The middle class of Pakistan

The middle class has generally been defined as the class of people who are between the 'upper' class and the 'working' class, on the basis generally of income or expenditure. These people are sometimes referred to also as the 'bourgeoisie' and possess either or both of two characteristics. First, members of the middle class are generally persons with higher education often employed as professionals or managers. Second, they may be endowed with entrepreneurial qualities and own small trading or production establishments. A large and expanding middle class is the sign of a rapidly growing economy.
The middle class can also play an effective role in promoting social and political change, as has been the case in many countries. They are frequently instrumental in demanding accountability for efficient and honest delivery of services and act as a counter to elite capture of state resources. They are also more inclined to promote the formulation and implementation of progressive policies.
The simplest approach to identifying the middle class is to look at the characteristics of the people in the third and fourth quintile of population on the basis of income or expenditure. This is made possible in the Pakistani context by the Household Integrated Economic Survey (HIES) conducted periodically by the Pakistan Bureau of Statistics (PBS).From 2001-02 to 2015-16, eight such surveys have been undertaken on a stratified random sample of over 20000 households all over Pakistan.
Based on adjustment for some understatement of income especially at the upper end of the income distribution, the spread of per capita income among the three classes has been determined for the latest survey year, 2015-16. Accordingly, the per capita income of the middle class is 225 percent of the per capita income of the lower class (bottom two quintiles) and 27 percent of the income of the upper class (top quintile). This demonstrates the fairly highly level of income inequality in Pakistan.
Three periods can be identified with regard to the progress of the middle class since 2001-02. During the Musharraf era up to 2007-08, incomes grew relatively fast but income inequality increased sharply. Consequently, the per capita income of the middle class rose in real terms annually by 5 percent, while the national per capita income grew faster at 5.5 percent.
The tenure of the PPP government for the next five years saw slow growth in the economy and, more or less, unchanged inequality. The per capita income of the middle class grew by just over 3 percent annually. During the tenure of the present government, income growth has continued to be slow but with some falling inequality, due particularly to adverse developments in the labor market described later. The middle class saw per capita income growth of even less than 2 percent annually in the first three years of PML(N) government.
Turning to the question as to whether to the size of the middle class is expanding or contracting with respect to the total population, a different approach has to be adopted. The middle class is now defined to include households with per capita expenditure in the range of 25 percent below and 25 percent above the median expenditure. The results are very revealing. In 2001-02, 43 percent of the population was in the middle class. By 2015-16, the share had fallen to 38 percent. Therefore, the presence of the middle class is shrinking as part of the population of the country. Is this in line with popular perceptions?
The next question of interest is how large the middle class is in relation to an international standard for a family to qualify as part of the middle class. The standard used is that the per capita expenditure per day should range from $5 to $25 in purchasing power parity (PPP) terms. For the latest year, almost 30 percent of the population falls in the middle class, with the PPP$ being almost four times the nominal US$ in the case of Pakistan. Therefore, almost 10 million families of the country form part of the global middle class. For example, Pakistan's middle class is 6 percent of the middle class of Asia and the Pacific. The combined purchasing power annually is estimated at $ 600 billion in PPP$. This implies a relatively large market for housing, consumer durables, etc.
There is need also to identify the distribution of the middle class within the country. Estimates are that 56 percent of the middle class is in the cities and towns of Pakistan and 44 percent in the rural areas. 59 percent of the middle class lives in Punjab; 22 percent in Sindh; 15 percent in Khyber-Pakhtunkhwa and 4 percent in Balochistan. The share in home remittances of the middle class is 34 percent. Over 57 percent of the remittances accrue to the upper class.
Wealth inequality is more pronounced than income inequality. Perhaps the best indicator of wealth is the ownership of property. With a share of 38 percent in income, the middle class owns 28 percent of the property in the country. This share has also been declining. Bulk of the property, almost two thirds, is with the upper class.
Based on the above findings, there is need to explain why the middle class of Pakistan is shrinking and why their incomes are growing slowly. The first reason is the adverse development in the labor market during the last few years, with regard to employment opportunities for educated workers, a large segment of which is in the middle class. There has been an exponential increase in the unemployment rate of such workers. It was 5 percent in 2007-08 rising sharply to 18 percent by 2014-15. Consequently, almost one in five workers in the labor force, with a graduate or post-graduate degree, is without a job. This is a tragic waste of the human capital in the country.
Second, the middle class is being squeezed by rising costs of living, especially of housing and utilities. The expansion in the number of housing units with two to four rooms between 2010-11 and 2014-15 has been only 10 percent. This compares with an increase of 17 percent for the upper class of housing units with five or more rooms. Also, rents, especially in metropolitan cities, have risen 20 percentage points more than the cumulative rise in the overall consumer price index since 2007-08.
Simultaneously, the electricity tariff for monthly domestic consumption of 300 to 1000 kwh per month has gone up almost four times. It is not surprising that the average savings rate for the middle class is down to only 4.5 percent.
There is nevertheless some good news. Middle income workers, with annual income from Rs 400,000 to Rs 1,000,000 per annum, remain the backbone of our personal income tax system. The majority are salaried taxpayers. They account for over 90 percent of tax return filers and contribute over 46 percent to the tax revenue.
There has also been a rapid growth in the demand for consumer durables like motorcycles, refrigerators, TV sets, etc., of 6 to 8 percent per annum in the last eight years. This has been facilitated by the arrival of relatively cheap Chinese makes in the market and somewhat improved consumer financing. Mobile phones have, of course, filtered down even to the lower class. Meanwhile, the fast growth in sale of motor cars of over 10 percent annually continues unabated. This testifies to the affluence of the upper class.
The overall conclusion is that the middle class of Pakistan finds itself faced today with limited opportunities in the labour market and a big squeeze in its living standards. The forthcoming elections will provide an opportunity for it to continue to agitate for improved governance, greater accountability against corrupt practices, for progressive policies against high inequality and for improvements in the provision of services.
(The writer is Professor Emeritus and former Federal Minister)