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Average income of a Sri Lankan: When numbers gathered from top and bottom do not tally!

February 24, 2014

Household Income and Expenditure Survey of 2012/13 The Preliminary eport of the Household Income and Expenditure Survey! a""reviated as HIES! for 2012/13 has #ust "een released "y $epartment of %ensus and Statistics or $%S &availa"le at' http'//((()statistics)*ov)l+/HIES/HIES2012Preliminery eport)pdf,) -ithout dou"t! the survey report carries a (ealth of information on the socio.economic conditions of the Sri /an+ans at this #uncture of their history) It supplies feed.material for researchers! analysts! policyma+ers! commentators and even mar+eters) Since HIES is conducted periodically 0 once in every three years no( 0 its num"ers can "e compared (ith those in the previous HIESs to assess (hether there has "een an improvement or a decline) The report has "een (ritten in technical terms "ut it does not reduce its value) 1ll those (ho had "een involved in the survey deserve commendation for the efforts they have made to "rin* out the survey results) $isparity in per capita income Ho(ever! one area of controversy has "een the avera*e annual income of a Sri /an+an! called per capita income or P%I "y economists! in 2012) 2any includin* some professional economists have "een "affled "y the (ide disparity in P%I as reported in HIES and in national accounts (hich estimate the country3s total income) 1ccordin* to 4ational 1ccounts estimated "y $%S and pu"lished "y "oth $%S and the %entral 5an+! P%I in 2012 amounted to 6 2723) 5ut the P%I reported in HIES as monetary income of a household of 3)7 persons (or+s out only to 6 788 in that year) This is not peculiar to this year3s HIES) It has "een the trend throu*hout and P%I num"ers reported "y national accounts have "een t(o to three times hi*her than those of HIESs) 9or all policy ma+in* and international comparison purposes! it is P%I estimated in national accounts that is "ein* used "y all) Sri /an+a is considered as havin* elevated to a lo(er

middle income country "ecause its P%I is reported to have surpassed the threshold of 6 2!000 no() The implication of this elevation is that Sri /an+a is no lon*er eli*i"le to receive concessionary fundin* from donors and multinational lendin* institutions) 1s a result! the country no( has to "orro( from commercial mar+ets and countries li+e %hina at commercial rates) Even the :overnment has set itself (ith a tar*et of dou"lin* this inflated P%I from 6 2!000 to 6 ;!000 "y 201<) It has even as+ed everyone 0 "an+s! private cham"ers and :overnment institutions 0 to *et ready for a 6 100 "illion economy in a fe( years3 time) 1ll these plans (ill "ecome senseless if the total income and P%I underlyin* that income have "een overestimated and need a correction do(n(ard as reflected "y the =(orm3s eye3 calculation of the country3s income and output> The follo(in* are some examples' in 2008! P%I accordin* to HIES (as 6 ;7? (hereas accordin* to national accounts it (as 6 1237) In 200</200@! the t(o num"ers (ere 6 <3@ and 6 1;22! respectively In 2007/10! they (ere 6 ?18 and 6 20<;! respectively) Since P%I is considered as an index of (ell"ein* of people on avera*e! many have Auestioned (hether Sri /an+a has inflated its *ro(th num"ers to sho( a hi*her prosperity and (ell"ein*) It is therefore opportune to loo+ at these t(o num"ers and see ho( they differ from each other and ho( the disparity can "e reconciled) 9irst of all! these t(o num"ers are derived "y adoptin* t(o different methodolo*ies) 5ird3s eye vie( of an economy "y national accounts compilers In national accounts! estimates are done "y the estimatin* a*ency 0 in Sri /an+a3s case! $%S 0 "y vie(in* the economy as a (hole from the top) It is li+e ta+in* a helicopter trip and loo+ at (hat is happenin* "elo() 9rom the air! it assesses ho( each of the sectors has performed and assi*ns num"ers to those sectors "ased on the *round data *athered) Hence! national accounts present a B"ird3s eye> vie( of the economy) $ata are *athered from other a*encies and therefore they are mostly data reported "y those a*encies) To ascertain accuracy! it is necessary to cross.chec+ them (ith other relevant num"ers and ma+e necessary ad#ustments to the B"ird3s eye> vie() Ho(ever! an economy is a hu*e enterprise havin* many su" sectors and production units) Thus! the estimatin* a*ency has a (ide lee(ay to increase or decrease its estimates to *ive a hi*her or lo(er value to *ro(th rate and the total output) 1 trust(orthy estimatin* a*ency is expected to place at every point of estimation the appropriate chec+s and "alances to prevent it from "ein* a"used) The recent criticism a*ainst $%S in Parliament and in the media (as "ased on an alle*ed instance of a"usin* this lee(ay there"y ris+in* its reputation and inte*rity) If the *ro(th rate is overestimated! the total output and P%I are also overestimated sho(in* a "etter

