Pakistan: Impact of Labor Force Expansion on Savings, Investments and GDP Growth
Pakistan's labor force expansion is the 3rd biggest in the world after India and Nigeria, according to UN World Population Prospects 2017. Rising working age population and growing workforce participation of both men and women in developing nations like Pakistan will boost domestic savings and investment, according to Global Development Horizons (GDH) report. Escaping the low savings low investment trap will help accelerate the lagging GDP growth rate in Pakistan, as will increased foreign investment such as the Chinese investment in China-Pakistan Economic Corridor.
Labor Force Expansion:
The latest Census 2017 results show that Pakistan's population growth rate has declined to 2.34% between 1998 and 2017, down from 2.61% (from 1981 to 1998) and 3.4% (from 1961-81). Life expectancy has increased from about 62 years in 1998 to 66.5 years now. The total fertility rate has declined from 4.6 children per woman in 1998 to to 2.62 children per woman in 2017. At the same time, Pakistan's labor force is growing at a rate of 3.6% a year, faster than the 2.34% overall population growth. Given Pakistan's human capital growth in recent years, it is a welcome situation that is expected to produce significant demographic dividend for the country.
Pakistan's working age population in 15-64 years age bracket is expected to increase by 27.5 million people to 147.1 million in 10 years, according to Bloomberg News' analysis of data reported in UN World Population Prospects 2017. Pakistan's increase of 27.5 million is the third largest after India's 115.9 million and Nigeria's 34.2 million increase in working age population of 15-64 years old. China's working age population in 15-64 years age group will decline by 21 million in the next 10 years.
Pakistan's labor force growth will continue by adding 80 million workers n 30 years' time, third only to India's 234 million and Nigeria's 130 million additional workers in 15-64 years age group. China's work force will decline by 171 million workers in this time period.
Savings, Investment and GDP Growth:
Currently, about a third of Pakistan's population is below the age of 15, dependent on working age adults. This high ratio of dependent population results in low savings, low investment and consequent slower economic growth and sub-par socio-economic development.
Pakistan's national savings was about 10% of GDP in 1960s. It increased to above 15% in 2000s in Musharraf years, but declined afterwards. It is well below the savings rates in South Asia region with India's 30%, Bangladesh's 28%, and Sri Lanka's 24.5%.
Higher levels of inequality in India, Bangladesh and Sri Lanka account at least partially for their higher savings rates than Pakistan's because people in higher income groups tend to save more of what they earn. But the other probably more important reason for Pakistan's lower savings rate is the larger percentage of children under the age of 15 who do not work and depend on their parents' incomes.
Summary:
Pakistan's labor force growth is forecast to be the 3rd biggest in the world after India's and Nigeria's, according to UN World Population Prospects 2017. Rising working age population and growing workforce participation of both men and women in developing nations like Pakistan will boost domestic savings and investment, according to Global Development Horizons (GDH) report. Escaping the low savings low investment trap will help accelerate the lagging GDP growth rate in Pakistan as will increased foreign investment such as Chinese investment in China-Pakistan Economic Corridor over the next several decades.
Here's a discussion on this and other subjects:
https://youtu.be/ucopTLFQdKY
Related Links:
Haq's Musings
Pakistan's Population Growth: Blessing or Curse?
Pakistan's Expected Demographic Dividend
World Bank Report on Job Growth in Pakistan
Underinvestment Hurting Pakistan's GDP Growth
China-Pakistan Economic Corridor
Musharraf Accelerated Growth of Pakistan's Financial and Human Capital
Working Women Seeding a Silent Revolution in Pakistan
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| Pakistan's Total Fertility Rate 2.62 Children Per Woman. Source: Washington Post |
Labor Force Expansion:
The latest Census 2017 results show that Pakistan's population growth rate has declined to 2.34% between 1998 and 2017, down from 2.61% (from 1981 to 1998) and 3.4% (from 1961-81). Life expectancy has increased from about 62 years in 1998 to 66.5 years now. The total fertility rate has declined from 4.6 children per woman in 1998 to to 2.62 children per woman in 2017. At the same time, Pakistan's labor force is growing at a rate of 3.6% a year, faster than the 2.34% overall population growth. Given Pakistan's human capital growth in recent years, it is a welcome situation that is expected to produce significant demographic dividend for the country.
