November 19, 2004

Document of the World BankR

eport No. 30381-PK

Pakistan R

ural Factor Markets

Report No. 30381-PK

PakistanRural Factor MarketsPolicy Reforms for Growth and Equity

Rural Development UnitSouth Asia Region

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 .

I1 .

I11 .

I V .

V .

VI .

Introduction .............................................................................................................. 1 Plan o f the Report ....................................................... 1. .................................................. 3

Agricultural Policy And Sector Performance in Pakistan: An Overview .......... 4 Agricultural Markets and Prices .......................................................................... 6

Rural Land Markets: Institutions and Constraints .............................................. 10 Land Ownership and Utilization .......................................................................... 10 Land Distribution, Land Policy and Land Reform .............................................. 14 Land Reforms ...................................................................................................... -14 Land Administration, Land Titles and Contract Enforcement ............................. 16 Patterns o f Land Use and Productivity by Farm Size and Tenure Status ............ 19

Water Markets In Pakistan Agriculture ................................................................ 24 Water Availability in Pakistan Agriculture .......................................................... 24 Access to Water and Agricultural Productivity ................................................... 27

Implications for Agricultural Productivity ........................................................... 30 Groundwater ........................................................................................................ 29

Laws and Regulatory Framework for Water ....................................................... 31

Rural Labor Markets .............................................................................................. 33 Structure o f Labor U s e ......................................................................................... 33 Sectoral Composition o f Labor U s e ..................................................................... 35 Trends in Wages .................................................................................................. 36 Labor Mobi l i ty and Migration ............................................................................. 38 Gender Issues ....................................................................................................... 38 Child Labor .......................................................................................................... 40 Bonded Labor ....................................................................................................... 42 Government Labor Policies ................................................................................. 43

Rural Credit Markets .............................................................................................. 46 Structure o f Rural Credit Markets ........................................................................ 46 Historical Trends .................................................................................................. 47 Repayment o f Loans ............................................................................................ 50 Structure o f Interest Rates .................................................................................... 50

. . . 111

Formal Sector Credit and Mechanization ............................................................ 5 1 Farmer Household Access to Credit ................................................................... 52 Access to Credit ................................................................................................... 54 Micro-credit Programs and Savings Mobilization ............................................... 54 Implications o f Credit Constraints for Productivity and Income ......................... 59

VI1 . Implications For Income Distribution And Poverty Reduction .......................... 60 The Puzzle o f Persistent Rural Poverty and High Agricultural Growth .............. 60 Agricultural Growth and Rural Income Distribution ........................................... 65 Factor Market Reforms ........................................................................................ 68 Implications for Growth and Poverty Reduction ................................................. 69

..................................................................... VI11 . Conclusions And Policy Implications 70 Land ..................................................................................................................... 70 Water .................................................................................................................... 75 Labor .................................................................................................................... 79 Credit .................................................................................................................... 81 Implications for Rural Poverty Reduction ........................................................... 84 Conclusions .......................................................................................................... 85

Table 1.1, Table 2.1. Table 2.2. Table 2.3 Table 2.4. Table 3.1. Table 3.2. Table 3.3 Table 3 .4 . Table 3.5. Table 3.6. Table 4.1. Table 4.2.

Table 5.1. Table 5.2. Table 5.3.

Table 5.4. Table 5.5. Table 5.6. Table 6.1. Table 6.2. Table 6.3. Table 6.4. Table 6.5. Table 6.6.

LIST OF TABLES Poverty Estimates for Pakistan ................................................................................. 1 Agricultural Growth in Pakistan. 1959-60 to 2001-02 ............................................. 4 Area. Y ie ld and Production o f Major Crops in Palustan. 1999-00 to 2002-03 ........ 5 Ratio o f Wholesale Prices (Lahore) to Support Prices. 1995-96 to 200 1 -02 .......... 7 Subsidies in Palustan Agriculture: 1996-97 to 1999-00 (mn Rs.) ........................... 9 Land Use in Pakistan. 1990-91 and 2000-01 ............................................................ 10 Pakistan: Distribution o f Land Ownership .............................................................. 11

Share o f different crops in total cropped area by size o f farm (1990 and 2000) ...... 21

Gini Coefficient for Ownership Holdings by Province ............................................ 11 Pakistan: Distribution o f Farms and Area by Farm Size (operated area) ................ 13

Recent Findings o n Land Productivity and Land Markets ....................................... 23 Average Water Balance o f the Indus River System ................................................. 25 Gross Revenue. Total Cost and Returns to Irrigation o f Major Crops in

Pakistan Rural Labor Force. 1998 (thousands) ........................................................ 34 Labor Force Participation, Unemployment and Underemployment Rates ............... 34 Percentage Distribution o f Rural Employed Persons by Major Sectors and

Provinces (1999-00) .............................................................................................. 35

Growth in Real Wage Rates in Palustan, 1984-2002 ............................................... 36 Female Labor Force Participation and Unemployment in Pahstan, 1999-2000 ...... 39

Sources o f Credit in Palustan, 1995-96 .................................................................... 47 Zarai Taraqiati Bank Ltd . (ADBP) Lending, 2002-03 ............................................. 49 Palustan: Interest Rates in Rural Credit Markets by Source .................................... 51 Outstanding Loans by Tenure Categories (Formal and Informal) ........................... 53 Average Size o f Loans to Farm Households, 2002-03 ............................................. 53

Various Regions o f Pakistan 2002-2003 ............................................................... 31

Underemployment Rates by Occupation (1999-00) ................................................. 35

Formal Sector Banking (bn 2000-01 Rupees) .......................................................... 46

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. Figure 3.1. Figure 3.2. Figure 4.1. Figure 5.1. Figure 5.2 Figure 5.3. Figure 6.1. Figure 6.2.

Figure 6.3. Figure 6.4. Figure 6.5. Figure 7.1. Figure 7.2. Figure 7.3.

Box 3.1 Box 3.2. Box 3.3. Box 3.4. Box 4.1. Box 4.2. Box 5.1. Box 5.2. Box 6.1. Box 6.2. Box 6.3. Box 7.1. Box 8.1

Box 8.2.

Credit Rationing in Rural Pakistan 200 1 .................................................................. 55 Major Micro-credit Programs in Pakistan, 2003 ...................................................... 55 Real Prices o f Major Food Grains in Pakistan, 1970-2003 ...................................... 61

Rural Household Income by Source and Expenditure Quintile (200 1-02) ............... 63 Palustan Rural Agricultural Incomes ........................................................................ 65 Implications o f Changes in Economic Structure for Agricultural Multiplier

Effects .................................................................................................................... 67 Simulated Distributional Impact o f Factor Market Reforms .................................... 68 Characteristics o f Factor Markets in Palustan .......................................................... 71 Major Linkages o f Key Factor Market Distortions .................................................. 72 Palustan Rural Factor Markets: Current Government Policies and Programs

and Possible Reforms ............................................................................................ 86

Rural Poverty Across Household Groups, 2002-2002 ............................................. 62

LIST OF FIGURES Wheat Prices in Palustan, 1995-2003 .................................................................... 7 Nominal Rates o f Protection o f Major Crops ........................................................ 8 Pakistan: Percentage o f Farms and Area Cultivated by Land Tenure Status ....... 13 Pakistan: Farm Income per Cultivated Area in Punjab, 2000/01 ......................... 20 Area Irrigated by Source o f Irrigation, Palustan 1982-2002 ................................. 25 Real Wages in Palustan: 1984-2002 ..................................................................... 37 Child Labor in Pakistan, 1999-2000 ..................................................................... 40 Child Labor Force Participation Rates by Province, Palustan 1999-2000 ............ 41 Growth o f Institutional Agricultural Credit (mn 2000-01 Rps.) ........................... 49 ADBP/ZTBL 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 Major Food Grains in Pakistan, 1970-2003 ................................... 61 Rural Household Income Sources by Quintile, Palustan, 2001-02 ....................... 63 Palustan: Per Capita Incomes and Expenditures 2001-02 .................................... 64

1986-87 - 2002103 ............................................................................................. 52

List of Text Boxes

Land Price Determination in Pakistan: Land Rents and Asset Effects ...... 12 Historical Rural Land Tenure Systems in Pakistan' ............................................. 15 Land Policies and Land Reform in Palustan ......................................................... 16 Land Rights in Punjab and Sindh .......................................................................... 18 The Indus Basin Irrigation System ........................................................................ 26 Administrative Reforms in Canal Water Management ......................................... 28 Child Labor in Rural Palustan ............................................................................... 41 Bonded Labor in Pakistan ..................................................................................... 42 Recent Reforms in Formal Sector Agricultural Lending in Palustan .................... 48 Pakistan Poverty Alleviation Fund (PPAF)' .......................................................... 57 Aga Khan Rural Support Programme (AKRSP) ................................................... 58 Agricultural Growth and Rural Poverty ................................................................ 66 Improving the Enforcement o f Contracts in Land Administration in

Palustan .............................................................................................................. 73 Examples o f Land Reform and Land Titling Projects ........................................... 74

V

B o x 8.3. B o x 8.4. B o x 8.5. B o x 8.6. B o x 8.7. B o x 8.8 B o x 8.9

Important Issues Regarding Tradable Water Rights ............................................. 77 Infrastructure Constraints for Development o f Water markets in Pakistan .......... 78 Factor Market Reforms and Agricultural Diversification in Chile ....................... 79 Factor Market Reforms and Labor Mobi l i ty in Poland ......................................... 80 Bonded Labor and Reforms in Nepal .................................................................... 81 Micro-Finance for Agriculture .............................................................................. 83

Activities ............................................................................................................ 84 Suggested Guidelines for Providing Matching 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 Econometric Specification .............................................................................................. 101

Human Capital ................................................................................................................ 102 M a i n Findings ................................................................................................................. 102

Farm Operation Size ....................................................................................................... 105 Land Ownership .............................................................................................................. 106 Family Size ..................................................................................................................... 107 Surface Water ................................................................................................................. 108 Credit .............................................................................................................................. 109 Other Results ................................................................................................................... 111 The Effects o f Tenancy Type .......................................................................................... 111

Annex 3: Distributional Impacts of Agricultural Growth and Factor Market Reforms ................................................................................................................. 113

The 2001-02 Pakistan S A M ............................................................................................ 113 Model ing Framework ...................................................................................................... 118 Simulation 1 : Output Shocks to Crop and Livestock Agriculture ................................. 120 Simulation 2: Shift f rom Share-Cropping to Fixed Rents ........................................... 122 Simulation 3 : Removal o f Credit Constraints ................................................................ 124 Simulation 4: Improved Distribution o f Water .............................................................. 127 Conclusion ...................................................................................................................... 129

Table A1 . 1 Table A l . 2 Table A l . 3 Table Al.4 Table A l . 5 Table A l . 6 Table A2.1 Table A2.2 Table A2.3

Table A2.4

L i s t o f Variables and Descriptive Statistics .......................................................... 89 Probit o n Access to Formal Credit ........................................................................ 91 Probit o n Access to Informal Credit ...................................................................... 92 Probit o n Access to Formal and Informal Credit .................................................. 93 Credit Access and Farm Productivity ................................................................... 94 Credit Access and Farm Productivity (IV Estimates) ........................................... 96 Canal Water Usage and Transactions by District., ............................................... -99

Ne t Farm Revenue Regression Results (Dependent Variable: N e t Farm

Elasticities o f Household Farm Revenue with Respect to Quasi-fixed

The Distribution o f Farm Size and Land Ownership (Acres) ............................... 100

Revenue (Rs) ....................................................................................................... 103

Factors ................................................................................................................ 105

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 1 Figure Al.2. Figure Al.3

B o x A3.1

Return on Credit (Elasticities) ............................................................................... 110 Pakistan: Household Incomes and Expenditures, 2001/02 .................................. 116 Pakistan: Factor Income Shares by Household Type 2001/02 ............................. 117 Disaggregated Factor Incomes Shares by Household Group, Pakistan

2001/02 ............................................................................................................... 117 Pakistan Rural Agricultural Incomes .................................................................... 118 Simulation Results: 10 Percent Output Shock to Major Crops and

Livestock.. .......................................................................................................... 121 Share o f Household Group Are Cultivated by Tenure Status, 2001/02 ................ 123 Share o f Area Cultivated by Tenure Status and Household Group

2001/02 ............................................................................................................... 123 Simulation Results: Percentage Change in Household Incomes.. ........................ 124 Estimates o f Productivity Gains f rom Removal o f Credit Constraints ................. 125 Distribution o f Estimated Returns to Small Farm Irrigated Land (Major

Crops), 2001/02 .................................................................................................. 126 Crop Yields by Location Along Canals (tons/hectare) ......................................... 127 Simulation Results: Household Incomes .............................................................. 128

Figures in Annexes

Credit Rationing in the Formal Market ................................................................. 89 Credit Rationing in the Informal Market ............................................................... 90 Operated vs . Owned Area by Province ................................................................. 97

Box in Annex

Structure of the 2001-02 Pakistan S A M ............................................................... 114

References ............................................................................................................................. 130

Background Papers for the Pakistan Rura l Factor Market Study ................................. 137

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

POVERN 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 (%)

Most recent estimate (latest year available, 1997-03) Poverty (% ofpopulation below national poverty line) Urban population (% of total population) Life expectancy at birth (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 annual 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 ier :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 2 1 247 233 235 lo

1 5 3 167 1 6 1 164 ~ o 4 7 7 503 535 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 growth) Agriculture lndiistrv

Manufacturing Services

Private consumption General government consumption Gross domestic investment Imports of goods and services

1983-93 199343 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 preliminary estimates. * The diamonds show four key indicators In the country (in bold) compared with its income-group average. If data are missing, the diamond will

be incomplete.

viii

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surplusldeflcit

TRADE

(US$ miilions) Total exports (fob)

cotton 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 -1 33 -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

1 O3 I 97 98 99 00 01 02

Exports imports

1 ;;nt 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

i x

ACKNOWLEDGEMENTS

This study was managed by Sakwa Bunyasi and Paul Dorosh, (co-task managers). Paul Dorosh i s the principal author o f the final report. Albert0 Valdes designed the study, provided overall guidance for the work and contributed to the analysis and synthesis. Sohail J. M a l i k played a major role in the work on agricultural credit and poverty, the synthesis o f the results, and in organizing seminars and workshops in Palustan.

The report draws f rom a set o f background papers prepared for this study listed at the end o f this report. Gustavo Anriquez, Hanan Jacoby, Ghazala Mansuri, H ina Nazli, Muhammad Khan Niaz i and Sarfraz Qureshi made major contributions, both as authors o f background papers, and in the synthesis o f the results. Background papers were also prepared by Munir Ahmad, Zafar Altaf, Alejandra Cox-Edwards, Zakir Hussain and A.R. Kemal. Manuel Contijoch contributed to the discussion o f irrigation and water markets .

