Opening the economy for trade in 1977 was a watershed event in Sri Lankan history. It unleashed an era of growth that laid the foundation for the prosperity that local baby boomers enjoyed, in line with their peers globally. Today many from that generation are parents of twenty something aspirants, taking the cue from their parents’ generation to form their own ideals for prosperity and wealth. Their timing certainly seems fortuitous. The end of the war in 2009 and the infrastructure boom now underway is reminiscent of the heady days of 1977 when free trade forces combined with huge infrastructure investments such as the Mahaweli development project. But the harsh reality for youngsters just joining the workforce is that prices of assets such as land and vehicles are at such high multiples of their annual salaries that they are all but unattainable. Examining this paradox will provide some insights into the future economic prospects of local millennials.
In Sri Lanka the majority of wealth seems to be tied up among a few asset classes, namely; land, vehicles and equity (defined as interest in a listed or unlisted business venture). For the common man, residential property forms the lion’s share of his personal wealth. Indeed in most cases this has served him well. Local land prices, particularly in urban areas have appreciated steeply and steadily in the last 2 – 3 decades. The large proportion of personal wealth tied up in land provides downward stickiness to land prices, as selling a property cheaply deals a heavy blow to the wealth of the seller. Land particularly in cities has appreciated due to combination of urbanization, population growth and industrialization.
Historically processes such as urbanization peak and plateau after a period, for instance, when a largely village dwelling population makes the transition to become largely urban. The effect of current developments should also be factored in. As highways and high speed rail connections decrease the marginal inconvenience of living outside the city, the tide on urbanization might turn soon.
This prediction is reinforced if one looks at land as a commodity market. People paying a premium for land at prestigious/convenient locations such as Colombo 07 are trading off lower prices elsewhere. As land prices in these locations keep rising the cost benefit analysis should make other areas more attractive. This would bring about a glass ceiling effect on the prices. Of course this must be counter balanced with the fact that centrally located land is fixed in supply in a market with ever growing demand. All these factors are likely to have a significant effect on the wealth of first time property buyers a few years down the line.
In most countries vehicles are considered fast depreciating assets. Wear and tear, technological obsolescence dictates this logic. However Sri Lanka has a protected market for vehicles as part of a government strategy to curb currency sapping imports. This creates situations where owners experience very slow depreciation rates in the market value of their vehicles. However this sets up the resale market for vehicles to react sharply to changes in government policy. Recent government policies in this area have varied remarkably within short periods. Holding an interest in a business venture (equity) may yield mixed results. A failed business would have a negative impact on investors’ wealth. Successful local businesses are likely to have produced reasonable returns given that the country has maintained a relatively fast pace of growth.
Only a lucky few will inherit family businesses or become investors. The majority will depend on accumulated savings to amass wealth. In terms of spending patterns clear differences are visible between millennials and their parents. The former spend more on categories such as entertainment and gadgetry. Consumerism has hugely widened our interpretation of ‘essentials’. It is also noteworthy that what were considered luxuries in the bygone era such as adding a swimming pool to one’s home, or purchasing a holiday home often added to one’s wealth. More current luxuries, particularly electronic gadgetry depreciate swiftly. The younger generation also spend more frequently on experiences such as overseas trips.
Ultimately whether the millennial generation in Sri Lanka will be better off than their parents will depend on a diverse mix of factors. How much they save and how they choose to allocate those savings will only be a fraction of the equation. Monetary policy of the central bank, personal ambition and drive, and everything in between too will play a role.