Pakistan fails to fully utilise human capital, technology

Country’s per hour productivity has marginally improved from 1970 to 2015

ISLAMABAD: Pakistan is a country where episodes of high growth tend to be shortlived, although longer than low-growth periods.

Regardless of this, over the last 50 years, the average economic growth is around 5.4% per annum – the growth pattern is full of short cycles of rapid growth followed by stagnation.

Growth has been cyclical because of it being input (factors) driven rather than productivity driven. Investment-to-gross domestic product (GDP) ratio stood at only 16% in 2018, implying that there are some other factors which have a significant effect on growth.

In this scenario, it is important to understand the role of total factor productivity (TFP) in order to foster and sustain economic growth. TFP is determined by how efficiently and intensely the inputs are utilised in production or in other words achievement of potential GDP.

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However, the growth level in itself can be reached by putting more inputs in production process and through attaining higher levels of output with the same quantity of resources.Few sectors of Pakistan’s economy do show some gains, but Pakistan’s low human development indicators (HDI) undermine economic growth and labour force productivity, with Pakistan being ranked 150th out of 189 countries according to the HDI, far behind most countries in South Asia.

In the Global Competitiveness Index (GCI) 2018-19, Pakistan is ranked 107th with India and Turkey at 58th and 61st places respectively.

Over the last decade, Pakistan gained momentum from sluggish growth, but contributing factors (factors-driven) were still dominant. Growth has been mainly driven by labour and capital accumulation rather than productivity growth, as measured by the TFP (the best overall measure of competitiveness).

The core question is what caused this productivity slowdown? For Pakistan, there is a clear evidence that it is due to inadequate utilisation of the inputs ie human capital and technological development.

According to latest statistics of the labour force, the total labour force in the country was 65.50 million in FY18. Unemployment was reported to be 5.7% in 2017-18.

The high percentage of workforce could be taken as a potential for economic growth, but there are issues related to the quality of human resources. It is important for Pakistan to understand the importance of its resources. According to the Asian Productivity Organisation, Pakistan’s per hour productivity has marginally improved from 1970 to 2015. Labour productivity and TFP can serve as major drivers of productivity growth. The lack of sustained growth and low and declining levels of investment appear to be the most important causes of the low contribution of TFP to productivity growth, which has now reached levels that should be of major concern to policymakers vis-a-vis Pakistan’s growth prospects.

GCI is an appropriate measure to understand the slow productive performance of Pakistan. GCI can be used as a reference point to understand Pakistan’s environment for improving its TFP. According to this index, Pakistan is ranked 107th, which is very low if compared with countries in the region (the World Economic Forum 2018).

Job creation

Innovation and technological development is not directly related to the amount of productive resources, therefore, it affects growth of the economy mostly through TFP. Technological innovation and non-technological factors are two main divisions of innovation.

Apart from all this, the most important and significant feature of TFP is that it can generate employment as Pakistan is a country where 64% of the total population is below the age of 30 (according to 2018 data), which indicates a high percentage of workforce, which will eventually translate into higher GDP growth rates. The point of concern is how TFP can lead to the generation of jobs and employment in a country like Pakistan?

At this time, the need is to have sustained growth. There is a possibility that TFP may not give desired results in the short run but it has huge benefits in the long run. While faster productivity growth may reduce employment in the short run, it promotes employment and higher wages in the long run.

The best example for this can be extracted from when 4G entered Pakistan and the online taxi service started its operations. In the starting days, it caused certain problems as employment level of other regular taxis/cabs fell and the employees opposed this decision. However, after some time they themselves shifted to the 4G network, adopted the technology and got themselves employed in the online taxi service.

There was shrinking of one industry and expansion of the other, and thus this all depends on how efficiently the labour force adopts the changes.

Since the 1980s, and until now, rapid globalisation – driven in part by the exceptional pace of technological change, especially in ICT – has allowed several developing countries, including China and India, to take advantage of these developments and achieve exceptionally high rates of economic growth, even soaring to double digits.

Unfortunately, Pakistan, which was among the 10 fastest-growing economies of the world during the 1960-90, has not been one of them now. According to the UNDP Global Knowledge Index (2018), Pakistan is ranked 115th with India at 81 and China at 39.

Technology gap

The persistence of technology gap suggests that the causes are deep-rooted and at least partly structural. A lot of steps have been taken by the current government to foster productivity and TFP as proposed in the PSDP 2019-20. An amount of Rs12 billion has been allocated to science and IT while a total amount of Rs13 billion has been earmarked for the knowledge economy initiatives.

Other than this, the other initiatives adopted and are in consideration pertaining to the TFP and digitalisation are Vision 2030, MTDF, Growth Strategy, Vision 2025 and above all the 12th Five-Year Plan along with other models.

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Other than that, there are a number of steps Pakistan can take today to boost its economic performance and thereby ensure a better future for its people.

These steps are a replication of the initiatives already taken by many countries such as technological readiness, innovation, company R&D, improved quality and quantity of human resources, especially engineers and scientists, and lastly improved intellectual property rights for laying the foundations for growth, investment and good jobs.

Pakistan’s greatest asset is its people – a young population of millions. This large population can transform into a demographic dividend that drives economic growth. To achieve that, Pakistan must act fast and strategically as faster productivity growth leads to higher real wages and improved living standards.

Rai Nasir Ali is the joint chief economist, M Mubashir Ehsan is the Young Development Fellow at the Ministry of Planning and Aimen Tayyab is the joint chief economist

Published in The Express Tribune, July 08^th, 2019.

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