The country is obsessed with housing schemes. In a drive through any urban, or even semi-urban centre, one’s visual senses are overwhelmed by new housing societies propping all over the place.
The tentacles of urban sprawl are spreading, while the commensurate utility infrastructure is not. Billions are being spent on new expressways to connect housing schemes of typical rent seekers, while a dream of Dubai-esque or sometimes even Parisian living is being sold on a per marla (or equivalent square yards) basis.
Pakistan has one of the lowest savings rates in the region, and among peer countries. Savings rate as a percentage of GDP has consistently stayed below 14 per cent, against a regional average of 29 per cent, and lower-middle income countries average of 26 per cent. Inability to save results in inability to accumulate sufficient capital that can be reallocated towards activities that can have a multiplier effect on GDP growth, such as export-oriented industries, or other manufacturing activity.
Increased circulation of cash in the economy also has a significant inflationary impact as there is too much cash chasing too few locally produced goods, eventually leading to reliance on imported goods and services, which results in a drain on foreign exchange reserves, and a perennial current account deficit problem. Our boom-bust cycle keeps on shortening, from a few years, to a few months now – and that is largely due to our perpetual reliance on imported goods and services, without producing much of substance locally that can be competitive in the global marketplace without state subsidies, bailouts, and concessions.
But do we really not save? We do save, but we save outside the formal economy. We save in cash, and we save in gold, and we save in real estate – most of which remains outside the ambit of the formal economy. There has been an accelerated transfer of capital from the formal economy to the informal economy over the last decade, solely driven by the state’s active desire to keep capital outside of productive capacity enhancement. Currency in Circulation as a percentage of GDP has increased from 10 per cent in 2012, to more than 18 per cent in 2022. In absolute terms, it increased from Rs1.6 trillion, to more than Rs7.6 trillion as of latest reporting, growing by almost 4.75x in 10 years.
This effectively means that there is more cash moving around the economy than ever before and being reallocated to enterprises that aren’t really being truly captured by the formal economy. Our tax-to-GDP ratio is already dismal; if we add the informal economy to the mix, it would probably be the worst in the world.
There is little to no tax that needs to be paid in a real-estate venture. In order to set up a manufacturing entity, the entrepreneur has to take dozens of approvals, and grease another dozen palms, while also taking front-loaded risk.
Meanwhile, for a housing scheme, the entrepreneur doesn’t have to pay any (or little) taxes, do most of their dealings in cash, while not even having to actually buy land using their own capital. They can solicit funds from ‘investors’ without any concern for any regulations, while investors accrue gains largely tax free. Regulatory burden is light, or non-existent, as most can be sorted by paying the right amount of speed money, for lack of a better word. In such a scenario, there is little to no incentive for any entrepreneur to take risks and allocate capital towards productive enterprise, when they can accrue tax-free gains without taking much front-loaded risk.
State policies over the years have created an environment wherein individuals and entities alike are not comfortable with investing in the capital markets, or in formal businesses, resulting in potential de-corporatization, capital flight, and creation of a hyper-cash economy. Formal business has been made difficult, taxed heavily, and with regulatory overreach, that it continues to scare away serious capital.
The best option then remains allocating your capital towards a plot, when one can see that successive governments are either supported by realtors, or have realtors as beneficiaries. The inability of the state to even half-heartedly regulate, or tax the segment clearly demonstrates its implicit approval of allocating capital towards non-productive segments. It also helps when a key state institution is also the largest realtor in the country. One can’t go wrong with real estate in such a macroeconomic and political economy context.
Plotistan cannot get the country sustainable economic growth, nor can it create sustainable jobs, or generate a recurring supply of export driven foreign exchange. It can however make a certain segment of the population, such as rent seekers, very rich. The economy has been structured such that these rent seekers continue to benefit, while the rest of the population has to deal with bouts of double-digit inflation in perpetuity.
If policymakers are serious about sustainable economic growth, there needs to be a drastic policy change that reallocates capital from real estate to export-oriented productive enterprise. This will not only create more sustainable jobs, but also enable generation of sufficient foreign exchange earnings to solve the current account deficit problem. This would also require significantly contracting currency circulation in the economy, by reallocating it towards the formal economy.
This may upset a few thousand rent seekers, and definitely upset many of those at the helm as well. Effectively, the decision is whether we want a country which catalyzes prosperity for 220 million plus people, or a country that exists for a few thousand rent seekers and their cronies.
The writer is an independent macroeconomist.
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