DIFFERENT STAGES OF DEVELOPMENT SECTORAL PERSPECTIVE Agricultural sector

DIFFERENT STAGES OF DEVELOPMENT: SECTORAL PERSPECTIVE Agricultural sector

This week Look at three main sectors Agriculture Industry Services ( financial sector)

Different stages of development Reading page 39 Growing economy: change in proportion Look at share of main sectors in output and employment Usual pattern : Agriculture Industry Service Industrialization and post industrialization

Industrialization As incomes grow demand for food reaches its natural limit: industrial goods New farm techniques and machinery: relatively less expensive Less labor required Industrial sector starts to take over a larger proportion in GDP

Post industrialization As incomes further rise : People demand services As compared to agriculture and industry, labor is relatively difficult to replace by machines Employment and share of GDP of services increases Most high income countries: post industrializing Low income countries : industrializing

Agriculture: Main readings Agricultural Development : Chapter 9, page 43 Agriculture pricing policy: Chapter 10, page 58

Introduction Important features of UDC’s: Agriculture is the pre-dominant sector Agriculture development forms part of an overall development plan Rate of economic growth is largely a function of the rate of growth of agriculture (contributes nearly 50% of their GDP) High gr rate at macro level has always been associated with a high gr rate in agricultural productivity

Importance of agricultural development In 37 LIC’s, agriculture accounts for about 50% of their GDP Absorbs nearly 3/4 th of their total labor force Contributes substantially to their exports In Pakistan: Backbone of the economy 1949 -50: 53% of GNP 2002 -03: 24% (largest) Absorbs nearly 48. 4% of employed labor force, and 70% if indirect employment is taken into account Largest source of export earnings (rice, raw cotton and cotton based products) Industry is based on agri raw materials

Role of agricultural surplus in development Economic surplus: Excess of production over consumption, utilisation for capital formation Our main sector is agriculture How to increase surplus?

Adam Smiths Natural Order of Development In economic development, priority should be given to agriculture to make it sustainable Industrial development should succeed rather than precede agricultural development U. S. A: agri growth provided ignition and was not sidelined, Japan, China Poverty eradication

Historical Perspective Agri assigned a low priority in the 1 st Plan (1955 – 60): 11% of total investable funds with a 2. 5% gr target, compared to 28% for industry with a 12% gr target Agri growth rates not met by the end of the plan period =< stagnant sector

Historical Perspective 2 nd Plan (1960 – 65): Growth rate of 3. 4% realized in agri , other crucial targets e. g exports. Agri assigned 24% of total funds compared to 26% to industry But priorities in industry were not right 3 rd Plan: Target of 5% growth rate Allocation: 30% , subsidies on inputs Setbacks: ’ 65 war, suspension of US aid, popular agitation + political uncertainties, failed land reforms

4 th Plan (1970 – 75): Became redundant after the split up of the country Crop productivity either stagnated or started a downward slide Reasons: seed deterioration, decline in water use efficiency, low level of input use, water-logging and salinity Land reforms 1977 – 87: partial recovery ; became almost selfsufficient in wheat Unsustainable growth because of persistent bad weather

7 th Plan (1988 – 93): Inconsistent growth rates during the plan period 1988 -89: 6. 9% gr rate 89 -90: 3. 03% 1991 -92: 9. 5% 92 -93: -5. 28% Average growth rate during the Plan: 3. 8% Negative gr rates in 92 -93 due to reverses in the production of major crops Cotton, sugarcane, rice

8 th Plan (1993 – 98): Wide fluctuations due to an natural/climatic conditions Prime Ministers task force during Benazirs government as well as Nawaz Sharifs government gave incentives Agri policy geared towards productivity gains through efficient use of key inputs such as irrigation, seeds, fertilizers, plant protection etc. Non-Plan period (1999 – 2001): Negative growth due to drought Status quo?

Way forward? Explore the possibility of more land reforms: skewed ownerships, wastage of land, lack of investment, feudalism Explore the possibility of small farms: seed, water , fertilizer package Improve the provision of physical inputs: irrigation(rice and irrigation), improved seeds, plant protection, mechanization

Improve the economic environment: minimum prices to growers for their produce, simplifying loan and credit schemes, storages Promote Research and Education

More Land Reforms Highly skewed land : retarding factor in agriculture Land ownership structure has not changed despite land reforms of ’ 59 and ’ 72 Land reforms largely neutralized Land surrendered was largely barren Wastage of land Feudalism Lack of investment Additional land reforms do not seem politically possible

Possibility of Small Farms Urgent need to fully exploit the considerable yield potential of small farms seed-water-fertilizer package Success of this program linked to freeing of small farmers from the bondage of big landlords Tremendous scope of expanding productivity

The Provision of Physical Inputs Water Shortage Appear at critical times, which particularly affect productivity of rice and sugarcane Nearly 45% of water resources wasted annually in transit Water availability can be increased by increasing ground and surface water, and also through initiating on-farm water management programs

The Provision of Physical Inputs Fertilizer: Key input: plays an important role in raising productivity Usage can be increased by subsidizing fertilizer and by advancing credit to farmers Provide expert advice on proper and effective use of fertilizers

The Provision of Physical Inputs Seeds: research work to aim at evolving new HYV of seeds Need more seed processing plants Plant Protection Measures: Import, sale and dist of pesticides handed over to the private sector in 1980.

