(Thread on #Growth & #Productivity: 1/n) Everyone wants growth but it must come from increasing productivity for it to be sustainable. But how do we increase productivity? Unfortunately, we dont hav definite answers but there r some low hanging fruits for countries like #Pakistan
(2/n) Most policy proposal center around spending money on expensive projects until govts' can no longer pay for these. But countries have also been able to increase their productivity by doing something less expensive i.e. correcting for 'misallocation of resources.'
(3/n) But wat is 'misallocation of resources'? This is wen countries do not allocate their resources to their most efficient use. For example, imagine u forcing your daughter to study medicine when she is good at mathematics. This is 'misallocation' of your daughter's talent.
(4/n) A recent paper by Restuccia and Rogerson (2017) notes, "many studies and anecdotes detail how corruption, regulation, or direct government involvement distort the allocation of resources from their most efficient use, especially in poorer economies." pubs.aeaweb.org/doi/pdf/10.125… 
(5/n) Another study shows how Mexico increased its productivity growth by improving allocation of resources. Meza et al (2019) shows that 41% of the increase in Mexico's productivity between 2003 and 2012 was because of this: sciencedirect.com/science/articl…
(6/n) Restuccia and Rogerson (2017) provide other examples. For example, Chen and Irrazabal (2015) show tht decrease in misallocation was an important part of Chile’s decade-long period of growth following debt crisis of early 80s. See attachment for more: pubs.aeaweb.org/doi/pdf/10.125…
(7/n) If u hav made it this far then u must be wondering what r some main causes for misallocation and what can govts do about it? Restuccia and Rogerson (2017) mentions few: (bad) regulation; property rights; trade and competition; & financial and informational frictions.
(8/n) Consider sugar industry. Through a combination of support price, provincial sugar acts and import restrictions, subsequent govts hav created a situation where more resources (i.e. land, labour & financial) r being used to produce sugar.
(9/n) Had govt regulations not created such distortions, these resources wud hav been used for more productive activities thus increasing overall productivity. This is true in many other industries. See this article for more examples: dawn.com/news/1458827
(10/n) Likewise, the effect of trade on increasing productivity due to improvement in allocation of resources is also well studied. See the summary from Restuccia and Rogerson (2017) attached here.
(11/n) Ad-hoc taxes is another reason for misallocation. I am sure the reader is already well aware how a complicated tax system in Pakistan has crippled the economy by providing opportunities for rent seeking. A drastic simplification of tax laws is the only way forward here.
(12/n) Finally, market failures can also lead to misallocation: e.g. info. asymmetries can lead to scenarios where even good projects cannot get financing bec of various reasons. This is where govt must step in. Here is a good step by govt in this regard: ifcextapps.ifc.org/IFCExt/Pressro…
(n/n) I want to conclude by referring to the article I wrote earlier. Ultimately, productivity reforms will have to be implemented by us if we r to go anywhere with our economy. I hope all socio-economic actors in Pakistan can rise to this challenge soon: dawn.com/news/1507479
