pakistan rural factor-market study
TRANSCRIPT
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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
I 1
I11
I V
V.
V I
Introduction
.............................................................................................................
1
Plan o f
he
Report ....................................................... 1. ..................................................
3
Agricultural Policy And Sector Performance in Pakistan: An Overview
..........4
Agricultu ral M arkets and Prices
..........................................................................
6
Rural Land Markets: Institutions and Constraints.............................................. 10
La nd Ownership and Ut i l izat ion .......................................................................... 10
LandDistr ibution, LandPol icy and Land Reform .............................................. 14
Land Reforms
.....................................................................................................
-14
Lan d Administration, Lan d Ti tles
and
Contract Enforcement
............................
16
Patterns o f Lan d Use and Product iv i ty
by
Farm Size
and
Tenure Status ............ 9
Water Markets In Pakistan Agriculture................................................................ 24
Water Avai labi l i ty
in
Pakistan Agriculture .......................................................... 24
Access to Water and Agricu ltural Pro ductivity
...................................................
27
Impl icat ions for Agr icul tural Product iv i ty
..........................................................
30
Groundwater
........................................................................................................
29
L a w s
and
Regulatory Framework for Water
.......................................................
3 1
Rural Labor Markets
..............................................................................................
33
Structure o f Labor
U s e ........................................................................................
33
Sectoral Compos it ion o f Labor U s e
....................................................................
35
Trends
in
Wages
..................................................................................................
36
Labor Mob i l i t y and M ig ra t ion ............................................................................. 38
Gender
Issues
.......................................................................................................
38
Chi ld Labor
..........................................................................................................
40
Bonded Labor
......................................................................................................
42
GovernmentLab or Policies
.................................................................................
43
Rural Credit Markets
.............................................................................................. 46
Structure o f Rural Credi t M arkets
.......................................................................
46
Historica l Trends
..................................................................................................
47
Repayment o f Loans ............................................................................................
50
Structure o f nterest Rates
....................................................................................
50
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. . .
111
Form al Sector Credit and Mechan ization
............................................................ 5 1
Farm er Hous ehold Access to C redit ................................................................... 52
Access to Cred it ................................................................................................... 54
Micro -credit Programs
and
Savings Mo bil iza tion
...............................................
54
Implicat ions o f Credit Constraints for Produ ctivity and Income
.........................
59
VI1
ImplicationsF o r Income Distribution And Poverty Reduction
..........................
60
The
Puzzle o f
Persistent
Rural Pove rty and
High
Agr icu l tura l G rowth
.............0
Agricul tural
Growth
and Rural Income Distribution .......................................... 65
Factor Market Reforms
........................................................................................
68
Impl icat ions f or Growth and Poverty Reduct ion
.................................................
69
.....................................................................
I11. Conclusions And Policy Implications 70
Land .....................................................................................................................
7 0
Water ....................................................................................................................
75
Labor .................................................................................................................... 79
Credit
...................................................................................................................
81
Implications for
Rural Poverty Reduction
........................................................... 84
Conclusions ......................................................................................................... 85
Table
1.1,
Tab le 2.1.
Table 2.2.
Table 2.3
Tab le 2.4.
Tab le 3.1.
Tab le 3.2.
Tab le 3.3
Table 3
.4
Tab le 3.5.
Tab le 3.6.
Tab le 4.1.
Tab le 4.2.
Tab le 5.1.
Tab le 5.2.
Tab le 5.3.
Table 5.4.
Tab le 5.5.
Table 5.6.
Table 6.1.
Table 6.2.
Tab le 6.3.
Tab le 6.4.
Tab le 6.5.
Table 6.6.
LIST
F
TABLES
Poverty Estimates for Pakistan ................................................................................ 1
Agr icu ltura l Growth in Pakistan. 1959-60 to 2001-02 .............................................
4
Area. Y i e l d and Product ion o f Ma jor Crops in Palustan. 1999-00 to 2002-03 ........ 5
R a ti o o f Wholesale Prices (Lahore) to S upport Prices. 1995-96 to 20 0 1 -02 .......... 7
Subsidies in Palustan Agri cult ure: 1996-97 to 1999-00 (mn Rs.)........................... 9
Land Use in Pakistan. 1990-91 and 2000-0 1 ........................................................... 10
Pakistan: Distr ibution o f L a n d
Ownership
..............................................................
11
Share o f different crops in otal cropped area by size o f arm (1990 and 2000) ......21
Gini Coeff icient for Ow nership Holdings
by
Province
............................................
11
Pakistan: Distr ibution o f Farms and Area by F ar m Size (operated area) ................ 13
Recent
Findings
on L and Product ivi ty and Land Markets ....................................... 23
Average Water Balance o f he Indus Riv er System .................................................
25
Gross Revenue. Total Cost and Returns to Ir r igat io n o f Maj or Crops in
Pakistan Ru ral La bor Force. 1998 (thousands) ........................................................ 34
Labor Force Part icipation, Unemploy ment and Underemployment Rates
..............
34
Percentage Distribution
o f
Ru ral Emplo yed Persons by Ma jo r Sectors and
Provinces (1999-00) .............................................................................................. 35
G r o w th
in
Re al Wage Rates in Palustan, 1984-2002
...............................................
3 6
Female La bor Force Part icipation and Unemployment in Pahstan, 1999-2000 ...... 9
Sources o f Credi t in Palustan, 1995-96
....................................................................
4 7
Zarai Taraqiat i Bank Ltd (ADBP) Lending, 2002-03 ............................................. 4 9
Palustan: Interest Rates in Rura l Cred i t Markets
by
Source
.................................... 5 1
Outstanding Loans by Tenure Categories (Form al and Inform al) ........................... 53
Average Size o f Loans to Fa rm Households, 2002-03 ............................................. 53
Various Regions o f Pakistan 2002-2003 ............................................................... 3 1
Underem ployme nt Rates
by
Occupa tion (1999-00) ................................................. 35
Form al Sector Bankin g (bn 200 0-01 Rupees) .......................................................... 4 6
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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.
Figure3.1.
Figure 3.2.
Figu re 4.1.
Figu re 5.1.
Figure 5.2
Figu re 5.3.
Figu re 6.1.
Figure
6.2.
Figure6.3.
Figure6.4.
Figure
6.5.
Figure 7.1.
Figure
7.2.
Figure 7.3.
Box 3.1
Bo x 3.2.
Bo x 3.3.
Bo x 3.4.
Bo x 4.1.
Bo x 4.2.
Bo x 5.1.
Bo x 5.2.
Bo x 6.1.
Bo x 6.2.
Bo x 6.3.
Bo x 7.1.
B o x 8.1
B o x 8.2.
Credit Rationing in Ru ral P akistan 200 1
................................................................. 55
Ma jor Micro-cre dit Programs in Pakistan, 2003 ......................................................
5 5
Real Prices o f Maj or Food Grains
in
Pakistan, 1970-2003 ...................................... 61
Rura l Household Income by Source and
Expenditure
Qui ntile (200 1-02)
...............
63
Palustan Ru ral Agricu ltural Incomes
.......................................................................
65
Implications o f Changes in Economic Structure for Agricultural Multiplier
Effects ................................................................................................................... 67
Simulated Distributional Impact of Factor Market Reforms
....................................
68
Characteristics o f Factor Markets
in
Palustan
..........................................................
71
Major L inkages o f
Key
Factor Mark et D istortions
..................................................
72
Palustan Rura l Factor Mark ets: Current Government Policies and Programs
and Possible R eforms
............................................................................................
86
Ru ral Pove rty Across Hou sehold Groups, 2002-2002
.............................................
62
LIST
OF
FIGURES
Wheat Prices in Palustan, 1995-2003
....................................................................
7
No mina l Rates o f Protect ion of Majo r Crops .......................................................