Adol fo Brizzi, Derek Byerlee, Tekola Dejene, Rashid Faruqee, Steven Haggblade, Abed Hasan, Isabel Lavadenz, John Mellor, Stephen Mink, Abdul Salaam and Dina Umali-Deininger provided useful comments and suggestions on various aspects o f the report. The report has also benefited f rom comments from the Pakistan Ministry o f Food, Agriculture and Livestock (MINFAL) and discussions with participants at seminars at the Agricultural Prices Commission, the Lahore University o f Management Sciences, the Pakistan Institute o f Development Economics and the International Water Management Institute in Lahore, and a seminar in September 2004 in Islamabad hosted by MINFAL.

X

EXECUTIVE SUMMARY

Introduction

1. and trade and output pricing reforms have spurred substantial agricultural growth over the last three decades. Agricultural GDP growth slowed substantially since the early 1990s, particularly in the crop sector (2.4 percent average annual growth f rom 1990 to 2002, compared with 3.5 percent per year growth from 1960 to 2002), however, raising concerns about the sustainability o f agricultural growth in the medium term. Moreover, the sharp declines in rural poverty that accompanied agricultural growth in the 1970s and 1980s have not continued. The latest available poverty estimates (38.9 percent in 2001-02), may be inflated by the effects o f the drought, but estimated rural poverty in 1998-99 (35.9 percent) i s essentially the same as in 1990-91 (36.9 percent).

In Pakistan, public and private investments in irrigation, adoption o f green revolution technology

2. a central ro le to the rural sector in accelerating growth and reducing rural poverty. However, although the PRSP places a major emphasis on employment-generating growth in agriculture, small and medium enterprises, housing and construction, information technology, telecommunications and exports, i t lacks an explicit rural development strategy beyond that for the agricultural sector. Accelerating rural economic growth and reducing rural poverty i s complex, and requires a comprehensive strategy built on sound analysis covering al l major aspects o f the rural economy including agricultural output markets, input markets (seeds, fertilizer, extension), factor markets (land, water, labor and credit), the rural non- farm economy, and targeted interventions.

Pakistan’s Poverty Reduction Strategy Paper (PRSP) wri t ten in 2003 (World Bank, 2003b) gives

3. earlier work on output and input markets, and anticipates future analytical work o n the rural non-farm economy and other key aspects o f the rural economy. The report i s designed to identify the main factor market inefficiencies in rural Pakistan, provide estimates o f their impact in terms o f efficiency and equity, and suggest pol icy measures to improve the functioning o f these markets, increase rural incomes and help reduce rural poverty.

This report focuses on one aspect o f this complex puzzle - rural factor markets. I t builds o n

4. constraints and statistical analysis o f recent household survey data. K e y new findings include quantitative estimates o f the importance o f linkages across factor markets and the impact o f factor market inefficiencies on agricultural output and revenues. In addition, the report presents analysis showing that for the 61 percent o f rural poor households that do not cultivate crops (agricultural laborers and non-farm households), expansion in output o f major crops may not be sufficient to significantly raise their incomes, even with substantial multiplier effects on the rural non-agricultural economy.

In presenting the results, each factor i s discussed in tum, drawing on descriptions o f institutional

Promoting Efficiency and Equity: The Role of Factor Markets

5. Trade and exchange rate pol icy reforms undertaken in the late 1980s greatly reduced the divergence between domestic and international prices for most major agricultural commodities in Pakistan, and in general increased incentives for production and farmer incomes. Although some trade taxes and marketing restrictions o n agricultural outputs s t i l l remain, lack o f access to land, water and capital, and inefficiencies in factor markets for land, water, labor and capital are now among the greatest impediments to agricultural and rural income growth, and reductions in rural poverty.

6. allocated to i t s most productive use, thus maximizing value added and incomes. Inefficiencies in these

Well-functioning factor markets can help ensure that the available supply o f these factors i s

xi

factor markets, whether due to structural characteristics o f the factors or administrative procedures and policies, increase costs o f transactions or even prevent transactions f rom occurring, however, and thereby lead to a misallocation o f factor resources that reduces output and economic growth. This report does not attempt to directly measure the relative contributions o f structural characteristics and pol icy distortions, but instead presents statistical evidence o f the existence o f factor market distortions and their effects (e.g. productivity effects arising f rom lack o f access to credit for small farmers). T o the extent that inefficiencies in factor markets are due to policy distortions, administrative and pol icy reforms can improve productivity. Where the inefficiencies are due to the very structure o f the factor market, (e.g. uneven distribution o f land holdings or the physical properties o f the Indus river irrigation system that limit storage and control o f water flows), administrative and policy reforms alone wil l not necessarily result in large efficiency or equity gains.

7. markets, and between land and credit markets, mean that structural and policy-induced inefficiencies in one factor market have significant implications for hnct ion ing o f other factor markets. These inefficiencies in factor markets can have particularly adverse effects for the poor, who often lack both employment opportunities and the access to the land, water and capital that would enable them to earn higher returns o n their labor in own-farm or own-enterprise activities.

Moreover, major linkages between factor markets, most importantly between land and water

Land

8, Land i s at the heart o f Pakistan agriculture and the rural economy, and returns to land are estimated to be about ha l f o f incomes (value added) fi-om crop agriculture. Distribution o f land i s highly skewed, however, a major cause o f income inequality in rural Pakistan.. According to the 2000 Agricultural Census, only 37 percent o f rural households owned land, and 61 percent o f these land- owning households owned less than 5 acres, (1 5 percent o f total land). T w o percent o f households owned 50 acres or more (accounting for 30 percent o f total land). The overall Gini coefficient o f land ownership in 2000 in Pakistan was 0.66 including rural landless households, the Gini coefficient was 0.86. By comparison, Gini coefficients for land ownership are 0.71 in India, 0.42 in Bangladesh, and 0.85 in Brazil.

9. Land i s rarely bought and sold due to high transactions costs, potential disputes about accuracy o f land records, land prices in excess o f the discounted value o f potential agricultural earnings f rom the land, and lack of access to credit by those without land. The l o w frequency o f land transactions helps perpetuate the highly unequal distribution o f land, hamper labor mobility, and reduce returns to fami ly labor. Highly skewed land distribution and inefficiencies in land markets also limit access to credit for many households, since land i s the major acceptable form o f collateral in formal credit markets. Land rentals in various forms are more common, however 33 percent o f area cultivated in 2000 was under some form o f tenancy arrangement according to 200 1-02 HIES data (1 8 percent under share-cropping).

10. that of small farms, holding other factors constant. For example, plot-level regressions o f productivity, correcting for plot characteristics and some household characteristics (such as tractor ownership and number o f household workers) suggests a doubling o f operated area leads to 10 percent lower wheat yields (and 13 percent lower rice yields), (World Bank, 2002). Farm household income data also show that small farmers have higher net returns per hectare than do large farms. These findings suggest that increases in the share o f land cultivated by small-holders would tend to increase overall farm productivity in Pakistan.

Most empirical evidence indicates that productivity o f land o n large farms in Pakistan i s less than

1 1. productivity. Productivity of share-croppers i s about 20 percent lower than productivity o f landowners,

Econometric evidence also suggests that tenure arrangements have significant impacts o n

xii

holding other factors constant, because o f lower incentives for own-labor inputs. Though share-cropping i s declining as a fo rm o f tenancy, the benefits to share-croppers (shared financial r i sks o f crop failure and credit for purchase o f inputs) and owners (greater owner input into management decisions) l ikely explain i t s persistence as a tenancy arrangement.

12. Three major attempts at redistributive land reform in Pakistan have failed (most recently in 1977), and land reform has neither polit ical support, nor the backing o f Islamic religious authorities. Because o f these severe institutional constraints to traditional redistributive land reform, more feasible options to increase access to land by poor households involve a win-win approach. Land purchase schemes that include grant components for the poorest landless households are one example, though fiscal costs could limit the scale o f such programs. Policy measures to increase access to land also include increased access to credit to enable poor households to purchase land, land taxation to reduce incentives for holding land for speculative purposes, and measures to improve the efficiency o f land sales and rental markets.

13. Administrative reforms in the enforcement o f existing norms and regulations, including enforcement o f contracts and the rights o f tenants, and lifting restrictions for rentals would also help improve the functioning o f land markets. Simplification o f complicated legal procedures that result in long delays in proceedings and a backlog o f cases would reduce land transactions costs. Poor households are at a particular disadvantage in cases brought before c iv i l courts, since they often cannot afford to pursue these cases. Possible steps include limits on the number o f appeals, procedural reforms, alternative conflict resolution mechanisms, and barring o f the jurisdiction o f c iv i l courts in land revenue matters. Improved dissemination o f information on land prices and transactions would also enhance efficiency o f land markets.

14. security o f tenure. Without secure rights to their land, farmers not only have less incentives for investment, but also devote resources to defending their rights. Lack o f secure title also reduces access to land by landless households through rentals by increasing the risk o f landowners who might otherwise rent out more land. In addition, banks are reluctant to lend money using land as collateral because they do not trust the current recording system. Questions regarding the validity and enforceability o f t i t les also make it harder to buy and sell land. Computerization o f land records, as tested in a recent pi lot project in Punjab, i s one option for establishing clearer land records and reducing fraudulent dealings by land administration officials.

Improvements in land records' could also enhance the efficiency o f land markets and increase

Water

15. droughts, water availability at the farm level i s a major determinant o f farm productivity in Pakistan agriculture. Nearly 80 percent o f cropped area i s irrigated, and agriculture i s by far the largest user o f available water sources in the country, consuming o n average about 95% o f available water resources. In 2001-02, out o f 18.0 mi l l ion hectares o f irrigated land, 38 percent was irrigated solely with canal water; 39 percent with canal and tube wel l water, and 19 percent solely with tube wel l water. Efficiency o f water use in surface irrigation i s low, however: conveyance losses (part o f which adds to groundwater recharge) are 55 percent o f total canal diversions.

Given l o w levels o f annual rainfall concentrated over only a few months o f the year and periodic

16. warabandi system o f allocation o f water through administratively set rotations. Access to canal water i s

In principle, access to canal water i s determined by physical location along the canal and the

In Punjab, land disputes are primari ly due to fraudulent dealing because the records are not clear and patwars (land administration officials) often accept informal payments.

x i i i

thus explicit ly t ied to access to land. Ownership o f a plot within a watercourse command area confers access to irrigation water, but does not guarantee canal water availability. In particular, water availability decreases significantly if the watercourse i s located near the tail o f the distributary or minor, and/or if the plot i s located near the tail end o f the watercourse (World Bank, 2002). Water theft by farmers upstream i s a major reason fo r these water shortages faced by these tail end farmers. Recent administrative reforms in some parts o f Sindh giving greater control to farmer organizations have reduced water theft, as wel l as improved maintenance o f water courses and collection o f fees.2 These could be expanded to other regions, as well. Other alternatives for improving delivery o f surface irrigation water services to farmers also exist, including private professional canal management.

17. Avai labi l i ty o f groundwater has an even higher impact on yields than does canal water, but only 8.1 percent o f cultivating households owned tube wells in 2001/02. Informal groundwater markets significantly improve access to groundwater, particularly for small farmers, landless tenants and younger households who often lack the resources (or land and water rights) to install their o w n tube well. However, water purchasers do not have full access rights to the water, and are frequently denied access when water or energy supplies are scarce. Moreover, access to tube wel l water depends on the proximity to an existing tube wel l and conveyance mechanisms (e.g. channels) to distribute the water.

18. Informal water markets for surface irrigation (mainly barter) and groundwater exist, but establishment o f water markets that would permit trading o f water rights across the canal system (such as those in Chile and Mexico) would require major institutional changes and investments. In particular, any system o f tradable water rights would need to account for the minimal degree o f water control above the water course level in the current Indus basin system, because o f the absence o f sufficient storage capacity and control structures (gates) to regulate water flows.

19. Several institutional changes could bring about major improvements in the efficiency and equity of water use in Pakistan agriculture, with or without the establishment o f water markets, however. First, in order to increase accountability for Operations and Maintenance, management o f distributaries and/or minors could be transferred to Farmer Organizations (FO’s), permitting assessment, collection and retention o f abiana (water charges) by the FO’s. Second, to increase transparency and enable more informed decisions on area irrigated and crop choice, a) periodic measurements o f the actual rate o f water flow at various points in the water course could be made; and b) open access to the written rules o f the water rotation could be provided to farmers. Third, reforms in the institutional arrangements for allocation o f water could be made to create a more demand-driven system. Options include: a) Water Course Associations, Water Users’ Associations and Area Water Boards (AWB’s); b) Professional canal management.

20. establishing legal tradable water rights at the national and provincial levels; ii) strengthening local institutions (such as Water Course Associations and Water Users’ Associations or professional canal management agencies) to enable them to serve as brokers in water markets, helping to match buyers and sellers o f water. Once effective water markets were developed at the water course level, trades between water courses could be brokered through these local institutions at the minor level.

Development o f effective water markets would require two steps beyond those outlined above: i)

2 1. establishment o f water markets), combined with appropriate trade and macro- policies, can facilitate

The experience o f Chile shows that improved allocation o f water, (in the Chilean case through the

In the command area covered by the L e f t Bank Area Water Board in Sindh, where tai l end farmers had not received water in three years, 48 il legal direct outlets serving an area o f about 25 thousand hectares were closed in early 2004.

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diversification o f agriculture into high-value products for urban and export products, increased labor demand and reductions in rural poverty. Given the infrastructure constraints in Pakistan, the potential gains f rom establishing water markets may be smaller than in other countries. Nonetheless, benefits o f more efficient allocation o f water through institutional reforms with or without water markets could s t i l l be substantial if they are combined with other measures to promote agricultural diversification, including strengthening security o f land titles, public investments in rural infrastructure (roads and electricity), private investments in processing and storage, and establishment o f market links to export markets.

Labor Markets

22. constraints, rather than supply constraints, as evidenced by substantial underemployment. There i s considerable labor mobility, in spite o f high transactions costs involved in j o b search and especially in migration, However, formal sector employment in rural areas i s minimal, and over 80 percent o f agricultural labor and most o f rural non-agricultural labor i s self-employed. Female participation in labor markets remains limited, though: only 16 percent for females age 15 and over (not including home-based activities), compared with 85 percent for males. Job s k i l l levels for both male and female labor are generally low.

Unlike the markets for land and water, rural labor markets are generally characterized by demand

23, Education i s an important determinant o f female labor force participation, rural-urban migration, and labor productivity in rural non-fann sectors. Econometric analysis shows that education i s also a key determinant o f agricultural productivity. For the average producing household, another year o f education translates into a 13% increase in yearly net revenues. Effective and more wide-spread vocational training programs could provide needed sk i l ls for non-agricultural labor. Women’s access to educational and training institutions could be increased through more reservation o f spaces for women.

24. percent per year f rom 1984 to 1994, indicating long t e r m tightening o f the labor market. Likewise, real wage rates o f construction laborers increased by 1.1 percent over the same period. Mos t o f the increases in real wage rates took place in the 1980s, however. The trends in the 1990s indicate l i t t le gains in real wages. From 1991-97, real wage rates o f casual agricultural laborers grew by an average o f 0.8 percent per year, while real wage rates o f regular agricultural workers fe l l by 2.4 percent per year. Likewise, real wage rates o f construction laborers grew by only 0.4 percent per year f rom 1991-97 and for the 1991- 2002 as a whole, fe l l by 0.4 percent per year.

