Pakistan Rural Factor Markets Study :Policy Reforms for Growth and Equity

Report No. 30381-PK
Pakistan
Rural Factor Markets
Policy Reforms for Growth and Equity
November 19, 2004
Rural Development Unit
South Asia Region
Document of the World Bank

11
RURAL FACTOR MARKETS IN PAKISTAN:
Policy Reforms for Growth and Equity
TABLE OF CONTENTS
.. Pakistan at a Glance ............................................................................................................vu
Acknowledgements .............................................................................................................. i x
Executive Summary ............................................................................................................. x
I .
I1.
I11 .
I V .
V .
VI .
Introduction .............................................................................................................. 1
Plan o f the Report ....................................................... 1. .................................................. 3
Agricultural Policy And Sector Performance in Pakistan: An Overview .......... 4
Agricultural Markets and Prices .......................................................................... 6
Rural Land Markets: Institutions and Constraints .............................................. 10
Land Ownership and Utilization .......................................................................... 10
Land Distribution, Land Policy and Land Reform .............................................. 14
Land Reforms ...................................................................................................... -14
Land Administration, Land Titles and Contract Enforcement ............................. 16
Patterns o f L and Use and Productivity by Farm Size and Tenure Status ............1 9
Water Markets In Pakistan Agriculture ................................................................ 24
Water Availability in Pakistan Agriculture .......................................................... 24
Access to Water and Agricultural Productivity ................................................... 27
Implications for Agricultural Productivity ........................................................... 30
Groundwater ........................................................................................................ 29
Laws and Regulatory Framework for Water ....................................................... 31
Rural Labor Markets .............................................................................................. 33
Structure o f Labor Use ......................................................................................... 33
Sectoral Composition o f Labor Use ..................................................................... 35
Trends in Wages .................................................................................................. 36
Labor Mobility and Migration ............................................................................. 38
Gender Issues ....................................................................................................... 38
Child Labor .......................................................................................................... 40
Bonded Labor ....................................................................................................... 42
Government Labor Policies ................................................................................. 43
Rural Credit Markets .............................................................................................. 46
Structure o f Rural Credit Markets ........................................................................ 46
Historical Trends .................................................................................................. 47
Repayment o f Loans ............................................................................................ 50
Structure o f Interest Rates .................................................................................... 50

...
111
Formal Sector Credit and Mechanization ............................................................ 51
Farmer Household Access to Credit ................................................................... 52
Access to Credit ................................................................................................... 54
Micro-credit Programs and Savings Mobilization ............................................... 54
Implications o f Credit Constraints for Productivity and Income ......................... 59
VI1 . Implications For Income Distribution And Poverty Reduction .......................... 60
The Puzzle o f P ersistent Rural Poverty and High Agricultural Growth. ............6. 0
Agricultural Growth and Rural Income Distribution ........................................... 65
Factor Market Reforms ........................................................................................ 68
Implications for Growth and Poverty Reduction ................................................. 69
VI11. Conclusions And Policy Implications. .................................................................... 70
Land ..................................................................................................................... 70
Water .................................................................................................................... 75
Labor .................................................................................................................... 79
Credit .................................................................................................................... 81
Implications for Rural Poverty Reduction ........................................................... 84
Conclusions .......................................................................................................... 85
Table 1.1,
Table 2.1.
Table 2.2.
Table 2.3
Table 2.4.
Table 3.1.
Table 3.2.
Table 3.3
Table 3 .4 .
Table 3.5.
Table 3.6.
Table 4.1.
Table 4.2.
Table 5.1.
Table 5.2.
Table 5.3.
Table 5.4.
Table 5.5.
Table 5.6.
Table 6.1.
Table 6.2.
Table 6.3.
Table 6.4.
Table 6.5.
Table 6.6.
LIST OF TABLES
Poverty Estimates for Pakistan ................................................................................. 1
Agricultural Growth in Pakistan. 1959-60 to 2001-02 ............................................. 4
Area. Yield and Production o f Major Crops in Palustan. 1999-00 to 2002-03 ........ 5
Ratio o f Wholesale Prices (Lahore) to Support Prices. 1995-96 to 200 1 -02 .......... 7
Subsidies in Palustan Agriculture: 1996-97 to 1999-00 (mn Rs.) ........................... 9
Land Use in Pakistan. 1990-91 and 2000-01 ............................................................ 10
Pakistan: Distribution o f Land Ownership .............................................................. 11
Gini Coefficient for Ownership Holdings by Province ............................................ 11
Pakistan: Distribution o f Farms and Area by Farm Size (operated area) ................ 13
Share o f different crops in total cropped area by size o f farm (1990 and 2000) ...... 21
Recent Findings on Land Productivity and Land Markets ....................................... 23
Average Water Balance o f the Indus River System ................................................. 25
Gross Revenue. Total Cost and Returns to Irrigation o f Major Crops in
Various Regions o f Pakistan 2002-2003 ............................................................... 31
Pakistan Rural Labor Force. 1998 (thousands) ........................................................ 34
Labor Force Participation, Unemployment and Underemployment Rates ............... 34
Percentage Distribution o f Rural Employed Persons by Major Sectors and
Provinces (1999-00) .............................................................................................. 35
Growth in Real Wage Rates in Palustan, 1984-2002 ............................................... 36
Female Labor Force Participation and Unemployment in Pahstan, 1999-2000 ...... 39
Sources o f Credit in Palustan, 1995-96 .................................................................... 47
Zarai Taraqiati Bank Ltd . (ADBP) Lending, 2002-03 ............................................. 49
Palustan: Interest Rates in Rural Credit Markets by Source .................................... 51
Outstanding Loans by Tenure Categories (Formal and Informal) ........................... 53
Average Size o f Loans to Farm Households, 2002-03 ............................................. 53
Underemployment Rates by Occupation (1999-00) ................................................. 35
Formal Sector Banking (bn 2000-01 Rupees) .......................................................... 46

iv
Table 6.7.
Table 6.8.
Table 7.1.
Table 7.2.
Table 7.3.
Table 7.4.
Table 7.5.
Table 7.6.
Table 8.1.
Table 8.2.
Table 8.3
Figure 2.1.
Figure 2.2.
Figure 3.1.
Figure 3.2.
Figure 4.1.
Figure 5.1.
Figure 5.2
Figure 5.3.
Figure 6.1.
Figure 6.2.
Figure 6.3.
Figure 6.4.
Figure 6.5.
Figure 7.1.
Figure 7.2.
Figure 7.3.
Box 3.1
Box 3.2.
Box 3.3.
Box 3.4.
Box 4.1.
Box 4.2.
Box 5.1.
Box 5.2.
Box 6.1.
Box 6.2.
Box 6.3.
Box 7.1.
Box 8.1
Box 8.2.
Credit Rationing in Rural Pakistan 200 1 .................................................................. 55
Major Micro-credit Programs in Pakistan, 2003 ...................................................... 55
Real Prices o f Major Food Grains in Pakistan, 1970-2003 ...................................... 61
Rural Household Income by Source and Expenditure Quintile (200 1-02) ............... 63
Palustan Rural Agricultural Incomes ........................................................................ 65
Implications o f Changes in Economic Structure for Agricultural Multiplier
Effects .................................................................................................................... 67
Simulated Distributional Impact o f Factor Market Reforms .................................... 68
Characteristics o f Factor Markets in Palustan .......................................................... 71
Major Linkages o f Key Factor Market Distortions .................................................. 72
Palustan Rural Factor Markets: Current Government Policies and Programs
and Possible Reforms ............................................................................................ 86
Rural Poverty Across Household Groups, 2002-2002 ............................................. 62
LIST OF FIGURES
Wheat Prices in Palustan, 1995-2003 .................................................................... 7
Nominal Rates o f Protection o f Major Crops ........................................................ 8
Pakistan: Percentage o f Farms and Area Cultivated by Land Tenure Status ....... 13
Pakistan: Farm Income per Cultivated Area in Punjab, 2000/01 ......................... 20
Area Irrigated by Source o f Irrigation, Palustan 1982-2002 ................................. 25
Real Wages in Palustan: 1984-2002 ..................................................................... 37
Child Labor in Pakistan, 1999-2000 ..................................................................... 40
Child Labor Force Participation Rates by Province, Palustan 1999-2000 ............4 1
Growth o f Institutional Agricultural Credit (mn 2000-01 Rps.) ........................... 49
ADBP/ZTBL Tractor Loans land Domestic Tractor Production,
1986-87 - 2002103 ............................................................................................. 52
Formal and Informal Credit by Tenure Categories, 200 1-02 ................................ 53
Credit Rationing in the Formal Market ................................................................. 56
Credit Rationing in the Informal Market ............................................................... 56
Real Prices o f Major Food Grains in Pakistan, 1970-2003 ................................... 61
Rural Household Income Sources by Quintile, Palustan, 2001-02 ....................... 63
Palustan: Per Capita Incomes and Expenditures 2001-02 .................................... 64
List of Text Boxes
Land Price Determination in Pakistan: Land Rents and Asset Effects ...... 12
Historical Rural Land Tenure Systems in Pakistan' ............................................. 15
Land Policies and Land Reform in Palustan ......................................................... 16
Land Rights in Punjab and Sindh .......................................................................... 18
The Indus Basin Irrigation System ........................................................................ 26
Administrative Reforms in Canal Water Management ......................................... 28
Child Labor in Rural Palustan ............................................................................... 41
Bonded Labor in Pakistan ..................................................................................... 42
Recent Reforms in Formal Sector Agricultural Lending in Palustan .................... 48
Pakistan Poverty Alleviation Fund (PPAF)' .......................................................... 57
Aga Khan Rural Support Programme (AKRSP) ................................................... 58
Agricultural Growth and Rural Poverty ................................................................ 66
Improving the Enforcement o f Contracts in Land Administration in
Palustan .............................................................................................................. 73
Examples o f Land Reform and Land Titling Projects ........................................... 74

