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The post war winners: urban rich or rural poor?

Friday, February 7, 2014

For some time now it has been quite clear to economists that assessments of economic performance cannot be solely focused on overall income growth, but must also take into account income distribution !his is because a growing body of research has established that where the income inequalities are large and widening it"s often the case that both economic prosperity and social stability soon suffer !he #$F%"s &'ahinda (hinthana )evelopment $olicy Framework& e*plicitly recognises the problem of rising inequality and the importance of reducing it +t is a rural centered development framework, quite in contrast to the &,egaining -ri .anka&framework of the previous #/$ government -uccessive budget speeches of the #$F% have reiterated the government"s commitment to increase the income of the poor and the rural areas at a faster pace than in previous decades % number of strategies have been introduced 0under various names1 2ama /agma, 2ami)iriya, 2ami$ubuduwa and )ivi/aguma3 aimed at improving the income levels and the living standards of the poor and rural society !his policy focus is to be especially appreciated given that even in 2012, 745 of -ri .ankan households are classified as being in the rural sector, and the urban sector accounts for barely 175 06*hibit 13 !he total number of households estimated in the country is 7 2 million Mismatch between Rhetoric and Reality

!he household income and e*penditure data released by the )epartment of (ensus and -tatistics however tells a different story +t says that reality is not consistent with the rhetoric, especially in the tra8ectory of post9war economic growth %ccording to the statistics, urban householdsare improving their lot much faster than during the war period, and the rural and estate households are improving much slower06*hibit 23 !his result is mirrored in comparison of the rich and poor as well 0leaving aside whether they live in urban or rural areas3 !he lot of the richer households is improving much faster than that of poorer households !o be noted in reading the results !he periods of analysis used here coincide with the implementation of the /ational :ousehold and 6*penditure -urvey implemented by the )epartment of (ensus and -tatistics, since that survey is the source of the data %ll the income growth figures are reported in nominal terms 0without ad8usting for inflation3 !hey should not therefore be read as improvement in consumption capacity, which after inflation would be much more modest $re9(hinthanaya was slightly better for the rural sector !he household income e*penditure survey data is available from 2002, 200;<7, 2004<10 and 2012<1= 6ven though the survey was also conducted in 2007, the report and results seem to have been retracted by the department, and is not available for public perusal !he fastest average annual growth in overall income as well as in rural and estate sector income was recorded during 20029200;<7 period 04 7 years3 !his seems ironic given that the popular conception is that the policy emphasis during the 200292007 period wasmore urban centeredthan in the periods after 2002-2006/7:,ural income increased by an annual rate of 17 425 and estate sector income increased by 1> 4=5 during that period 06*hibit 23 #rban incomes also

recorded a healthy growth of 14 =75, though lower than the rural and estate sectors 2006/7 to 2009/10: +n this period the annual rate of income growth slowed drastically for the urban sector, but rural and estate sector growth continued at a rapid pace, even though a little slower than the previous period ?ver9all in the full period total rural and estate income increased by 445 and ;=5 respectively, while urban incomes recorded only >5 growth 0-ee 6*hibit 2 for the average annual rates of growth3 $ost9war income growth crashes the &(hinthanaya& !he post war results are quite different +ncome growth registers a continued slow down, and the main beneficiaries are now the urban households, not the rural !otal urban income growth post9war 04>53 is twice that of rural02=53 and estate sector 02453 income growth 06*hibit =3 !he urban income has increased by as opposed to the 2=5 and 245 growth recorded by the rural and estate sectors !his same trend can be observed in growth in e*penditure as well From 2002 up to 2004, e*penditure growth rates were higher in rural and estate sectors compared to urban sector From 2004 to 2012, it is the other way around1 urban sector e*penditures growth at =25 growth followed by rural 02253 and estate 01;53 sectors The poorest are getting an even smaller slice of the pie )espite the robust growth of the rural and estate sectors from 2002 to 2004<10 the poorest 105 of the households in the country have not increased their income share From 2002 to 2004, the income share of the poorest 105 of the households stagnated at 1 75 of total income From 2004 to 2012, the share has in fact declined to 1 45 +n contrast, the share of income of the richest 105 of households in the country has increased from =; >5 to => 75 during the same period !his is further corroborated by the 2ini coefficient, which quantifies on a scale between 0 and 1, the severity of income inequality @ero implies perfect equality and one, perfect inequality ,eading from 14>1 to 2007 the coefficient value has increased from 0 4= to 0 47 Aet during 200292004, where the rural and estate sector growth is amongst the highest, the recordedthe 2ini coefficient increased from 0 47 to 0 44 indicating further increase in income inequality Caveats and Conclusion

!he data made available by the )epartment of (ensus has some considerable limitations !he main issue is that while results given are in aggregate, the earlier +ncome and 6*penditure -urveys did not cover all the geographic areas covered by the later surveys Bhile the whole country was covered in 2012<1=, the 2004<10 survey e*cluded 'annar, Cillinochchi and 'ullaitivu districts in the /orthern $rovinceD the 200;<7 survey e*cluded the whole /orthern $rovince as well as !rincomalee district in the 6astern $rovinceD and the 2002 aggregate reporting e*cluded all of the /orthern and 6astern $rovince !aking into account these changes in scope will modify the specific numbers in the analysis, but the conclusions of this analysis will remain robust !his is because the post9war result will only be affected by adding 'annar, Cillinochchi and 'ullaitivudistricts to the sample in 2012<1= 0everything else was included in 2004<103, and together they account for only 1 ;5 of the total population !he surprising conclusion remains this1 the 'ahinda(hinthanaya vision for rural and estate sector income growth was more alive before the vision was announced, than after %nd the rural and estate sector were growing much faster before the war ended than after +t is the urban populations, and the richer households that have benefited from the post9war growth bump %nd 0as previous EeritF +nsights have shown3 that bump9up, may also have ended Verité Research provides strategic analysis and advice to governments and the private sector in Asia !omments "elcome# email insights$veriteresearch org %sland Posted by Thavam