Pakistan is facing a pressing issue that threatens its economic stability and prosperity – the rise of the land mafia and rent-seeking behaviour. As housing schemes marketed as “Parisian Utopias” continue to surge across the country, the consequences of urban sprawl, low savings rates, and a lack of capital for productive activities are becoming increasingly evident.
Pakistan’s savings rate, currently standing at a meagre 14%, falls significantly below the regional average of 29%. This deficiency in savings translates into a lack of capital available for investment in activities that can serve as multipliers for the country’s GDP, such as exports and manufacturing.
One alarming outcome of this low savings rate is the increased circulation of cash within the economy, leading to an oversupply of currency for locally produced goods and services. This overreliance on imported goods and services has resulted in a drain on foreign reserves and a negative impact on the country’s current account deficit. Pakistan produces insufficient local goods to compete effectively in the international market, necessitating subsidies and bailouts.
Pakistan can either continue to exist for the benefit of a few thousand rent-seekers and their allies, or it can catalyze prosperity for its entire population.
One of the primary reasons for the dearth of savings within the formal economy is that many individuals prefer to save their wealth outside of it, often in cash, gold, and real estate. Government policies aimed at keeping capital away from productive capacity enhancement have contributed to the transfer of capital from the formal to the informal economy.
The currency in circulation as a percentage of GDP has increased significantly, growing by almost 4.75 times in the past decade, from Rs1.6 trillion to over Rs7.6 trillion in 2022. A substantial portion of this cash is allocated to industries operating in the informal economy, thereby evading taxation.
Pakistan’s tax-to-GDP ratio is notably poor, ranking among the lowest in the world. This low tax base allows entrepreneurs in real estate dealings to pay minimal to no taxes, while those venturing into other industries face extensive bureaucracy, bribery, and risks.
Real estate transactions, notorious for being conducted in cash, have become a haven for those seeking tax-free income. Investors’ capital remains secure in this sector, thanks to a lack of regulations and the prevalence of “speed money” in the form of bribery. Consequently, there is little incentive for entrepreneurs to take risks in other sectors, perpetuating the cycle of rent-seeking behaviour.
State policies have further discouraged investment in the formal economy due to excessive taxation and regulatory overreach. As a result, many individuals choose to allocate their resources toward purchasing land, exacerbating the real estate bubble.
It is important to note that successive governments in Pakistan, and even key state organizations like the military, have close ties to the real estate sector. This alignment of interests hampers the country’s ability to achieve sustainable economic growth, create jobs, and boost foreign exchange earnings through exports.
To break free from this cycle, Pakistan must undertake a series of legislative decisions. Capital must be reallocated from the real estate sector to export-oriented enterprises to generate jobs and reduce the current account deficit. Furthermore, significant efforts should be made to contract the currency circulation in the economy by reallocating resources to the formal economy.
While such reforms may upset a small segment of rent-seekers, they are essential for the broader prosperity of the 220 million-plus population. The choice is clear – Pakistan can either continue to exist for the benefit of a few thousand rent-seekers and their allies, or it can catalyze prosperity for its entire population through meaningful economic reforms.
In conclusion, the rise of the land mafia and rent-seeking behaviour in Pakistan presents a severe threat to the country’s economic well-being. Urgent legislative action is needed to redirect capital toward productive activities and away from the real estate sector, fostering sustainable economic growth, job creation, and reduced economic disparities for all Pakistanis.
The author is a freelance writer who is currently studying at Aitchison College, Lahore.