claimed China’s
economy would soon be larger than that of the United States. For whatever reasons
the Chinese did not welcome that prospect and unfortunately this affected their
participation in the 2011 ICP in a number of ways. First, they obtained a position for
one of the NBS staff on the Executive Board of the 2011 ICP with a serious impact on
the timely completion of the 2011 benchmark.
Second, Chinese participation within Asia created serious frictions with both the
ADB staff and the Global Office. This took the form of asking to see the prices of othercountries before making Chinese prices available and other fairly overt attempts tomanipulate the results. During validation the ADB did an analysis of the increase in
prices between 2005 and 2011 in the prices submitted to the ADB (41 percent) and theChinese CPI (22 percent), a large difference.113 As part of participation in the 2011 ICP
each country had agreed that the prices and expenditures submitted to the regional or
Global Office would be validated after which further analysis would be carried out at theregional and global levels. The NSB provided 856 products from the regional list ofwhich 383 were from the global core list. In addition China priced 200 global core items,
113

In fairness, the ADB listed other countries whose prices required further scrutiny including
Hong Kong, Indonesia and India.
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not priced in any country in the Asia-Pacific region, and which would have been of nouse in the regional comparison. It will be recalled that global core items were the basisof linking the regions in the ICP but it had been agreed that validation of the global core
items was first to be done in each region, so there was no mechanism for China’s
additional core prices to be validated.
After the NSB had submitted data and their prices were validated at the ADB
they continued to raise time consuming issues with respect to how Chinese data werebeing used. China was the only country to raise such issues, and they were the only
country to submit a set of revised prices apparently to see whether this would change
the estimates. In fact, the set of revised prices were by no means all higher than before
and their use would not have basically changed the results. Rather the issue was that if
one country was allowed to do this how could one refuse a similar request by othercountries.
Third, the main Chinese concern was not with their economic position within Asiaand the Pacific but rather their position with respect to the United States and several
other countries. This led the NBS at a late stage to demand that they be treated as asingle country and not be included in the ADB comparisons. It is not clear that treating
China as a single country would necessarily achieve the result that the Chinese wished,but this was considered a non-starter by the Global Office and the TAG because
countries had agreed to abide by the accepted multilateral methods. The last event thatpushed everyone involved to the brink occurred when the preliminary 2011 results werereviewed by the TAG in September 2013 with explicit agreement that the results would
not be distributed, an agreement violated by the NBS.114
Martine Durand was OECD Chief Statistician and as Chair of the Executive
Board had to deal with the Chinese demand to be treated as a single country. The
Global Office was geared up to publish the results in 2014 but the eventual compromise
pushed publication to 2015, an unfortunate outcome. What was agreed by the
Executive Board was that the NBS would put their concerns in writing and there would
be a meeting at the Bank November 20-22, 2013 including an NBS delegation, ADB
and Global Office and EU-OECD staff, a representative from India, and a task force of
the TAG, including Aten, Deaton, and me. I knew two of the NBS representatives fromprevious meetings and I felt embarrassed for their unprofessional presentations
because I knew they were capable of so much more. They claimed to provide new
evidence that was all clippings from the media. They talked about housing but all theirevidence was based upon property prices not the flow of rental services. Angus at one
point asked the Chinese why they were wasting our time, a common sentiment among
the non-NBS representatives. And perhaps among the NBS delegates too, as their
discussion points were presented in a repetitive but unconvincing fashion.
The result was that Angus Deaton, Alan Heston, Paul McCarthy, Prasada Rao,and Fred Vogel sent an open letter to the Executive Board explaining why the Chinese
114

