Analysing the middle-class

The latest SBP annual report put FY17 GDP growth rate at 5.3 percent. Referring to this decade-high growth as "consumption led", the central bank has rightly pointed out the sustainability concerns arising from growing consumer spending. But what caught one's attention is the authors' reference to "higher demand from expanding middle class population" as one of the factors behind the growth run.

Since there is continuing debate over a consistent methodology to classify middle class, it would have been nice had the SBP given its take on the size of the Pakistani middle class. The report didn't have such a number - and that's fine. But the supporting data mentioned for "higher demand from expanding middle class" makes things a little confusing.

"According to the Household Integrated Expenditure Survey [HIES] conducted by PBS, the second, third and fourth quartile population of the economy witnessed an increase of 14.5 percent, 12.6 percent and 16.1 percent respectively in their income, which led to a rise of 16.7 percent in per capita expenditure for three quartiles during FY14 to FY16," the report cited.

No one disagrees with the expansion in purchasing power in recent years. But one needs to be careful interpreting such evidence. There are two issues with the statement in the above paragraph. One, the HIES provides data in 'quintiles', not 'quartiles'. The authors most likely meant quintiles, so let's go with quintiles. But even there, the issue is that "middle class" is not what the middle-three quintiles make.

If one were to identify "middle class" through the middle quintiles approach, it would mean that the size of middle class would forever remain the same in terms of total population - that is, 60 percent. That cannot be the case, for the size of a middle class can shift as a percentage of population over time. Secondly, in a country with high concentration of poor and low-income people, such an approach would end up counting among the middle class many poor and low-income households.

Arguably, "class" is a socioeconomic theme, so it cannot be linked entirely to a person's income, expenditure, or wealth. There are several numbers masquerading around as the true size of Pakistani middle class. Very few serious studies are available. Dr. Durr-e-Nayab, of PIDE, did a study in 2011 titled 'Estimating the Middle Class in Pakistan" that stands out.

Using a weighted composite index - which comprised i) education index, ii) income index, iii) housing index, iv) lifestyle index, and v) occupation index, Dr. Nayab estimated middle class at 35 percent of the population (based on 2007 PSLM data). A decade later, using conservative estimates, the middle class concentration is expected to have reached at least 40 percent of the population. That's over 80 million individuals or 13 million households.

This particular column doesn't mean to criticise, but to emphasise on studying the middle class phenomenon in proper detail. It must be done, not just for the sake of demographic planning or urban management, but also for cultivating social values - such as education, hard work, planning and saving - which are associated with the middle class and benefit the economy in the long run.

Pakistan is currently a lower-middle-income country. Within five years it may reach the $2,000 per capita (PCI) level, beyond which average consumer starts spending more on lifestyle, convenience, and discretionary products. For business, real potential rests at the bottom of the pyramid. Bulk of Pakistan's population can be classified as low-income, earning between $2-10 per day. They are the aspirants, who can be tomorrow's middle class, if they are provided better education and livelihood opportunities.