 |
| Source: World Bank Report "More and Better Jobs in South Asia" |
Pakistan's working age population in 15-64 years age bracket is expected to increase by 27.5 million people to 147.1 million in 10 years, according to Bloomberg News' analysis of data reported in UN World Population Prospects 2017. Pakistan's increase of 27.5 million is the third largest after India's 115.9 million and Nigeria's 34.2 million increase in working age population of 15-64 years old. China's working age population in 15-64 years age group will decline by 21 million in the next 10 years.
 |
| Source: Bloomberg |
Pakistan's labor force growth will continue by adding 80 million workers n 30 years' time, third only to India's 234 million and Nigeria's 130 million additional workers in 15-64 years age group. China's work force will decline by 171 million workers in this time period.
 |
| Source: Bloomberg |
Savings, Investment and GDP Growth:
Currently, about a third of Pakistan's population is below the age of 15, dependent on working age adults. This high ratio of dependent population results in low savings, low investment and consequent slower economic growth and sub-par socio-economic development.
Pakistan's national savings was about 10% of GDP in 1960s. It increased to above 15% in 2000s in Musharraf years, but declined afterwards. It is well below the savings rates in South Asia region with India's 30%, Bangladesh's 28%, and Sri Lanka's 24.5%.
Higher levels of inequality in India, Bangladesh and Sri Lanka account at least partially for their higher savings rates than Pakistan's because people in higher income groups tend to save more of what they earn. But the other probably more important reason for Pakistan's lower savings rate is the larger percentage of children under the age of 15 who do not work and depend on their parents' incomes.
Summary:
Pakistan's labor force growth is forecast to be the 3rd biggest in the world after India's and Nigeria's, according to UN World Population Prospects 2017. Rising working age population and growing workforce participation of both men and women in developing nations like Pakistan will boost domestic savings and investment, according to Global Development Horizons (GDH) report. Escaping the low savings low investment trap will help accelerate the lagging GDP growth rate in Pakistan as will increased foreign investment such as Chinese investment in China-Pakistan Economic Corridor over the next several decades.
Here's a discussion on this and other subjects:
https://youtu.be/ucopTLFQdKY
Related Links:
Haq's Musings
Pakistan's Population Growth: Blessing or Curse?
Pakistan's Expected Demographic Dividend
World Bank Report on Job Growth in Pakistan
Underinvestment Hurting Pakistan's GDP Growth
China-Pakistan Economic Corridor
Musharraf Accelerated Growth of Pakistan's Financial and Human Capital
Working Women Seeding a Silent Revolution in Pakistan
Comments
http://economictimes.indiatimes.com/news/economy/policy/raghuram-rajan-flags-indias-biggest-worry-that-could-cost-modi-a-win-in-2019-elections/articleshow/60434472.cms
"Remember that we have what we call the population dividend. A million new people entering the labor force every month," Rajan said. "If we don’t provide these jobs that are required, you have a million dissatisfied entrants. And that could create a lot of social mischief."
Rajan is right in this aspect. India will have the world’s biggest labor force by 2027 and the millennial generation is crucial to anchor one of the fastest paces of economic growth. However, fresh employment opp ..
Under Modi, just over 10,000 jobs a month are being created instead, according to government figures from 2015.
Read more at:
http://economictimes.indiatimes.com/articleshow/60434472.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
https://www.samaa.tv/economy/2017/09/govt-not-going-imf-bailout-finance-division-spokesman/
The spokesman of the Finance Division gave following comments in response to the report:
The fact that Pakistan’s economic indicators are positive has been acknowledged internationally. Recently, the Asian Development Bank (ADB) stated that Pakistan enjoyed growth despite trade contraction.
The external sector which was under strain in the last two years due to falling exports and declining remittances has now started showing positive and impressive growth both in exports and remittances.
