Productivity Key to Global Competitiveness

Karachi: Arguably, productivity is one of the key building blocks for global competitiveness. Evidence suggests that the total factor productivity growth is positively correlated with the GDP growth. As Pakistan continues to search for high and sustainable export-led growth, it is crucial to keep sight of the most critical denominator of the objective: productivity — its significance in the recipe for growth remains unmatched, according to a report jointly prepared by the Ministry of Planning, Development and Special Initiatives and Pakistan Institute of Development Economics.

“We are well-aware of the challenges Pakistan is facing; economists have spoken at length about the twin deficits and elevated debt levels, whose roots probably intertwine with the country’s productivity structure,” it added.

The reasons for Pakistan’s boom and bust cycles would surely identify the low productivity as one of the culprits of the inconsistent growth path, besides highlighting it as one of the causes for the country’s myriad engagements with the International Monetary Fund (IMF).

Perhaps the national desire to maintain a consistent and stable macroeconomic environment may only be possible if the “business model” of the economy is structurally appropriate to grow and generate resources to maintain manageable debt levels and keep the current and fiscal account balances in check, the report showed.

If Pakistan is to grow and aspires to follow the path of export-led growth, then it becomes relevant to understand, as minutely as possible, where we stand today in terms of the total factor productivity growth vis-à-vis various sectors, including the export-oriented sectors, which compete at the international level.

This endeavour is an attempt to contribute to limited research and data in the area of sectoral total factor productivity and has been worked upon with the expectation that it can be used by the policymakers to make informed decisions on how to support the sectors, as we embark on our journey to seek export-led growth and develop a more stable macroeconomic environment.

If we are not competitive globally, we cannot export, which switches off one of the key engines of foreign currency contributors to the economy.

With circa one-third of the total debt denominated in foreign currency, the country is; therefore, pressed to take on large foreign currency budgetary support loans in the name of development: the importance of productivity is just not only confined to being competitive but also has the potential to shake the foundations of our macroeconomic environment and the development process, as well.

The Total factor productivity growth is a key determinant of long-run output growth. Countries that manage to boost their TFP growth, grow at a much higher rate and for a sustained period.

Besides, those countries that grow without a significant contribution from the TFP growth experience difficulty in maintaining a sustainable growth trajectory.

Evidence shows that economies that had TFP growth of more than 3 per cent had a GDP growth rate of 8 per cent or more, whereas the TFP growth of less than 3 per cent was associated with a GDP growth rate in the range of 3 and 7 per cent, enunciating a positive correlation between the TFP growth and GDP growth.

The economy-wide TFP growth estimates show that both TFP and GDP growth have been erratic in Pakistan since the early 1970s. For some years, the TFP growth has even remained negative. Moreover, the economy-wide TFP growth, according to different estimates, has hovered around 2 per cent over the last few decades, while the economy-wide TFP estimates are indicative, sectoral estimates are significant to understand productivity at various sub-macro levels.

A firm data needed for sectoral estimates has been difficult to obtain, especially for those firms that are not listed on the stock exchange.

The study has tried to address this void to gain a better understanding of the productivity trends. It has used firm-level data to estimate TFP and used these to obtain average sectoral estimates, a bottom-up approach.

The study estimated the firm level and sectoral TFP growth based on Harmonised System 2 (HS-2) level codes. A total of 1,321 firms are divided into 61 sectors with each firm’s data spanning a period from 2010 to 2020.

The firm level data of the listed and non-listed public firms, obtained from the Securities and Exchange Commission of Pakistan (SECP), is included in the analysis.

The study’s results show that the average TFP growth for all the 61 sectors included in the analysis during 2010/20 remained at 1.5 per cent. The low TFP growth implies that the economy has not been productive over time.

Moreover, lower productivity implies that the economy is uncompetitive, compared with the economies that have higher TFP growth, which could harbinger consequences for Pakistan’s push for a larger share of the global export market’s wallet.

The low productivity could be due to a combination of factors: dividing the 61 sectors into three categories, i.e., high TFP growth (TFP growth greater than 3 per cent), medium and low TFP growth (TFP growth between zero and 2.9 per cent) and negative TFP growth (TFP growth below zero per cent), the study found that: Most of the sectors that have high TFP growth are either services-related or tech-based.

Similarly, most of the sectors in the medium and low TFP growth category are in manufacturing. Two export-designated sectors, i.e., sports goods and textile composite, also feature in the medium and low TFP growth sectors.

Likewise, most negative TFP growth sectors are in manufacturing. This category captures three export-designated sectors (textile spinning, weaving, leather and tanneries) among other salient industries such as fertiliser and automobiles.

The analysis also precipitates a trend between the sectors that receive subsidies and medium and low TFP growth or negative TFP growth categories.

Similarly, the export share of each of these sectors, barring the textile sector, in the global exports is less than one per cent in their respective category.

The services sectors could also be more productive because of digitalisation. Similarly, flexibility in technology adoption could be another factor. It is often observed that the Pakistani firms in the manufacturing sector are primarily family-owned and managed and are, in general, averse to modern management practices, which inhibits productivity growth.

The analysis also highlighted some other interesting and important aspects: export-designated sectors (not necessarily export-oriented firms in a sector) have either low or negative TFP growth and the sectors that are the recipients of subsidies have low to negative TFP growth.

There is almost no presence of Pakistani exports in top global export sectors and industries, while the sectors that have high TFP growth are not major export contributors.

The negative TFP growth in the sectors that receive subsidies is essentially a deadweight loss to the economy. It also acts as a barrier to the private sector development. The below average and negative TFP growth of the export-designated sectors poses an area of concern.

According to the analysis, on an average, the services sectors have higher TFP growth than the manufacturing sectors. One plausible reason for this could be greater competition in services.

Besides, the manufacturing sector are protected in Pakistan, which insulates them from competition; protecting a sector retards any incentive to improve efficiency.

Improving productivity suggests a need to revisit and reorient policies, especially incentives purely to propagate productivity. This aspect takes centre stage, especially in the light of the government of Pakistan’s push for augmenting exports in the traditional and non-traditional sectors.

Low productivity may be associated with the adverse policy environment such as Statutory Regulatory Orders (SROs) and policy instability reflected in frequent changes in the areas of taxes and tariffs, among others.