V
Box 8.3.
Box 8.4.
Box 8.5.
Box 8.6.
Box 8.7.
Box 8.8
Box 8.9
Important Issues Regarding Tradable Water Rights ............................................. 77
Infrastructure Constraints for Development o f Water markets in Pakistan .......... 78
Factor Market Reforms and Agricultural Diversification in Chile ....................... 79
Factor Market Reforms and Labor Mobility in Poland ......................................... 80
Bonded Labor and Reforms in Nepal .................................................................... 81
Micro-Finance for Agriculture .............................................................................. 83
Suggested Guidelines for Providing Matching Grants for Income-generating
Activities ............................................................................................................ 84
ANNEXES
Annex 1 : Credit Access and Agricultural Productivity .................................................... 88
Annex 2: Determinants of Farm Revenue Income in Pakistan -Revenue
Functions for Pakistani Farm Households ....................................................... 98
Econometric Specification .............................................................................................. 101
Human Capital ................................................................................................................ 102
Main Findings ................................................................................................................. 102
Farm Operation Size ....................................................................................................... 105
Land Ownership .............................................................................................................. 106
Family Size ..................................................................................................................... 107
Surface Water ................................................................................................................. 108
Credit .............................................................................................................................. 109
Other Results ................................................................................................................... 111
The Effects o f Tenancy Type .......................................................................................... 111
Annex 3: Distributional Impacts of Agricultural Growth and Factor Market
Reforms ................................................................................................................. 113
The 2001-02 Pakistan S A M ............................................................................................ 113
Modeling Framework ...................................................................................................... 118
Simulation 1 : Output Shocks to Crop and Livestock Agriculture ................................. 120
Simulation 2: Shift from Share-Cropping to Fixed Rents ........................................... 122
Simulation 3 : Removal o f Credit Constraints ................................................................ 124
Simulation 4: Improved Distribution o f Water .............................................................. 127
Conclusion ...................................................................................................................... 129
Table A1 . 1
Table A l . 2
Table A l . 3
Table Al.4
Table A l . 5
Table A l . 6
Table A2.1
Table A2.2
Table A2.3
Table A2.4
L i s t o f Variables and Descriptive Statistics .......................................................... 89
Probit on Access to Formal Credit ........................................................................ 91
Probit on Access to Informal Credit ...................................................................... 92
Probit on Access to Formal and Informal Credit .................................................. 93
Credit Access and Farm Productivity ................................................................... 94
Credit Access and Farm Productivity (IV Estimates) ........................................... 96
Canal Water Usage and Transactions by District., ............................................... -99
Net Farm Revenue Regression Results (Dependent Variable: Net Farm
Elasticities o f Household Farm Revenue with Respect to Quasi-fixed
The Distribution o f Farm Size and Land Ownership (Acres) ............................... 100
Revenue (Rs) ....................................................................................................... 103
Factors ................................................................................................................ 105

v1
Table A2.5
Table A3.1
Table A3.2
Table A3.3
Table A3.4
Table A3.5
Table A3.6
Table A3.7
Table A3.8.
Table A3.9
Table A3.10
Table A3.11
Table A3.12
Figure A l a1
Figure Al.2.
Figure Al.3
B o x A3.1
Return on Credit (Elasticities) ............................................................................... 110
Pakistan: Household Incomes and Expenditures, 2001/02 .................................. 116
Pakistan: Factor Income Shares by Household Type 2001/02 ............................. 117
Disaggregated Factor Incomes Shares by Household Group, Pakistan
2001/02 ............................................................................................................... 117
Pakistan Rural Agricultural Incomes .................................................................... 118
Simulation Results: 10 Percent Output Shock to Major Crops and
Livestock.. .......................................................................................................... 121
Share o f Household Group Are Cultivated by Tenure Status, 2001/02 ................ 123
Share o f Area Cultivated by Tenure Status and Household Group
2001/02 ............................................................................................................... 123
Simulation Results: Percentage Change in Household Incomes.. ........................ 124
Estimates o f P roductivity Gains from Removal o f C redit Constraints .................1 25
Distribution o f Estimated Returns to Small Farm Irrigated Land (Major
Crops), 2001/02 .................................................................................................. 126
Crop Yields by Location Along Canals (tons/hectare) ......................................... 127
Simulation Results: Household Incomes .............................................................. 128
Figures in Annexes
Credit Rationing in the Formal Market ................................................................. 89
Credit Rationing in the Informal Market ............................................................... 90
Operated vs . Owned Area by Province ................................................................. 97
Box in Annex
Structure ofthe 2001-02 Pakistan S A M ............................................................... 114
References ............................................................................................................................. 130
Background Papers for the Pakistan Rural Factor Market Study ................................. 137

vii
Pakistan at a glance 911 7/04
1983 1993 2002 2003
30.3 25.0 23.2 23.3
-
Growth of investment and GDP (%)
" T I
POVERN and SOCIAL
Pakistan
2003
Population, mid-year (millions)
GNI per capita (Atlas method, US$)
GNI (Atlas method, US$ billions)
Average annual growth, 1997-03
Population (%)
Labor force (%)
Most recent estimate (latest year available, 1997-03)
Poverty (% ofpopulation below national poverty line)
Urban population (% of total population)
Life expectancy at birth (years)
Infant mortality (per 7,000 live births)
Child malnutrition (% of children under 5)
Access to an improved water source (% ofpopulation)
illiteracy (% of population age 75+J
Gross primary enrollment (% of school-age population)
Male
Female
KEY ECONOMIC RATIOS and LONG-TERM TRENDS
1983
GDP (US$ billions) 28.7
Gross domestic investmenffGDP 18.8
Exports of goods and servicesiGDP 11.9
Gross domestic savingsiGDP 7.7
Gross national savings/GDP 17.0
Current account balance/GDP 0.6
Interest paymentsiGDP 1.1
Total debffGDP 41.9
Total debt serviceiexports 20.9
Present value of debffGDP
Present value of debffexports
1983-93 1993-03
(average annual growth)
GDP 5.8 3.4
GDP per capita 3.1 0.9
Exports of goods and services 10.4 3.3
148.4
430
64.0
2.4
3.2
33
34
64
76
90
59
73
84
62
1993
51.5
20.8
16.3
14.7
20.6
5 . 5
1.5
47.7
23.9
2002
2.8
0.4
10.3
South
Asia
1,425
510
726
1.8
2.3
28
63
68
48
84
41
95
103
88
2002
58.9
14.7
18.7
14.4
18.1
2.7
1.3
57.1
21.0
44.9
195.2
2003
5.8
3.3
32.9
Low-income
2,310
450
1,038
1.9
2.3
30
58
82
44
75
39
92
99
85
2003
68.6
15.5
20.5
15.6
22.2
6.1
1.1
52.7
16.7
200347
6.1
3.7
1.5
levelopment diamond'
Life expectancy
T
;NI
ier
:apita
I
Access to improved water source
Pakistan
Low-income group
Economic ratlos'
Trade
T
indebtedness
Pakistan
Low-income (ITOUR
-*
STRUCTURE of the ECONOMY
(% of GDPJ
Agriculture
Industry
Services
221 247 233 235 lo
Manufacturing 153 167 161 164 o
~ I 477 503 535 532 .,o
Private consumption 80.8 72.2 74.4 72.7 -no1
General government consumption 11.4 13.1 11.3 11.7
imports of goods and services 23.0 22.4 19.0 20.4 -GDI +GDP I
(average annual growth)
Agriculture
lndiistrv
Manufacturing
Services
Private consumption
General government consumption
Gross domestic investment
Imports of goods and services
1983-93 199343 2002 2003
4.4 3.5 -0.1 4.1
7.1 3.6 5.4 5.4
6.6 4.1 5.0
5.7 4.1 4.1 I
4.3
6.6
3.5
1.3
1.4
13.5
-0.6
10.4
4.9 0.7 -3.0 10.5 -Exports -imports
3.2 0.0 4.5 13.9
Note: 2003 data are preliminary estimates.
* The diamonds show four key indicators In the country (in bold) compared with its income-group average. If data are missing, the diamond will
be incomplete.

viii
PRICES and GOVERNMENT FINANCE
Domestic prices
(% change)
Consumer prices
Implicit GDP deflator
Government finance
(% of GDP, includes current grants)
Current revenue
Current budget balance
Overall surplusldeflcit
TRADE
(US$ miilions)
Total exports (fob)
cotton
Rice
Manufactures
Total imports (ci0
Food
Fuel and energy
Capital goods
Export price index (1995=100)
Import price index (1995-100)
Terms of trade (1995=100J
BALANCE of PAYMENTS
(US$ millions)
Exports of goods and services
Imports of goods and services
Resource balance
Net income
Net current transfers
Current account balance
Financing items (net)
Changes In net reserves
Memo:
Reserves including gold (US$ millionsJ
Conversion rate (DEC, local/US$)
EXTERNAL DEBT and RESOURCE FLOWS
(US$ millions)
Total debt outstanding and disbursed
IBRD
IDA
Total debt sewice
IBRD
IDA
Composition of net resource flows
Official grants
Official creditors
Private creditors
Foreign direct investment
Portfolio equity
World Bank program
Commitments
Disbursements
Principal repayments
Net flows
Interest payments
Net transfers
1983 1993
.. 9.8
5.3 8.7
.. 18.1
.. -2.4
.. -8.1
1983 1993
2,694 6,782
.. 271
.. 317
1,881 3,723
.. 10,049
.. 1,290
.. 1,578
.. 3,409
88
96
92
1983 1993
3,420 8,339
6,593 12,856
-3,173 -4,517
-421 -1,498
3,416 2,688
-178 -3,326
.. 2,682
.. 644
2,758 1,369
12.7 25.9
1983 1993
12,026 24,546
351 2,624
1,145 2,683
1,343 2,383
63 343
14 45
277 361
350 1,011
-87 710
30 306
0 270
306 625
144 598
34 182
110 416
42 206
68 210
2002
2.7
3.1
19.5
0.2
-6.7
2002
9,140
18
448
5,368
9,432
413
2,664
2,594
80
90
89
2002
11,056
11,646
-590
-2,319
4,500
1,591
1,685
-3,276
4,997
61.6
2002
33,672
2,749
5,394
2,850
367
111
1,495
78 1
-515
368
-491
736
961
318
643
160
483
2003
3.1
4.6
20.8
1.1
4 . 5
2003
10,889
49
555
6,653
11,333
587
3,097
3,392
89
101
88
2003
13,686
14,047
-361
-2,210
6,775
4,204
1,475
-5,679
10,243
58.6
2003
36,132
2,695
5,869
3,028
373
130
1,038
-1 33
-530
612
-394
498
145
357
-21 2
147
-358
Inflation (Oh) I 1 I
Export and Import levels (US$ mill.)
12,500 I 10 000
7 500
5 000
2 500
1 0 97 98 99 00 01 02
I Exports imports
O3 1 ;;nt account balance to GDP (%)
1-10 1
Composition of 2003 debt (US$ mill.)
G: 1.245 A 2,695
F 2,265
E 14342
A - iBRD E. Bilateral
B - IDA D. Other multilaterai F - Private
C - IMF G * Short-term
DeveloDment Economics 911 7104

i x
ACKNOWLEDGEMENTS
This study was managed by Sakwa Bunyasi and Paul Dorosh, (co-task managers). Paul Dorosh i s the
principal author o f the final report. Albert0 Valdes designed the study, provided overall guidance for the
work and contributed to the analysis and synthesis. Sohail J. Malik played a major role in the work on
agricultural credit and poverty, the synthesis o f the results, and in organizing seminars and workshops in
Palustan.
The report draws from a set o f background papers prepared for this study listed at the end o f this report.
Gustavo Anriquez, Hanan Jacoby, Ghazala Mansuri, Hina Nazli, Muhammad Khan Niazi and Sarfraz
Qureshi made major contributions, both as authors o f background papers, and in the synthesis o f the
results. Background papers were also prepared by Munir Ahmad, Zafar Altaf, Alejandra Cox-Edwards,
Zakir Hussain and A.R. Kemal. Manuel Contijoch contributed to the discussion o f irrigation and water
markets .
Adolfo Brizzi, Derek Byerlee, Tekola Dejene, Rashid Faruqee, Steven Haggblade, Abed Hasan, Isabel
Lavadenz, John Mellor, Stephen Mink, Abdul Salaam and Dina Umali-Deininger provided useful
comments and suggestions on various aspects o f the report. The report has also benefited from comments
from the Pakistan Ministry o f Food, Agriculture and Livestock (MINFAL) and discussions with
participants at seminars at the Agricultural Prices Commission, the Lahore University o f Management
Sciences, the Pakistan Institute o f Development Economics and the International Water Management
Institute in Lahore, and a seminar in September 2004 in Islamabad hosted by MINFAL.

