Pakistan's Productivity Growth Low To Attain Required GDP Growth Rate

To estimate productivity growth in the country, the study used unique listed and non-listed data from 1,321 firms divided into 61 sectors.

Pakistan's Productivity Growth Low To Attain Required GDP Growth Rate

Average productivity growth rate of Pakistan remained at 1.5 percent from 2010 to 2020, which is far too low to achieve the required GDP growth rate of around 7-8 percent on a sustainable basis, according to a new study.

According to 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), productivity growth is a critical determinant of an economy’s growth and must be increased to more than 3 percent.

To estimate productivity growth in the country, the study used unique listed and non-listed data from 1,321 firms divided into 61 sectors.

Its findings show that high-productivity growth sectors are primarily based on services or technology, whereas those with medium-to-low or negative growth are primarily based on productivity growth in manufacturing.

Growth in total factor productivity (TFP) is a critical determinant of long-term output growth. Countries that are successful in increasing TFP growth grow at a much faster rate and for a longer period of time. Countries growing without a significant contribution from TFP growth, on the other hand, have difficulty maintaining a sustainable growth trajectory.

According to the study, economies with TFP growth of more than 3% had GDP growth rates of 8% or higher, whereas economies with TFP growth of less than 3% had GDP growth rates ranging from 3% to 7%, indicating a positive relationship between TFP growth and GDP growth.

TFP growth estimates for the entire economy show that TFP and GDP growth in Pakistan have been erratic since the early 1970s. For some years, TFP growth has even remained negative. Moreover, economy-wide TFP growth, according to different estimates, has hovered around 2 percent over the last few decades.

While overall TFP estimates are indicative, sectoral estimates are important for understanding productivity at different sub-macro levels. Firm data required for sectoral estimates has been difficult to obtain, particularly for firms that are not publicly traded.

Based on the Harmonized System‘s level-two codes, or HS-2, the study estimated firm-level and sectoral TFP growth. The study includes 1,321 firms divided into 61 sectors, with data from each firm spanning the years 2010 to 2020.

The analysis includes firm-level data from the Securities and Exchange Commission of Pakistan (SECP) on both listed and non-listed public firms. The study’s findings show that the average TFP growth rate for all 61 sectors examined between 2010 and 2020 remained at 1.5 percent.

Low TFP growth indicates that the economy has been inefficient over time. Furthermore, lower productivity implies that the economy is less competitive in comparison to those with higher TFP growth, which could have ramifications for Pakistan’s push for a larger share of the global export market‘s wallet.

The study found that most sectors with high TFP growth are either related to services or technology. It divided the 61 sectors into three categories: high TFP growth (above 3 percent), medium to low TFP growth (between 0 percent and 2.9 percent), and negative TFP growth (below 0 percent).

Manufacturing accounts for the majority of industries with medium-to-low TFP growth. Sports goods and textile composites are two export-designated sectors that are also included in the medium- to low-growth sectors.

The majority of negative growth sectors are also in the manufacturing category, which includes three export-designated sectors (textile spinning, textile weaving, and leather and tanneries) as well as other notable industries like fertiliser and automobiles.

The analysis also reveals a link between sectors that receive subsidies and categories with medium-to-low TFP growth or negative TFP growth. Similarly, with the exception of the textile sector, each of these sectors’ export share in global exports is less than 1% in their respective categories.

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

Because of digitization, the services sector may also become more productive. Similarly, adaptability in technology adoption could be a factor. According to the study, it is frequently observed that Pakistani firms in the manufacturing sector are primarily family-owned and managed and are generally averse to modern management practices, a factor that inhibits productivity growth.