Pakistan Rural Factor-market Study

8/10/2019 Pakistan Rural Factor-market Study

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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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iv

Table 6.7.

Table 6.8.

Table 7.1.

Table 7.2.

Table 7.3.

Table 7.4.

Table 7.5.

Table 7.6.

Table 8.1.

Table 8.2.

Table 8.3

Figure 2.1.

Figure

2.2.

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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V

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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v1

Table

A2.5

Table A3.1

Table A3.2

Table

A3.3

Table

A3.4

Table A3.5

Table A3.6

Table A3.7

Table A3.8.

Table A3.9

Table A3.10

Table A3.11

Table A3.12

Figure A l 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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vii

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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viii

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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i x

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


15/158

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.


16/158

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.


17/158

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


18/158

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.


19/158

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.


22/158

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


24/158

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:

Documents

Pakistan Rural Factor-market Study