The Provision of Physical Inputs Mechanization: Helps overcome labor shortage at sowing and harvesting season, and also does the job more quickly Need to locally manufacture tractors, threshers, harvestors, reapers etc. Research should be undertaken to evolve suitable machinery that is suited to local conditions.

Improving the Economic Environment Improve price incentives, agricultural credit, marketing and storing facilities etc. Essential to formulate a liberal credit policy Build additional storage capacity, so that procurement plans are not adversely affected

Promote Research and Education Only 1/20 th of 1% of GNP allocated for research in agriculture Research characterized by duplication of effort => wastage of resources Research conducted by PARC has resulted in production gains in cotton, wheat, maize, oilseed etc. , leading to yield gains ranging between 25% to 100% Acute shortage of research personnel

Pricing policy Govt’s intervene to stabilize prices of agricultural goods to ensure a reasonable price to the consumer and producers Support Price? Procurement Price? Motivations: to safeguard the interests of both producers and consumers and moderate the impact of excessive fluctuations in output.

Agricultural price policy: ‘a policy of the government whereby it acts to influence or determine the prices of agricultural outputs and inputs. ’ Subsidized by government directly or indirectly

Importance and need 1. 2. 3. 4. 5. 6. 7. To remove uncertainty To increase agricultural production Keynesian arguments Lack of storage facilities Stabilize the tempo of economic growth Income disparities To increase the standard of living

Objectives 1. 2. 3. 4. Stabilization of prices Induce greater production Supply of food to urban consumers at reasonable prices Generate public revenues

Price stabilization Carried out through fixation of support prices below which market prices are not allowed to fall Buffer stocks: Over and underproduction

Inducement for greater production Direct and positive correlation between argi prices and production Provide incentive to growers to bring more acreage under cultivation of a crop to expand production Time series data

Reasonable food prices for urban consumers Relatively a more organized and vocal pressure group Absolute necessity for the survival of a political government

Generate Public revenues Wide margin between procurement prices at which the government purchases the agricultural commodity, and the price at which they are exported Augments efforts of resource mobilization

Agricultural output price policy in Pakistan ‘output price policy’ refers to the fixation of procurement and support prices Food and cash crops included in the policy account for nearly 2/3 rd of the annual cropped acreage Early period characterized by the unwillingness of the govt. to use the output policy to expand production.

Agricultural output price policy in Pakistan Resulted in frequent food shortages, esp. of wheat Increase in price of wheat => rippling effect, thus leading to an increase in the overall cost of living Govt. concerned with stability of prices for urban consumers rather than expanding frontiers of food prod during the early years.

Agricultural output price policy in Pakistan Established a direct and +ve relation between support prices and output Next four decades: govt. successfully uses output price policy to increase the production of the 3 major crops of Pakistan

Price fixation process APComm responsible for reviewing and recommending support/procurement prices Recommendations forwarded to the Federal Ministry of Food, Agriculture and Cooperatives. Final approval accorded by the federal cabinet after discussing the proposals.

Price Fixation Criteria APComm takes into account the following: Cost of Production Parity index between competing crops Import Parity Price Export Parity Price Buffer Stocks

Impact on Income Distribution Benefits big landlords at the expense of small farmers Support price policy serves to widen the gap in productivity between the large and small farmers Further worsens income inequalities between the rural rich and the poor Input price policy also favors big landlords => easier access to subsidized inputs such as seeds, fertilizer, machinery etc.

Input Price Policy Refers to government subsidies given on agricultural inputs such as fertilizers, improved seeds, pesticides, tubewells, electricity and agricultural machinery. Objectives? Superior to high output price policy, as even small farmers can benefit from it

Input Price Policy Subsidization of technology ensures its speedy adoption Drawbacks? � Cost of inputs is only a small part of the total cost of production � Low input price may lead to unwanted substitutions (e. g chem fertilizers instead of organic manure, wastage of water)

Input Price Policy Subsidy on inputs should only be temporary Should not be continued indefinitely Objective: help farmers adopt new technology and expand production and income

Input price policy in Pakistan � Explicit subsidy: covers the difference between the real cost and the subsidized rate at which the input is supplied to the cultivator (e. g fertilizer, pesticides) � Implicit subsidy: concealed in concessional prices charged by the govt. for the provision of certain inputs, such as water rate, credit, electricity

Input price policy in Pakistan Subsidies can also be classified from the budgetary point of view: � Current subsidies: financed from revenue budget and are given on agri products used for consumption purposes, e. g wheat, sugar, edible oils etc � Development subsidies are financed from development budget and are given on agri products used for dev purposes, e. g. tubewells, fertilizers, pesticides.