1.
Agricultural Pricing Policy of Pakistan

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Critical Analysis“It requires a very unusual mind to undertakethe analysis of the obvious” Alfred North Whitehead

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Sequence of PresentationIntroduction of agriculture sector of PakistanAgricultural Policy of PakistanPricing policy mechanismsHistory of Pricing policyImpact of Pricing policyCritical AnalysisConclusion and suggestions

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Agricultural Sector of PakistanPopulation depends 70%Labor force employment 44%Share in GDP 26%Total area 79.6 million hectaresTotal cultivated land area 22 million hectaresCountry’s exports 80%

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Contd…Agriculture as back bone of economyProvides foods and nutritionProvides raw materialProvides base for foreign trade and exchangeProvides market for industrial outputs

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MAJOR CROPS OF PAKISTAN Wheat Rice Maize Grams Pulses CottonSugarcane Tobacco Mustard 6

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WHEATIt is a major cropIt contributes 14.4% of the value addedin the agriculture sector of the economyIt accounts for nearly 38% of the totalcropped area76% of the total production of food grain 7

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Contd…Pakistan stands within the top10 wheat producing countriesin the worldIt is grown on an area of 8494million hectares with anaverage yield of 2769 kg/ha 8

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RICEIt the 2nd most important cropIt occupies 11% of the country’s croppedareaIt contributes about 17% to food grainproductionIt is cultivated over an area of 2581 millionhectares with production of 5.4 million tons 9

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Contd… Punjab • 48% Sindh • 41%Balochistan • 8% KPK • 3% 1

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COTTONIt is important cash cropIt contributes over 60% of Pakistan’s foreign exchangeearningsIt yields 3.4 to 3.6 million tons of cotton seeds whichcontributes over 64% of the local edible oil production( Federal Bureau of Statistics) 1

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Agricultural Policy of Pakistan • an easy source of generatingAgricultural revenues from agriculture sector • providing cheap food for politically sector more active urban consumers became • Government often impose polices to correct for market failures e.g.supporting provision of the public goods, sector correction for imperfect markets like rural credit and externalities

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Agricultural Policy of PakistanPakistan has always followed interventionist andlow domestic price policy since independence tohelp consumers, textiles and cotton industryGovernment also carried out domestic pricestabilization in response to global fluctuatingprices of these commoditiesMajor rational behind the policy was to transferincome from low saving sector to high savingsectors like manufacturing

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Price Policy mechanisms • income distribution and priceGovernment stabilization.can exert its • Commodity policies (taxes, subsidies etc), macro price control policies through • (wage rate, interest rate, land various rental rate etc)mechanisms • macroeconomic policies(fiscal and monetary management)

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Timeline(1947-1950’s)Pakistani side produced raw materials for the rest ofsubcontinent and imported manufacturing goodsAgricultural products subject to compulsory procurement atless the international prices levelInter district movement and export of major crops bannedBoth procured and imported quantities of sugar and wheatsubsidized for urban consumersOvervaluation of rupee to encourage industrial imports butadverse effect on agricultural exports

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Timeline(1960’s) Policy considerably relaxed • TractorsPolicy of liberal • Tube wells subsidies • Improved seeds Compulsory procurement replaced byVoluntary sales

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Timeline(1970’s)Devaluation of rupee wasn’t transferredto agricultural sector in form of higherprices which was hampered by exportduties and government monopoliesNationalisation program of governmentkept production and distribution of keyproducts to itself

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Timeline(1980-90’s)New agricultural policy was introduced which aimed at bringingdomestic prices at par with the international prices.Agricultural price commission was formed in 1981 to helpgovernment with support pricesWorld Banks Structural adjustment program-bringing inputsand outputs prices close to world pricesPhased removal of subsidies from fertilizers was doneRupee further devaluated and government shifted to floatingexchange rates

