Pakistan and the rest: A tale of dismal productivity growth, misallocation, and missing transformation

We leverage newly available datasets to study key factors which explain why Pakistan has seen limited transformation in recent decades. First, we show that one of the reasons for this is low productivity growth. Average labour productivity growth due to within sector improvements equals only 0.73% between 1990 - 2018. This is explained by decreasing capital-output ratio. In sharp contrast, factor inputs only explain 6.22% of variation in labour productivity in Pakistan. Second, while we show that the extent of misallocation across the economy has decreased over time, there is significant misallocation between the agriculture and the non-agriculture sectors. Finally, we explore the extent to which GVC linkages can facilitate the transformation process by decreasing misallocation and increasing productivity. Throughout the paper, we also highlight trends in other developing countries.