Real wage rates o f both regular and casual agricultural workers increased by an average o f 1 .O

25, but s t i l l positive per capita agricultural growth. This suggests rather weak linkages between agncultural growth and rural labor demand. The smaller rate o f decline o f real wages for construction laborers suggests that lack o f labor mobi l i ty between sectors and between rural and urban regions hinder integration o f non-agricultural and agricultural labor markets

The decline in real wages in the agricultural sector in the 1990s coincides with a period o f slower

26. leave farming to sell or rent out their farm land. This would require greater security o f property rights, and facilitation o f land transactions that are presently stifled by the absence o f a val id title, r isks o f court challenges, and high regulatory and transactions costs (for example, stamp duty plus registration fee plus capital tax amounted to 16% o f the average market price o f land in 1995).

A better functioning land market could also promote labor mobil ity, helping farmers who want to

27. also needed. In addition, measures to assist households trapped in bonded labor arrangements, including

A concerted effort to enforce existing legislation regarding the rights o f women and children i s

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legal protection, provision o f credit and debt cancellation programs should be urgently ~ons ide red .~ Although these programs often face considerable opposition f rom powerful vested interests, such programs could have a major impact on some o f the poorest rural households.

Credit

28. In principle, credit markets offer a wide scope for policies to increase productivity and to reduce rural poverty, and can help overcome inefficiencies in other factor markets. In Pakistan, however, access to formal credit markets in rural areas i s generally l imited to landowners, since land i s the main form o f acceptable collateral for loans. According to Pakistan Rural Household survey data, only 11 percent o f farmers obtained formal sector loans in 2001-02. Access to informal credit markets, particularly supplier’s and consumer’s credit i s more widespread, (75 percent o f farm households received loans), but approximately 40 percent o f rural (farm) households are credit constrained, not being able to obtain as much credit as they would l ike at existing interest rates.

29. farm productivity (measured as gross value o f output per unit o f land). Households who faced credit rationing in both the formal and informal sectors (approximately 17 percent o f a l l households) had a 23 percent reduction in value o f yields. Further streamlining o f lending procedures, development o f alternative forms o f collateral, and other lending innovations to increase access o f small farmers to commercial credit could help relieve these credit constraints for small farmers.

Econometric analysis o f plot-level data suggests that lack o f access to credit significantly reduces

30. loans in the formal sector) could eliminate these policy-induced incentives toward capital-intensive technologies that reduce labor demand. Efforts at promoting agricultural diversification should thus avoid subsidies on credit that would encourage capital-intensive technologies in production, processing and marketing. Instead, agricultural diversification, the development o f the rural non-farm sector and poverty reduction may be better achieved through public investments in electricity, transport and other infrastructure. Further work o n particular constraints to rural non-farm investment, employment and growth i s needed, however.

Removal o f subsidies o n credit (implicit in the continuing l o w repayment / high default rates for

3 1. other forms o f collateral (besides land) could also help promote rural employment and income generation. Rural credit f rom formal sources i s currently available for a narrow range o f agricultural production activities and does not serve the needs o f the non-farm sector. In particular, availability o f medium-term credit i s extremely limited. Increased access to credit by small scale enterprises in rural areas, for example, would promote farm to non-farm linkages, develop the rural non-agricultural sector and increase labor demand. Targeted matching grants to poor households for income-generating activities are one option.

Production credit and micro-credit programs targeted to landless and small farmers that required

32. The Government o f Pakistan in recent years has, in fact, placed considerable emphasis on developing micro-finance as part o f i t s poverty alleviation strategy. In 2003, Rs. 1,442 mi l l ion (2.5 % o f total institutional credit) was disbursed as small loans through the Pakistan Poverty Alleviation Fund (PPAF), Khushali Bank and the Zarai Taraqiati Bank L imi ted (ZTBL, formerly called ADBP). N o

Nearly 200 thousand rural households in Sindh and Punjab (equivalent t o about 2 percent o f Pakistan’s rural population), were estimated to be in debt bondage based on 1990 Agricultural Census data. Analysis o f 2000 Agricultural Census data suggests that in Punjab alone, 50 thousand sharecroppers were in debt bondage, equivalent to about 9 percent o f total landless tenant farmers in Punjab.

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comprehensive study o f the overall impact o f these micro-credit schemes has yet been done, and there remains a major concern regarding financial sustainability o f these programs. Promotion o f savings mobil ization schemes and implementation o f an adequate regulatory fkamework for deposit-based institutions could help provide sustainable resources for micro-credit.

Income Distribution and Poverty Reduction

33. Increased agricultural production has been a major force for reducing rural poverty over much o f South Asia over the past four decades. Rural poverty in Pakistan did not decline in the 199Os, however, in spite o f agricultural growth. Overestimation o f true sectoral growth rates because o f abrupt changes in estimates o f livestock population i s part o f the explanation for this lack o f correlation between agricultural growth and poverty reduction. Stagnation in the real consumer prices o f rice and wheat (in contrast to declines in early decades) i s another major factor.

34. T w o other major factors are the changing structure o f the Pakistan economy, in particular the declining share o f agriculture in total GDP (39 percent in 1970, but only 24 percent in 2000), and the persistent unequal distribution o f land (and land revenue). Moreover, since more than 60 percent o f rural poor households are not farm households (according to HIES 2001-02 data), the magnitude o f these linkage effects with the non-agricultural sector i s crucial to the poverty impacts o f agricultural growth. Rural non-farm households account for 46 percent o f the rural poor; agricultural laborer households comprise 15 percent o f the rural poor. Though there i s substantial poverty among small landowning farmers (38 percent are poor), this group accounts for only 24 percent o f total rural poor households. Landless tenant farmers (61 percent o f whom are poor) account for another 13 percent o f the rural poor.

35. Model simulation results o f the direct and multiplier effects o f a 10 percent increase in the output o f a l l major crops (wheat, basmati and IRRI rice, cotton and sugar cane, which together account for about 35 percent o f total agricultural value-added) suggest that the largest gains o f increased production o f these major crops accrue to large and medium land owners, whose incomes rise by 7 percent. Incomes o f small farm owners and pure tenants also r i se by about 5 percent. But the poorest rural household groups (agricultural laborers and rural non-farm poor -- 29 percent o f the rural population) reap only 7 percent o f the total income gains, and their incomes rise by only 3-4 percent. Gains f rom a 10 percent increase in livestock production (mainly cattle, goats and dairy products) are more evenly spread out given the distribution o f ownership o f livestock, suggesting that measures to increase livestock productivity may have more positive effects on equity.

36. suggest that a shift from share-cropping to f ixed rents would remove labor disincentive effects and raise the productivity o f former share-croppers to equal that o f land owners (affecting 18 percent o f area cultivated in Pakistan) would raise average incomes o f tenant farmers by 3 to 4 percent (and incomes o f farmers directly impacted by the reforms by about 10 percent), but are l ikely to have only small overall impacts on rural incomes in aggregate. Releasing constraints o n access to credit has similar impacts o n small farmers, as well as inducing an estimated 2 percent gain in average incomes o f the rural non-farm poor, Raising productivity o f farmers at the tail-end o f watercourses to match that o f head-end farmers through increased access to water, if it could be achieved without reducing the productivity o f head-end farmers, would have even larger impacts o n small farmers (4-6 percent average income gains) and could raise incomes o f the rural non-farm poor by 3 percent.

Similarly, in spite o f multiplier effects o n agricultural and non-agricultural output, simulations

37. poor through combined direct and multiplier effects, i t i s unlikely to be sufficient to rapidly raise incomes o f the 30 percent o f the rural population (and 61 percent o f the rural poor) who are landless agricultural laborers and non-agricultural rural poor households. In the absence o f a change in the structure o f rural

Thus, although agricultural growth can have a major impact on a sizeable segment o f the rural

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incomes and employment or significant gains in the rural non-farm economy apart f rom agricultural growth-induced linkage effects, targeted interventions to agricultural laborers and the rural non-farm poor will be needed.

38. 2003b) recognizes this explicitly. In addition to advocating sustained and broad based economic growth emanating f rom the rural areas the strategy also emphasizes the simultaneous provision o f social and economic services and infrastructure for the poor, creating j o b opportunities and improving governance as essential elements. A more detailed rural development strategy i s s t i l l needed, however.

The Poverty Reduction Strategy Paper (PRSP) o f Pakistan issued in December 2003 (World Bank

39. decades that make factor market reforms critical to increasing agricultural productivity and raising incomes o f the rural poor. Rural population has steadily increased, gradually reducing average farm sizes in the face o f constraints on the overall supply o f arable land and water. The size o f the agricultural sector relative to the overall economy has steadily shrunk, as the output o f the rural non-farm economy has expanded, tending to lessen the impact o f agriculture on the overall rural economy.

Significant structural changes have taken place in Pakistan’s economy over the past several

40. growth can play a major role in increasing incomes and reducing poverty among farm households. Experience o f other countries suggests that factor market reforms, coupled with outward-oriented trade and exchange rate pol icy can lead to rapid agricultural growth and rural poverty reduction through diversification o f agricultural production into high-value products (e.g. fruits and vegetables) with labor- intensive production and processing. Reforms in factor markets that promote the allocation o f scarce land and water resources to their most efficient uses, and increase returns to unskilled labor, are essential for replicating this success in Pakistan.

Even in the face o f increasingly severe constraints on land and water resources, agricultural

41. However, because many rural poor households lack access to land, agricultural growth alone i s not sufficient to significantly raise incomes o f a large fraction o f the rural non-farm poor, even with i t s substantial multiplier effects on the non-agricultural economy. Policies and programs to increase access to credit and enhance worker and entrepreneurial sk i l ls can directly support growth in the rural non- agricultural economy and further raise incomes o f the rural non-farm poor. Targeted interventions are also needed to reach the poorest households including expansion o f micro-credit, enforcement o f laws o n bonded labor, and training in marketable ski l ls.

I. RURAL FACTOR MARKETS IN PAKISTAN: POLICY REFORMS FOR GROWTH AND EQUITY

I. INTRODUCTION

1.1 with agricultural Gross Domestic Product (GDP) increasing by an average o f 4.1 percent per year f rom 1975 to 2000. Green revolution technology o f improved seeds, irrigation, and increased fertilizer use spurred rapid growth in crop agriculture (especially wheat and rice) beginning in the later 1960s. Livestock production outpaced the rapid growth in crop agriculture, with value added increasing by 5.3 percent per year f rom 1975 to 2000.

Palustan’s agricultural sector has enjoyed steady growth for most o f the last three decades,

1.2 particularly in the 1980s. Rural poverty fell f rom 49.3 percent in 1984-85 to 33.4 percent in 1993-94, contributing to an overall decline o f poverty in Pakistan f rom 46.0 percent in 1984-85 to 28.6 percent.

Long-term agricultural growth has also been accompanied by reductions in rural 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. P I H S and HIES combined since 1998- 99 Source: W o r l d Bank (2002), p. 20. Fo r 2001-02, Government o f Pakistan Pakistan Economic Survey (2002-03)

1.3 More recent trends of agricultural incomes and of rural poverty are far less encouraging. However, agricultural GDP f e l l by 1 percent between 2000 and 2002, in large part because o f drought, highlighting the vulnerability o f Pakistan agriculture and the importance o f availability o f water as a major constraint for many farmers. Likewise, the long-term downward trends in rural poverty have not continued: estimates o f rural poverty for 2001-02 o f 38.9 percent suggest that for the 1990s as a whole, rural poverty has no t declined in spite o f agncultural GDP growth.

1.4 o f generally favorable policies affecting markets and prices o f agricultural outputs and non-factor inputs (e.g. seeds, fertilizer and pesticides). Major macro-trade pol icy and output market reforms in 1980s reduced the bias against apcu l tu ra l production in P a l s t a n reflected in prices o f agncultural outputs and inputs relative to those in the non-agricultural sectors. Though some trade taxes and marketing restrictions remain, the incentive structure for production o f maj or crops (wheat, cotton, basmati and IRRI rice, and sugar cane) i s more favorable today than in the early 1980s when substantial growth occurred.

The deceleration o f agricultural growth and the rate o f poverty reduction has occurred in spite

1.5 Long-term agricultural growth and rural poverty reduction are s t i l l constrained by the structure and performance o f key rural factor markets (land, water, labor and credit), however. These four factor inputs into production, and the markets that facilitate their efficient allocation across alternative uses, are key determinants o f agricultural production and growth. Moreover, retums to these factors o f production, and their structure o f ownership across households, are major determinants o f rural household incomes and poverty.

2

1.6 production would be the same for a l l activities. Profit maximizing households and f i r m s would uti l ize factors up to the point where marginal returns to each factor equaled i t s cost (the market price o f the factor). Any excess demand for a factor could be purchased at the market price; similarly any excess supply o f a factor could be sold at the market price. The economic reality in rural Palustan i s far different f rom the economic theory o f perfectly functioning factor markets, however, as inefficiencies in markets for land, water, labor and capital result in lower production and incomes.

In a perfectly competitive market, economic theory suggests that returns to each factor o f

1.7 land ownership or physical properties o f the Indus river irrigation system that limit storage and control o f water flows) or administrative procedures and policies (e.g. lack o f clear land titles) can increase costs o f transactions or even prevent transactions f rom occurring, however, and thereby lead to reduced output and economic growth. However, to the extent that inefficiencies in factor markets are due to the very structure o f the factor market, (e.g. uneven distribution o f land holdings or the physical properties o f the Indus river irrigation system that limit storage and control o f water flows), administrative and pol icy reforms alone will not necessarily result in large efficiency or equity gains.4

These inefficiencies, whether due to structural characteristics o f the factors (e.g. the pattern o f

1.8 Land i s the most immobile and most unequally distributed o f the factors, and land sales markets in Pakistan are very thin. The absence o f well-functioning land markets hinders access to land for the landless or small farmers, and perpetuates a highly skewed distribution o f land ownership. Land rentals in various forms (share-cropping, cash rentals) are more common, however, 20 percent o f area cultivated in 2000 was under some form o f tenancy arrangement. Mos t empirical evidence suggests that productivity of land on large farms in Pakistan i s less than that o f small farms, holding other factors constant. Moreover, both economic theory and empirical evidence suggest that productivity o f land under tenancy arrangements will be less than productivity o f owned land. Thus, the absence o f a well-functioning land market results in lower overall output, whi le the skewed ness o f land ownership contributes to widespread rural poverty.

1.9 Access to water in Pakistan i s closely tied to access to land, and water markets are nearly as thin as those o f land. Throughout the Indus basin, surface water i s allocated through the warabandi system in which water flows are regulated administratively on a rotating basis. Trading o f canal water i s common (although sales o f canal water are illegal), but i s l imi ted to trades with farmers in the same distributary. Groundwater irrigation (mainly by tube wells) supplements surface irrigation for many farmers, increasing the reliabil i ty o f water supply and crop yields. Purchases o f groundwater increase access to water and yields o f small holders and tenants, but likewise are limited by distance the water must travel (often through unlined watercourses).

