Total Factor Productivity Growth in Pakistan: An Analysis of the Agricultural and Manufacturing Sectors
Chaudhry, Azam Amjad, The Lahore Journal of Economics
This paper uses Cobb-Douglas and translog production functions to calculate total factor productivity (TFP) in Pakistan over the period 1985 - 2005, first for the manufacturing and agricultural sectors individually, then for the economy as a whole. In manufacturing, productivity increased at an average of 2.4% per year with output growth being driven mainly by increases in capital. Despite the limitations of the available agricultural data, we have determined that productivity has grown at an average rate of 1.75% per year in this sector. The major drivers of growth in agriculture have been increases in labor and TFP. These estimates of sectoral TFP put Pakistan at par or above average as compared to other developing countries, but lagging behind the East Asian economies. For the economy as a whole, TFP has increased at an average rate of only 1.1% a year in Pakistan, resulting in almost three quarters of GDP growth attributed to increases in labor and the capital stock.
JEL Classification: D24, E0, F4.
Keywords: Growth, capital, labor, total factor productivity.
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One of the fundamental questions that arises across all economies is how much of economic growth is caused by growth in physical and human capital and how much is caused by factors such as technology and institutional change. Though there is little doubt about the positive impact of increased physical and human capital on growth, most economists feel that sustained high growth is dependent on sustained technological and institutional growth. Based on the assumptions of constant returns to scale and competitive factor markets, one can calculate the growth rate implied by the rates of change in physical and human capital and find the deviations of the actual growth rate from this implied growth rate. These deviations are the result of technological and institutional change and are called growth in total factor productivity (TFP). The objective of this paper is to analyze the growth rates of TFP in Pakistan's agricultural and manufacturing sectors over the last two decades and see how they compare to TFP growth rates in other developing countries.
Most economic analyses of TFP growth focus on gross domestic product (GDP) growth across countries instead of manufacturing and agricultural sector growth. The reason that a disaggregated analysis is meaningful in the context of a developing country like Pakistan is because of the prevailing view that agricultural productivity growth is significantly lower than manufacturing productivity growth. This has extremely important policy implications. First, if agricultural productivity is perceived to be perpetually lower than manufacturing productivity, then policymakers will tend to bias policies and incentive structures toward manufacturing (which has generally been the case in Pakistan). Second, if agricultural productivity is perceived to be lower than manufacturing productivity, then research resources and technology adoption will be more heavily directed toward the manufacturing side. Finally, if agricultural productivity is perceived to be lower than manufacturing productivity, then policymakers may become perpetually reliant on the existing manufacturing structure as the driver of growth and less willing to create incentives to allow risky diversification in the manufacturing sector.
The reason for undertaking a sectoral analysis of TFP growth is because the cross-country empirical evidence is far from clear: Hayami and Ruttan (1985) found a number of examples of rapid technological change in agriculture; Bernard and Jones (1996) and Syrquin (1986) found much higher rates of growth in agricultural TFP relative to other sectors. This means that comparing manufacturing and agricultural sector TFP growth rates could be useful in the Pakistani context.
The structure of this paper is as follows: Section II discusses how TFP growth is estimated. …