Global integration can spur productivity growth in Pakistan
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The average Pakistani worker produces 40 percent more value added today than 30 years ago. Compare that to the average Vietnamese worker, who is 328 percent more productive today.
Workers’ productivity has practical implications: it is linked to growth of income and overall national growth. We tackle this question of low productivity and stunted growth in Pakistan in our new report,Evidence shows that economies integrating into global markets can be a powerful platform to both allocate resources and talent better and for firms to learn faster.
Evidence shows that economies integrating into global markets can be a powerful platform to both allocate resources and talent better and for firms to learn faster.
Through the 1990s, Vietnam’s economic structure was not significantly different than that of Pakistan then or now. Vietnam exported textiles, agricultural products, and minerals. Fast forward to 2023, the country added electronics, computers, and semiconductors sectors to the mix. Vietnam’s soaring productivity results from this productive transformation. The stagnation of Pakistan’s, from its productive stagnation.
This helped boost productivity and create jobs within the multinationals and Vietnamese firms. Take Samsung. When it set up shop in Vietnam in 2008 to assemble and export electronics, almost all its suppliers were foreign.
Between 2014 and 2020, the number of Vietnamese companies chosen as first-tier suppliers by Samsung increased from 4 to 50. Today, Samsung Vietnam produces semiconductor parts and conducts R&D in the country. It has trained its local suppliers and helped them improve their organizational practices and product quality. Their productivity grew, and so did their domestic and foreign sales.
We look at whether Pakistani firms learn by integrating within the world economy and if they become more productive by exporting, importing, and connecting to Foreign Direct Income (FDI). The short answers: yes, yes, and somehow, respectively.
Exporting and Productivity
In Pakistan, exporters are substantially more productive than domestic-oriented firms, across sectors and locations. In From Swimming in Sand to High and Sustainable Growth, we split the sample into ‘never exporters’, ‘latent exporters’ (those that are not currently exporting, but will start exporting soon), and ‘systematic exporters’ (those that always export). We find that latent exporters are 26 percent more productive than never exporters.
Foreign firms in Pakistan are 46 percent more productive than comparable domestic-owned ones.
The ratio of exporters among publicly listed firms declined from 60 to 51 percent in the past decade, and the share of exports in sales for those that export, declined from 31 to 27 percent. The learning-by-exporting platform has shrunk in Pakistan.
Importing and Productivity
those that struggle accessing duty drawback schemes, benefit more. A one percentage point reduction in import duties on intermediates increases the productivity of domestic firms by 0.75 percent, and of small exporters by 0.94 percent, with no effect on that of large exporters.
The productivity-sales-wage troika matters: lower import costs are not just productivity enhancing, they also enhance growth and job quality. But not all firms benefit equally from lower trade costs for intermediates: domestic firms and small exporters, such asFDI and Productivity
This is mostly explained by the fact that foreign firms concertedly acquire more productive firms, and some firms perform better after foreign acquisition, i.e., they learn better.
Looptrace platform by Pakistan’s large exporter, Interloop, boosted the textile manufacturer’s productivity and was facilitated by the availability of quality services providers in upstream sectors, ranging from telecom, internet, or business services providers. But FDI has been elusive for Pakistan. Yet another learning platform that has shrunk in Pakistan.
Domestic firms that compete with multinationals do not gain from the presence of foreign competitors. Instead, there are ‘vertical spillovers’: more FDI in upstream services sectors boosts productivity of downstream firms. For example, the recent introduction of the
Trade and investment integration are crucial and largely untapped platforms for Pakistan’s productivity growth
How to Accelerate Productivity for Inclusive Growth
Three policy actions can help speed up productivity and spur economic growth in Pakistan:
- Promote FDI in efficiency-enhancing sectors. Start by making the Investment Policy of 2013 a law, replacing the highly protectionist Investment Act of 1976. This will reduce uncertainty, crucial to boosting investment.
- Promote exports actively. Automate duty drawbacks, so that exporters can access intermediates at world prices, just like their global competitors. Support skills upgrading of potential exporters, and help smaller firms connect with markets. Conduct impact evaluations on firms’ support interventions, to ensure public funds are used efficiently.
- Reduce import barriers. Barriers aimed at substituting imports end up substituting exports instead. Reduce duties on intermediates first. Further, to create the needed fiscal space, eliminate import duty exemptions for non-exporting firms.
Join the Conversation
Indeed, lack of global integration and consequential low productivity is the main cause of Pakistan's poor export performance. Unfortunately the current setup at the ministry of finance is not likely to take any initiative to rectify this.