DIFFERENT STAGES OF DEVELOPMENT: SECTORAL PERSPECTIVE

Agricultural sector

This week

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

Different stages of development Reading page 39 Growing economy: change in proportion Look at share of main sectors in output

and employment Usual pattern : Agriculture Industry

Service Industrialization and post

industrialization

Industrialization

As incomes grow demand for food reaches its natural limit: industrial goods

New farm techniques and machinery: relatively less expensive

Less labor required Industrial sector starts to take over a

larger proportion in GDP

Post industrialization

As incomes further rise : People demand services

As compared to agriculture and industry, labor is relatively difficult to replace by machines

Employment and share of GDP of services increases

Most high income countries: post industrializing

Low income countries : industrializing

Agriculture: Main readings

Agricultural Development : Chapter 9, page 43

Agriculture pricing policy: Chapter 10, page 58

Introduction

Important features of UDC’s: Agriculture is the pre-dominant sector Agriculture development forms part of an

overall development plan Rate of economic growth is largely a

function of the rate of growth of agriculture (contributes nearly 50% of their GDP)

High gr rate at macro level has always been associated with a high gr rate in agricultural productivity

Importance of agricultural development

In 37 LIC’s, agriculture accounts for about 50% of their GDP Absorbs nearly 3/4th of their total labor force Contributes substantially to their exports

In Pakistan: Backbone of the economy 1949-50: 53% of GNP 2002-03: 24% (largest) Absorbs nearly 48.4% of employed labor force,

and 70% if indirect employment is taken into account

Largest source of export earnings (rice, raw cotton and cotton based products)

Industry is based on agri raw materials

Role of agricultural surplus in development Economic surplus: Excess of production

over consumption, utilisation for capital formation

Our main sector is agriculture How to increase surplus?

Adam Smiths Natural Order of Development In economic development, priority

should be given to agriculture to make it sustainable

Industrial development should succeed rather than precede agricultural development

U.S.A: agri growth provided ignition and was not sidelined, Japan, China

Poverty eradication

Historical Perspective

Agri assigned a low priority in the 1st Plan (1955 – 60): 11% of total investable funds with a 2.5%

gr target, compared to 28% for industry with a 12% gr target

Agri growth rates not met by the end of the plan period =< stagnant sector

Historical Perspective

2nd Plan (1960 – 65): Growth rate of 3.4% realized in agri ,other

crucial targets e.g exports. Agri assigned 24% of total funds compared to

26% to industry But priorities in industry were not right

3rd Plan: Target of 5% growth rate Allocation: 30% , subsidies on inputs Setbacks: ’65 war, suspension of US aid,

popular agitation + political uncertainties, failed land reforms

4th Plan (1970 – 75): Became redundant after the split up of the country Crop productivity either stagnated or started a

downward slide Reasons: seed deterioration, decline in water use

efficiency, low level of input use, water-logging and salinity

Land reforms 1977 – 87: partial recovery ; became almost

self-sufficient in wheat Unsustainable growth because of persistent

bad weather

7th Plan (1988 – 93): Inconsistent growth rates during the plan

period 1988-89: 6.9% gr rate 89-90: 3.03% 1991-92: 9.5% 92-93: -5.28% Average growth rate during the Plan: 3.8% Negative gr rates in 92-93 due to reverses

in the production of major crops Cotton, sugarcane, rice

8th Plan (1993 – 98): Wide fluctuations due to an natural/climatic

conditions Prime Ministers task force during Benazirs

government as well as Nawaz Sharifs government gave incentives

Agri policy geared towards productivity gains through efficient use of key inputs such as irrigation, seeds, fertilizers, plant protection etc.

Non-Plan period (1999 – 2001): Negative growth due to drought

Status quo?

Way forward? Explore the possibility of more land

reforms: skewed ownerships, wastage of land, lack of investment, feudalism

Explore the possibility of small farms: seed, water , fertilizer package

Improve the provision of physical inputs: irrigation(rice and irrigation),improved seeds, plant protection, mechanization

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

Promote Research and Education

More Land Reforms

Highly skewed land : retarding factor in agriculture

Land ownership structure has not changed despite land reforms of ’59 and ’72

Land reforms largely neutralized Land surrendered was largely barren Wastage of land Feudalism Lack of investment Additional land reforms do not seem

politically possible

Possibility of Small Farms

Urgent need to fully exploit the considerable yield potential of small farms

seed-water-fertilizer package Success of this program linked to freeing

of small farmers from the bondage of big landlords

Tremendous scope of expanding productivity

The Provision of Physical Inputs Water Shortage

Appear at critical times, which particularly affect productivity of rice and sugarcane

Nearly 45% of water resources wasted annually in transit

Water availability can be increased by increasing ground and surface water, and also through initiating on-farm water management programs

The Provision of Physical Inputs Fertilizer:

Key input: plays an important role in raising productivity

Usage can be increased by subsidizing fertilizer and by advancing credit to farmers

Provide expert advice on proper and effective use of fertilizers

The Provision of Physical Inputs Seeds:

research work to aim at evolving new HYV of seeds

Need more seed processing plants Plant Protection Measures:

Import, sale and dist of pesticides handed over to the private sector in 1980.

