The idea of wealth signalling is not new to economic theory; for decades, purveyors of luxury cars, designer clothing, accessories, and countless other goods, have profited in the niche markets created to serve the rich in their desire to spend large sums of money on extremely expensive items. Thorstein Veblen’s idea of conspicuous consumption defined the reasons for extravagant spending behaviours of wealthy classes in society. Although these goods defy the law of demand, it is fairly simple to understand excessive spending by affluent people on goods that act as proof of their success: the wealthy purchase expensive goods not only for the utility they derive from their goods, but also because the ownership of these goods acts as a signal of their monetary status. In this upward sloping demand curve, as prices for such goods increase, so does the individual’s demand.

An interesting concept is a variation of conspicuous consumption in terms of the spenders; surprisingly, this kind of spending is extremely popular among the less wealthy and poor classes. Although this may sound counter intuitive, in reality is a generational disease that plagues most of Pakistan’s middle and low-income households. In a nutshell, Pakistan is not a saving economy. Our households in the low income bracket consist of unaware consumers who are unable to make the correct use of their hard earned money, regardless of them being rural or urban dwellers. Out of the total working population in Pakistan, 45.8% of employed individuals earn less than PPP$2 a day. This problem is especially large in rural areas where the majority of individuals earn meagre incomes, but is not limited to them. About 1 in 8 people in urban centres in Pakistan live below the national poverty line, and engage in irrational spending especially when they cannot afford it. With these statistics, it might come as a surprise to find any relationship at all between wealth signalling and poverty. After all, what luxuries can the poor invest in when they can barely meet their daily nutritional needs?

In order for a household caught in the grips of poverty to overcome its financial constraints, acquiring marketable skills is essential to generate better incomes. Investment in human capital development is key and educating the younger generations can provide them with the ability to join the skilled labour force and earn better than the previous generation of the family. One of the key factors holding us back is the incessant need among households to spend on goods that are neither essential for survival, nor for productive developments. For example, one of the greatest financial burdens on the low and middle income earners in the country is that of extravagant wedding ceremonies, where families spend well beyond their means on large banquets and extravagant gifts for each other. With the introduction of regulations regarding expenditures on wedding ceremonies in Pakistan, middle income households may have found some respite by renting wedding venues for fewer hours, reducing the number of items on their menus to two, and so on. However, poor households, those earning well below the national poverty line, were not subject to these issues in the first place. Their relatively small wedding ceremonies still cost them a lot of money given their means. If they had to borrow large amounts of money before such regulations were enforced, they were forced to borrow the same amounts later too, as the regulations did not impact their relatively modest celebrations. One of the major issues that plagues the middle and low income bracket is the need to comply to social norms. Whether a man works as a manual labourer or a semi skilled mechanic, he will have to make extravagant expenditures on his children’s weddings, dowry preparations etc., and most of this is done through informal borrowing from peers, with little or no means to pay them back. These practices aggravate the financial constraints such households face, furthering their financial predicaments.

Although poverty alleviation is a responsibility assigned to the government and is shared with non government actors, the prevalence of conspicuous spending in different strata of society holds back several microfinance and cash transfer schemes from generating positive economic outcomes and decreasing poverty. If individuals in disadvantaged groups are handed cash transfers for investment purposes or to register for professional training programs, it is very likely that several heads of the family will prefer to squander this opportunity on purchasing drugs, alcohol, or other harmful substances that are not essential to survival or conducive to the family’s financial growth and well being. Quite often, men are addicted to the fashion of consuming harmful goods in the company of others in their neighbourhood. The opportunity cost of one night of gambling could very likely be the month’s groceries for the household, but they are swayed by similar decisions made by their peers. In order to overcome such problems and to provide women previously outside the labour force with access to funds for investment in productive activities, microfinance institutes and other poverty alleviation programs brought such women to the forefront. However, even in such cases, women fall prey to cajoling husbands and sons, who take away their transfers to indulge in unnecessary “luxuries” outside the household, eliminating the change of a financial uplift.

Pakistan is a society where economic prosperity comes second to social standing. Societal pressures make wealth signalling a necessity, not a choice. Microfinance may work in urban centres, or rural areas with some development. But there are always households or individuals who will choose to make zero return investments in weddings, alcohol, drugs, instead of lucrative investments in training, machinery, or their children’s education. Such expenditures are not limited to wedding expenditures or the consumption of harmful goods. More often than not, one household must obtain certain material goods to maintain the illusion of their increasing wealth, because another household in the neighbourhood did, too. The incessant need for possessions that add no productive value and come at the expense of the household member salaries, are an extremely important deterrent to growth, and to the possible escape of many households from poverty. Employing such methods to engage in wealth signalling are misleading not only for the neighbourhood but also for the households themselves, who are essentially trapped in a rat race to prove that they maintain the social standing they have not necessarily achieved in monetary terms.

This piece does not imply in any way that the poor suffer from financial constraints solely because of such practices. While a basic infrastructure with good quality education for all, an efficient social security system, adequate healthcare and professional training programs form the foundations of a possible move out of poverty for such countries, it is important to consider societal aspects that may negatively impact the financial situations of households. Conspicuous consumption is an important issue to be considered in a society where material wealth, or rather the incorrect prioritisation and unnecessary display of it, is an evil that entraps thousands of households in financial distress.

The writer is a Masters graduate in Economics and International Financial Economics from the University of Warwick.