Recent input-output price policy in Pakistan's agriculture: effects on producers and consumers.
Article Type: Report
Subject: Agricultural industry (Prices and rates)
Agricultural industry (Laws, regulations and rules)
Agricultural policy (Interpretation and construction)
Input-output analysis
Author: Chaudhry, M. Ghaffar
Pub Date: 03/22/1995
Publication: Name: Pakistan Development Review Publisher: Pakistan Institute of Development Economics Audience: Academic Format: Magazine/Journal Subject: Business, international; Social sciences Copyright: COPYRIGHT 1995 Reproduced with permission of the Publications Division, Pakistan Institute of Development Economies, Islamabad, Pakistan. ISSN: 0030-9729
Issue: Date: Spring, 1995 Source Volume: 34 Source Issue: 1
Topic: Event Code: 740 Commodity & service prices; 930 Government regulation; 940 Government regulation (cont); 980 Legal issues & crime; 970 Government domestic functions Advertising Code: 94 Legal/Government Regulation Computer Subject: Company pricing policy; Government regulation
Product: Product Code: 9008500 Agricultural Programs-Total Govt; 9108500 Agricultural Programs NAICS Code: 92614 Regulation of Agricultural Marketing and Commodities SIC Code: 0191 General farms, primarily crop; 0291 General farms, primarily animal
Geographic: Geographic Scope: Pakistan Geographic Name: Pakistan Geographic Code: 9PAKI Pakistan
Accession Number: 182200165
Full Text: The paper analyses the impact of the input-output price policy in agriculture on producers and consumers. Trends in prices cause immense resource transfers from agriculture, with adverse consequences for investment, output, employment, and income distribution. To the extent that these transfers accrue to industrialists and the government, the poorest benefit the least. These deleterious effects can be minimised by assured world prices for agriculture and restoration of true competition in agricultural commodity and input markets. In agricultural input markets, elimination of corruption, excessive profiteering and overstaffing should serve as the basis of a cost reduction strategy and removal of input subsidies. In the specific case of irrigation water, equitable distribution, compatibility of water rate assessment and water supply bases, and elimination of overstaffing are the prime issues deserving immediate government attention.

1. INTRODUCTION

The pursuit of an appropriate input-output price policy in agriculture is important in many respects. First, in their usual allocative role, distortion-free prices are a means of consolidating maximum resource use efficiency. Second, the long-term trends in agricultural commodity prices relative to those of input prices influence expectations, investment, and technology, and hence the growth of agricultural production [Timmer (1988)]. Third, stable and remunerative prices of farm products are associated with the reduction of risk and uncertainty and augment the entrepreneurial skills of the fanning community [Schultz (1978)]. Finally, movements in the inter-sectoral terms of trade set the trends in employment, wage goods prices, and income distribution, with widespread implications for the social welfare of the masses [Brown (1978); Mellor (1975)].

The above propositions point to the prime importance of appropriate and right prices in agricultural development and rapid growth of agricultural production. The non-price factors (technological and institutional), as a strong alternative to prices, are sometimes given equal importance in this respect [Byerlee and Sain (1986); Byerlee and Hussain (1992)]. Although the role of non-price factors is important, it must be placed second to prices as the former cease to operate in the absence of remunerative prices of agricultural commodities. There is considerable evidence in the literature in this regard. For example, Bale and Lutz (1981) highlight the fact that the level of agricultural production depends not so much on technical considerations but, in large measure, on what governments do to agriculture. According to Schultz (1978), whenever the farm product is underpriced, even though superior varieties are at hand, the adoption is at best partial. Arguing in the same vein, Johnston and Cownie (1969) have remarked that the application of chemical fertilizers will undoubtedly increase unless there is a marked deterioration of grain-fertilizer price ratios. With respect to institutional factors, Schultz (1965) categorically states that when the price of fertilizer is far above the prices of farm products, no extension programme can induce farmers to use additional quantities of fertilizer.

In view of the prime importance of prices in agricultural development, the purpose of the present essay is to review Pakistan's agricultural price policy and to study its effects on producers and consumers. In accordance with this objective, the paper extends to five sections. Section 2 provides a detailed overview of Pakistan's agricultural price policy since the 1950s. A quantitative analysis of the effects of price policy on producers and consumers is undertaken in Section 3. Due to limitations of data, however, the analysis is restricted to the recent years, beginning with 1984-85. The discussion in Section 4 pertains to available policy options, and Section 5 presents the summary and conclusions of the study.

2. AN OVERVIEW OF THE AGRICULTURAL PRICE POLICY

Since independence in 1947, Pakistan has constantly followed an interventionist price policy for agriculture. Depending on the interventionist measures in vogue, the levels of intervention, however, have varied considerably from time to time. In the 1950s, for example, most of the agricultural commodities were subjected to compulsory procurement at substantially less than world prices [Aresvik (1967)]. Inter-district movement and exports of major agricultural commodities, except cotton, were banned [Turvey and Cook (1976)]. Both the procured and imported quantities of wheat and sugar were subsidised for urban consumers [Alderman, Chandhry and Garcia (1988)]. While there was no emphasis on modern inputs, a considerable overvaluation of the rupee was maintained to encourage industrial imports, with adverse effects on agricultural exports. This policy was considerably relaxed in the 1960s. Although the ban on exports and the movement of grains as well as the overvaiuation of the exchange rates continued, the government began to guarantee above-world prices of agricultural commodities, at least at the official exchange rate [Aresvik (1967)]. The policy of compulsory procurement was replaced by voluntary sales. A policy of liberal subsidies on fertilizers, pesticides, tubewells, tractors, and improved seeds of agricultural commodities was also instituted [Kuhnen (1989)].

A reversal of this somewhat favourable price policy towards agriculture occurred in the beginning of the 1970s, following the major devaluation of the rupee in 1972 [Haque (1993)]. As should be expected, the controlled prices of agricultural commodities fell immediately to less than world levels [Chaudhry (1980)]. Although the same should be expected with respect to input prices, a more than tripling of fertilizer prices was undertaken to curtail the burden of subsidies on the government exchequer. In view of the world energy crisis, similar though somewhat less pronounced increases in the prices of oil, electricity, and pesticides also occurred. Trade in agricultural commodities increasingly became an exclusive monopoly of parastatal organisations as they handled procurement, import, export, and distribution of agricultural commodities. Under the nationalisation programme, both the production and distribution of key agricultural inputs also rested with the government.

