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For a decade, Pakistan’s Productivity Growth Rate averaged just 1.5pc

ISLAMABAD: The average productivity growth of Pakistan remained just 1.5pc from year 2010 to 2020. It is significantly low to achieve the required GDP growth rate of around 7-8pc on a sustainable basis.

The study by the Planning Commission and PIDE, ‘Sectoral Total Factor Productivity in Pakistan‘ found productivity growth to be a crucial determinant of economic growth. The evidence suggested that economies with TFP growth higher than 3pc had a GDP growth rate higher than 8pc. Whereas TFP growth of less than 3pc was associated with a GDP growth rate between 3pc and 7pc. This pattern enunciated a positive correlation between TFP growth and GDP growth.

The study used unique listed and non-listed data from 1,321 firms and divided into 61 sectors to estimate productivity growth in the country. The study has estimated firm-level and sectoral TFP growth based on Harmonized System’s level-two codes, or HS-2. Its results show that high-productivity growth sectors are mostly based on services or tech. While those with medium to low or negative productivity growth are in manufacturing.

Total factor productivity growth is a crucial determinant of long-term output growth. Countries that manage to boost their TFP growth grow at a much higher rate and for a sustained period. While countries growing without a significant contribution from the TFP growth experience difficulty in maintaining a sustainable growth trajectory.

The economy-wide TFP growth estimates indicate that both TFP and GDP growth have been erratic in Pakistan since the early 1970s. For some years, TFP growth has even remained negative. Moreover, the economy-wide TFP growth has hovered around 2pc over the last few decades.

While the economy-wide TFP estimates are indicative, sectoral estimates are significant to understand productivity at various sub-macro levels. However, the firm data needed for sectoral estimates has been difficult to obtain.

The study divided the 61 sectors into three categories. The high category included sectors with TFP growth above 3pc. The medium between 0pc and 2.9pc and the low TFP growth category with negative or below zero TFP growth. The study found that most sectors with high TFP growth are either related to services or tech.

The results show that the average TFP growth between 2010-2020 for all the 61sectors included in the analysis remained 1.5pc.

Low TFP growth implies that the economy has not been productive over time. Moreover, lower productivity implies that the economy is not competitive.

Most sectors in the medium to low TFP growth category are in manufacturing. Two export-designated sectors, i.e. sports goods and textile composite, also feature in medium to low-growth sectors.

Most negative growth sectors are also in the manufacturing category. It captures three export-designated sectors (textile spinning, textile weaving, and leather and tanneries) amongst other salient industries such as fertiliser and automobiles.

The analysis also precipitates a trend between sectors that receive subsidies and medium to low TFP growth or negative TFP growth categories. Similarly, the export share of each of these sectors, barring the textile sector, in global exports is less than 1pc in their respective category.

According to the analysis, services have higher TFP growth on average than manufacturing. One plausible reason for this could be greater competition in services. Besides, the manufacturing sector is protected in Pakistan, which insulates them from the competition by retarding any incentive to improve efficiency.

The services sector could also be more productive because of digitization. Similarly, flexibility in technology adoption could be another factor.

The study observed Pakistani firms in the manufacturing sector to be primarily family-owned and managed. Besides those are generally averse to modern management practices. These are the factors that inhibits productivity growth.

Zahra Sikandar
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