Improving Productivity of Pakistan's Economy

This policy viewpoint analyzes the main reasons for low productivity in Pakistan, along with proposing a set of actionable policy recommendations to address them. In Pakistan, economic growth has generally been driven by input accumulation rather than by improving productivity growth. Pakistan's TFP and GDP growth move together, and whenever TFP growth has increased, the GDP growth has also increased, and vice versa. As a result, Pakistan's export-oriented manufacturing has struggled to compete globally. With a growing labor force, which has reached over 83 million according to the latest Labour Force Survey (LFS 2024-25), the need to shift from growth based on input accumulation to skill-based productivity has increased manifold. Pakistan's productivity experience shows that episodes of economic liberalization and reform have generally been associated with stronger TFP growth. On the other hand, periods characterized by restrictive policies, such as import restrictions and exchange rate control, have coincided with weaker productivity performance (Siddique, 2022a; Siddique, 2022b). This makes a strong case for reducing misallocation of resources, which has resulted from a long history of incentive-based and protectionist policy regimes, and improving the competitive environment by removing distortionary policies to increase productivity growth. Improving productivity growth will help in making Pakistan's industrial sector dynamic, which will ultimately improve export competitiveness. Such a scenario will put the economy on the path of sustainable growth and development.