1.10 underemployment. Lack o f access to land limits self-employment opportunities for small farmers and landless households, while subsidized formal sector credit encourages labor-displacing mechanization. Informal labor markets account for essentially a l l employment in rural areas, but agricultural labor demand remains highly seasonal. Rural non-farm employment i s main ly self- employment, and returns to labor are constrained in part by lack o f s k i l l s and physical capital. Female labor force participation i s low: in rural areas only 32 percent, even when 14 household labor activities are included.

Rural labor markets for male labor generally function well, though there i s substantial rural

This report does not attempt to directly measure the relative contributions o f structural characteristics, but instead presents statistical evidence o f the existence and effects o f factor market distortions (e.g. productivity effects arising f rom lack o f access to credit for small farmers).

3

1.1 1 credit i s determined by government monetary and banking policy. There are substantial inefficiencies in formal credit markets, however, where credit i s rationed and the landless and small farmers lack the collateral to access credit. These groups get almost a l l o f their credit through informal markets, or through tied arrangements with landlords, employers or traders. Nevertheless, access to informal sector credit for poor households can be problematic, as evidenced by instances o f bonded labor arrangements.

Credit markets are potentially the most flexible o f a l l factor markets since overall supply o f

1.12 Because o f the strong linkages across rural factor markets in Palustan, inefficiencies in one market can adversely affect the performance o f other markets, magnifying the efficiency losses and consequences for income distribution. For example, ownership o f land i s a major determinant o f access to formal credit; water rights also are tied to ownership or user rights to land. The skewed distribution o f land thus results in a skewed access to water and credit, and the earnings derived from these factors. Better functioning water and credit markets, however, could help ease the adverse efficiency and distributional consequences o f skewed land ownership.

Plan of the report

1.13 policies. Sections 3 through 6 then analyze the four factor markets (land, water, labor and credit) in turn. Section 7 discusses the implications o f agricultural growth and inefficiencies in factor markets for rural poverty in Palustan, drawing on analysis o f farm-level data and model simulations. Section 8 concludes with a summary o f the major findings, lessons f rom other countries, and pol icy implications.

Section 2 o f this report presents an overview o f Palustan’s agriculture and agricultural

11. AGRICULTURAL POLICY AND SECTOR PERF’ORMANCE IN PAKISTAN: AN OVERVIEW

2.1, rural household incomes and about 25 percent o f national GDP. Both crop and livestock sub-sectors have enjoyed substantial growth over four decades, but Pakistan’s agriculture remains highly susceptible to droughts and i s heavily reliant on irrigation.

The agricultural sector i s at the heart o f Pakistan’s rural economy, accounting for 70 percent o f

2.2. The agriculture 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 rom a period o f s low growth in the f i r s t h a l f o f the 1970s, average agricultural growth exceeded 3.2 percent per year in each quinquennium f rom 1960 to 2000. However, the performance o f the agriculture sector (particularly the crops sub-sector), has suffered in recent years because o f severe droughts in the country. Agricultural GDP f e l l by 2.64 percent in 2000-01 and grew by only 1.39 percent in 2001-02 (table 2.1).

Table 2.1 Agricultural Growth in Pakistan, 1959-60 to 2001-02

Agriculture Crops Livestock Wheat Rice Cotton SCane 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 Pakistan are nearly evenly split between crop and livestock agriculture. The crops sub-sector currently contributes about 54 percent o f the value added, with major crops (wheat, cotton, rice, sugar cane) accounting for 38 percent o f total agricultural GDP and minor crops contributing 16 percent. Wheat, cotton and rice together account for 60 percent area cultivated nationally (table 2.2). The livestock sub-sector, dominated by dairy, sheep and poultry, has increased i t s share over time, f rom only 25 percent in 1982 to i t s present level o f 46 percent. Fish and forestry are minor sectors in Pakistan, accounting for 2.2 and 0.3 percent o f agricultural GDP, respectively.

5

Table 2.2 Area, Yield and Production o f Major Crops in Pakistan, 1999-00 to 2002-03

Area Area Area Yield Yield Production Production

Notes: Oilseeds includes rapeseed, mustard and sesamum. Other includes frui ts, vegetables and al l other crops. Growth rates are average growth rates, 1990-9 1 to 2002-03, 2002103 data are preliminary.

Source: Economic Survey o f Pakistan, 2003, (tables 2.1 and 2.4).

2.4. constraint o n agricultural production at the farm level. 82 percent o f area cultivated o f Pakistan’s major crops i s grown on irrigated land (both surface and groundwater), with cotton, r ice and sugar cane grown exclusively on irrigated land.

Over 80 percent of arable land in Pakistan i s irrigated, and availability o f water i s a major

2.5. Dominant cropping patterns vary across Pakistan according to soi l type and water availability. In the northern irrigated areas o f Punjab, basmati rice i s cultivated in the monsoon season (kharif), followed by wheat in the winter season (rabi). In southern Punjab and northern Sindh, cotton i s the major khar i f crop, with the wheat crop immediately fo l lowing5 In southern Sindh where drainage problems inhibit cultivation o f cotton and warm night temperatures reduce wheat yields, non-aromatic rice (typically called IRRI rice) i s the major crop. In dryland (barani) areas o f northern Punjab and NWFP, wheat i s cultivated along with pulses and other minor crops.

2.6. irrigation) enabled the crops sub-sector to grow at an average rate o f 3.5 percent per year over the last 40 years. Within the crops sector, cotton production grew most rapidly (4.4 percent per year). Wheat, rice, sugar cane and maize also grew at rates in excess o f 3 percent per year (3.8, 3.3, 3.6 and 3.0 percent per year, respectively). 2.7. Annual growth rates o f wheat (2.36%), cotton (0.53%) and sugar cane (2.46%) have been much lower since 1990. Total area cultivated has increased by only 0.18 percent per year as expansion

Adoption o f green revolution technology, (improved seeds, increased fer t i l izer use, and

Here, farmers face a tradeoff between leaving cotton crop in the f ield for an additional harvest and delays in wheat planting that result in lower wheat yields. Al though area planted with cotton i s only about 113 o f wheat area, the two crops each account for about 30 percent agricultural value added at 1980-81 base prices.

6

in multiple-cropping has slowed. Several years o f drought have also l imited area expansion, as wel l as diminished yields. M u c h o f the gains f rom the init ial introduction o f new technologies for major crops had been realized by the early 1990s. Average wheat yields in Pakistan (2.12 tonsha) were 16 percent below average wheat yields in India (2.52 tonsha) over the 1989-90 to 2002-03 period. Average rice yields were essentially the same as those in India (2.74 and 2.85 tons/ha, respectively).6 Sugar cane yields in Pakistan are only two-thirds those of India (45.5 and 67.7 tonsha, respectively).

2.8. Recent analysis suggests that total factor productivity in crop agriculture in Punjab grew by only 1.26 percent per year from 1966 to 1994, and that deteriorating soil and water quality are reducing productivity growth by an average of 0.22 percent per year (Ali and Byerlee, 2002). Although land and labor productivity both increased by about 2.5 percent per year f rom 1966 to 1994, rising costs o f inputs limited growth in total factor productivity in crop agriculture. Labor use in crop agriculture in Punjab declined from 98.7 daydhectare to only 71.7 dayshectare due to increased mechanization (tractors, harvesters and thre~hers).~ Total factor productivity growth in the rice-wheat cropping system has actually declined, in part due to overuse o f poor-quality tube wel l water, leading to soil salinity.

2.9. North West Frontier Province (N.W.F.P), and i s a major source of farm earnings in other parts of Pakistan, as well. Production o f sheep and goats accounts for 17 percent o f livestock value added. Dai ry production (milk and ghee) i s a major source o f incomes for l o w income households in the Punjab and Sindh, with production of milk increasing by 80 percent between 1990-9 1 and 2002-03. Poultry production has increased even more rapidly, with the number o f birds and egg production increasing by 135 and 145 percent, respectively, f rom 1990-91 to 2002-03, but the sub-sector s t i l l accounted for only 3 percent o f livestock value added in 2002-03.

Livestock production dominates the rural economies in pastoral areas of Balochistan and

2.10. o f a change in the base for cattle production, According to official GDP statistics, the value added o f livestock grew by 26% in 1995-96. This large jump i s the result o f using figures f rom the 1995-96 Livestock Census o n the stock o f cattle to calculate value added in that year without making adjustments to livestock figures in previous years. Using the 10-year average livestock growth rate o f 5% for 1995-96 (instead o f 26%) reduces agricultural growth rate in that year f rom 12% to 4.7%. With these adjustments, agricultural growth during the 1990s i s reduced f rom 4.5% to only 3.1%.

Agricultural markets and prices 2.1 1. The Government o f Pakistan intervenes in both output and input markets in order to stabilize prices and improve incentives for agricultural production. Support prices are set for a l l major crops (wheat, rice, sugar cane and cotton), though government procurement takes place only for wheat and cotton, The Palustan Agricultural Storage and Supplies Corporation (PASSCO) and provincial Food Departments procure 25-40 percent o f total production o f wheat, and private market wholesale prices in Lahore have closely tracked the support price for wheat in most years (table 2.3 and figure 2.1). There has been n o procurement o f basmati or International Rice Research Institute (IRRI) rice since 1995-96, , even in 2000-0 1 when the support price (in rice equivalent) was near the wholesale price in Lahore. The Trading Corporation o f Pakistan (TCP) procures cotton, and minimum cotton export prices are announced

Livestock and agricultural GDP growth in the 199Os, though substantial, are overstated because

In value terms, r ice productivity in Pakistan exceeds that o f India since a higher share o f Pakistan’s production derives from hgh-value basmati r ice.

A l i and Byerlee, (2002), Table 2, p. 847.

7

daily which effectively act as ceiling prices. Market prices fe l l substantially below support prices in 1999 and 2001, however. The TCP also exports rice, sugar and wheat.

Table 2.3 Ratio of Wholesale Prices (Lahore) to Support Prices, 1995-96 to 2001-02 Basmati IRRl Sugar

Wheat Rice Rice Cane 1995-96 1.16 1.46 1.74 1.19 1996-97 0.99 1.59 1.99 1.48 1997-98 1.25 1.28 1.54 0.83 1998-99 1.14 1.67 1.55 0.82 1999-00 0.98 1.47 1.69 0.90 2000-01 1.07 1.01 1.13 1.20 2001-02 1.03 1.47 1.28 0.85

Average 1.09 1.42 1.56 1.04

Notes: Missing data for wheat prices f r o m January-April 1999 i s interpolated. Support price o f basmati and IRRI paddy i s converted to rice equivalent using a m i l l i ng ratio o f 0.67. Source: Agriculture Statistics o f Pakistan (200 1-02)

Figure 2.1 Wheat Prices in Pakistan, 1995-2003

18.0 I 1 16.0 14.0 12.0 10.0 8.0 6.0 4.0

1 -Wholesale Price (Lahore) +i+ Procurement Price + Import Parity Lahore 1 Source: Calculated from Federal Bureau o f Statistics data and M. Ahmad (2003).

2.12. Up until the mid-l980s, negative indirect effects of overall trade and exchange rate policy exacerbated the effects o f agricultural domestic price interventions, and most major agricultural commodities were implicitly taxed. In the 1983-87 period, direct effects o f domestic price and trade policies reduced wheat and basmati rice prices by an average o f 25 and 72 percent, respectively, be low border prices, The indirect effects o f trade and exchange rate policies that led to an appreciation o f the

8

real exchange rate further reduced theses prices to an average o f 42 and 78 percent below border prices. For cotton, this real exchange rate appreciation reduced the protection afforded to domestic cotton production f rom 177 percent down to 27 percent. These price disincentives reduced wheat and r ice production by an estimated 24 and 25 percent (relative to what they would have been during this period), and reduced farm incomes by an estimated 29 percent (Dorosh and Valdes, 1990).8

2.13. As a result of policy reforms, divergences between domestic and international prices of major agricultural products are much smaller now than in the mid-1980s (figure 2.2). Wheat support prices were on average only 10 percent below import parity levels (measured at procurement centers) in 1999-00 and though prices since then have been below import parity levels, wheat import demand by Pakistan at wor ld prices was essentially zero, (so that wheat was essentially a non-traded good).g Support prices for basmati rice were on average 22 percent below border prices (measured at procurement centers); IRRI rice prices were o n average 15 percent above border prices. Cotton prices were within 5 percent o f estimated export parity in 2000-01 and 2001-02. Moreover, trade and exchange rate reforms since the late 1980s have to a large extent eliminated major trade and foreign exchange restrictions and greatly reduced the appreciation o f the real exchange rate relative to i t s medium term equilibrium levels.

Figure 2.2 Nominal Rates of Protection of Major Crops

0.40 0.30 0.20 0.10 0.00

-0.10 -0.20 -0.30 -0.40 -0.50 ’

B3.I 1999-00 2000-01

0 2001 -02

Source: Based o n calculations in M. Ahmad (2003).

2.14. reduce market efficiencies remain, however. Econometric evidence suggests that wholesale wheat prices in village markets are determined by the procurement price and the distance o f the village to the procurement center (Kurosaki, 1996), but movement o f grain across district boundaries has been banned for a few months after the wheat harvest in some recent years. Rent seeking activities occur, in markets with and without government intervention, as well. In mango markets in the Sindh, rents are involved in

Some informal and formal restrictions on internal markets that raise transactions costs and

Hamid, N a b i and Nasim (1990) give similar figures for nominal rates o f protection, as w e l l as a detailed account o f the pol icy interventions f r o m 1960 to the mid-1980s.

In 2001, the GOP provided a subsidy o n wheat exports that totaled about $1 mil l ion. In 2002-03, the wheat export subsidy o n wheat was Rs 3250/ton, equivalent to 30 percent o f the estimated C&F price o f U S wheat at Karachi.

9

~

lrriga tion Credit Electricity Total 1996-97 4,550 1,000 604 6,154 1997-98 5,111 83 972 6,166 1998-99 4,237 437 1,336 6,010 1999-00 4,608 279 652 5,539

Average 4,627 450 89 1 5,967

the collection o f market fees, issuance o f trader licenses, and allotment o f shops (Smith, Khushk, and Stockbridge, 1999).

2.15. There have been n o direct subsidies on pesticides, seeds and fertilizer since 1996, but subsidies o n surface irrigation water and electricity (in Baluchistan only) remain. The pesticide and seed subsidies were eliminated in 1981-82 and 1982-83, respectively. The subsidy o n locally produced fertilizer was eliminated in 1993; a small subsidy on imported fertilizer was eliminated in 1996." Likewise, a subsidy o n tube wells o f Rs 16,000 to 20,000 per unit was abolished in 1994-95. Subsidies o n canal irrigation (calculated as the difference between revenues collected from farmers as water charges and the cost incurred by the government for operation and maintenance, excluding capital costs) averaged Rs 4.6 b i l l ion f rom 1996-97 to 1999-00, equivalent to 0.8 percent o f agricultural GDP (table 2.4).

