Productivity dilemma

LAHORE: Productivity in Pakistan is hostage to informality. The larger firms with 500 or more employees are highly efficient than the small informal firms making the same product.

Larger firms are operating on more efficient technologies than smaller firms. Their workforce is highly skilled then the low or no skill employees of smaller firms.

Quality of the products of larger firms is similarly much superior to that of smaller firms. The reason for this gap is that the larger firms are operating on more efficient technologies than the smaller firms.

Some economists, not well versed with the tax culture in Pakistan wonder as to why the inefficient businesses not only operate but flourish as well. The simple reason is that the smaller firms operate outside the tax net.

They do not comply with labour laws and do not pay their workers even the minimum wage. By saving taxes and labour costs, these smaller firms can compete with more efficient manufacturers.

Quality conscious buyers do prefer better products produced on high-tech machines, but bulk of the consumers’ compromise on the quality, if the price is low. This is the reason that we see our markets flooded with low standard replicas of products produced by quality producers.

Increasing productivity gap between the large and small manufacturing firms in Pakistan with the latter as the larger provider of employment in the country is keeping the overall productivity low in the country. It should be a matter of concern for our economic planners.

The informal sector is dragging the productivity of the country down as the gains in productivity made by the larger formal sector are overshadowed by increased activity in the informal sector.

One way to close the gap between the efficient and inefficient segments of the economy is to enable small and microenterprises to grow. They should be facilitated to enter the formal economy, which would make them more productive.

One must admit that the microenterprises and even small enterprises face many barriers that need to be removed. The government is not serving well the needs of informal and traditional parts of the economy. Informal sector is denied services as well as infrastructure. They have almost no access to finance, and they are cut off from global markets.

They are forced to employ workers and managers with low skills and education as the state has not made adequate arrangements for skill training. Informal small firms are over 3.5 million and account for 70 percent of the employment (almost all low paid).

The larger firms are few thousand (including those employing 100 workers to 10,000 workers), and provide the remaining employment (predominantly with minimum wage but also high salaries based on skills).

Alternate strategy is to provide more opportunities to larger firms so that they can attract semiskilled workers and upgrade their skills instead of letting them fall into the hands of the informal sector, which has very low productivity.

This strategy may be more effective in eliminating the informal sector, but it needs a lot of investment in infrastructure. Planners would have to ensure an efficient transport system to commute workers from slums and poor urban areas to the manufacturing centres that are usually located outside the cities.

At the same time, the regulators must ensure a minimum standard of the products. Our regulators ignore the quality of even those products that threaten the lives of consumers. Substandard LPG cylinders for instance are produced by the informal sector that does not use the specified steel. These cylinders when burst cause a lot of injuries and fatalities.

In the same way, substandard burners and geysers produced almost exclusively by the informal sector operate at 25 percent efficiency resulting in massive wastage of natural gas that is acutely short in the country.

Most of the economic development occurred worldwide when workers and farmers moved from low-productivity sectors (such as agriculture and petty services) to modern factory work and services.

With this, the overall productivity of the economy increased. Engagement of the bulk of labour force in modern sectors boosted productivity and the economy. Thus, the productivity gap between the traditional and modern parts of the economy narrowed. At the same time better farming techniques requiring fewer workers also boosted agriculture.

This happened in economies that underwent rapid industrialisation; that regrettably did not happen in Pakistan. The structural change needed to boost productivity was absent. Pakistan unfortunately is among the countries where industrialisation is running out of steam and experiencing premature deindustrialisation. This is the reason that young people who move to cities from rural areas to the cities find no jobs in factories and are forced to perform informal, low-productivity services. Pakistan would remain a low productivity country if informality is allowed to flourish. Efforts should be made to phase out informal business activities in a planned manner.