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Average monthly income (horizontal) and spending (HIES, 2009/10) by income deciles*

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What do wealthy Sri Lankans spend on? Foreign cars, iPhones, imported goods and travel. I call it Ghettonomics. Rappers representing the hood get out and spend all their money on luxury items, sold by already wealthy people. It’s not like Bentleys are made in Brooklyn. Hence, the hood remains poor. I think this is one reason why income inequality hurts developing countries.

Look at this chart of spending by income bracket. Until you’re earning about Rs. 20,000 a month (about $200, per household), you’re spending most of your money on food. Once you break about 30k, however, you have disposable income. Where does that income go?

TVs, phones, vehicles, appliance, and also condiments and better tasting food. Now, think about it. Where does that money go? I don’t know any TVs or phones made in Sri Lanka. Even mobile phone service providers are mostly foreign owned (Dialog’s holding company is Malaysian, Etisalat is middle eastern, Airtel is Indian). Vehicles are at best Sri Lankan assembled (Micro), but almost all made abroad. The government’s hefty 100%+ tax does pump money back into the country, but that’s not an ideal level.

Sri Lanka’s rich are living ghetto fabulous. I think. That, of course, is not in the data, in this case from the 2009/10 Household Income And Expenditure Survey. But it seems to make a bit of sense. I mean, we even import tinned fish and rice if you want to get into it.

This is not to say anything against imports. The question is inequality. I previously went over how wide income inequality is bad for sustained growth. What I’m trying to figure out is why. So here’s my theory.

Ghettonomics

Big money leaves the hood

Let’s take one closed system, say the Marcy Projects. Jay-Z is from Marcy, but once he made a bunch of money he couldn’t spend it there. He grew rich faster than the people around him, so he basically had to leave. It’s not like you can spend $10,000 on soul food and it’s not like that neighborhood makes luxury goods. If, however, Jay-Z and his hood had grown wealthy at similar rates, there would be products and services they could sell to each other.

While this type of inequality can have very visible positives (charity for example) it’s not that sustainable. Of course, it’s not like there’s any sanctity to any ‘closed’ system, I mean, if you want to get out of the projects get out. On a national level, however, people pay taxes and pool their resources for some sort of shared benefit. So, policy that balances inequality is within the ambit of good governance.

The (somewhat allegorical) Henry Ford model was producing a car his employees could afford. Hence, the market feeds the market. A certain amount of trade between discrete markets (ie nations) is beneficial,

Now this is dangerous because many countries react to this ‘threat to the nation’ by cutting off imports or imposing tariffs. This is like cutting off your nose when you have allergies. As much as I often wish for this, not helpful. I think the broader issue is inequality, and how to address that. Hence, perhaps making investments in health and education before big infrastructure projects, or at least at the same time. Such that you have the human capital to perhaps build your own highways or drill your own oil. Not for nationalistic reasons, but simply to lay a foundation for more stable growth.

Globalization

Even before globalization, high income inequality meant that the wealthy would spend on gold and diamonds and pyramids and stuff that had little connection to the people around them. Royal families in Europe tended to be more closely related to each other than their people (the Windsors, for example, are German family by descent). Now what you get is a situation where they globally wealthy often have more in common with each other than their own national compatriots. US companies can get quite rich hiring people in China, and people in Sri Lanka can get quite rich selling stuff abroad.

Anyways, this is just a theory. All I’ve got data wise is the above which shows a rise in non-food spending and a confusing paper about inequality and import demand. Ghettonomics requires more research.

*The graph here shows the Sri Lankan population in deciles, the top 10%, next, etc. As the report says: In addition to the median value, decile groups are also ease the understanding about an income distribution, particularly the inequality of the distribution. The boundary values of the decile groups break a distribution into 10 equal size groups and the first decile holds the population 10 percent which the lowest values of the distribution are attributed to. So to obtain the range values of the household income deciles, all the households are arranged in ascending order according to the income and divided into 10 equal sized groups.