Rising Inequality or Inflation Paradox

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Mariam Afzal

We all are familiar with the term that Karl max coined “haves not” that highlights the rather unfortunate group of the society. Every society is divided between the haves & the haves not, creating a polar economy, the phenomena we casually call “inequality.”
Here we are not discussing about the gender or other inequalities that the nation is plagued with, rather the class differences among the people. We feel no hesitation in saying that Pakistan is a highly unequal society and the disparity between the society’s classes is only increasing. The Gini co-efficient for Pakistan is 29.6 index points, latest available for year 2018.
Since the time Covid has struck the globe, inflation has been on rise. Pakistan is one of the worst hit countries in terms of inflation to say the least. Globally, despite the inflation, we observe a rise in demand for many commodities, specially the luxury ones. Strangely, we see the same for Pakistan as well. Although the term luxury may differ from person to person, the essence is same. The reason why we call it a paradox is how people are still managing to maintain the lifestyles, rather investing more in luxuries despite being a victim of a soaring inflation and apart from the overall class disparity; we are observing a significant disparity among the middle income group of the country.
There is a term that we do not get to hear more often-revenge spending, which refers to a sudden increase in spending after the consumers are denied the opportunity to shop for longer period of time. This term became quite popular during and post covid-19 recovery period. Contrary to the expectations, many luxury brands around the world experienced a sharp increase in sales. While we do not deny that revenge spending is one of the reasons behind it, it cannot be the sole reason either. Moreover, the prerequisite for revenge spending is being able to spend and have enough purchasing power.
Pakistan is a developing as well as a poverty stricken economy. Every day, we see people ranting and blaming sitting governments for their situation. However, we see a large fraction of society who despite being facing inflationary pressures, is able to spend on commodities that are on a pricier side. While a large number of people belonging to the middle income are cutting their expenses because of the shrunken purchasing power, a large number of people have also observed to be multiplying their expenditures and seem to remain indifferent of the soaring prices. Evidence to support our notion of rising inequality is the recent past event- Eid. While the local markets seem to have drastically hit by the back breaking inflation, buyers seemed to throng the shopping malls and willing to pay whatever they are charged. To our surprise, the brands were struggling to keep up with the demand and their P&L statements show no signs of inflation impact for this year.
The current spending behaviors are still evolving and challenging basic economic theories about rational behavior. Substitution affect accentuates that consumer would spend on a cheaper substitute while Income effect emphasizes that increase in income leads to higher demand that may lead to complete shift of demand curve. However, the current spending behaviors are rather contrary. Becoming more brand conscious has induced an irrational behavior where despite the perfect substitute being available in market, consumers prefer to buy a luxury which would cost them a lot higher. Moreover, even if we take income effect into consideration, the ratio to increase in income and demand shift is disproportionate. There are quite a few reasons that may explain this paradox.
The rise of platform economy is emerging that has brought radical changes in how consumers create value for the business owners. Digital frameworks, owing to their diverse structure and function, have expanded the reach where people are exposed to the commodities from all over the world. Brands are excessively spending in social media which has increased their sales multifold. The term “social media influencers” has never caught greater attention where they influence buying decisions of the masses. Luxury brands that were only a part of the elites lives then, has now integrated themselves in the life of the society’s middle class as well. Moreover, the luxury brands have now completely changed their rationale as well. A few decades ago, luxury brands would deliberately function this way where they used to serve the elites only. However, there business strategies have completely evolved. Considering the fact that a normal middle class buyer may not be able to afford to a very high priced commodity, they have diversified their items by offering a wide range of products priced at different levels that are still costlier than the regular substitutes. In other words, we can say that have created a demand for their supplies by creating a brand conscious market where consumer would pay a higher price to own a luxury. The shift in behavior is massive. If we go by the rational behavior, a regular increase in purchasing capacity may lead a person to afford a few more items, however, today they try to portray a complete class shift. They would cut a fraction of their necessities to save and buy a luxury. This overall scenario is leading to a more brand conscious society which is unfortunately unhealthy.
While the lower income class of the economy is being grinded more than ever and could barely meet ends, middle class is rather finding ways to be a part of class they do not belong to, creating a more polar society and that makes us wonder is there really any inflationary pressure that loom over people’s heads or it’s just a paradox. In my view, we are unconsciously becoming a part of an agenda where elites are trying to trap consumers in a viscous pit for their own good which is a means of destruction for the economies. It is not a hidden fact that inflation, debt, financial crises and economic stability are also a product of high of level income inequality in a society. After a comprehensive interval of quasi neglect, economic inequality has become a topic of policy debate worldwide. For Pakistan, curtailing inequality will be a bandage to rising poverty as well along with economic development. A more effective and higher tax for the higher income group would help in raising funds for the poor. Generalized use of credit and debit cards and bank accounts makes it easier to control tax evasion and monitor personal incomes. Moreover, it will lead developing economies to put more stress on direct taxation. Reliance on indirect taxes is regressive since it focuses on consumption rather than income, ignoring the fact that higher income groups have larger capacity to save as well. Lowering overall taxes on basic goods, such as food items would do little to redistribution since they are consumed by the wealthy. Same argument goes for subsidies on items such as fuel. Hence, income transfers through taxes are preferred over subsidies since they are targeted. However, Pakistan’s administrative capacity and political opposition may remain a major obstacle in doing so.
The writer is a freelance columnist.