8
Pakistan: Percentage o f Farms and Area C ultivated by L a n d Tenure Status .......13
Pakistan: Fa rm Income
per
Cultivated Area
in
Punjab, 2000/01
.........................
20
Area Irrigated by Source o f rriga tion, Palustan 1982-2002 ................................. 25
Real Wages
in
Palustan: 1984-2002
....................................................................
37
Chi ld Labor
in
Pakistan, 1999-2000 ..................................................................... 40
Ch ild La bor Force Participation Rates by Province, Palustan 1999-2000 ............ 1
Growth o f nst i tut ional Agricultural C redit (mn 2000-01
Rps.)
........................... 49
AD BP /Z TB L Tractor Loans land Domestic Tractor Production,
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 M ajor Food Grains in Pakistan, 1970-2003
...................................
61
Rur al House hold Income Sources
by
Quintile, Palustan, 2001-02
.......................
63
Palustan: Per Capita Incomes and Expenditures 2001-02
....................................
64
1986-87 - 2002103 ............................................................................................. 52
List
o f Te xt Boxes
L a n d P r i ce De t e rm in a t i on in Pakistan: LandRents and Asse t E f fec ts
......
12
Historical Rural Land Tenure
Systems
in Pakistan' ............................................. 15
Lan d Policies and Lan d Reform
in
Palustan
.........................................................
16
Land
Rights in
Punjab and Sindh
.........................................................................
18
The Indus
Basin Irr igat ion
System .......................................................................
26
Administrative Reforms
in
Canal Water Management
.........................................
28
Chi ld Labor in Ru ral Palustan............................................................................... 41
Bonded Labor
in
Pakistan
.....................................................................................
42
Recent Reforms in Form al Sector Agric ultural
Lending
n Palustan .................... 48
Pakistan Poverty A lleviatio n
Fund
(PPAF)'
..........................................................
57
Aga K ha n Rural Support Programme (AKRSP) ................................................... 58
Agricultural Gro wth and Rural Poverty ................................................................ 66
Improving
the
Enforcement o f Contracts
in
Lan d Administrat ion
in
Palustan
..............................................................................................................
73
Examples o f Land Reform and Land Titling Projects
...........................................
74
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B o x 8.3.
B o x 8.4.
B ox 8.5.
B ox 8.6.
B o x 8.7.
B o x 8.8
Bo x 8.9
Imp ort ant Issues Regarding Tradable Water
Rights ............................................
77
Infrastruc ture Constraints for Development o f Water markets in Pakistan
..........
78
Factor Market Reforms and Agricul tural Diversi f icat ion in Chi le ....................... 79
Factor Market Reforms and Labor Mob i l i ty
in
Poland
........................................
80
Bonde d Labor and Reforms in Nepal
...................................................................
81
Micro-Finance for Agr icul ture
..............................................................................
83
Activi t ies ............................................................................................................
84
Suggested Guidelines fo r Pr ovidin g Ma tch ing Grants for Income-generating
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
Econometr ic S peci f icat ion ............................................................................................. 101
Hum an Capi ta l
................................................................................................................
102
M a i n Findings ................................................................................................................ 102
Fa rm Operation Size ....................................................................................................... 105
Lan d Ownersh ip ............................................................................................................. 106
Fam i ly S ize ..................................................................................................................... 107
Surface Wate r ................................................................................................................. 108
Credit
..............................................................................................................................
109
Other Results
.................................................................................................................. 111
The E ffec ts o f Tenancy Type ..........................................................................................
111
Annex 3: Distributional mpacts of Agricultural Growth and Factor Market
Reforms................................................................................................................. 113
The 2001-02 Pakistan
S A M
...........................................................................................
113
Mode l i ng Framework ..................................................................................................... 118
Simulat ion 1 Output Shocks to Crop and Livestock A gr icul ture ................................. 120
Simulatio n 2: Shift fr om Share-Cropping to Fi xe d Rents
...........................................
122
Simulatio n 3: R e m ov a l o f Credit Constraints ................................................................ 124
Simula t ion 4 : Improved Dist r ibu t ion o f Water
..............................................................
127
Conclusion
......................................................................................................................
129
Table A1
1
T ab le A l . 2
Tab le A l . 3
Table
Al.4
Tab le A l . 5
T ab le A l . 6
Table A2.1
Table A2.2
Table A2.3
Table A2.4
L i s t
o f Variables and Des criptive Statistics
..........................................................
89
Probit o n Access to Forma l Credit ........................................................................ 91
Probit o n Access to Inf ormal Credi t ..................................................................... 92
Prob i t on Access to Formal and In form al Cred it
..................................................
93
Credit Access and F arm Productivi ty ................................................................... 94
Credit Access and F arm Productivi ty (IV Estimates)
...........................................
96
Canal W ater Usage and Transactions
by
Distr ict. ,
...............................................
-99
Ne t Far m Revenue Regression Results (Dependent V ar iable: N et F ar m
Elastic i ties o f Household F arm Revenue with Respect to Qu asi-fixed
The D is tr i bu ti on o f Fa rm Size and La nd Ownership (Acres) ............................... 100
Revenue
(Rs)
....................................................................................................... 103
Factors ................................................................................................................ 105
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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 a
Figure A l .2 .
Figure Al.3
B o x A3.1
Retu rn on Credit (Elasticities)
............................................................................... 110
Pakistan: House hold ncomes and Expenditures, 2001/02 .................................. 116
Pakistan: Factor Income Shares by Household Type 2001/02 ............................ 117
Disaggregated Factor Inco mes Shares
by
House hold Group, Pakistan
2001/02 .............................................................................................................. 117
Pakistan Rural Agr icul tural Incomes
....................................................................
118
Simulation Results: 10 Percent Output Shock to Majo r Crops and
Livestock..
.......................................................................................................... 121
Share o f Household Group Ar e C ult ivated
by
Tenure Status,
2001/02 ................123
Share o f Area Cult ivated
by
Tenure Status and Hous ehold Group
2001/02
...............................................................................................................
123
Sim ula tio n Results: Percentage Change in Househ old Incomes..
........................
124
Estimates o f Product ivi ty Gains f rom Removal o f Credit Constraints
.................
25
Dis tr i bu t ion o f Estimated Returns to Smal l Fa rm rr igated La nd (Major
Crops), 2001/02 ................................................................................................. 126
Crop Y ie lds by Loc ati on Al on g Canals (tons/hectare) ......................................... 127
Simulatio n Results: House hold Incomes.............................................................. 128
Figures in Annexes
Credit Rationing in he Formal Mar ket ................................................................ 89
Credit Rationing in he In formal Mark et
.............................................................. 90
Operated vs. Owned Area by Province ................................................................. 97
Box in Annex
Structure oft he 2001-02 Pakistan S A M ............................................................... 114
References............................................................................................................................. 130
Background Papers for the Pak is tan Ru ra l Factor M ar ke t Study
.................................
137
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1983
1993 2002
2003
30.3 25.0 23.2 23.3
Pakistan at a glance
911 7/04
Growth
of
investment and GDP (%)
T I
P O V E R N 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
(%)
Mos t recent estimate (latest year available,
1997-03)
Poverty (% ofpopu lation below national poverty line)
Urban population (% of total population)
Life expectancy at b irth (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
Total debffGDP 41.9
Total debt serviceiexports 20.9
Present value of debffGDP
Present value of debffexports
Interest paymentsiGDP
1.1
1983-93 1993-03
(average ann ual 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
i e r
: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
Manufacturing
I
2 1 2 4 7
2 3 3 2 3 5 lo
1 5 3 1 6 7 1 6 1 1 6 4
~
o
4 7 7
5 0 3
5 3 5 5 3 2 .o
Private consumption
80.8 72.2 74.4 72 .7
n o 1
General government consumption 11.4 13.1
11.3 11.7
imports of goods and services
23.0 22.4 19.0 20.4 I
GDI
+GDP
(average annual g rowth)
Agriculture
lndiistrv
Manufacturing
Services
Private consumption
General government consumption
Gross domestic investment
Imports of goods and services
1983-93 199 34 3 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 prelim inary estimates.
