Independent Pakistani economists have recently called for setting new priorities for public policies to pull the economy out of multiple crises. Now an international development lender has identified ‘productivity stagnation’ which, it considers, is contributing to the country’s slow structural transformation.

“Pakistan’s economic growth has been stunted by the inability to mobilise all its talents and resources and allocate them to productive uses,” says a World Bank (WB) study.

The slow structural transformation is also symptomatic of low productivity of growth and low-quality job creation. The transformation process had accelerated more recently but a supply constraint — low labour force participation — may reduce the scope for further acceleration, the WB noted in its latest report ‘Pakistan’s Country Memorandum’.

The country’s growth prospects, the report adds, are directly associated with the ability of its firms to grow large and productive over time so that they create good job opportunities for the working-age population.

The key issue facing Pakistan’s political economy is to equitably balance individual/group interests with overall collective interests

No doubt the upscaling of firms’ operations may help boost exports but one may argue, given the current phase of economic growth, that benefits a few and not many. Neither all the country’s talents nor all of its resources can be harnessed for economic progress by firms alone. It is the entire society that has to be entrusted with the task of pushing forward the wheels of economic progress and equitably share the benefits accruing from economic growth.

But the greatest barrier is the absence of citizen-based democracy that is badly needed to redistribute rights and responsibilities widely for socio-economic development.

Political parties and their leaders — averse to the empowered representative third tier of government — appear to be keen to enlist the support of the apparently politically neutral establishment rather than consolidate their political position through grassroots participatory democracy.

The key issue facing Pakistan’s political economy is to equitably balance individual/group interests with overall collective interests. The imbalance between the individual and collective interests results in serious consequences.

In 1991, the Soviet Union’s economy suffered badly because individual interests were suppressed and the so-called collective interest prevailed while centralisation worked there at the cost of democracy. In Pakistan, we are still suffering from the legacy of a mixed economy with huge leftover loss-making state-owned enterprises to be run by common taxpayers’ money.

Often both foreign and domestic markets are rigged, and exorbitant profits are also made solely based on demand and supply positions with no consideration for production costs. The latest regional example is Afghanistan’s decision to raise duty on coal from $90 to $200 per tonne on substantial demand from Pakistan following an increase in oil, gas and foodstuff as a result of the Ukraine war.

In 2005, Pakistan’s exporters accounted for 0.15 per cent of the global exports. In 2019 they amounted to only 0.12pc. This, the WB report argues, is suggestive of relative productivity stagnation and relative low scope for future productivity growth.

Only a couple of years back, Afghanistan was the third-largest destination for exports of Pakistani products. Now the value of imports from that country far exceeds our export earnings.

In the first eleven months of this fiscal year, there was a marked improvement in the country’s export of merchandise and services to a record of $38 billion owing to a global hike in commodity prices and free fall of the rupee. But the trade deficit widened further with imports soaring to$80.51bn owing to higher costs of imported goods. Pakistan is more strongly linked with global markets because of its huge imports and foreign debts than its export earnings.

In the last one and a half months ending July 2, interest rate hikes, rupee volatility, skyrocketing fuel prices, higher gas and power tariffs etc have raised the cost of production of various goods by around 15pc, says the President of the Federation of Pakistan Chambers and Industry Irfan Iqbal Sheikh. He said it would be hard to compete with regional countries in the export market.

The share in low growth of investment and exports are associated with productivity stagnation, says the WB report and adds, this also shows at the firm level with many firms not investing enough even to replace their capital depreciation. They do not grow large (or ‘wise’) as they grow old. That indicates an underwhelming of Pakistani firms in the demanding global market.

Factors identified in the report contributing to low investment include frequent macroeconomic instability that creates an uncertain environment, the financial sector’s limited capital being channelled to the government, regulatory complexity and policy inconsistencies deterring investment and the lack of quality infrastructure and well-functioning complementary services needed to stimulate and crowd in private investment.

Inflation had soared to 21.32pc in June which the industry leaders described as ‘alarming’. The monthly economic update for June and the outlook released by the Economic Affairs Wing of the Ministry of Finance have warned that the State Bank’s demand management policy was unlikely to be successful in the face of supply-side constraints and higher international commodity prices and may further erode income levels.

Overcoming productivity stagnation through the mobilisation of all the country’s human talents and indigenous resources is the only way forward for sustained economic growth. Initial priority should be set for food security, the building of big as well as small dams, increasing reliance on the exploitation of domestic coal or oil reserves and focusing on renewable energies and upgrading human skills.

No less important, the export-oriented manufacturing sector needs to look at options available for investment in import substitution with fears of a recession haunting the global market, making the export outlook a bit blurred.

Published in Dawn, The Business and Finance Weekly, July 13th, 2022