Research Themes

Firm Productivity

Pilot Benchmarking of Productivity in the Pakistani Garments Secto

Researcher: Theresa Chaudhry (Lahore School), Chris Woodruff (Oxford University), Rocco MacChiavello (London School of Economics), and Azam Chaudhry (Lahore School)

Incentives and Productivity: Work Groups vs. Production Lines in Pakistani Electric Fan Production

Researcher: Theresa Chaudhry (Lahore School), Chris Woodruff (Oxford University)

The fan sector is an important source of employment in the region around Gujrat in the Punjab province of Pakistan. Moreover, it is representative of other light engineering sectors in Pakistan. Exporting has developed as an important market for fans produced in Pakistan, with the largest markets being in the Middle East. However, competition with Chinese firms is a threat to the Pakistani fan sector, and the largest firms are focused on increasing productivity in order to remain competitive. We will carry out this project with one of the largest producers of fans. Our work with the firm will focus on the organisation of production in the factory.

The major objective is to understand the role of incentives in worker performance in manufacturing firms in Pakistan. The manufacturer(s) with whom we are working report issues with both workmanship issues and worker absences. They also report that workers resist changes in production techniques which are proposed by management.

The project has been developed under the firm capabilities programme of the International Growth Centre (IGC) and is led by a team of researchers including Dr. Theresa Chaudhry and Zunia Tirmazee (Lahore School), Muhammad Haseeb (student, Warwick) and Dr. Christopher Woodruff (University of Warwick). They have attempted to test whether short-term financial incentives can be used to decrease worker absenteeism in one of Gujrat's leading fan factories.

In early 2012, workers from eight work groups (teams) were surveyed on demographic characteristics, work habits, and team interactions. From February to June 2012, two incentive schemes, one based on individual attendance and one based on meeting a team attendance target, were rotated among the eight teams on a monthly basis. Results of the pilot indicated that the team attendance target appeared to have some effect on coordinating workers' absences as compared to the bonus based on individual attendance.

In order to build stronger evidence, we completed a second round of the experiment conducted in 2013 of just the team attendance incentive against a control group on a sample of 14 new teams. For three months, 7 out of the 14 teams were offered the team attendance incentive. For most teams, the team attendance target was N-1 workers, for a team of N workers. Using data on individual and team attendance from 2011 - 2013, we find that offering the team attendance incentive helped to smooth attendance by coordinating workers' absences; there were three fewer days each month such that more than two workers were absent on average for the treatment group as compared to the control group, controlling for team and month fixed effects.

Same Jeans, Same Stitch? A Comparison of Denim Production across Three Factories in Punjab, Pakistan

Researcher: Theresa Thompson Chaudhry (Lahore School) and Mahvish Faran (Lahore School, PhD candidate, Sheffield University)

In this paper, we look at denim production in three different factories in Punjab, Pakistan. We map the manufacturing process for a standard pair of denim jeans produced for an international retailer.

We asked three factories of different scales and proximities to the technological frontier to stitch, finish and wash an identical pair of jeans. These firms included a large-scale exporter with established links to a major multinational brand, a medium exporter with links to regional European labels and a small producer selling primarily to the domestic market.

Timing the operations ourselves, we find that the stitching time of the large-scale exporter is about one-third less than that of the medium exporter and about half the stitching time of the small firm. Of the three firms, only the large exporter pays wages based strictly on standard minute value - the time expected to complete an operation. The two smaller firms pay piece rates that reflect the market rates paid for individual operations by firms throughout the sector. Even without increases in stitching efficiency, the two smaller firms could reduce their stitching costs by 30-50 percent if they were able to switch to paying wages based on stitching times.

We also calculate the labor cost savings that the two smaller firms could accrue by adopting some of the more advanced equipment used by the large exporter, along with lower piece rates. Of these, the most reasonable investment would be in better loop-making machines; the cost of equipment could be recuperated by producing 325,000-500,000 garments, which for the medium firm is four to eight months' production at current levels. However, piece rates are entrenched and, if sticky, could reduce the incentives for firms to adopt labor-saving technologies.

Published Article: The Lahore Journal of Economics, Volume 21: SE (September 2016): pp. 211-236.

Technology in the Sialkot Gloves Manufacturing Sector

Researcher: Saba Firdousi (Lahore School)

The research team has used a unique sample of sports gloves manufacturers from Sialkot to develop an index of technological sophistication by mapping the various technologies used at each step of the glove manufacturing process.

Published Article: The Lahore Journal of Economics, Volume 21: SE (September 2016): pp. 253-272.