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Impacts of Pricing Policy • Effects on consumption of agricultural products • Effects on exports of agricultural products • Effects on Foreign Exchange ofAgricultural the countryPricing has • Political Impacts and on budget • Effects on resource transfers between agriculture and rest of the sectors of the economy. (Agriculture Policy)

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Impacts (A case study of 1950- 90’s)*• Severe controls of pricing in 1950’s and 1960’s led to the stagnation of production and decrease in the per capita food availability• Such price controls had significant impact on determining the general profitability of agriculture and in influencing agricultural production in 1950s and early 1960s* The Political Economy of Agricultural Pricing Policy Trade, Exchange Rate, and Agricultural Pricing Policies in Pakistan Naved Hamid, Ijaz Nabi, and Anjum Nasim, 1990

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Contd…As a consequence thedeteriorating food supplies (wheatin particular) led to substantialgaps between the supply anddemand, which were met by theeasily available food aid under PL-480. Clear links have been foundbetween PL-480 imports andstagnating wheat production.

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Timeline(2000’s)The federal spending on agriculture has increasedby almost 1% a year during the 2001-02 to 2007-08. Government has spent a very small amount oftheir revenue on the agricultural sector,suggestingthat agriculture sector is under fundedAccording to the Organization for Economic Co-operation Development 2009, high oil and energycosts and erratic weather conditions are amongmajor reasons for volatility in agriculture prices ofdeveloping countries like Pakistan

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Total Output Effects (1963-87)*

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Output Effects*Table in above slide shows thatfor all crops, with only oneexception, actual (atintervention prices) output waslower than potential( at non-intervention prices) output foreach year of the study

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Contd …It is evident that the agricultural output in 25 years (from 1963 - 87) hasbeen below potential because of government price intervention, bothdirect and indirectIt is also seen that the loss in output tended to increase in the 1970s andreached its peak in 1975-76 when it ranged from 17% for wheat to 50% forcottonSince then it has declined in the case of all crops, except basmati rice, andin 1986-87 it ranged from 13 % for sugarcane to 40% for basmati riceBased on these figures one can make a rough estimate that the aggregateloss of agricultural output during the 1970s was around 25 % of actualoutput and though it declined since 70’s it was still around 15% of theoutput in 90’s

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Total Consumption Effects(1960- 87)*

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Consumption Effects*Consumption of all crops except sugarwas, in most years, higher than itwould have been in the absence of(total) price intervention.In the case of cotton and wheatactual consumption exceededconsumption in case of non-intervention in all years

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Political ImpactsThus it seems that price interventionallowed per capita consumption of food andclothing to be higher than what it wouldhave been in the absence of interventionThere is no doubt that in urban areasconsumption would have been lower underthe non-intervention scenario and thatcould have resulted in political problems forthe government

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Contd …In this context, it is important tomention that the publicdemonstrations in 1968, thatled to the fall of Ayub KhansGovernment, were triggered byprotests in urban centers over asharp increase in sugar prices

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Total Export Effects(1963-87)*

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Total Foreign Exchange Effects(1963-87)*

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Contd …For basmati and Irri rice, foreign exchangeearnings foregone as a proportion of nonintervention earnings are, on average,27% and 13 % respectively.For cotton they are substantially larger(94%)

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Analysis of Case Study (1963-87)*Given the short and long run supplyelasticity, distortions in producer prices dueto government intervention imposesignificant costs on the economy in terms offoregone outputThis ranged, on average, between 5 % forwheat and 23 % for basmati rice over the 24year period under study

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Contd …The corresponding long term output lossdue to intervention ranged from 12% forwheat to 44% for cottonWe observe significant trade effects also.On average, long run export losses dueto price intervention, are 27% (basmati)13% (Irri) and 94% (cotton)

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Contd …foreign exchange earning foregone of all crops taken together,are substantial ranging from 17 % for short run direct to 148 %for long run totalthese effects have to be interpreted with caution, since infiniteexport elasticities and substantial acreage response especiallyin the long run has been assumed which is not feasible.in calculating these effects, the political consequences ofpassing on higher prices to consumers has been ignored.The feasibility of passing on the high prices to consumers,particularly for wheat, is questionable