X
EXECUTIVE SUMMARY
Introduction
1.
In Pakistan, public and private investments in irrigation, adoption o f green revolution technology
and trade and output pricing reforms have spurred substantial agricultural growth over the last three
decades. Agricultural GDP growth slowed substantially since the early 1990s, particularly in the crop
sector (2.4 percent average annual growth from 1990 to 2002, compared with 3.5 percent per year growth
from 1960 to 2002), however, raising concerns about the sustainability o f agricultural growth in the
medium term. Moreover, the sharp declines in rural poverty that accompanied agricultural growth in the
1970s and 1980s have not continued. The latest available poverty estimates (38.9 percent in 2001-02),
may be inflated by the effects o f the drought, but estimated rural poverty in 1998-99 (35.9 percent) i s
essentially the same as in 1990-91 (36.9 percent).
Pakistan’s Poverty Reduction Strategy Paper (PRSP) written in 2003 (World Bank, 2003b) gives
2.
a central role to the rural sector in accelerating growth and reducing rural poverty. However, although the
PRSP places a major emphasis on employment-generating growth in agriculture, small and medium
enterprises, housing and construction, information technology, telecommunications and exports, it lacks
an explicit rural development strategy beyond that for the agricultural sector. Accelerating rural
economic growth and reducing rural poverty i s complex, and requires a comprehensive strategy built on
sound analysis covering all major aspects o f the rural economy including agricultural output markets,
input markets (seeds, fertilizer, extension), factor markets (land, water, labor and credit), the rural non-farm
economy, and targeted interventions.
This report focuses on one aspect o f this complex puzzle - rural factor markets. It builds on
3.
earlier work on output and input markets, and anticipates future analytical work on the rural non-farm
economy and other key aspects o f the rural economy. The report i s designed to identify the main factor
market inefficiencies in rural Pakistan, provide estimates o f their impact in terms o f efficiency and equity,
and suggest policy measures to improve the functioning o f these markets, increase rural incomes and help
reduce rural poverty.
In presenting the results, each factor i s discussed in tum, drawing on descriptions o f institutional
4.
constraints and statistical analysis o f recent household survey data. Key new findings include quantitative
estimates o f the importance o f linkages across factor markets and the impact o f factor market
inefficiencies on agricultural output and revenues. In addition, the report presents analysis showing that
for the 61 percent o f rural poor households that do not cultivate crops (agricultural laborers and non-farm
households), expansion in output o f major crops may not be sufficient to significantly raise their incomes,
even with substantial multiplier effects on the rural non-agricultural economy.
Promoting Efficiency and Equity: The Role of Factor Markets
5. Trade and exchange rate policy reforms undertaken in the late 1980s greatly reduced the
divergence between domestic and international prices for most major agricultural commodities in
Pakistan, and in general increased incentives for production and farmer incomes. Although some trade
taxes and marketing restrictions on agricultural outputs s t i l l remain, lack o f access to land, water and
capital, and inefficiencies in factor markets for land, water, labor and capital are now among the greatest
impediments to agricultural and rural income growth, and reductions in rural poverty.
6.
Well-functioning factor markets can help ensure that the available supply o f these factors i s
allocated to i t s most productive use, thus maximizing value added and incomes. Inefficiencies in these

xi
factor markets, whether due to structural characteristics o f the factors or administrative procedures and
policies, increase costs o f transactions or even prevent transactions from occurring, however, and thereby
lead to a misallocation o f factor resources that reduces output and economic growth. This report does not
attempt to directly measure the relative contributions o f structural characteristics and policy distortions,
but instead presents statistical evidence o f the existence o f factor market distortions and their effects (e.g.
productivity effects arising from lack o f access to credit for small farmers). T o the extent that
inefficiencies in factor markets are due to policy distortions, administrative and policy reforms can
improve productivity. Where the inefficiencies are due to the very structure o f the factor market, (e.g.
uneven distribution o f land holdings or the physical properties o f the Indus river irrigation system that
limit storage and control o f water flows), administrative and policy reforms alone will not necessarily
result in large efficiency or equity gains.
7.
Moreover, major linkages between factor markets, most importantly between land and water
markets, and between land and credit markets, mean that structural and policy-induced inefficiencies in
one factor market have significant implications for hnctioning o f other factor markets. These
inefficiencies in factor markets can have particularly adverse effects for the poor, who often lack both
employment opportunities and the access to the land, water and capital that would enable them to earn
higher returns on their labor in own-farm or own-enterprise activities.
Land
8, Land i s at the heart o f Pakistan agriculture and the rural economy, and returns to land are
estimated to be about h a l f o f incomes (value added) fi-om crop agriculture. Distribution o f land i s highly
skewed, however, a major cause o f income inequality in rural Pakistan.. According to the 2000
Agricultural Census, only 37 percent o f rural households owned land, and 61 percent o f these land-owning
households owned less than 5 acres, (1 5 percent o f total land). Two percent o f households owned
50 acres or more (accounting for 30 percent o f total land). The overall Gini coefficient o f land ownership
in 2000 in Pakistan was 0.66 including rural landless households, the Gini coefficient was 0.86. By
comparison, Gini coefficients for land ownership are 0.71 in India, 0.42 in Bangladesh, and 0.85 in
Brazil.
9. Land i s rarely bought and sold due to high transactions costs, potential disputes about accuracy o f
land records, land prices in excess o f the discounted value o f potential agricultural earnings from the land,
and lack of access to credit by those without land. The l o w frequency o f land transactions helps
perpetuate the highly unequal distribution o f land, hamper labor mobility, and reduce returns to family
labor. Highly skewed land distribution and inefficiencies in land markets also limit access to credit for
many households, since land i s the major acceptable form o f collateral in formal credit markets. Land
rentals in various forms are more common, however 33 percent o f area cultivated in 2000 was under
some form o f tenancy arrangement according to 200 1-02 HIES data (1 8 percent under share-cropping).
10.
Most empirical evidence indicates that productivity o f land on large farms in Pakistan i s less than
that of small farms, holding other factors constant. For example, plot-level regressions o f productivity,
correcting for plot characteristics and some household characteristics (such as tractor ownership and
number o f household workers) suggests a doubling o f operated area leads to 10 percent lower wheat
yields (and 13 percent lower rice yields), (World Bank, 2002). Farm household income data also show
that small farmers have higher net returns per hectare than do large farms. These findings suggest that
increases in the share o f land cultivated by small-holders would tend to increase overall farm productivity
in Pakistan.
1 1.
Econometric evidence also suggests that tenure arrangements have significant impacts on
productivity. Productivity of share-croppers i s about 20 percent lower than productivity o f landowners,

xii
holding other factors constant, because o f lower incentives for own-labor inputs. Though share-cropping
i s declining as a form o f tenancy, the benefits to share-croppers (shared financial risks o f crop failure and
credit for purchase o f inputs) and owners (greater owner input into management decisions) likely explain
i t s persistence as a tenancy arrangement.
12. Three major attempts at redistributive land reform in Pakistan have failed (most recently in 1977),
and land reform has neither political support, nor the backing o f Islamic religious authorities. Because o f
these severe institutional constraints to traditional redistributive land reform, more feasible options to
increase access to land by poor households involve a win-win approach. Land purchase schemes that
include grant components for the poorest landless households are one example, though fiscal costs could
limit the scale o f such programs. Policy measures to increase access to land also include increased access
to credit to enable poor households to purchase land, land taxation to reduce incentives for holding land
for speculative purposes, and measures to improve the efficiency o f land sales and rental markets.
13. Administrative reforms in the enforcement o f existing norms and regulations, including
enforcement o f contracts and the rights o f tenants, and lifting restrictions for rentals would also help
improve the functioning o f land markets. Simplification o f complicated legal procedures that result in
long delays in proceedings and a backlog o f cases would reduce land transactions costs. Poor households
are at a particular disadvantage in cases brought before civil courts, since they often cannot afford to
pursue these cases. Possible steps include limits on the number o f appeals, procedural reforms,
alternative conflict resolution mechanisms, and barring o f the jurisdiction o f civil courts in land revenue
matters. Improved dissemination o f information on land prices and transactions would also enhance
efficiency o f land markets.
14.
Improvements in land records' could also enhance the efficiency o f land markets and increase
security o f tenure. Without secure rights to their land, farmers not only have less incentives for
investment, but also devote resources to defending their rights. Lack o f secure title also reduces access to
land by landless households through rentals by increasing the risk o f landowners who might otherwise
rent out more land. In addition, banks are reluctant to lend money using land as collateral because they
do not trust the current recording system. Questions regarding the validity and enforceability o f titles also
make it harder t o buy and sell land. Computerization o f land records, as tested in a recent pilot project in
Punjab, i s one option for establishing clearer land records and reducing fraudulent dealings by land
administration officials.
Water
15.
Given l o w levels o f annual rainfall concentrated over only a few months o f the year and periodic
droughts, water availability at the farm level i s a major determinant o f farm productivity in Pakistan
agriculture. Nearly 80 percent o f cropped area i s irrigated, and agriculture i s by far the largest user o f
available water sources in the country, consuming on average about 95% o f available water resources. In
2001-02, out o f 18.0 million hectares o f irrigated land, 38 percent was irrigated solely with canal water;
39 percent with canal and tube well water, and 19 percent solely with tube well water. Efficiency o f
water use in surface irrigation i s low, however: conveyance losses (part o f which adds to groundwater
recharge) are 55 percent o f total canal diversions.
In principle, access to canal water i s determined by physical location along the canal and the
16.
warabandi system o f allocation o f water through administratively set rotations. Access to canal water i s
In Punjab, land disputes are primarily due to fraudulent dealing because the records are not clear and patwars (land
administration officials) often accept informal payments.

