STANDARD ways of thinking about the economy suggest that decisions to spend, save, and what to spend on and where to save are shaped by incentives and constraints. Households will spend more over and above basic subsistence needs if it’s of greater benefit to them (in the present and in the future), and households will choose to save more if they have money left over after fulfilling their basic requirements of clothes, shelter, healthcare etc. The existing system of incentives and constraints on expenditure and savings is usually set by the government through taxes, interest rates, and administrative procedures that can facilitate one over the other.

There is little contention over the fact that ‘formal’ savings in Pakistan are very low. The gross domestic savings rate (of which 85 per cent comes from household savings) has declined from around 20pc of GDP — not very high to begin with — to under 10pc, between 2002 and 2020 (India’s is 28pc of GDP). Part of this is simply because Pakistan is a very poor country, afflicted by frequent rounds of low income growth and high inflation that forces an average of 40pc of total household expenses to be spent on food. With such high allocations towards basic subsistence needs, there’s likely not much going to be left over to save. PSLM/HIES (Pakistan Social and Living Standards Measurement/Pakistan Social And Living Standards Measurement) data shows that on average, urban households have 8pc of their incomes left over post monthly expenditure, compared to around 9pc for rural households.

The importance of savings and its relationship with investments and thus overall economic growth is repeatedly asserted by all prescriptive discussions. What, however, is also needed is an analysis of consumption preferences, especially among urban upper-income households (top quintile). PSLM/HIES data shows that share of basic subsistence goods in the consumption basket is relatively lower for these households, but the savings rate is still around 10pc of total income. Instead, there is greater expenditure on private services (like education) and leisure activities, such as eating out. The percentage differences are not particularly large, but they speak more broadly of consumerist preferences. This is underscored by the fact that over the past two decades Pakistan has become a consumption-heavy economy, with private consumption reaching upwards of 90pc of GDP.

The pattern of development of Pakistan’s big cities seems to anecdotally confirm these widespread consumerist preferences. The most profitable and numerous businesses seem to be consumer retail oriented. The development of shopping malls, the rise of international and local fast food chains, and the continued success of automobile manufacturers catering to the uppermost tier of buyers with their SUVs is mounting evidence of such preferences. In other words, standard economic models may speak about incentives and constraints to spend versus save, but they need to be supplemented with an analysis of the ‘culture’ of consuming versus saving.

The desire to keep up, to retain and to reflect a certain lifestyle is an incredibly powerful one.

Cultural analysis is important here because outside of simple economic models, people’s behaviour is dictated by a wide range of sources. Incentives, constraints and expectations of the future are certainly a part of it, but what is also important are belief systems, peer effects, and ideologies. Unlike incentives — which models assume people will encounter individually — beliefs, ideologies and peer pressures are socially prevalent. People are socialised into their money habits from an early age, often through observation of their elders; they also tend to measure themselves and compete with their peers based on what they observe in their immediate environment, ie the clothes they wear, the cars they drive, the food they eat, the leisure products/experiences they consume. The desire to keep up, to retain and to reflect a certain lifestyle is an incredibly powerful one.

The same cultural analysis also needs to be extended to existing savings habits. Whatever little that is saved in well-to-do urban households ends up in informal savings (such as jewellery and real estate). A State Bank staff note from 2016 pointed out that less than 30pc of all savings — which are not much to begin with — are actually channelled into formal financial instruments, with the rest going into informal sources such as real estate.

Changing cultural preferences around consumption and savings itself is incredibly difficult in the short to medium term. There is no straightforward instrument that can do this. A countrywide re-education of preferences dictated by the state is not possible and probably not desirable either. Mass media is kept afloat by a consumerist economy and is unlikely to be of any use here. Religious notions of what is permissible and what isn’t are also unlikely to change. Noble efforts on social media to make savings popular are directed towards the educated (and freely consuming) segments of society, but face insurmountable odds placed by peer pressure, and the general sentiment of fatalism that pervades anyone who follows news and current affairs in Pakistan.

Ultimately, one has to turn to the state for a solution that can help create smaller nudges in cultural habits over a longer period of time. The starting point has to be improving the policy environment around formal savings (by making it easier and cheaper), and discouraging investment in unproductive and informal assets such as real estate (through taxes and greater regulation). This is literally the only thing that remains in the government’s immediate control, though one remains pessimistic for obvious reasons: the 2016 State Bank note cited here shows the share of formal savings in total savings falling from around 50pc to 20pc during 2000 to 2005 — a period characterised by a major real estate boom under Gen Musharraf’s regime. A similar boom has been encouraged by the current government when, based on the challenge posed by a consumerist economy, it should probably have been doing the exact opposite.

The writer teaches politics and sociology at Lums.

Twitter: @umairjav

Published in Dawn, November 15th, 2021