Growth & Unemployment in Historical Perspective

Unemployment is directly linked with poverty. Higher levels of unemployment/ underemployment contribute to higher levels of poverty. Furthermore, higher levels of poverty compel the children and women of poor families to join the labour force, adding to the growing labour supply. Given the demand for labour generated by the level economic activity, the excess supply labour increases unemployment/underemployment. Given the bi-directional nature of relationship between unemployment and poverty, it is, therefore, essential to review the trends in unemployment over the last three and a half decades. Furthermore, the level of economic activity is likely to have bearings on employment opportunities, thereby affecting the levels of poverty as well. Thus, a review of economic activity along with the trends in employment is essential for a meaningful analysis of the subject matter.

Like in many developing countries, the employment situation in Pakistan has worsened in recent years. The employment generation capacity of the economy (2.5 percent p.a.) has been significantly lower than the increase in the rate of population growth (3.1 percent p.a.). Furthermore, during the last three decades, the real GDP has grown at an average rate of 6.0 percent p.a, while the employment during the same period has grown at an average rate of 2.5 percent p.a. (this gives on employment elasticity of 0.42). The first half of the 1990s (1990-91 to 1994-95) has witnessed a marked slowdown in the economic activities. The real GDP has grown at an average rate of 4.8 percent p.a. but population and labour force continued to grow at an average rate of 3.0 percent p.a. during the first half of the  1990s. Consequently, the economy’s capacity to generate employment must have been reduced even further which is clearly evident from the current worsening unemployment situation in the country. In sizing up the implications of high population and labour force growth on the one hand and the level of economic activity on the other, one needs to view the developments in historical perspective.

Pakistan’s economic performance during the last three decades has been lopsided, evoking considerable approbation on the one hand, and controversy on the other. Its growth performance during the 1960s was eulogised rather uncritically and acclaimed as a paradigm of success in developing countries. Real GDP grew at an average annual rate of 6.8 percent with major advances taking place in the industrial and agricultural sector. The high growth rate was made possible by deliberately pursuing a set of policy measures which encouraged private industrial investment along with massive inflow of foreign aid. The overall investment rate rising from 14.1 percent in 1960-61, reached to an all-time high of 22.8 percent in 1964-65 but averaged at 17.6 percent during the ‘60s. The performance of agriculture and manufacturing during the 1960s, was equally impressive, growing at the annual average rates of 5.1 percent and 9.9 percent respectively [See Table 3]. Labour force, on the other hand, grew at a moderate rate of around 2.0 percent p.a. during the 1960s. Thus, coupled with low inflation rate (3.8 percent) and high growth rates in major labour absorbing sectors (agriculture and manufacturing absorbing about 73 percent labour force) on the one hand and moderate growth of labour force on the other, the (open) unemployment rate remained at a very low level (1.43 percent) during the ‘60s [See Table 3].

By the end of the decade, a number of problems began to emerge which indicated that growth was not as firmly established as had been hoped. The overall investment declined from 22.8 percent in 1964-65 to 15.8 percent in 1969-70. The employment situation started deteriorating with the decline in investment rate and the slowing down of the growth of non-agricultural sector. The political turmoil in the late 1960s also adversely affected the industrial activity which eventually contributed to the rise in unemployment, especially the educated youth.

The 1970s witnessed a marked slowdown in economic activity owing to the combined effects of domestic economic policies and external economic environment. The hopes raised by the impressive performance of the economy during the 1960s were frustrated by the experience of the early 1970s. The disturbed political situation in the 1970s leading to the separation of eastern part of the country (now Bangladesh) in 1971, caused a major setback to the economy. The reforms introduced by the government during 1972-77 added a major element of uncertainty in economic relations which could not be removed by subsequent assurances. Nationalisation of a significant segment of the industry and of the entire financial system, including banking and life insurance, shattered investors’ confidence. Furthermore, the adverse weather conditions severely affected agricultural output in the mid-1970s. The external factors also played a major role slowing down the economic activity in the first half of the 1970s. The five-fold rise in oil prices along with a 56.7 percent devaluation of currency in May 1972 accelerated inflation to the double-digit level.

The combined effects of both the domestic and external factors have been far-reaching. The growth rates of agriculture and manufacturing sharply decelerated to 2.4 percent and 5.5 percent respectively during the 1970s. Real GDP grew at an average rate of 4.8 percent p.a. during the 1970s [see Table 3J. The drastic slowdown in economic activity, particularly in the agriculture and manufacturing — the two largest manpower absorbing sectors in the country — would have severely worsened the unemployment situation. The emergence of the Middle East boom and sizable migration however, changed the picture dramatically in the late 1970s and early 1980s. Two million workforce emigrated to the oil-rich countries accounting for roughly 25 percent of the incremental labour force. Despite slowing down of the economy the unemployment problem remained manageable during the 1970s — the average unemployment rate has been 2.42 percent [see Table 3].

Table 3

GROWTH AND UNEMPLOYMENT IN HISTORICAL PERSPECTIVE (%)

 Source: Pakistan Economic Survey 1994-95.