Beginning with 1980, a different set of conditions determined the fate of agricultural price policy. Under the World Bank/IMF structural adjustment programme, the government committed itself to bringing input and output prices closer to world levels, reducing public expenditure, and enhancing the role of the private sector [World Bank (1991)]. As a consequence, a number of policy decisions became inevitable. For example, subsidies on pesticides, seeds, and mechanisation were withdrawn in one step in the early 1980s and a phased programme of removal of fertilizer subsidy was instituted, which resulted in periodic increases in fertilizer prices. The rupee was further devalued and Pakistan moved from a policy of fixed exchange rate to a policy of managed float for determining from time to time the value of the rupee in relation to major world currencies. In view of the rising input costs, prices of major agricultural commodities were periodically adjusted to the cost of production estimates. The government also remained committed to enhancing the role of the private sector in the procurement and distribution of agricultural commodities and inputs. For example, the ration-shop system was dismantled in 1987 [Alderman, Chaudhry and Garcia (1988)]. Private traders were inducted in the export and import of agricultural commodities and the procurement of rice and cotton was opened up to the private sector. The distribution of pesticides was handed over to registered dealers. Similar steps were taken in the case of fertilizer, although the government remained the major distributor.

Despite the emphasis on structural adjustment reforms throughout the Eighties, the creation of a distortion-free agricultural sector still remains in the offing. Although there is growing evidence that parastatal organisations are usually much more concerned with their own well-being rather than the welfare of the consumers and the interests of the farmers [Bale (1985)], these public sector corporations continue to intervene in agriculture. It was particularly noted in a World Bank study that government Controls the external trade in all major agricultural commodities [World Bank (1991)]. To make such controls effective, the government continues to operate procurement, storage, and distribution of major agricultural inputs and commodities. In order to avoid the antagonism of politically powerful urban consumers and industrialists, the government has been adamant about not raising agricultural commodity prices to word levels. The evidence cited in a large number of studies is quite emphatic in indicating that underpricing of agricultural commodities relative to world prices in Pakistan was a common phenomenon throughout the Eighties [Ali (1992); Chaudhry and Kayani (1991); Dorosh and Valdes (1990); Ender (1992); Longmire and Debord (1993); John Mellor Associates and Asianics Agro-Dev International (1993); Nabi, Hamid and Nasim (1990); Nasim and Mukhtar (1991); Government of Punjab (1991) and Qureshi (1987)]. Apart from the underpricing of agricultural commodities, agriculture was also doubly squeezed through deteriorating terms of trade relative to the manufacturing sector [Haque (1993)] and by steeper increases in the prices of major agricultural inputs than those of agricultural commodities [Afzal et al. (1992)]. In order to sum up some of these relationships and to pinpoint the extent of the underpricing of agricultural commodities, Table 1 reports the relevant data for the more recent years.

Many conclusions follow from the time-series data reported in Table 1, depending on the deflator used and the crop under consideration. On the basis of the nominal protection coefficients (1) (NPCs), reflected in the ratios of domestic procurement and import-export parity prices, three conclusions are important. First, there has been no consistent intertemporal trend and the NPCs varied randomly. Second, with the exception of a few years in the case of coarse rice and sugarcane, the underpricing of agricultural commodities relative to world levels remains a common policy feature. Third, the overvalued exchange rates, as reported in Appendix Table-B, have been maintained so that the NPCs at the shadow exchange rates have been lower than those at the official exchange rates. As argued in two earlier studies [Cheong and D'Silva (1984); World Bank (1991)], the random fluctuations of the NPCs are inherently induced by fluctuating world prices despite an occasional increase in domestic agricultural commodity prices. This implies that government efforts at ensuring world prices for agriculture in Pakistan have thus far met with little successes.

Like the NPCs, the real prices of most of the agricultural commodities have fluctuated without any intertemporal trend, except in the case of coarse rice and seed cotton, where real prices fell more or less consistently between 1984-85 and 199293. Agricultural commodity prices as a percentage of the NPK fertilizer prices witnessed a fall with the passage of time. As a result of this progressive decline, agricultural commodity prices in 1992-93 were only 60 percent of those of the fertilizer prices. Although this analysis is based on the trends of agricultural commodity prices relative to the fertilizer prices, a study by Afzal et al. (1992) shows that increases in the price of other agricultural inputs were even steeper than those of fertilizer prices between 1986-87 and 1991-92. The conclusion is important for it points to the falling rates of profit in agriculture, a phenomenon shown empirically in recent studies [Afzal et al. (1993); Ahmed and Chaudhry (1987)].

3. EFFECTS ON PRODUCERS AND CONSUMERS

The previous section has shown that Pakistan has been in pursuit of a deliberate policy of underpricing of agricultural commodities. The depressed prices have many and varied deleterious effects on production, employment, and income distribution [Chaudhry and Kayani (1991); Dorosh and Valdes (1990); Mellor (1975)]. In general terms, low agricultural commodity prices retard the growth of agricultural production, accentuate urban-rural income disparities by transferring resources from low-income rural households to high-income urban households, and dislocate the labour from farms to urban slums [Bale and Lutz (1981)]. The nature and speed of the processes at work depend on the magnitudes of various effects on the producers and consumers of agricultural commodities.

Low Prices and Producers

A quantitative assessment of the various effects of low agricultural commodity prices can be undertaken on the basis of such information as the extent of underpricing of agricultural prices, the marketed surpluses of crops, official and shadow foreign exchange rates, supply elasticity with respect to prices, and employment elasticity of agricultural production. As is usual, the underpricing of agricultural commodities can be measured by the differences between world prices, defined here as import or export parity prices of various crops, and domestic procurement prices. The marketed surpluses for the purposes of this paper are equated to total output of cotton, procured tonnage of wheat, cane crushed by mills, and exported amounts of rice. The shadow foreign exchange rate is the equilibrium exchange rate that will prevail in the absence of all trade distortions, and depicts the overvaluation of the rupee. In calculating the adverse effects of underpricing of agricultural commodities on agricultural output and employment, we make use of the aggregate price elasticity of supply reported in Ali (1990) and Haque (1993) and the employment elasticity of agricultural production calculated by Mellor (1988), respectively.

