Academic journal article The Lahore Journal of Economics

Pakistan's Productivity Performance and TFP Trends, 1980-2015: Cause for Real Concern

Academic journal article The Lahore Journal of Economics

Pakistan's Productivity Performance and TFP Trends, 1980-2015: Cause for Real Concern

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1 Introduction

Since the 1980s, and until recently, rapid globalization - driven in part by the unprecedented pace of technological change, especially in information and communications technology (ICT) - has allowed several developing countries, including China and India, to take advantage of these developments and achieve exceptionally high rates of economic growth, even soaring to double digits. Unfortunately, Pakistan, which was among the ten fastest-growing economies of the world during 1960-90, has not been one of them.1 This is despite the fact that, in many ways, Pakistan was a more open and globalized economy than either China or India in the early 1980s. While Pakistan's low and declining economic growth during 1990-2015 (except for a brief spurt in 2003-06) has been the subject of considerable rumination, an important factor responsible for this outcome, i.e., labor productivity, has not received the attention it deserves.

The importance of labor productivity is best captured by Nobel Laureate Paul Krugman: "Productivity isn't everything, but in the long run it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise output per worker" (1994). A closer examination of Pakistan's labor productivity trends is both revealing and deeply worrying. Compared to the 1980s, when labor productivity (defined as GDP divided by the employed labor force) grew at 4.2 percent per annum, by the 1990s this had plummeted to 1.8 percent, falling further to 1.3 percent during 2000-15. Since 2007, it has grown at just 1 percent. In India, the trend has moved in the opposite direction, with labor productivity growing to well over 5 percent during 2000-10.

Labor productivity, or output growth per worker, can be attributed to three major factors (ignoring arable land, which did not grow in this period): (i) increases in physical capital (machinery and related inputs), (ii) increases in human capital (measured by average years of schooling) and (iii) what economists term 'total factor productivity' (TFP), which measures the contribution of technological progress and more efficient use of existing resources.

While the contribution of both capital and labor has been marginal - for good reason, as we explain below - it is the continuing decline in TFP growth over the last 25 years that exposes many of the fundamental weaknesses that bedevil the Pakistani economy. It is indeed ironic that, despite many attempts at economic reforms under the aegis of the International Monetary Fund (IMF) and World Bank, TFP growth has slowed down drastically, pointing to the little impact these reforms have had on improving economic efficiency when they were expected to have exactly the opposite effect. Clearly, the reform process - either due to its uneven pace or frequent reversals - has not delivered. This declining TFP growth also shows that, despite the widespread use of mobile phones and other ICT-driven gadgets, Pakistan has been unable to take advantage of the potential of extraordinary technological advancements we have seen in the last 25 years. Accordingly, we focus on the following questions:

* Why did the overall economy as well as its main sectors (agriculture, industry and services) not become more productive and efficient (in terms of a rising TFP growth) during 1980-2015 - a period of rapid globalization and technological change (especially in ICT), in which far-reaching reforms were undertaken under the aegis of the IMF and World Bank post-1990?

* What were the major contributors to the overall declining trend in productivity growth? Physical capital per worker, human capital (educational attainment) or TFP, which is expected to capture technological change, innovation and improvements in the basic efficiency of resource use?

To address these questions, we use the endogenous growth model and analyze the contribution of physical capital, human capital and TFP to overall labor productivity as well as that of the major sectors. …

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