x i i i
thus explicitly tied t o access to land. Ownership o f a plot within a watercourse command area confers
access to irrigation water, but does not guarantee canal water availability. In particular, water availability
decreases significantly if the watercourse i s located near the tail o f the distributary or minor, and/or if the
plot i s located near the tail end o f the watercourse (World Bank, 2002). Water theft by farmers upstream
i s a major reason f o r these water shortages faced by these tail end farmers. Recent administrative reforms
in some parts o f Sindh giving greater control to farmer organizations have reduced water theft, as well as
improved maintenance o f water courses and collection o f fees.2 These could be expanded t o other
regions, as well. Other alternatives for improving delivery o f surface irrigation water services to farmers
also exist, including private professional canal management.
17. Availability o f groundwater has an even higher impact on yields than does canal water, but only
8.1 percent o f cultivating households owned tube wells in 2001/02. Informal groundwater markets
significantly improve access to groundwater, particularly for small farmers, landless tenants and younger
households who often lack the resources (or land and water rights) to install their own tube well.
However, water purchasers do not have full access rights to the water, and are frequently denied access
when water or energy supplies are scarce. Moreover, access to tube well water depends on the proximity
to an existing tube well and conveyance mechanisms (e.g. channels) to distribute the water.
18. Informal water markets for surface irrigation (mainly barter) and groundwater exist, but
establishment o f water markets that would permit trading o f water rights across the canal system (such as
those in Chile and Mexico) would require major institutional changes and investments. In particular, any
system o f tradable water rights would need t o account for the minimal degree o f water control above the
water course level in the current Indus basin system, because o f the absence o f sufficient storage capacity
and control structures (gates) to regulate water flows.
19. Several institutional changes could bring about major improvements in the efficiency and equity
of water use in Pakistan agriculture, with or without the establishment o f water markets, however. First,
in order to increase accountability for Operations and Maintenance, management o f distributaries and/or
minors could be transferred to Farmer Organizations (FO’s), permitting assessment, collection and
retention o f abiana (water charges) by the FO’s. Second, to increase transparency and enable more
informed decisions on area irrigated and crop choice, a) periodic measurements o f the actual rate o f water
flow at various points in the water course could be made; and b) open access to the written rules o f the
water rotation could be provided to farmers. Third, reforms in the institutional arrangements for
allocation o f water could be made to create a more demand-driven system. Options include: a) Water
Course Associations, Water Users’ Associations and Area Water Boards (AWB’s); b) Professional canal
management.
20.
establishing legal tradable water rights at the national and provincial levels; ii) strengthening local
institutions (such as Water Course Associations and Water Users’ Associations or professional canal
management agencies) to enable them to serve as brokers in water markets, helping to match buyers and
sellers o f water. Once effective water markets were developed at the water course level, trades between
water courses could be brokered through these local institutions at the minor level.
Development o f effective water markets would require two steps beyond those outlined above: i)
The experience o f Chile shows that improved allocation o f water, (in the Chilean case through the
2 1.
establishment o f water markets), combined with appropriate trade and macro- policies, can facilitate
In the command area covered by the L e f t Bank Area Water Board in Sindh, where tail end farmers had not
received water in three years, 48 illegal direct outlets serving an area o f about 25 thousand hectares were closed in
early 2004.

xiv
diversification o f agriculture into high-value products for urban and export products, increased labor
demand and reductions in rural poverty. Given the infrastructure constraints in Pakistan, the potential
gains from establishing water markets may be smaller than in other countries. Nonetheless, benefits o f
more efficient allocation o f water through institutional reforms with or without water markets could s t i l l
be substantial if they are combined with other measures to promote agricultural diversification, including
strengthening security o f land titles, public investments in rural infrastructure (roads and electricity),
private investments in processing and storage, and establishment o f market links to export markets.
Labor Markets
22.
Unlike the markets for land and water, rural labor markets are generally characterized by demand
constraints, rather than supply constraints, as evidenced by substantial underemployment. There i s
considerable labor mobility, in spite o f high transactions costs involved in j o b search and especially in
migration, However, formal sector employment in rural areas i s minimal, and over 80 percent o f
agricultural labor and most o f rural non-agricultural labor i s self-employed. Female participation in labor
markets remains limited, though: only 16 percent for females age 15 and over (not including home-based
activities), compared with 85 percent for males. Job s k i l l levels for both male and female labor are
generally low.
23, Education i s an important determinant o f female labor force participation, rural-urban migration,
and labor productivity in rural non-fann sectors. Econometric analysis shows that education i s also a key
determinant o f agricultural productivity. For the average producing household, another year o f education
translates into a 13% increase in yearly net revenues. Effective and more wide-spread vocational training
programs could provide needed skills for non-agricultural labor. Women’s access to educational and
training institutions could be increased through more reservation o f spaces for women.
24.
Real wage rates o f both regular and casual agricultural workers increased by an average o f 1 .O
percent per year from 1984 to 1994, indicating long term tightening o f the labor market. Likewise, real
wage rates o f construction laborers increased by 1.1 percent over the same period. Most o f the increases
in real wage rates took place in the 1980s, however. The trends in the 1990s indicate little gains in real
wages. From 1991-97, real wage rates o f casual agricultural laborers grew by an average o f 0.8 percent
per year, while real wage rates o f regular agricultural workers fell by 2.4 percent per year. Likewise, real
wage rates o f construction laborers grew by only 0.4 percent per year from 1991-97 and for the 1991-
2002 as a whole, fell by 0.4 percent per year.
The decline in real wages in the agricultural sector in the 1990s coincides with a period o f slower
25,
but s t i l l positive per capita agricultural growth. This suggests rather weak linkages between agncultural
growth and rural labor demand. The smaller rate o f decline o f real wages for construction laborers
suggests that lack o f labor mobility between sectors and between rural and urban regions hinder
integration o f non-agricultural and agricultural labor markets
A better functioning land market could also promote labor mobility, helping farmers who want t o
26.
leave farming to sell or rent out their farm land. This would require greater security o f property rights, and
facilitation o f land transactions that are presently stifled by the absence o f a valid title, risks o f court
challenges, and high regulatory and transactions costs (for example, stamp duty plus registration fee plus
capital tax amounted to 16% o f the average market price o f land in 1995).
A concerted effort to enforce existing legislation regarding the rights o f women and children i s
27.
also needed. In addition, measures to assist households trapped in bonded labor arrangements, including

xv
legal protection, provision o f credit and debt cancellation programs should be urgently ~onsidered.~
Although these programs often face considerable opposition from powerful vested interests, such
programs could have a major impact on some o f the poorest rural households.
Credit
28. In principle, credit markets offer a wide scope for policies to increase productivity and to reduce
rural poverty, and can help overcome inefficiencies in other factor markets. In Pakistan, however, access
to formal credit markets in rural areas i s generally limited to landowners, since land i s the main form o f
acceptable collateral for loans. According to Pakistan Rural Household survey data, only 11 percent o f
farmers obtained formal sector loans in 2001-02. Access to informal credit markets, particularly
supplier’s and consumer’s credit i s more widespread, (75 percent o f farm households received loans), but
approximately 40 percent o f rural (farm) households are credit constrained, not being able to obtain as
much credit as they would like at existing interest rates.
29.
farm productivity (measured as gross value o f output per unit o f land). Households who faced credit
rationing in both the formal and informal sectors (approximately 17 percent o f all households) had a 23
percent reduction in value o f yields. Further streamlining o f lending procedures, development o f
alternative forms o f collateral, and other lending innovations to increase access o f small farmers to
commercial credit could help relieve these credit constraints for small farmers.
Econometric analysis o f plot-level data suggests that lack o f access to credit significantly reduces
Removal o f subsidies on credit (implicit in the continuing l o w repayment / high default rates for
30.
loans in the formal sector) could eliminate these policy-induced incentives toward capital-intensive
technologies that reduce labor demand. Efforts at promoting agricultural diversification should thus avoid
subsidies on credit that would encourage capital-intensive technologies in production, processing and
marketing. Instead, agricultural diversification, the development o f the rural non-farm sector and poverty
reduction may be better achieved through public investments in electricity, transport and other
infrastructure. Further work on particular constraints to rural non-farm investment, employment and
growth i s needed, however.
3 1.
Production credit and micro-credit programs targeted to landless and small farmers that required
other forms o f collateral (besides land) could also help promote rural employment and income generation.
Rural credit from formal sources i s currently available for a narrow range o f agricultural production
activities and does not serve the needs o f the non-farm sector. In particular, availability o f medium-term
credit i s extremely limited. Increased access to credit by small scale enterprises in rural areas, for
example, would promote farm to non-farm linkages, develop the rural non-agricultural sector and increase
labor demand. Targeted matching grants to poor households for income-generating activities are one
option.
32. The Government o f Pakistan in recent years has, in fact, placed considerable emphasis on
developing micro-finance as part o f i t s poverty alleviation strategy. In 2003, Rs. 1,442 million (2.5 % o f
total institutional credit) was disbursed as small loans through the Pakistan Poverty Alleviation Fund
(PPAF), Khushali Bank and the Zarai Taraqiati Bank Limited (ZTBL, formerly called ADBP). N o
Nearly 200 thousand rural households in Sindh and Punjab (equivalent to about 2 percent o f Pakistan’s rural
population), were estimated to be in debt bondage based on 1990 Agricultural Census data. Analysis o f 2000
Agricultural Census data suggests that in Punjab alone, 50 thousand sharecroppers were in debt bondage, equivalent
to about 9 percent o f total landless tenant farmers in Punjab.