Low prices of agricultural commodities have often been associated with immense resource transfers from or implicit taxation of agriculture. Although subsidies on fertilizer, irrigation water, and institutional credit have operated concurrently, they have been either negligible or ineffective to reverse the outflow of resources from agriculture. While the detailed calculations of some of the resource flows are included in Appendix Table-A, a summary statement of resource outflows due to input-output price policy is given in Table 2.

The above table reveals several facts. First, the yearly resource outflow from agriculture averaged around Rs 35.00 billion, with extremes of Rs 17-72 billion. While low prices and overvalued exchange rate contributed more or less equally to gross outflows until 1988-89, price policy became increasingly important in this respect since 1989-90, and the contribution of the overvalued exchange rate fell to less than one-third of the total. Resource transfers were the lowest in 1985-86 and the highest in 1989-90, and varied directly with the trends in international prices.

By contrast, agriculture received little help from government exchequer. As such, subsidies on insecticides and agricultural machinery were abolished prior to 1984-85. However, certain kinds of fertilizers, irrigation water, and institutional credit were still subsidised. Although much is made of the remaining subsidies on agricultural inputs in most of the public meetings and research studies, total subsidies relative to implicit taxes seem to be considerably unimportant and never exceeded Rs 6.0 billion over the period under consideration. The same applies to the government's development expenditure for the agriculture and water sectors, which remained below Rs 10 billion for most of the years in the period. Thus, the net outflow of resources or implicit taxation due to the input-output price policy remains immense, with an average of Rs 21 billion per year and a range of Rs 4-60 billion for the same period. While the data in Table 2 suggest a rising trend in net resource outflows from agriculture, there seems to be little room for conclusions that hold that resource transfers out of agriculture have been on the decline in the Eighties [Khan (1994); Nabi, Hamid and Nasim (1990)]. Such conclusions can only be temporary, unless the government commits itself to a policy of a freely floating exchange rate and guarantees world prices to the farm sector.

Second, taken at their face value, subsidies on agricultural inputs tend to reduce the outflow of resources from agriculture. It has, however, been noted in different studies that a significant proportion of them may not be accruing to the farm sector at all. For example, the budgetary expenditure and receipts may not reflect the benefits and costs of irrigation water to the farmers. There is always over-reporting of expenditures and under-reporting of irrigation receipts. Although no estimates of the degree of escalation of expenditure in Pakistan are readily available, the Indian experience with an irrigation system similar to that in Pakistan suggests that the actual irrigation expenditure may be only half of that reported in the government budgets [Wade (1982); Rao (1984)]. The provincial irrigation departments are overstaffed to the extent of 50 percent [Wolf (1986)] and would be responsible for excessive expenditure. Apart from overstaffing, the recent surges in irrigation expenditure must be attributed to growing illicit practices, steep increases in the maintenance costs of public tubewells, and multiple increases in the salaries and allowances of government employees. While the governments tend to treat any increase in expenditure as a subsidy to farmers, it is questionable whether the financing of such expenditures should be the responsibility of the farm sector.

The under-reporting of receipts follows from two sources. First, water rates were under-assessed by irrigation officials to the extent of 10 percent in the Punjab and the NWFP, 30 percent in Sindh, and 60 percent in Balochistan [Government of Pakistan (1990)]; and so were the irrigation receipts. Second, because of widespread corruption among irrigation officials, farmers are charged illegal gratifications, which do not appear anywhere in the budgets and accrue directly to irrigation staff [Ilyas (1994); Chaudhry, Majid and Chaudhry (1993); Wolf (1986)]. Due to these reasons, it is doubtful if the irrigation water in Pakistan was at all subsidised. In the case of fertilizers, the sub-standard production, under-bagging, and occasional black-marketing [Government of Pakistan (1993a); Government of Punjab (1991)] are common problems and leave little for the farmers to benefit from in terms of subsidies. Similar problems characterise the agricultural credit markets. Accounting for some of the above distortions in input markets, comparisons of effective and nominal protection coefficients for agricultural crops in Pakistan [Appleyard (1987); Longrnire and Debord (1993)] reveal that agricultural inputs in aggregate received no subsidies and were in fact implicitly taxed to the extent of 5-10 percent throughout the Eighties.

A third effect of the underpricing of agricultural commodity prices appears in tow agricultural production. Depending on the extent of underpricing and the price elasticity of output, the under-production in agriculture is likely to vary from time to time. Looking at the NPCs reported in Table 1, agricultural commodities in the 1990s were underpriced to the extent of nearly 40-60 percent. At an estimated aggregate elasticity of output with respect to prices of 0.6 [Ali (1990); Haque (1993)], it should be obvious that Pakistan suffered a loss of agricultural production of nearly 25-36 percent per year because of low prices. The findings of an independent study for the Eighties placed such annual losses at 30-40 percent of Pakistan's total agricultural production [Dorosh and Valdes (1990)].

Fourth, producers are also affected adversely in many other ways. For example, capital formation in agriculture may be anticipated to be slow due to three important processes: (1) low levels of agricultural production would be consistent with low agricultural incomes and low rates of savings, thus producing low investment in agriculture; (2) negative resource transfers lead to low investment; and (3) capital flees from agriculture to the industrial sector because of relatively high rates of profit on investment in industry. While the current estimates of the rates of return in agriculture hardly exceed 10 percent, and are even negative for rice [Afzal et al. (1992); Ahmed and Chaudhry (1987)], the same rates in the industrial sector vary between 25-125 percent and average around 50 percent [Government of Punjab (1991)].

Fifth, low production in agriculture is associated with underemployment in the sector. At the annual losses of 25-35 percent of agricultural production and an employment elasticity with respect to output of 0.6 [Mellor (1988)], the demand for labour in agriculture remains below its potential by a substantial margin of 15-21 percent.

