When Incomes Cross a Threshold: How Economies Create Disproportionate Winners

When we talk about economic growth, it is often described as if it unfolds smoothly and proportionally, as though rising incomes simply translate into a slightly better version of yesterday. In reality, that isn’t how economies evolve. The most important changes tend to happen at specific points, almost quietly, when the arithmetic of daily life shifts just enough to alter behaviour, and once behaviour changes, the structure of demand follows.

Sri Lanka today sits somewhere near one of those points.

At an average household income of roughly Rs 80,000 per month, consumption is still largely constrained by necessity. Most households allocate the majority of their income towards food, transport, utilities, education, basic healthcare and household expenses, leaving very little room for discretionary choice. At this level, consumption is functional rather than expressive, and purchasing decisions are driven far more by price and availability than by preference or brand. This is sometimes misunderstood as a lack of sophistication, but it is really just a lack of slack. When income barely clears essentials, optimisation replaces choice almost by default.

What becomes interesting is what happens as incomes rise gradually over time. The first visible change is not luxury consumption or indulgence, but flexibility. Households begin to make choices within categories rather than merely accessing them. They trade up modestly, pay a little more for durability or reliability, begin to value convenience, and allow comfort to enter the decision-making process. Eating out becomes slightly more frequent, homes become marginally larger or better finished, appliances are chosen for quality rather than price alone. These shifts often appear subtle from the outside, but they signal something far more important underneath.

Consumption stops growing evenly and begins to reorganise itself.

Certain parts of the economy begin to expand at a pace that bears little resemblance to overall GDP growth. Consumer discretionary categories, housing and construction, home improvement, furnishings, appliances, private healthcare, education, mobility and travel all tend to benefit disproportionately once a large enough segment of the population crosses an income threshold. This happens not because people suddenly become wealthier in absolute terms, but because millions of households are entering markets that were previously out of reach. The total addressable market does not just grow; it deepens, and once this process begins, it often sustains itself for long periods.

This is where the opportunity, and the difficulty, lie for investors.

As demand deepens, businesses are given the space to invest. Scale allows for better products, stronger brands, more efficient distribution and more professional systems. Costs come down, standards go up, and capabilities develop organically. Over time, some of these businesses find that the domestic market has quietly prepared them to compete internationally. Export potential, when it emerges, is usually the result of this internal maturation rather than deliberate policy support or strategic intent.

This combination of forces is something Charlie Munger often described through the idea of a lollapalooza effect, where multiple factors reinforce one another in a way that produces momentum far greater than the sum of its parts. Rising incomes, urbanisation, access to credit, aspiration, economies of scale and reinvestment all begin to pull in the same direction, and once that alignment is in place, growth becomes more resilient and more durable than it initially appears.

However, this phase is rarely comfortable. Structural demand growth attracts competition, and high returns inevitably invite capital. The early and middle years of these transitions are often messy, with pricing pressure, overcapacity, aggressive expansion and a large number of participants chasing the same opportunity. Many businesses that appear well positioned fail not because demand disappears, but because they underestimate how difficult it is to survive the period when growth is visible but economics are still unsettled.

The eventual winners are usually not the most aggressive players, but the most patient ones. They are businesses that reinvest when short-term returns look mediocre, that focus on building position rather than maximising profit early, and that understand the hardest part of growth is often the middle rather than the beginning. These are the businesses that emerge stronger once competition has done its work.

For investors, this is why developing markets are better understood as selection environments rather than simple growth stories. Growth will not be evenly distributed, and not all businesses operating in fast-growing industries will benefit equally. The challenge is not predicting economic progress, but identifying which companies have the balance sheets, management discipline and competitive advantages required to reinvest into future demand while surviving the volatility that accompanies it.

Headline economic statistics rarely capture this process well. GDP measures output, not transformation, and it tells us little about how preferences are shifting, where quality expectations are rising, or which businesses are quietly building advantages that will compound over time. By the time these changes become obvious in aggregate numbers, much of the value creation has already been set in motion.

Sri Lanka’s opportunity, like that of many developing economies, lies in navigating this transition thoughtfully. As more households enter the middle and upper-middle classes over the long term, demand will continue to shift in uneven but fairly predictable ways. The businesses that matter will be those prepared ahead of time, with the scale, discipline and mindset to invest into that future demand rather than react to it once it arrives.

Economic progress ultimately changes what people want, not just what they can afford. The most enduring businesses are built quietly during these periods of transition, long before they attract widespread attention. Markets tend to recognise them only after the most difficult work has already been done, which is usually where the real opportunity once lay.