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That Pakistan’s economic growth has been driven mainly by factor accumulation rather than labour productivity over the last few decades has been a subject of discussion among policy wonks for a few years.

A recent paper by PIDE’s Omer Siddique (WP 2020:11) also shows that “whenever attempts were made to deregulate and liberalize Pakistan’s economy, it resulted in higher growth in the country’s total factor productivity and consequently in higher GDP growth.” World Bank’s economist Gonzalo Varela recently presented his analysis of both Pakistan’s poor level of firm productivity as well as declining rates of capital deepening. The central bank’s latest State of Pakistan’s Economy report adds a rather sobering insight to that discourse.

After flagging Pakistan’s worsening level of labour productivity and poor investments in primary and secondary level school education, the central bank notes that “the underwhelming extent to which the business community has got itself engaged in the formal TVET sector limits the scope, coverage and effectiveness of technical and vocational education in the country. As business surveys illustrate, most firms do not appear particularly keen on skill-building amongst their employees and appear mostly content with the existing human resource.”

This observation echoes what several business leaders such as Interloop’s CEO and a few others have been talking about – the fact that firms are not investing in HR training. But this begs the question what are the incentives for private sector to invest in training of its human resources? (Read BR Research’s ‘Two big think questions about productivity’, May,19, 2019)

The central bank reflects on this question by stating that firms’ lack of interest on skill building of its employees “probably represents firms’ own disinclination towards adopting modern production processes (particularly in manufacturing firms) and innovation activities, and overall weak business dynamism (particularly in the sense of diversifying product base)”.

This chimes well with the finding (based on SBP’s analyses of Labour Force Surveys) that sans a few exceptions “in many industries/occupations, there is little to no difference in wages”, be it on-the-job training or off-the-job training. And even where there is a positive wage gap - i.e. trained workers are better paid for the same job – it is not large enough to incentivise workers to keenly seek training of either kind.

Offering an important context to the question raised above, the central bank notes that “in Pakistan, level of competition in the market is low, businesses are predominantly domestic market-oriented, incentive for research and innovation is minimal”, which means that “firms do not face pressure or feel adequately incentivized to focus on productivity enhancement, of which training of the workforce is a crucial component.”

This perspective is spot on, albeit it does not necessarily mean that all exporting sectors boast internationally competitive levels of firm, labour, and capital productivity. One need only look at textile or rice exporters, for example. Combined, these two sectors are the country’s top exporting segments, but outside a few exceptions, they do not boast high levels of productivity. (Read also: ‘State of exports’, 28 Jul,2020)

Two aspects still missing from the discourse on Pakistan’s productivity is the role of price regulation and taxation. The former –such as stringent price caps in pharmaceutical, dairy, beef –disincentivizes businesses and workers to seek productivity and innovation.

The latter has two facets: at the one end, there aren’t enough tax incentives for businesses to invest in workforce training, nor are their tax incentives for workers to seek training over the course of their working age.

At the other end, scores of businesses are outside the tax net or are otherwise able to evade taxes or are rent seeking in any other shape and form - enabling them to earn fantastic return on investments (ROI). Those tax evaded monies or money earned through rent seeking are then invested in real estate, whose returns also offer untaxed or little taxed ROIs. And when businesses earn more than their desired ROIs, why would they even feel the need to invest in productivity and innovation?

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