Finally, apart from their deleterious effects on output, low prices of agricultural commodities tend to accentuate poverty and income differentials among the farmers. Being regressive in its effects, implicit taxation of commercial crops falls heavily on small farmers. As a result, the skewness in post-tax incomes is greatly increased. Similarly, the current system of charging irrigation water is highly inequitable. While the farm area is the basis of water supply, water rates are assessed on the basis of crop-land. As intensity of cropping varies inversely with farm size, the average charge per unit of water for some of the smallest farm size categories would be 2-3 times that paid by the largest category [Chaudhry, Majid and Chaudhry (1993); Ilyas (1994)].

Effects on Consumers

Consumers, in general, are the main beneficiary of low agricultural commodity prices and most of the transfers from agriculture accrue to a diverse group of non-agricultural urban consumers consisting of labourers, industrialists, traders, businessmen, government servants, and even the government itself. Low agricultural commodity prices affect the urban population in various ways. For example, the effect of low food prices on the urban population is to raise their real incomes, alleviate purchasing power constraints, and increase food intake; and also to reduce the malnutrition, hunger, and poverty, especially among the vulnerable low-income groups. Because non-food agricultural commodities are commonly used as industrial raw materials, the impact of their low prices is to reduce industrial costs and raise industrial profits. In the event of reinvestment of those profits, the likelihood of an expanding industrial sector and, along with it, an expanding job market may be anticipated. If and when this happens, industrial workers may be the indirect beneficiary of low agricultural commodity prices. Apart from taxes on increased industrial profits, government intervention in agricultural commodity markets and trade may generate funds for the government exchequer. Finally, a biased price policy against agriculture, as it operates in Pakistan, can result in capital flight from agriculture to the urban industrial sector.

It is difficult, if not impossible, to quantify the exact impact of depressed agricultural commodity prices on various groups of consumers due to the lack of appropriate data. However, some idea of the potential beneficiaries can be had by looking at the transfers by commodities. The data in Appendix Table-A in combination with those in Table 2 indicate that out of the total transfers of Rs 44.4 billion from agriculture during 1992-93, Rs 9.4 billion, or 21 percent, accrued to wheat consumers. The remaining transfers of Rs 35.0 billion, or 79 percent, were shared among industrialists, traders, and the government's trading corporations. Since seed cotton is underpriced to the extent of 40 percent (Table 1) and the government imposes a duty of 20 percent on cotton exports [Mellor (1993)], the transfers from cotton amounting to Rs 28.8 billion would be shared more or less equally between the industrialists and the government. While the transfers of Rs 3.1 billion from sugarcane accrue solely to the sugar industry, those from rice, of almost equal magnitude, fall mainly into government hands. Thus, it would seem that the industrialists and the government are the main beneficiaries of underpriced agricultural commodities.

To the extent that government has the power to manipulate taxes, prices, and expenditure, the urban bias in government policy may be somewhat more protracted than that shown above. Against the less-than-world-prices for agricultural commodities, most of the industrial output enjoys positive protection with an average margin of nearly 70 percent over and above the world prices [Government of Punjab (1991); Kemal (1993)]. While indirect taxes accounted for more than 85 percent of the government revenue of Rs 250 billion during 1992-93 [Government of Pakistan (1993)], the tax incidence studies in Pakistan indicate that agriculture contributed a rising share to such taxes, and its contribution in the mid-eighties was in excess of 40 percent [Qureshi (1986)]. Against such taxes, government's annual development expenditure of Rs 120 billion in 1992-93 allocated only Rs 14.4 billion to the agriculture and water sectors and the rest was reserved for the development facilities heavily concentrated in the urban areas [Government of Pakistan (1993)].

The low prices of agricultural commodities may be harmful to consumers from the food security point of view. Due to shortfalls in production, they may encourage the growing dependence on food imports and add to consumer misery if such imports are not forthcoming. The low prices may also result in smuggling across the open borders, with limited and uncertain supply of food for domestic consumers [Haque (1993)].

4. POLICY RECOMMENDATIONS

In the light of the analysis and discussion above, it should be clear that the agricultural price policy pursued in Pakistan has adverse consequences for investment, production, employment, and income distribution in agriculture. In view of the heavy dependence of national economy on agriculture and the importance of some of the above variables, an indefinite pursuit of such a policy is neither desirable nor sustainable and must be discontinued.

The current price policy needs to be modified in at least three important respects.

First, rather than seeking guidance from discretion and cost of production studies, the fixation of agricultural commodity prices must be undertaken on the basis of corresponding import and export parity prices of various commodities. Since parity prices tend to be higher than procurement prices, favourable incentive effects of the recommended policy on investment, production, trade, employment, and income distribution would become obvious. Although higher domestic prices of food may be hard on some consumers, they should not unnecessarily tax urban consumers as they are the minimum prices which would prevail in the country in the absence of domestic production. However, as parity prices are likely to vary directly with highly volatile world prices, the stability of agricultural commodity prices at home can be ensured if they are determined by the trend lines of past parity prices. This way domestic prices would be higher than parity prices in the years of low world prices, and lower than them in the years of high world prices. As cyclical fluctuations around the trend would be cancelled out over time, it is not difficult to see that this recommendation would conspicuously be marked by the absence of any implicit taxation of agriculture.

Second, government intervention in agricultural commodity markets serves no useful purpose. In fact, most of the parastatal organisations suffer from gross inefficiencies, with immense costs to producers, consumers, and the government exchequer. In order to save on these costs and to promote the cause of privatisation, the government would be well-advised to desist from active and direct engagement in procurement, storage, distribution, and external trade on a massive scale and leave these tasks to the private sector.

While restrictive trade policies such as the licencing and the ban on the interregional movement of commodities should be discontinued, severe penalties backed by law should be imposed on illicit trade practices. The government in its new role must be watchful of private sector activities, ensure competition in agricultural commodity markets, and buy and sell in the major commodity markets to safeguard against monopolistic tendencies, excessive profiteering, and rising and unstable commodity prices.