economic picture) -orm3s eye vie( throu*h field surveys In HIES! the surveyin* a*ency 0 a*ain $%S 0 visits the people in person to *ather details of their income and expenditure) Since it is impossi"le and too costly to visit all the income recipients! (hat it does is to select a representative sample and visit them durin* a *iven period of the year) There are several factors that have a "earin* on the accuracy of the information it *athers) Cne is that the sample should "e lar*e enou*h to represent the (hole country and it should "e selected (ithout any personal interests to eliminate "iases or pre#udices) $%S says that in the current preliminary survey! a sample of 8!;;2 households from a total of 8)2 million households has "een usedD this (or+s out to "e a sample of a"out 0)1 E) Ho(ever! (hen the final survey is conducted! this (ill "e expanded to 28!000 households accountin* for a"out 0);E of the total num"er of households) It is the vie( of this (riter that the siFe of the sample chosen is Auite adeAuate to derive the results (hich the survey has produced) Second is that the period durin* (hich the information is *athered should "e an avera*e income.and.expenditure period (ithout seasonal pea+s or "ottoms) Third is that the officials (ho fill in the information *atherin* sheets should have s+ills to elicit correct information from the income recipients) $%S (hich has a lon* experience in conductin* field surveys has affirmed that its methods and systems meet (ith these reAuirements) Since it is information *athered from the "ottom at the *round level! it is considered a B(orm3s eye> vie( of the income received "y people of the country) The more accurate method of calculatin* P%I is this (orm3s eye method) That is "ecause it *ives information on incomes earned "y income recipients themselves and not income estimates made "y usin* secondary sources) Get! "ecause of the practical difficulties and the costs involved! it is done only periodically! once in every three years today) 1s such! there are no annual P%I num"ers produced "y HIES "ut only (ith respect to the years in (hich the particular survey has "een conducted) 9ield survey P%I should "e hi*her than P%I in national accounts These t(o num"ers are accordin*ly derived "y usin* t(o different methods that dra( on t(o different sources) Hence! they need not "e exactly identical) 5ut they should not "e too different from each other as (ell) There is one other reason that ma+es these t(o num"ers not compara"le in ra( form) Hence! if any comparison has to "e made! they have to "e ad#usted ta+in* note of the essential differences in the content of the t(o num"ers) Even after ad#ustment! P%I derived from HIES should "e hi*her than P%I estimated in national accounts) 5ut P%I num"ers in Sri /an+a sho( the opposite (ith P%I estimated in national accounts recordin* a t(o to three times hi*her fi*ure than that is P%I derived from HIES) 4ational accounts rec+ons only incomes earned in the mar+et In national accounts! income is simply the total income earned "y people "y sellin* their resources in the mar+et) These resources have "een cate*orised "y economists into four main cate*ories! namely! la"our! land! capital and enterprise) Hence! income consists of the income derived from these four sources in the form of (a*es! rents! interest and profits! respectively) The total income is therefore the total of these four types of incomes earned in the process of producin* various *oods and services in a mar+et set.up) Hence! income in national accounts comprises only the income received in money form in the mar+et "y providin* an eAuivalent

service) 1 "enefit received in non.monetary form such as the self.services rendered "y people to themselves is not included in income) 9or instance! if I *o to supermar+et and "uy a *as cylinder for the household it provides a service to the family) 5ut! since I am not paid in money for that "enefit! it is not included in the family income) 5y the same reasonin*! services rendered "y house(ives and househus"ands to their families are not included in the income of a nation (hen it is estimated in national accounts)

Pro"lem of multiple.countin* of incomes There is another pro"lem faced (hen calculatin* national income from the top) That is the pro"lem of eliminatin* the multiple countin* of incomes that arises in different sta*es of production) This is "ecause one man3s purchase of an input from another man is an income for that second man and his purchase of inputs from a third man is an income of that third man) Hence! if all incomes are added to*ether to derive the total income of a nation! it overestimates the income) Halue addition in tyre industry This can "e illustrated (ith an example) Suppose in the sale of motor car tyres! there are four different production sta*es! production of ru""er! manufacture of tyres! distri"ution of tyres and sale of tyres to car o(ners) Suppose a tyre priced at s) 1!000 is sold and the seller *ets an income of s) 1!000) Ho(ever! in this income are included several other incomes earned "y others involved in the process) Suppose the ru""er producer sells his ru""er for s) 200) The manufacturer uses that ru""er and manufactures a tyre (hich he sells for s) ?00) The distri"utor sells the same tyre to the side(ay tyre shop for s) 700 (hich the shop o(ner sells to the car o(ner for s) 1!000) If all these incomes are added to*ether! the total incomes received "y the four different people come to s) 2!700 &that is! 200I?00I700I1!000,) 5ut that is not the total income earned "y a nation "ecause in each sta*e income! the incomes earned in the previous sta*es are also included) Thus! it leads to an overestimation of national income)

