SINCE the 1980s, and until recently, rapid globalisation — driven in part by the unprecedented pace of technological change, especially in information and communications technologies (ICT) — has allowed several developing countries (including China and India) to take advantage of these developments and achieve exceptionally high rates of economic growth, even soaring to double digits.
Unfortunately, Pakistan, which was among the 10 fastest-growing economies of the world during 1960-90, has not been one of them. This is despite the fact that, in many ways, Pakistan was a more open and globalised economy than either China or India in the early 1980s. While Pakistan’s low and declining economic growth during 1990-2015 (except for a brief spurt in 2003-06) has been the subject of considerable rumination, an important factor responsible for this outcome, ie labour productivity, has not received the attention it deserves.
The importance of labour productivity is best captured by Nobel Laureate Paul Krugman — “Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise output per worker”.
A closer examination of Pakistan’s labour productivity trend is both revealing and deeply worrying. Compared to the 1980s, when labour productivity (defined as GDP divided by the employed labour force) grew at 4.2pc per annum, by the 1990s this had plummeted to 1.8pc, falling further to 1.3pc during 2000-15. Since 2007, it has been growing at just 1pc. In India, the trend has moved in the opposite direction, with labour productivity growing to well over 5pc during 2000-10.
Closer examination of the labour productivity trend is both revealing and worrying.
Labour productivity, or output per worker growth, can be attributed to three major factors (ignoring arable land, which did not grow in this period); increases in physical capital (machinery and related inputs), increases in human capital (measured by average years of schooling), and what economists term ‘total factor productivity’ (TFP), which measures the contribution of technological progress and more efficient use of existing resources.
While the contribution of both capital and labour has been marginal for good reason, as I explain below, it is the continuing decline in TFP over the last 25 years which exposes many of the fundamental weaknesses that bedevil the Pakistani economy. It is indeed ironic that, despite many attempts at economic reforms (under the aegis of the IMF and World Bank), the economy has become more inefficient, when economic reforms were expected to have exactly the opposite effect. Clearly, the reform process — either due to its uneven pace or its frequent reversals — has not delivered.
This declining TFP also shows that, despite the widespread use of mobile phones and other ICT-driven gadgets, Pakistan has been unable to take advantage of the potential of extraordinary technological advancements that we have seen in the last 25 years.
Underlying causes for the decline in productivity growth are not difficult to identify.
The first is a sharp fall in investment (private, public and foreign), which dropped from 25pc of the GDP in the 1980s to less than 15pc in recent years, not least due to security concerns. New investment brings with it machinery and equipment, embodying the latest industry knowledge and technology; this fall means that a large part of Pakistan’s capital stock became increasingly outdated and, therefore, less productive and less competitive in terms of quality and new goods produced.
The second is the poor quality of our workforce. It is now an established fact that taking advantage of globalisation, as well as new technology, depends critically on the ability of the workforce to learn new skills, to absorb and master new technology. For a workforce, one-third of which is illiterate and another 40pc below Matric (ie 10 years of education), this is well near an impossible task.
The third is the labour force’s lack of movement, from low-productivity agriculture, to higher-productivity industry and services — the well-trod historical path to economic development. In Pakistan, the agricultural share of the total employed labour force has shown no significant decrease, and still remains at over 40pc. By contrast, in India labour has shifted significantly from agriculture to services — though interestingly both India and Pakistan have not managed to create jobs in manufacturing.
Given the track record of the last 25 years, perhaps the time has come for us to admit that the economic paradigm we have followed since the 1990s has not worked, and that we need to rethink and modify some of its basic premises. This may be an opportune time to do so. The economy has achieved a fair degree of macroeconomic stability, thanks (mainly) to favourable external developments. There is also a significant improvement in the security situation, especially in Karachi. There is much talk of shifting gears, from economic stabilisation, to a path of high economic growth.
However, to ensure sustained higher growth in output and productivity in the medium and longer term, it will require more than a one-time stimulus through CPEC. Business confidence, which has been badly bruised in recent years, needs to be revived, together with a sharp increase in public and private expenditure (if possible, in partnership), to overcome binding infrastructure constraints (especially energy), and develop human capital. A modern, skilled workforce cannot be built on poor quality educational foundations.
These are daunting challenges that require deft economic management. Policymakers need to spell out the economic framework which underlies the envisaged shift to higher growth, while ensuring macroeconomic stability, ie fiscal and trade balance, in the face of stagnant exports and rising debt repayments. Equally important would be to create, this time through achievable reforms, a favourable business environment, which ignites entrepreneurship and encourages firms to innovate and invest in new technology and upgrading skills. The time has come to walk the talk, seeping out of Islamabad, of ‘much better days to come’.
The writer is a professor at the Lahore School of Economics and is former VC of the Pakistan Institute of Development Economics.
Published in Dawn, April 19th, 2016