Third, most of the agricultural input markets are still in their infancy in Pakistan and suffer from even greater fundamental problems than the commodity markets. For example, they are typically characterised by monopoly positions of one kind or another; quality is no consideration; and almost any product is saleable at the asking price. These problems are particularly acute in the modern input markets, such as those dealing in seeds, insecticides, and fertilizer, with only a few exceptions in the irrigation water and credit markets. Apart from being admixtures of all varieties, seeds supplied by seed agencies have doubtful viability. The seeds being admixtures, there is hardly any justification for premium prices for seed. Rather than emphasising the mushroom growth of seed agencies and the quantities of seed marketed, quality should be the main consideration, with clear seed agency labels testifying to the variety of seed, its viability, and the date when the seed was tested for germination. Any inconsistent results at the farm level should be punishable by fines, which must recover for reimbursement to affected farmers all costs associated with seed purchases, preparatory tillage operations, and efforts foregone in acquiring seed. Similar policy action may also be suggested to check the production and marketing of sub-standard, fictitious, and underbagged fertilizers and insecticides. To break up the monopoly of registered dealers and to promote competition, the government should withdraw from fertilizer production, its trade as well as distribution, in favour of free sales in the open market by interested parties and individuals. In the case of irrigation water, the need for equitable distribution of water among outlets and canals, elimination of overstaffing, and precise alignment of the water rate assessment base with the water supply base can hardly be over-emphasised.

While all three recommendations would be consistent with stepped-up water use or cost efficiency, the latter should also protect the small farmers from the onerous burdens of current intensity-borne water rates. The unlimited powers of irrigation officers should be carefully balanced by granting some powers to irrigation associations of the farmers to wipe out corruption from the irrigation departments. The credit market also needs to be made more competitive, with the same terms and conditions for agricultural credit as those for other loans. While the demand-creation strategies lead to much waste, effective supply management with a view to reducing the cost of loans to government should serve as the basis of the future credit strategy in agriculture.

In a nutshell, the emphasis of the government policy should be to minimise the cost of its programmes, ensure efficiency of resource use in agriculture, and, so far as possible, discourage corruption and unnecessary intervention in agriculture. Although the private sector can deliver many services to agriculture, its unbridled growth based on excessive profits and without specification of the rules of the game would be equally undesirable.

5. SUMMARY AND CONCLUSIONS

The study was undertaken in order to review the input-output policy in Pakistan's agriculture, study its possible effects on producers and consumers, and make policy recommendations for rapid agricultural development and hence enhanced welfare of the consumers. On the basis of the evidence produced here, it can be concluded that government policy in recent years was heavily biased against agriculture. As a result of government intervention, agricultural commodity prices in general remained well below their corresponding world prices, input prices rose at a faster pace than commodity prices, and agriculture witnessed falling rates of profit against rising and high rates of profit in the industrial sector. Such a state of affairs resulted in immense resource transfers from agriculture, with all kinds of deleterious effects on investment, production, employment, and income distribution in that sector and elsewhere in the economy. In order to reverse these trends, and to ensure rapid transformation of Pakistan's economy in general, and of agriculture in particular, there is a need for halting active government intervention and for promoting the role of the private sector in the marketing, trade, and distribution of agricultural inputs and commodities. While the supremacy of the private sector must be upheld, the rules of the game must be clearly defined and the breach of law must be punishable by heavy penalties. As a step towards right prices, agricultural commodity prices should be fixed on the basis of the trend lines of past parity prices. As such, there is little need for subsidising the inputs. In fact, stable and even falling prices of most of the agricultural inputs can be assured if the government takes note of the corruption and excessive profiteering and decides to pursue a cost-reduction strategy. In the specific case of irrigation water, an equitable distribution of water, the compatibility of water delivery and water rate assessment bases, and the elimination of overstaffing are the prime issues that require immediate government attention.

Author's Note: I owe a great debt of gratitude to Professor William C. Thiesenhusen of the University of Wisconsin-Madison for his valuable and constructive comments on an earlier draft of this paper. However, I alone am responsible for the ideas and opinions contained in this paper, and for any errors or omissions remaining.

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Mahmood, Muhammad Sajid (1992) Impact of Overvalued Exchange Rates on Agricultural Commodity Prices in Pakistan for the Years 1982-91. Unpublished M. A. Thesis, Department of Economics, Quaid-i-Azam University, Islamabad.

Mellor, John W. (1975) Agricultural Price Policy and Income Distribution in Low Income Nations. Washington, D. C.: World Bank. (World Bank Staff Working Paper No. 214.)

Mellor, John W. (1988) Lectures on Agricultural Growth and Employment. Islamabad: Pakistan Institute of Development Economics.

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Qureshi, M. L. (1986) Incidence of Taxation in Pakistan. A Report prepared for the National Taxation Reforms Commission, Lahore.

Qureshi, Sarfraz Khan (1987) Agricultural Pricing and Taxation in Pakistan. Islamabad: Pakistan Institute of Development Economics.

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(1) The nominal protection coefficient is the ratio of the domestic prices to world prices. While domestic prices are equated to procurement prices, the world prices have been defined by corresponding f.o.b, or c.i.f, prices of various commodities, adjusted for any handling, distribution, and processing costs [Chaudhry and Kayani (1981)]. In common parlance, the prices so adjusted may alternatively be termed as farm-gate parity prices.

M. Ghaffar Chaudhry is Joint Director at the Pakistan Institute of Development Economics, Islamabad.
Appendix Table-A
Calculating the Resource Transfers * from Agriculture

                                          1984-85   1985-86   1986-87

A. Wheat

   1. Import Parity Price per Ton (Rs)

      a. At the Official Exchange Rate       3337      3087      3754
      b. At the Shadow Exchange Rate         4476      3940      4602

   2. Procurement Price per Ton (Rs)         1750      2000      2000

   3. Wedge between Import Parity and
      Procurement Prices (Rs)

      a. At the Official Exchange Rate       1587      1087      1754
      b. At the Shadow Exchange Rate         2726      1940      2602

   4. Marketed Output (M. Tonnes)            2.27      2.53      5.03

   5. Transfers (M. Rs)

      a. At the Official Exchange Rate       3602      2750      8023
      b. At the Shadow Exchange Rate         6270      4908     13088