* The diamonds show four key indicators In the country (in bold) compared with its incom e-group average. If data are m issing, the diamond will
be incomplete.
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PRICES and GOVERNMENT FINANCE
Domest ic p r ices
(% change)
Consumer prices
Implicit GDP deflator
Government inance
(% of
GDP, include s current grants)
Current revenue
Current budget balance
Overall surplusldeflcit
TRADE
(US miilions)
Total exports (fob)
cot ton
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
-133
-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
0
O3
I
7
98
99
00
01
02
Exports imports
; 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
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ACKNOWLEDGEMENTS
This study was managed by Sakwa Bunyas i and Paul Dorosh, (co-task managers). Paul Doros h i s he
principal author o f he f inal report. Albert0Valdes
designed
the
study,
provi ded overall guidance for the
wo rk and contributed to the analysis and synthesis. Sohail J. M a li k played a major ro le
in the
w o r k o n
agric ultur al credit and poverty, the synthesis
o f
the results, and
in
organizing seminars a nd workshops
in
Palustan.
The repor t draws f ro m a set o f backgro und papers prepared for this
study
listed at
the end
o f his report.
Gustavo Anriquez, Hana n Jacoby, Ghazala Mansuri, Hi na Nazli, Muh amm ad Kha n Ni az i and Sarfraz
Qureshimade major contributions, bo th as authors o f background papers, and in the synthesis o f he
results. Bac kgr oun d papers were also prepared by Munir Ahmad, Zafa r Altaf , Alejandra Cox-Edwards,
Zaki r Hussa in and
A.R.
Kemal. Manu el Conti joch contributed
to
the discussion o f rr igat ion and water
markets
Ad ol fo B rizzi, De rek Byerlee, Tek ola Dejene, Rashid Faruqee, Steven Haggblade, Abe d Hasan, Isabe l
Lavadenz,
John
Mel lor, Stephen Mink,
Abdul
Salaam and Di na Uma l i-Deininger provided useful
comments and suggestions o n various aspects o f he report. The repo rt has also benefited fr om comments
f rom the PakistanMinistry o f Food, Agriculture and Livestock (MINFAL) and discussions with
participants at seminars at the Agricultur al Prices Commission, the Lahore Uni ver sity o f Management
Sciences, the Pakistan Institute o f Develop ment Economics and the International Water Ma nagem ent
Inst i tute in Lahore, and a seminar in September 2004 in slamabad hosted by MINFAL.
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X
EXECUTIVE SUMMARY
Introduction
1.
and trade an d outpu t pr ic ing reforms have
spurred
substantial agricultural g row th over
the
last three
decades. Agricultural GDP gro wth slo wed substantial ly since the early 1990s, part icular ly in the crop
sector (2.4 percent average annual growth fr om
1990
to
2002,
compared with
3 .5
percent per year gro wth
f rom 1960 t o 2002), however, raising concerns about the sustainabil i ty o f agricu ltural grow th in he
me diu m erm. Moreover, the sharp declines
in
rural po verty that accompanied agr icul tural growth
in
he
1970s and 1980s have no t continued. The latest available pov erty estimates (38.9 percent in 2001-02),
ma y b e in fla ted
by
the effects of he drought,
but
est imated rural poverty
in 1998-99 (35.9
percent)
i s
essen tially the same as
in 1990-91 (36.9
percent).
In
Pakistan, pub lic and private investments in r r igat ion, adopt ion o f green revolut ion techno logy
2.
a central rol e to the rur al sector in accelerat ing gro wth and reducing rural poverty. However, al though the
PRSP places a majo r emphasis o n employment-generat ing gro wth in agr iculture, smal l and med ium
enterprises, h ous ing and construction, inf orm atio n technology, telecommunications and exports,
i t
acks
an ex pl ic i t ru ral development strategy beyon d that for the agr icul tural sector. Accelerat ing ru ral
economic gr owth a nd reducing rural poverty i s comp lex, an d requires a comprehensive strategy
built
o n
sound analysis co ver ing al l m ajor aspects o f he rura l economy inclu ding agr icul tural output markets,
input marke ts (seeds, fertilizer, extension), factor m arkets (land, water, labor an d credit), the r u ra l non-
fa rm economy, and targeted interventions.
Pakistans Pov erty Red uction Strategy Paper (PRSP)
wr i t t en in 2003
(Wo r ld Bank, 2003b) gives
3.
ear lier wo rk o n output and inputmarkets, and anticipates future analytical wo rk o n the r u ra l non- fa rm
econom y and other key aspects o f he rural economy. The report
i s
designed to iden t i fy the m ai n factor
market ineff ic iencies
in
rural Pakistan, provide est imates o f heir impa ct
in
erms o f ef f ic iency and equi ty,
and suggest pol ic y measures to im pro ve the funct ion ing o f hese markets, increase rura l incomes a nd help
reduce rural poverty.
This repo rt focuses on one aspect o f this complex puzzle - ura l factor markets. I t builds o n
4.
constraints and statistical analysis o f ecent hou seho ld survey data. K e y ne w findings include quantitative
estimates o f the importance o f inkages across factor markets and the impact o f ac tor market
inefficiencies on ag ricultura l output and revenues.
In
addition, the repo rt presents analysis sho wing that
for the
61
percent o f ural poor households that do n ot cu l t ivate crops (agr icul tural laborers and non-fa rm
households), expansion in outpu t o f major crops m ay no t be suff ic ient to s igni f icant ly raise their incomes,
even with substantial mul t ipl ier ef fects on the ru ral non-agr icul tural economy.
In presenting the results, each factor i s discussed in
tum,
drawing on descr ip t ions o f ns t i tu t ional
Promoting Efficiency and Equity: The Role of Factor Markets
5. Trade and exchange rate po lic y reform s undertaken
in
he late
1980s
greatly reduced the
divergence between domestic and internat ional pr ices for most majo r agr icul tural commodit ies in
Pakistan, and
in
general increased incentives for produ ctio n and farmer incomes. Alt ho ug h some trade
taxes and m arket ing restr ict ions o n a gr icul tural outputs
s t i l l
remain, lac k o f access to land, water a nd
capital, and inefficiencies in factor markets for land, water, labor a nd capital are no w among the greatest
impedime nts to agr icul tural and rural income growth, and reduct ions in rural poverty.
6.
allocated to i t s mos t produc tive use, thus ma ximiz ing value added and incomes. Ineff ic iencies
in
hese
We ll-fun ctio nin g factor markets can he lp ensure that the available
supply
o f hese factors i s
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xi
factor markets, whether due to structural characteristics o f he factors or administrative procedures and
policies, increase costs o f ransactions or even prevent transactions fr om occurring, however, and thereby
lead to a misal loca t ion o f actor resources that reduces output and economic growth.
This
report does no t
attempt to d irec tly measure the relat ive contribut ions o f structural characteristics a nd p ol ic y distortions,
but instead presents statistical evidence o f he existence o f actor ma rket distortions a nd their effects (e.g.
product iv i ty ef fec ts ar ising f rom lack o f access to credit for sma ll farmers). T o the extent that
ineff ic iencies in factor markets are due to polic y distortions, adm inistrative and pol ic y reform s can
improve product iv i ty . Where the ine fficienc ies are due to the very structure o f he factor market,
(e.g.
uneven d is t ribut ion o f and hold ings or the physical propert ies o f he Indus r iver i r r igat ion system that
limit storage and control o f water flows), a dministrative and po licy reform s alone wil l no t necessarily
resul t
in
arge efficie ncy o r equity gains.