Table 2.4 Subsidies in Pakistan Agriculture: 1996-97 to 1999-00 (mn Rs)

Source: M. Ahmad (2003); Statistical Supplement (2002b); Pakistan notifications to the WTO.

lo All fertilizers n o w face a 15 percent sales duty, and imported fertilizers also face a 5 percent custom duty.

10

111. RURAL LAND MARKETS: INSTITUTIONS AND CONSTRAINTS

3.1 Land, particularly irrigated land, i s the most important productive asset in rural Pakistan and a major determinant o f social status, polit ical influence and income. Land ownership provides access to polit ical power and public incomes for large landowners, and has considerable pecuniary and n o n pecuniary, often invisible, associated returns. An effective land market has failed to develop because o f legal impediments t o the sale and purchase o f land such as the right o f shufa ( f i rs t purchase) and excessive bureaucratic intervention. While the market for land rental i s somewhat more developed, inadequate information f low and other rigidities (including lack o f access to credit) are responsible for an economically and socially sub-optimal allocation o f this basic resource.

Land Ownership and Utilization

3.2 mainly to increases in water availability at the farm level. Most o f this gain in area cultivated was achieved pr ior to 1990; between 1990/91 and 2000/0 1, cultivated area increased by only 3.2 percent, f rom 20.96 to 22.13 m i l l i on hectares, as cropping intensity increased f rom 1.35 to 1.43 (table 3.1).

Cultivated area in Pakistan has increased by about 50 percent since Independence in 1948 due

Table 3.1 Land U s e in Pakistan, 1990-91 and 2000-01

7990-97 2000-07 Forest Area 3.46 3.77

(6.0) (6.3) Not Available for Cultivation 24.34 24.31

(42.2) (40.0) Culturable Waste 8.85 8.95

Cultivated Area 20.96 22.27 (36.4) (37.2)

a. Net Area Sown 16.1 1 15.4 (28.0) (25.9)

b. Current Fallow 4.85 6.73

(1 5.4) (1 5.4)

(8.4) (1 1.3) Total Cropped Area 21.82 22.12

(37.9) (37.1) Total Area 57.61 59.44

(100.0) (1 00.0)

a. Net Area Sown 16.1 1 15.4 b. Area Sown More than once 5.71 6.64 c. Cropping Intensity 1.35 1.43

Note: Figures in parentheses are the percentages o f total reported area. Source: Agricultural Census (1990 and 2000).

3.3 Distribution o f owned land in Pakistan i s highly skewed and the number o f small farms i s increasing over time. According to Agricultural Census data for 1990, 54.4 percent o f farm households owned less than 5 acres (accounting for only 11.4 percent o f total area), while 2.8 percent o f households owned 50 acres or more (accounting for 34.0 percent o f total land). By 2000,61.2 percent o f farm

11

households owned less than 5 acres o f land, (accounting for 14.8 percent o f total farm area), and 2.0 percent farmers owned 50 or more acres, but these farms accounted for 29.7 percent o f total area.

3.4 percent o f rural households with n o land, the al l Pakistan Gini coefficient i s 0.86. By comparison, Gini coefficients for land ownership are 0.71 (NSS, 1991-92) for India as whole" (0.76 for Punjab, 0.63 in Uttar Pradesh), 0.42 in Bangladesh, 0.37 in Thailand, 0.85 in Brazil.12 In spite o f the increase in the number o f small farms, the overall Gini coefficient for land ownership in Pakistan remained approximately constant f rom 1972 to 2000 (table 3.2).

The overall Gini coefficient o f land-holdings in 2000 in Pakistan was 0.66. Including the 63

Table 3.2 Pakistan: Distribution o f Land Ownership

1972 1980 I990 2000

Gini Coefficient 0.66 0.65 0.66 0.66

% of landless households 62.0 63.3

% Share of Holdings <5 acres a. Households b. Land

% Share of Holdings 50+ acres a. Households b. Land

47.3 n.a. 54.4 61.2 5.4 n.a. 11.4 14.8

3.3 n.a. 2.8 2.0 22.4 n.a. 34.0 29.7

Source: Agr icu l ture Census (various issues)

3.5 and 2000. The Gini coefficient for Punjab remained almost constant at about 0.62. Inequality in Sindh declined f i o m 1972 (Gini coefficient o f 0.69) to 1980 (Gini coefficient o f 0.62), but has remained the same since then. In Balochistan, the Gini coefficient declined slightly from 0.70 in 1990 to 0.66 in 2000, indicating an increased equality o f land distribution (table 3.3).

Similarly, inequality o f land holding within provinces did not change significantly between 1972

Table 3.3 Gini Coefficient for Ownership Holdings by Province

1972 1980 1990 2000 Punj ab 0.63 0.62 0.62 0.62 NWFP 0.68 0.69 0.65 0.70 Sindh 0.69 0.63 0.63 0.63 Balochistan 0.69 0.68 0.70 0.66 Source: Agricultural Census (Various Issues)

0.59 (1985 FA0 data).

l2 These land ownership data l ike ly understate the concentration o f land-holdings in Pakistan (and other countries) since a household's land may be registered in the names o f several household members.

12

3.6 data, in 2001-02 less than 0.2 percent o f total agricultural land was ~ 0 l d . l ~ Over time, however, land prices have risen substantially relative to land rents, making land less accessible for landless and small holders since agricultural incomes f rom purchased land may be insufficient to repay money borrowed for a land purchase, even if credit were available (See B o x 3.1).

Land sales markets in Pakistan are extremely thin: according to Pakistan Rural Household Survey

Box 3.1 Land Price Determination in Pakistan: Land Rents and Asset Effects

Conventional rent theory suggests that the price o f land i s determined by the discounted value o f the land’s potential earnings (rents). Data on long-term trends in rental values and land prices in colonial and post-independence Punjab show a long term decline in the rental value o f land relative to the price o f land, suggesting that agricultural earnings are not the main determinant o f land prices (Hirashima, 1996). Instead, asset effects, l ikely l inked to the use o f land as a symbol o f prestige and power, and private capital formation in non-agricultural sectors, appear to be the major determinant o f land prices in Punjab in the long run. During periods o f major technological change (the peak o f the green revolution, 1976-86), however, rents rose faster than land prices in rural Punjab villages. Nonetheless, f rom 1960 to 1989, the ratio o f annual rent to land asset price (the WP ratio) declined f rom 3.93 percent to 2.59 percent in the irrigated villages and from 2.85 percent in 1960 to 1.98 percent in 1989 in non-irrigated villages (Renkow, 1991). The large asset component in land prices makes it very diff icult for landless households to purchase land, High land prices increase the financial capital required, and l o w returns to land relative to these land prices mean that agricultural incomes alone may be insufficient to repay money borrowed for a land purchase. Only those who can afford to wait for the asset effects to be captured in the long-run, without expecting much return in the short-run, can participate in land market. In this situation, the income f rom outside the agricultural sector (including through remittances) are needed for most landless or small farm households to purchase land. Moreover, because increases in land prices f rom asset value effects vary according to the level o f infrastructure and the dynamism o f the local rural non- farm economy, uneven regional economic growth i s l ikely to increase wealth disparities across farmers in Pakistan.

Source: Hirashima, 1996 ; Renkow, 1991 ; Qureshi, 2003.

3.7 Land rentals are much more common than land sales, but s t i l l account for a relatively small share of area cultivated. In 2000, 78 percent o f farms in Pakistan, accounting for 73 percent o f area cultivated, were cultivated solely by the owners o f the land. Fourteen percent o f farms, with 12 percent o f total area cultivated, were cultivated solely by tenants. The remaining 8 percent o f farms (with 15 percent o f area cultivated) were farms consisting o f both owned and rented-in land (figure 3.1). Tenancy i s declining in Pahstan, however, between 1990 and 2000 the percentage o f farms with at least some rented-in land fel l from 3 1 percent to 22 percent.

3.8 share-cropping arrangements where the landlord i s responsible for most input costs (such as seed,

According to the 2000 Agricultural Census, about two-thirds o f tenant-cultivated farms involve

l3 Pakistan Rural Household Survey (PRHS) 2001-02. By comparison, annual tumovers o f land in Latin American are often 10 to 20 times larger, averaging 5 percent in Colombia, 2 to 3.5 percent in Venezuela, and 1.4 to 2 percent in Ecuador (Jaramillo 2001). In contrast, no formal land sales markets in Cambodia, China and the Lao People’s Democratic Republic, where the state or the collective still owns the land.

13

fertilizer and pesticides), the tenants share in some other expenditures (such as water and rental o f machinery), and the output i s shared equally between landlord and tenant. Most o f the remaining one- third o f tenant-cultivated farms involve fixed rents paid in cash.

Figure 3.1 Pakistan: Percentage o f Farms and Area Cultivated by Land Tenure Status

90 80 70

60 3 50 2 40

30 20 10 0

S

0

Owners OwnlRent Tenant

1 % of Farms E % of Area

Source: 2000 Agricultural Census.

3.9 11.4 percent o f farm area in Balochistan to 17.2 percent o f farm area in Sindh. Although share-cropping declined from 1990 to 2000, the relative importance o f share-cropping across provinces has no t changed.

There i s substantial variance in the incidence o f share-cropping across provinces, ranging f rom

3.10 The distribution o f operational holdings i s nearly as skewed as distribution o f land ownership. In 2000, 58 percent o f farms in Pakistan were smaller than 5 acres in size. These farms occupy 16 percent o f total farm area. In contrast, only 5 percent farms were 25 acres and above and total area under these farms was 38 percent in 2000 (table 3.4). Trends in distribution o f land cultivated are l ikewise similar to those of land ownership, The number o f small farms (under 5 acres) has increased from 46 percent in 1960 to 58 percent in 2000. Area under these farms has also increased considerably - f rom 3 percent in 1960 to 16 percent in 2000. The number o f farms in al l other farm category shows a decline since 1960, except for the medium farms (5 to 12.5 acres).

Table 3.4 Pakistan: Distribution o f Farms and Area by Farm Size (operated area)

Source: Agriculture Census (various issues)

14

3.1 1 in the NWFP and Baluchistan. Over the past three decades, however, the differences across provinces have narrowed, as distribution in Sindh and Punjab have worsened, rising from 0.43 and 0.49, respectively in 1972 to 0.56 and 0.57, respectively in 2000. Over this period, the gini coefficients for operated land area have remained almost constant in the NWFP and Balochistan, varying between 0.63 and 0.65.

Across provinces o f Pakistan, both owned land and operated land are most unequally distributed

Land Distribution, Land Policy and Land Reform

3.12 rule and successive governments o f independent Pakistan. As part o f i t s strategy to “win friends amongst enemies”, land rights were granted to rural elites as a reward for cooperation and to encourage future assistance (Naqvi et. al., 1987).14 Land policies varied over time and across province, and included four concurrent major land administration systems pr ior to independence -- including the zamindari (landlord tenant), ryotwari (peasant proprietorship) systems, that established or encouraged an unequal distribution o f land (Box 3.2).

The current distribution o f land in Pakistan reflects the government land policies under British

Land Reforms

3.13 followed by three national land reform acts (1959, 1972, 1977). Implementation o f these reforms was weak, however, due in part to a general lack o f polit ical will and insufficient polit ical strength o f tenants to counter the opposition by landlords (Box 3.3).

3.14 8 percent o f the country’s cultivated area) f rom large landowners. About 1.3 m i l l i on hectares was redistributed to about 280,000 beneficiaries (an average o f 4.6 hectares per beneficiary). M u c h o f this redistributed land was not o f high quality, however, (less than three-quarters o f the distributed area was under cultivation). N o t al l beneficiaries were sharecroppers: a high proportion o f recipients were already small-landowners.

Af ter Independence in 1947, various tenancy acts were passed in Punjab and Sindh in 1950,

Under the 1959 and 1972 land reform acts,15 the government acquired 1.6 m i l l i on hectares (about

3.15 agenda o f policy-makers in Pakistan. The Shariat Court has given a ruling that imposing a ceiling o n land ownership i s in accordance with Islam, and that the land reform acts must be rescinded. The Government o f Pakistan has appealed this ruling, and the case i s s t i l l pending.

Despite continuing high levels o f land concentration, further land reforms are currently o f f the

l4 Naqv i N.H., Khan M.H. and Chaudhury M.G. (1987) Land Reforms in Pakistan: A Historical Perspective, PIDE, Islamabad

The 1977 land reform act was never implemented.

15

Box 3.2 Historical Rural Land Tenure Systems in Pakistan Both the British and the Moguls before them granted large rent-free tracts o f land called jagirs to

individuals who h a d helped them in conquering parts o f Pakistan. In the Sindh, jagirdars often collected part a f the produce f r o m occupancy tenants, i.e. tenants who had permanent, heritable and transferable rights to Eultivate the lands.' In many areas these occupancy tenants, called Mukhadims, did not cultivate the land themselves but engaged tenants-at-will (tenants w i th few, if any, legal rights, including occupancy rights), called haris.

Similar to the jagirdari system o f land administration, the Pattadari system was operated in the northem parts of Sukkur and Shikarpur districts in the Sindh for Afghan settlers. These settlers collectively paid a nominal rent to the government, but an unequal distribution o f land holdings prevailed among individuals as these were based o n ancestral and customary rights.

The British officials also recognized the proprietary rights o f landlords (zamindars) who had acquired large estates during the per iod o f political instability immediately before the extension o f Br i t ish rule to the Punjab and other areas constituting present-day Pakistan. The construction o f the Sukkur Barrage in 1932 and perennial canals in the fol lowing years, much o f the newly irrigated land was purchased by zamindars at high prices and subsequently rented out to poor cultivators.

In Sindh, the British introduced the ryotwari system, under wh ich the state kept the proprietary rights to the land and leased the land to tenants who paid land revenues only for the years they ploughed the fields. Likewise, the Mahalwari system (a refinement o f the ryotwari system) was established in the eastern part o f the Punjab, by wh ich the peasants o f a village were responsible collectively and individual ly for the payment o f land revenue to the British.

Ownership & System Region Ri hts

Mahalwari Eastern Punjab

Jagirdari Punjab, Sindh

Zamindari Pakistan

Ryotwari Pakistan

Pattadari Sindh

Individual

Individual

State

State

State

Peasants responsible individually and collectively for payment of land revenue to British

Tax-free tracts of land allocated to favored individuals Occupancy-tenants (Mukhadims) with permanent, heritable

Mukhadims engaged tenants-at-will with few, if any legal rights and transferable rights

Large landlord-holdings with heritable, divisible and transferable rights provided land revenues were paid to State

Peasant-holdings with heritable, divisible and transferable rights provided land revenues were paid to State

Nominal rent paid to State by Afghan settlers collectively; unequal distribution of land holdings based on ancestral

Source: Based on Qureshi, Sarfraz. 2003. Rural Land Markets in Pakistan: Institutions and Constraints. Background paper for Pakistan Rural Factor Markets Study.