B. Seed Cotton

   1. Export Parity Price per Ton (Rs)

      a. At the Official Exchange Rate       6516      5266      4971
      b. At the Shadow Exchange Rate         8739      6703      6093

   2. Procurement Price per Ton (Rs)         4525      4625      4625

   3. Wedge between Export Parity and
      Procurement Prices (Rs)

      a. At the Official Exchange Rate       1991       641       316
      b. At the Shadow Exchange Rate         4214      2078      1468

   4. Marketed Output (M. Tonnes)            3.03      3.63      3.93

   5. Transfers (M. Rs)

     a. At the Official Exchange Rate        6033      2327      1242
     b. At the Shadow Exchange Rate         12768      7543      5769

C. Rice Basmati

   1. Export Parity Price per Ton (Rs)

      a. At the Official Exchange Rate       6767      7504      8386
      b. At the Shadow Exchange Rate         9076      9552     10280

   2. Procurement Price per Ton (Rs)         2207      2276      2498

   3. Wedge between Export Parity and
      Procurement Prices (Rs)

      a. At the Official Exchange Rate       4491      5228      5588
      b. At the Shadow Exchange Rate         6869      7276      7782

   4. Marketed Output (M. Tonnes)            0.23      0.61      0.25

   5. Transfers (M. Rs)

      a. At the Official Exchange Rate       1033      3189      1397
      b. At the Shadow Exchange Rate         1580      4438      1946

D. Rice Coarse

   1. Export Parity Price per Ton (Rs)

      a. At the Official Exchange Rate       1640      1131      1081
      b. At the Shadow Exchange Rate         2200      1440      1325

   2. Procurement Price per Ton (Rs)         1232      1276      1273

   3. Wedge between Export Parity and
     Procurement Prices (Rs)

      a. At the Official Exchange Rate        408      -145      -193
      b. At the Shadow Exchange Rate          968       164        52

   4. Marketed Output (M. Tonnes)            0.73      1.41      1.44

   5. Transfers (M. Rs)

      a. At the Official Exchange Rate        298      -204      -278
      b. At the Shadow Exchange Rate          767       231        75

E. Sugarcane

   1. Import Parity Price of Cane per
      Ton (Rs)

      a. At the Official Exchange Rate        140       202       191
      b. At the Shadow Exchange Rate          188       257       234

   2. Procurement Price per Ton (Rs)          241       241       292

   3. Wedge between Import Parity and
      Procurement Prices (Rs)

      a. At the Official Exchange Rate       -101       -39      -101
      b. At the Shadow Exchange Rate          -53        16       -58

   4. Marketed Cane Output (M. Tonnes)      14.70     12.02     14.48

   5. Transfers (M. Rs)

      a. At the Official Exchange Rate      -1485      -470     -1262
      b. At the Shadow Exchange Rate         -779       193      -840

                                          1987-88   1988-89   1989-90

A. Wheat

   1. Import Parity Price per Ton (Rs)

      a. At the Official Exchange Rate       3793      3940      5026
      b. At the Shadow Exchange Rate         4982      5155      6163

   2. Procurement Price per Ton (Rs)         2062      2125      2400

   3. Wedge between Import Parity and
      Procurement Prices (Rs)

      a. At the Official Exchange Rate       1731      1815      2626
      b. At the Shadow Exchange Rate         2930      3030      3763

   4. Marketed Output (M. Tonnes)            3.97      3.49      4.31

   5. Transfers (M. Rs)

      a. At the Official Exchange Rate       6872      6456     10845
      b. At the Shadow Exchange Rate        11632     10575     15537

B. Seed Cotton

   1. Export Parity Price per Ton (Rs)

      a. At the Official Exchange Rate       8136      7277     11990
      b. At the Shadow Exchange Rate        10687      9520     14702

   2. Procurement Price per Ton (Rs)         4625      4650      5075

   3. Wedge between Export Parity and
      Procurement Prices (Rs)

      a. At the Official Exchange Rate       3511      2627      6915
      b. At the Shadow Exchange Rate         6062      4870      9627

   4. Marketed Output (M. Tonnes)            4.41      4.29      4.38

   5. Transfers (M. Rs)

      a. At the Official Exchange Rate      15484     11270     30288
      b. At the Shadow Exchange Rate        26733     20892     42166

C. Rice Basmati

   1. Export Parity Price per Ton (Rs)

      a. At the Official Exchange Rate       8698      8740      8741
      b. At the Shadow Exchange Rate        11425     11435     10718

   2. Procurement Price per Ton (Rs)         3196      3319      3530

   3. Wedge between Export Parity and
      Procurement Prices (Rs)

      a. At the Official Exchange Rate       5502      5421      5211
      b. At the Shadow Exchange Rate         8229      8116      7188

   4. Marketed Output (M. Tonnes)            0.30      0.29      0.60

   5. Transfers (M. Rs)

      a. At the Official Exchange Rate       1651      1572      3127
      b. At the Shadow Exchange Rate         2469      2354      4313

D. Rice Coarse

  1. Export Parity Price per Ton (Rs)

     a. At the Official Exchange Rate        1496      2353      3168
     b. At the Shadow Exchange Rate          1965      3078      3885

  2. Procurement Price per Ton (Rs)          1321      1444      1592

  3. Wedge between Export Parity and
     Procurement Prices (Rs)

     a. At the Official Exchange Rate         175       709      1576
     b. At the Shadow Exchange Rate           644      1634      2293

  4. Marketed Output (M. Tonnes)             1.61      1.13      0.99

  5. Transfers (M. Rs)

     a. At the Official Exchange Rate         282       801      1560
     b. At the Shadow Exchange Rate          1036      1846      2270

E. Sugarcane

   1. Import Parity Price of Cane per
      Ton (Rs)

      a. At the Official Exchange Rate        158       219       591

      b. At the Shadow Exchange Rate          208       287       725

   2. Procurement Price per Ton (Rs)          292       315       344

   3. Wedge between Import Parity and
      Procurement Prices (Rs)

      a. At the Official Exchange Rate       -134       -96       247
      b. At the Shadow Exchange Rate          -84       -28       381

