Pakistan’s Growth Stunted by Inability to Mobilize Talent and Resources: WB

Pakistan’s growth has been stunted by the inability to mobilize all of its talent and resources, and to allocate them to productive uses, says the World Bank.

The Bank in its latest report “Pakistan Country Economic Memorandum”, stated that the country’s growth prospects are directly associated with the ability of its firms to grow large and productive over time, so that they create good quality job opportunities for the increasing working age population.

Growth has been low and consumption driven with implications on macro imbalances and long-term growth sustainability because low growth contributions of investment and exports are associated with productivity stagnation which also shows at the firm level and in part driven by lower capital deepening with many firms are not investing enough even to replace their depreciation which means they do not grow large (or ‘wise’) as they grow old and showing in underwhelming performance of Pakistani firms in demanding global markets in fact, lack of global integration is both cause and consequence of low productivity growth.

Slow structural transformation is also symptomatic of low productivity growth and quality job creation and while more recently, this process has accelerated but a supply constraint – low female labor force participation – may reduce the scope for further accelerations.

The report noted that since 2000, Pakistan’s real GDP per capita growth has been low at around 2.0 percent – almost 2.7 percentage points lower than the South Asian average. Not only is the contribution of exports and investment to overall growth in aggregate demand low from a long-term perspective and a cross-country comparison, but it has also declined.

During 1999-00-2009-10, exports and investment demand added on average 1.4 percentage points to aggregate demand growth. This contribution fell to an average of 0.7 percentage points during 2009-10 — 2019-20.

Low investment rates more than offset high consumption (therefore low saving). Structural challenges to mobilize revenues to match high government expenditures, resulted in systematic public sector deficits.

As a result, Pakistan has had current account deficits for 16-21 years since the turn of the century. As a result, risks of balance of payments crisis and macro instability have increased.

In 2018, an average worker in Pakistan produced only 38.1 percent more output than in 1991, while one from Vietnam produced 257.6 percent more than in 1991.

Evidence for publicly listed firms shows that firm’s average productivity between 2012 and 2017 has only increased slightly (and has been mildly falling since 2015).

Low investment rates, led to a deceleration in capital per worker. Rate of growth of capital per worker has been falling over time, while it has been growing among structural comparators. Global export market shares of Pakistan are in sharp contrast with those of structural or aspirational comparators.

In 2005, Pakistani exporters accounted for 0.15 percent of global exports, in 2019 they accounted for only 0.12 percent. This is suggestive of relative productivity stagnation, and of relatively low scope for future productivity growth.

In Pakistan (like elsewhere) exporting firms do better than inward-oriented ones, and their productivity grows after exporting systematically …but Pakistan’s export orientation is limited so this productivity upgrading opportunity is not fully tapped into.

Firms acquired by multinationals do better than domestic-owned firms, and their productivity grows after being acquired but FDI inflows in Pakistan remain low, so this productivity upgrading opportunity is not fully tapped into either. Between 1991-2018, Pakistan experienced sluggish within and low across productivity gains in contrast with experience among structural and aspirational peers.

Employment growth has started being faster in industry and services (higher productivity sectors) relative to agriculture (lower productivity sector) since 2012 Resulting in a pattern of productivity growth that resembles that observed in structural and aspirational comparators – with structural transformation playing a more prominent role in explaining productivity gains

In 2018, only 22 percent of working age women participated in the labor market with the share of males and females in the working age population being similar, this low ratio of female labor force participation is holding back value addition substantially, compared to what would be produced if female and male labor force participation were equal (at 80 percent for both)

Pakistan became more inward-looking since 2000. Lack of dynamism of exports and exporters, with little entry and exit, which altogether reduce scope for productivity gains Policy inconsistency hinders export growth, at the expense of the taxpayer. On one hand, high import duties and a cascading tariff structure implicitly act as an export tax (and increase overall prices for consumers). On the other hand, Pakistan actively supports exporters through export finance schemes, rebates on imports and subsidized electricity and gas.

Private investment as a share of GDP has declined. FDI attraction lackluster. Shrinking capital stocks in many firms. Factors constraining investment include frequent macroeconomic instability created an uncertain environment, financial sector’s limited capital is being channeled to the government, regulatory complexity and policy inconsistencies have deterred investment, quality infrastructure and well-functioning complementary services needed to stimulate and crowd in private investment are lacking.

Technology can be a game changer, but disparities exist. Technology could play a key role in reducing barriers that women face in accessing educational and work opportunities however, studies have also shown that women are 37 percent less likely to own a mobile phone and 40 percent less likely to access the internet than men.