Pakistan is grappling with a pressing economic issue that threatens its stability and prosperity: the rampant rise of the land mafia and rent-seeking behavior. As housing schemes, often marketed as “Parisian Utopias,” mushroom across the country, the consequences of urban sprawl, low savings rates, and a lack of capital for productive activities are becoming increasingly evident.
At the heart of Pakistan’s economic woes lies its low savings rate, which currently stands at a meager 14%, significantly below the regional average of 29%. This deficiency in savings translates into a shortage of capital available for productive investment, hindering the country’s ability to boost its GDP through exports and manufacturing.
The low savings rate has led to an oversupply of currency in the economy, as individuals opt to hold their wealth in cash, gold, or real estate instead of investing in productive ventures. This overreliance on imported goods and services has drained foreign reserves and widened the country’s current account deficit.
One of the primary reasons for the dearth of savings within the formal economy is the government’s policies that have discouraged investment in productive capacity. The informal economy, characterized by tax evasion and unregulated activities, has thrived as a result.
The currency in circulation as a percentage of GDP has increased significantly in recent years, indicating a growing preference for cash over other financial instruments. A substantial portion of this cash is allocated to informal industries, further exacerbating the country’s tax revenue shortfall.
Pakistan’s tax-to-GDP ratio is among the lowest in the world, reflecting the prevalence of tax evasion and avoidance. Real estate transactions, often conducted in cash, have become a haven for those seeking tax-free income. The lack of regulations and the prevalence of bribery in the real estate sector have discouraged investment in other industries, perpetuating the cycle of rent-seeking behavior.
State policies have further hindered investment in the formal economy through excessive taxation and regulatory overreach. As a result, individuals are increasingly drawn to land purchases as a safe haven for their wealth, fueling the real estate bubble.
The real estate sector in Pakistan has strong ties to successive governments and even key state organizations like the military. This alignment of interests has hindered the country’s efforts 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 reforms. Capital must be reallocated from the real estate sector to export-oriented enterprises to generate jobs and reduce the current account deficit. Additionally, the government should implement measures to contract the currency circulation in the economy and encourage investment in the formal sector.
While these reforms may face opposition from those who benefit from the current system, they are essential for the broader prosperity of Pakistan’s 220 million-plus population. The choice is clear: Pakistan can either continue to exist for the benefit of a few thousand rent-seekers or it can catalyze prosperity for its entire population through meaningful economic reforms.
