With the China Pakistan Economic Corridor (CPEC) project all set to move from the drawing board to the work place, urgent reforms are needed that influence labour productivity - such as those in education. The ingredients for the recipe for such a reform need to include measures to better prepare youth for the labour market of the future. These will require improving outcomes and equity in basic education and adult training programmes, and beefing-up job search assistance and other active labour market policies to facilitate universal employment. Improved packaging of reforms would make them easier to implement, maximise the impact on growth and job creation and help reduce income inequality.
These reforms need to be based on the following principles:
-- Allocating educational resources more equitably across schools and students: spreading education benefits more fairly across society is a common challenge at primary and secondary levels to reduce inequality of opportunities and lift productivity in the long run.
-- Expanding and improving vocational education and training: Addressing challenges in this area can in the short run tackle persistently high youth unemployment while providing in the long run better bridges between education and the labour market and reduce skill mismatch.
-- Addressing infrastructure bottlenecks: Particularly acute in transport and energy (and considering the digital future, in networks), it will boost productivity and could also contribute to stronger labour utilisation and inclusiveness through enhanced labour mobility.
-- Enhancing R&D collaboration between universities and firms: This can help to close the productivity gap between the least productive and most productive firms as R&D collaboration facilitates technological diffusion by providing smaller firms with access to sources of knowledge. Initiatives to encourage R&D collaboration between universities and firms can thus make productivity more inclusive.
-- Achieving greater gender equality, in particular through more and better early childhood education options: The high proportion of women excluded from the labour market (or over-represented among involuntary part-time workers) can be partly traced to ill-designed policies, such as a lack of affordable and high-quality childcare. Since attendance at early childhood education also improves school outcomes for disadvantaged students, increasing provision and quality can entail the double dividend of encouraging greater female labour force participation and mitigating social inequalities.
In a recent study conducted by OECD, the organisation has advised both OECD and non-OECD countries to deploy policy packages that take advantage of the synergies between labour, product and financial market reforms to escape the low-growth trap and ensure that benefits are broadly shared by the vast majority of citizens.
The study, titled "Going for Growth 2017," offers a comprehensive assessment of policy reforms that can be packaged together to boost long-term growth, improve competitiveness and productivity, create jobs and ensure a more inclusive economy.
The following recommendations have been gleaned from the relevant parts of the OECD study but tailored appropriately to suit Pakistan's context:
Without adequate education and skills, people are unable to access jobs. Technological progress does not translate into economic growth. Countries can no longer compete in an increasingly knowledge-based global society. Reforms that facilitate the accumulation of human capital and skills are thus paramount for enhancing long-run living standards, and require continued efforts over an extended period of time. As a result, those include both reforms aimed at improving the performance of the education system and those that seek to reduce inequality of educational opportunities, as the latter may also contribute to lower labour productivity and utilisation.
A strong focus needs to be placed on primary and secondary education. A common challenge is to spread education benefits more fairly across society. For that it is recommended to allocate resources more equitably across socio-economically advantaged and disadvantaged schools and students, to attract the best teachers to disadvantaged schools and to target early on additional support to students at risk of leaving the educational system.
A second common challenge is to raise the quality of education. Improving teaching quality is therefore the key, ranging from improving teachers' training to introducing performance-based remuneration schemes or attracting higher performing graduates to the teaching profession and improving their career prospects. Reflecting the prevalence of high unemployment among school drop-outs, it is also recommended to boost second chance educational opportunities.
A common challenge in the area of tertiary education is to improve university responsiveness to labour market needs. Digitalization, globalisation, demographic shifts and other changes in work organisation are constantly reshaping skill needs. Excessive inertia in the education and training systems, in particular in universities, would translate into people acquiring obsolete skills and into persistent skill shortages and mismatches, which are costly for individuals, firms and society in terms of lower wages, productivity and growth.
Flexibility and ability to equip students with job-relevant skills are thus vital and recommended. For that, curricula should be updated regularly, intelligence about future skills needs should be developed and fields with high expected demand, such as engineering or basic science, should be promoted. Funding mechanisms can play an important role in this respect, and it is recommended that the funding formula takes into account labour market outcomes and needs. Better targeting financial assistance provided to students is also a frequent area of recommendations. In some cases it is recommended to introduce mean-tested grants targeted at students from low socio-economic backgrounds.
The pay-off from policy reforms in vocational education and training (VET) can be particularly important in the current context. We need to expand or enhance the effectiveness of VET so as to address the skill mismatch and to provide better bridges between education and the labour market. The potential for a broadly-based increase in the skills level to result in improved well-being and higher productivity gains can only fully materialise if both workers and firms make best use of these skills. But the growing gap between education qualifications and the actual level of skills means that using qualifications as a proxy for skills may lead to placing people in the wrong jobs. As a result, not only can well-designed VET systems improve the overall quality and equity of secondary and tertiary education systems, they can also be particularly useful at raising employability among youth and the low-skilled. Reducing the skills mismatch requires a combination of policies that include education but also labour market and product market regulation measures.
The most direct contribution of policy to growth of the whole-economy capital stock comes from public investment. Solving both social and physical infrastructure bottlenecks, such as education, health and transport, can also contribute to stronger labour utilisation, through enhanced labour productivity and mobility.
In the current macroeconomic context, enhancing core public capital, and in particular the capacity and regulation of infrastructure, is a priority for Pakistan. This requires addressing infrastructure shortages in a cost-effective way, in the area of transport, energy, education and health. Reforms in this area also need optimising the use of infrastructure. Raising public investment in infrastructure should be accompanied by reforms of the regulatory environment to attract private investment and optimise use, by reforming land acquisition and improving the institutional framework.
Not only physical but also legal infrastructure bottlenecks hamper productivity. An inefficient judicial system can also act as a significant impediment to full implementation of structural reforms. A well-enforced rule of law is thus essential for growth and this is reflected in different mechanisms on which reform priorities need to be addressed. Streamlining the court system and enhancing the monitoring of court performance would make judicial systems more agile and responsive.
Implementing out-of-court settlement mechanisms, such as mediation, would help to reduce delays and backload of cases. Using more e-justice tools, moving from written to oral trials, and increasing courts specialisation, would also contribute to quicker resolutions and stronger contract enforcement. Lastly, it is also important that legislation remains clear and unambiguous and that legislation reforms are enacted and implemented.
Reducing corruption and improving trust in government institutions must also remain a priority, as it would help the government to implement structural reforms, in particular those bringing long-term benefits. Corruption and crony capitalism are also conducive to resource misallocation and low productivity. Consequently, it is recommended to establish or reinforce dedicated anti-corruption agencies.
Financial market reform has generally not featured prominently in Pakistan, owing to the particular need for strong international co-ordination in this area. Accelerating the resolution of non-performing loans and improving insolvency procedures, would contribute to restore credit growth and would allow banks to focus on new lending and on reallocating capital to new and more productive firms.
Basic financial-sector liberalization is needed to sustain high growth. However, in order to deliver their full benefits, such liberalisation's should be gradual and accompanied by strong prudential regulation. Thus financial literacy should be also enhanced through financial education from an early age. Overall striking a better balance between liberalization and regulation in financial markets, would allow for better pricing of risk and contribute to lower the adverse impact on inequality of the financial sector.