- Risks and Opportunities – III
One initiative that the government could take to ensure lower LTV ratio, is to create a ‘housing wealth fund’, whereby, like what happened in the west after the Great Depression of the 1930s, the government could apply a one-time or for a couple of times, significantly higher income tax rates on the rich. For this the government could take a cue from history of western countries like US, and in turn under this thought process increases income tax rate in the range of around 70 to 90 percent on the highest income slabs for a one or a couple of more times. After all, in any society to become a welfare society, when a need arises, the rich must sacrifice the most for the most vulnerable.
It also needs to be kept in mind that the government will have to involve Planning Commission (PC) and its provincial departments, and include some other authorities formed just for this particular Scheme, to see to it that the physical quality of the houses is up to the mark. In doing this, the elements of corruption in procurement and application of materials will have to be also kept in check. This will not be an easy task given the enormity of the task at hand and the low capacity of PC and its departments, which will have to be enhanced, and facilitated by the creation of specific authorities for overseeing the work in this regard.
Also, the database being formed in collaboration with NADRA (National Database and Registration Authority) about potential house buyers should be enhanced to include data both on a variety of poverty/vulnerability related indicators with regard to these families, and also in terms of the employment situation of individuals in these households. Enhancement of database on the lines of knowing about the extent of active labour force in these families will help policy makers in understanding the level and depth of supply of labour, and overall knowledge gathered on other related variables over the households could be used by the government to initiate meaningful interventions in denting poverty. After all, these low budget households consist of people who do not have the means to buy houses on their own; that is households belonging to lower and middles classes.
At the same time, as a perquisite to implementing this Scheme, the government should try to understood why the mortgage rate is so low in Pakistan, as only 0.28 percent of the total private sector credit is currently allocated for mortgage financing — and historically too it has remained on the lower side — which is indeed very small given countries of similar economic realities as Pakistan. Hence, taking a step back, it would be a good exercise for government to understand the issues in the financial markets and institutions, due to which lenders are risk averse in lending to the private sector; some reasons being high bank investment in T-bills, and the quantum of non-performing loans on the higher side.
PM Housing Scheme is prone to many risks and there are high trade-offs to the opportunities that could be generated from this Scheme
As indicated above, the housing work will take a lot of government oversight towards ensuring quality controls and curtailing corruption, but in order to ensure that labour market issues are dealt with properly — in an overall environment of weak labour regulations including seeing to it that both the minimum wage and all other labour incomes flow in a timely manner.
Also, given the increased demands on cement that will be generated in this Scheme, for example, has a study been made by government to foresee both this demand and also how much more is needed to meet the routine demands on cement in the economy. The economy has a history of cartels developing to take advantage of increased demands situation is a sector, and therefore the government will have to ensure that the price of cement is not artificially hiked up by any of the cartels forming. Moreover, the government will have to forecast demand needs and to take steps to smooth out prices by avoiding any sharp rise in price due to an unanticipated cement demand shock (that is caused by demand pull inflation).
At the same time, the labour diverted into this huge venture will likely reduce the supply of labour to cater the traditional/routine labour demand in other sectors, which may lead to a shortage of labour supply there, resulting in a sharp rise in labour wages in those sub-labour markets. This is likely to generate a secondary impact, whereby, there could be a shift of labour from the housing scheme back into markets of traditional demands, unless they are paid higher than those markets. Has government factored in those cost increases? Overall, the government will have to ensure that (a) similar impacts of pressure situation in other markets related with this Scheme will be dealt with properly and timely, like in the market of electricity and plumbing supplies, and that (b) these materials will pass through proper quality controls.
The construction boom that this Scheme will usher in is likely to result in pushing up of inflation rate at the back of demand pull inflation, since there is no policy in as such to create a matching boom in the overall manufacturing sector — resulting in the case of too few goods being chased by too many hands. Also, the money earned by labour sector through this scheme could cause increase in income inequality, one reason being that the builders that will come to do this project will mostly be part of a cartel and will be linked to one source (family) having many businesses. Hence, if the labour market is not reformed, competition is not properly restored in business activity, and proper tax is not collected, then the income inequality will rise, and this could also lead to money laundering.
Overall, the economy is improved and people are made capable to raise their standard of living in a better economic environment, and in turn, the people themselves make houses in the presence of correct price signals, and better property and contractual rights. More importantly the government should primarily focus on improving institutions, and employ creative economic policy, and the rest will take care of itself.
PM Housing Scheme is prone to many risks and there are high trade-offs to the opportunities that could be generated from this Scheme — here what is foregone could be a lot more than the opportunities gained, especially given the current tight macroeconomic situation.