The cutting edge

"Lower cost of living, cheap labour and land cost make Pakistan an incredibly attractive country", says the Economist Intelligence Unit (EIU) in its latest report on the world wide cost of living. The world cost of living survey of EIU compares more than 400 individual prices across 160 products and services. The purpose of the survey is to help build compensation packages for expatriates and business travelers. The survey gives a comparison of how cheap it is to do business and live in different countries. The 2012 survey shows a very interesting currency trend seen in the developed/mature markets and talks about the bargain offered by the Asian sub-continent. The index has ranked Karachi as the city with the lowest cost of living in the world, following it is Mumbai. Overall three out of the four countries with the lowest cost of living hail from subcontinent. The lower labour and other input cost owes to the lower ranking. This is the primary reason why these countries have attracted large FDI and labour outsourcing, and are considered to be offering a bargain. The petrol price is a good indicator of the difference in cost of living in Pakistan and countries with higher costs of living as any change in this single variable affects a very wide range of items. The per liter price of petrol in Pakistan right now is 0.98 dollars the level the developed economies had 10 years ago. The top five ranks are held by Zurich, Tokyo, Geneva, Osaka Kobe and Oslo. The question is what makes these mature markets more expensive and what are the implications of being expensive? According to the report the main factors behind the higher rankings is currency strengthening in these countries. This trend can especially be seen in the Japanese Yen, Swiss Franc and Australian dollar. The demand for these currencies especially Swiss Franc has spiked as investors are taking money out of the struggling Euro zone. This demand frenzy has pushed up exchange rate. Despite the fact that currency strengthening normally results in cheaper imports and hence lesser local inflation, the report suggest that in mature markets local inflation has much lesser impact on the cost of living compared to their currency movements. Australian dollar which has roughly appreciated to twice the level that it had with US dollar a decade ago, serves as a good example. Being the cheapest city to live, and having very low cost of doing business, however, has a cost associated with it, which includes irregular government policies, very volatile currency movement and in Pakistans case bad security situation. Leading economists believe that these costs need to be taken care of if FDI starved Pakistan wants sustainable long term stable growth.