7.
markets, and between land and credi t markets, mea n that structural and pol icy- induc ed neff ic iencies
in
one factor market have s igni f icant impl ications for h nct ion ing o f other factor m arkets. These
ineff ic iencies in factor markets can have particu larly adverse effects for the poor, wh o of ten lack bot h
emp loym ent opportunities and the access to the land, water and capital that wo ul d enable the m to earn
higher returns on
their
labor in own -farm o r own-enterprise a ctivities.
More over, m ajo r linkages between factor markets, m ost importan tly between an d and water
Land
8, L a n d
s
at the h ea rt o f Pakistan agriculture and the rural economy, and returns to la nd are
estimated to be about h al f o f ncomes (value added) f i-om crop agr iculture. Distr ibut io n o f and
s
highly
skewed, howeve r, a ma jor cause of ncome inequal i ty in rur al Pakistan.. Acc ord ing to the
2000
Agr icul tu ral Census, on ly 37 percent o f ural households owned land, and 61 percent o f hese land-
own ing households ow ned less than 5 acres,
(1
percent o f o ta l land). Tw o percent o f households o wned
50 acres or more (accounting for 30 percent o f otal land). The ove ral l Gini coef f ic ient o f and ownership
in 2000 in Pakistan was 0.66 in clu din g rur al landless households, the Gini coeff icient was 0.86. By
comparison, Gini coefficients for la nd ownership are 0.71 in India, 0.42 in Bangladesh, and
0.85
in
Braz i l .
9. L a n d s rarely bought and sold
due
to
high
transactions costs, poten tial disputes about accuracy o f
land records, land pr ices
in
excess o f he discounted value o f potent ial agr icul tural earnings fr om the land,
and lac k of access to cre dit
by
those wi thout land. The l o w frequency o f and transact ions helps
perpetuate the
highly
unequal distr ibut ion o f and, hamper labor mobi l i ty , and reduce returns to fam i ly
labor. Highly skewed lan d distr ibut ion and ineff ic iencies in and markets also limit access to cre dit fo r
m an y households, since lan d s the major acceptable f orm o f collateral in formal c redi t markets. L an d
rentals in various forms are more common, howe ver 33 percent o f area cultivated in 2000 was under
some fo rm o f enancy arrangement according to
200
1-02 HI ES data
(18
percent un der share-cropping).
10.
that of sm all farms, ho ldin g other factors constant. Fo r example, plo t- lev el regressions o f product iv i ty ,
correc ting for p lot characteristics and some household characteristics (such as tractor own ership and
n um b er o f household workers) suggests a dou bling o f operated area leads to
10
percent lower wheat
yields (and 13 percent lowe r r ice y ields) , (W or ld Bank, 2002). Fa rm household ncome data a lso show
that sm all farmers have higher net returns per hectare than do la rge farms. These findings suggest that
increases
in
he share o f and cul t ivated
by
smal l-holders wo uld ten d to increase overal l farm produ ct iv i ty
in Pakistan.
Mo st empir ical evidence indicates that produ ct iv i ty o f and o n arge farms
in
Pakistan
s
ess than
11.
productivity. Productivity of share-croppers
i s
about
20
percent lower than product iv i ty o f andowners ,
Econometric evidence also suggests that tenure arrangements h ave sig nifican t impa cts on
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xii
ho ldi ng other factors constant, because o f owe r incentives for own-labor
inputs.
Tho ugh share-cropping
i s dec linin g as a f o rm o f enancy, the benefits to share-croppers (shared finan cial r i s ks o f crop fai lure and
credit for purchase o f nputs) and owners (greater owne r input int o management decisions) l ik el y explain
i t s persistence as a tenancy arrangement.
12. Three ma jo r attempts at
redistributive
a n d r e f o r m
in
Pakistan have fai le d (most recen tly
in
1977),
and land re fo rm has neither pol i t ica l support , n or
the
backin g o f s lamic rel igious author it ies. Because o f
these severe in sti tu tion al constraints to tradition al
redistributive
and reform, m ore feasible options to
increase access to lan d by poo r households involve a
win-win
approach. L an d purchase schemes that
includ e grant components for the poorest landless households are one example, thoug h fiscal costs co uld
limit the scale o f such program s. Po lic y measures to increase access to la nd also inclu de increased access
to credi t to enable poo r households to purchase land, land taxat ion to reduce incent ives fo r h oldin g lan d
for speculative purposes, and measures to imp rove the eff ic iency o f and sales and rental markets.
13. Adm inistrat ive reforms in
the
enforcement o f exist ing norms and regulat ions, including
enforcement o f contracts and the rights o f enants, and
lifting
restr ictions f or rentals wo ul d also help
improve the func t ion ing o f and markets . S impl i f i cat ion o f compl icated egal procedures that resu l t in
lon g delays in proceedings and a back log o f cases w ou ld reduce la nd transactions costs. Poo r households
are at a partic ula r disadvantage
in
cases broug ht before ci vi l courts, since they often cannot a ffo rd to
pursu e these cases. Pos sible steps inc lude limits on the num ber o f appeals, procedural reforms,
al ternat ive conf l ic t resolut ion mechanisms, and barr ing o f he jur isdict ion o f c i v i l cour ts in and revenue
matters. Im prov ed disseminat ion o f nform ation o n land pr ices and transactions would also enhance
ef f i c iency o f and markets .
14.
secur ity o f enure. With out secure
rights
to their land, farmers no t only ha ve less incentives for
investment,
but
also devote resources to defending th eir
rights.
L a ck o f secure tit le also reduce s access to
l and by landless households th roug h rentals by increasing the risk o f andowners who might otherwise
rent out more land. In addi tion, banks are reluctant to lend m one y using an d as collateral because the y
do no t
t rust
the current recording system. Questions regarding the val id i ty and enforceabi l i ty o f
i t les
also
make
i t
harder to
buy
and sel l land. Compu ter izat ion o f and records, as tested
in
a recent pi l ot proje ct
in
Punjab, i s one op tion fo r establishing clearer land records and redu cing fraudulent dealings by l and
administrat ion off ic ials.
Improvements
in
and records' could also enhance the eff ic iency o f and markets and increase
Water
15.
droughts, water availab il i ty at the farm le vel
i s
a major determinant o f arm product iv i ty in Pakistan
agr icul ture. Ne ar ly
80
percent o f croppe d area
i s
rr igated, an d agriculture
i s by
far
the
largest user o f
availab le water sources in he country, consuming on average about 95% o f availab le water resources. In
2001-02, ou t o f 18.0 mi l l i on hectares o f r r igated land, 38 percent was i r r igated solely with canal water;
39 percent
with
canal and tube wel l water, a nd 19 percent solely with
tube
wel l wa te r. E f f i c iency o f
water use in surface irr iga tion s low, however: conveyance losses (par t o f wh ich adds to groundwater
recharge) are
5 5
percent o f ota l canal diversions.
Given l o w evels o f annual ra in fa l l concentrated over onl y a few months o f he year and per iod ic
16.
warabandi
system
o f a l loca ti on o f water through admin istrative ly set rotations. Access to canal water
i s
In
princip le, access to canal water
i s
determined by phys ica l locat ion a long the canal and the
In
Punjab, land disputes are pr imar i ly due to f raudulent deal ing because the records are n ot c lear and patwars ( land
administ rat ion of fic ia ls) of ten accept inform al payments.