Benchmarking of Productivity in Pakistan's Readymade Garment Sector

Researcher: Azam Chaudhry (Lahore School), Theresa Chaudhry (Lahore School), Rocco MacChiavello (London School of Economics) and Christopher woodruff (Oxford University)

There is significant potential for expansion in Pakistani exports especially keeping in mind the fact that the European Union has granted Pakistan GSP Plus status. That said, expanding exports must be accompanied by improvements in productivity if any export surges are to be sustained over the coming years. Dr. Theresa Chaudhry (Lahore School) and Dr. Azam Chaudhry (Lahore School) are working with Dr. Christopher Woodruff (University of Oxford) and Dr. Rocco MacChiavello (London School of Economics) to benchmark the productivity of garment factories in Pakistan. The pilot phase of the project will be used to understand bottlenecks to increasing productivity with the aim to develop productivity-enhancing interventions for the sector, to be evaluated through the method of a Randomized Controlled Trial (RCT). The project has been funded by the International Growth Centre (IGC).

Link to the Working Paper:
https://www.theigc.org/wp-content/uploads/2016/04/Macchiavello-et-al-2016-Working-paper-1.pdf

Pakistan: A Case of Premature Deindustrialization?

Researcher: Naved Hamid (Lahore School) and Maha Khan (Lahore School; Current PhD student, The University of York)

Manufacturing growth has played a vital role in the development of advanced economies as well as in most developing economies and has also helped in closing the income gap between the two. Presently, the manufacturing industry in Pakistan, which was seen as the engine of growth, is in crisis.

Growth in the large scale manufacturing (LSM) sector, which accounts for 80 percent of the manufacturing sector, has shrunk to its all-time lowest level of 1.1 percent per annum over the last seven years, with no signs of a pickup in the current period. One key reason is that over the last few decades, Pakistan's exports have not been significantly upgraded in terms of technology or sophistication. As a result of this stagnation in product sophistication, researchers from the Lahore School of Economics have found that Pakistan is on the brink of, if not already in the midst of, premature deindustrialization that blocks off the main avenue for the country to catch up with advanced economies.

However, some positive recent developments like the improvement in the internal security conditions and the announcement of China-Pakistan Economic Corridor investment package of about US$ 46 billion could boost both domestic and foreign direct investment in the country. This raises the chance that Pakistan's manufacturing growth might be revived to once again achieve the levels reached in the previous high growth cycles.

The researchers found that the main reason for the crises in the Pakistani manufacturing sector is that there has not been any pro-active industrial policy since the 1990s. Based on their analysis, the researchers suggest that there is an urgent need to develop and implement a comprehensive and pro-active industrial policy. This policy should consider the main constraints of the sector such as, curtailing unnecessary taxes on manufacturing, prioritizing manufacturing in the management of power and gas shortages, insulating the sector from the chronic exchange rate overvaluation, and finally helping the sector move up the sophistication curve by developing the required technical and skilled manpower. Only with a focused industrial policy can there be a revival in manufacturing growth in Pakistan.

This research was funded by the Lahore School of Economics (LSE) and was published in the Lahore Journal of Economics. The researchers included Dr. Naved Hamid, Director, Centre for Research in Economics and Business, Lahore School of Economics and Ms. Maha Khan, Research and Teaching Fellow, Centre for Research in Economics and Business, Lahore School of Economics.

Published Article: The Lahore Journal of Economics, Volume 20: SE (September 2015): pp. 107-141.

Exporters in Pakistan and Firms Who Do Not Export: What's the Big Difference?

Researcher: Theresa Chaudhry (Lahore School) and Muhammad Haseeb (University of Warrick)

Developing countries have sought to promote exports as a growth strategy since the area source of both higher demand and of coveted foreign exchange. Proponents of trade liberalization argue that there is a positive relationship between openness of economy and productivity of its firms.

However, the mechanism through which this works is by the introduction of imports which reduce the markups that the firms charge from consumers due to greater competition which in turn lowers the average cost of production due to the exit of low-productivity firms. In Pakistan, exporting firms use more imported inputs, are more productive and capital intensive and have higher growth potential reveals recent research conducted by the Lahore School of Economics.

Researchers from the Lahore School of Economics showed that the average sales from exports, among exporters, was approximately 51% of total sales in Punjab and that many exporters in Pakistan don't have a significant domestic presence.

Exporting firms have been found to have 29% higher revenues and 150% more output even after controlling for firm level characteristics such as geographical locations and ownership status. The labor productivity of exporting firms was found to be 2-3 times higher than that of non-exporters and exporters were doing better in terms of larger firm sizes, more employment opportunities, higher compensation and greater productivity.

The researchers from the Lahore School of Economics found that apparel producers are doing well and exporting nearly 93% of their output. This sector employs on average 400 workers per organization and offers significantly higher compensation which makes the sector favorable for exports. Therefore, the government's recent emphasis on developing the readymade garments sector is well placed.

The researchers also found generally that the capital-labor ratio among exporters was twice than that of non-exporters. Exploring some additional dimensions by which the exporting and non-exporting firms differ, it was found that the average exporting firms tended to use a larger share of imported material in their input mixes than non-exporting firms. Also, looking at the number of days a factory is in operation, it was found that exporters' factories operates, on average, more days than the non-exporting factories.

