Pakistan’s Productivity Problem

Pakistan’s economy is facing a crunch: owing to reckless foreign borrowing in last few years, declining exports, shrinking foreign remittances, and a perpetual trade deficit, the country is facing a grim short- to mid-term economic outlook. On June 20th, credit rating agency Moody’s downgraded Pakistan’s economic outlook from Stable to Negative, citing external vulnerability risks as ongoing balance of payments pressure continues to erode foreign exchange buffers. On July 3rd 2018, Fitch raised the alarm on serious risks to Pakistan’s economy, warning that the current account deficit would rise to 5.3% of GDP and the fiscal deficit would be at 6%.

This alarming economic reality is not new to Pakistan. The country continues to find itself in situations where it seeks financial bailouts to avoid complete economic collapse, and implements a few quick-fix macroeconomic reforms while leaving the fundamental problems unaddressed.

The perpetual trade deficit and shrinking foreign remittances have put pressure on the country’s foreign exchange reserves. Like many developing countries, there has been much focus on the country’s lack of productivity. However, there is one fundamental aspect of the problem that is overlooked in proposed solutions for the productivity problem: the under-utilization of available human capital.

Pakistan’s Labor Participation rate is 54.4%. That means of the working age population, only half is currently participating in the workforce. Pakistan ranks 143rd globally in Labor Participation, below both Bangladesh and Bhutan. This a significant waste, given the fact that Pakistan has a large youth population; almost 2/3rd of the population falls under working age population. This low labor participation becomes more critical because Pakistan neither has a competitive or technical advantage in high value addition segments, nor does it have abundant mineral resources to export. The country’s prime source of wealth generation remains agricultural (rice and cotton mainly) or mostly low-value products (e.g. yarn) generated using agrarian outputs. Because of a lack of education and vocational training, and a very limited proportion of the population engaged in the high-skilled, high-value crafts, Pakistan’s work force mostly falls under the category of low-skilled to unskilled.

Pakistan has a population of around 208 million and of this, around 64% of the population is of working age, and the minimum monthly wage is Pakistan is around US $120. Even if Pakistan manages to deploy an additional 5% of its working age population to work at minimum wage, it leads to the generation of an additional US$ 9.5 billion to the economy or an additional 3% of GDP. If Pakistan could achieve the labor participation rate of Malaysia, 68.2%, at minimum wage, it has the potential to add US$ 25.9 billion to its GDP, or around 8% of GDP. These figures do not represent the impact of this money circulating in the economy.

One of the most significant reasons for the low labor participation rate is the social structure of joint family system whereby one or two breadwinners earn for a family of 10-12 people. This practice is especially common among middle- and lower-income households. Since the family serves as the ultimate social security net for individuals, those not in work have little incentive to seek work actively.

 

Pakistan’s policymakers have, for many decades, emphasized economic growth through value-addition. This is in stark contrast to the reality in which most of the workforce remains unskilled. If the country wants to move out of its perpetual economic trap, it needs to shift its policy focus on bringing its working age population into the workforce. This must begin with the creation of incentives and a cost structure that enables people to work.

On the incentive side, the easiest course of action is to emphasize on agriculture and peripheral industries that require low-skilled labor to produce goods that can be exported. An emphasis on agriculture requires bringing more land under cultivation. In a country facing a water shortage, this poses a challenge but also an opportunity to invest in overhauling the country’s old water infrastructure and introducing low-tech water conservation systems like drip-irrigation. Bringing people into workforce creates a chain reaction that leads to adaptation to lifestyles on an enhanced income as well as increased consumption. This opens new avenues for economic opportunity and leads to a desire on the part of the workforce to enhance their income through improving their skillset. Countries such as China and Singapore have gone through the same cycle of moving from unskilled to skilled economies. The global drive, especially among oil-rich nations, to attain food security is also an opportunity where Pakistan’s low skilled agricultural workforce can be utilized. Here, Pakistan’s government must actively pursue this avenue to compensate for the shrinking remittance forex.

The government should also introduce policies that discourage people from remaining outside the workforce. One such incentive can be to link social security benefits to participation in workforce and limiting the number of dependents per active member of workforce. This will incentivize free-riders in families to start working in order to claim basic social welfare benefits like free healthcare, education, food support etc.

There is another more important dimension of Pakistan’s low labor participation rate and that is the lack of participation of women in the workforce. Pakistan’s female labor participation rate is 25%, which is the lowest in South Asia and among the lowest in the world. In recent years, various government and non-government programs have demonstrated that when women are trusted with economic activity, it bears economic and social benefits. Even in Pakistan, the government of Sindh’s micro-finance loans for women program is a step in this direction. The allocation of land to women for farming has similarly helped to lift many families out of poverty and has helped to improve the condition of women. Thus, a key element of engaging the population to join the workforce must be to increase women’s labor participation rate.

Expanding the economy by expanding the workforce to join low-skilled and unskilled sectors is the easiest and most feasible route for Pakistan. This will allow the country to gradually and organically enhance its economy to a more high-skilled economy with high productivity and value-addition capabilities. Failing to do this will not only rob Pakistan of sustainable economic growth, but will also prevent the negative externalities caused by a high unemployed youth population.