Pakistan's low productivity and the way out

Market economy is most-effective option for enhancing productivity

KARACHI:

Low productivity is one of the major issues that Pakistan’s economy has been facing for decades.

This issue is affecting the output in every sector, including agriculture, manufacturing, trade, education, health and other services. Low productivity causes an increase in the cost of production, which reduces the profit of producers.

This results in price escalation, which increases the burden on consumers and leads to loss of competitiveness at the international level. Therefore, it is a big hurdle in the way of industrialisation and needs immediate attention, if we want the manufacturing sector to grow, create jobs for the youth, earn foreign exchange by increasing the volume and range of exports, and grow sustainably.

As per the International Labour Organisation (ILO) estimates, China’s output per person, which is a measure of labour productivity, increased by 388%, India’s by 177%, Bangladesh’s by 109% while ours increased by merely 32% over the 2000-2019 period.

Given various reasons for the low labour productivity, there is a need to work in several directions consistently for a long period of time to resolve this problem. Advanced machinery and technological adaptation increase the productivity of labour and thus enable them to produce better quality goods in more quantity and less time.

Unfortunately, our engineering sector does not produce hi-tech machines that could help industries in automating the production of goods and service delivery. Therefore, we have to rely on imported machines.

Given the historical issue of huge balance of payments (BOP) deficit and the kind of government-regulated economy that we are, the policymakers and financial managers often opt to squeeze imports by raising taxes and duties and even by banning some imports.

Moreover, the financial, psychic and time cost of machinery import is too high because of over-reliance on imports for revenue generation and inefficient mechanisms at port and regulatory bodies.

As a result, companies often opt to continue with outdated inefficient capital, which ultimately hits labour productivity and thus final product is produced at a higher cost. This makes firms uncompetitive and they seek government protection for survival.

Therefore, there is a need to revamp the local engineering institutions first and then encourage graduates to set up firms that could produce good-quality efficient machinery and plants.

Reforming and strengthening the financial sector and relevant government departments such as the SECP and tax authorities to simplify procedures is also a must for this.

Human capital

Investment in human capital is also required immediately to boost productivity. Better health conditions improve the physical strength of workers, reduce the number of absentees, improve concentration on work and enable them to get the most out of machines.

Moreover, a better health status of children also helps them in learning well at schools. A good public health structure that provides quality services to resource-constraint segments of society will also help them save and invest money in education and acquiring skills.

Similarly, access to quality education that blends theoretical scientific knowledge with practical learning at early schooling age will be useful for boosting creativity among young children and thus improve their productivity in future.

Similarly, students studying science and technology, especially engineering, must have hands-on training of working in their respective fields during their engineering course work. For this purpose, labs must be upgraded, course outline must be revised with more focus on practical learning and strong linkages with the industry should be established to help students and the faculty understand what skillset and level is in demand.

Establishing technology parks and centres of excellence within or near university premises that get work contracts from leading automobile, construction machinery, agriculture and IT goods manufacturing firms of the world will help students in their learning and developing professional attitude.

Such strong alliance with the industry will also be beneficial for the academia in generating financial resources and thus upgrading their infrastructure and faculty’s skill level.

Initial financial resources required for such upgrading of public engineering universities can be generated easily by disposing of loss-making public enterprises.

Moreover, improving environmental conditions, encouraging sports, entertainment, art and thought culture also broadens thoughts and improves creativity. This ultimately leads to improving productivity as well.

On the same lines, reforming institutions and authorities such as the Technical Education and Vocational Training Authority (Tevta), which offer short technical courses and training, is also necessary to create a large pool of skilled masons, plumbers, carpenters and technicians, who can work in the construction industry, repair IT devices, home appliances, automobiles, etc.

This is especially important as following a recently announced concessionary package for the construction and housing industry by the government, an upsurge is expected in the demand for skilled workers.

Given the huge share of population with no or very little education, this area must be given due attention to address unemployment and low productivity in the labour force. For this purpose, getting assistance of technologically advanced countries like Japan and Germany can be quite helpful.

Market economy

Last but not the least, a market-based economy where entry into and exit from the market is easy, cost of doing business is low, financial sector is well developed and the system favours competition is perhaps the least-cost and most-effective option for enhancing productivity.

Such an economic system, where subsidies, bailouts and government concessions for certain businesses are absent, trade is unrestricted, institutions provide a fair playing field and favour competition, compels everyone to keep on improving constantly.

Everyone gets equal opportunities and the market system does not offer undue favour to any sector, group or individual. Therefore, each tries his/her best to excel. Those who do not improve themselves are automatically left behind and those who work hard, adapt to evolving conditions, and learn and upgrade themselves to better technologies are rewarded.

Only the fittest and the most adaptable can survive in the market system based on competition and non-favouritism. Therefore, both the firms as well as individuals have to improve their productivity consistently, which ultimately improves competitiveness in the international market. This multiplies exports and helps countries earn foreign exchange.

A competition-based market economic system with unrestricted trade also directs scarce financial and human resources to efficient sectors. This better allocation of resources improves productivity.

Mexico adopted it and as a result managed to improve productivity by 41% between 2003 and 2012 because of efficient allocation of resources.

On the other hand, research shows that poor productivity growth in Japan after the 1990s was because of misallocation of resources in the manufacturing sector.

Given the market conditions and huge fiscal deficit that Pakistan is facing, adapting to the market economy system and restricting government role in economic affairs is perhaps the best option available to us.

The writer is a PhD scholar in economics at IBA Karachi

 

Published in The Express Tribune, August 10^th, 2020.

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