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x i i i
thus
exp l ic i t ly t ied to access to land. Ownership o f a p l o t
within
a watercourse com ma nd area confers
access to i rr ig atio n water,
but
does not guarantee canal water availa bil i ty. In particular, water availabil i ty
decreases sig nific ant ly i f he watercourse
i s
ocated near the tai l o f he distributary or m inor, and/or i f
he
p l o t s located near the ta i l
end
o f he watercourse (Wo r ld Bank, 2002). Water theft by farmers upstream
i s a major reason for these water shortages face d by these tai l end farmers. Recent administrative re forms
in
some par ts o f S indh
giving
greater con tro l to farmer organizations have reduced water theft, as we ll as
improved maintenance o f water courses and collection o f ees.2 These co uld be expanded to other
regions, as well. Othe r alternatives for im pro vin g delivery o f surface irr iga tion water services to farmers
also exist, inc lud ing priva te professional canal management.
17.
Ava i lab i l i ty o f groundwater has an even h igher impact on
yields
than does canal water,
but
only
8.1
percen t o f cul t ivat ing households owne d tube wells in 2001/02. Info rma l groundwater markets
sign ifica ntly im pro ve access to groundwater, pa rticularly for sma ll farmers, landless tenants and younger
households wh o often lack the resources (or lan d and water rights) to ins ta ll the i r ow n ube wel l .
Howe ver, water purchasers do no t have full access rights to the water, an d are frequen tly d enied access
wh en water o r energy supplies are scarce. More over, access to tube w el l water depends o n the prox imi ty
to an existin g tube w el l and conveyance mechanisms (e.g. channels) to distr ibute the water.
18.
In for ma l water markets for sur face i r r iga t ion (ma inly bar ter) and groundwater exist,
but
establ ishment o f water markets that woul d permi t t rad ing o f water rights across the canal system (such as
those in Chi le and Mex ico) wo uld requ ire major inst i tut ional changes and investments. In particular, any
system o f radable water
rights
wou ld need o account for the min im a l degree o f water con trol above the
water course leve l in he current
Indus
basin system, because o f he absence o f sufficie nt storage capacity
and co ntrol structures (gates) to regulate water flo ws.
19. Several insti tutiona l changes coul d
bring
about majo r improvements in the eff ic iency and equity
of wa ter use
in
Pakista n agriculture, with or wi thou t the establ ishment o f water markets, however.
First,
in order to increase accountability for Operations and Maintenance, management o f distr ibutaries and/or
minors could be transferred to Farmer Organizations (FOs), perm ittin g assessment, col le ctio n and
reten tion o f abiana (water charges)
by
the FOs. Second, to increase transparency and enable more
inform ed decis ions o n area ir r igated and crop choice, a) p er iodic measurements o f he actual rate o f water
f low at var ious points in the water course cou ld be made; an d
b)
open access to the wr i t ten rules o f he
water rotat ion could
be
provide d to farmers. Third, re forms in he insti tutio nal arrangements for
a l loca ti on o f water cou ld be made to create a mor e demand-driven system. O ption s includ e: a) Wat er
Course Associations, W ater Users Associations and Area Wa ter Boards (AWBs);
b)
Professional canal
management.
20.
establishing lega l tradable water
rights
at the nat ion al and prov incia l levels; ii) t rengthening loca l
insti tutio ns (such as Water Course Associations and Wa ter Users Associations or profes siona l canal
manag ement agencies) to enable the m to serve as broke rs
in
water markets, helping to mat ch buyers and
sellers o f water. Once effective water markets were developed at the water course level, trades betwee n
wate r courses could be brokered hrough these lo cal inst i tut ions at the min or level .
Development o f e f fec tive water markets w ou ld requi re two steps beyon d those out l ined above: i)
2 1.
establ ishment o f water markets), combined with appropriate trade and mac ro- policies, c an faci l i tate
The experience o f Chi le shows that impr ove d al locat ion o f water, (in the Chi lean case throu gh the
In
he c omma nd area covered
by
t he Le f t B ank A r ea Wa t e r B oa r d
in
Sindh, where tai l en d farmers ha d not
received water in hree years, 48 i l legal direct out lets serv ing an area
o f
about 25 thousand hectares were close d
in
early
2004.
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xiv
divers i f icat ion o f agr icul ture into high-value products for urban and export products, increased labor
demand and reduct ions
in
rura l pover ty. Given the infrastructure constraints
in
Pakistan, the poten tial
gains f rom establishing water markets may be smaller than
in
other countr ies. Nonetheless, benefits o f
more ef f i cient a l locat ion o f water through inst i tut ional reforms with or wi thout water markets could
s t i l l
be substantial i f hey are combined with other measures to prom ote agricultura l diversif ication, inclu din g
strengthening security o f an d ti t les, pub lic investments
in
rur al infrastructure (roads and e lectr icity),
private investments in processing and storage, and establishment o f market
links
to e xport markets.
Labor Markets
22.
constraints, rather than
supply
constraints, as evidenced
by
substantial underemployment. There i s
considerable labor mo bil i ty , in spite o f high ransactions costs involved in o b search an d especial ly in
migrat ion, However, forma l sector employm ent
in
rur al areas i s minim al , and over
80
percent o f
agr icul tura l abor and most o f ura l non-agr icu l tura l abor i s self-employed. Fem ale particip ation in abor
markets remains l imit ed, though: on ly 16 percent for females age 15 and over (not i nclud ing home-based
activities), compared with
85
percent fo r males. Job s k i l l levels fo r bo th male and female labo r are
generally low.
Unlike the markets fo r la nd and water, rur al labor markets are generally characterized
by
demand
23, Educat ion
s
an important determinant o f emale labor force part icipat ion, rural -urban migrat ion,
and labor produ ct iv i ty
in
rur al no n-f an n sectors. Econometric analysis shows that education
i s
also a key
determinant o f agr icul tural produ ct iv i ty. Fo r the average produ cing household, another year o f educat ion
translates int o a 13% increase in year ly net revenues. Effect ive and mo re wide-spread vocat ional t raining
programs could prov ide needed sk i l ls for non-a gricultu ral labor. Wo men s access to educational and
training inst i tut ions could b e increased through m ore reservation o f spaces for women.
24.
percent per year from 1984 to 1994, indicat ing on g e r m t ightening o f he labor market . L ikewise, rea l
wage rates o f construction laborers increased
by
1.1percent over the same per iod. M o st o f he increases
in rea l wage rates too k place in he 1980s, however. The trends in he 1990s indicate i t t le gains in rea l
wages. Fr om 1991-97, real wage rates o f casual a gricultu ral laborers
grew
by
an average o f
0.8
percent
per year, whi le real wage rates o f egular agr icul tural workers fel l
by
2.4 percent
per
year. Likewise, real
wage rates o f construction laborers gre w
by
on ly 0.4 percent per year from 1991-97 and for the 1991-
200 2 as a whole, f el l
by
0.4 percent per year.
Real wage rates o f bo th regular an d casual agricu ltural workers increased
by
an average o f
1
O
25,
but s t i l l
posi t ive per capi ta agr icul tural growth.
This
suggests rather weak l inkages be twee n agncultura l
grow th and rural labor demand. The smal ler rate o f decl ine o f eal wages f or con struct ion aborers
suggests that lack o f abor mo bi l i ty between sectors and between rural and urba n regions hinder
i n tegra t ion o f non-agr icul tural and ag r icul tural labor markets
The decline
in
rea l wages
in
he agricu ltural sector in he 1990s coincides with a per iod o f s lower
26.
leave farming to sel l or rent out their far m land.
This
wo uld require greater secur ity o f proper ty rights, and
facil i tatio n o f and transactions that are presently
stifledby
the absence o f a v al i d t i tle,
r isks
o f court
challenges, and high regu latory and transactions costs (for example, stamp dutyplus registrat ion fee plus
capi tal tax amounted to 16% o f he average market pr ice o f and
in
1995).
A
better funct ioning land market could also promote labor mob i l i ty , he lping farmers who want t o
27.
also needed.
