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On the shores of the Arabian Sea lies Karachi, Pakistan’s largest and most cosmopolitan city. Historically, it has been "a city of immigrants," founded by "sailor businessmen," according to author Pamela Constable’s recently published book, Playing with Fire: Pakistan at War with Itself. With a large seaport, stock exchange, and financial institutions, Karachi is home to many foreign workers and expatriates who, despite ongoing security concerns, have taken advantage of the city’s culture, business opportunities—and low cost of living.
In Mercer’s 2011 Worldwide Cost of Living Survey, released July 12, the city has maintained its position as the world’s cheapest city for expats for the second year in a row. Certain costs in Karachi have even gotten cheaper in U.S. dollars over the last year: For example, the average monthly rent for an unfurnished two-bedroom luxury apartment fell to about $293 in this year’s survey from $353 in 2010, show Mercer data.
After Karachi, the next cheapest cities for expats are Managua, Nicaragua; La Paz, Bolivia; Addis Ababa, Ethiopia; and Bishkek, Kyrgyzstan. Many of the low-cost locations in the ranking are in Africa, South America, South Asia, and former Soviet republics. One U.S. city placed among the 25 cheapest: Winston-Salem, N.C., ranking 18th (about the same as last year). In Canada, Toronto overtook Vancouver as most expensive city, ranking 59th, up from 76th last year.
The five most expensive cities for expats are also unchanged from 2010: Luanda, Angola, followed by Tokyo; N’Djamena, Chad; Moscow; and Geneva. New York fell to 32nd from 27th, placing below such Australian cities as Sydney and Melbourne, as well as Chinese cities Beijing and Shanghai.
For the survey, conducted in March, the New York-based consultancy collected price data from 214 cities on more than 200 items, including housing, transportation, food, clothing, household goods, and entertainment (but not costs such as health care and education). New York is used as the baseline city and currency movements are measured against the U.S. dollar. Certain items, such as housing, were given more weight, says Ed Hannibal, partner and leader of Mercer’s global mobility business for North America.
The survey reflects the cost to maintain a relatively high, international living standard—including luxury housing and meals at comfortable restaurants—rather than the local lifestyle.
"Multinational companies have long understood the competitive advantage of a globally mobile workforce, though the enduring challenge is to balance the cost of their expatriate programs," Nathalie Constantin-Métral, senior researcher at Mercer, says in a release.
Even in the downturn, companies sent more workers on international assignments. Tax filings show a 6.4 percent increase in the number of international returns filed from tax year 2006 to tax year 2009, according to a June report by the Internal Revenue Service Wage and Investment Research and Analysis. In 2009, the IRS reported that more than 7 million Americans (not including military personnel) resided outside the U.S.
Employers have increasingly been reevaluating how assignments are structured in the downturn. Hannibal says many companies are now sending employees on shorter assignments, ranging from three to 12 months, as a way to manage costs. A standard assignment is three to five years.
While expatriate assignments can bring new value to companies, they are also expensive. Employers often pay executives enough to maintain the same standard of living in the new location as in their home country and add other benefits as a means to attract and retain talent. In HSBC Bank International’s 2010 Expat Explorer survey, which covered 100 countries, about two-thirds of expats have more disposable income in their new country.
An expat package typically includes a cost-of-living allowance (which equalizes the person’s buying power to levels in their home country), a mobility premium of 5 percent to 15 percent of gross salary, a hardship allowance of up to 30 percent for employees moving to difficult areas, moving costs, schooling costs for children, support for family members (such as language and culture classes), and a one-time payment to cover miscellaneous expenses, reported London’s Times, citing Mercer.
Altogether the average cost of an expatriate assignment is three to five times the employee’s base salary, says Hannibal.
Even in low-cost areas, relocation can be costly. In Tripoli, Libya, for example, one of the lowest-cost cities in Mercer’s survey, monthly rent for an unfurnished two-bedroom luxury apartment is about $1,615 and lunch for one at a nice restaurant is about $34, according to Mercer data.
"Security is an important factor, so based on quality-of-living issues it can be expensive to find reasonable accommodation for executives that are moving to these locations," says Hannibal. Assignees may choose to live in secured, gated communities in locations with ongoing threats, including Libya and Pakistan.
Security concerns aside, the main reason employees want to work abroad: "broadening their horizons and gaining life experience," followed by "better quality of life," shows HSBC’s survey. Career development and financial wealth, while still important, were less crucial than life experience opportunities for survey-takers.
"An expat assignment is an investment in the employee and in the company," says Hannibal. While the cost of living in Karachi and other inexpensive cities may be low, hidden costs are involved in keeping assignees productive and safe.
Click here to see the 25 cheapest global cities to live well.