You can’t finance away bad policy and thinking

Reagan deregulation created a romance with finance. My generation of educated Pakistanis benefited from it greatly—even gave us a Prime Minister. The romance with finance still plays strongly in Pakistani political/administrative and intellectual class. We look to finance our way out of things. It is the easy way out and we love shortcuts.

Every government runs after money. Bureaucrats are trained to look for aid and financing above all other issues. We sing siren songs to foreign investors luring them into our quagmire unaware that they like Ulysses might come prepared.

We love clever financing schemes: diaspora bonds as if immigrants can be conned into ‘cheaper than the market’ lending. Policy circles continuously chatter about securitizing remittances, floating convertible bonds or issuing more Sakooks expecting financial magic to deliver effortless development.   

Why do we think that we can con the world with financial instruments? Do we now know that financial firms are 1000s of times better at it than our policymakers? Would our politicians and bureaucrats be able to con the conmen who conned the world in 2008?

Did IPPs not come back to haunt us? Did we not learn from the Rek o Diq fiasco that the foreign investor is no friend but a shark who will take his pound of flesh?  

The romance with finance is also fed by donors after all they have to push money. We are always told how much we need their money for infrastructure, schooling, food security, sanitation, water, environment and much more. They do have an army of analysts who have nothing better to do than write reports and blogs and preach “you need money” to our governments.

All officials know that their post retirement jobs depend on donors and their children’s careers lie with donors. So, they are captured audience to the donor mantra of “you need more finance.”

Can finance solve all problems? Let us look the use simple economics to study the example of housing.

Donors have pitched for long that the shortage of housing is because of the lack of mortgages and SBP keenly engaged in mission creep for the last 10 years to develop a mortgage market. Yet the housing stock expands through the DHAs, the bureaucratic plot development (DMG), or cooperative housing societies. The first 2 are schemes for self-dealing 101, and the last is Pakistan’s contribution to the scam literature given the number of uninvestigated scams in coops.

So, the housing stock expands in expensive sprawl-based single-family homes. Cheap flats in dense spaces where the middle class can live are severely limited because the self-dealing paradigm of land development (inherent in the DHA/DMG model) seeks to restrict density and flats.

By now our demographic situation is well known. Our labor force is increasing about 2-3 million a year and our housing needs will also grow by about a 0.5- million a year. Yet the stock seems to grow in the 1000s given the myriad planning issues. Given the huge shortage, prices are escalating rapidly. 

In most cities, the cheapest house runs over a 100,000 USD forcing most people to seek informal housing or join up in some form of informal extended family arrangement. Neither of the informal arrangements are bankable given unclear property rights and contractual arrangements.

Let us examine the proposition of getting a mortgage on a house of a 100,000 USD which is about the minimum for a house in Pakistan. Even though interest rates have come down, mortgages will still be priced at 12-15%. At 12% the payment will be about 12000 USD a year. Add a little for insurance and maintenance and not including principle we will be looking at a minimum of a 15000 USD a year all included. 

Generally, it is regarded that housing should be no more than 30% of your income. This means that the income of the family buying such a house should be about 45000 USD a year. 

Just review the state of salaries. 45000 USD or 4.8 million rupees (about 400,000 rupees a month) is a seriously high salary in Pakistan even if both spouses are working.

So even if we develop a mortgage market, are we doing it only for the rich? Why then is SBP expending so much effort and why are donors funding this effort so huge? Just bad analysis?

Another approach could be to adopt reform and increase the supply of flats as dwelling units not just single family homes. This would mean break the DHA/DMG hold on the housing market to allow more density through high-rise flat construction. Supply if it goes up sharply will bring the price of dwelling unit down.

A virtuous cycle would happen as more real estate construction invigorates the economy as well as the labor market. More jobs and more bankable properties will lead to a mortgage market. 

So, donors and SBP have it the wrong way around. Rather than increase supply they are pushing expensive mortgages on a poor population. 

Moral of the story: countries and societies grow with good policy analysis rather than fanciful finance and begging for money.


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