In August 2017, exports have witnessed a growth of 12.89 percent over the same period of 2016, while over previous month the exports are higher by 14.41 percent and imports are only 2.42 percent and during July-August, FY 2018 exports have registered a growth of 11.80 percent.
Similarly, workers’ remittances have shown a growth of 13.18% during July-August, FY 2018 and on month on month basis higher by 26.8 percent in August 2017.
These all bode well that pressure on current account will ease, going forward. The growth in FDI is also on upward trajectory. During July 2017, FDI posted a stellar growth of 162.8 percent.
With regard to taxation, it is to be noted that the share of direct taxes in total taxes has increased over the years.
In 1990-91 the direct taxes were just around 20% of total taxes, rose to 31.1 percent in 2004-05, 38.2 percent in 2012-13 and 39.1 percent in 2015-16.
In FY 2016-17 the share of direct taxes reached 40% and it has become the single largest tax collected by FBR.
The government is focused on further increasing the share of direct taxes through various policy and administrative reforms including broadening of tax base.
Substantial progress has been made to bring potential taxpayers in the tax net during the last four years. As a result of these efforts the number of income tax return filers which was around 766,000 for the tax year 2012 has risen to 1.26 million in the tax year 2016 and would further increase in coming years.
The reforms program has started paying dividends in shape of higher tax revenues, an efficient, modern, transparent and taxpayers’ friendly revenue organization.
The revenue collection has witnessed a substantial increase during last four years. The net collection increased from Rs 1,946 billion in 2012-13 to Rs 3,362 billion in FY 2016-17, registering an overall growth of around 73%.
In absolute terms revenue collection has been increased by Rs 1.4 trillion. The tax-GDP ratio of the country has reached 12.5 percent in FY 2016-17.
With regard to debt, the claim that PML(N) government borrowed record Rs 10.8 trillion is incorrect and based on incorrect projections. The actual increase in present Government’s 4 year tenure is around Rs 6.1 trillion.
Even if the year 2018 is added as projected, the total debt increase in 5 years is expected to remain around Rs 7.5 trillion until 2018. The statement is only intended to mislead the general public by propagating increase in total debt by Rs 10.8 trillion by the current government, which is based on mere projections and may include PSE debt and other external debt and liabilities as well, which are not part of total government debt.
Moreover, the contention of large borrowing from external sources is incorrect. Out of total debt, external debt proportion fell from 21.4 percent of GDP in 2013 to 20.6 percent of GDP in 2017. Against the total external debt, the largest component is multilateral and bilateral concessional debt, which constitutes around 85 percent.
External debt sustainability has increased manifold during the tenure of present government as recent debt sustainability analysis shows that external debt would remain on a downward trend over the medium term and staying well below the risk assessment benchmarks.
https://www.ceicdata.com/en/indicator/india/labour-force-participation-rate
https://www.macrotrends.net/countries/PAK/pakistan/labor-force-participation-rate
https://www.macrotrends.net/countries/IND/india/labor-force-participation-rate
https://www.dawn.com/news/1725956
According to research by Oraan, around 41pc Pakistanis saved via committees (or Rosca), whereas Karandaaz puts that figure at 34pc. Assuming the informal economy accounts for roughly 30pc, as suggested by research from the Pakistan Institute of Developing Economics, it translates into annual committees of Rs4 trillion at base prices, using conservative inputs.
While this back-of-the-envelope calculation is far from scientific, it helps contextualise how big the informal savings market really is. Everyone from a widow looking to save up for her children’s education to young adults trying to save up for their marriage, committees are what they turn to.
This phenomenon is not exclusive to Pakistan. According to a note by Middle East Venture Partners (one of the investors in Bykea), “the global market is largely untapped and ripe for disruption with 2.4 billion people using money circles through traditional channels.”
They recently participated in the Egyptian digital committees’ startup MoneyFellows’ $31m Series B.
Apart from the traditional financial institutions’ general apathy towards the customer, committees appeal to an average Pakistani for several reasons: they are a community-based instrument with some level of flexibility and there is no interest involved.
