Pakistan Productivity Profile 1965-2005

By Dr. Hafiz Khalil Ahmad

This book is focused to point out sources of economic growth and estimation of total factor productivity (TFP) for the Pakistan economy, as a whole, as well as for its major sectors (agriculture, manufacturing, and services). For this purpose the study utilized three different techniques to obtain reliable estimates of TFP for Pakistan economy. These techniques are, growth accounting technique, index number technique and econometric technique. The study covers the period from 1965 to 2005. The empirical evidence indicates that traditional measures of TFP tend to overestimate, by ignoring variation in work hours, education and skills, as well as variation in capacity utilization resulting from business fluctuations. This study avoids pitfalls of earlier studies by improving upon reliable measures of factor inputs. This feature of the study makes it distinct from previous studies and enables it to provide reliable results. Hence, based upon such reliable results efficient economic policy may be formulated.

• Language: English
• Publisher: AuthorHouse UK
• Release date: Sep 15, 2011
• ISBN: 9781456793760

Dr. Hafiz Khalil Ahmad

Dr. Khalil Ahmad is currently working as Assistant Professor at Economic Department, University of the Punjab, Lahore, Pakistan. He holds Ph.D. in Economics from Punjab University. Over Twenty two year's teaching experience and 16 research articles published in HEC recognized National and Foreign journals are on his credit. In addition, he has already published two books on Macroeconomics. He has been teaching as well at Superior University Pakistan and at Hailey College of Commerce, Institute of Administrative Science and Institute of Education and Research, University of the Punjab Lahore. His writing style is very simple but comprehensive, convincing and appealing.

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PAKISTAN PRODUCTIVITY PROFILE

(1965-2005)

Dr. Hafiz Khalil Ahmad

IN THENAME OF ALLAH, THE MERCIFUL, THE MOST MERCIFUL

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© 2011 by Dr. Hafiz Khalil Ahmad. All rights reserved.

No part of this book may be reproduced, stored in a retrieval system, or transmitted by any means without the written permission of the author.

First published by AuthorHouse 09/09/2011

ISBN: 978-1-4567-9375-3 (sc)

ISBN: 978-1-4567-9376-0 (ebk)

Printed in the United States of America

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Contents

Abstract

Acknowledgement

Chapter 1

Introduction

Chapter 2

Economic Growth in Pakistan-An Overview

Chapter 3

Review of Literature

Chapter 4

Methodology and Data Description

Chapter 5

Estimation and Interpretation of Results

Chapter 6

Sources of Total Factor Productivity Growth

Appendix 6

Chapter 7

Conclusions and Policy Implications

References

To My Mother:

Fazal Bibi

Abstract

This book is focused to point out sources of economic growth and estimation of total factor productivity (TFP) for the Pakistan economy, as a whole, as well as for its major sectors (agriculture, manufacturing, and services). For this purpose the study utilized three different techniques to obtain reliable estimates of TFP for Pakistan economy. These techniques are, growth accounting technique, index number technique and econometric technique. The study covers the period from 1965 to 2005. The empirical evidence indicates that traditional measures of TFP tend to overestimate, by ignoring variation in work hours, education and skills, as well as variation in capacity utilization resulting from business fluctuations. This study avoids pitfalls of earlier studies by improving upon reliable measures of factor inputs. This feature of the study makes it distinct from previous studies and enables it to provide reliable results. Hence, based upon such reliable results efficient economic policy may be formulated.

In the present study, dual estimates of TFP were obtained. The first set of estimates is based on traditional measure of factor inputs, as done in limited earlier studies. This approach tends to underestimate factor inputs and overestimate TFP. This is named unadjusted TFP in this study. The second set of TFP estimates is based on improved measure of factor inputs. In this method, labour input is measured in number of work hours and adjusted for improvement in its quality, as a result of increased education, training and skill. Besides, capital input is adjusted for variation in capacity utilization. The estimated TFP using this method is named adjusted TFP.

The study utilized all the three major available techniques for this purpose. A comparison of the findings obtained through different techniques provided improved results. It is learnt that traditional measure of TFP based on traditional measure of inputs substantially overestimates TFP due to underestimating inputs.

The results of the study indicated that annual average growth rates of adjusted and unadjusted TFP for the overall economy of Pakistan remained at 0.72 percent and 1.64 percent, respectively during 1965-2005. It shows an overestimation of 128 percent of TFP over its true figures. The similar rates for agriculture sector were 0.28 percent and 1.22 percent showing overestimation of 336 percent. For the manufacturing sector, adjusted and unadjusted TFP growth rates were 1.42 percent and 2.34 percent, respectively. Overestimation in this case is 65 percent. The comparable figures of adjusted and unadjusted TFP in the services sector were 1.44 percent and 1.49 percent, respectively. Overestimation in this case was very low and negligible.

The growth analysis indicates that domestic investment, private credit, expenditure on education, and openness of trade were the major contributors of

TFP growth, at the aggregate level. Major sources of agriculture TFP growth were found to be education, cultivated area, fertilizer, and agriculture credit. In the manufacturing sector, imports of capital goods, especially, import of machinery and transportation equipment, and unit value index of manufactured exports were found to be the main sources of TFP growth. Finally, schooling, remittances, public development expenditures, and foreign direct investment (FDI) were found to be major contributors of TFP growth in the services sector. No study so far has pointed out these sources of TFP growth. It is the first study which has contributed this in the literature pertaining to Pakistan.

