Implications of Growing Middle Class for Pakistans Socio-Economy

Dr. Vaqar Ahmed Sustainable Development Policy Institute

Global GDP Growth 1961 - 2010

10 8 6 % Growth 4 2 0 -2 -4 -6 Middle income countries Low income countries High income countries
2

Middle income countries are now drivers of global growth

1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

Regional Comparison of GDP Growth

10 8 6 % Growth

4
2 0

South Asia High income World 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

-2
-4 -6

South Asian has grown at a faster pace

Household Consumption Expenditure

12 10

8
% Growth 6 4 South Asia High income World

2
0

1971

1977

1974

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

-2

-4
-6

2010

Rising growth shows in higher consumption expenditures

Pakistan: Changes in Population Structure

Labour force growth higher than population growth

Increasing working age population

What makes middle class important?

Middle class:
Is a precondition of stability in the social structures Is a measure of mitigating inequality in a society

Easterly (2001): Nations with a large middle class tend to grow faster
English middle class of 18th & 19th century Todays China and India
6

What makes middle class important?

Collier (1999): Middle class forms alliance with lower classes in order to demand an inclusive political system
Acemoglu (2003): Decisive voters in democracy are from middle class Bannerjee (2007): middle class is a source of new entrepreneurs and this class stresses on accumulation of human capital and savings
7

What makes middle class important?

Warning:
Basu (2003): If venues for channeling middle class human capital and savings not provided, then tendency towards consumption expenditure puts sustainability of growth in danger

How big is middle class in Pakistan?

Method 1: Expenditure from PPP $2 to $20 per person per day

Class
Lower lower (< $1.25) Lower ($ 1.25-2)

Proportion (%)
21.3 34.8

Lower Middle ($2-4)

Middle Middle ($4-10) Upper Middle ($10-20)

32.4
9.8 1.3

81.5 million people

Upper (>20)

0.4
9

How big is middle class in Pakistan?

Method 2: Computation by Weighted Composite Index

Class Lower lower

Middle lower Upper lower Lower middle Middle middle Upper middle Upper

Categorisation Destitute
Aspirants Climbers Fledgling middle class Hard-core middleclass Elite middle class Privileged

Proportion (%) 41.9

23 15.8 8.5 4.3 6 0.4
10

32.5 million people

Source: Dur-e-Nayab (2011)

How big is middle class in Pakistan?

Method 2: Computation by Weighted Composite Index

Class
Lower lower Middle lower Upper lower Lower middle Middle middle

Urban (%)
23.6 21.8 20.8 12.5 8.1

Rural (%)
55.2 23.9 12.3 5.7 1.6
Urban: 22.6m Rural: 9.8m

Upper middle
Upper

12.3
0.9

1.3
0.1

The middle class is an urban phenomenon lives and works in cities 11

Occupational Proportion in Middle Class (%)

Occupation Armed forces Senior Officials Professionals Technicians Clerks Service /retail Agriculture Crafts Plant operators Elementary occupations Total

Lower Middle 1.1 2.9 18.3 19.3 14.5 30 5.9 2.6 2.1
3.3 100

Middle Middle 0.6 8.2 15.7 14.2 11.8 28.9 8.6 5 3.1
3.9 100

Upper Middle 1.3 20.7 26.4 21.3 12.9 17.1 0.1 0 0

0 100

Dominant presence in civil service

The middle class is an urban phenomenon lives and works in cities 12

Occupational Proportion in Middle Class (%)

Occupation Armed forces Senior Officials Professionals Technicians Clerks Service /retail Agriculture Crafts Plant operators Elementary occupations Total

Lower Middle 1.1 2.9 18.3 19.3 14.5 30 5.9 2.6 2.1
3.3 100

Middle Middle 0.6 8.2 15.7 14.2 11.8 28.9 8.6 5 3.1
3.9 100

Upper Middle 1.3 20.7 26.4 21.3 12.9 17.1 0.1 0 0

0 100

Dominant presence in engineering & medicine

The middle class is an urban phenomenon lives and works in cities 13

Occupational Proportion in Middle Class (%)

Occupation Armed forces Senior Officials Professionals Technicians Clerks Service /retail Agriculture Crafts Plant operators Elementary occupations Total

Lower Middle 1.1 2.9 18.3 19.3 14.5 30 5.9 2.6 2.1
3.3 100

Middle Middle 0.6 8.2 15.7 14.2 11.8 28.9 8.6 5 3.1
3.9 100

Upper Middle 1.3 20.7 26.4 21.3 12.9 17.1 0.1 0 0

0 100

Dominant presence in Services Sector (53% of GDP)

The middle class is an urban phenomenon lives and works in cities 14

Occupational Proportion in Middle Class (%)

Industry Lower Middle Agriculture 6.2 Mining 0.8 Manufacturing 7.6 Power & fuel 2.6 Construction 2.5 Wholesale/retail 25.6 Transport/commu nication 4.3 Banking & Insurance 3.6 Community services 46.8 Total 100

Middle Middle 8.9 0.5 9.7 2.6 2.7 27 4.8

6.9 36.8 100

Upper Middle 1.4 0.9 11.6 2.7 2.1 15.5 4.9

9.4 51.5 100

Domestic commerce

The middle class is an urban phenomenon lives and works in cities 15

Proportion of Occupational Status (%)

Occupational Status Lower Middle Employer with < 10 employees 1.1 Employer with > 10 employees 1.4 Self employed nonagriculture 27.5 Paid employee 64.5 Unpaid family worker 0 Own cultivator 4.7 Share cropper 0.3 Contract cultivator 0.3 Own Livestock 0.3 Total 100 Middle Middle
1.6 3.9 27 60.1 0 6.3 0 0.6 0.5 100

Upper Middle
1 4 16.9 78 0 0.1 0 0 0 100
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Moving from wage to self employment

Barriers to entrepreneurship holding back the middle class

What does this middle class want?

They want:
Education Jobs

Nayab (2011):
When compared to its neighbours Pakistan has a bigger middle class The middle class in Pakistan has actually grown with time
17

Two facts about education in Pakistan

Average years of schooling (age 15-19) has not changed since 1990 (currently at 7.6 years)
Labour force with tertiary education under 22%

18

What about jobs?

12 10 Percent

Declining Growth, Rising Unemployment

8
6 4

2
0

GDP growth (annual %) Unemployment, total (% of total labor force)

Education without opportunity

19

Migration Increase Since 1972

Skilled 20

Highly Skilled

16

Highly Qualified

20

10

15

20

25

% Growth

Remittances and Dutch Disease Phenomenon

20

Choices
Currently no space for middle class (physical & intellectual)

Reforms for engaging middle class

21

Accommodating Middle Class

The rise in consumption

Opportunities and challenges

The development of urban markets

Changes in consumption pattern

McKinsey 2007

Backward linking of urban with rural markets

22

Annual Projected Consumption Growth - 2030

16 14 12 10 8 6 4 2 0
12 13

14

% Growth

8
6 4 7

Emphasis has already shifted from food to durable goods Choice driven consumption

23

Urban Growth and Management

Births and migration will drive growth Labour market shortages:
Design Engineering Middle management

Financial markets that provide savings instruments Opportunity for niche cities Backward linkages with farm activity
Diversification towards higher value addition
24

Inclusive Governance for Middle Class

Infrastructure governance reform of PSEs Social sector governance 18th Amendment
Legal and judicial reforms for inclusive markets Efficiency of public expenditure results based management
25

Thank You

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