Consumption conundrum

Published Mar 22, 2012 08:31pm

AFTER a recent visit to Pakistan, friend Meekal Ahmed, a former senior economist at the Planning Commission and later the IMF (now settled in the US), emailed: “What am I missing? This place is rocking. The pizza parlours, coffee houses, swank new malls are all packed, brimming with consumers. It took us nearly a month to get a reservation in Karachi’s top restaurant!”

Beyond the usual headlines on the country, what many outsiders are missing is another story: an unprecedented consumption boom has been under way in Pakistan since the mid-2000s. How does one reconcile this reality with what many of us have been writing about incessantly in the past couple of years — that the economy is tanking, and has never before posted a worse set of yearly economic data in its history? Or, that too many Pakistanis are falling through the cracks?

The data from household surveys is revealing, and points to two parallel universes existing side by side in Pakistan: an expanding middle class with a voracious appetite for consumption, and a large swathe of population that is increasingly food-insecure, let alone facing rising deprivation on other measures.

The estimates of the size of Pakistan’s middle class are truly astounding. Amongst the first to take a stab at this nearly a decade ago, as part of a request from a large fast-moving consumer goods (FMCG) client, I estimated the cohort to be at around 35 to 40 million, using a global definition of ‘middle class’ taking into account just one parameter — income. Later, eminent economic historian and commentator Shahid Javed Burki published his estimate in the context of the expansion of the middle class in the Musharraf years, and also arrived at a figure of around 40 million.

More recently, while preparing my presentation on ‘The Pakistan Opportunity’ for the Marketing Association of Pakistan’s flagship event MARCON 2012, I updated the figures arrived at earlier, making one crucial adjustment: for the estimated size of Pakistan’s undocumented (or, ‘black’) economy. The adjusted figure for the middle class is a staggering 70 million people, or 40 per cent of the population.

I would have been hesitant to quote this figure were it not for two other recent published reports from credible sources that ‘validate’ the number. Dr Durr-e-Nayab’s work has been published as a Pakistan Institute of Development Economics (PIDE) working paper, while the Asian Development Bank’s 2010 flagship report Asian Development Outlook contained a special section on Asia’s rising middle class. Both, using largely similar methodology (with Durr-e-Nayab using a more expanded definition), also arrived at the size of Pakistan’s middle class at around 70 million.

To put this number in perspective, Pakistan’s middle class is larger in size than the individual population of UK, France and Italy — and is a shade smaller than the total population of Germany. In absolute terms, it is the fourth largest middle class cohort in Asia, behind China, India and Indonesia. Affluent, educated, urbanised, and increasingly ‘globalised’, Pakistan’s middle class is not only growing, but is already a voracious consumer. The ADB report estimated total consumption spending by this group at $75bn.

This can be gauged by the furious pace of sales nationwide of cars, motorcycles, cellphones and durable goods over the past few years. Over 1.5 million motorcycles and nearly half a million cars have been sold in the country since 2008 (based on registration data), while the number of cellular subscribers has crossed over 100 million. True, despite such ‘glamorous’ numbers, Pakistan is a two-speed economy where the vulnerability of too many people has increased. Successive shocks to the economy — a severe energy crisis, unprecedented floods for two consecutive years, a fight against militancy which has gone on for several years — have all taken their toll on jobs and incomes.

However, despite these challenges, what amazes observers and commentators alike is the sheer resilience of the Pakistani nation.

Over the past few years, this resilience has come to a large extent from the performance of the rural economy, which has drawn strength from bumper crops and booming prices. The government’s intervention in the market for wheat has poured an additional several hundred billion rupees into the rural economy, propelling demand for cars, motorcycles, tractors, durable goods as well as fast-moving consumer goods (FMCG). In fact, the FMCG sector has witnessed an unprecedented boom in sales since 2008, which has defied expectations — and gravity.

Additional support for consumption has come from remittances from the Pakistani diaspora, and, in part, from the fiscal behaviour of the government which has injected several hundred billion rupees into the economy via borrowing from the central bank. From the foregoing, it is clear that the Pakistani consumerism story is not cyclical, but has structural underpinnings. Rapid urbanisation, a young, mobile and spirited population entering the work force, global connectivity via the Internet, social media and cable TV are all driving aspirations — and conspicuous consumption.