On the basis of above empirical findings it may be proposed that an economic policy focused on promotion of domestic investment, increase in private credit, openness of international trade, and raising expenditure on education could further enhance aggregate TFP growth in the economy.

Along with the above it is important to note that agriculture sector must be given priority in public policies as this sector has shown lowest TFP figures as compared with other sectors, which shows its neglect. Keeping in view the sources of agriculture productivity growth, policies should be focused to improve skill, training and education level through diffusion of technical knowledge; bringing more area under cultivation; ensuring on time, adequate supply of fertilizer at affordable prices for farmers; and providing needed credit to farmers. By doing so agriculture output could be enhanced. Pakistan is a developing country. It depends upon imported inputs including machinery for industrial growth, therefore, import of capital goods in general, and imports of machinery and transport equipment in particular, must continue as per demand for acceleration of TFP growth in the manufacturing sector. Such imports are building industrial base in Pakistan. A liberal policy for such imports must continue.

Finally, the study recommends that expenditure on education be sufficiently raised, development expenditure be enhanced, domestic investment be promoted, international trade should be freed, and private credit should be made readily available on affordable terms, to accelerate TFP growth in the services sector.

All above empirical evidences and policy guideline provide a sound basis to accelerate growth in Pakistan which has not been presented by any such comprehensive study in Pakistan.

Acknowledgement

I express my profound thanks to Almighty Allah who granted me courage, determination and potential to undertake and accomplish this valuable piece of research work. As a matter of fact, it was not possible for me to perform this difficult task without His blessings and help. So I am indebted to Him from the core of my heart.

My parents deserve special thanks for their unprecedented efforts they made in bringing me up. They faced all the hardships in this regard with a smiling face and went on praying for me. I pray Almighty Allah to mercy them and sustain their shadow over my head for ever.

I feel great pleasure in extending my sincere gratitude to Professor Dr. Muhammad Aslam Chaudhary, Ex-Chairman, Department of Economics, University of the Punjab, Lahore for his scholarly and adept advice for improving the stuff contained in this work. He exercised great patience in examining and improving the draft of this book. It is due to his kind supervision that this study took the present form. I, once again, express my heartfelt gratitude for him and pray for his health and services for the nation as well as for the noble profession.

I am also thankful to Prof. Dr. Abdul Rauf Butt, Ex-Dean Faculty of Arts and Chairman Department of Economics, University of the Punjab for his valuable suggestions and encouragement. I am also indebted to Dr. Munir A. S. Chaudhary of the University of the Punjab with whom I frequently discussed econometric issues involved in the present study. He was very kind to listen and helped me in this regard. His academic contribution will be remembered forever. I am also indebted to the library staff at the Department of Economics, Mr. Lutful Mannan and Miss. Shahida Bano, who helped me by providing the required books, research journals and official publications. Last, but not the least Prof. Khaild Paracha of Government College, Township Lahore, read the draft and significantly improved the draft of this book. His valuable suggestions greatly contributed to the improvement of the stuff contained in this study. I express my special acknowledgement for him. For all the good attributes of this work the credit goes to the above mentioned personalities. However, for any lacuna, if any, the responsibility solely rests on me.

Dr. Hafiz Khalil Ahmad

Chapter 1

Introduction

1.1 Statement of the Problem

Achievement of sustained output growth has become one of the fundamental objectives of development economics and macroeconomic policy. Researchers and policy makers think that it is necessary, though may not be sufficient, for raising standards of living. Thus, study of the determinants of output growth has become preoccupation of many economists [Han (2003)].

Sustained output growth is considered necessary for improving living standards. It is even more important for developing economies since they are suffering from a variety of economic problems1. In Pakistan, 23.9 percent of population is living below the absolute poverty line.2 More than 6 percent of the labour force remains unemployed.3 Fiscal deficit as percentage of gross domestic product (GDP) has been very high in the past and is still higher than 4 percent of GDP.4 These are very few of the many problems faced by Pakistan. For a country faced with the above-mentioned problems, the importance of sustained growth can hardly be exaggerated. In view of the increased importance of growth, many economists have been preoccupied with the study of determinants of income growth [see for example Han (2003), Bajracharya (2002), Cororaton (2002), Denison (1962), and Fu (2002) etc.). Although, literature on the subject matter is very limited pertaining to Pakistan but still recently it drew attention of Economists (Wizarat 2004).

One of the major sources of growth is total factor productivity (TFP). It measures the impact of economic and technical efficiency with which factor inputs are put together to produce output. A higher sustained output growth can be achieved by either a faster growth of factors of production or by improved way in which these factors are put together in the production process (i.e. by TFP growth). According to encyclopedia Vikipedia (2009) total-factor productivity (TFP) is a variable which accounts for effects in total output not caused by inputs5 The developing countries, in general, have limited input resources (except for unskilled labour) and hence need optimal use of these resources. The growth of an economy depends on the rate of expansion of its productive resources and TFP growth. The low productivity growth or its negative trend has been a commonly observed feature of most of the developing countries (Pradhan and Barik 1998). Achievement of higher productivity to accelerate economic growth has become an imperative for these countries.

In Pakistan, like other developing countries, the expansion of employable resources is constrained by many obstacles and limits such as, low rate of domestic savings6, high population growth of 1.83 percent7, low literacy rate of 54 percent8, high budget deficits as 4.3 percent of GNP9 and high trade account deficits of 7419 millions U.S dollars10 etc. The only alternative to achieve a higher