Festivities for the few, hardships for the many

By the Economist

The soaring prices that characterised 2007 appear to have little impact on crowds shopping in Colombo. Despite the inflation that is encompassing the country there appears to be brisk shopping and preparations for expensive entertainment. The festive occasions that are planned for the Christmas season do not reflect hard times. The hotels are decorated and illuminated as never before. Prices at the five star hotels are high and yet there appears to be little evidence of reduced clientele. In fact, the expectations are for a more lavish celebration this year.

The increases in prices do not appear to have slackened demand during the Christmas season. The elementary law of demand states that when prices rise, there is a decrease in demand. This does not appear to have happened. An explanation for this may be insightful of what is happening in the country.

There are many ways in which one could explain the apparent prosperity, particularly in the city of Colombo. First of all, it has to be recognised that inflation does not affect all sections of the community alike. The most adverse impact is on the poorer sections of the population, the middle income groups, fixed wage earners and fixed income receivers. There are other sections of the community who could very well gain from inflation by increasing prices by more than the increases in their costs. Their incomes would have increased not merely in nominal terms but real terms as well. Most of those who have benefited from the rise in prices would be probably living in the city of Colombo or its suburbs. The income distribution data also disclose that high income groups are mainly resident in the Western Province. This means that the conspicuous spenders are in the city and that they are the ones who keep the shops and hotels the busy places that they are, during this time of year.

The prosperity that we witness in the city is also a reflection of the disparities in income in the country. There is an enormous gap between the incomes of the rich and the poor in the country. In 2003/2004, the poorest 20 percent of the population received less than 4 percent of the national income as compared to 55 percent for the richest 20 percent. The share of national income of the poorest 10 percent of the population was only 1.1 percent in 2003/2004, while the richest 10 percent of the population obtained nearly 40 percent of national income. Add to this the regional disparity in incomes. The Western Province has an average per capita income that is 8 times of those in many other provinces. Income data disclose that the high income groups are mainly in the Western Province and perhaps live mainly in the city of Colombo or its suburbs.

The income distribution data in the country lends support to the contention that there are enough rich people in the country who are little affected by inflation. They have no need to reduce their consumption, particularly at a festive season. This means that the conspicuous spenders are in the city and are the ones who keep the shops and hotels the busy places that they are. To be more precise 20 percent of the population in the country that receive 55 percent of incomes are about 4 million persons. This is not an insignificant number when concentrated in a small geographical area. Their demand is the secret of the spending spree that we witness in the city.

In any event the rise in prices would not be affecting the very rich to the same degree that it affects the poorer sections of the population. The rich and affluent need not cut down their consumption even though their real incomes have been eroded by the price increases. They could dip into their savings quite easily. In any case, the impact of the inflation on them would be relatively less. When you take the very rich and those least affected by the rise in prices, they probably constitute much of the high spenders in the city's fashionable up market shops, boutique hotels and five star hotels. The wide disparity in incomes, the location of the high income groups in the city and their tendency for conspicuous consumption therefore accounts for their splurge. This however is only a part explanation.

Another likely reason is that even those income earners who are badly affected by the rise in prices have had compensatory income increases. In most cases these increases would be hardly adequate to compensate them for the sharp increases in prices of essential items of consumption. Nevertheless the increase in their money incomes gives them a 'money illusion' that makes them think that they are well off. This illusion makes them enjoy the festive season. The increase in wages of public servants as well as private sector employees may not have adjusted and compensated for the full rise in prices. Yet their 'feel good' effect of the wage increases would have led them to higher expenditure during the festive season.

Besides this, there is an aspect of human behaviour among all communities of wanting to enjoy festive seasons. Christmas is a time of merriment for all communities in the country, especially for those in cities and towns. This is reinforced by the fact that it is the end of the year. Consequently their expenditure tends to be beyond the means of the poorer sections of the population. They would dip into their savings, cut other expenditures or borrow to meet expenditure, particularly for gift giving. This is another reason why despite rises in prices and less disposal incomes festive expenditure continues to be high.

For these reasons it would be quite misleading to interpret the maddening crowds in the city's shops and hotels as an index of prosperity. It is an indication that there is a minority of people who have prospered and who have not been touched by the high inflation. It is the much larger and predominantly rural community that is being crushed by the rise in prices. It is also not the festive types of purchases that have increased in price. It is the bare essentials like rice, sugar, milk, wheat flour, bread, cooking gas and other daily expenditures that have skyrocketed in price.

Colombo's dazzling lights are no indicator of the people's condition. The poor have been crushed by the price increases. Worst of all there still are a large number of Tsunami victims living in hovels with no proper places to lay their heads and no income generating opportunities either. For them there are no Christmas bells peeling glad tidings of great joy.