xvi
comprehensive study o f the overall impact o f these micro-credit schemes has yet been done, and there
remains a major concern regarding financial sustainability o f these programs. Promotion o f savings
mobilization schemes and implementation o f an adequate regulatory fkamework for deposit-based
institutions could help provide sustainable resources for micro-credit.
Income Distribution and Poverty Reduction
33. Increased agricultural production has been a major force for reducing rural poverty over much o f
South Asia over the past four decades. Rural poverty in Pakistan did not decline in the 199Os, however,
in spite o f agricultural growth. Overestimation o f true sectoral growth rates because o f abrupt changes in
estimates o f livestock population i s part o f the explanation for this lack o f correlation between agricultural
growth and poverty reduction. Stagnation in the real consumer prices o f rice and wheat (in contrast to
declines in early decades) i s another major factor.
34. Two other major factors are the changing structure o f the Pakistan economy, in particular the
declining share o f agriculture in total GDP (39 percent in 1970, but only 24 percent in 2000), and the
persistent unequal distribution o f land (and land revenue). Moreover, since more than 60 percent o f rural
poor households are not farm households (according to HIES 2001-02 data), the magnitude o f these
linkage effects with the non-agricultural sector i s crucial to the poverty impacts o f agricultural growth.
Rural non-farm households account for 46 percent o f the rural poor; agricultural laborer households
comprise 15 percent o f the rural poor. Though there i s substantial poverty among small landowning
farmers (38 percent are poor), this group accounts for only 24 percent o f total rural poor households.
Landless tenant farmers (61 percent o f whom are poor) account for another 13 percent o f the rural poor.
35. Model simulation results o f the direct and multiplier effects o f a 10 percent increase in the output
o f all major crops (wheat, basmati and IRRI rice, cotton and sugar cane, which together account for about
35 percent o f total agricultural value-added) suggest that the largest gains o f increased production o f these
major crops accrue to large and medium land owners, whose incomes rise by 7 percent. Incomes o f small
farm owners and pure tenants also rise by about 5 percent. But the poorest rural household groups
(agricultural laborers and rural non-farm poor -- 29 percent o f the rural population) reap only 7 percent o f
the total income gains, and their incomes rise by only 3-4 percent. Gains from a 10 percent increase in
livestock production (mainly cattle, goats and dairy products) are more evenly spread out given the
distribution o f ownership o f livestock, suggesting that measures to increase livestock productivity may
have more positive effects on equity.
36.
Similarly, in spite o f multiplier effects on agricultural and non-agricultural output, simulations
suggest that a shift from share-cropping to fixed rents would remove labor disincentive effects and raise
the productivity o f former share-croppers to equal that o f land owners (affecting 18 percent o f area
cultivated in Pakistan) would raise average incomes o f tenant farmers by 3 to 4 percent (and incomes o f
farmers directly impacted by the reforms by about 10 percent), but are likely to have only small overall
impacts on rural incomes in aggregate. Releasing constraints on access to credit has similar impacts o n
small farmers, as well as inducing an estimated 2 percent gain in average incomes o f the rural non-farm
poor, Raising productivity o f farmers at the tail-end o f watercourses to match that o f head-end farmers
through increased access to water, if it could be achieved without reducing the productivity o f head-end
farmers, would have even larger impacts on small farmers (4-6 percent average income gains) and could
raise incomes o f the rural non-farm poor by 3 percent.
Thus, although agricultural growth can have a major impact on a sizeable segment o f the rural
37.
poor through combined direct and multiplier effects, it i s unlikely to be sufficient to rapidly raise incomes
o f the 30 percent o f the rural population (and 61 percent o f the rural poor) who are landless agricultural
laborers and non-agricultural rural poor households. In the absence o f a change in the structure o f rural

xvii
incomes and employment or significant gains in the rural non-farm economy apart from agricultural
growth-induced linkage effects, targeted interventions to agricultural laborers and the rural non-farm poor
will be needed.
38.
2003b) recognizes this explicitly. In addition to advocating sustained and broad based economic growth
emanating from the rural areas the strategy also emphasizes the simultaneous provision o f social and
economic services and infrastructure for the poor, creating j o b opportunities and improving governance as
essential elements. A more detailed rural development strategy i s s t i l l needed, however.
The Poverty Reduction Strategy Paper (PRSP) o f Pakistan issued in December 2003 (World Bank
Significant structural changes have taken place in Pakistan’s economy over the past several
39.
decades that make factor market reforms critical to increasing agricultural productivity and raising
incomes o f the rural poor. Rural population has steadily increased, gradually reducing average farm sizes
in the face o f constraints on the overall supply o f arable land and water. The size o f the agricultural
sector relative to the overall economy has steadily shrunk, as the output o f the rural non-farm economy
has expanded, tending to lessen the impact o f agriculture on the overall rural economy.
Even in the face o f increasingly severe constraints on land and water resources, agricultural
40.
growth can play a major role in increasing incomes and reducing poverty among farm households.
Experience o f other countries suggests that factor market reforms, coupled with outward-oriented trade
and exchange rate policy can lead to rapid agricultural growth and rural poverty reduction through
diversification o f agricultural production into high-value products (e.g. fruits and vegetables) with labor-intensive
production and processing. Reforms in factor markets that promote the allocation o f scarce land
and water resources to their most efficient uses, and increase returns to unskilled labor, are essential for
replicating this success in Pakistan.
41. However, because many rural poor households lack access to land, agricultural growth alone i s
not sufficient to significantly raise incomes o f a large fraction o f the rural non-farm poor, even with i t s
substantial multiplier effects on the non-agricultural economy. Policies and programs to increase access
to credit and enhance worker and entrepreneurial skills can directly support growth in the rural non-agricultural
economy and further raise incomes o f the rural non-farm poor. Targeted interventions are
also needed to reach the poorest households including expansion o f micro-credit, enforcement o f laws o n
bonded labor, and training in marketable skills.

I. RURAL FACTOR MARKETS IN PAKISTAN: POLICY REFORMS
FOR GROWTH AND EQUITY
I. INTRODUCTION
Palustan’s agricultural sector has enjoyed steady growth for most o f the last three decades,
1.1
with agricultural Gross Domestic Product (GDP) increasing by an average o f 4.1 percent per year
from 1975 to 2000. Green revolution technology o f improved seeds, irrigation, and increased
fertilizer use spurred rapid growth in crop agriculture (especially wheat and rice) beginning in the
later 1960s. Livestock production outpaced the rapid growth in crop agriculture, with value added
increasing by 5.3 percent per year from 1975 to 2000.
Long-term agricultural growth has also been accompanied by reductions in rural poverty,
1.2
particularly in the 1980s. Rural poverty fell from 49.3 percent in 1984-85 to 33.4 percent in 1993-94,
contributing to an overall decline o f poverty in Pakistan from 46.0 percent in 1984-85 to 28.6 percent.
Table 1.1. Poverty Estimates for Pakistan
1984-85 1987-88 1990-91 1993-94 1998-99 2001-02
Urban 38.2 30.7 28.0 17.2 24.2 22.7
Rural 49.3 40.2 36.9 33.4 35.9 38.9
Overall 46.0 37.4 34.0 28.6 32.6 32.1
Note: 1998-99 data from PIHS; a l l other years HIES. PIHS and HIES combined since 1998-
99
Source: World Bank (2002), p. 20. For 2001-02, Government o f Pakistan Pakistan
Economic Survey (2002-03)
1.3 More recent trends of agricultural incomes and of rural poverty are far less
encouraging. However, agricultural GDP f e l l by 1 percent between 2000 and 2002, in large part
because o f drought, highlighting the vulnerability o f Pakistan agriculture and the importance o f
availability o f water as a major constraint for many farmers. Likewise, the long-term downward
trends in rural poverty have not continued: estimates o f rural poverty for 2001-02 o f 38.9 percent
suggest that for the 1990s as a whole, rural poverty has not declined in spite o f agncultural GDP
growth.
1.4
o f generally favorable policies affecting markets and prices o f agricultural outputs and non-factor
inputs (e.g. seeds, fertilizer and pesticides). Major macro-trade policy and output market reforms in
1980s reduced the bias against apcultural production in Palstan reflected in prices o f agncultural
outputs and inputs relative to those in the non-agricultural sectors. Though some trade taxes and
marketing restrictions remain, the incentive structure for production o f maj or crops (wheat, cotton,
basmati and IRRI rice, and sugar cane) i s more favorable today than in the early 1980s when
substantial growth occurred.
The deceleration o f agricultural growth and the rate o f poverty reduction has occurred in spite
1.5 Long-term agricultural growth and rural poverty reduction are s t i l l constrained by the
structure and performance o f key rural factor markets (land, water, labor and credit), however. These
four factor inputs into production, and the markets that facilitate their efficient allocation across
alternative uses, are key determinants o f agricultural production and growth. Moreover, retums to
these factors o f production, and their structure o f ownership across households, are major
determinants o f rural household incomes and poverty.

2
1.6
In a perfectly competitive market, economic theory suggests that returns to each factor o f
production would be the same for all activities. Profit maximizing households and f i r m s would
utilize factors up t o the point where marginal returns to each factor equaled i t s cost (the market price
o f the factor). Any excess demand for a factor could be purchased at the market price; similarly any
excess supply o f a factor could be sold at the market price. The economic reality in rural Palustan i s
far different from the economic theory o f perfectly functioning factor markets, however, as
inefficiencies in markets for land, water, labor and capital result in lower production and incomes.
1.7
land ownership or physical properties o f the Indus river irrigation system that limit storage and
control o f water flows) or administrative procedures and policies (e.g. lack o f clear land titles) can
increase costs o f transactions or even prevent transactions from occurring, however, and thereby lead
to reduced output and economic growth. However, to the extent that inefficiencies in factor markets
are due to the very structure o f the factor market, (e.g. uneven distribution o f land holdings or the
physical properties o f the Indus river irrigation system that limit storage and control o f water flows),
administrative and policy reforms alone will not necessarily result in large efficiency or equity gains.4
These inefficiencies, whether due to structural characteristics o f the factors (e.g. the pattern o f
1.8 Land i s the most immobile and most unequally distributed of the factors, and land sales
markets in Pakistan are very thin. The absence o f well-functioning land markets hinders access to
land for the landless or small farmers, and perpetuates a highly skewed distribution o f land
ownership. Land rentals in various forms (share-cropping, cash rentals) are more common, however,
20 percent o f area cultivated in 2000 was under some form o f tenancy arrangement. Most empirical
evidence suggests that productivity of land on large farms in Pakistan i s less than that o f small farms,
holding other factors constant. Moreover, both economic theory and empirical evidence suggest that
productivity o f land under tenancy arrangements will be less than productivity o f owned land. Thus,
the absence o f a well-functioning land market results in lower overall output, while the skewed ness
o f land ownership contributes to widespread rural poverty.
1.9 Access to water in Pakistan i s closely tied to access to land, and water markets are
nearly as thin as those o f land. Throughout the Indus basin, surface water i s allocated through the
warabandi system in which water flows are regulated administratively on a rotating basis. Trading o f
canal water i s common (although sales o f canal water are illegal), but i s limited to trades with farmers
in the same distributary. Groundwater irrigation (mainly by tube wells) supplements surface
irrigation for many farmers, increasing the reliability o f water supply and crop yields. Purchases o f
groundwater increase access to water and yields o f small holders and tenants, but likewise are limited
by distance the water must travel (often through unlined watercourses).
1.10
Rural labor markets for male labor generally function well, though there i s substantial rural
underemployment. Lack o f access to land limits self-employment opportunities for small farmers and
landless households, while subsidized formal sector credit encourages labor-displacing
mechanization. Informal labor markets account for essentially all employment in rural areas, but
agricultural labor demand remains highly seasonal. Rural non-farm employment i s mainly self-employment,
and returns to labor are constrained in part by lack o f s k i l l s and physical capital.
Female labor force participation i s low: in rural areas only 32 percent, even when 14 household labor
activities are included.
This report does not attempt to directly measure the relative contributions o f structural
characteristics, but instead presents statistical evidence o f the existence and effects o f factor market
distortions (e.g. productivity effects arising from lack o f access to credit for small farmers).

