The Pak Banker

Pakistan’s labour productivi­ty dilemma

- ISLAMABAD

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 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 longterm 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 familyowne­d 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.

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