Most importantly, it helps them manage cash flow better due to habitual change. For women, the product enjoys particular popularity since the former financial services are largely inaccessible.
However, since committees are primarily cash-based with virtually no money trail involved, it poses massive risks, as we saw recently when a girl, Sidra Humaid, who ran a network of committees through social media, defaulted on Rs420m of payments.
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Even beyond this, committees have flaws by design, only amplified by Pakistan’s macros. For instance, the person receiving the first lump sum amount will always be at an advantage since their instalments in the subsequent months would be worth less due to both inflation and rupee depreciation. The recipient of the last payment would see the amount’s purchasing power eroded substantially by the time they get it.
Moreover, due to the community-based nature of the product, the risk of network defaulting is higher as people of usually similar risk profiles would be pooling in their money.
For example, if employees from an organisation have running office committees, delayed salaries or layoffs within the organisation would lead to a bad equilibrium, creating losses for the rest of the group, often resulting in default.
However, there are ways to address some of those challenges. First of all, to (partially) protect your lump sum from depreciation or devaluation, you can enter a committee with a duration of up to 10 months. Given Pakistan’s macros of late, you’d still lose money in real terms but to be fair, that’d most likely be the case in any other instrument as well, including the risk-free government papers.
In fact, contrary to popular perception, there are certain ways to further alleviate the inflation problem. Digital committees have an option of gamifying the experience by rewarding good payment behaviour through loyalty programs and/or brand partnerships to provide discounts on utilities-based services and products.
Secondly, digital committees help create a trail of money which, coupled with a centralised authority (the platform itself), brings in accountability and recourse in the event of a default. The receipt and/or ledger helps with basic accounting in committees creating transparency for people within the group.
The third benefit of digital committees is the security factor. The participant has to go through a know-your-customer and credit check process to make sure there is no fraudulent behaviour that could negatively impact the group, along with the participant’s ability and willingness to pay to create an overall environment for responsible finance.
A recent NY Times article by Lauren Leatherby titled "How a Vast Demographic Shift Will Reshape the World" uses charts and graphics to show how the world economic landscape will change during the rest of the century.
It shows that Pakistan will join the top 10 countries with highest share of working age population and lowest dependency ratios.
https://www.nytimes.com/interactive/2023/07/16/world/world-demographics.html
Pakistan will join top 10 countries in working age population in 2050
Bangladesh is already in the top 10 working age population countries today.
https://www.nytimes.com/interactive/2023/07/16/world/world-demographics.html
Countries are categorized as having large working-age populations if people between the ages of 15 and 64, an age group commonly used by demographers, make up at least 65 percent of the total population.
Countries where at least a quarter of the population is under age 15 and where less than 65 percent of the population is working age are categorized as having a large young population. Countries are categorized as having a large old population if those age 65 and older make up more than a quarter of the population.
Unless noted otherwise, graphics include all countries with a population of at least 50,000 people.
The world’s demographics have already been transformed. Europe is shrinking. China is shrinking, with India, a much younger country, overtaking it this year as the world’s most populous nation.
But what we’ve seen so far is just the beginning.
The projections are reliable, and stark: By 2050, people age 65 and older will make up nearly 40 percent of the population in some parts of East Asia and Europe. That’s almost twice the share of older adults in Florida, America’s retirement capital. Extraordinary numbers of retirees will be dependent on a shrinking number of working-age people to support them.
In all of recorded history, no country has ever been as old as these nations are expected to get.
As a result, experts predict, things many wealthier countries take for granted — like pensions, retirement ages and strict immigration policies — will need overhauls to be sustainable. And today’s wealthier countries will almost inevitably make up a smaller share of global G.D.P., economists say.
This is a sea change for Europe, the United States, China and other top economies, which have had some of the most working-age people in the world, adjusted for their populations. Their large work forces have helped to drive their economic growth.
Those countries are already aging off the list. Soon, the best-balanced work forces will mostly be in South and Southeast Asia, Africa and the Middle East, according to U.N. projections. The shift could reshape economic growth and geopolitical power balances, experts say.