3
1.1 1
Credit markets are potentially the most flexible o f all factor markets since overall supply o f
credit i s determined by government monetary and banking policy. There are substantial inefficiencies
in formal credit markets, however, where credit i s rationed and the landless and small farmers lack
the collateral to access credit. These groups get almost all o f their credit through informal markets, or
through tied arrangements with landlords, employers or traders. Nevertheless, access t o informal
sector credit for poor households can be problematic, as evidenced by instances o f bonded labor
arrangements.
1.12 Because o f the strong linkages across rural factor markets in Palustan, inefficiencies in one
market can adversely affect the performance o f other markets, magnifying the efficiency losses and
consequences for income distribution. For example, ownership o f land i s a major determinant o f
access to formal credit; water rights also are tied to ownership or user rights to land. The skewed
distribution o f land thus results in a skewed access to water and credit, and the earnings derived from
these factors. Better functioning water and credit markets, however, could help ease the adverse
efficiency and distributional consequences o f skewed land ownership.
Plan of the report
1.13
Section 2 o f this report presents an overview o f Palustan’s agriculture and agricultural
policies. Sections 3 through 6 then analyze the four factor markets (land, water, labor and credit) in
turn. Section 7 discusses the implications o f agricultural growth and inefficiencies in factor markets
for rural poverty in Palustan, drawing on analysis o f farm-level data and model simulations. Section
8 concludes with a summary o f the major findings, lessons from other countries, and policy
implications.

11. AGRICULTURAL POLICY AND SECTOR PERF’ORMANCE IN
PAKISTAN: AN OVERVIEW
The agricultural sector i s at the heart o f Pakistan’s rural economy, accounting for 70 percent o f
2.1,
rural household incomes and about 25 percent o f national GDP. Both crop and livestock sub-sectors have
enjoyed substantial growth over four decades, but Pakistan’s agriculture remains highly susceptible t o
droughts and i s heavily reliant on irrigation.
2.2. The agriculture sector has maintained a long-term annual growth rate o f 3.7 percent over
the period o f 1959-60 to 2001-2002 with wide year-to-year variations. Apart from a period o f slow
growth in the first h a l f o f the 1970s, average agricultural growth exceeded 3.2 percent per year in each
quinquennium from 1960 to 2000. However, the performance o f the agriculture sector (particularly the
crops sub-sector), has suffered in recent years because o f severe droughts in the country. Agricultural
GDP f e l l by 2.64 percent in 2000-01 and grew by only 1.39 percent in 2001-02 (table 2.1).
Table 2.1 Agricultural Growth in Pakistan, 1959-60 to 2001-02
Agriculture Crops Livestock Wheat Rice Cotton SCane Maize
1960-65
1965-70
1970-75
1975-80
1980-85
1985-90
1990-95
1995-00
2000-01
2001 -02
3.78 4.76
6.26 8.18
0.78 0.49
3.91 4.15
3.28 2.63
4.57 3.70
3.93 3.02
4.81 3.19
-2.64 -7.11
1.39 -0.09
1.90 3.27 4.88
1.97 9.70 12.20
2.01 1.02 -0.74
3.07 7.19 6.80
4.77 1.51 0.61
6.12 4.1 1 -0.58
5.70 3.50 1.37
6.57 4.39 8.39
4.86 -3.33 -5.49
3.42 -2.42 -11.10
5.32 11.85 1.30
7.24 7.15 4.82
2.64 -4.23 2.26
3.61 5.29 3.21
6.73 3.17 3.27
7.62 2.01 2.79
0.32 5.85 2.25
5.26 -0.36 4.62
-1.88 -4.85 -1.87
6.46 4.10 -0.64
1960-2002 3.67 3.50 3.98 3.77 3.28 4.41 3.65 2.99
1990-2003 3.46 2.40 5.79 2.44 3.31 0.83 2.66 3.59
Source: M. Ahmad, (2003).
2.3. Agricultural incomes in Pakistan are nearly evenly split between crop and livestock
agriculture. The crops sub-sector currently contributes about 54 percent o f the value added, with major
crops (wheat, cotton, rice, sugar cane) accounting for 38 percent o f total agricultural GDP and minor
crops contributing 16 percent. Wheat, cotton and rice together account for 60 percent area cultivated
nationally (table 2.2). The livestock sub-sector, dominated by dairy, sheep and poultry, has increased i t s
share over time, from only 25 percent in 1982 to i t s present level o f 46 percent. Fish and forestry are
minor sectors in Pakistan, accounting for 2.2 and 0.3 percent o f agricultural GDP, respectively.

5
Table 2.2 Area, Yield and Production o f Major Crops in Pakistan, 1999-00 t o 2002-03
Area Area Area Yield Yield Production Production
Notes: Oilseeds includes rapeseed, mustard and sesamum.
Other includes fruits, vegetables and all other crops.
Growth rates are average growth rates, 1990-9 1 to 2002-03, 2002103 data are preliminary.
Source: Economic Survey o f Pakistan, 2003, (tables 2.1 and 2.4).
2.4.
constraint o n agricultural production at the farm level. 82 percent o f area cultivated o f Pakistan’s
major crops i s grown on irrigated land (both surface and groundwater), with cotton, rice and sugar cane
grown exclusively on irrigated land.
Over 80 percent of arable land in Pakistan i s irrigated, and availability o f water i s a major
2.5. Dominant cropping patterns vary across Pakistan according to soil type and water
availability. In the northern irrigated areas o f Punjab, basmati rice i s cultivated in the monsoon season
(kharif), followed by wheat in the winter season (rabi). In southern Punjab and northern Sindh, cotton i s
the major kharif crop, with the wheat crop immediately following5 In southern Sindh where drainage
problems inhibit cultivation o f cotton and warm night temperatures reduce wheat yields, non-aromatic
rice (typically called IRRI rice) i s the major crop. In dryland (barani) areas o f northern Punjab and
NWFP, wheat i s cultivated along with pulses and other minor crops.
2.6.
Adoption o f green revolution technology, (improved seeds, increased fertilizer use, and
irrigation) enabled the crops sub-sector t o grow at an average rate o f 3.5 percent per year over the
last 40 years. Within the crops sector, cotton production grew most rapidly (4.4 percent per year).
Wheat, rice, sugar cane and maize also grew at rates in excess o f 3 percent per year (3.8, 3.3, 3.6 and 3.0
percent per year, respectively).
2.7. Annual growth rates o f wheat (2.36%), cotton (0.53%) and sugar cane (2.46%) have been
much lower since 1990. Total area cultivated has increased by only 0.18 percent per year as expansion
Here, farmers face a tradeoff between leaving cotton crop in the field for an additional harvest and delays in wheat
planting that result in lower wheat yields. Although area planted with cotton i s only about 113 o f wheat area, the two
crops each account for about 30 percent agricultural value added at 1980-81 base prices.

6
in multiple-cropping has slowed. Several years o f drought have also limited area expansion, as well as
diminished yields. Much o f the gains from the initial introduction o f new technologies for major crops
had been realized by the early 1990s. Average wheat yields in Pakistan (2.12 tonsha) were 16 percent
below average wheat yields in India (2.52 tonsha) over the 1989-90 to 2002-03 period. Average rice
yields were essentially the same as those in India (2.74 and 2.85 tons/ha, respectively).6 Sugar cane
yields in Pakistan are only two-thirds those of India (45.5 and 67.7 tonsha, respectively).
2.8. Recent analysis suggests that total factor productivity in crop agriculture in Punjab grew
by only 1.26 percent per year from 1966 to 1994, and that deteriorating soil and water quality are
reducing productivity growth by an average of 0.22 percent per year (Ali and Byerlee, 2002).
Although land and labor productivity both increased by about 2.5 percent per year from 1966 to 1994,
rising costs o f inputs limited growth in total factor productivity in crop agriculture. Labor use in crop
agriculture in Punjab declined from 98.7 daydhectare to only 71.7 dayshectare due to increased
mechanization (tractors, harvesters and thre~hers).~T otal factor productivity growth in the rice-wheat
cropping system has actually declined, in part due to overuse o f poor-quality tube well water, leading to
soil salinity.
2.9.
Livestock production dominates the rural economies in pastoral areas of Balochistan and
North West Frontier Province (N.W.F.P), and i s a major source of farm earnings in other parts of
Pakistan, as well. Production o f sheep and goats accounts for 17 percent o f livestock value added. Dairy
production (milk and ghee) i s a major source o f incomes for l o w income households in the Punjab and
Sindh, with production of milk increasing by 80 percent between 1990-9 1 and 2002-03. Poultry
production has increased even more rapidly, with the number o f birds and egg production increasing by
135 and 145 percent, respectively, from 1990-91 to 2002-03, but the sub-sector s t i l l accounted for only 3
percent o f livestock value added in 2002-03.
Livestock and agricultural GDP growth in the 199Os, though substantial, are overstated because
2.10.
o f a change in the base for cattle production, According to official GDP statistics, the value added o f
livestock grew by 26% in 1995-96. This large jump i s the result o f using figures from the 1995-96
Livestock Census on the stock o f cattle to calculate value added in that year without making adjustments
to livestock figures in previous years. Using the 10-year average livestock growth rate o f 5% for 1995-96
(instead o f 26%) reduces agricultural growth rate in that year from 12% to 4.7%. With these adjustments,
agricultural growth during the 1990s i s reduced from 4.5% to only 3.1%.
Agricultural markets and prices
2.1 1. The Government o f Pakistan intervenes in both output and input markets in order to stabilize
prices and improve incentives for agricultural production. Support prices are set for all major crops
(wheat, rice, sugar cane and cotton), though government procurement takes place only for wheat and
cotton, The Palustan Agricultural Storage and Supplies Corporation (PASSCO) and provincial Food
Departments procure 25-40 percent o f total production o f wheat, and private market wholesale prices in
Lahore have closely tracked the support price for wheat in most years (table 2.3 and figure 2.1). There
has been no procurement o f basmati or International Rice Research Institute (IRRI) rice since 1995-96, ,
even in 2000-0 1 when the support price (in rice equivalent) was near the wholesale price in Lahore. The
Trading Corporation o f Pakistan (TCP) procures cotton, and minimum cotton export prices are announced
In value terms, rice productivity in Pakistan exceeds that o f India since a higher share o f Pakistan’s production
derives from hgh-value basmati rice.
Ali and Byerlee, (2002), Table 2, p. 847.

