Productivity and distortions

Generally academic debates remain limited in academic circles with their key takeaways inked in books and journal articles. The real world of economic policymaking has its own universe.

However policy initiatives compel those who offer advice to borrow ideas from academia and apply it to real-world policy formulation. The World Bank’s recent report ‘From Swimming in Sand to High and Sustainable Growth’ which focuses on Pakistan is one such example where its many co-authors have been inspired by the academic economic thought on productivity and distortions, and have applied it to Pakistan through careful micro-level data collection as well as utilizing various country-wide indices. It is a delightful read even though one may question some of the neoliberal presumptions and solutions enlisted in it.

One of the central ideas running through the report is that Pakistan’s economy has been performing at a suboptimal level for the past two decades (the report has generally analyzed data from 2000 to 2018/2020) as compared to its comparable-size economies in the world. It is mainly because there are embedded distortions in Pakistan’s economy that are hampering its productivity and growth.

Such distortions, whether introduced through subsidies, taxes, misguided industrial policies, trade restrictions or even more structural/societal gender norms, discourage productivity and innovation. In a way, credit goes to the report for including low women’s participation in the labour force as a distortion introduced through gender norms that do not allow Pakistan to perform as well as even Bangladesh in more gender-balanced labour-force participation. Pakistan experiences stunted growth because it is not able to allocate its resources and talent to the most productive uses due to such distortions.

We have in the past in these pages discussed how minimal taxation on real estate discourages manufacturing. The report does the same. It states that investing in real-estate (which is non-tradable/non-exportable) is more lucrative than making investments in manufacturing. If policymakers in Pakistan remove this distortion and heavily tax real estate, it would give an incentive to investors to focus on manufacturing where some/most/all of their production can also be exported and earn foreign exchange rather than the investment sitting unproductively in plots in housing colonies.

Even within tradable/manufacturing, high-import duties make it more profitable for firms to produce for the domestic market and earn windfall profits rather than become more competitive and export internationally. This analysis of the World Bank is in line with its neoliberal thinking. Pakistan may need high import duties to contain its current account deficit in the short run – though in the long run the World Bank prognosis may hold more ground.

The report goes one notch up and takes the productivity and distortions analysis further by saying that even within the export sector, subsidy schemes are designed in such a way that favour low value-added products over incentivizing innovation. According to the report, “it is 80 per cent more likely for a potential exporter that decides to export a traditional product (eg apparel) to be eligible for an export subsidy, than for one that decides to innovate and export a new product. This is because export subsidy schemes target mostly well-established, unsophisticated export products and can provide up to a 30 to 35 percent boost in profits.”

Just as the report has studied firm-level data in Pakistan in detail as part of its analysis, it has also reviewed farm-level data. In agriculture, according to the report, support prices for crops and subsidies as well as below-mark water pricing introduce distortions in Pakistan as they give incentives to farmers to grow high water-intensive crops like sugarcane. This is bad news for the environment in a water-scarce country like Pakistan, and it is done at the cost of growing crops that would take less water and be more environmentally smart and yet fetch a higher export price in the international market.

The World Bank analysis of lack of productivity in agriculture appears good on its face value. Except that one is not sure how farmers are going to be affected if support prices for crops are removed and water is priced more aggressively given high rural poverty in Pakistan. There is an urgent need for transition to more productive agriculture in Pakistan, but it should be done in a careful manner so that weak and vulnerable sections in rural areas are not made worse off.

Under-participation of women in the labour force is also keeping Pakistan behind its comparable countries. Though women have made inroads into educational attainment in Pakistan, it does not often translate into labour force participation. There is a U-shaped relationship between women’s education and work: those at the very bottom of the education ladder work or the highly educated work and those at the in-between levels of education do not have a strong share in job market participation. Although the overall women labour force participation is low, it is at an abysmal level of four per cent in the manufacturing sector. This low level of participation leads to both supply- and demand-side constraints for women.

To sum it up, Pakistan’s ‘untapped’ foreign direct investment inflow prospect is equivalent to $2.8 billion every year due to the distortions mentioned above and other related factors. Similar figures are applicable to growth, investment, savings, productivity, and women’s participation in the labour force. Pakistan is under-performing and needs to adhere to good policy advice and strengthen the ‘winners’ of reforms in Pakistan at the cost of the elitist ‘losers’ of reforms if it wants to transform into a country that has equitable growth undergirded by productivity and innovation.

The writer is an Islamabad-based social scientist. She can be reached at: fskcolumns@gmail.com