Sunday, January 15, 2023

Higher growth crucial for mounting productivity: study

Subsidy-recipient sectors essentially a "deadweight loss" to the economy, claims study

LAbourers carry sacks of onions in this undated photograph in Lahore. — AFP/File
LAbourers carry sacks of onions in this undated photograph in Lahore. — AFP/File

ISLAMABAD: An increase in Total Factor Productivity (TFP) is a crucial determinant of an economy’s growth, and must be pushed to over 3% in a bid to raise Pakistan’s Gross Domestic Product (GDP) to over 7-8% in a sustainable basis.

A study titled “Sectoral Total Factor Productivity in Pakistan,” conducted jointly by the Planning Ministry and Pakistan Institute of Development Economics (PIDE) shows that the average productivity growth rate in Pakistan has been 1.5% between 2010 and 2020 for all 61 sectors that have been included in the study.

However, a TFP of 1.5% is not enough if Pakistan wants to achieve GDP growth of around 7-8%.

The study reveals that there is a positive correlation between GDP growth and TFP, which is also known as multifactor productivity, and tells us how productively the economy uses the factors of production to produce.

Economies with TFP growth of more than 3% were recorded to have a GDP growth rate of at least 8%. However, where the TFP growth was noted to be less than 3%, the GDP growth rate was noted to be between 3% and 7%.

In his preface to the study, Asim Saeed, a Member of Private Sector Development and Competitiveness at the Planning Commission of Pakistan refers to productivity as a “key building block for global competitiveness”, without which countries “experience difficulty in maintaining sustainable GDP growth”.

Asim, being a key player behind the study, noted that the only sustainable way for Pakistan to rid itself of its perplexing macroeconomic woes was to substitute foreign currency refinancing and foreign debt with a foreign currency stream generated by export dollars.

“This is possible only if we wholeheartedly embrace productivity as our national emblem,” he remarked.

The study used unique listed and non-listed data from 1,321 firms divided into 61 sectors, and spans over 11 years, to estimate the productivity growth in Pakistan.

The findings

According to the study’s findings, high-productivity growth sectors are mostly services-based or tech-based, whereas most of the sectors that have medium to low or negative productivity growth are in manufacturing.

The study maintains that one plausible reason for the afore-stated performance could be greater competition in the services sector.

The study further finds states, “the manufacturing sectors are protected in Pakistan, which insulates them from the competition; protecting a sector retards any incentive to improve efficiency”.

It is noted that since the incumbent government came into power in April last year, Planning Minister Prof Ahsan Iqbal has been constantly emphasising adopting export-oriented policies for the public and private sectors to accelerate export led-growth.

The Planning Ministry has recently launched the Champions of Reforms (CORs) network to bring together professionals from different sectors to contribute towards the socio-economic development of the country.

The analysis also shows that export-designated sectors (not export-oriented firms in a sector) have either low or negative productivity growth.

Moreover, sectors that are the recipient of subsidies also have low to negative productivity growth.

It further highlighted that thrice the productivity growth turned negative around the time of elections, and once during the COVID-19 period.

This, perhaps, suggests that the overall macro-environment and political transitions cast a significant impact on productivity and GDP growth.

Implications of findings

The study’s results further furnish some serious implications.

One of these implications is that the negative productivity in the subsidy-recipient sectors is essentially a deadweight loss to the economy.

It also acts as a barrier to private sector development.

Meanwhile, the below-average performance of the export-designated sectors is a wake-up call for all because it implies that Pakistani exports are not competitive compared to the exports of other countries.

The study further concludes that to move the country towards a higher growth trajectory, solid measures that aim to improve productivity are inevitable.

In Pakistan, episodes of liberalisation and market-friendly policies are key to ensuring high productivity and increasing GDP growth on sustainable grounds, urges the study.

High productivity and GDP growth in Pakistan are also correlated with better macroeconomic fundamentals, structural reforms, institutions, governance, and private sector dynamism.

“Providing discriminatory incentives to certain sectors and firms retards competition in the economy, which eliminates the need to improve efficiency and hurts the private sector’s development,” said Omer Siddique, Senior Research Economist at PIDE.