It is difficult to argue with absolute truths. But one that has constantly escaped the country’s financial managers is that the economy, possibly cannot achieve the cherished goal of sustainable growth, unless the middle class is allowed to flourish — both in terms of size and prosperity.

In a free market economy, no amount of facilitation and concessions to promote investment would help without a surge in local demand. Export sector too has to have a home market that may cushion the shocks of ebb and flow of demand and prices in international market. In looking after the interests of the industrialists and traders at the cost of consumers, the Government is perhaps looking at some distant rose garden. But as long as there is no effective economic demand in the market (propelled particularly by the strong 60 per cent of the country’s middle incomes) there is little hope for a meaningful improvement in overall economic scenario, even if everything else is managed and managed well.

A recently launched study by the Social Policy Development Centre, titled “Social development in Pakistan, growth inequality and poverty” is an astonishing insight into the growing inequality of income of the country’s population. For all the talk of poverty alleviation, poor as percentage of population have increased from 17.3 per cent in 1987-88 to 38 per cent in 2000-2001. It is surely an alarming signal.

But a very disturbing fact that is often overlooked is the drop in share of income of the middle 60 per cent, that has actually declined from 48.3 per cent to 45.6 per cent, over that 12-year period.

What does it mean? Economists might draw various conclusions. But it quite looks that either the earning power of the middle class is eroding or the number of people joining the ranks of middle class is increasing at a rate slower than that of the growth rate of population. So more people are perhaps dropping down in the category of poor 20 per cent than those managing to scramble out of poverty into the middle class.

How does one classify the middle class or the people who may be presumed to be above the poverty line? If we adopt the international standard of $2 a day, an average Pakistani family of five must manage income of $10 a day to be able to cross over the poverty line. That would work out to $ 300 a month, or Rs 18,000 in rupee terms. It means that from UN standard almost all teachers, factory workers, masons, electricians, lecturers, clerks, doctors, engineers, office workers, journalists and even civil servants upto grade 18— if they be the sole earners in the family, are living below poverty line.

But Rs 18,000/- a month is pretty tall sum and the ground reality is an average income well below Rs 5,000/- a month. People earning less than that can scarcely frequent markets for making purchases other than the essential food items.

The cost of their other requirements such as clothing, healthcare, education, etc, if at all, is provided by community support programmes (such as in the case of well-knit Khojas, Bohras, Ismaili communities, etc). Others, who rank among the poor and lower middle class, simply live off the direct handouts, (khairat, zakat, sadqa, etc) which is quite common in our society. Housemaids, guards, messengers, small time traders and unskilled labour fall in this category. This class mostly live in unauthorized settlements (Katchi Abadis) where either they manage to get utilities free or at very nominal rates through informal means.

Families with income under Rs 10,000/- a month are barely able to survive. According to my guesstimates based on some random household surveys, families earning in between Rs 10 to 50 thousand a month, are actually the ones that could constitute middle class. In most cases they live in regularized colonies where they pay for their housing and utilities. Except from their own extended family normally this class neither seeks nor gets the type of financial help that the poor solicit in our society. Their household budget, rates of savings and pattern of consumption are highly elastic and respond to all manner of things. It is this class of people who generate the greatest demand for goods and services and who in turn make the wheels of economy to turn. All around the world, it is the burgeoing middle class that attracts new investment in industries— both local and foreign. But the government here seems to be quite insensitive to the needs and aspirations of this class of potential buyers. Its policies of stabilization have adversely affected them by reducing their purchasing capacities leading to shrinkage of market for consumer goods.

The economic managers of the country claim that the rate of inflation has been brought under firm control. Independent estimates and people belonging to the middle class tell a totally different tale.

When the rate of inflation was projected by the government at a small 2.6 per cent, the price of electricity, gas and oil increased by staggering 46 per cent (worked out on the basis of change in actual rates charged between 1999 and 2002) in last three years since October 99. And the price of three items in the food basket: onion, gram and banana went up by about 40 per cent over the same period. Prices of flour and other pulses, however, have not changed much.

Even if one assumes the level of consumption of utilities were static at 1999 level, this segment of household budget alone must have increased by about the same rate as its cost—more than 40 per cent. Ignoring the increasing costs of other expenses such as of healthcare and education, the disposable income in the hands of people, would still decline.

The current budget again does not seem sympathetic to general Pakistani consumers. Imposition of 15 per cent GST on edible oil translated within days into Rs 10 or more increase in ghee and vegetable oil price per kg. There is nothing in the financial document that shows any resolve on the part of the government to address the needs of ordinary folks. This would not only affect consumers choice pattern but depending on their actual financial standing, it will drive many to give up or curtail expenditures that they previously could afford.

What would they do? Possibly cut corners in their spending on clothing, fruits or even education of their children. Personal response of each may vary depending on combination of their needs and choices. There is little doubt, however, that level of their presence in market must have already declined.

Is this a problem of middle class alone? It cannot possibly be. A market economy cannot progress without a robust expanding market. If other stakeholders such as traders and manufacturers and most of all, government, are preoccupied with their immediate petty issues it could be because of their shortsightedness. Where would the supplies go without demand?

There is of course dire need to encourage private sector to invest so as to acquire respectable sustainable growth rates. But the viability of investment is very much dependent on the depth and breadth of local market. It is, therefore, absolutely necessary to look deeper into this issue. Unless trend of marginalization of the consumer class is halted, there would be little scope or incentive for investment. The government needs to adopt a strategy to increase income of middle class so as to provide it more fiscal space. No country can ever progress without allowing its middle class to play its due role in the market. Strangulating the middle class is to put brakes on demand and what good is the investment in production and supplies, if there be no growth in demand?