16

Box 3.3 Land Policies and Land Reform in Pakistan Numerous land policies have been enacted in Pakistan since 1947, both at the provincial and federal leve l

The Punjab Tenancy Acts (1887 to 1950) included several important provisions limiting land ownership and conditions o f tenancy:

i) A landlord holding more than 100 acres was to keep only 50 acres for cultivating land himself and the rest o f the land owned by him was to be given to the tenants.

ii) The landlord’s share o f the produce was fixed at 40 percent and he was to pay government dues in the same proportion.

iii) All Jagirs were abolished except military Jagirs and those connected with religious and charitable institutions.

iv) Tenants could be ejected only if they failed to pay tax in time, did not cultivate the land, or the landlord wanted the land for his own cultivation.

v) Occupancy tenancy was abolished and the creation o f new tenants was prohibited.

In 1950, the Sindh Tenancy Act gave permanent rights to the tenants (Hark) who had cultivated at least four acres of land continuously for three years. I t abolished ‘Beaar’ (free services) and various illegal charges. Under the 1959 Land Reform enacted under Martial Law, i) ceilings on holdings were fixed at 500 acres o f irrigated land and 1000 acres o f un-irrigated land; ii) tenants had the f i rs t claim to purchase the land resumed by the government; iii) landlords were given compensation through interest -bearing bonds; iv) jagirdari o f all types was abolished without compensation; v) security o f tenure o f tenants was guaranteed; and vi) division o f land into uneconomic holdings was prohibited. In addition, a plan for consolidation o f holdings was adopted, a comprehensive plan for land utilization was formulated, and credit facilities were envisaged for the new landowners.

I n 1972, more radical land reforms (under MLR-115) included the following provisions: i) the ceiling on land ownership was reduced from 500 acres o f irrigated land to 150 acres and from 1000 acres o f unirrigated land to 300 acres; ii) land owned above the permissible limit was to be surrendered to the government without compensation; iii) al l the resumed land was to be distributed among the ti l lers free o f cost; iv) Shikaraahs (hunting grounds), except those already owned by government, were to be resumed; v) land over 100 acres acquired by a government servant during his t e r m in office or two years after his retirement was to be confiscated; vi) all state land was to be given to landless cultivators or those having smaller than subsistence holdings on easy installments; vii) tenants could be ejected only if they failed to give the crop share or rent; and viii) the water rate and cost o f seed was to be paid by the landlord.

The 1977 land reforms were designed to be even more stringent in terms o f the ceilings on land ownership. However, these were never implemented due to opposition by large land owners.

Land Administration, Land Titles and Contract Enforcement

3.16 Pakistan has an elaborate system o f land administration inherited f rom the British, involv ing the establishment o f rules and regulation regarding sale, purchase and use o f land resources and the collection of land tax. This system has decayed in many respects due to inadequate resource allocation for routine land administration, and the additional administrative burdens o f development work placed o n revenue officials after independence in 1947.

3.17 and not to provide conclusive titles to land. As a result, neither the agrarian laws for providing titles to land nor the actual land records provide a firm foundation for efficient land markets or secure land tenure. Instead, the ambiguity in laws has l ed to incessant l i t igation and clogging o f the judic ia l machinery in the country.

The original primary intent o f agrarian laws in Pakistan was to facilitate collection o f land taxes

17

3.18 prevailing during the British period. Under those laws, the King o f England was the eventual proprietor o f a l l lands. The rights of any individual to have any kind o f right for the land were subject to payment to him o f land revenue unless a special waiver was granted from the payment o f land revenues as for j agirdars

The agrarian laws in Pakistan dealing with land administration are patterned on the laws

3.19 Revenue Act, 1967, which unified the provisions o f the Bombay (Sindh) Land Revenue Code, 1879, and the Punjab Land Revenue Act, 1887.” Sections 42-45 o f this unified A c t enumerate the rights (of landowners), and a l l land sales or transfers o f land are required to be recorded in the records-of-rights according to specified procedures. Section 52 o f the Ac t attaches the presumption o f correctness to the records-of-rights prepared at the time o f the settlement, as also to any entry made in the records-of-rights or in the periodical records in accordance with the provisions la id down in sections 42-45 and the rules there under.

The major legal provisions related to land in Pakistan were codified in the West Pakistan Land

3.20 The present law does not profess to provide for a State certificate o f t it le to land under the aegis of a public authority. The records-of-rights and other documents based on the land records, by virtue o f provisions in the land laws are presumed to be accurate. These entries only provide presumptive status o f rights under land laws. Many court rulings have also maintained that entries in the land records are not sacrosanct, that the revenue records are not the documents o f title, and that it i s permissible to challenge the entries for determining the tit le to land.I8 This gap in the law has been the basis o f l i t igation in land m a t t e r ~ . ’ ~

3.21 Preparation, maintenance and updating o f land records in Pakistan are administered at the provincial level by a Board o f Revenue, which i s responsible for pol icy matters, and i s the ultimate forum for the final appeal o f a l l land disputes. The Board also organizes full-scale settlement operations for the periodic updating o f land records. At the district and sub-district levels, Directorates o f Land Records and field-level land management officials (tehsildurs and putwaris) under the District Coordination Officer (DCO) are responsible for both maintenance and continuous updating o f land records.20 These basic land records at the field level consist of: i) the record o f rightdperiodical record (along with the pedigree table of the owners); ii) the Register o f Mutations; iii) The Register o f Crop Inspections (Register Girduwari); and iv) the Cadastral Map (Shujru Kishtwur).

l6 The Governments o f Punjab and NWFP enacted legislation to abolish Jugirs in 1950, but a similar action o f the Sindh government was successfully challenged in the H i g h Court in 1955.

l7 Since the Land Revenue A c t was uni f ied in 1967, the land revenue acts in a l l provinces are identical. There are, however, minor variations in the administrative set-up o f the provinces for land management.

’* The Lahore High Court (PLD 1966) he ld that “entries in revenue record are not sacrosanct. They are certainly an important piece o f evidence but l ike a l l other evidence they can be countered”.

l 9 The Registration Act, 1908, (the model A c t o n wh ich the present A c t in Pakistan i s based), provides for the registration o f documents but not for the registration o f titles. Registration o f documents i s compulsory on ly where some provision in the Transfer o f Property A c t (for example, Section 543 in the case o f an outright sale o f an immovable property) or some provision in the Registration A c t (for example, Section 17 dealing with various transactions concerning immovable property) provides for compulsory registration. In a l l other cases, unless provided by a special law, registration o f documents i s optional, particularly in the case o f wills. The registering officer i s not supposed to concern himself with the val idity o f the document.

2o The central survey and settlement organizations (within the Boards o f Revenue ) and the directorates o f land records are a small setup with the ma in mandate o f conducting training and providing technical advice to f ie ld officials and providing support to the Board o f Revenue.

18

3.22 Contract enforcement o f land rental contracts result in numerous legal disputes over i l legal possession o f land, restoration o f tenancy, incorporation o f transfer o f property (by oral transactions, registered sale deeds, or decree o f the court) in the revenue record, eviction o f tenants, land leases and grants, (particularly o f land jo int ly owned), and recovery o f rent. Although the Revenue courts have a legal mandate to adjudicate land disputes, many o f these cases are heard in c iv i l courts.21 In general, small land holders and tenants, tend to prefer to come to the revenue courts, however, because these courts are more accessible, cheaper and less time - consuming than the c i v i l courts. Nonetheless, there i s a widespread perception that implementation and enforcement o f decisions o f revenue courts are often biased in favor o f large and powerful land owners.

3.23 The ambiguity o f agrarian law regarding records o f land rights i s particularly harmful to poor, who cannot afford protracted land disputes. The insecurity o f land tenure also serves as a disincentive for investment, reducing growth o f the agricultural sector. Unambiguous and authoritative laws, together with an effective land recording system, would promote the smooth transfer o f titles and an efficient land market (Box 3.4).

Box 3.4: Land Rights in Punjab and Sindh In Punjab, oral mutation has led to fraudulent transactions entered in the Register o f Mutations by the

patwari and hence to serious disputes in rural areas. Accordingly, the relevant sections o f the Transfer o f Property Act, 1882, were amended. However, the old system o f oral mutation was revived in 1978 under pressure from vested interest groups.

According to the Punjab Land Revenue Act, 1967 and the Punjab Tenancy Act, 1887, the jurisdiction o f the c iv i l courts i s barred in revenue cases, but the civil courts may take cognizance in disputes related to tit le. The common causes o f dispute are the demarcation o f boundaries, recovery o f rent, restoration o f tenancy, eviction o f tenants, land leases and inheritance disputes. According to the Muslim law o f inheritance, daughters, sisters, mothers, grandmother are also entitled to inherit property, but in the agricultural community there i s a tendency to deprive them o f their share o f inheritance. Women have become more aware o f their rights now because o f an increase in education and general awareness.

In Sindh, any person who acquires a right in the property has to report orally or in writing the nature o f his right to the specially set up ce l l at Taluka (sub-district) level within three months. The Mukhtiarkar makes necessary corrections within 15 days. If objections are received, the Mukhtiarkar in an open katchery disposes these of, There are serious defects in the system o f maintenance o f Records o f Rights in Sind. Most importantly, there are cases o f corruption, public harassment and inefficiency. Moreover, the Mukhtiarkar or other officials manning the Taluka cells, may not be available for either receiving statements or for hearing objections, given their busy schedule and pre-occupation wi th many other administrative tasks.

Source: Qureshi, Sarfraz. 2003.

21 Under the new system o f devolution introduced by the present government, the functioning o f the Revenue courts remains much the same as before, with the work o f Deputy Commissioner, Assistant Commissioner and Commissioner now transferred to District Officer (DO) (Revenue), Deputy District Officer (DDO), and Executive District Officers [EDO] (Revenue). The Land Revenue Laws and operational capacity o f the revenue courts remain the same, however.

19

Patterns o f Land U s e and Productivity by Farm Size and Tenure Status

3.24 with productivity has been the subject o f considerable debate in Pakistan. Economies o f scale (especially with regard to mechanization), less aversion to risk, and better access to credit, purchased inputs, extension services and markets could potentially make large farms more productive than small farms. But more intensive use of own family labor and lower management costs per unit o f area farmed could result in an inverse relationship between farm size and productivity. For farms o f equal size, owner-operated farms might be expected to be more productive than tenant-operated farms, because o f their relatively greater incentives to invest in land and tube wells which they themselves own. Moreover, under share- cropping arrangements where the costs o f some inputs are borne by the tenant, a profit-maximizing tenant will use less inputs and produce less output per hectare than he would i f owned the land (or pa id a fixed rental amount).*’

Size o f f a rm and tenure status have clear implications for farm incomes, but their relationship

3.25 for very small farms (less than 0.5 hectares) (See table 3.5). Wheat i s the predominant crop across a l l farm sizes, accounting for 36 to 43 percent o f area. Among the major field crops, only for maize and fodders, and to a lesser extent, rice and cotton, do cropping patterns vary significantly by farm size. Maize i s the second most important crop (accounting for 21 percent o f area cultivated) for the smallest farms (less than 0.5 hectares), but accounts for an average o f only 4 percent o f area cultivated o f a l l farms. By contrast, the share o f rice and cotton in total area cultivated o f very small farms (5 and 6 percent, respectively, in 2000) i s less than ha l f the average area cultivated for farms o f a l l sizes (12 and 14 percent, respectively). These differences to a large extent reflect distribution o f irrigated land in the main areas o f cultivation o f these crops. Similarly, vegetables and orchards occupy a significantly larger proportion o f the cultivated acreage o f the largest farms than o f the smallest farms. Agricultural Census data show n o distinct patterns across tenurial status in terms o f the crops grown, however.

3.26 suggests that small farms are more productive in terms o f net revenue per unit o f land cultivated than are larger farms, particularly on irrigated land. Farm incomes per cultivated area o f farms less than 5.0 acres in size in the partial barani zone (dependent o n rainfall and wells for water) and the irrigated zone (with canal, wel l and rain water) were 3.1 and 1.6 times farm incomes per cultivated area o f farms greater than 25 acres in the respective zones. There are only small differences in incomes across farm size in barani (rainfed) zones, however, and the estimated differences in income per acre among farms greater than 5 acres i s only 8 to 16 percent in irrigated zones (figure 3 -2).

According to agricultural census data, cropping patterns vary l itt le by farm size and tenure, except

Data on farm incomez3 per cultivated area across ago-climatic region in the Punjab for 2000/0 1

22 See Nabi, Hamid and Zahid (1986) for a detailed discussion o f farm size and productivity, and economic incentives under tenancy.

23 Fa rm income includes both crop and livestock income.

20

Figure 3.2: Pakistan: Farm Income per Cultivated Area in Punjab, 2000/01

35,000

30,000

25,000

20,000

Q, 15,000

$

a 10,000

u) 0 Q

5,000

Barani Partial Irrigated Average Barani

Less than 5 5 to 12.5

0 12.5 to 25 D25andabove

Source; PEN (2001) Note; (1) Barani zone consists o f four districts o f Punjab namely Attock, Rawalpindi,

Chakwal and Jehlum districts. (2) Partial Baranythal zone: consists o f Gujarat, Gujranwala, Sialkot,

Sheikhupura, M a n d i Bhaudin, Lahore, Narowal, Kasur and Hafizabad districts. (3) Irrigated area: consists o f remaining 25 districts in the province o f Punjab.

N N 9.

b N b N m i 3

N N

m' N

n

0 0 0 (d

B v

22

3.27 scale in physical production (table 3.6). Plot-level regressions o f productivity, correcting for plot characteristics and some household characteristics (such as tractor ownership and number o f household workers) suggests a doubling o f operated area leads to 10 percent lower wheat yields (and 13 percent lower rice yields), (World Bank, 2002). Similarly, controlling for access to credit, Jacoby and Mansuri (2004b) find that a doubling o f p lot area leads to a 12 percent reduction in gross productivity (controlling here for access to credit).

However, most recent econometric evidence suggests relatively small diseconomies o f

3.28 Estimates o f scale effects on net revenue per acre (Le. gross revenue less the value o f inputs) differ widely though. Wor ld Bank (2002) estimates that a 100 percent increase in plot area results in a 22 percent reduction in khar i f season and 38 percent in rabi season net revenues. In contrast, correcting for land owned, Anriquez and Valdes (2004) find an overall elasticity o f net revenues with respect to total operational size o f a farm o f 0.33. In theory, if land rental markets worked efficiently, land rental rates would equal marginal returns to land, and net revenues would exhibit constant returns to scale.

3.29 croppers who are relatively u n ~ u p e r v i s e d ~ ~ i s 18 percent less than productivity o f supervised share-croppers and farmers who cultivate their o w n land.” Since only 19 percent o f land in Pakistan i s share-cropped, and an estimated 35 percent of tenants are relatively unsupervised, “unsupervised” tenants account for only about 7 percent o f total area cultivated and the effect on total production o f major crops i s small: only 1.4 percent (Jacoby and Mansuri, 2004a).

