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Friday March 01, 2024

Stagnant growth

In Pakistan, workers continue to lose their purchasing power as their wages increase much less than inflation

January 20, 2024
A view of sun set at Karachi port in Karachi on January 17, 2024. — Online
A view of sun set at Karachi port in Karachi on January 17, 2024. — Online

LAHORE: Low productivity in Pakistan is one of the major reasons for its low GDP growth and inability to penetrate the global markets with its products. There are several factors that contribute to our low productivity.

Productivity is the measure of how efficiently inputs, such as labor and capital, are used to produce output. Productivity is low in Pakistan because labor is underpaid and capital is highly expensive with a markup of 25 percent.

Workers who are denied a living wage cannot be expected to match the productivity of workers who earn enough to support themselves and their families. In most of the high-productivity economies, the wages of workers increase in line with the yearly inflation in that country.

In Pakistan, the workers continue to lose their purchasing power as their wages increase much less than the average inflation, at least in the last 15 years. There is a mentality in Pakistani enterprises to pay low wages and employ a larger number of workers, which also results in lower productivity. In the apparel sector, the exporting industries assign the inspection of finished apparel to a worker and then it is rechecked by the supervisor. This duplication of the same task wastes time and increases cost.

The input costs also impact productivity, especially if they are higher than in competing economies. The power and gas rates in Pakistan are higher than its regional competitors. Similarly, the cost of other inputs has increased more sharply in our country because of its two to three times higher inflation than competing economies.

In Pakistan, the average productivity growth has been 1.5 percent from 2010 to 2020, which is not enough if Pakistan wants to achieve a GDP growth of over 7-8 percent on a sustainable basis.The growth of productivity is a crucial determinant of an economy’s growth.

A study by the Pakistan Institute of Development Economics (PIDE) found that the sectors with high-productivity growth in Pakistan are mostly services-based or tech-based, whereas most of the sectors with medium to low or negative productivity growth are in manufacturing.

One plausible reason for the higher productivity growth in the services sector is the greater competition in services. The study revealed that the average productivity growth in Pakistan has been 1.5 percent from 2010 to 2020, which is not enough if Pakistan wants to achieve a GDP growth of over 7-8 percent on a sustainable basis.

The competition in the manufacturing sectors is marred by the operation of cartels and the protection of manufacturers in Pakistan, which insulates them from the competition. It is a known fact that protection reduces any incentive to improve efficiency.

The PIDE study further pointed out that the export-designated sectors (not the export-oriented firms in a sector) have either low or negative productivity growth. Moreover, the sectors that receive subsidies also have low to negative productivity growth.

We have seen our textile sector underperforming in the global markets as it received numerous subsidies in the past (which have been considerably reduced recently). The below-average performance of the export-designated sectors implies that Pakistani exports are not competitive compared to its competitors. Higher factor productivity, or simply productivity, is a key building block for global competitiveness. Without high productivity, we cannot compete at the international level.

High productivity and GDP growth in Pakistan are also correlated with better macroeconomic fundamentals, structural reforms, institutions, governance, and private sector dynamism. Providing discriminatory incentives to certain sectors and firms hinders competition in the economy, which eliminates the need to improve efficiency and hurts the private sector’s development.