7
daily which effectively act as ceiling prices. Market prices fell substantially below support prices in 1999
and 2001, however. The TCP also exports rice, sugar and wheat.
Table 2.3 Ratio of Wholesale Prices (Lahore) to Support Prices, 1995-96 to 2001-02
Basmati IRRl Sugar
Wheat Rice Rice Cane
1995-96 1.16 1.46 1.74 1.19
1996-97 0.99 1.59 1.99 1.48
1997-98 1.25 1.28 1.54 0.83
1998-99 1.14 1.67 1.55 0.82
1999-00 0.98 1.47 1.69 0.90
2000-01 1.07 1.01 1.13 1.20
2001-02 1.03 1.47 1.28 0.85
Average 1.09 1.42 1.56 1.04
Notes: Missing data for wheat prices from January-April 1999 i s interpolated. Support price o f basmati
and IRRI paddy i s converted to rice equivalent using a m i l l i n g ratio o f 0.67.
Source: Agriculture Statistics o f Pakistan (200 1-02)
Figure 2.1 Wheat Prices in Pakistan, 1995-2003
18.0 I 1
16.0
14.0
12.0
10.0
8.0
6.0
4.0
1 -Wholesale Price (Lahore) +i+ Procurement Price + Import Parity Lahore 1
Source: Calculated from Federal Bureau o f Statistics data and M. Ahmad (2003).
2.12. Up until the mid-l980s, negative indirect effects of overall trade and exchange rate policy
exacerbated the effects of agricultural domestic price interventions, and most major agricultural
commodities were implicitly taxed. In the 1983-87 period, direct effects o f domestic price and trade
policies reduced wheat and basmati rice prices by an average o f 25 and 72 percent, respectively, below
border prices, The indirect effects o f trade and exchange rate policies that led to an appreciation o f the

8
real exchange rate further reduced theses prices to an average o f 42 and 78 percent below border prices.
For cotton, this real exchange rate appreciation reduced the protection afforded to domestic cotton
production from 177 percent down to 27 percent. These price disincentives reduced wheat and rice
production by an estimated 24 and 25 percent (relative to what they would have been during this period),
and reduced farm incomes by an estimated 29 percent (Dorosh and Valdes, 1990).8
2.13. As a result of policy reforms, divergences between domestic and international prices of
major agricultural products are much smaller now than in the mid-1980s (figure 2.2). Wheat
support prices were on average only 10 percent below import parity levels (measured at procurement
centers) in 1999-00 and though prices since then have been below import parity levels, wheat import
demand by Pakistan at world prices was essentially zero, (so that wheat was essentially a non-traded
good).g Support prices for basmati rice were on average 22 percent below border prices (measured at
procurement centers); IRRI rice prices were on average 15 percent above border prices. Cotton prices
were within 5 percent o f estimated export parity in 2000-01 and 2001-02. Moreover, trade and exchange
rate reforms since the late 1980s have to a large extent eliminated major trade and foreign exchange
restrictions and greatly reduced the appreciation o f the real exchange rate relative to i t s medium term
equilibrium levels.
Figure 2.2 Nominal Rates of Protection of Major Crops
0.40
0.30
0.20
0.10
0.00
-0.10
-0.20
-0.30
-0.40
-0.50 ’
B3.I 1999-00
2000-01
0 2001 -02
Source: Based o n calculations in M. Ahmad (2003).
Some informal and formal restrictions on internal markets that raise transactions costs and
2.14.
reduce market efficiencies remain, however. Econometric evidence suggests that wholesale wheat
prices in village markets are determined by the procurement price and the distance o f the village to the
procurement center (Kurosaki, 1996), but movement o f grain across district boundaries has been banned
for a few months after the wheat harvest in some recent years. Rent seeking activities occur, in markets
with and without government intervention, as well. In mango markets in the Sindh, rents are involved in
Hamid, Nabi and Nasim (1990) give similar figures for nominal rates o f protection, as w e l l as a detailed account
o f the policy interventions from 1960 to the mid-1980s.
In 2001, the GOP provided a subsidy o n wheat exports that totaled about $1 million. In 2002-03, the wheat export
subsidy o n wheat was Rs 3250/ton, equivalent to 30 percent o f the estimated C&F price o f U S wheat at Karachi.

9
the collection o f market fees, issuance o f trader licenses, and allotment o f shops (Smith, Khushk, and
Stockbridge, 1999).
2.15. There have been n o direct subsidies on pesticides, seeds and fertilizer since 1996, but subsidies
on surface irrigation water and electricity (in Baluchistan only) remain. The pesticide and seed subsidies
were eliminated in 1981-82 and 1982-83, respectively. The subsidy on locally produced fertilizer was
eliminated in 1993; a small subsidy on imported fertilizer was eliminated in 1996." Likewise, a subsidy
on tube wells o f Rs 16,000 to 20,000 per unit was abolished in 1994-95. Subsidies o n canal irrigation
(calculated as the difference between revenues collected from farmers as water charges and the cost
incurred by the government for operation and maintenance, excluding capital costs) averaged Rs 4.6
billion from 1996-97 to 1999-00, equivalent to 0.8 percent o f agricultural GDP (table 2.4).
Table 2.4 Subsidies in Pakistan Agriculture: 1996-97 to 1999-00 (mn Rs)
~
lrriga tion Credit Electricity Total
1996-97 4,550 1,000 604 6,154
1997-98 5,111 83 972 6,166
1998-99 4,237 437 1,336 6,010
1999-00 4,608 279 652 5,539
Average 4,627 450 89 1 5,967
Source: M. Ahmad (2003); Statistical Supplement (2002b);
Pakistan notifications to the WTO.
loA ll fertilizers n ow face a 15 percent sales duty, and imported fertilizers also face a 5 percent custom duty.

10
111. RURAL LAND MARKETS: INSTITUTIONS AND CONSTRAINTS
3.1 Land, particularly irrigated land, i s the most important productive asset in rural Pakistan and a
major determinant of social status, political influence and income. Land ownership provides access to
political power and public incomes for large landowners, and has considerable pecuniary and non
pecuniary, often invisible, associated returns. An effective land market has failed to develop because o f
legal impediments t o the sale and purchase o f land such as the right o f shufa (first purchase) and
excessive bureaucratic intervention. While the market for land rental i s somewhat more developed,
inadequate information flow and other rigidities (including lack o f access to credit) are responsible for an
economically and socially sub-optimal allocation o f this basic resource.
Land Ownership and Utilization
3.2
Cultivated area in Pakistan has increased by about 50 percent since Independence in 1948 due
mainly to increases in water availability at the farm level. Most o f this gain in area cultivated was
achieved prior to 1990; between 1990/91 and 2000/0 1, cultivated area increased by only 3.2 percent, from
20.96 to 22.13 m i l l i o n hectares, as cropping intensity increased from 1.35 to 1.43 (table 3.1).
Table 3.1 Land Use in Pakistan, 1990-91 and 2000-01
7990-97 2000-07
Forest Area 3.46 3.77
(6.0) (6.3)
Not Available for Cultivation 24.34 24.31
(42.2) (40.0)
Culturable Waste 8.85 8.95
(1 5.4) (1 5.4)
Cultivated Area 20.96 22.27
(36.4) (37.2)
a. Net Area Sown 16.1 1 15.4
(28.0) (25.9)
b. Current Fallow 4.85 6.73
(8.4) (1 1.3)
Total Cropped Area 21.82 22.12
(37.9) (37.1)
Total Area 57.61 59.44
(100.0) (1 00.0)
a. Net Area Sown 16.1 1 15.4
b. Area Sown More than once 5.71 6.64
c. Cropping Intensity 1.35 1.43
Note: Figures in parentheses are the percentages o f total reported area.
Source: Agricultural Census (1990 and 2000).
3.3 Distribution o f owned land in Pakistan i s highly skewed and the number o f small farms i s
increasing over time. According to Agricultural Census data for 1990, 54.4 percent o f farm households
owned less than 5 acres (accounting for only 11.4 percent o f total area), while 2.8 percent o f households
owned 50 acres or more (accounting for 34.0 percent o f total land). By 2000,61.2 percent o f farm

11
households owned less than 5 acres o f land, (accounting for 14.8 percent o f total farm area), and 2.0
percent farmers owned 50 or more acres, but these farms accounted for 29.7 percent o f total area.
3.4
The overall Gini coefficient o f land-holdings in 2000 in Pakistan was 0.66. Including the 63
percent o f rural households with no land, the all Pakistan Gini coefficient i s 0.86. By comparison, Gini
coefficients for land ownership are 0.71 (NSS, 1991-92) for India as whole" (0.76 for Punjab, 0.63 in
Uttar Pradesh), 0.42 in Bangladesh, 0.37 in Thailand, 0.85 in Brazil.12 In spite o f the increase in the
number o f small farms, the overall Gini coefficient for land ownership in Pakistan remained
approximately constant from 1972 to 2000 (table 3.2).
Table 3.2 Pakistan: Distribution o f Land Ownership
1972 1980 I990 2000
Gini Coefficient 0.66 0.65 0.66 0.66
% of landless households
62.0 63.3
% Share of Holdings <5 acres
a. Households
b. Land
% Share of Holdings 50+ acres
a. Households
b. Land
47.3 n.a. 54.4 61.2
5.4 n.a. 11.4 14.8
3.3 n.a. 2.8 2.0
22.4 n.a. 34.0 29.7
Source: Agriculture Census (various issues)
3.5
and 2000. The Gini coefficient for Punjab remained almost constant at about 0.62. Inequality in Sindh
declined f i o m 1972 (Gini coefficient o f 0.69) to 1980 (Gini coefficient o f 0.62), but has remained the
same since then. In Balochistan, the Gini coefficient declined slightly from 0.70 in 1990 to 0.66 in 2000,
indicating an increased equality o f land distribution (table 3.3).
Similarly, inequality o f land holding within provinces did not change significantly between 1972
Table 3.3 Gini Coefficient for Ownership Holdings by Province
1972 1980 1990 2000
Punj ab 0.63 0.62 0.62 0.62
NWFP 0.68 0.69 0.65 0.70
Sindh 0.69 0.63 0.63 0.63
Balochistan 0.69 0.68 0.70 0.66
Source: Agricultural Census (Various Issues)
0.59 (1985 FA0 data).
l2 These land ownership data likely understate the concentration o f land-holdings in Pakistan (and other countries)
since a household's land may be registered in the names o f several household members.