   4. Marketed Cane Output (M. Tonnes)      20.33     21.71     20.84

   5. Transfers (M. Rs)

      a. At the Official Exchange Rate      -2724     -2084      5148
      b. At the Shadow Exchange Rate        -1708      -608      7940

                                          1990-91   1991-92   1992-93

A. Wheat

   1. Import Parity Price per Ton (Rs)

      a. At the Official Exchange Rate       4106      6192      5285
      b. At the Shadow Exchange Rate         4941      6034      6142

   2. Procurement Price per Ton (Rs)         2800      3100      3250

   3. Wedge between Import Parity and
      Procurement Prices (Rs)

      a. At the Official Exchange Rate       1306      2092      2035
      b. At the Shadow Exchange Rate         2141      2934      2892

   4. Marketed Output (M. Tonnes)            4.41      3.16      3.25

   5. Transfers (M. Rs)

      a. At the Official Exchange Rate       5759      6611      6614
      b. At the Shadow Exchange Rate         9442      9271      9399

B. Seed Cotton

   1. Export Parity Price per Ton (Rs)
      a. At the Official Exchange Rate      12498     10684     11636
      b. At the Shadow Exchange Rate        15039     12417     13523

   2. Procurement Price per Ton (Rs)         5875      6750      7500

   3. Wedge between Export Parity and
      Procurement Prices (Rs)

      a. At the Official Exchange Rate       6620      3934      4136
      b. At the Shadow Exchange Rate         9144      5667      6023

   4. Marketed Output (M. Tonnes)            4.92      6.54      4.77

   5. Transfers (M. Rs)

      a. At the Official Exchange Rate      32570     26122     19729
      b. At the Shadow Exchange Rate        41176     37062     28730

C. Rice Basmati

   1. Export Parity Price per Ton (Rs)

      a. At the Official Exchange Rate       5806      5494      6479
      b. At the Shadow Exchange Rate         6986      6385      7530

   2. Procurement Price per Ton (Rs)         3690      3813      4311

   3. Wedge between Export Parity and
      Procurement Prices (Rs)

      a. At the Official Exchange Rate       2116      1681      2163
      b. At the Shadow Exchange Rate         3296      2572      3219

   4. Marketed Output (M. Tonnes)            0.62      0.74      0.70

   5. Transfers (M. Rs)

      a. At the Official Exchange Rate       1312      1244      1513
      b. At the Shadow Exchange Rate         2044      1903      2253

D. Rice Coarse

   1. Export Parity Price per Ton (Rs)

      a. At the Official Exchange Rate       1235      1490      2251
      b. At the Shadow Exchange Rate         1486       732      2616

   2. Procurement Price per Ton (Rs)         1765      1888      2061

   3. Wedge between Export Parity and
      Procurement Prices (Rs)

      a. At the Official Exchange Rate       -530      -398       190
      b. At the Shadow Exchange Rate         -279      -156       555

   4. Marketed Output (M. Tonnes)            1.61      2.02      1.55

   5. Transfers (M. Rs)

      a. At the Official Exchange Rate       -853      -804       294
      b. At the Shadow Exchange Rate         -449      -315       860

E. Sugarcane

   1. Import Parity Price of Cane per
      Ton (Rs)

      a. At the Official Exchange Rate        515       488       490

      b. At the Shadow Exchange Rate          620       567       570

   2. Procurement Price per Ton (Rs)          381       419       438

   3. Wedge between Import Parity and
      Procurement Prices (Rs)

      a. At the Official Exchange Rate        134        69        52
      b. At the Shadow Exchange Rate          239       148       132

   4. Marketed Cane Output (M. Tonnes)      22.60     24.80     23.58

   5. Transfers (M. Rs)

      a. At the Official Exchange Rate       3028      1551      1226
      b. At the Shadow Exchange Rate         5401      3670      3112

Source: Chaudhry and Kayani (1991) and calculations based on the
information in Government of Pakistan (1993, 1993b).

* Transfers for individual commodities were obtained by multiplication
of the wedge between parity and procurement prices with the respective
marketed surplus.

Appendix Table-B
Official and Shadow Exchange Rates (Rs per US$)

                                     Ratio of
                                     Shadow to
               Official    Shadow    Official
               Exchange   Exchange   Exchange
Period           Rate       Rate       Rate

1984-85         15.151     20.038     1.3412

1985-86         16.139     20.553     1.2729

1986-87         17.179     21.058     1.2258

1987-88         17.599     23.116     1.3135

1988-89         19.215     25.139     1.3083

1989-90         21.445     26.295     1.2262

1990-91         22.242     26.981     1.2033

1991-92         24.844     28.875     1.1622

1992-93         25.639     29.798     1.1622
(July-March)

Source: [Kemal (1993); Mahmood (1992); Government of Pakistan
(1993a)]

Note: Shadow exchange rates are equilibrium exchange rates
between 1984-85 and 1990-91 and effective exchange rates
for 1991-92 and 1992-93.


Table 1
Agricultural Commodity Prices Relative to World Prices
GDP Deflator and NPK (Fertilizer) Prices

Description and
Commodity Prices      1984-85   1985-86   1986-87   1987-88   1988-89

A. The Ratio of Procurement and Parity Prices at the Official
   Exchange Rate

   1.  Wheat            0.524     0.648     0.533     0.544     0.539
   2.  Seed Cotton      0.694     0.878     0.930     0.568     0.639
   3.  Rice (Fine)      0.326     0.303     0.298     0.367     0.380
   4.  Rice (IRRI)      0.751     1.128     1.178     0.883     0.614
   5.  Sugarcane        1.721     1.193     1.528     1.848     1.438

B. The Ratio of Procurement and Parity Prices at the Shadow
   Exchange Rate

   1.  Wheat            0.391     0.508     0.435     0.414     0.412
   2.  Seed Cotton      0.518     0.690     0.759     0.433     0.488
   3.  Rice (Fine)      0.243     0.238     0.243     0.280     0.290
   4.  Rice (IRRI)      0.560     0.886     0.961     0.672     0.469
   5.  Sugarcane        1.282     0.938     1.248     1.404     1.098