At one point Deaton suggested that the Chinese be asked the result they wanted and thatwould be included in the report. This solution would have removed the pretense that China wasabiding by the ICP protocol like the other countries.
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demand was technically not feasible and totally at odds with the agreed terms ofparticipation in the ICP. Fred Vogel wrote an initial draft and Paul McCarthy added his
input to produce an excellent version that ran to seven pages after adding a few TAG
suggestions. The final letter to the Executive Board answered NSB concerns about the
preliminary results of the 2011 ICP where China was included with the ADB group. I
have been told that there was some support within the Bank and the Executive Board togo along with treating China as a single country prior to this letter. After all the drama
the initial results with China in Asia were published with each Table having an end notesaying in part “The National Bureau of Statistics does not recognize these results asofficial statistics.” My own take is that the published China estimates for 2011 are an
improvement over 2005. I would like to report that China’s cooperation with the ICP will
go more smoothly in the future. However, as of this writing it is not clear that China will
follow other countries in Asia and provide newly collected or updated 2017 prices
extrapolated from 2011.
C. Moving the ICP Towards Annual Updates
After publication of the 2011 ICP in 2014, an evaluation of the ICP took place under
the auspices of the Friends of the Chair and was presented to 47 th session of the United
Nations Statistical Commission. This section will take up three major recommendations
from the evaluation report that were accepted by the UNSC: permanent place of the ICP
in the international statistical system, governance structure of the project, and moving toa rolling benchmark system.
(1) You’ve Come a Long Way Baby
The UNSC “supported the recommendation of the Friends of the Chair group…that
the International Comparison Programme become a permanent element of the global
statistical programme and that it be conducted at more frequent intervals”. Having begun
as a research program in 1968 at the UNSD and Penn, moved to a regional basis in the1980 ICP, survived major reviews under less than friendly circumstances in the 1990s,
the ICP is now as permanent as such words convey. A few hundred people have been
involved at the global and regional offices over this period and several thousand in country
offices in the role of national accounts and price statisticians as well as price collectors.
It has been a major international economic project, perhaps the largest to the present
time.
It is a project that demands cooperation among countries in matching ofspecifications of goods and services, not a typical activity in statistical offices outside ofinternational trade statistics. The most gratifying part of the ICP for me over the past 15
years has been the group of younger government statisticians and researchers who havetaken on this work with interest and often enthusiasm. It is that generation who will becarrying out the recommendations of the UNSC and will be modifying existing methods
to produce more frequent ICP comparisons using less resources than in the past.
(2) Rolling Benchmarks

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The UNSC also “agreed with the proposal to adopt a rolling benchmark approachof surveys to be spread over a three-year cycle starting in 2017…”. The rolling benchmark
approach was an OECD initiative originally suggested by Katerina Reut (BLS) and
Barbara Slater (Statistics Canada). They argued that countries would find participationeasier if data collection was continuous. At the time Eurostat collected consumer prices
for the five year benchmarks (t) between mid t-1 and mid t+1 with machinery andequipment and construction priced every year (paid for by Eurostat). So it was relatively
easy for the European Union to adopt the approach. The OECD adopted the approach at
the same time but as it was the countries that paid for the pricing of capital goods, sothese were priced only once every three years. House rents and government
compensation were collected every year by Eurostat and every three years by the OECD.
Since 1991, EU comparisons have been annual comparisons and EU-OECD
comparisons have been three yearly comparisons.
The UNSC envisions the remaining ICP countries undertaking a similar exercise
with the initial reference year being 2017. The 2017 results will serve as an update of the
global 2011 benchmark and will be based on surveys undertaken in the regions at
different survey dates since 2011. All regions will have done price surveys for 2017 for atleast some portion of the basic headings. The UNSC recognizes it is easy to recommend
but implementing rolling benchmarks involves a degree of coordination of survey timing
between regions other than EU-OECD that is not necessarily feasible. As a practicalmatter this means that the countries and regions will need to extrapolate many prices orbasic heading price levels to 2017 so as to provide the Global Office with the inputs
necessary to produce a global aggregation for 2017.
One area of research the Global Office is testing is whether non-official prices canbe productively employed, for example, as time to time extrapolators. One reason for thisis that country price indexes are often not very detailed, certainly not at the basic headinglevel. Sources for non-official prices can include special collections contracted to firms
who do this on a regular basis, scanner data recording quantities and prices by bar codefor each transaction, and prices obtained by web scraping of websites for supermarkets
and the like.115 Some of these techniques are quite feasible in Latin America, Western
Asia and Asia and the Pacific, less so in Africa. Another question is whether fixity outside
the European Union and the OECD is to be maintained every year or some more flexible
approach will be adopted, like having preliminary annual global results followed by more
final results with fixity when each region is satisfied with their results. The World Bank
background paper recommended that results be provided with and without fixity, an idea
I strongly support because I believe it adds information beyond that published in thepresent report, and because of the increasingly non-contiguous character of someregions.
I would also suggest that the World Bank provide for users, on request, a table ofall possible binary price and quantity matrices for consumption and domestic absorption
115

