Economist Report Challenged

By Raisa Wickrematunge

Local politicians and economists are voicing their disagreement at the Economist Intelligence Unit’s latest report on the cost of living index, which places Sri Lanka as the 7th cheapest country to live in.
The cost of living index works by comparing around 400 retail prices for over a hundred categories of consumer products, including the price of a kilogramme of bread, for instance, and cigarettes, clothing, household supplies and personal care items, home rents, transport, utility bills, private schools, domestic help and recreational costs.
It compares these items to prices from the previous year as well as five years and ten years previously. Karachi, Mumbai and New Delhi were all named as some of the cheapest cities to live in the world.
The purpose of this index is actually to help human resource and finance managers calculate cost of living allowances for expatriates and business travellers – all the prices are standardised in US dollars.

Survey had little relevance

However, UNP MP, Ravi Karunanayake, pointed out that the countries being used for comparison included places such as Malaysia and Thailand, common tourist destinations. As such, the survey had little relevance, as the minimum cost per day would be USD 150, with 15 million tourists. He added that perhaps this was considered cheap when compared to the total revenue inflows generated as a result of tourism, but expressed his doubt that the cost per day in Sri Lanka was lower for expatriates than in other countries where tourist inflows were higher. Karunanayake pointed to the low occupancy of hotels in November and December.
Speaking of the price comparisons of commodities he said the report had picked and chosen commodities to compare, and as such the report could not be said to be wholly accurate, relevant and unbiased.
It was interesting to note that the report said that apart from India, which was described as a ‘tiger’ economy, with the potential for growth, ‘security risk’ might put off expatriates who were looking for cheaper cities to live in. “Bangladesh, Pakistan, Nepal, Sri Lanka, Algeria and Iran all feature in the bottom ten, but have had well documented security issues or domestic unrest,” the report said, adding that Bucharest (Romania), Panama City and Jeddah (Saudi Arabia) could be better options, with a lower cost of living in a relatively stable environment.

Salaries not factored

Meanwhile, Muttukrishnan Sarvanathan, of the Point Pedro Institute of Development, said salaries weren’t factored when calculating the cost of living index – only possible expenses. Even though the costs of living in Sri Lanka might be cheaper, the salaries might also be lower compared with other countries, Sarvanathan said and added, “This could be considered as a weakness in the index methodology, as well as the fact that the index was standardised by converting the prices into US dollars.”
While Sri Lanka had scored high in terms of economic freedom, it scored very low in terms of human freedom on a development index compiled by the Fraser Institute.
In fact, Sri Lanka was one of the lowest scored on the Fraser index, ranking alongside Zimbabwe, Syria, Pakistan and Myanmar.
The news on Sri Lanka being one of the cheapest countries to live in comes following a ‘lottery of life’ study, also completed by the Economist Intelligence Unit. This study, which showed which country was the best for babies to be born in 2013, ranked Sri Lanka at just 63rd out of 80 countries, as a good place to be born in. The report, released in November last year, ranked Switzerland as the top country to be born in, based on the Economist Intelligence Unit’s forecasts for 2030 (which is roughly the year when children born in 2013 will reach adulthood).
However, it is also important to note that the Economist itself said that it expected scholars to challenge the results. “Quibblers will, of course, find more holes in all this than there are in a chunk of Swiss cheese,” an Economist article published on November 21 said. It added that in 1988, America had received a significant boost to nab the top spot in 1988, with one of the factors included ranking the ‘philistine factor’ (used to measure cultural poverty) and even a ‘yawn index’ (the degree to which a country might, despite its virtues, be ‘irredeemably boring,’ as the article bluntly puts it). At that time, Switzerland had received abysmal scores on both counts.

Difference in methodology

What was the reaction of local economists? Sarvanathan said this was simply due to a difference in methodology. “There will always be contradictions in such studies,” he explained. “There are many different ways of measuring development, and so the technical aspects can lead to differences.”
The ‘lottery of life’ index was based on a life satisfaction study based on several quality of life variables, including GDP per head, life expectancy at birth, the quality of family life (based on divorce rates) political freedom and personal security ratings, as well as the quality of community life. GDP per head explained about two-thirds of the variations between countries – in short, those with higher incomes were often more satisfied than those with lower income, the report explained – thus making those countries with higher GDP per head better places to be born in. So while the news that Sri Lanka is one of the cheapest countries to live in was widely published, there are some caveats – while expatriates might find Colombo cheaper than other more urban cities, locals (including economic experts and Opposition politicians) do not appear to feel the same way.
The fact that the Economist spoke of security risks faced in Sri Lanka was also interesting – no mention was made of what exactly the security risks consisted of.
And this is hardly surprising, given the number of price hikes experienced last year, from bread to milk powder, from electricity to petrol and kerosene, causing fishermen and trade unions alike to take to the streets in protest.