A research article that will shortly be published in Information Technology and International Development got me thinking about Engel’s Law, which states that as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises.
The article is by Aileen Aguero, Harsha de Silva and Juhee Kang. It’s not about food prices, per se, but about some extensions that allow the identification of necessary goods and luxuries. Their interesting finding is that voice telephony is a necessity in Asia (in the six countries covered by LIRNEasia’s teleuse@BOP research), while it is still a luxury in Latin America. How could the same thing be a luxury in one place and a necessity in another?
Research on healthcare in Africa changing from a luxury to a necessity within a decade, also reported in the article, suggested an explanation: As communication services become cheaper, they become necessities. Latin American mobile voice users currently suffer from much higher mobile prices than their Asian counterparts. When and if they decrease, they too will be seen as necessities, and one would be able to conclusively refute the claim that communication is a luxury for the poor and a necessity for the rich.
Having written the guest editorial, I thought I should do a little more checking. The Annual Report of the Central Bank of Sri Lanka, 2010 compares data from the Household Income and Expenditure Survey of 2006-07 and 2009-10. Go right to the last page: for some reason only known to the Central Bank, the 2009-10 data are given only in the last page.
Household incomes have gone up a quite a bit, from LKR 26,286 to LKR 35,495, a 35 percent increase.
Household expenditures have also gone up: LKR 22,952 in 2006-07 to LKR 32,446 in 2009-10, an increase of 41 percent.
Now communication expenditures should have gone down, if Aguero, de Silva and Kang, are right:
And they have: transportation and communication expenditures declined from 10.5 percent of total expenditures to 10 percent. Nice if communication was broken out from the combined number but given fuel prices increases, we can assume that transportation increased, giving a decline (larger than 0.5 percent) for communication. So Aileen, Harsha and Juhee are on safe ground.
Now comes the surprise: expenditures on food (as a percentage of the total) have not declined, but have increased: from 37.6 percent to 39.8 percent. So food is a luxury in Sri Lanka, not a necessity?
Perhaps, Harsha de Silva will provide an explanation?