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This paper reviews Pakistan’s productivity performance over the last 35 years (1980–2015) and identifies factors that help explain the declining trend in labor productivity and total factor productivity (TFP),both of which could have served as major drivers of productivity growth – as happened in East Asia and more recently in India. A key finding is that the maximum TFP gains and their contribution to economic growth are realized during periods of high-output growth. The lack of sustained growth and low and declining levels of investment appear to be the most important causes of the low contribution of TFP to productivity growth, which has now reached levels that should be of major concern to policymakers vis-a-vis Pakistan’s growth prospects. Using the endogenous growth model, we examine the contribution of physical capital, human capital and TFP to labor productivity. The results suggest that, over these35 years, the contribution of physical capital and education remains modest and there has been a declining trend in TFP growth. This shows that Pakistan’s economy has not taken full advantage of the favorable technological developments and rapid globalization of the period. We also question the view expressed in recent studies that Pakistan’s growth has been driven primarily by factor inputs, namely labor and capital, and not by TFP growth. The paper argues to the contrary that it is the lack of investment in and growth of the stock of capital embodying the most recent knowledge and technology that has inhibited TFP growth post-1990. Finally, there is an urgent need for further research to understand the dynamics of growth in services and to raise TFP in this sector as India has done post-1990.

Pakistan’s Productivity Performance and TFP Trends, 1980–2015: Cause for Real Concern