In
addition, m easures to assist households trappe d
in
bond ed abor arrangements, inclu ding
A
concerted effor t t o enforce exist ing legis lat ion regarding the rights o f wome n and chi ldren i s
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xv
l egal protec tion, prov is ion o f credit and debt cancel lat ion programs should be urgent ly ~o n si de re d .~
Alt ho ug h these program s often face considerable opposition f ro m pow erf ul vested interests, such
programs c ould have a majo r impact on some o f he poorest rural households.
Credit
28. In pr inciple, credit markets offer a wid e scope f or po l ic ies to increase produc t iv i ty and to reduce
rur al poverty, and can help overcome ineff ic iencies
in
other factor markets. In Pakistan, however, access
to formal c redi t markets in ur al areas i s generally l im ite d to landowners, since land s th e m a i n f o r m o f
acceptable collate ral for loans. Acc ordi ng to Pakistan Ru ral Househ old survey data, o nly 11percen t o f
farmers obtained fo rm al sector loans in 2001-02. Access to info rm al credit markets, particu larly
suppliers and consumers cred it
i s
mo re widespread, (75 percent o f arm households receiv ed oans),
but
app roxim ately 40 percent o f ura l (farm) households are credit constrained, no t bein g able to obta in as
mu ch credi t as they wo uld l ike at exist ing interest rates.
29.
far m prod uct ivity (measured as gross value o f output per unit o f and). Households who faced credi t
ra t ion ing in bo th he form al and infor mal sectors (approximately 17 percent o f al l households) had a 23
percent reduct ion
in
va lue o f yields.
Further
streaml ining o f endin g procedures, development o f
a l ternat ive forms o f collateral, and other lend ing innova tions to increase access o f smal l farmers to
com merc ial credit cou ld help rel ieve these credit constraints for sma ll farmers.
Econometr ic analysis o f plot- level data suggests that lack o f access to credit signific antly reduces
30.
loans
in
he fo rm al sector) cou ld el iminate these policy-ind uced incentives to war d capital- intensive
technologies that reduce labor demand. Effo rts at prom otin g agricultural diversif icatio n shou ld thus avo id
subsidies on credit that w ou ld encourage capital- intensive technologies in production, processing and
marketing. Instead, a gricultu ral diversif ication, the development o f he rural non-farm sector and poverty
reduct ion ma y be better achieved through pub l ic investments in electricity, transport and other
infrastructure.
Further
wo rk o n par t icular constraints to rur al non-farm investment, employm ent and
grow th
i s
needed, ho weve r.
R e mo v al o f subsidies o n credit ( implic it in
the
cont inu ing l o w repayment /
high
defaul t rates f or
3 1.
other forms o f collateral (besides land) co uld also help pro mo te rural em ploym ent and income generation.
Rura l credi t f ro m forma l sources i s cur rently avai lab le for a nar row range o f agr icul tural produ ct ion
activit ies and does no t serve the needs o f he non-fa rm sector . In part icular, avai labi l i ty o f medium- term
credi t
i s
extremely l im ited . Increased access to cre dit
by
sm all scale enterprises in rur al areas, fo r
example, w ou ld promote farm to n on-farm l inkages, develop the rura l non-agr icul tural sector and increase
labor demand. Targeted match ing grants to p oo r households for income-generating activit ies are one
option.
Product ion credi t and m icro-credi t programs targeted to landless and s mal l farmers that required
32. The Government o f Pakistan
in
recent years has, in fact, place d considerable emphasis on
developing micro- f inance as par t o f
t s
poverty al leviation strategy. In 2003, Rs. 1,442 mi l l io n (2.5 % o f
tota l insti tutio nal credit) was disbursed as small loans throug h the Pakistan Poverty Al levia t ion Fund
(PPAF), Khus hal i Ban k and
the
Zarai Taraq ia t i Bank L im i te d
(ZTBL,
former ly cal led
ADBP).
N o
Near l y
200
thousand rural households in Sindh and Punjab (equivalent to about 2 percent o f Pakistans rura l
population), were estimated to be in
debt
bondage based on
1990
Agric ul tur al Census data. Analysis o f 2000
Agr icu ltur al Census data suggests that
in
Punjab alone,
50
thousand sharecroppers were
in
debt bondage, equivale nt
to about 9 percent o f otal landless tenant farmers
in
Punjab.
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xvi
comprehensive
study
o f he overa ll impa ct o f hese micro -credit schemes has yet been done, and there
remains a ma jor concern regarding f inancial sustainabi li ty o f hese programs. Promotio n o f savings
mo bi l izat ion schemes and im plementat ion o f an adequate regulatory fkamework for deposi t-based
institut ions co uld he lp provide sustainable resources for micro-credit.
Income Distribution and Poverty Reduction
33. Increased agr icul tural product ion has been a major force for reducing rural pove rty over mu ch o f
South Asia over the past four decades. Rura l poverty in Pakistan did no t decline in he 199Os, however,
in
spi te o f agr icul tural growth. Overestimation o f rue sectoral growth rates because o f abrup t changes
in
est imates o f ivestock populat ion s p ar t o f
he
explanation for
this
l a ck o f correlat ion between agr icul tural
grow th and poverty reduction. Stagnat ion in he real consumer pr ices o f ice and wheat
(in
contrast to
declines in early decades) i s another maj or factor.
34. T w o other major factors are the changing structure o f he Pakistan economy, in part icular the
dec l in ing share o f agriculture
in
otal
GDP
(39 percent
in
1970,
but
only 24 percent
in
2000), and the
persistent unequal distr ibut ion o f and (and land revenue). Moreover, s ince more than 60 percent o f ural
po or households are not fa rm households (according to H IE S 2001-02 data), the magni tude o f hese
l inkage effects
with the
non-agricultural sector
i s
crucial to
the
pover ty impacts o f agr icul tural growth.
Ru ral non-farm households account for 46 percent o f he rur al poor; agricultural laborer households
compr ise 15 percent o f he rural poor. Thou gh there i s substantial poverty among smal l lan down ing
farmers (38 pe rcent are poor), this group accounts for on ly 24 percent o f otal rural poor households.
Landless tenant farmers (61 percent o f wh om are poor) account for another 13 percent o f he rura l poor .
35. Mo de l s imulation results o f the direct and m ul t ipl ie r ef fects o f a 10 percent increase
in
the output
o f al l ma jor crops (wheat, ba smati and IRRI ice, co tton and sugar cane, whi ch together account for about
35 percent o f otal agricultural value-added) suggest that the largest gains o f ncreased pro duc tion o f hese
ma jor crops accrue to large and me diu m land owners, whose incomes rise
by
7 percent. Incomes o f smal l
farm owners and
pure
tenants also
r i se by
about 5 percent. But the poorest rural household groups
(agr icul tural laborers and rural non-farm p oor -- 29 percent o f he rural population) reap only 7 percen t o f
the tota l incom e gains, and their incomes rise
by
only 3-4 percent. Gains fro m a
10
perce nt increase
in
l ives tock produ ctio n (main ly cattle, goats and dairy products) are more even ly spread out giv en the
d i s tr i bu t i on o f ownership o f ivestock, suggest ing that measures to increase l ivestock produ ct iv i ty m ay
have mo re posi t ive effects o n equi ty.