4ational accounts use only value added incomes To avoid this multiple countin* of incomes! economists ta+e into account only the incomes added to the total income at each sta*e of production) This is called the addition of value at each sta*e or in economists3 lan*ua*e! the value added) To calculate the value added! only the ne( incomes created at each sta*e of production is considered and that is calculated "y deductin* the costs of inputs purchased from outside "y each seller) In this case! it assumed that the ru""er producer does not "uy any input and therefore he creates a total of ne( income amountin* to s) 200) 5ut the tyre manufacturer has to deduct (hat he has purchased from the ru""er producer and therefore he creates only a ne( income of s) <00) Similarly! the distri"utor and the side(ay tyre shop create a ne( income of s) 100 each ma+in* a total of s) 200 #ointly) Thus! the value addition is simply the total of these ne( incomes (hich come to s) 1!000 or the value of the final commodity sold "y the side(ay tyre shop) Since there are four people involved! the income on avera*e earned "y them! or P%I in our #ar*on is s 280) If the multiple.counted income of s) 2!700 is used! P%I "ecomes s) @28 (hich is an overestimated fi*ure) Thus! the value added income is simply the surpluses made "y each party and is eAual to the a**re*ation of all the profit fi*ures in each person3s profit and loss account "efore char*in* depreciation) HIES income is simply the credit side of a cash "oo+ The income fi*ures reported in HIES include many items that are not included in the income estimated in national accounts) 9irst! they include income received in "oth money form and non.money form) Hence! for comparison (ith national account fi*ures! the non.money income has to "e i*nored) In Sri /an+a! historically! this amounts to a"out 1<E of the total income earned "y an individual) Second! even in the case of income in money form! HIES considers all incomes and not #ust the value additions) Hence! HIES income num"ers (hich have this multiple.countin* feature should "e pretty much hi*her than the value.added income num"ers in national accounts) &-)1) -i#e(ardena! a former $eputy :overnor of the %entral 5an+! can "e reached at (a(17;7J*mail)com), Third! for HIES! even for income in money form! incomes received in all forms are ta+en into account) 5ut in national accountin* it is only incomes received for providin* an eAuivalent service are rec+oned) 1s a result! HIES incomes include lottery *ains! repayment of loans "y de"tors! cash received as proceeds of loans "orro(ed! sale proceeds of assets! free *ifts received in money form! and su"sidies and pension receipts) These are not considered as income in national accounts) 5ecause of this reason as (ell as the inclusion of multiple.counted incomes! HIES income num"ers should "e pretty much hi*her than the income fi*ures estimated in national accounts) HIES income num"ers are li+e the summation of the credit side of a cash"oo+ that records all types of receipts in cash) 1ll of them are not incomes accordin* to definitions used in national accounts) Hence! P%I num"ers produced in HIES should naturally "e hi*her than those estimated in national accounts) 5oth P%Is not inflation ad#usted 5ut a common feature in "oth num"ers is the inflation of incomes due to increases in prices) 9or instance! suppose that the price of a coconut *oes up from s) 28 to s) 80) If a coconut is sold for this price! "oth HIES and national accounts treat it as a receipt of money income

amountin* to s) 80) It is therefore clear that HIES income num"ers should in theory "e pretty much hi*her than the income fi*ures reported in national accounts) Ho(ever! in Sri /an+a! in practice! it is the opposite that has ta+en place' P%I num"ers in national accounts are t(o to three times hi*her than the HIES num"ers) This (ide disparity has several implications for assessin* the (elfare levels of the people in Sri /an+a) Is Sri /an+a3s P%I overestimatedK 9or all policy ma+in* and international comparison purposes! it is P%I estimated in national accounts that is "ein* used "y all) Sri /an+a is considered as havin* elevated to a lo(er middle income country "ecause its P%I is reported to have surpassed the threshold of 6 2!000 no() The implication of this elevation is that Sri /an+a is no lon*er eli*i"le to receive concessionary fundin* from donors and multinational lendin* institutions) 1s a result! the country no( has to "orro( from commercial mar+ets and countries li+e %hina at commercial rates) Even the :overnment has set itself (ith a tar*et of dou"lin* this inflated P%I from 6 2!000 to 6 ;!000 "y 201<) It has even as+ed everyone 0 "an+s! private cham"ers and :overnment institutions 0 to *et ready for a 6 100 "illion economy in a fe( years3 time) 1ll these plans (ill "ecome senseless if the total income and P%I underlyin* that income have "een overestimated and need a correction do(n(ard as reflected "y the =(orm3s eye3 calculation of the country3s income and output) This is perhaps a *ood research topic for researchers and analysts to underta+e)

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