The Provision of Physical Inputs Mechanization:

Helps overcome labor shortage at sowing and harvesting season, and also does the job more quickly

Need to locally manufacture tractors, threshers, harvestors, reapers etc. Research should be undertaken to evolve suitable machinery that is suited to local conditions.

Improving the Economic Environment

Improve price incentives, agricultural credit, marketing and storing facilities etc.

Essential to formulate a liberal credit policy

Build additional storage capacity,so that procurement plans are not adversely affected

Promote Research and Education Only 1/20th of 1% of GNP allocated for

research in agriculture Research characterized by duplication of

effort => wastage of resources Research conducted by PARC has resulted

in production gains in cotton, wheat, maize, oilseed etc., leading to yield gains ranging between 25% to 100%

Acute shortage of research personnel

Pricing policy

Govt’s intervene to stabilize prices of agricultural goods to ensure a reasonable price to the consumer and producers

Support Price? Procurement Price? Motivations: to safeguard the interests of

both producers and consumers and moderate the impact of excessive fluctuations in output.

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

Subsidized by government directly or indirectly

Importance and need

1. To remove uncertainty2. To increase agricultural production3. Keynesian arguments4. Lack of storage facilities5. Stabilize the tempo of economic

growth6. Income disparities7. To increase the standard of living

Objectives

1. Stabilization of prices2. Induce greater production3. Supply of food to urban consumers at

reasonable prices4. Generate public revenues

Price stabilization

Carried out through fixation of support prices below which market prices are not allowed to fall

Buffer stocks: Over and underproduction

Inducement for greater production Direct and positive correlation

between argi prices and production Provide incentive to growers to bring

more acreage under cultivation of a crop to expand production

Time series data

Reasonable food prices for urban consumers Relatively a more organized and vocal

pressure group Absolute necessity for the survival of a

political government

Generate Public revenues

Wide margin between procurement prices at which the government purchases the agricultural commodity, and the price at which they are exported

Augments efforts of resource mobilization

Agricultural output price policy in Pakistan ‘output price policy’ refers to the fixation

of procurement and support prices Food and cash crops included in the

policy account for nearly 2/3rd of the annual cropped acreage

Early period characterized by the unwillingness of the govt. to use the output policy to expand production.

Agricultural output price policy in Pakistan Resulted in frequent food shortages, esp.

of wheat Increase in price of wheat => rippling

effect, thus leading to an increase in the overall cost of living

Govt. concerned with stability of prices for urban consumers rather than expanding frontiers of food prod during the early years.

Agricultural output price policy in Pakistan Established a direct and +ve relation

between support prices and output Next four decades: govt. successfully

uses output price policy to increase the production of the 3 major crops of Pakistan

Price fixation process APComm responsible for reviewing and

recommending support/procurement prices

Recommendations forwarded to the Federal Ministry of Food, Agriculture and Cooperatives.

Final approval accorded by the federal cabinet after discussing the proposals.

Price Fixation Criteria

APComm takes into account the following:

Cost of Production Parity index between competing crops Import Parity Price Export Parity Price Buffer Stocks

Impact on Income Distribution Benefits big landlords at the expense of

small farmers Support price policy serves to widen the

gap in productivity between the large and small farmers

Further worsens income inequalities between the rural rich and the poor

Input price policy also favors big landlords => easier access to subsidized inputs such as seeds, fertilizer, machinery etc.

Input Price Policy Refers to government subsidies given on

agricultural inputs such as fertilizers, improved seeds, pesticides, tubewells, electricity and agricultural machinery.

Objectives? Superior to high output price policy, as

even small farmers can benefit from it

Input Price Policy Subsidization of technology ensures its

speedy adoption Drawbacks?

Cost of inputs is only a small part of the total cost of production

Low input price may lead to unwanted substitutions (e.g chem fertilizers instead of organic manure, wastage of water)

Input Price Policy Subsidy on inputs should only be

temporary Should not be continued indefinitely Objective: help farmers adopt new

technology and expand production and income

Input price policy in Pakistan

Explicit subsidy: covers the difference between the real cost and the subsidized rate at which the input is supplied to the cultivator (e.g fertilizer, pesticides)

Implicit subsidy: concealed in concessional prices charged by the govt. for the provision of certain inputs, such as water rate, credit, electricity

Input price policy in Pakistan Subsidies can also be classified from

the budgetary point of view: Current subsidies: financed from revenue

budget and are given on agri products used for consumption purposes, e.g wheat, sugar, edible oils etc

Development subsidies are financed from development budget and are given on agri products used for dev purposes, e.g. tubewells, fertilizers, pesticides.