As per the International Labour Organisation (ILO) definition, labour production represents the total volume of output produced per unit of labour during a given time. Economists refer to labour productivity as the amount of output per worker. It is calculated by dividing GDP by the total number of working labourers.

Labour productivity is one of the most important indicators of economic growth and is linked with living standards. It determines economic growth and affects everyone in the economy. Higher labour productivity reflects high business profits, wages for workers, and more government revenue.

Unfortunately, Pakistan has been running low on productivity for the last two decades — though it was once ahead of peer countries like India, Bangladesh, and China for at least one decade. According to the ILO, Pakistan had an average labour productivity rate of 1.5 per cent from 2000 to 2020 annually, compared to India’s 5.7pc, Bangladesh’s 3.9pc, and China’s 8.5 pc in the same period.

It’s a sad state of affairs that one of the founding members of the Asian Productivity Organisation (APO) was surpassed by India and Bangladesh in the years 2008 and 2012 respectively.

Pakistan’s low average growth rate of 1.5pc from 2010 to 2020 reflects the country’s increasing economic unproductivity due to political instability, insignificant exports, and lack of R&D

Labour productivity is either a one-factor or partial-factor measure of productivity and doesn’t reflect overall production efficiency. For example, low labour productivity could reflect labour production efficiency but not the production method depending either on usage and cost of human labour or technology — as only labour productivity can make it difficult to determine which is the case.

Therefore, economists often analyse Total Factor Productivity (TFP) — the GDP per unit of combined input — to determine the overall production efficiency of a country. It reflects how efficiently an economy capitalises its production factors to produce output. It is a key determinant for long-run output growth.

A research report published in January 2023 by the Pakistan Institute of Development Economics, ’Sectoral Total Factor Productivity in Pakistan,’ reflects that TFP is crucial for sustainable economic growth.

Countries with high TFP growth experience faster and more long-term economic growth compared to countries with low TFP growth. Evidence shows that economies with TFP growth above 3pc achieve GDP growth rates of 8pc and above, while those with below 3pc TFP growth have GDP growth between 3pc to 7pc. This indicates a positive correlation between TFP and GDP growth.

However, Pakistan’s average growth rate across 61 sectors from 2010 to 2020 remained low at 1.5pc, reflecting the increasing unproductivity of the economy over time. The study categorises sectors based on TFP growth, with services and tech-based sectors showing high growth, while manufacturing sectors, including key export sectors like sports goods and textiles, show medium to low TFP growth.

The possible reasons behind the high growth in the services and tech sectors could be digitisation and greater competition, in contrast to family-owned manufacturing sectors. The sectors with negative growth are also in the manufacturing sector, including textile spinning, weaving, and leather products.

The analysis indicates a trend in which sectors receiving subsidies tend to have lower and negative TFP growth, which suddenly declines during the general election period, indicating a correlation with political instability.

Pakistan’s export sector does not have a presence among the top global export sectors. In comparison, sectors with high TFP growth are not part of major export contributors. The top two global export sectors consist of tech-based goods, including electronic products, with a global share of 16pc, and machinery & mechanic products, with a share of 12pc, which both require research and development (R&D) and innovation.

In comparison, Pakistan’s top export sector — textile — has only a 2pc global export market share. Pakistan also exports agriculture-based products, whereas the top fifteen global exports do not feature such products.

The study suggests several factors that contribute to low productivity: inadequate skilled labour, political instability, weak organisational measures, poor management practices and patronage policies, low-capacity utilisation, slow tech adaptation, and lack of R&D and innovation.

Therefore, Pakistan needs to revisit its policies and consider fostering steps to improve productivity to achieve sustainable growth. It requires immediate structural reforms and a policy overhaul focusing on human development, capacity building, transparency, and digitisation. It is time to reconsider and diversify exports and prioritise R&D and innovation in all production sectors.

The writer is a scholar and research fellow at the Pakistan Institute of Development Economics, Islamabad

Published in Dawn, The Business and Finance Weekly, April 15th, 2024