36.
suggest that a shift f ro m share-cropping to f ixe d rents wo uld remove labor dis incentive effects and raise
the produ ct iv i ty o f ormer share-croppers to equal that o f and owners (affect ing 18 percent o f area
cul t ivated
in
Pakistan) wo uld raise average incomes o f enant farmers
by
3 to
4
percent (and incomes o f
farmers directly impacted
by the
reforms by about 10 percent), but are l i ke ly to have only smal l overa l l
impacts on rural incomes in aggregate. Releasing constraints o n access to credit has sim ilar im pacts o n
small farmers, as
well
as ind ucin g an estimated
2
percent gain
in
average incomes o f he rura l non- farm
poor , Rais ing product iv i ty o f armers at the ta il -end o f watercourses t o ma tch that o f head-end farmers
thro ug h increased access to water,
i f t
could be achieved w i thout reduc ing the product iv i ty o f head-end
farmers, wo ul d have even larger impacts on sma ll farmers (4-6 percent average incom e gains) and cou ld
ra ise incomes o f he rura l non- farm poor
by
3 percent.
Simi lar ly, in spite o f mul t ipl ier ef fects on ag r icul tural and non-agr icul tural output, s imulat ions
37.
poo r through combined direct and
multiplier
effects,
i t
s unl ike ly to be suf f ic ient to rapid ly ra ise incomes
o f he 30 percent o f he rura l populat ion (and 6 1 percent o f he rura l poor) who are landless agr icu l tura l
laborers and non-agricultural r ura l poor households. In he absence o f a change in the s t ruc ture o f ura l
Thus,
al though agr icul tural grow th can have a ma jor impa ct on a s izeable segment o f he rura l
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xvii
incomes and employm ent or s igni f icant gains in he rural non-farm economy apart f r o m agr icul tural
growth- induced l inka ge effects, targeted intervent ions t o agr icul tural laborers and the rur al non -farm po or
will be
needed.
38.
2003b) recognizes
this
expl ic i t ly .
In
addi t ion to advocating sustained and broad based economic grow th
emanating f ro m the rural areas the strategy also emphasizes the simultaneous pro vis ion o f social and
economic services and infrastructure for the poor, creating o b opportunities and impro vin g governance as
essential elements.
A
mo re detai led rur al development strategy i s s t i l l needed, ho weve r.
The P overty Reduct ion Strategy Paper (PRSP) o f Pakistan issued in December 2003 ( W o r ld B a n k
39.
decades that make factor market reforms cr i t ical to increasing agr icul tural produ ct iv i ty and rais ing
incomes o f he ru ral poor. Ru ral populat ion has steadi ly increased, gradual ly reducing average fa rm sizes
in
he face o f constraints on the ove rall
supply
o f arable land and water . The size o f he agr icul tural
sector relative to the o verall econom y has steadily
shrunk,
as the output o f he rural non -farm economy
has expanded, tending to lessen the imp act o f agr icul ture on the overal l rural economy.
Sign ificant structural changes have taken place in Pakistans economy over the past several
40.
growth can p lay a major ro le
in
ncreasing incomes and reducing pove rty among far m households.
Exper ience o f other countr ies suggests that factor mark et reforms, coup led
with
outward-oriented trade
and exchange rate pol i cy can lead to rapid agr icul tural grow th and rural pove rty reduct ion through
diversi f icat ion o f agricu ltural pro duc tion nto high-value products (e.g. fruits an d vegetables) with labor-
intensive pro duc tion and processing. Refo rms in factor markets that promote the al locat ion o f scarce lan d
and water resources to the ir mo st effic ien t uses, and increase
returns
to u nsk il led labor, are essential for
repl icat ing this success
in
Pakistan.
Even in he face o f ncreasingly severe constraints on land and water resources, ag ricultura l
41. However, because ma ny rura l poor households lack access to land, agr icul tural grow th alone i s
no t suff ic ient to s ign i f icant ly raise incomes o f a large fract ion o f he rural non-fa rm poor, even
with t s
substantial mu ltip l ie r effects o n the non-a gricultu ral economy. Policie s and programs to increase access
to credit and enhance worke r and entrepreneurial sk i l ls can direct ly support growth
in
he ru ra l non-
agr icul tural economy and fur ther raise incomes o f
he
rural non-fa rm poor. Targeted intervent ions are
also needed to reach the poorest households includin g expansion o f micro-credi t, enforcement o f aws o n
bonded labor, and training in marketable sk i l ls .
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I
RURAL FACTOR MARKETS
IN
PAKISTAN: POLICY REFORMS
FOR GROWTH AND EQUITY
I
NTRODUCTION
1.1
with agricultural Gross Dome stic Product (GDP) increasing
by
an average o f 4.1 percent per year
fr om 1975 to 2000. Green revol ution technology o f mpro ved seeds, irr igation, and increased
ferti l izer use spurred rap id grow th in crop agriculture (especially wheat and rice) beg innin g in he
later 1960s. Lives tock prod uctio n outpaced the rap id growt h in crop agriculture, with value added
increasing
by
5.3 percent per year fro m 1975 to 2000.
Palustans agricultural sector has enjoyed steady gr owt h for m ost o f he last th ree decades,
1.2
particularly
in
he 1980s. Ru ral poverty fell f ro m 49.3 percent
in
1984-85 to 33.4 percent
in
1993-94,
contr ibuting to an overal l decl ine o f poverty in Pakistan fr om 46.0 percent in 1984-85 t o 28.6 percent.
Lon g-te rm agric ultural growt h has also been accompanied by reductions in rura l poverty,
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 . PIH S and
HIES
comb ined since 1998-
99
Source: W o r l d
Bank (2002),
p.
20.
F o r
2001-02,
Government o f Pakistan Pakistan
Economic Survey (2002-03)
1.3
M o r e recent trends of agricultural incomes and o f ru ra l poverty are far
less
encouraging.
However, agr icul tural GDP f e l l by 1 percent between 2000 and 2002, in arge part
because o f drought,
highlighting
he vulnerab i li ty o f Pakista n agriculture and
the
importance o f
ava i lab i li ty o f water as a ma jor constraint for many farmers. Likewis e, the long- term down ward
trends
in rural poverty have not continued: estimates o f ura l poverty fo r 2001-02 o f 38.9 percent
suggest that fo r the 1990s as a whole, ru ra l pov erty has n o t decline d in spi te o f agncultural GDP
growth.
1.4
o f generally favorable policies affec ting markets and prices o f agricultura l outputs and non-factor
inputs (e.g. seeds, fertilize r and pesticides). M aj or macro-trade po li cy and output marke t ref orm s in
1980s reduced the bias against a pc ul tu ra l production
in
Pa ls ta n ref l ec ted in pri ces o f agncultural
outputs and
inputs
relative t o those in he non -agr icult ural sectors. Th ou gh some trade taxes and
marketin g restrictions remain, the incentive structure for produc tion o f major crops (wheat, cotton,
basmati and
IRRI
ice, an d sugar cane) i s more favorable today than in he early 1980s whe n
substantial growth occurred.
The deceleration o f agr icul tural growt h and the rate o f pov erty redu ction has occurred in spite
1.5 Long-term agr icul tural growth and rural pove rty reduction are s t i l l constrained by the
structure and performance o f ke y rur al factor markets (land, water, lab or and credit), how eve r. These
four factor inputs into production, and the markets that facil i ta te their effic ient alloc ation across
alternative uses, are key determinants o f agr icul tural production and growth. Moreover, retums to
these factors o f production, a nd their structure o f own ersh ip across households, are ma jor
determinants o f ural household incomes and poverty.
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2
1.6
produc t ion wou ld be the same for a l l act iv i ties. Prof i t max imizing households and f i r m s w o u l d
uti l ize factors up to the poin t where marg inal returns to each factor equaled i t s cost (the ma rket price
o f he factor). Any excess demand for a factor co uld be purchased at the market price; sim ilarly any
excess
supply
o f a factor co uld be sold at the marke t price. The economic reali ty in ura l Palustan i s
far di f ferent fro m the economic theory o f perfe ctly functio ning factor markets, howev er, as
ineff ic iencies in marke ts for land, water, lab or and capital result in owe r produc t ion and incomes.
