Productivity in Pakistan: Trends and Determinants

The chronically low productivity in Pakistan is due to structural issues. Rather than improving productivity, economic growth in Pakistan has historically relied on factor accumulation rather than productivity growth. Total factor productivity (TFP) growth in Pakistan has been on a declining trend since the 1970s, except for a few years, especially in the 1980s and 1990s. Pakistan undertook liberalization and deregulation policies during these decades, which shows that productivity outcomes respond to policy. At the sectoral level, productivity of the services sector and technology-based activities is higher than that of manufacturing and agriculture, both of which have historically enjoyed protection and various incentives. More alarmingly, however, the sectors that have been designated export-oriented often show low or negative TFP growth. It implies that a protectionist regime has a high cost in terms of lower productivity and lower exports. The macroeconomic literature on productivity shows that trade openness, financial sector depth, and macroeconomic stability are the primary determinants of productivity growth in Pakistan. On the other hand, IMF programs, which come with stringent conditionalities, and infrastructure dampen productivity growth. At the firm level, using ICT, skills, competition, and quality certification are the main determinants of productivity growth. The main message of the research on productivity by the World Bank, IMF, PIDE, and SBP is that resource misallocation, regulatory burden, and weak capabilities hamper productivity and economic growth in Pakistan. Addressing these constraints requires a coordinated and firm reform effort. Any reform effort must focus on the removal of distortionary regulatory and energy-sector bottlenecks in the short term, institutional strengthening in state-owned enterprises, agriculture, and services in the medium term, and investment in human capital, R&D, and global value chain integration in the long t...