Engel's Law, telecom use, and the odd case of Sri Lankan food expenditures

Engel’s Law, telecom use, and the odd case of Sri Lankan food expenditures

Posted on August 22, 2011 / 8 Comments

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?

8 Comments

indi
August 22, 2011, 5:35 pm
Haven’t food prices gone up a lot? I personally pay more for the same amount of food than a year ago.

It could be that people are spending more and getting the same amount of food, or less.
Rohan Samarajiva
August 22, 2011, 5:41 pm
Obvious answer, yes. Note expenditures have gone up by 41 percent, while income have gone up only by 35%. So they’re saving less.

Food prices are not behaving normally, so we have a violation of Engel’s Law.
abdussamad
August 23, 2011, 3:33 am
I don’t think you should put much stock in differences of 2-3 percentage points like this. It’s a survey after all and depending on who they asked it could very well change the result completely.
Rohan Samarajiva
August 23, 2011, 8:33 am
I might accept that the difference between 10.5 and 10 (communication and transportation) is insignificant. But more than two percentage points on food is significant. Based on recall, the HIES is a 12,000 sample survey which means margin of error is quite small.
Rohan Samarajiva
August 24, 2011, 11:31 am
In light of Abdussamad, I checked the 2003-04 food expenditures: 34.4 percent. So there has been a five percentage point increase in six years. Looks like something odd is going on in Sri Lanka.
Mahesh
August 24, 2011, 1:21 pm
assuming high proportion of communication is done on mobile phones, i am sure there is a 50% reduction on mobile call charges which should effectively drive down the spend on communication..this means cost of transportation also gone up drastically….could it be bus fares? what is the impact of the substitution effect of communication to transport?
Rohan Samarajiva
August 24, 2011, 1:38 pm
@Mahesh, no quick answer but more food for thought. In 2003-04 they broke out communication and transportation expenditures. It was 2.2 percent for communication and 9.8 percent for transportation, giving a total of 12 percent. in 2010-11 it was 10 percent. Looks like both declined.
Mahesh
August 25, 2011, 3:51 pm
@rohan, did some preliminary numbers assuming Dialogs ARPU
It appears that ICT expenditure has increased drastically over the period. The ICT spent in 2003/04 has to be heavility understated due to low mobile penetration at that time whilst transport remains same despite many price shocks..looks like there is a substitution effect…

2009/2010 2003/2004
Mean Mean
Spend 8,112 3,936
ICT+Transportation % 10.50% 12.00%
ICT+Transportation Absolue 852 472
Mobile ARPU ( Dialog) 465 NA
Total ICT 465 87
Transportation 387 386
ICT Split 5.73% 2.20%
Transportation 4.77% 9.80%