Consumption conundrum

Published March 22, 2012

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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