Econometric evidence on the effects o f tenancy suggest that the productivity o f share-

3.30 through disincentives on long-term investments by the tenant in land quality. Econometric analysis o f PRHS 2001-02 data, (Jacoby and Mansuri, 2003), shows that farmers used less manure o n leased plots than on their o w n plots, reducing yields by about one percent in the f i rs t year and a cumulative total o f 2-2.5 percent in future years.26 These effects o n yields are relatively small, but disincentive effects o f tenancy contracts may be larger for investments in canal lining and tube wells.

Lack o f secure tenancy arrangements also has negative implications for productivity

24 In this study, tenants were considered to b e unsupervised, if during the cropping season there were less than ten meetings between the tenant and landlord to discuss management o f the plot.

25 Share-cropping arrangements benefit share-croppers by enabling them to share the risk o f output fluctuations with the landlord, and also to share the costs o f purchased inputs. However, they provide less incentives for labor input by the tenant, since the output i s shared, as well.

26 Application o f manure increases yields, by providing additional soi l nutrients and by improv ing soil structure, aeration, water retention, and abi l i ty t o retain nutrients.

a E: ed

m c.l

cl

8

IV. WATER MARKETS IN PAKISTAN AGRICULTURE

4.1 year, though with large year-to-year fluctuations. Large-scale movements o f water f rom one location to another take place through the extensive Indus basin canal system in Pakistan, notwithstanding substantial conveyance losses. Small storage capacity relative to water f low and lack o f control structures (such as gates) greatly limit the control o f water flows within the system, however. Distribution o f this canal water at the water course level i s determined by physical location along the canal and the wavabandi system o f established, administratively-set rotations.

L i k e the supply o f cultivable land, the supply o f water in Palustan i s essentially f ixed within a

4.2 expanded since the 1960s, and has led to increased agricultural productivity by providing greater water control at the farm level. Groundwater markets have increased productivity o f farmers who lack their own tube wells, but surface water markets are l imited to informal transactions within water courses due to both insufficient water storage and control structures, as well as the absence o f tradable water rights.

In part because o f unreliability o f irrigation by canal water, tube wel l irrigation has greatly

Water Availability in Pakistan Agriculture

4.3 droughts, water availability at the farm level i s a major determinant o f farm productivity in Pakistan agriculture. Nearly 80 percent o f cropped area i s irrigated, and agriculture i s by far the largest user o f available water sources in the country, consuming on average about 95% o f available water resources.

Given l o w levels o f annual rainfall concentrated over only a few months o f the year and per iod

4.4 Increases in water resource availability for irrigation and expansion o f irrigated area have played a central role in agricultural growth since the 1960s. Total irrigated area increased by 80 percent between 1960 and 2000, f rom 10.4 to 18.0 mi l l ion hectares, mainly due to an expansion in tube w e l l irrigation. In 2001-02, out o f 18.0 mi l l ion hectares o f irrigated land, 38 percent was irrigated solely with canal water; 39 percent with canal and tube wel l water, and 19 percent solely with tube we l l water. (Other forms o f irrigation, including wells, canals with wells and tanks) accounted for the remaining 4 percent). (figure 4.1). About 60 percent o f irrigated water available at farm head i s provided by canal water; the remaining 40 percent i s supplied by g r o u n d ~ a t e r . ~ ’

4.5 in the wor ld (Box 4.1). O n average, approximately two-thirds o f total net water in the Indus basin (103.8 out o f 15 1.6 MAF) i s diverted to canals. Of this total, about 45 percent goes for consumptive use, with the remainder as conveyance losses (including groundwater recharge). Surplus flows to the estuary (29.4 MAF); system losses (9.9 MAF) and Indus Treaty Allocations to India (8.4 MAF) account for the remaining water. (Table 4.1)

Near ly 97% o f this irrigated area i s in the Indus Basin, the largest contiguous irrigation system

~

27 GOP, Water V is ion 2025 Country Report, cited in W o r l d Bank, 2003a, Pakistan Public Expenditure Management, Accelerated Development o f Water Resources and Irrigated Agriculture, vol. 11.

25

Figure 4.1 Area irrigated by source of irrigation, Pakistan 1982-2001 I I 9 1 I

Source: Economic Survey 1996-97 and 2001-2

Table 4.1 Average Water Balance o f the Indus River System

Item Annual Volume MAF (million acre feet) BCM (bn cubic

meters) INFLOW Westem Rivers Eastern Rivers

143.18 8.40

176.54 10.36

Total Inflow 151.58 186.90 OUTFLOW Indus Treaty Allocation to India 8.40 10.36 Average Canal Diversions 103.84 128.03 System Losses 9.90 12.2 1 Surplus flow to lower River and Estuary Total Outflow

29.44 151.58

36.30 186.90

Source: World Bank (2003a).

26

Box 4.1: The Indus Basin Irrigation System

The Indus basin irrigation system consists o f 3 major reservoirs (Tarbela, Mangla and Chasma dams), with 19 barrages or headworks, 12 link canals and 43 canal commands and about 107,000 water courses. Within each canal command there are typically 4-6 branch canals, 2 distributaries per branch canal, 20-30 minors per distributary, 20-30 water courses per minor. A typical water course i s 2-3 kilometers in length, irrigating 200-700 acres (80-280 hectares) for 20-30 farmers.

In the Indus system, river water i s diverted by barrages and weirs into main canals and subsequently into branch canals, distributaries and minors. The flow to the farm i s delivered by the watercourses which are supplied through outlets (moghas) from the distributaries and minors. The mogha i s designed to allow a constant discharge that se l f adjusts to variations in the parent canal. Within the watercourse command, farmers receive water proportional to their land holding. The entire discharge o f the watercourse i s given to one farm for a specified period on a seven or ten day rotation, called “warabandi”.

Flat topography and lack o f well-defined natural drainage in the Indus Plain create a surface drainage problem which has been compounded by the construction o f roads, railways, flood embankments, and irrigation systems that obstruct natural drainage flows. In spite o f investments in surface drains and deep tube wells, (the latter installed as part o f SCARPS -- Salinity Control and Reclamation Projects), drainage remains a major problem.

Source: World Bank (1994). Pakistan Irrigation and Drainage: Issues and Options.

4.6 Conveyance efficiency in the system i s low, however (45 percent). Inadequate maintenance results in canal losses (up to canal outlets) o f 25 percent. Unl ined watercourses result in another 40 percent loss f rom canal outlet to farm gate. Though these conveyance losses reduce availability o f surface water, they nonetheless contribute to groundwater resources.28

4.7 Surface water availability at the farm head in the Indus Basin System has changed litt le since the late 1970s when the Tarbela dam was completed, remaining at about 62 MAF per year. The major increase in availability has been due to the growth in groundwater use - from 4.2 MAF (8 percent o f water availability) in 1960-61 to over 40% in the late 1980s, after which time it appears to have changed very l i t t le . This large growth in groundwater use was stimulated in part by the use o f tube wells for vertical drainage and water table control under the Salinity Control and Reclamation Projects (SCARPS), which are now being gradually turned over to communities and Water Users Associations (WAS), as well as by the large spurt in farm mechanization in the 1980s and the availability o f inexpensive tube wel l technology in the market. However, one critical consequence o f this growth i s that increasing amounts o f salt are circulating vertically in the system, progressively poisoning the soil because drainage and evacuation o f salt f rom the basin i s inadequate. (World Bank, 2003a).

28

(though they are indeed losses in saline groundwater areas). This seepage, however, essentially reallocates water from those downstream who only have access to canal water to those with access to tube wells. Moreover, since conjunctive use of canal water and groundwater to control water logging and salinity has been a key principle underlying the overall irrigation development strategy since the 1960s, one cannot look at either canal water or groundwater in isolation in the Indus Basin system. (World Bank, 2003a)

In fresh groundwater areas, canal and field seepage are an increasingly important source o f irrigation water

27

4.8 late 1990s), also contributed to the growth in tube well irrigation. Removal o f these subsidies have increased the cost o f groundwater for tube wel l owners and purchasers in groundwater markets. The l o w efficiency o f pumps also contributes to high operating costs.

L o w prices o f energy (electricity and fuel), which remained in place until pr ic ing reforms in the

4.9 Moreover, in part because o f successive droughts, water tables in Punjab, NWFP, and Baluchistan have receded, adding to costs o f pumping and contributing to reduced quality. Ali and Byerlee’s2’ decomposition o f crop sector productivity growth in Punjab from 1971-94 showed that o n average about half of the positive contribution o f technological change (cropping intensity and new crop varieties) and public investment (roads and literacy) was offset by soil and water quality degradation due to water-logging and salinity.

Access to Water and Agricultural Productivity

4.10 cultivation in to areas and seasons that lack sufficient rainfall for agriculture. However, the public irrigation systems do not provide farmers with adequate water or enough control over irrigation deliveries to meet the demands o f more input-intensive green revolution technology and increasing population pressure. Moreover, problems with operation and maintenance o f the canal systems have led to increased water losses in the channels, but n o allowances for these water losses are made in the water rotation system .

Surface Water. The development o f surface irrigation in Pakistan permitted the extension o f

4.1 1 Since the time o f the British Raj in Pakistan, access to surface water has been tied with land ownership. Canal water i s distributed to each acre o n a water course according to rotation system (warabandi), with each land owner or til ler o f land allotted a turn to use water f low in the canal at a specified time every seven to ten days (depending o n the geography o f the water course). The access to water i s l imi ted to a farmer who owns land in a water course command area and the time allotted to each turn i s directly proportional to size o f holding, irrespective o f the cropping pattern. The duration varies f rom 20 to 30 minutes per acre. This distribution system was designed for cropping intensi ty o f 70 percent, but the existing cropping intensity is126 percent (Government o f Pakistan 2002). As a result, tail-end distributaries and watercourses do not receive enough canal water for the current cropping intensity, and delivery schedules are unreliable in many areas.30

4.12 Water charges are assessed on the bases o f crop land, the relative burden o f payable water rates per canal command area i s essentially determined by the intensity o f cropping. Water rates vary by crop, and there i s systematic relationship between water rates and water requirements for various crops. For example, water charges for rice, wheat and sugar cane are Rs. 2.0, Rs. 3.0 and Rs 2.0 per acre inch. The present level and structure o f water charges constitute only a small fraction o f cash production cost and net farm incomes (varying from 8 percent to 26 percent o f total cash costs).31 Thus there i s considerable scope for increases in water charges to farmers to cover the operation and maintenance o f the irrigation systems.

29 Productivity Growth and Resource Degradation in Pakistan’s Punjab: A Decomposition Analysis; Mubarik Ali and Derek Byerlee; World Bank Policy Research Working Paper No. 2480; November 2000.

30 Monthly canal withdrawals vary from month to month depending upon the rainfall and decision o f the Indus River System Authority. The average monthly f low i s 4.7 MAF with a coefficient variation (CV) as 32 percent in Punjab, 3.9 MAF and C V as 5 1 percent in Sindh, 0.055 MAF and C V as 66 percent in NWFP, and 0.26 MAF and C V as 67 percent in Balochistan. (Monthly f low data for 1999; WB 2003, p.xx)

31 Z. Hussain, 2003.

28

4.13 Ownership of a plot within a watercourse command area confers access to irrigation water, but does not guarantee canal water availability. In particular, water availability decreases significantly i f the watercourse i s located near the ta i l o f the distributary or minor, and/or if the p lo t i s located near the tail end o f the watercourse (World Bank, 2002).

4.14 For example, in the Nara canal, an estimated 30-40 percent o f the water i s diverted through il legal direct o ~ t l e t s . ~ ’ Administrative reforms giving greater control to farmers as part o f the National Drainage Program (box 4.2) may help reduce these misappropriations o f water, however. In the command area covered by the Lef t Bank Area Water Board, where tail end farmers had not received water in three years, 48 illegal direct outlets serving an area o f about 25 thousand hectares were closed in early 2004.

Water theft by farmers upstream i s a major reason for water shortages faced by tail end farmers.

Box 4.2: Administrative Reforms in Canal Water Management

Within the framework o f the National Drainage Program, a package o f administrative reforms were to be implemented in one canal command in each province. These reforms consist primarily o f decentralization and management transfer o f the irrigation and drainage system to water users. In this comprehensive approach to Canal Management: i) federal agencies, notably the Water and Power Development Authority’s (WAPDA’s) Water Wing, are strengthened to better implement their federal responsibilities; ii) Provincial Irrigation and Drainage Authorities (PIDAs) are established with a certain degree o f autonomy to oversee and provide technical assistance to the transfer process as wel l as to agree o n water allocation and monitoring; iii) Area Water Boards (AWB) are established at the level o f a canal command to manage the transfer process at the canal and distributary level with the participation o f Farmers’ Organizations; iv) Farmer Organizations (FOs) are promoted to take over operations and maintenance at the watercourse level by permitting assessment, collection and retention o f the abiana; and v) development o f water markets and individual water property rights i s fostered. The degree o f implementation o f these administrative reforms has varied considerably across province. Altogether, only the Sindh Province has implemented the reform package and applied it to the Nara canal command area. Wh i le a thorough impact assessment o f the reforms in the Nara canal i s needed, init ial evidence suggest that this participatory irrigation management approach has resulted in increased efficiency, effective participation o f farmers in operations and maintenance as we l l as in decision making over the allocation of water, and reduction in water theft.

Source: World Bank 1997. Staff Appraisal Report: Pakistan National Drainage Program Project, April. Report No . 15310-PAK.

4.15 Even in the absence o f water theft, there i s a lack o f transparency in water allocation that derives largely f rom the lack o f participation o f farmers in water management decisions and the tendency o f the departments to centralize management decisions such as water allocation. Some farmers attempt to influence these water allocations at the local level through informal payments to officials and political pressure, however. Regression analysis shows that when the data are controlled for plot location, the availability o f canal water increases significantly where farmers reported informal

32 Manuel Cantijoch, Senior Water Resources Specialist, W o r l d Bank.

29

payments for water; where there i s less inequality o f land ownership, and where the land holdings o f the three largest cultivators on the watercourse i s high.33

4.16 According to PRHS (200 1-02) data, average farm sales/purchases o f canal water were only 5.5 hours, equal to only 2.7 percent o f canal water endowments, though in one district (N. Shah in Sindh), average farm sales/purchases were 25.6 hourdfarm, equivalent to 39 percent o f canal water endowments. Average non-market transactions were even smaller (5.2 hourdfarm, only 2.5 percent o f canal water endowment^).^^ The PRHS data apparently do n o capture informal canal water trading, however. According to a 2003 survey in central Punjab, few farmers buy or sell canal water (less than 6 percent) for cash, with the price o f canal water ranging from Rs 125 to 240 per percent o f the farmers at the head and middle o f distributaries, (and 50 percent o f farms at the tail) traded water.

Sales o f canal water are technically illegal, but limited sales and exchanges do take place.

In contrast, more than 80

Groundwater

4.17 conditions that affect the amount o f water in the Indus river, but because o f the uncertainties in distribution related to water misappropriation discussed above. Groundwater supply, in contrast, i s more reliable, and thus helps overcome water shortages, as wel l as improve irrigation timing. Largely for these reasons, groundwater use has expanded rapidly in Pakistan (World Bank, 2003a). In addition, until pricing reforms in the late 1990s, tube well irrigation was subsidized through l o w prices o f energy (electricity and fuel).