12
Land sales markets in Pakistan are extremely thin: according to Pakistan Rural Household Survey
3.6
data, in 2001-02 less than 0.2 percent o f t otal agricultural land was ~ 0 l d .Ol ~ve r time, however, land
prices have risen substantially relative to land rents, making land less accessible for landless and small
holders since agricultural incomes from purchased land may be insufficient to repay money borrowed for
a land purchase, even if credit were available (See Box 3.1).
Box 3.1 Land Price Determination in Pakistan: Land Rents and Asset Effects
Conventional rent theory suggests that the price o f land i s determined by the discounted value o f the
land’s potential earnings (rents). Data on long-term trends in rental values and land prices in colonial
and post-independence Punjab show a long term decline in the rental value o f land relative to the price
o f land, suggesting that agricultural earnings are not the main determinant o f land prices (Hirashima,
1996). Instead, asset effects, likely linked to the use o f land as a symbol o f prestige and power, and
private capital formation in non-agricultural sectors, appear to be the major determinant o f land prices
in Punjab in the long run.
During periods o f major technological change (the peak o f the green revolution, 1976-86), however,
rents rose faster than land prices in rural Punjab villages. Nonetheless, from 1960 to 1989, the ratio o f
annual rent to land asset price (the WP ratio) declined from 3.93 percent to 2.59 percent in the irrigated
villages and from 2.85 percent in 1960 to 1.98 percent in 1989 in non-irrigated villages (Renkow,
1991).
The large asset component in land prices makes it very difficult for landless households to purchase
land, High land prices increase the financial capital required, and l o w returns to land relative to these
land prices mean that agricultural incomes alone may be insufficient to repay money borrowed for a
land purchase. Only those who can afford to wait for the asset effects to be captured in the long-run,
without expecting much return in the short-run, can participate in land market. In this situation, the
income from outside the agricultural sector (including through remittances) are needed for most
landless or small farm households to purchase land. Moreover, because increases in land prices from
asset value effects vary according to the level o f infrastructure and the dynamism o f the local rural non-farm
economy, uneven regional economic growth i s likely to increase wealth disparities across farmers
in Pakistan.
Source: Hirashima, 1996 ; Renkow, 1991 ; Qureshi, 2003.
3.7 Land rentals are much more common than land sales, but s t i l l account for a relatively small share
of area cultivated. In 2000, 78 percent o f farms in Pakistan, accounting for 73 percent o f area cultivated,
were cultivated solely by the owners o f the land. Fourteen percent o f farms, with 12 percent o f total area
cultivated, were cultivated solely by tenants. The remaining 8 percent o f farms (with 15 percent o f area
cultivated) were farms consisting o f both owned and rented-in land (figure 3.1). Tenancy i s declining in
Pahstan, however, between 1990 and 2000 the percentage o f farms with at least some rented-in land fell
from 3 1 percent to 22 percent.
3.8
According to the 2000 Agricultural Census, about two-thirds o f tenant-cultivated farms involve
share-cropping arrangements where the landlord i s responsible for most input costs (such as seed,
l3Pa kistan Rural Household Survey (PRHS) 2001-02. By comparison, annual tumovers o f land in Latin American
are often 10 to 20 times larger, averaging 5 percent in Colombia, 2 to 3.5 percent in Venezuela, and 1.4 to 2 percent
in Ecuador (Jaramillo 2001). In contrast, no formal land sales markets in Cambodia, China and the Lao People’s
Democratic Republic, where the state or the collective still owns the land.

13
fertilizer and pesticides), the tenants share in some other expenditures (such as water and rental o f
machinery), and the output i s shared equally between landlord and tenant. Most o f the remaining one-third
o f tenant-cultivated farms involve fixed rents paid in cash.
Figure 3.1 Pakistan: Percentage o f Farms and Area Cultivated by Land Tenure Status
90
80
70
60
3 50
2 40
30
20
10
0
S
0
Owners OwnlRent Tenant
1 % of Farms E % of Area
Source: 2000 Agricultural Census.
There i s substantial variance in the incidence o f share-cropping across provinces, ranging from
3.9
11.4 percent o f farm area in Balochistan to 17.2 percent o f farm area in Sindh. Although share-cropping
declined from 1990 to 2000, the relative importance o f share-cropping across provinces has not changed.
3.10 The distribution o f operational holdings i s nearly as skewed as distribution o f land ownership. In
2000, 58 percent o f farms in Pakistan were smaller than 5 acres in size. These farms occupy 16 percent o f
total farm area. In contrast, only 5 percent farms were 25 acres and above and total area under these farms
was 38 percent in 2000 (table 3.4). Trends in distribution o f land cultivated are likewise similar to those
of land ownership, The number o f small farms (under 5 acres) has increased from 46 percent in 1960 to
58 percent in 2000. Area under these farms has also increased considerably - from 3 percent in 1960 to 16
percent in 2000. The number o f farms in all other farm category shows a decline since 1960, except for
the medium farms (5 to 12.5 acres).
Table 3.4 Pakistan: Distribution o f Farms and Area by Farm Size (operated area)
Source: Agriculture Census (various issues)

14
Across provinces o f Pakistan, both owned land and operated land are most unequally distributed
3.1 1
in the NWFP and Baluchistan. Over the past three decades, however, the differences across provinces
have narrowed, as distribution in Sindh and Punjab have worsened, rising from 0.43 and 0.49,
respectively in 1972 to 0.56 and 0.57, respectively in 2000. Over this period, the gini coefficients for
operated land area have remained almost constant in the NWFP and Balochistan, varying between 0.63
and 0.65.
Land Distribution, Land Policy and Land Reform
3.12
The current distribution o f land in Pakistan reflects the government land policies under British
rule and successive governments o f independent Pakistan. As part o f i t s strategy t o “win friends amongst
enemies”, land rights were granted to rural elites as a reward for cooperation and to encourage future
assistance (Naqvi et. al., 1987).14 Land policies varied over time and across province, and included four
concurrent major land administration systems prior to independence -- including the zamindari (landlord
tenant), ryotwari (peasant proprietorship) systems, that established or encouraged an unequal distribution
o f land (Box 3.2).
Land Reforms
3.13
After Independence in 1947, various tenancy acts were passed in Punjab and Sindh in 1950,
followed by three national land reform acts (1959, 1972, 1977). Implementation o f these reforms was
weak, however, due in part to a general lack o f political will and insufficient political strength o f tenants
to counter the opposition by landlords (Box 3.3).
3.14
8 percent o f the country’s cultivated area) from large landowners. About 1.3 m i l l i o n hectares was
redistributed to about 280,000 beneficiaries (an average o f 4.6 hectares per beneficiary). Much o f this
redistributed land was not o f high quality, however, (less than three-quarters o f the distributed area was
under cultivation). Not all beneficiaries were sharecroppers: a high proportion o f recipients were already
small-landowners.
Under the 1959 and 1972 land reform acts,15 the government acquired 1.6 m i l l i o n hectares (about
Despite continuing high levels o f land concentration, further land reforms are currently o f f the
3.15
agenda o f policy-makers in Pakistan. The Shariat Court has given a ruling that imposing a ceiling on land
ownership i s in accordance with Islam, and that the land reform acts must be rescinded. The Government
o f Pakistan has appealed this ruling, and the case i s s t i l l pending.
l4 Naqvi N.H., Khan M.H. and Chaudhury M.G. (1987) Land Reforms in Pakistan: A Historical Perspective,
PIDE, Islamabad
The 1977 land reform act was never implemented.

15
Box 3.2 Historical Rural Land Tenure Systems in Pakistan
Both the British and the Moguls before them granted large rent-free tracts o f land called jagirs to
individuals who had helped them in conquering parts o f Pakistan. In the Sindh, jagirdars often collected part
a f the produce from occupancy tenants, i.e. tenants who had permanent, heritable and transferable rights to
Eultivate the lands.' In many areas these occupancy tenants, called Mukhadims, did not cultivate the land
themselves but engaged tenants-at-will (tenants with few, if any, legal rights, including occupancy rights),
called haris.
Similar to the jagirdari system o f land administration, the Pattadari system was operated in the northem
parts of Sukkur and Shikarpur districts in the Sindh for Afghan settlers. These settlers collectively paid a
nominal rent to the government, but an unequal distribution o f land holdings prevailed among individuals as
these were based o n ancestral and customary rights.
The British officials also recognized the proprietary rights o f landlords (zamindars) who had acquired large
estates during the period o f political instability immediately before the extension o f British rule to the Punjab
and other areas constituting present-day Pakistan. The construction o f the Sukkur Barrage in 1932 and
perennial canals in the following years, much o f the newly irrigated land was purchased by zamindars at high
prices and subsequently rented out to poor cultivators.
In Sindh, the British introduced the ryotwari system, under which the state kept the proprietary rights to the
land and leased the land to tenants who paid land revenues only for the years they ploughed the fields.
Likewise, the Mahalwari system (a refinement o f the ryotwari system) was established in the eastern part o f
the Punjab, by which the peasants o f a village were responsible collectively and individually for the payment
o f land revenue to the British.
Ownership &System Region Ri hts
Mahalwari
Eastern Punjab
Jagirdari Punjab, Sindh
Zamindari Pakistan
Ryotwari Pakistan
Pattadari Sindh
Individual
Individual
State
State
State
Peasants responsible individually and collectively for payment
of land revenue to British
Tax-free tracts of land allocated to favored individuals
Occupancy-tenants (Mukhadims) with permanent, heritable
and transferable rights
Mukhadims engaged tenants-at-will with few, if any legal rights
Large landlord-holdings with heritable, divisible and transferable
rights provided land revenues were paid to State
Peasant-holdings with heritable, divisible and transferable
rights provided land revenues were paid to State
Nominal rent paid to State by Afghan settlers collectively;
unequal distribution of land holdings based on ancestral
Source: Based on Qureshi, Sarfraz. 2003. Rural Land Markets in Pakistan: Institutions and Constraints.
Background paper for Pakistan Rural Factor Markets Study.

Pakistan Rural Factor Markets Study :Policy Reforms for Growth and Equity

Pakistan Rural Factor Markets Study :Policy Reforms for Growth and Equity

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