C. The Procurement Prices Index Relative to the GDP Deflator
   (1984-85=1.0)

   1.  Wheat            1.000     1.108     1.061     1.019     0.949
   2.  Seed Cotton      1.000     0.991     0.949     0.884     0.803
   3.  Rice (Fine)      1.000     1.000     1.050     1.238     1.175
   4.  Rice (IRRI)      1.000     1.004     0.959     0.927     0.716
   5.  Sugarcane        1.000     0.970     1.125     1.048     1.021

D. The Procurement Prices Relative to the NPK Prices (1984-85 = 1.0)

   1.  Wheat            1.000     0.956     0.956     0.920     0.866
   2.  Seed Cotton      1.000     0.855     0.855     0.798     0.733
   3.  Rice (Fine)      1.000     0.863     0.947     1.118     1.072
   4.  Rice (IRRI)      1.000     0.867     0.865     0.837     0.836
   5.  Sugarcane        1.000     0.837     1.014     0.946     0.932

Description and
Commodity Prices      1989-90   1990-91   1991-92   1992-93

A. The Ratio of Procurement and Parity Prices at the Official
   Exchange Rate

   1.  Wheat            0.478     0.682     0.597     0.615
   2.  Seed Cotton      0.423     0.470     0.632     0.645
   3.  Rice (Fine)      0.404     0.636     0.694     0.665
   4.  Rice (IRRI)      0.503     1.429     1.267     0.916
   5.  Sugarcane        0.582     0.740     0.859     0.896

B. The Ratio of Procurement and Parity Prices at the Shadow
   Exchange Rate

   1.  Wheat            0.389     0.567     0.514     0.529
   2.  Seed Cotton      0.345     0.470     0.544     0.555
   3.  Rice (Fine)      0.329     0.528     0.397     0.572
   4.  Rice (IRRI)      0.410     1.188     1.085     0.788
   5.  Sugarcane        0.474     0.615     0.739     0.767

C. The Procurement Prices Index Relative to the GDP Deflator
   (1984-85=1.0)

   1.  Wheat            1.007     1.038     1.043     0.997
   2.  Seed Cotton      0.824     0.842     0.878     0.890
   3.  Rice (Fine)      1.175     1.084     1.017     1.048
   4.  Rice (IRRI)      0.949     0.929     0.902     0.098
   5.  Sugarcane        1.048     1.025     1.023     0.976

D. The Procurement Prices Relative to the NPK Prices (1984-85 = 1.0)

   1.  Wheat            0.786     0.746     0.825     0.578
   2.  Seed Cotton      0.643     0.605     0.695     0.510
   3.  Rice (Fine)      0.917     0.779     0.805     0.608
   4.  Rice (IRRI)      0.741     0.667     0.714     0.521
   5.  Sugarcane        0.818     0.737     0.810     0.585

Source: Appendix Table-A and [Government of Pakistan (1993)].

Table 2
Annual Gross and Net Resource Transfers from Agriculture due to Price
and Exchange Rate Policies 1984-85 to 1992-93 (Rs Million)

     Kinds of Transfers from
        and to Agriculture               1984-85   1985-86   1986-87

  I. Gross Resource Transfers from Agriculture due to:

     1. Depressed Crop Prices *             9481      7592      9122
     2. Overvalued Exchange Rate **        11065      9721     10916
        Total                              20546     17313     20038

 II. Transfers into Agriculture

     A. Input Subsidies on:
        1. Fertilizer                       1501      2408      1124
        2. Irrigation Water                  827      1005      1234
        3. Institutional Credit              543       448       551
        4. Sub-total                        2871      3861      2909

     B. Public Sector Expenditure for:
        1. Agriculture                      2920      4435      3221
        2. Water                            3541      4589      4129
        3. Sub-total                        6461      9024      7350
           Total (A4+B3)                    9332     12885     10259

III. Net Transfers from Agriculture
     (Total I-Total II)                    11214      4428      9779

     Kinds of Transfers from
        and to Agriculture               1987-88   1988-89   1989-90

  I. Gross Resource Transfers from Agriculture due to:

     1. Depressed Crop Prices *             2165      1805     50968
     2. Overvalued Exchange Rate **        18597     17074     21258
        Total                              40162     35059     72226

 II. Transfers into Agriculture

     A. Input Subsidies on:
        1. Fertilizer                       2170      2423      1170
        2. Irrigation Water                  352      1154      1028
        3. Institutional Credit              785      1009      1207
        4. Sub-total                        4307      4586      3405

     B. Public Sector Expenditure for:
        1. Agriculture                      3493      3990      3012
        2. Water                            4538      3389      5440
        3. Sub-total                        8031      7379      8452
           Total (A4+B3)                   12338     11965     11857

     Kinds of Transfers from
        and to Agriculture               1990-91   1991-92   1992-93

  I. Gross Resource Transfers from Agriculture due to:

     1. Depressed Crop Prices *            41816     34724     29376
     2. Overvalued Exchange Rate **        15798     16867     14978
        Total                              57614     51591     44354

 II. Transfers into Agriculture

     A. Input Subsidies on:
        1. Fertilizer                       1386      1224       810
        2. Irrigation Water                 1545      2781      3111
        3. Institutional Credit             1526      1744      1993
        4. Sub-total                        4457      5749      5914

     B. Public Sector Expenditure for:
        1. Agriculture                      3042      3692      3461
        2. Water                            6815      5554      8461
        3. Sub-total                        9857      9246     11922
           Total (A4+B3)                   14314     14995     17836

III. Net Transfers from Agriculture
     (Total I-Total II)                    43300     36596     26518

Source: Appendix Table-A and [Government of Pakistan (1993)
and Government of Pakistan (1993b)].

* Sum total of transfers for wheat, rice, cotton, and sugarcane
at the official exchange rate given in Appendix Table -A.

** Sum total of transfers for the above commodities at the shadow
exchange rate minus transfers at the official exchange rate.

*** The subsidies on fertilizer, irrigation water, and
institutional credit respectively equal the subsidies reported
in official budgets, current expenditure minus receipts from
irrigation, and the interest foregone, which have been obtained
by multiplication of annual outstanding credit, with differences
in market interest rates and those charged from agriculture.
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