In a perfe ctly compe tit ive market, economic theory suggests that returns to each factor o f
1.7
l and ownership or phys ica l propert ies o f he
Indus
river i r r igat ion system that
limit
storage and
c o nt ro l o f water
f lows)
or a dministrative procedures and policie s
(e.g.
l ac k o f clear land it les) can
increase costs o f ransactions or even prevent transactions fro m occurring, however, and thereby lead
to reduced output and economic growth. However, to the extent that ineff ic iencies in actor markets
are due to the very structure o f he factor market, (e.g. uneven distribut ion o f and holdings or the
phys ica l propert ies o f he Indus r iver i r r igat ion system that limit storage and control o f water flows),
administrat ive and pol icy reforms alone will no t necessarily result
in
arge eff ic iency or equi ty gains.4
These inefficiencies, w hether due to structu ral characteristics o f he factors (e.g. the pattern o f
1.8
L a n d s
the most
immobile and
most
unequally distributed
o f the
factors, a nd lan d sales
markets
in
Pakistan are very
thin. The absence o f wel l - funct ioning land markets hinde rs access to
lan d for the landless or s mall farmers, and perpetuates a highly skewed distr ibut ion o f and
ownership. La nd rentals
in
various fo rms (share-cropping, cash rentals) are mo re common , how ever,
20 percen t o f area cultivated in 2000 was under some form
o f
enancy arrangement. M o s t emp ir ical
evidence suggests that produ ctivi ty of lan d on large farms
in
Pakistan
i s
ess than that o f smal l farms,
ho ldi ng other factors constant. More over, bo th economic theory and em pirica l evidence suggest that
produ ct iv i ty o f and under tenancy arrangements will be less than product iv i ty o f owned land.
Thus,
the absence o f a we l l - funct ioning la nd market resul ts in ower overa l l
output,
wh i le the skewed ness
o f and ownership contr ibutes t o widespread rural poverty.
1.9 Access
to
water in Pakistan
i s
closely tied
to
access to land, and water markets are
nea rly as
thin
as
those o f
and.
Throughout the Indusbasin, surface water i s al located through
the
warabandi
system
in
wh ich water f lows are regulated administrat ively on a rotat ing basis. Trading o f
canal water i s comm on (al though sales o f canal water are illegal), but i s l imi t ed to t rades with farmers
in the same distr ibutary. Groundwater irr igat ion (main ly by tube wells) supplements surface
ir r igat ion for m any farmers, increasing the rel iab i l i ty o f water supply and crop yields. Purchases o f
groundwater increase access to water and yields o f sm all holde rs an d tenants,
but
l ikew ise are limited
by distance the water must travel (often t hrou gh un line d watercourses).
1.10
underemployment. La ck o f access to la nd limits self-employment opportunities for small farmers and
landless households, wh ile subsidized form al sector cre dit encourages labor-dis placin g
mechanizat ion. Informal labor markets account for essent ially al l employm ent in ru ra l areas, but
agr icul tural abor demand remains highly seasonal. Ru ral non-fa rm employmen t
i s
ma inly se l f -
employment, and returns to la bor are constrained in par t by l ac k o f
sk i l l s
and phy sical capi tal .
Female labor force pa rticipatio n s l o w :
in
rural areas only
32
percent, even when 14 household abor
activities are include d.
Ru ral abor markets for male labor general ly funct ion well, thoug h there i s substant ial rura l
This report does not attempt to di re ct ly measure the relat ive contr ibut ions o f structural
characteristics, but instead presents statistical evidence o f he existence and effects o f actor mark et
distor t ions (e.g. produ ct iv i ty effects ar is ing fro m lack o f access to credit fo r s ma ll farmers).
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3
1.11
credi t
s
determined
by
government monetary and ban king pol icy. There are substantial inefficie ncies
in form al credit markets, however, where credit
i s
rationed and the landless and small farmers la ck
the collateral to access credit. These groups get almost al l o f heir credit throug h info rm al markets, o r
through tied arrangements with landlords, employe rs or traders. Nevertheless, access t o in fo rm al
sector credit f or p oo r households can
be
problematic, as evidenced
by
i ns tances o f bonded abor
arrangements.
Credi t markets are potent ial ly the most f lexible o f al l factor markets since overa ll supply o f
1.12 Because o f he strong l inkages across rur al factor markets in Palustan, inefficie ncies in one
mark et can adversely affect the performance o f other markets, m ag nif yin g the efficien cy losses and
consequences for inco me distr ibution. Fo r example, ownership o f an d s a major determinant o f
access to form al credit; water
rights
also are tie d to own ership or user rights to land. The skewed
distr ibut ion o f a n d thus results
in
a skewed access to water and credit, and the earnings deriv ed fr om
these factors. Bette r func tion ing water an d credit markets, however, c ou ld help ease the adverse
eff ic iency and d istr ibut ional consequences o f skewed lan d ownership.
Plan o f the report
1.13
policies. Sections
3
through 6 then analyze the four factor markets ( land, water, lab or an d credit) in
turn.
Section
7
discusses the imp l icat ions o f agr icul tural grow th and ineff ic iencies
in
actor markets
for rura l pover ty
in
Palustan, draw ing on analysis o f arm- level data and mod el s imulat ions. Section
8
concludes with a summary o f he major
findings,
lessons fro m other countr ies, and po lic y
impl icat ions.
Section
2
o f
his
report presents an overview o f Palustans agricu lture and agricultural
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11.
AGRICULTURAL POLICY AND SECTOR PERFORMANCEIN
PAKISTAN: AN OVERVIEW
2.1,
rura l household incomes and about 25 percent o f national
GDP.
Bo th crop and l ivestock sub-sectors have
enjoyed substantial gr owt h over four decades,
but
Pakistans agriculture remains
highly
susceptible t o
droughts and i s heavi ly rel iant on rr igation.
The agricultural sector i s at the heart o f Pakistans ru ral economy, accounting fo r 70 percent o f
2.2. The
agric ulture 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 f r om a pe r iod o f s low
growth
in
he
f i r s t
h a lf o f he 1970s, average agric ultural grow th exceeded 3.2 percent per year in each
quinquen nium fr o m 1960 to 2000. Howe ver, the performance o f he agriculture sector (particularly the
crop s sub-sector), has suffered in recent years because o f severe droughts
in
he country. Ag ricult ural
G D P
f e l l
by 2.64 percent in 2000-01 and grew
by
on ly 1.39 percent
in
2001 -02 (table 2.1).
Table 2.1 Agricultural Growt h
in
Pakistan,
1959-60 to
2001-02
Agriculture Crops Livestock Whe at Rice Cotton SCan e 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
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
2.01 1.02 -0.74
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
Pakista n are nearly evenly split between crop and livestock
agriculture.
The crops sub-sector cur rent ly contributes about 54 percent o f he value added, with major
crops (wheat, cotton, rice, sugar cane) accounting for 38 percent o f otal agricultu ral GD P and mino r
crops contributing
16
percent. Wheat, cotton and rice together account for 60 percent area cultivated
nat ion ally (table 2.2). The lives toc k sub-sector, dom inat ed by dairy, sheep and pou ltry, has increased i t s
share over time, fro m on ly 25 percent in 1982 to
i t s
present leve l o f 46 percent.
Fish
and forestry are
mi no r sectors in Pakistan, accounting for 2.2 and 0.3 percent o f agricultural GDP, respectively.
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5
Table 2.2 Area,
Yield
and Product ion
o f
Ma jor Crops in Pakistan,
1999-00 t o
2002-03
Area Are a Area Yield Yield Production Production
Notes: Oilseeds includes rapeseed, mu star d and sesamum.
Other includes f rui ts , vegetables and al l other crops.
Gr ow th rates are average gro wt h rates, 1990-91 to 2002-03, 2002103 data are pre lim ina ry.
Source: