Human capital 2.0

Back in 2017, Apple’s CEO Tim Cook told the world why Apple makes its iPhones in China, his raved review widely negating the myth that manufactures move to China with their technology and designs so Chinese abundant labour can assemble these products at dirt cheap wages. Though Chinese labour is the very reason why Apple and its peers move to China; it is because of their level of efficiency and their, what Cook termed “extraordinary” skills set. While it is true that many Asian economies, of which China is the prime example, became the back alley factories of the world by employing their burgeoning populations at depressed rates, is cheap labor still a measure of competitiveness, or has Pakistan missed that gravy boat? The World Bank posits it could still catch it. Then the question becomes: should it?

In its latest “Pakistan @100” report where the Bank advises policymakers to divert all their energies toward building and investing in Pakistan’s biggest asset, its human capital, the report remarks: “With labour costs quickly rising in China, many firms (both Chinese and foreign) may seek to relocate plants to third countries. Pakistan could attract some of those relocating plants. It is relatively close to China, has low labour costs and a large labour force. Many argue that CPEC could also help in this process”. The report immediately follows that with: “but technological advances may mean that many manufacturing jobs will disappear in the medium term, reducing the possibilities of following a transformation path similar to that of East Asian countries in the past.”

In fact, Hungarian economist, Nicholas Kaldor, in 1978 claimed that economies that grew faster also had the fastest growth in labour costs. What became the “Kaldor-paradox” was backed by literature later on to suggest that continued lower costs of labour may not imply that the economy is competitive, and in fact, increasing wages lead to higher productivity. One could hypothesize that, at least for a while, Pakistan could leverage its lower labour costs toward attracting manufacturers or putting its low wage labourers toward export led industries and expand then.

But the simple fact is that global demand is evolving. For one, global manufacturers are looking to move factories that not only have the capacity and infrastructure, but technology, and a trained labour force that is efficient and has skills that are adaptive. Intelligence based technologies (robotics, digitised systems and so on) are transforming production processes and factories of the world. These essentially labour-reducing techniques will determine which countries will become more attractive to investors and global manufacturers. As Cook argued that the “craftsman kind of skill” together with the “sophisticated robotics” of Chinese factories has been a rare combination, and that the precision and quality level of Chinese laborers is unmatchable.

But Pakistan is eons away from developing such a workforce even with the advantage of a rising youth population in search for jobs. Firstly, most skills development programs in Pakistan today, of which there is a massive dearth, provide manufacturing skills that train workers to assemble, to operate heavy machinery, to manage floor operations and existing technology, in essence, skills that are easily replicable. Why would any country move its factories here, against other populous countries like India, if population is the only thing we are selling? The WB report rightfully argues: “There is increasingly a premium on adaptability, strong cognitive skills and less demand for routine tasks”.

Secondly, our labour is not efficient (read more here: “Two big think question about productivity”, March 19, 2019). Efficiency questions whether one job can be done in lesser number of hours, or the same job by a fewer number of laborers. Efficient labor automatically brings labour costs down.

The opposite end of the argument is that the supply of skilled labour will come with the demand, and the existing skills set are reflective of current needs. Since Pakistani businesses themselves are far below the global competitive curve, neither innovative, nor technologically advance, nor integrated, the pressure on skilled labor reforms is simply not there. Everyone is making do.

Both sides need addressing. First, Pakistan must heed the Bank’s advice to invest in education and health. Secondly, as this column frequently recommends, Pakistan must try to integrate into the global value chains, even if starting with the low-hanging fruits. This will create demand for more skilled labour.

Simultaneously, using CPEC and the SEZs strategically, Pakistan must create a robust skills development program together with the Chinese that would bring new techniques and skills into the country. In general, programs offered by NAVTCC and private organisations like Aman Tech must think beyond mere minimum wage employability and toward productivity. Lastly, investment agreements and trade deals must focus on targets for technology transfer as well as to create backward and forward linkages through trade to promote local value addition.