With the end of the migration boom in the early 1980s there was again a growing concern with regard to the employment situation. This period, however, witnessed considerable improvement in the demand for labour in the domestic market. The performance of Pakistan’s economy during the 1980s was equally impressive and broad-based even in the face of a number of adverse internal factors. The growth momentum which was lost in the 1970s bounced back in the 1980s. The real GDP grew at an average rate of 6.1 percent supported by equally impressive growth in agriculture (4.1 percent) and manufacturing (8.2 percent).

As a result of a high rate of economic growth a larger part of the edition to the labour force was absorbed. These positive developments were offset by a large-than-expected growth rate of population (3.l percent against the Plan assumption of 2.9 percent). The 1980s ended with an average unemployment rate of 3.51 percent.

Continuing high growth rate of the labour force and high rates of unemployment, especially amongst the youth and fresh graduates, have witnessed the emergence of unemployment as a major issue in the late 1980s.

The first half of the 1990s (1990-91-1994-95) witnessed a marked slowdown in economic activity. Real GDP grew at an average rate of 4.8 percent p.a. helped by 3.4 percent growth in agriculture and 5.9 percent growth in manufacturing. A significant slowdown was experienced in the manufacturing sector whose growth rate of 5.9 percent p.a. fared badly with 8.2 percent registered during the 1980s. Several factors have operated in league to constrain the growth in overall economic activity in general and manufacturing sector in particular. These include the disturbed law and order situation in major ‘growth poles’ of the country, political uncertainty, setback to cotton crop, emergence of infrastructure bottlenecks in power, transport, and other sectors, and insufficient industrial investment. As a result of the slowdown, the employment situation worsened. As shown in Table 3, approximately 2.32 million or 6.7 percent labour force were unemployed in 1993-94 and 2.53 million or 7.1  percent in 1994-95.

The above analysis suggests that the (open) unemployment rate was as high as 7.1 percent in 1994-95. The rate of disguised or underemployment (working less than 35 hours per week) is considerably higher than the (open) unemployment rate. In 1987-88 when (open) unemployment rate was 3.1 percent the underemployment rate was as high as 11.0 percent. The recent slowdown has already raised the (open) unemployment rate to 7.1 percent, therefore, the condition of underemployment must have worsened even further.

As will be shown later, the unemployment situation is likely to worsen during the next two years. Special efforts are needed to arrest the deteriorating unemployment situation that include, among others, a growth rate of real GDP to the tune of 6.5-7.0 percent per annum and investment rate in the range of 22-24 percent on a sustained basis.

It is instructive to see how the structure of employment, has changed over the last three and a half decades. This exercise is important because this will identify the sector where job opportunities can be created to alleviate poverty. In 1994-95, the total labour force was estimated to be approximately 35.7 million — 1 million higher than the last year. The total labour force was 16.4 million in 1963-64 but more than doubled during the last 35 years — rising at an average rate of 2.5 percent p.a. Agriculture, the single largest contributor to the GDP remained the single largest employer of Pakistani workforce. It used to employ about 60.5 percent of workforce in 1963-64 but its share has gradually declined to 47.5 percent in 1994-95. As economy develops over time, the share of agriculture in GDP and employment declines while that of manufacturing increases. This has been partly true in the case of Pakistan.

As shown in Table 4, the shares of manufacturing and mining in absorbing manpower, instead of rising with a corresponding fall in agriculture, have declined from 13.6 percent in 1963-64 to 10.9 in 1994-95. As an employer of workforce, this sector was as its peak during the 1960s but with the passage of time, its share declined to 13.5 percent during the 1980s. It further declined to 10.9 percent by 1994-95. For a labour-surplus economy like Pakistan, the declining share of employment in this sector is a matter of serious concern for the policymakers. Interestingly, the share of manufacturing in the GDP has increased from 12.0 percent in 1960-61 to almost 18.0 percent in 1994-95, the share of labour engaged in this sector, however, has declined. The growth of output and employment in manufacturing sector clearly reflects the strong bias in favour of capital-intensive technology. The government policies have played an important role in influencing the pace, structure and labour-absorptive capacity of the manufacturing sector. This has been done mainly through the use of fiscal, monetary, exchange rate and trade policies.

Another interesting feature is to note that until 1989-90 the manufacturing sector has been the second largest employer of Pakistani labour force, employing about 12.8 percent workforce. But the recent slowdown in manufacturing activity from an average of 8.2 percent in the 1980s to 5.9 percent in the first half of the 1990s has adversely affected its labour-absorptive capacity and placed it behind the general trade sector. By now, the trade sector employs 13.3 percent labour force as against only 9.0 percent in 1963-64.

The above analysis suggests that a 13 percent decline in the share of agriculture and 2.7 percent in manufacturing have been compensated by the rise in the shares of other sectors with major improvements taking place in the general trade sector (5.5 percent) construction sector (4.9 percent) and transport sector (3.5 percent).

TABLE  4

GROWTH AND UNEMPLOYMENT IN HISTORICAL PERSPECTIVE

 Source: Pakistan Economic Survey 1994-95.

Source: Poverty Alleviation in Pakistan: Present Scenario and Future Strategy, Mohibul Haq Sahibzada. Republished with permission.