How Can We Help Pakistan Develop?
Nayyer Ali, MD

Dumb question, eh? But actually, it can be a very revealing one when looked at in a fundamental way. I don’t subscribe to the exploitation school of world history, where the prosperity of the West is attributed to the exploitation of the rest. Rather, I think the answers to these issues are far more mundane and lead to useful insights into what should Pakistan’s economic policies be, and how should we here in the United States work to help Pakistan develop.

To understand why Pakistan is poor, we have to understand what makes modern society rich. The exploitation theory would suggest that Pakistan needs to colonize its neighbors in order to achieve development. In reality, colonizing and enslaving others is not the route to development, and was not the route taken by the West. The argument should actually be the opposite. Colonization occurred because capitalism and development gave Europe the military power to colonize. The great worldwide wave of colonization occurred between 1850 and 1900, well after Western Europe had entered into and been transformed by the industrial revolution. In fact, the two largest economies in 1900, America and Germany, had no colonies to boast of.

So what are the essential differences that make America rich and Pakistan poor? There are basically two factors that account for the disparity: the number of people who work, and the productivity of each individual worker. The labor force varies sharply from country to country. Rather than looking at hard to compare statistics such as the unemployment rate, a truer picture emerges when we ask what percentage of the total population is working. At the high end, Singapore employs 57% of its population. On the low end, Iran employs only 26%. The United States is near the top (#12) at 51%, but Pakistan is near the absolute bottom at third from last with 28% of the population employed. If Pakistan had the employment structure of the United States, its per capita income would almost double simply due to a higher number of people working. This makes sense; if a household has two earners instead of one, the average “income” of the household members would be doubled.

Why does Pakistan employ so few of its people? A big reason is that a massive fraction of the population comprises children. In Pakistan, 40% of the population is under 15 years of age. Even if they did work, their productivity is the very low output of an unskilled and unschooled worker. Thrusting our children into the labor force is not the answer to this, but it does point out that a very rapid population growth has created a country with one of the highest dependency ratios (proportion non-workers to workers) in the world. This is a major factor in the current state of low economic output.

The other major reason why so few in Pakistan work is that wage earning is denied to females. Our cultural bias against women earning money has created a work force almost devoid of women. Only 15% of the work force is female in Pakistan, compared with 45 % in the United States and Britain. If we want to increase Pakistan’s economic output, then encouraging female work is an obvious approach. If that is not culturally acceptable, then we should realize the price we are choosing to pay to live that way.

The second factor is productivity. Productivity is the actual amount of goods and services produced by a worker. The average wage paid in an economy is going to be roughly equal to the average productivity of the workers in that economy. In highly productive economies, average wage is very high, while in low productivity economies, the average wage is very low. This is why an engineer in Pakistan is paid so much more if he moved to California, even though he has not improved himself in any real way. It is also why even though Americans are far richer than Pakistanis, they are unable to afford domestic servants that an average middle class Pakistani can.

Worker productivity is determined by three things: the skills and training of the worker, the amount of tools (capital) the worker has to use, and the efficiency of the production methods (a concept called total factor productivity). The first item, skills and training, is just a fancy way of pointing out the importance of education. In America, 25% of the adults have a college degree, and among young adults that fraction is even higher. This represents an enormous amount of human capital. Investments in literacy, primary and secondary education, and universities are guaranteed to return many times to the country. The United States, at both local and national government level, strongly encourages and supports widespread advanced education. America’s universities are the best in the world. As a country, Pakistan must invest heavily in education. I would like to see our current spending triple as a share of the economy.

The amount of capital per worker is constantly being increased in any functioning economy. This is the tools and factories that are available. An American farmer with a tractor is going to be far more productive than a Pakistani without one, even if they both work just as hard. Capital expansion requires investment, which requires savings. Pakistan has very low rates of investment and savings even for a country of its size and stage of development. We must push the government to promote policies that improve that, and also allow foreign capital to invest easily.

Finally, the efficiency of the workforce is vitally important. The rapid growth of the American economy in the last 5 years has been almost entirely due to unexpected gains in efficiency, mostly related to information technology and the Internet’s impact. A simple example of how important efficiency is will suffice. Imagine two car factories with identical workforces and equipment. In each, every individual autoworker gathers together the parts and makes his own car from start to finish. Suddenly, one of the factory owners gets a flash of insight. He sees that if he rearranges the work into an “assembly line” where the car moves down a track as each worker adds his assigned piece to the car, he can increase his output ten times for no added cost in labor. This insight was actually Henry Ford’s, and is probably the greatest business invention of the 20th century.

The quickest way to boost efficiency in Pakistan’s economy is through vigorous competition. The best way to ensure that there is real competition is by promoting as much free trade with the rest of the world as possible. Free trade is a transmission belt that injects outside systems and standards into a backward economy.

Pakistan does not have to be poor. It can be just as developed as any nation in the world. Poverty is not the fault of the average Pakistani, and it is not in our genes. But to escape the Third World and enter the First, Pakistan must understand what it needs to do and start doing it.