Luxury consumption and agricultural constraints

Luxury consumption is a hallmark feature of the advanced economies where per capita income is very high. A person's income is divided between consumption and saving.

Rich people spend a small proportion of their income on food and spend a reasonable proportion on luxury items. In addition, they save a large proportion of income.

In advanced economies, rich people keep their savings in forms such as treasury securities, prize bonds, gold, stock market, real estate and housing. Rich and upper-middle class individuals put their savings in these forms.

In Pakistan, real estate and housing get the lion's share of savings. From the village side, large landlords and arthis (merchants) command high income. From cities, large traders, financial capitalists, bureaucrats and successful professionals earn higher income. In addition to savings, these people consume luxury goods.

Sports utility vehicles (SUVs) are part of luxury goods. Car assemblers have been introducing new designs and styles of SUVs. These SUVs are mostly imported while a small percentage is assembled in the country.

Earlier, these SUVs were ignited through either diesel or petrol. Now, car assemblers introduce electric or hybrid vehicles keeping in view the emerging demand.

The estimated size of the SUV market is $1.4 billion. The size of this segment is gradually growing and is quite stable. When foreign exchange reserves are either stable or growing, the market size of SUVs remains intact.

However, these SUVs consume precious foreign exchange. Under the Extended Fund Facility (EFF) of the International Monetary Fund (IMF), foreign exchange reserves are growing, hence the market of SUVs.

Though housing contributes to the investment component of GDP, yet housing is furnished through luxury goods. Modern and western style homes are decorated and embellished through luxury furniture, classy flooring, expensive hardware and lights.

Keeping in view the stable demand for luxury housing, builders and developers also offer either luxury units or apartments. Those apartments also use luxury goods, hence contributing to luxury consumption.

On the contrary, there is high demand for affordable housing in the country. Since low profits are associated with this type of housing, builders and developers do not cater to the needs of this housing.

Hence, this large segment of the demand either remains unfulfilled or is met through informal settlements.

Some analysts and commentators are of the opinion that luxury consumption is the indicator of standard of living. This general statement needs qualification that luxury consumption increases the standard of living of the upper-middle class in Pakistan.

Similarly, this segment of population sends their children to grammar schools. Now, grammar schools are further segmented where top-notch ones charge a premium fee as they offer modern curriculum and state-of-the-art facilities such as smart libraries.

Since demand for luxury consumption is stable, industrial capitalists target those luxury goods and orient their productive capacities accordingly. If demand for luxury goods increases, it will increase the level of employment and wages of workers producing those goods. Then the question arises what happens to the mass-producing industrial sector?

Since the agriculture sector in Pakistan is constrained by institutional bottlenecks, the pent-up demand for luxury goods increases the level of employment which, in turn, increases food prices.

These high food prices will constrain and squeeze the market of mass-producing industrial sector. Hence, the mass-producing industrial sector squeezes in the presence of institutional bottlenecks in the agriculture sector along with expansion of luxury consumption.

In short, luxury consumption provides stable profitable opportunities to the industrial capitalists who fulfil this demand. However, this type of consumption puts a strain on precious foreign exchange reserves. Let us see how policymakers respond.

The writer is an independent economist who worked at SDSB, Lahore University of Management Sciences (LUMS)