• Significantly low to achieve required GDP growth of 7-8pc
• High-productivity growth sectors mostly based on services or technology

ISLAMABAD: Pakistan’s average productivity growth remained just 1.5 per cent from 2010 to 2020, significantly low to achieve the required GDP growth rate of around 7-8pc on a sustainable basis, a new study shows.

The study — titled Sectoral Total Factor Productivity in Pakistan and conducted by the planning ministry and the think tank Pakistan Institute of Development Economics (PIDE) — says that the growth of productivity is a crucial determinant of an economy’s growth that has to be pushed higher to over 3pc.

The study used unique listed and non-listed data from 1,321 firms divided into 61 sectors to estimate productivity growth in the country. Its results show that high-productivity growth sectors are mostly based on services or tech, whereas those with medium to low or negative productivity growth are in manufacturing.

Total factor productivity (TFP) 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. On the other hand, countries growing without a significant contribution from the TFP growth experience difficulty in maintaining a sustainable growth trajectory.

According to the study, evidence shows that economies that had TFP growth of more than 3pc had a GDP growth rate of 8pc or more, whereas TFP growth of less than 3pc was associated with a GDP growth rate between 3pc and 7pc, enunciating a positive correlation between TFP growth and GDP growth.

The economy-wide TFP growth estimates show 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, according to different estimates, 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. Firm data needed for sectoral estimates has been difficult to obtain, especially for those firms that are not listed on the stock exchange.

The study has estimated firm-level and sectoral TFP growth based on Harmonised System’s level-two codes, or HS-2. In the study, 1,321 firms are divided into 61 sectors, with each firm’s data spanning a period from 2010 to 2020.

Firm-level data of listed and non-listed public firms obtained from the Securities and Exchange Commission of Pakistan (SECP) is included in the analysis. The study’s results show that the average TFP growth for all the 61 sectors included in the analysis between 2010 and 2020 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 compared to those with higher TFP growth, which could harbinger consequences for Pakistan’s push for a larger share of the global export market’s wallet.

Dividing the 61 sectors into three categories — i.e., high TFP growth (above 3pc), medium to low TFP growth (between 0pc and 2.9pc), and negative TFP growth (below 0pc) — the study found that most sectors with high TFP growth are either related to services or tech.

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, which 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 digitisation. Similarly, flexibility in technology adoption could be another factor. It is often observed that Pakistani firms in the manufacturing sector are primarily family-owned and managed, and are in general averse to modern management practices, a factor that inhibits productivity growth, the study says.

Published in Dawn, January 16th, 2023