Measuring Total Factor Productivity and Finding the Determinants of Total Factor Productivity at Sectoral Level: A Case Study of Pakistan

Abstract

The current study has attempted to measure the total factor productivity at sectoral level. For this, the stock of capital series which was constructed by Kemal and Ahmad (1992) has been extended till 2013. The Solow residual has been calculated through growth accounting framework. The sectoral TFP is tested against the macroeconomic variables, such as human capital, openness of the economy, transfer of technology, financial development and development expenditure by the government. Using the ARDL methodology, it has been found that agriculture sector has the potential to grow provided there is investment in human capital and the agriculturists do acquire appropriate technology. The manufacturing sector TFP growth, on the other hand, not only requires further investment in human capital, it also requires diversification of the economy and its opening up to international trade transactions, financial development of the economy, and the use of technological advances in the field. The study also supports the Keynesian argument that government development expenditure is growth promoting.

JCL Classification: O15, O33, O47

Keywords: Production Function, Total Factor Productivity, Growth Accounting Framework, Auto Regressive Distributed Lag Model and Error Correction Model