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Creating an Index to Measure Perceived Economic Opportunity

Sri Lanka has achieved fast growth with falling unemployment and povertyThere is visible change in post war Sri Lanka with new roads, high rise buildings, designer

boutiques and fast cars. According to the Central Bank economic growth has moved up

to the 8 percent per annum region. Most recent data suggests that the economy picked

up in 2010 and sustained the growth rate in 2011. Agriculture was estimated to have

grown by 2.0 percent contributing 12 percent to GDP while industry and services had

expanded by 10.1 and 8.6 percent contributing 30 and 58 percent to GDP respectively.

Economic growth (percent per annum) and unemployment (percent of labour force)

7.7

6.8

6

3.5

8 8.3

6.56

5.45.8

4.94.3

0

1

2

3

4

5

6

7

8

9

2006 2007 2008 2009 2010 2011Growth Unemployment

Source: Central Bank Annual Reports and Department of Census and Statistics Bulletins

Data from the Department of Census and Statistics (DCS) suggests that unemployment

has fallen to 4.3 percent while poverty has fallen to 8.9 percent in 2010 from 15.2

percent in 2006. Both are record figures; in that Sri Lanka has never seen such high

employment and such low poverty.

However not everyone agrees with the data

While these figures are certainly startling, several economists including the President of

the Sri Lanka Economic Association have questioned the validity of these figures.1

The

author has questioned in Parliament on several occasions, without obtaining answers,

the reason for the unprecedented fall in poverty, particularly in the estate sector from

32 percent in 2007 to 11.4 percent in 2010 during a period of falling growth and high

inflation.2

The author has also argued in Parliament that the growth, poverty and

unemployment data do not tally with the household real income data of the DCS for the

same period.

1"Experts question data and validity of poverty figures, economic growth" in the Sunday Times of 8

January 2012. http://www.sundaytimes.lk/120108/BusinessTimes/bt18.html2

Annual average inflation in Sri Lanka was 15.8 percent in 2007 followed by 22.6 percent in 2008

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Average monthly real and nominal mean household income in Rupees

12803

17465 17023

12803

26286

35495

5000

10000

15000

20000

25000

30000

35000

40000

2002 2006/7 2009/10

Real Nominal Source:Household Income and Expenditure Survey, 2009/10,Preliminary Results. Page 3

Instead of providing an explanation for the fall in the mean household income during

the last few years the DSC has dropped the comparison of real income between periods

from its Household Income and Expenditure Report of 2009/10 raising even further

questions than answers.

Sri Lanka is expected grow even faster, but questions remain

Notwithstanding the controversy in the data Sri Lanka is expected to continue its high

growth trajectory in to the medium term to reach beyond USD 4,000 per capita income

by 2016.3 This growth is expected to come from all sectors creating a thriving domestic

economy with enhanced international trade in goods and services, remittances and

tourism supported by heavy investments in economic infrastructure. The development

model is based on the country becoming a regional hub for aviation, shipping, energy,

commercial activity and knowledge. Whether this model will work and if so whether the

general population would benefit from the same is a question that cannot be answered

at the moment, but there are a number of amber lights flashing and some turning to

red. These danger signs have primarily been caused by the expanding role of the

political- military establishment in the economy and deteriorating governance

structures and institutions. While the expansion of the state in multiple sectors from

banking to retail to industry and the unprecedented entry of the military in to sectorsranging from tourism to construction to retail trade has crowded out opportunities for

the private sector, the passage of the 18th amendment in to the constitution in 2010

inter alia eliminating the independent commissions, for instance for elections, police,

public services, as well as key officials such as the attorney general, auditor general,

inspector general of police and the members of the monetary board etc. has seriously

eroded the economic freedom enjoyed by the people.

3Current per capita income is USD 2,830

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Is economic opportunity increasing or shrinking?

What would be an appropriate way to measure the changing economic opportunities in

a country? While some use growth and unemployment figures to proxy economic

opportunity others consider economic freedom as a means for economic opportunity

and therefore attempt to measure economic freedom. The Charles Koch Institute

defines economic freedom as the "key to greater opportunity and an improved quality

of life" via the "freedom to choose how to produce, sell, and use your own resources,

while respecting others rights to do the same". The Fraser Institute has pioneered the

measurement of economic freedom by considering size of government, the legal

structure and its protection of property rights, access to sound money, freedom to trade

internationally, and regulation of credit, labor, and business. The Heritage Foundation

with the Wall Street Journal also measures economic freedom by looking at levels of

business, trade, fiscal, monetary, and labor freedom, government spending and

property rights. While these proxies for economic opportunity are calculated annuallyusing secondary data collected by various agencies, there is no measurement of the

perceived economic opportunities given the various dynamic policy and institutional

changes that take place in a country. It is to address this void that we created a simple

index to track perceived economic opportunity.

