A deepening productivity crisis

Pakistan stands at a critical crossroads as it grapples with a deepening productivity crisis that threatens its economic future. In a comprehensive report, titled ‘Investing in productivity growth’, released by McKinsey Global Institute in March 2024, Pakistan was singled out as the worst-performing country in terms of productivity growth within the Emerging Asia group.

Over the past 25 years, neighbouring countries like India, China, and even Bangladesh have made significant strides in industrialization, urbanization, and productivity enhancement. In stark contrast, Pakistan has seen minimal improvement, languishing in a state of economic stagnation. This performance gap is a result of numerous structural deficiencies that continue to stifle the country’s potential for growth.

A major fundamental factor behind Pakistan's lack of progress is the massive expansion of government and wasteful expenditure financed through unrestrained borrowing over the last three decades. This has resulted in an unsustainable debt burden that hampers economic development. Poor productivity is the main reason for the huge imbalance in external trade and recurring current account deficits, forcing the country to rely on successive IMF bailouts.

Productivity growth is essential for raising living standards, reducing poverty, and driving economic development. Countries like China and India have leveraged high investment rates in human capital, infrastructure and technology to maintain robust productivity growth, lifting millions out of poverty. As Pakistan awaits the approval of yet another IMF programme, the pressing question is whether any features in such a programme can help improve its productivity leading to sustainable economic progress.

While emerging economies like China, India, and Bangladesh are firmly in the ‘fast lane’ of productivity improvement as per the aforementioned report, Pakistan remains stuck in the ‘slow lane’, unable to keep pace with its peers. With its current policies and governance framework, the country is unlikely to enhance its productivity levels to achieve meaningful progress in the foreseeable future.

Several key factors have contributed to Pakistan's failure to match the productivity gains seen in other emerging Asian economies. First, Pakistan's consistent underinvestment and poor governance in education, health, and population planning have been major impediments to productivity growth. Allocating less than 3.0 per cent of its GDP to education and health, the country falls far short of what's needed to produce a skilled, competitive, and healthy workforce.

Much of this limited funding is consumed by salaries for an oversized government workforce and lost to systemic inefficiencies. Consequently, Pakistan's labour force remains poorly educated and lacks the skills necessary to participate in high-productivity sectors like technology and advanced manufacturing.

In contrast, India and Bangladesh have steadily increased their investments in education and health, producing a more skilled and healthier workforce capable of driving economic growth. India’s tech and services sectors have particularly benefited from a well-educated workforce, propelling the country onto the global stage. Bangladesh's focus on educational reforms has empowered its labour force, especially women, contributing significantly to its rapid industrialization and productivity gains.

Second, chronic political instability has profoundly impacted Pakistan's economic performance. Frequent changes in government, military interventions, and political unrest have made it difficult to implement long-term economic plans or attract foreign investment. Institutional weaknesses – such as widespread corruption and bureaucratic inefficiencies – have discouraged private-sector investment and stifled economic reforms.

By comparison, countries like China have benefited from stable governance structures that enable long-term planning and massive investments in infrastructure and industrial development. Even India, despite its democratic challenges, has maintained relatively consistent economic reforms since the 1990s, attracting foreign investment and fostering an environment conducive to sustained productivity growth.

Third, capital investment in infrastructure, technology, and industrial capacity is a critical driver of productivity growth. However, Pakistan's gross capital formation has remained low, averaging just 15 per cent of GDP over the past three decades. This figure is far below the levels seen in China and India, which have consistently invested 30-40 per cent of their GDP in capital formation.

China’s massive capital investments have transformed its economy into a global manufacturing hub with state-of-the-art infrastructure. India has also made significant progress in infrastructure development, from highways to power generation, creating conditions for long-term productivity growth. Bangladesh has strategically channeled investments into its booming textile sector and supporting infrastructure, positioning itself as a global leader in ready-made garments.

Fourth, while countries like China, India, and Bangladesh have successfully transitioned from agrarian economies to industrial powerhouses, Pakistan remains heavily reliant on agriculture. This sector accounts for a large share of employment but generates low productivity. The country has not diversified its economy or developed higher value-added industries, leaving it dependent on low-productivity commodity sectors.

Conversely, China's emergence as a global manufacturing powerhouse and India's capitalizing on its comparative advantage in services have significantly boosted their economies. Bangladesh’s rapid growth in textile manufacturing has also substantially increased its productivity.

Fifth, a critical barrier to productivity growth in Pakistan is the ongoing energy crisis. Frequent power outages and an unreliable energy supply have severely disrupted industrial activity, reducing output and hindering business scalability. Additionally, inadequate infrastructure – such as poorly maintained roads, railways, and ports – has hampered economic activity by increasing transportation and logistics costs.

In contrast, China's rapid and efficient development of infrastructure has been a cornerstone of its economic success. India has also significantly improved its transport and energy infrastructure in recent years, facilitating industrial growth. Bangladesh, despite its smaller size, has made considerable progress in building infrastructure to support its manufacturing sector, ensuring a steady flow of goods and services.

Sixth, Pakistan's minimal investment in research and development (R&D) and slow adoption of modern technology have significantly hindered its ability to compete globally. The industrial sector remains dominated by outdated production techniques. In an era increasingly driven by technology and innovation, this failure to modernize has left Pakistan trailing behind.

By comparison, China has aggressively invested in R&D and innovation, becoming a global leader in advanced manufacturing and high-tech industries. India's rise as a global IT hub demonstrates how technology adoption can fuel productivity. Bangladesh has also embraced technology in its manufacturing processes, particularly in textiles, enabling greater efficiency and output.

Seventh, Pakistan’s export base is narrow, focused primarily on low-value goods like textiles and agricultural products. This reliance, combined with a lack of integration into global supply chains, has limited productivity growth. Unlike China and India, which have diversified their export portfolios and integrated into global value chains, Pakistan has struggled to make similar advancements.

China’s success as a global exporter of manufactured goods and India’s diversification into services have significantly boosted their economies. Bangladesh has leveraged its textile exports to drive growth. Pakistan's inability to develop high-value exports or become part of global supply chains has widened the productivity gap with its regional peers.

Unfortunately, the proposed IMF programme, like its predecessors, is primarily focused on reducing the fiscal deficit through significant increases in taxes and tariffs rather than cutting the size and scope of an oversized government that squanders scarce resources. To catch up with its regional counterparts, Pakistan must implement significant structural reforms across education, governance, infrastructure, and industrial policies aimed at enhancing the competitiveness of its private sector. Only by addressing these deep-rooted challenges can the nation hope to reverse its stagnant productivity growth and unlock its true economic potential.

Without urgent and sustained reforms, Pakistan’s productivity gap with countries like India, China, and Bangladesh will continue to widen, leaving the country further behind in the global economy. The path to recovery requires bold policy decisions, increased investment in human capital, and a commitment to building a modern, dynamic economy capable of competing on the global stage.

The writer is a former managing partner of a leading professional services firm and has done extensive work on governance in the public and private

sectors. He tweets/posts @Asad_Ashah