Deepening wealth gap

Recent data from the Pakistan Bureau of Statistics reveals widening inequality between rich, poor

Recent data from the Pakistan Bureau of Statistics, compiled by a stock brokerage and financial company, reveals a widening inequality in incomes and assets between the rich and the poor of the country. The data shows economic prosperity is flowing upwards while financial strain is dissipating deep downwards, making the rich richer and the poor poorer. Based on the latest Household Integrated Economic Survey (HIES), it is observed that the real purchasing power for the common man has been declining between FY19 to FY25.

As the HIES provides a review of socioeconomic conditions of the country, it was deemed a key tool for evidence-based planning and policymaking by the Ministry of Planning. That means the ministry will follow the results of the survey as evidence for future economic planning, ensuring data-driven governance. The morbid situation not only raises questions about the much-debated economic stabilisation but also demands an informed analysis of what is fundamentally wrong with the country's economy. The literature shows that inequality is not always bad if the economy is on the right track. For this purpose, however, long-term economic growth policies need to be based on principles of inclusivity, balancing the power relations between the powerful and the powerless. Most economic growth theories and quantitatively sophisticated econometric models do not treat balanced political power as a determinant of economic growth in a country, but it is a major mistake.

Although the concept of long-run determinants of economic growth does accommodate such factors as culture, geography and religion of a country, an analysis of power relations is still inadequately examined. Few researchers, such as Nobel laureate Daron Acemoglu, however, discuss the trade-off between democracy and nondemocracy for elites and the influence of economic institutions thereon. In his book, Economic Origins of Dictatorship and Democracy, he presents two sets of ideas while juxtaposing the structure of an economy.

Firstly, the structure of an economy may influence the costs of repression or coups. And, secondly, it may also influence redistributive politics between different groups, resulting in the creation and stabilisation of democracy. Based on the HIES data, one can argue that Pakistan is a case of highly skewed economic inequality, concentrating wealth in the hands of the elites. Acemoglu's two economic narratives, accordingly, provide a sinewy framework through which the structure of the Pakistani economy can be analysed.

Following the first narrative, the literature shows that power relations may not remain balanced in societies where the elites are large landowners. In Pakistan, elites not only include large landowners but also powerful housing societies and agricultural industrialists, maximising their profits through unbridled use of power and avoiding due taxes. The agricultural income tax exemption to the landowners in Pakistan may be cited as an exigent example of unbalanced power relations in society. There are several other fiscal exemptions and privileges granted to the powerful elites, resulting in the concentration of wealth in a few hands, as reflected in the HIES.

The cost of repression or coups for the economy is, therefore, very high, as rightly pointed out by Acemoglu. It is because production in a progressive economy requires contributions from several stakeholders in the goods finishing and supply chain processes based on mutual trust and sanguine competition. Unfortunately, unbalanced power relations in Pakistan have historically undermined the stakeholders' business trust, thus deepening the wealth gap between the powerful and the powerless. As the HIES reveals a surge of up to 57% in individual internet users, mostly Gen Z, the flow of information inherently questions monopolistic business practices in Pakistan, which continue to make the rich richer and the poor poorer. The Ministry of Planning's fastidious resolve to ensure data-driven governance in the country is appreciable, but the same will require a formal power analysis in the governance structure of Pakistan, which will be a challenging assignment.

The second narrative is also equally important as it analyses how the structure of the economy influences political conflict and the implications of balanced power relations for the elites. It also suggests that large landowners, including powerful housing societies, may have to lose more if democratic institutions are strengthened. This observation is itself an explanation why landowners in Pakistan are part of the powerful elites. These powerful elites may not like redistributive politics, which will inherently provide power to the small businessmen and impecunious citizens to make business policies favouring them. As higher tax rates and biased tax exemptions inherently undermine long-run economic growth prospects in a country, the ruling elites may not like redistributive politics.

Balanced power relations and fair competition in business and entrepreneurship are, therefore, the key to just income redistribution in Pakistan. The creation of wealth by the powerless needs to be encouraged, as it will act as motivation for others. The privileges granted to the powerful require de novo policy appraisal because they are further unbalancing the power relations in the structure of the economy, thus widening the economic inequality gap. The elite's quixotic focus on investing in lands needs to be discouraged as industrial innovation, new startups and entrepreneurship through just competition is the right path for the economy.

Per HIES, the literacy rate has risen from 60% to 63%, indicating a surge in the human capital development in Pakistan's middle class. The surge is a result of heavy investments from household savings, which, per survey, have collapsed by 66% since FY19. Even the wealthier class has witnessed a gawky fall in savings of 57%, reflecting diminishing incomes and drawing down past assets.

Clearly, power relations need to be balanced mainly between large landowners, industrialists and people with high human capital through meaningful institutional interventions. Sustainable economic growth is mostly an inclusive phenomenon and, therefore, the deepening wealth gap may only be bridged through equitable increases in per capita income by bringing about requisite changes in the structure of the economy. For this purpose, the physical and human capital must be treated as more important than land and the businesses associated with land development.