Weak employment generation

Published January 30, 2018
The writer is a former governor of the State Bank.
The writer is a former governor of the State Bank.

THE structure of the economy refers to the composition of the country’s GDP. In developing countries like Pakistan, different sectors of the economy are at different stages of development, with the configuration of production different between sectors, resulting in each sector growing at its own rate, different from the rates of other sectors.

Several factors can constrain production, because of, for example, factors of rigidity such as land fragmentation which inhibits and limits improvement in productivity or production even when prices of agriculture produce increase in comparison with those of manufactured products.

Nor can factors of production (eg capital and labour) be substituted with each other seamlessly in all sectors for reasons that include the rigidities mentioned above, and government-administered prices for produce such as wheat and sugar cane, and utilities (eg electricity and gas),etc. In other words, the movement in prices, production and productivity is impacted by the initial differences in the sectors’ respective growth rates because production conditions are different for different sectors, making substitution difficult for some sectors.

The sectoral composition of Pakistan’s GDP has changed substantially. The structure has moved straight from agriculture — its share has declined from 30 per cent in 1980 to 19.5pc today — to services — whose share has risen from 49pc to 60pc — without adequate development of the more dynamic, manufacturing sector. Consequently, we seem to have skipped this important phase of development.

A skewed distribution of wealth and incomes cannot sustain the growth momentum.

This shift from agriculture to services has resulted in reduced dependence of non-agricultural sectors on agriculture — especially with a low manufacturing growth rate that uses farm products as raw material, industrial cartels’ manipulating the market for raw materials, greater use of technology in production, the changing sectoral composition of GDP, etc..

A low-income elasticity of demand for agricultural commodities means that an increase in growth of the services sector does not lead to a significant increase in relative food prices and thereby provide an incentive for increasing production and investing in improvement in productivity. So when the services sector grows at a healthy pace, the agricultural sector does not experience similar growth, resulting in the widening of the gap between the two sectors’ growth rates.

The higher productivity of non-agricultural sectors compared to that of the farm sector has also resulted in GDP’s share of agriculture falling well below its share of workers. Whereas its share of agriculture has fallen by almost 10 percentage points over 37 years, its share of the labour force has dropped by only 13 percentage points (from 56pc to 43pc).

Part of the reason for the slow reduction in the labour force’s share of agriculture is the high rate of population growth and the low share of manufacturing in GDP, having risen at a moderate pace from 15pc in 1980 to just over 20pc today — although its share in labour has increased from 13.5pc in 1980 to a mere 14.5pc today — compared to the share of services in GDP, almost 40 percentage points higher than that of manufacturing.

Resultantly, incomes from farming have not kept pace with incomes secured in non-agricultural sectors. What is intriguing is that despite the growing gap in the two productivities, income differentials have not widened sharply. As argued, this is because the industrial sector’s share (especially large-scale, organised manufacturing), which should have ushered in structural transformation, continues to be small. It has experienced sluggish growth, having improved by a meagre five percentage points after 37 years, reflecting the economy’s unhurried transformation in favour of manufacturing that has the most potential to create employment and other earning opportunities. With its share relatively constant, employment has tended to remain lethargic if not stagnant. Hence, employment generation in the economy has remained weak.

However, it is interesting to note that growth in urban areas has facilitated an accelerated growth of the rural non-farm sector, with incomes and non-farm jobs rising faster in urban areas experiencing more rapid growth. This shift from agricultural production activities to non-agricultural employment has been the outcome of the growing urban impact on rural non-farm self-employment, resulting in a narrower differential in per capita incomes between urban and rural areas.

This spillover in rural areas of economic growth from commercial activities in urban areas has been a major contributor to the sharp growth of the non-farm sector, which now accommodates almost the same proportion of the labour force in the country as agriculture (around 42pc), with more than 75pc of it employed in the informal sector.

High income and wealth inequalities resulting partly from the pattern of growth — the share of agriculture showing a sharper decline in national output compared to the fall in the share of labour — has not only influenced the sectoral and technological composition of national output but also the pace of GDP growth and the economy’s employment-generating potential of the economy. Since income generation in the services sector has, in the last two decades, been concentrated in capital and skill-intensive sub-sectors, income distribution in favour of the upper social class — especially professionals — has worsened. Admittedly, some socioeconomic structures and the tax regime have also contributed to an increase in these inequities.

With augmentation in the share of technology in production and the greater use of subcontracting and outsourcing the relative effective demand for unskilled labour in the organised sector has also declined over the last two decades. Resultantly, the scale, scope and variety of employment opportunities have been impacted by these developments which have affected the degree and nature of the demand for domestic and external demand for goods and services. But, a skewed distribution of wealth and incomes cannot sustain the growth momentum. It will eventually run out of steam. For sustainability, it will require a better distribution of incomes and wealth to include the less affluent segments of the population.

The writer is a former governor of the State Bank.

Published in Dawn, January 30th, 2018

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