Macro Bite # 5

5 min read

Keeping up with the Pakistani tradition of U-turns, Macro Pakistani has decided to limit its emails to twice a week. This tough decision was taken in consultation with its followers and is aimed at making the bite-sized pieces on Pakistan’s economy even more digestible. The feedback received in the last 10 days has been great and we look forward to hearing more from you in the future as we continue to provide you the real story behind the breaking news.

What happened to productivity across sectors over the years?

Before digging into a sectoral analysis, let’s first understand what the different sectors in Pakistan are:

Agriculture sector includes crops, livestock, forestry and fishing.

Industrial sector includes mining, manufacturing, utilities and construction.

Services sector includes retail/wholesale trade, transport/communications, finance, housing, government and other private services.

After all my talk of lack of investment, if you go back to the last post and look at the investment to GDP ratios, you will notice that the number had started to increase again from 14.7% in 2014 to 17.4% in 2018. But the bulk of this increase came from foreign and not domestic savings and our productivity started to drop.

Pakistan has been experiencing growing pains

Source: Pakistan Economic Survey 2018-19; PM Analysis

For the Investment to GDP ratio to rise during the previous government’s time, you would expect investment to grow faster than the rest of the economy. And that’s exactly what had been happening with investment growing at roughly 10% since 2015 while GDP grew at a slightly less 9%. What is interesting to note is the difference in growth across various sectors. Each time a sector is growing slower than the overall GDP CAGR of 9%, understand that its contribution to the economy is falling.

The slowest growing sectors were also the largest sectors of Agriculture, Manufacturing, Retail/Wholesale Trade and Transport that grew between 6-8%. Government and other private services, which make up a smaller portion of the economy, drove most growth in GDP. The utilities sector saw the fastest growing investment at 20% to build capacity for electricity generation, while the construction sector saw a sharp decline due to stricter tax regime.

Let’s get real again

All the growth numbers mentioned above were nominal and not real. So let’s dive into the real world again and specifically talk about productivity. A recent article on Business Recorder explains what productivity is and if that is too long, watch this video by U.S. Bureau of Labor Statistics.

Note: Real output at 2005-06 prices; Source: Pakistan Economic Survey 2018-19; PM Analysis

If you compare real output per worker between 2014 and 2018, you will see that it has hardly changed. The way to read the graph above is if the circle is on the red dotted line, there hasn’t been much of a change in workers’ productivity. If it has moved up, like in the case of construction, productivity has improved. If it has moved down, like in the case of utilities, productivity has become worse. The size of the bubble shows how many workers are employed in each sector. In 2018, an average worker produced an annual output of PKR 200,000 so if the circle is above the black dotted line, that sector is more productive than the others. Overall, the real value add of an average worker in Pakistan barely changed by 10% in 5 years.

You reap what you sow

Source: World Development Indicators

This trend of stagnant labor productivity is not new. In agriculture, for example, value add per worker has been the same for the last 25 years! During this time, both India and China, which used to produce half as many agricultural goods per worker as Pakistan in 1995, improved their productivity rapidly. China now produces more than twice as many agricultural goods as Pakistan, while India has caught up with us over the years.

I hope all of you can now predict how prices for agricultural products should have changed, given that real output per worker did not increase.

Source: Pakistan Economic Survey 2018-19

Despite input prices for fertilizers, gas and motor fuels for transportation remaining roughly the same since 2012, prices for the output of agriculture products have steadily increased year on year. Because demand for agricultural goods has increased with the population on a steady rise, to produce more goods at the same level of productivity you had in 1995, you will have to increase prices.

Poor Dad Poor Son

When talking about productivity, agriculture is the most important sector as it employs the most workers especially in rural areas. While agriculture contributes roughly just over 20% to GDP, it contributes almost 40% to the workforce. Meaning workers in this sector are half as productive as other workers.

Source: Labor Force Survey 2017-18; Household Integrated Economic Survey 2018-19

Out of the 62 million employed workers in Pakistan, 41 million or 66% belong to rural households. If we want to meaningfully impact productivity in the country, this rural base would need to be addressed. It is important to note that rural areas provide more workers per household as well (1.92 per HH vs. urban average of 1.75), which means their share in the employed labor force is higher than their share in the population.

Read the article below to understand more about the breakup of income and understand the significance of agriculture in Pakistan – 26% of all income in rural communities comes from crops and livestock. Given the significance of rural workers in Pakistan’s workforce and their reliance on agrarian incomes, agriculture will be the first sector we will dive into next time.

Read the full article in the link below

What happened to productivity across sectors in Pakistan over the years?

 

Deep dive into the structural issues facing Pakistan with a focus on productivity as part of the Macro Pakistani series on the economy.

Read more

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