Published Article: The Lahore Journal of Economics 19: SE (September 2014): pp. 207-246.

The Textiles and Garments Sector: Moving Up the Value Chain

Researcher: Naved Hamid (Lahore School), Ijaz Nabi (LUMS & IGC), and Rafia Zafar (Lahore School)

The textiles and garments (T&G) sector accounts for almost 50% of Pakistan's exports and is the largest component of manufacturing. T&G sector, because of recent favorable developments for the industry in Pakistan and the expected future changes in the international trade structure for the sector, has the potential to play an important role in expanding Pakistan's exports. In addition, garments manufacturing is the least energy and capital intensive industrial activity and thus resonates with Pakistan's resource endowment to generate economic growth and employment. Garment manufacturers have tried to overcome the constraints arising from the energy shortages and adverse security and country risk perceptions by investing in power generation, upgrading IT, developing design and R&D capability. Punjab Government's focus on garments as a central plank of its industrial strategy has also helped. However, this paper argues that for the sector to fully realize its potential, government policies that shape the incentive structure faced by the industry need to be re-aligned In this regard, the most important is Pakistan's import policies and customs procedures that discourage the import of materials such as synthetic yarn and fabric, technical textiles and specialized trimmings and accessories needed by exporters to move up the value chain, and a significant bump up in the growth trajectory will only take place if import policy and custom procedures are substantially reformed. This paper focuses on the following themes: First, structural changes and trends in T&G exports; second, the associated constraints to growth of the garments sector; and third, to highlight some of the steps taken by the industry leaders in terms of policy reforms and by firms, particularly with regards to managing resources to enhance competitiveness.

Published Article: Lahore Journal of Economics, 2014, Vol. 19, issue Special Edition, 283-306.

The Effect of Trade Liberalization on Firm Entry and Exit in Punjab, Pakistan

Researcher: Marjan Nasir (Lahore School)

The industrial organization literature has traditionally emphasized the role of new firms as stimulators of economic development. The entry of new firms is associated with employment changes, product and technological innovation, and other structural changes in that particular industry (Roberts & Thompson, 2003).

Furthermore, as incumbent firms face growing competition from the new arrivals, their productivity is expected to improve.

Researchers have examined the relationship between trade liberalization and firm turnover to determine the extent to which international markets and policies influence regional industries and their development. Exchange rate depreciation and tariff reductions can lead to the expansion of exports as the output of existing firms increases or new firms enter the industry (Bernard and Jensen, 2004; Gu, Sawchuk, and Whewell, 2003). Domestic firms can face increased competition from abroad when domestic tariff rates fall or the domestic currency appreciates (Baggs, Beaulieu, & Fung, 2009; Fung, 2008; Head and Ries, 1999; Klein, Schuh, and Triest, 2000).

The primary aim of this study was to analyze the impact of exchange rate depreciation and tariff reductions on the output resulting from the entry of new firms. However, it is pertinent to note that entry into the exports sector requires that firms are at least as productive as the incumbent firms in order to survive both local and foreign competition, which could otherwise lead them to exit if they do not deliver efficiently.

Over the last decade, Pakistan has experienced currency depreciations against the US dollar and the euro, together with an increase in export volume. In 2010, nearly 22 percent and 17 percent of its exports went to the European Union (EU) and the US, respectively; 48 other countries, each receiving a minimal share, accounted for the remaining volume. Accordingly, we look only at those sectors that export to the US and EU, while the depreciating rupee provides an opportunity to study its effects on firm turnover on the export industries in Punjab.

At the same time, the tariff rates of member countries of the World Trade Organization (WTO) have decreased since 2000, in an effort to boost world exports. Pakistan has also experienced this decline together with an increase in exports to the US and EU.

This study focuses on the impact of trade liberalization on firm entry and exit in Punjab's export manufacturing sector over the decade 2001-10. As far as the province's export industries are concerned, real exchange rate depreciation attracts new firms but also leads weaker firms to exit. A reduction in local or international tariffs, however, has no significant impact on firm entry or exit.

This study has shown that a real exchange rate appreciation or depreciation is more likely to influence firm entry and exit than large tariff changes. Whether these changes in tariff rates take place in the domestic market or foreign market, they seem to have very little impact on firm turnover. Firm entry is lower and firm exit higher in industries comprising smaller or medium firms, suggesting that they are more competitive and may pose a threat to new as well as existing firms. Finally, the results highlight the significant role of high initial investment in deterring firm entry and exit.

Published Article: The Lahore Journal of Economics, Volume 19: 1 (Summer 2014): pp. 67-89.

RESEARCH

Pilot Benchmarking of Productivity in the Pakistani Garments Sector