Perceived Economic Opportunity Index

During the first half of 2011 we undertook desk research and a series of sample surveys

to determine what kind of questions should be asked to assess the perceived 'economic

opportunity' of the people. Our objective was to create an index to track the 'economic

opportunity' on a monthly basis.

Methodology

It was decided to use a random sample survey of 100 respondents every month among

the general public covering the entire strata of the society; from Socio Economic

Classification 'A' to 'E' covering both males and females. Respondents were randomly

selected by dialing arbitrary telephone numbers.4

Questions and responses

A structured questionnaire was used as the data collection tool and the questions were

designed to be very simple and short to keep the attention of the telephonic respondent

throughout the interview. Based on the trials we used seven questions: one each on

income, saving and cost of living; one each on law and order, media freedom and

corruption; and one question on opportunities to advance in the respondents job,

profession or entrepreneurial activity. The answers could only have three possibilities;

the current situation with regard to each issue is worse than it was six months ago, the

same or better than six months ago.

4Given 3.6 million fixed phone connections and 18.2 million mobile phone connections for Sri Lanka's 20

million people market research agencies regularly use this methodology to select island-wide random

samples.

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The Perceived Economic Opportunity Index and its components

Thus, based on 6 months of weighted data from July through December 2011, we

established a range for the Perceived Economic Opportunity Index between the

minimum of 1 and the maximum of 3 with 1 being the worst and 3 being the best.

Therefore a score of 2 would neither be better nor worse relative to the opportunities

that existed six months prior.

The PEOI and components

1.91

1.42

2.17 2.1

1.621.791.841.81

1

1.25

1.5

1.75

22.25

2.5

2.75

3

PEOI

Income,

abilityto

save

Expenditure

COL

Opportunity

Lawand

order

Media

freedom

Corruptio

The Perceived Economic Opportunity Index is calculated as a weighted average of the

seven questions mentioned earlier. The idea is to consider both hard economic issuesas well as societal issues in arriving at what is defined as 'economic opportunity'. The

components of the index are together related to the concept of economic freedom as

defined by others and alluded to earlier. The Table represents the six months (July to

December) averages of the perception score, ranging from 1 (worse) and 3 (best), for

each of the seven questions. The hard economic issues of income and ability to save,

household expenditure and the cost of living got relatively lower scores during this

period than the societal issues dealing with law and order, media freedom and

corruption. The question on opportunities to advance in one's field of business or

profession got a score below the mid point. In general the second half of 2011 seem to

have been viewed as a period where people found day to day living relatively hard,particularly the cost of living compared to the security situation and the freedom to

express. However, Sri Lankan people also thought that the level of corruption was

relatively high giving it a rather low score.

Expectations

Even though not presented here, the index is structured in such a way that we are also

able to determine what peoples expectations are for the coming half year; whether

opportunities are expected to improve or worsen.

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The PEOI: July 2011 to January 2012

Having developed the Perceived Economic Opportunity Index by considering the data

for the second half of 2011 we were able to apply the formula back to the original data

to assess the monthly movement of the PEOI for the same period; given below.

Movement of the PEOI from July 2011 to January 2012

1.761.86 1.89

1.65

1.81.88 1.83

1

1.25

1.5

1.75

2

2.25

2.5

2.75

3

July August September October November December January

The trend of the PEOI for the period indicates that the Sri Lankan people do not seem to

be very optimistic about the economic opportunities available to them. The index did

not surpass the mid-point indicating that compared to six months prior to the month inquestion they did not feel the available opportunities were getting better. In fact they

felt by and large that the opportunities were getting lesser and not greater. While the

exact index number is an indicator as to how optimistic people feel about the economic

opportunities in front of them, what is more important is the trend. If the trend is

upwards, then there is greater optimism while if it is downward sloping then there is

nothing much to cheer about. It also must be noted that this index can only move

within the band of 1 and 3, thus, the importance is being given to the relative dynamics

of the index than the absolute value of the index. Thus we expect the index to move up

when policies that are perceived to enhance the components of economic freedom are

implemented and vice-versa.

Harsha de Silva, Ph.D.

Member of Parliament and Chairman Foundation for Economic Freedom in Sri Lanka

The Perceived Economic Opportunity Index was designed and developed by the

Foundation for Economic Freedom in Sri Lanka with financial assistance from Friedrich

Naumann Stiftung Fur Die Freiheit. Fieldwork was carried out by market research

agency PepperCube Consultants.