In the early ICPs we regularly used Sears’ catalogues, both because BLS also used them,and because for appliances like refrigerators, Sears was the largest seller in the UnitedStates.
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and possibly GDP. Researchers can of course do this on their own if their request for thebasic heading parities and expenditures is approved. But I would argue that nonresearchers would also be interested in such binary results within and across regions.
This would involve over 100,000 numbers but they are not being published, only provided
on request, and these days would not even be qualified as big data.
(3) Governance
The governance structure would consist of a Governing Board taking the place of
the Executive Committee, an Interagency Coordinating Group and a Technical Advisory
Task Force. The aim of these changes would be to increase efficiency and offer more
flexibility to the structure. As I read the UNSC report, membership in these bodies would
be a balance of countries, regions, experience and expertise. I believe the TechnicalAdvisory Task Force will not be a continuing body like the TAG, but rather a rotating groupthat would be chosen to examine particular issues as they arise and report to the Global
Office and other groups as appropriate. The Technical Advisory Task Force should be
able to function with smaller and probably fewer meetings, which should reduce costs,
and operate in a more focused way. An Interagency Coordinating Group would be
efficient in the sense these agencies already meet on a fairly regular basis so there could
be fewer special meetings because many regular attendees are likely to also be familiar
with the ICP. Given a certain unwieldy governance structure of the 2011 ICP theprospects for the future appear an improvement.
Before leaving the UNSC report, I must say I was surprised that there was virtuallyno mention of PPP comparisons within countries. At one time Eurostat recommended but
did not fund country surveys of regional differences in prices. The EU countries haveperiodically made studies of differences in prices in major metropolitan areas for a sample
of items that are used to adjust to national prices those prices actually surveyed for theestimation of PPPs. I have never thought this was a very satisfactory adjustment for larger
countries but at least an effort is made. The BEA with the leadership of Bettina Aten, does
produce metropolitan area and state price parities annually on the basis of the time totime price data collected by the BLS and the Census Bureau. But if the truth be told these
are not used for the purpose of adjusting US prices provided to the OECD for PPP
purposes. Luigi Biggeri with the support of Prasada Rao has been instrumental in pushingregional comparisons in Italy and most recently at a conference in Nanchang, China. (Pic50)
D. In Good Hands
This chapter on reflections includes commentary on the immediate future of the
ICP, reflecting the difficulty of getting me to shut up on a topic that continues to hold myinterest. There are a lot of challenges ahead for the Global ICP but I am optimistic that
new approaches will be developed that will improve its quality while using less resources.
The source of this Panglossian view of the ICP future is the entry of younger better trained
and motivated staff into the global, country, and regional offices. In some ways I am
surprised that the same expenditure side approach to GDP has been maintained as longas it has, given the continued criticism of GDP. Perhaps the Groningen group will in the132

future bring out industry side productivity measures that parallel expenditure side PPP
estimates in a consistent way. Hopefully the EU-OECD approaches to better measuresof health and educational output can be extended to other regions. Add to the wish list
improvements in measuring output of government and to better estimate the flow of owneroccupied and rental housing. These almost 50 years association with The Project has
been a rewarding experience, especially the friends I have made, and in too many cases
lost.

133

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