Productivity is the mother of economic prosperity

LAHORE: Pakistan will have to invest in highly skilled human capital, upgrade existing technology, enhance productivity growth, and start exporting more and more value-added products, if it wants to rub shoulders with the up-and-coming economies of the world.    Productivity is the ultimate engine of growth in the global economy. Taking the productivity to new levels is therefore a fundamental challenge for Pakistan. As things stand today, productivity in Pakistan is only 14.6 percent of the productivity in the United States. Pakistan is endowed with a hard working workforce but productivity is about working smarter, rather than harder. It reflects our ability to produce more output by better combining inputs, owing to new ideas, technological innovations and business models. Productivity isn't everything, but in the long run it is almost everything.

Still, productivity is not technology-centric only. The Japanese had mastered the art of reducing production cost through better management near 60 years back. In those days, United States, equipped with the latest technology of that time, was the largest producer as well as exporter of passenger cars in the world. The Japanese cornered US manufacturers in their courtyard by producing cars of the same quality at a far lower cost.

They took the idea of the economies of scale to a new level by assembling cars from the parts made by vendors. These vendors also supplied similar parts to other Japanese car producers, which reduced their costs appreciably. In the US, every part and even the upholstery were made independently by each carmaker. By the time they realized their mistake, they had already lost the global as well as the US markets to Japanese.   

Pakistani planners and manufacturers must realize that from now on productivity would be the main driver of future growth and prosperity. The businesses have to operate rationally by effectively allocating human talent to jobs. It will boost productivity and reduce inequity.

The policy planners must realize that growth in productivity is a must to neutralize the impact of demographic strain on public budgets. Pakistan has to come out of middle income trap by improving efficiency and eliminating waste.   

Government policies should facilitate new entrants to experiment with new technologies and business models. Best use of scarce resources can be achieved by enabling labor, capital, and skills to flow to the most productive firms.

Moreover, Pakistan needs investment in innovation, research & development (R&D), skills, and organizational know-how, so that the economy could absorb, adapt and ultimately reap the full benefits of new technologies.  

Skill mismatch, which is widespread in our society, give rise to rigidities in labor market matching. It not only checks the growth of innovative firms but also influences the wage inequality. Tackling skill mismatch is particularly important for Pakistan as scarcity of better skills is being felt world over. Given the openness of our economy, it is essential for up new small entrepreneurs to grow rapidly or exit. Small and less productive old firms are bound to die.  

In order to ensure sustained national productivity growth, the policymakers will have to improve public funding and the basic research. It is imperative to provide the researchers with right incentives.

Multinationals operating in Pakistan should be encouraged to transfer technology to and conduct research in Pakistan through corporate tax incentives and intellectual property rights protection. Productivity growth can also be increased through trade openness and participation in global value chains.

There is a dire need for well-functioning product, labor and risk capital markets. The policy makers would have to ensure that resources don’t get trapped in inefficient firms.

To achieve this, the state would have to make judicial system efficient and introduce bankruptcy laws that don’t penalize failures only. It is crucial that the state should help the national firms achieve a scale to enter global markets and benefit from innovations at the global frontier.