A developing, but increasingly expensive service industry

Pakistan is seeing high inflation in the sector that is fast becoming dominant

Fahd Rehman August 30, 2015
The service-oriented economy is insulated from international competition since most of it is non-tradable and lacks regulatory control. PHOTO: FILE

LAHORE: Ever since the country’s economy started moving away from agriculture to the services sector, it has been passing through commodity stagnation and services inflation simultaneously; this phenomenon could be termed the ‘dual track economy.’

Sector-wise composition shows that the share of services sector in Gross Domestic Product (GDP) increased to 58.8% in FY15, while the rest is of the commodity-producing sectors (agriculture and industry). Hence, Pakistan becomes a service-oriented, developing economy.

A service-oriented developing economy cannot absorb a huge young population, ultimately creating youth unemployment. A service-oriented economy is desirable at the later stages of economic development, which is the case in advanced countries since most of them don’t have young populations. Therefore, these advanced countries look for potential young immigrants from developing countries to man their economies.

Producers and consumers

The commodity producing sector of Pakistan is exposed to international competition owing to globalisation of production and reduction of international trade barriers.

International commodity prices such as wheat, cotton, rice, sugar, iron ore, coal and oil are on the downhill since 2014. This reduction has translated into almost flat domestic prices in Pakistan that are benefiting consumers to some extent. These flat prices are reflected in the Consumer Price Index (CPI) of the Pakistan Bureau of Statistics (PBS), which is showing around 5% inflation at the moment.

However, the producers’ side of the story is not encouraging. Commodity producers are unable to align their production efficiencies with international standard, therefore, they face stiff competition from international competitors.  The plummeting prices have been reflecting in the Whole Sale Price Index (WPI) which is in the negative territory since November 2014.

These prices reflect the state of stagnancy in commodity production. The stagnancy of commodity prices doesn’t bode well for the economy since it stunts industrial expansion and growth. Furthermore, the impact of low prices has been felt by the farming community a great deal since they cannot even resist international competition. That is the reason farmers are disillusioned, raising voices for subsidising their produce.

Services inflation in Pakistan

The service-oriented economy is quite insulated from international competition since most of the service sector is non-tradable and lacks regulatory control. These domestically-produced services are not even standardised and service providers are charging according to their will and whim. For instance, a visit to a doctor costs more than the previous year. Similarly, education expenses have been on the rise. The privatisation of education and health care has made them quite expensive, regardless of the quality comparison.

Also, rents in the metropolitan cities in Pakistan are increasing since the pace of urbanisation is fast. More people are flocking to cities as compared to the number of houses available. The irresistible lure of the cities is creating a different kind of crisis. The service charges for real estate transactions are increasing since most of the people prefer to buy land since it is a good form of savings and brings capital gain.

In addition, even the tourism services have become expensive over the years since hotels charge higher prices due to ever increasing cost and they involve higher fixed cost. The costly tourism services can be gauged by visiting the northern areas or costly room charges of hotels in the metropolitan cities of Pakistan. Similarly, consulting fees of lawyers are also increasing due to lack of contract enforcement.

In a nutshell, a dual track economy of Pakistan has distinct features with an increasing informal sector. Since there is a general increase in the prices of the services sector we may call this services inflation. The services inflation seems to be quite high, since these services are not adequately reflected in the official statistics owing to sampling, measurement and informality issues. However, the higher services prices affect the well-being of the masses a great deal.

The writer is an Assistant Professor of Economics at Lums

Published in The Express Tribune, August 31st,  2015.

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