The report looks at the reasons for why Pakistan is stuck with low per-capita GDP growth over the past two decades, and explore ways and means to put the country on a path of higher and sustained economic growth.
By Staff Reporter
ISLAMABAD: Distortions caused by misallocation of talent and resources is why Pakistan is stuck in a cycle of repeated external crises, a new World Bank report has said.
Titled “From Swimming in Sand to High and Sustainable Growth: A Roadmap to Reduce Distortions in the Allocation of Resources and Talent in the Pakistani Economy”, the report was launched here Friday.
Technically a World Bank country economic memorandum for Pakistan, the report says Pakistan’s economy can grow sustainably only if the country introduces productivity enhancing reforms that facilitate a better allocation of resources into more dynamic activities, and of talent to more productive uses.
The report finds that the country’s inability to allocate all its talent and resources to the most productive uses has stunted economic growth. It presents evidence of systematic productivity stagnation across firms and farms.
In manufacturing and services, most of the productivity stagnation is related to firms losing efficiency over time. The report also shows a systematic decline in agricultural productivity, as well as a strong link between elevated temperatures and rainfall variations and productivity.
The report presents a roadmap to reduce distortions in the economy that are currently acting as a deterrent to productivity growth. Critical reforms include: harmonizing direct taxes across sectors, so that more resources flow into dynamic tradable sectors like manufacturing and tradable services, instead of real estate and non-tradables; reduce the anti-export bias of trade policy by lowering import duties and reversing the anti-diversification bias of export incentives.
The report goes on to say that productivity is further affected by the fact that Pakistan does not tap into all of its talent.
A press release issued by the World Bank on the occasion of the report’s release quotes World Bank Country Director for Pakistan Najy Benhassine as saying Pakistan’s female labour force is underused because of constraints to women’s participation in the labour force.
She said: “With only 22 percent of women employed in Pakistan, women’s labour force participation is among the lowest in the world. By closing the female employment gap relative to its peers, Pakistan can accrue GDP gains of up to 23 percent.
“Successful implementation of policies to address the demand- and supply-side barriers to female labour force participation, can create about 7.3 million new jobs for women.”
World Bank senior economist and co-author of the report Gonzalo Varela believes Pakistan’s economy is at a critical stage.
“It could be a turning point where long-term structural imbalances that have prevented sustainable growth for too long ought to be addressed urgently”, he said. “The report puts forward a series of policy recommendations to achieve this in a sequenced way.
“First, reduce distortions that misallocate resources and talent. Second, support growth of firms through smart interventions, rather than through blanket subsidies.
“Third, create a positive, dynamic loop between evidence and policymaking, strengthening feasibility analysis of publicly funded projects or programs.”
The report emphasises that Pakistan can maximize positive impact on businesses and productivity across the board by reducing regulatory complexity; harmonizing the general sales tax (GST) across provinces; reforming investment laws to attract more foreign direct investment; and upgrading insolvency laws to reduce the costs of liquidating non-viable firms.
Among the top and medium-term recommendations of the report are measures like providing safe and affordable mobility especially for women; boosting digital connectivity and digitally enabled jobs; demonstrating the benefits of increased female labour force participation to positively shift entrenched norms; developing skills; and reducing sectoral gender bias.
Economist and co-author of the report Zehra Aslam said firms in Pakistan struggle to grow large as they grow old.
“A young formal firm in Pakistan that has been in operation for 10 to 15 years is about the same size as a firm that has been in operation for more than 40 years”, she said.
“Similarly, an average Pakistani exporter is less than half the size of one in Bangladesh. This shows a lack of dynamism amongst Pakistani firms, compared to better functioning markets, where firms either grow or exit”.
According to the report’s citation, it focuses on growth in Pakistan, and on key aspects of its proximate determinants: productivity, capital, and talent accumulation.
“Productivity is crucial in accounting for differences in standards of living across countries and time. In addition, and particularly at the level of development of Pakistan, factor accumulation, investment, and human capital, also matters.
“Specific and policy relevant questions around these broad themes are this report’s centre of attention. The underlying framework of analysis and orientation of public policy recommendations is what is known as the ‘ABC’ of growth.
“This ‘ABC’ implies improving allocative efficiency of resources and talent, encouraging business-to-business connections and spillovers, and strengthening firms’ capabilities. Public policies oriented to create an enabling environment around these three pillars will be powerful in boosting sustainable growth.
“However, the efficient allocation of talent and resources, and the business-to business interactions leading to spillovers and the conditions to upgrade capabilities, are limited by economic distortions (or market failures) that inhibit the growth process, sometimes making it as difficult as swimming in sand.”
The report may be downloaded or read in full below.
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