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Input Subsidies (1961-87)*

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Resource Distribution Effects (1961- 87)*Table in following slide presents the sumof transfers resulting from input andoutput price intervention.It can be seen that the direct transfersrange between -2 per cent and 7 per centof the G.D.P.While the total transfers range between 2per cent and 12 per cent

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Contd …

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Contd …The situation was reversed in the first half of the 1970s,when total price related transfers increased three fold andthere was a net transfer out of agriculture equal to 5 percent of GDP (15 per cent of agricultural value added)This was the period when the Bhutto government usedexport taxes and export monopolies to generate revenuefor the governmentIt was the only time when government revenues from pricepolicies exceeded government expenditure on agriculturalinput subsidies

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Distorted income Distributions • both the policy of subsidizing agricultural Against inputs and imposition of hidden tax welfare implemented throughobjectives pricing policies have adverse implications on income distribution

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Taxation System improvementdirect and indirect interventions begradually reduced through agriculturalincome taxClosure of all the loopholes in the existingtaxation structure for the tax evadersJust output price for agricultural products isvital and the time has come to re-schedulethe system of pricing of agriculture

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Individual versus overall price policy The • mainly due to shift ofresponse of resources from one crop to individual the other crops • overall agricultural production can increase onlydiffers from if a technical change takes the overall place or more resources areresponse of devoted to the agriculture sectoragricultural output

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Rationale behind the policy?Due to lower output prices the overall magnitudeof consumption is much higher then it would havebeen in the absence of these distortionsdifferent social and psychological reasons behindsuch a policy, which cannot in any way be justifiedby economic rationaleAdverse terms of trade for agriculture reflect thatprices of agricultural products were not allowed torise as rapidly as prices of consumer goods

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Justifications for price distortions? • subsidized inputs are mostly used lower or by middle and upper class farmers due to their access to institutionalsubsidized credit (at lower interest rate) or due to the abundance of their input own self-generated funds prices for • The small farmers usually lack in time credit facilities. the • Even if they succeed in obtaining farmers credit they pay high rates of interest on it.

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Output selling price distortionsboth the small as well as large farmers sell their outputsat equally distorted pricesby taking advantage of subsidized inputs large farmersmake up their losses on account of lower output prices“distorted input and output prices contribute intransferring incomes from small farmers to medium andlarge farmers and from agricultural producers toconsumers and the government”

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Prices of various cropsfor the period 1961 to 1987 the averageprocurement/support price of wheat was about 30percent lower than the inflation adjusted border pricethe price to producers of basmati rice was less than halfof the border pricethe producer price of cotton gradually increasedthroughout this period but always remained below theborder price

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Prices of various crops(Contd…)The government has favoredsugarcane production and pricesmore than any other cropOn account of sharp fluctuations inborder price of sugarcane itsproducer price has remained higherthan the border price on occasions

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ConclusionsDue to direct and indirect controls, the producer pricesremain well below the border pricesNegative effects on production, consumption, incomedistribution and economic welfareMedium and large land owners reap the benefits and smallfarmers remain at lossWe have never been able to achieve delicate balance to thebenefit of producers and consumers at the same time

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Comparison with IndiaNot only demand and supply but production side is alsotaken into accountIn accordance with the needs, they assign particulararea for different crops taking into account manyrelevant factors and then place a pricing mechanism inplaceResult: no shortages as agriculture products beingperishable cannot be imported in time

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RecommendationsProduction side shall also be taken into account throughfacilitationMinimization of interventionsInstead of giving indirect subsidies through fertilizers and supportprice, direct facilities of loans should be encouragedMinimum base prices should be enforced in order to protect thefarmers and reduce exploitation at the hands of middlemen butmaximum price should be left to the market forces

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In accordance withthe domestic needs,export of agriculturalcommodities shouldalso be regulated

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