How productive is our labour?

LAHORE: Pakistan faces a critical economic challenge: stagnant labour productivity. Over the past three decades, the country’s performance in this area has been dismal, ranking among the world’s lowest.

Between 1990 and 2018, Pakistan’s average annual growth in labour productivity was a meagre 1.33 per cent. While data beyond 2018 is limited, the ongoing economic turmoil suggests even this minimal growth may have stalled.

Labour productivity is a vital indicator of economic health and living standards. It measures the total goods and services produced by workers within a specific period. Compared to Pakistan, its South Asian neighbours boast significantly higher growth rates: Bangladesh (3.88 per cent), India (4.72 per cent), and China (a staggering 8.12 per cent).

The disparity in Pakistan’s productivity becomes even more concerning when examining different sectors. While national growth lags, agriculture -- a significant contributor to the economy -- paints a particularly bleak picture. Labour productivity in this sector stands at a mere 47 per cent compared to the non-agricultural sector. This highlights the need for targeted interventions to boost efficiency within agriculture.

Unlike its regional peers, Pakistan exhibits stagnant or declining productivity in six of its 12 key sectors, including mining, utilities, transport, real estate, construction, and trade. The limited growth witnessed is primarily concentrated in non-tradable manufacturing and service sectors, which offer less potential for long-term, sustainable economic expansion.

Part of productivity growth typically involves the movement of labour from less productive sectors to more productive ones. Pakistan, however, struggles on this front as well. When considering only internal growth within sectors, the average annual growth rate plummets to an abysmal 0.73 per cent. This signifies the urgent need for structural reforms across various industries.

Capital formation or deepening, the process of increasing the capital stock within an economy, is another crucial factor influencing productivity growth. This involves setting aside a portion of a nation’s output for investment in capital goods.

Unfortunately, Pakistan suffers from low national savings rates, averaging only 13 per cent. This pales in comparison to its neighbours, with India, Bangladesh, and China boasting rates two to three times higher. This deficiency hinders the creation of resources needed to empower economic growth.

Pakistan’s low capital-output ratio, a measure of efficiency in converting capital into output, further emphasizes its economic struggles. This ratio has been declining steadily since the late 1970s, placing Pakistan among the lowest in a global comparison of 183 countries. Notably, Vietnam’s labour productivity growth is almost entirely explained by its capital accumulation.

This highlights the crucial role investment plays in boosting efficiency.

Pakistan’s anaemic labour productivity growth is inexorably linked to its inability to leverage the benefits of globalization. Unlike many developing nations, Pakistan has failed to harness this economic wave for sustained growth. Consequently, the country continues to lag behind its Asian neighbours, burdened by low productivity and unsustainable levels of external debt.