Evolving Sectoral Dynamics: Agricultural Sector in Different Development Stages

1. Different Stages of Development: Sectoral Perspective Agricultural sector

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

3. 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

4. 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

5. 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

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

7. 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

8. Importance of agricultural development • In 37 LIC’s, agriculture • accounts for about 50% of their GDP • Absorbs nearly 3/4th 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

9. 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?

10. 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

11. Historical Perspective • Agri assigned a low priority in the 1st 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

12. Historical Perspective • 2nd 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 • 3rd 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

13. 4th 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 self-sufficient in wheat • Unsustainable growth because of persistent bad weather

14. 7th 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

15. 8th 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?

16. 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

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

18. 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

19. 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

20. 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

21. 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

22. 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.

23. 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.

24. 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

25. Promote Research and Education • Only 1/20th 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

26. 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.

27. 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

28. Importance and need • 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

29. Objectives • Stabilization of prices • Induce greater production • Supply of food to urban consumers at reasonable prices • Generate public revenues

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

31. 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

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

33. 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

34. 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 2/3rd of the annual cropped acreage • Early period characterized by the unwillingness of the govt. to use the output policy to expand production.

35. 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.

36. 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

37. 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.

38. 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

39. 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.

40. 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

41. 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)

42. 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

43. 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

44. 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.