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Karachi cheapest city for Americans

Karachi has the world's lowest cost of living for expatriates, according to a new survey by global human resources firm Mercer.
/ Source: Business Week

Karachi, a sprawling city on the Indian Ocean with a population of about 18 million people, reigns as Pakistan's economic center and primary seaport. The international business hub, which hosts domestic companies as well as multinationals such as IBM, Chevron, and Abbott Laboratories, also happens to have the world's lowest cost of living for expatriates, according to a new survey by global human resources firm Mercer.

On the other side of the world, in North Carolina, lies another city where costs are among the lowest in the world, according to Mercer. Winston-Salem, a community of about 230,000 people whose average income is about $35,500, ranks 17th in lowest cost of living among the 214 locations Mercer surveyed—the least-expensive U.S. city in the survey. Winston-Salem is home to the Wake Forest University Baptist Medical Center and multinational companies such as Bekaert Textiles of Belgium and packaging company Rexam from the U.K. Winston-Salem is the only city in a G8 nation among this year's 20 cheapest cities.

How do two cities so dissimilar in location, size, and environment end up on the same end of the cost-of-living scale? Much boils down to lifestyle. For its 2010 cost of living report, Mercer surveyed 214 locations around the world in which multinational companies and international organizations have a presence or are looking to set up operations. The ranking was based on a basket of more than 200 goods, including housing, transportation, food, clothing, household goods, and entertainment.

The survey ranked the cost for businesspeople to maintain a standard of living similar to that in their home city when they move overseas—but the same metrics can apply to any U.S. expatriate. The average cost of housing, food, and entertainment in a small U.S. city can be the about the same, if not more, in places where similar goods are uncommon or must be imported from more expensive markets, says Nathalie Constantin-Métral, a senior researcher at Mercer.

Cost of housing a key factor
Even in locations where the overall cost of living is low, many amenities that are customary in global cities do not come cheap.

Rebecca Powers, a principal and consultant at Mercer, says: "In a lot of cases, the difference in housing costs is one of the key factors." According to Mercer, expatriates in Karachi pay an average $353 per month to rent a luxury, two-bedroom apartment, one of the lowest rates among surveyed cities. In the second- and third-cheapest cities—Managua, Nicaragua, and Islamabad, Pakistan—the average rent is $800.

By contrast, Mercer found that rental costs average $450 per month in Winston-Salem. "Housing is one area where we have a huge advantage," says Bret Marchant, director of research and economic development at the Winston-Salem Chamber of Commerce.

Heather Savelle, director of investor and public relations at biopharmaceutical company Targacept, recently moved to the Winston-Salem area from Boston and says the cost of housing is one of the main reasons that living in the city is so affordable. Outside the city, she rents a four-bedroom home with a two-car garage for $900 per month.

While rent levels in Karachi are far lower than in most international cities, costs for high-end goods and services were not far below U.S. levels: A cup of coffee from a café costs about $2.24 and a three-course business dinner can cost $43 per person.

Adopting a local standard of living
"It's the availability of what you're looking for that will drive prices," says E. James "Jim" Brennan, senior associate at the ERI Economic Research Institute. For example, he says, the cost of Western food and groceries in Bishkek, Kyrgyzstan, can be twice as expensive as in the U.S., while a gallon of regular gasoline costs only around $2.40.

Prices in any city can range from extremely low to extremely high, depending on lifestyle. In places with few amenities for a transient population, many businesses have emerged to cater to the needs of business travelers—often backed by company expense accounts, says Brennan. This creates an entirely different spending pattern from locals.

Indeed, the majority of local products and services in Pakistan belong in a completely separate price category. Pakistan's Federal Bureau of Statistics estimates that national per capita income is about $1,100; few locals can afford the daily luxuries that many expatriates take for granted.

Those who understand the local language—or simply want to live even more cheaply—may choose local alternatives in order to save money. However, Mercer's Powers says it is unrealistic for companies to expect an executive to adopt a local standard of living in many of the world's cheapest cities, where overall quality of life is low by Western standards. While employers generally will not provide an additional cost of living allowance as they do in such expensive cities as Tokyo, Powers says they might still offer a hardship allowance, incentive pay, education allowance for the employee's children, and pay for additional security.

"What is seen as excessive [to many] is only reasonable and logical from the perspective of the people who are working there, especially if they see their peers living the high life and sitting at the table with decisionmakers," says Brennan. Expecting an executive to adopt a local standard of living may save a few dollars in the short term, he says, but can cost the company in the future. "If they are a resource for you, you have to make sure they are happy and motivated."

Then again, not everyone needs fancy dinners and imported goods to maintain a high quality of life. Brennan says, "It depends on what the lifestyle expectations of the transferee are."