Not much of the above should really be surprising given Pakistan’s demographics. It is Asia’s fourth most populous country, and the world’s sixth. Over 100 million of its 180 million people are below the age of 30 years. With rapid population growth, Pakistan is expected to become the fourth largest country on earth by 2030. This will propel economic growth as well, and is a major factor in Pakistan being ranked among the top 30 economies of the world by size by 2050 in a recent HSBC publication.

Nonetheless, the growth in incomes and opportunities will continue to increasingly be skewed towards the more affluent segments of the population, with inequality rising ever more sharply. Looking ahead, while the middle class is likely to expand further, without a return to more inclusive growth, so will unfortunately the number of the vulnerable and poor segments.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

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Comments (9) (Closed)

Dr Meekal Ahmed
Mar 23, 2012 03:33pm
The sting is in the last paragraph! Nor is this consumerism a goood thing for a low-saving economy which creates chronic domestic and external deficits that we cannot finance.
Mar 23, 2012 04:48pm
A happy story until the last paragraph. If more consumption and money leads to higher inequality, it only increases problems. I grew up in a Pakistan with less money/less comsumption but a more equal distribution of wealth, and it was a safer place to live. Only a good governance system can ensure a better distribution of wealth in any society, and there can be no good governance system without honest people managing it at the top. We have seen enough of so called "capable" leaders, who turn out to be corrupt in the end. Now we need to elect someone with a clean reputation, even if they lack governance experience
Whats in the Name
Mar 23, 2012 10:31pm
"To put this number in perspective, Pakistan’s middle class is larger in size than the individual population of UK, France and Italy — and is a shade smaller than the total population of Germany" Now this is some thing I was not aware of. The populations of UK, France and Italy are each 5 crores making it 15. And since they are developed and belong to the 1st world, lets say a modest 75% is middle class that makes their population 11 crore. Also in real terms Pakistan is 4th largest consumer in Asia. Again holes in this theory. If that is indeed the case why don't they top in categories like the country to send tourists abroad to France, Australia, South America Africa etc or even Malaysia, they hardly figure in the list. Its a good and desperate spin. If indeed 40% is middle class then why is that Pakistan is the hotbed of terrorism. Isn't Middle class supposed to be secular no matter which country they belong.
Tariq Mufti
Mar 24, 2012 01:04am
A crrection seems necessary to emphasize the writer's own argument: annual motorcycle production (and sales) have been over 1.5 million for a couple of years, and are estimated at 1.8 million for 2012 alone. Not 1.5 million since 2008. Annual 4-wheeler production slipped below 100,000 in 2008, but has since risen to 150,000 annually.
K. Hussan Zia
Mar 24, 2012 12:01pm
The rise in size and affluence of the middle class in Pakistan is palpably apparent. Can it be sustained is another question given the mismanagement of the infrastructure, especially in the water and power sector, by corrupt and inept governments. Unless this is corrected very soon, the country may plunge into economic chaos leading to societal breakdown. In that event it will be the middle class that will bear most of the brunt.
Mar 24, 2012 12:23pm
Interesting info. So this booming middle-class percentage of Pakistan corresponds to that of India. The phenomenon is also similar. Now, the consumption conundrum in India rests on multiple factors/sectors like remittances and multiple sectors like Pharma, Information Technology, BPO/KPO, tourism etc. I wonder, apart from huge remittances and booming Agri, what sectors pakistani economy that letting this boom happen? Can anybody explain.
Gul Muhammad Bawa
Jul 07, 2012 05:07am
The consumption conundrum in Pakistan with Extreme poverty on the one hand and rising affluent middle class spending can be explained by a few factors viz. growing remittances by Overseas Pakistanis, increased flow of income of educated postgraduates employed by banks and service sector, increased incomes of transport sector caused by transportation of NATO supplies, smuggling, a huge underground economy and ill gotten gains of corruption,
Kaleem Ahmad
Jul 04, 2012 05:49am
Sir the figures for motorbikes need to be corrected. Honda alone is making close to 500,000 motor bikes per annum . So the figure for mbike would be close to 3 million since 2008. However the your post is really remarkable and I also appreciat the fact that you have taken pains to quote economists from PIDE and IBRD.
Gul Muhammad Bawa
Jul 06, 2012 06:27pm
Besides remittances and agriculture, the other major factors that can be the cause of Pakistan's consumerism or whatever is huge underground economy, ill goten gains from corruption at all levels and funds generated by narcotics and also Afghan transit trade etc.