LAHORE:
The economic pie is divided among the income classes where high-net-worth individuals buy luxury goods and services while low and middle-income ones buy mass produced goods.
Luxury goods are usually imported. If they are produced locally, they will involve a lot of imported content. In addition, they are produced through capital-intensive techniques. Hence, they consume precious foreign exchange in developing countries.
The market size of luxury goods remains stable and increase over time as high-income individuals command higher wealth. These individuals intend to change their choices after a short interval.
For instance, women opt for latest trends in the fashion industry. Men look out for new models in the automobile industry.
On the other hand, the market of mass-producing goods is narrow and unstable. There is a variation in the income of masses and they possess a low purchasing power.
Therefore, they buy new stuff after a long period of time. In addition, their income remains mostly stagnant over the years, which imposes constraints on the size of the market.
If the demand for products is forthcoming, industrial capitalists will install their capacity accordingly. They orient their production according to the emerging and stable demand.
Since the demand for luxury goods is stable, the structure of production is aligned with it. The case of automobile industry is instructive here.
The demand for 1,300cc and above-category cars is quite stable. Keeping in view this stability, industrial capitalists have installed their assembly plants. The localisation of parts and accessories is around 45% to 50% with the existing models; the remaining ones need to be imported.
Specifically, the new assembly plants have geared up their productive capacity in accordance with the stable demand. In the beginning, they introduced hybrid vehicles and now they are allowed to import electric ones under the new automobile policy.
In the next phase, they will locally assemble vehicles and procure their parts and components. These plants employ capital-intensive techniques, where skilled labour is required. Hence, such plants generate a limited amount of employment.
On the contrary, the demand for mass-producing goods is relatively less stable. Therefore, industrial capitalists are cautious about orienting their productive capacity for these products. Capacity utilisation of these plants is normally low. Hence, the level of employment falls in those industries.
A significant proportion of the population resides in villages where most of the people are either unemployed or underemployed. If labour is gainfully employed, it will increase the level of demand in the economy. Otherwise, the level of demand remains low and hence the purchasing power.
That is the reason the market size of mass-producing goods is small, which does not provide any impetus to industrial capitalists to invest in their productive capacities.
Considering all of the above, the real challenge is to increase the purchasing power of our country cousins. This will require an increase in inflation-adjusted income of the masses. This is possible by generating employment opportunities for the low-end rural population. This will also lessen the burden on cities.
In short, income distribution plays an important role in orienting the productive structure in the economy.
A highly skewed income distribution will promote luxury production and consumption, while adequate income distribution will give rise to mass production and consumption. Hence, the challenge is to improve the income distribution.
The reduction in skewness of income distribution is a formidable task, which requires a political will. A strong political government can take up this challenge. Let us see how things unfold in the future.
The writer is an independent economist who worked at SDSB, Lahore University of Management Sciences (LUMS)
