An increase in Total Factor Productivity (TFP) is a crucial determinant of an economy’s growth. Therefore, it must be pushed to over 3% to raise Pakistan’s Gross Domestic Product (GDP) to over 7-8% on a sustainable basis.
A study titled “Sectoral Total Factor Productivity in Pakistan,” conducted jointly by the Planning Ministry and Pakistan Institute of Development Economics (PIDE), shows that the average productivity growth rate in Pakistan has been 1.5% between 2010 and 2020 for all 61 sectors that have been included in the study.
However, a TFP of 1.5% is not enough if Pakistan wants to achieve GDP growth of around 7-8%.
The study reveals a positive correlation between GDP growth and TFP, also known as multifactor productivity, and tells us how productively the economy uses the factors of production to produce.
Economies with TFP growth of more than 3% were recorded to have a GDP growth rate of at least 8%. However, where the TFP growth was less than 3%, the GDP growth rate was between 3% and 7%.
In his preface to the study, Asim Saeed, a Member of Private Sector Development and Competitiveness at the Planning Commission of Pakistan, refers to productivity as a “key building block for global competitiveness,” without which countries “experience difficulty in maintaining sustainable GDP growth.”
Asim, a key player behind the study, noted that the only sustainable way for Pakistan to rid itself of its perplexing macroeconomic woes was to substitute foreign currency refinancing and foreign debt with a foreign currency stream generated by export dollars.
“This is possible only if we wholeheartedly embrace productivity as our national emblem,” he remarked.
The study used unique listed and non-listed data from 1,321 firms divided into 61 sectors and spans over 11 years to estimate the productivity growth in Pakistan.
The findings
According to the study, high-productivity growth sectors are mostly services-based or tech-based. In contrast, most sectors with medium to low or negative productivity growth are in manufacturing.
The study maintains that one plausible reason for the afore-stated performance could be greater competition in the services sector.
The study further finds states “the manufacturing sectors are protected in Pakistan, which insulates them from the competition; protecting a sector retards any incentive to improve efficiency.”
It is noted that since the incumbent government came into power in April last year, Planning Minister Prof Ahsan Iqbal has constantly been emphasizing adopting export-oriented policies for the public and private sectors to accelerate export led-growth.
The Planning Ministry has recently launched the Champions of Reforms (CORs) network to bring together professionals from different sectors to contribute towards the country’s socio-economic development.
The analysis also shows that export-designated sectors (not export-oriented firms in a sector) have either low or negative productivity growth.
Moreover, sectors that receive subsidies also have low to negative productivity growth.
It further highlighted that thrice the productivity growth turned negative during elections and once during the COVID-19 period.
This, perhaps, suggests that the overall macro-environment and political transitions cast a significant impact on productivity and GDP growth.
Implications of findings
The study’s results further furnish some serious implications.
One of these implications is that the negative productivity in the subsidy-recipient sectors is essentially a deadweight loss to the economy.
It also acts as a barrier to private sector development.
Meanwhile, the below-average performance of the export-designated sectors is a wake-up call for all because it implies that Pakistani exports are not competitive compared to other countries exports.
The study concludes that concrete measures that improve productivity are inevitable to move the country towards a higher growth trajectory.
In Pakistan, episodes of liberalization and market-friendly policies are key to ensuring high productivity and increasing GDP growth on sustainable grounds, urges the study.
Pakistan’s high productivity and GDP growth are also correlated with better macroeconomic fundamentals, structural reforms, institutions, governance, and private sector dynamism.
“Providing discriminatory incentives to certain sectors and firms retards competition in the economy, eliminating the need to improve efficiency and hurts the private sector’s development,” said Omer Siddique, Senior Research Economist at PIDE. (APP)
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