Availabil ity of canal water at the farm level varies significantly, not only because o f weather

4.18 The l o w efficiency o f pumps contributes to high operating costs. Moreover, in part because o f successive droughts, water tables in Punjab, NWFP, and Balochistan have receded, adding to costs o f pumping and contributing to reduced quality. Water quality i s also increasingly a problem in Sindh.

4.19 with l i t t l e systematic variation by income (proxied as total consumption). Even among the poorest 20 percent o f cultivating households, 5.1 percent owned tube wells; 1 1 .O percent o f the richest 20 percent of cultivating households owned tube wells. (p.86 WB 2002).

PRHS (2001/02) data indicate that only 8.1 percent o f cultivating households owned tube wells,

4.20 Groundwater markets significantly improve access to groundwater, particularly for small farmers, landless tenants and younger households who often lack the resources (or land and water rights) to install their own tube well. However, water purchasers do not have full access rights to the water, and are frequently denied access when water or energy supplies are scarce. Unreliabil ity o f access to purchased water was a problem for more than ha l f o f the water buyers in an IFPRI sample survey in 1993, limiting the productivity o f groundwater for p u r c h a ~ e r s . ~ ~

4.21 usually supply-driven. Farmers offer water for sale only after satisfying water needs o n their o w n fields. According to a 2003 survey in central Punjab, few farmers buy or sell canal water (less than 6 percent)

However, current informal water markets in Pakistan are fragmented and localized, and are

3 3 One reason for the positive correlation between larger landowners and water availabil ity i s that these cultivators are l ike ly to be able to lobby more effectively with irr igation officials and politicians. W o r l d Bank 2002, p. 90).

34 Anriquez and Valdes, 2004, p.8

35 Z. Hossain (2003).

36 Meinzen-Dick (1996).

30

for cash, with the price o f canal water ranging f rom Rs 125 to 240 per hour. In contrast, more than 80 percent o f the farmers at the head and middle o f distributaries, (and 50 percent o f farms at the tail) traded water. Tube well water sales are much more common: more than 90 percent o f farmers with tube wells sold tube well water, with the mean quantity sales o f 5 hours.

4.22 most o f the groundwater market areas. This type o f arrangements occurs under al l types o f tube wells. Water f rom diesel pump sets i s commonly sold under an arrangement whereby the buyer supplies the diesel and motor o i l for the pump and pays an additional fee per hour to the wel l owner to cover the wear and tear o n the engines. Share cropping contracts for water are used under both diesel and electric tube wells.

A f lat charge per hour o f pumping i s the most common form o f groundwater market contract in

4.23 higher prices o f water f rom PTO tube wells reflect the higher cost o f operating this type o f pump. The average price o f water under the hourly charge system i s approximately the same for diesel and electric tube wells, although the former are usually more expensive to operate. The mean hour ly cost o f water to the purchaser f rom diesel tube wells i s slightly higher under the buyer-brings-fuel system than under the flat hourly charge. Water sellers with diesel pumps are apparently only recovering their own operation and maintenance costs under either type o f contract. The seller’s transaction costs in acquiring the fuel and operating or supervising the operation o f the pump are presumably higher under the hour ly charge contracts but there may be reluctance to let some purchasers operate the pumps themselves under the buyer-brings-fuel system.

Prices under the hourly charge system depend on the pump type, capacity and location. The

Implications for Agricultural Productivity

4.24 be possible through shifts in cropping patterns induced by increasing the opportunity cost o f water to farmers. The average net income o f water for IRRI r ice in Punjab i s only Rs 47 /acre-inch o f water compared to Rs. 2 15 for cotton (table 4.2). The corresponding figures for Sindh are Rs 66 for IRFU rice and Rs 361 for cotton.37 Increases in the opportunity cost o f water for IRRI rice farmers through the opportunity to sell water rights could promote more efficient use o f water in IRRI r ice cultivation, as wel l as increase incentives and water availability for cultivation o f less water-intensive crops. Similarly, better allocation o f water could even bring about an increase in area cultivated in some regions. For example, because o f uncontrolled direct outlets in the Nara Canal in Sindh, the command area has increased by 30 percent, leaving large areas in the tail portion o f the canal without sufficient water.

Data o n water use and crop incomes suggest that large gains in average water productivity may

4.25 Crop yields o f rice and wheat are 1.3 to 1.5 times higher at the tai l o f canals than at the head; sugar cane yields are 1.9 times higher at the tail than at the head3* ,39

Increasing water availability to tail-end farmers could also have large effects o n productivity.

37 These data need to be interpreted cautiously since water quality and availabil ity o f supplemental tube w e l l irrigation vary within provinces. Moreover, during the kha r i f season, there are few alternatives to rice o n water- logged land.

38 National Agricultural Commission Report (1987), p. 289.

39 In contrast, econometric analysis o f survey data f r o m the early 1990s (Jacoby and Murgai, 1998) suggests that at a micro-level (within the boundaries o f a water course), there were only minor productivi ty losses to ta i l end farmers, Moreover, the expansion of private tube wells m a y have even further reduced the productivi ty differential between head and ta i l farmers.

31

Table 4.2 Returns to Irrigation of Major Crops, Pakistan 2002-2003

Gross ProvinceJCrops Revenue Total Cost Net Income Irrigation Water Net IncomebVater Use

Punjab Cotton Sugarcane Wheat Rice

Basmati Rice IRRI Rice

Sindh Cotton Sugarcane Wheat IRRI Rice

NWFP

Rs

15,093 25,425

9,000

13,395 9,387

13,554 37,181

8,325 10,374

Rs

11,658 15,622 6,130

5,722 6,405

6,333 21,375

6,913 6,140

Rs Use Acre Inches

3,434 9,802 2,569

16 64 16

7,622 64 2,98 1 64

7,220 20 15,806 64

1,412 16 4,234 64

Rs/acre inch

215 153 161

119 47

361 246

88 66

Sugarcane 32,199 211,163 11,036 64 172

Note: N e t income excludes irrigation cost.

Source: Agricultural Prices Commission (APCOM), Ministry o f Food, Agriculture and Livestock, Government o f Pakistan, Cost o f Production Studies, series 2002-2003

4.26 showed that groundwater has a higher impact on wheat yields than canal water, and that water markets that increased groundwater available to farmers who do not own tube wells clearly increased the level of agricultural productivity. Water f rom own wells was even more productive, most l ike ly because o f the less regular availability o f purchased water.40

Increased availability o f groundwater could have even greater effects. Meinzen-Dick (1996)

4.27 markets for tube well water markets do not function efficiently. Controlling for tube we l l availability, plots cultivated by tube well-owning households have a 15 to 17 percent higher uti l ization rate than do households without tube wells. I f tube wel l markets functioned efficiently, water sales would result in a smaller difference in water use between owners o f tube wells and buyers o f tube w e l l water. The estimated impact o n productivity i s very large and highly significant in the rabi season: ownership o f a tube well, controlling for access o f a p lo t to a tube wel l (whether owned or not) raises wheat yields by 30 percent and rabi season net revenues by 83 percent.41

Analysis o f PRHS 2002-03 data on groundwater use per acre at the p lo t level suggests that

Laws and Regulatory Framework for Water

4.28 measure water flows would enable farmers to maximize their incomes by allocating water according to

Efficient water markets, tradable water rights and physical infrastructure to transfer water and

40 Meinzen-Dick (1996).

41 Pakistan Poverty Report, 2002, pp. 99, 101.

32

i t s most optimal use (whether o n their own fields or sales to or purchases from other farmers). The current regulatory framework in Pakistan, however, impedes the development o f water markets.

4.29 whi le the Federal government i s responsible for regulation and development o f inter-state rivers and river valleys, provincial govemments are responsible for water supplies, irrigation and canals, drainage and embankments, and water storage . Nonetheless, the power o f the provinces has emerged as pre- eminent and water has come to be perceived as a provincial subject.

Pakistani L a w treats al l surface water as provincial property. Under the Pakistan Constitution,

4.30 basins (including the Indus basin) extend across province boundaries. In the absence o f legal clarity o n what individual provincial shares are, each province has argued for as large a share as possible. It i s therefore important to introduce necessary legal arrangements to facilitate the management o f surface water on a r iver basin basis, before formal water markets can be introduced. Government has constituted the Indus River System Authority (IRSA) which decides inter-provincial allocation water based o n the Water Accord o f 1991. But, disputes are quite common among the provinces, and allocations are s t i l l made on the basis o f historical distributions o f water.

This has serious ramifications for inter-provincial water development and allocation, since

4.3 1 Individual usufructuary rights for surface water are not clearly defined, however, as the legislation has failed to devise a system for providing secure, defensible and enforceable surface water rights. Unless surface water rights are better clarified and in favor o f individuals, confl ict and lit igation will grow in the future and formal water markets will not be possible.

4.32 Separating rights to groundwater f rom rights to land i s another necessary step for groundwater market developments. According to the riparian allocation o f water in Pakistan, ownership o f groundwater belongs to the owner o f the land above. By virtue o f these laws, groundwater i s “attached land property” and cannot be transferred separately f rom the land to which it i s attached. This has l imited the potential for inter-sectoral allocation. For instance, a local municipal committee or council i s not authorized to have access to groundwater f rom the neighboring farms without buying their land. T o establish an active formal water market, rights to water use must be separated f rom land for alternative use.

4.33 users. The lack of these limits, coupled with tying land rights with water rights, has serious equity implications, because it allows larger farmers with higher pumping capacity and deeper tube wells to have a disproportionate claim over water than others. Establishment o f withdrawal limits would also promote efficient water use. In addition, an efficient market requires the pr ior existence o f an effective legal institution of property rights, establishing the init ial resource endowments o f individuals. There i s therefore a need to specify water withdrawal limits by individuals in volumetric terms. Finally, ecological sustainability requires that collective withdrawal limits keeping in v iew the annual recharge,

Finally, existing laws place n o quantitative limits o n groundwater withdrawal by individual

V. RURAL LABOR MARKETS

5.1 demand constraints, rather than supply constraints, as evidenced by substantial underemployment. Compared to land and water, labor i s much more mobile across sectors, and labor migration between regions and between rural and urban areas helps link labor markets across the country. Incomes f rom labor are a major source o f incomes for the rural poor, who often lack sufficient access to land and water. Nonetheless, l o w levels o f educational attainment, lack o f marketable skil ls, l o w female participation rates, and ineffective enforcement o f laws regarding chi ld and bonded labor, a l l contribute to l o w productivity o f labor and reduced labor earnings.

Unl ike the markets for land and water, rural labor markets are generally characterized by

Structure o f L a b o r Use

5.2 2002-03). Of this total, 29.82 mi l l ion (29 percent) participated in the labor force in work other than household work. Counting only population age 15 and above, the labor force participation rate was 50 percent (table 5.1). Reported unemployment i s l o w (5.7 percent in 1997-98), reflecting the predominance o f informal sector and self-employment in the labor market. Estimated underemployment (defined as employment less than 3 5 hours per week) i s considerably higher, however (16 percent, according to the 1999-2000 Labor Force Survey).

Two-thirds o f Palustan’s population l ive in rural areas (100.6 mi l l ion out o f 149.0 mi l l ion, in

5.3 Aggregate labor force participation rates have changed litt le over time, though official figures for unemployment rates doubled from 3-4 percent in the mid-1980s to 7-8 percent in 2002-03 (table 5.2). Reported underemployment rates have also increased, but at a lesser pace. Underemployment in rural areas rose f rom 12 percent in 1985-86 to 16 percent in 1999-2000. The highest rates were found in NWFP (21 percent), and the lowest in Balochistan and Sindh (12 and 11 percent, respectively).

5.4 employed or actively seeking employment, as compared to only 16 percent o f women in the same age group, Including housekeeping and other related activities as employment raises the calculated participation rate o f women age 15 years or greater to 50 percent. These l o w female participation rates in part reflect cultural norms and individual preferences. Nonetheless, various studies have found that females’ decisions to participate in the labor market are significantly influenced by household income, family size, educational attainment, and the market wage rate.

Participation rates vary sharply by gender: 85 percent o f men age 15 years or greater are

34

Table 5.1 Pakistan Rura l Labor Force, 1998 (thousands)

Male Female Total

Population

Working Age Population

Labor Force (age 10-14 years)

(age 15+ years)

Total (age IO+ years)

Participation Rate (age 10-14 years) (age 15+ years) (age 1 O+ years) Total Population

Employed Labor Force

Unemployed Labor Force

43,830

29,640 51.5%

51.3%

1,015 72.2% 19,733 85.3%

20,748 84.5%

17.2% 83.1% 70.0% 47.3%

19,812 85.5%

936

41,233

28,099 48.5%

48.7%

392 27.8% 3,407 14.7%

15.5%

7.6% 14.8% 13.5% 9.2%

3,799

3,349 14.5%

451

85,063 100.0%

57,739 100.0%

1,407 100.0% 23,141 100.0%

100.0%

12.7% 49.6% 42.5% 28.9%

24,548

23,161 100.0%

1,387

Unemployment Rate (97-98) 4.5% 11.9% 5.7%

Source: Pakistan Population Census and Labor Force Surveys. Total unemployment rate f r o m Table 12.9 Pakistan Economic Survey 1999-2000.

1999-00 I 39.84 I 28.03 I 28.97 I 29.82 I 7.82 I 6.94 I 13.64 1 16.08 2002-03 I 42.38 I 29.82 I 28.97 I 29.82 I 7.82 I 6.94 I

I I Source: Labor force survey (various issues), Government o f Pakistan

5.5 Education levels o f the rural labor force are low, but have improved over time. In the late 1960s, 75 percent of employed people in Pakistan were illiterate. By 200 1-02 this percentage had declined to 53 percent overall, and 62 percent in rural areas [HIES (2001-02)]. Econometric analysis indicates that an education i s positively correlated with the probability o f rural-urban migration, labor productivity in the non-farm sector, and female labor force participation. Higher education i s also positively correlated with unemployment, as skilled workers who cannot find jobs in their fields often

35

Agriculture, forestry, hunting and fishing Manufacturing Construction Wholesale, retailitradelrestaurantsihotels

Community, social and personal services

Total

choose to remain unemployed rather than take unskilled labor positions. For example, in 1999-00, among total unemployed in rural areas, 61 percent were literate. Moreover, higher education i s correlated with increased rural household incomes. For the average producing farm household, another year o f education translates into a 13% increase in yearly net revenues (Annex 2; Anriquez and Valdes, 2004).

Proportion in total underemployed

Proportion in total employed

63 15 8 14 12 47 4 10

11 24

100 17

Sectoral Composition o f Labor Use

5.6 activities), main ly own-family labor. There are significant variations across provinces, however. Agriculture1 accounts for 74 percent o f rural employment in Sindh, but only 54 percent o f rural employment in NWFP, where the shares o f trade, transport and other services are higher than the national average (table 5.3).

The agricultural sector accounts for two-thirds o f rural employment (excluding household

Table 5.3 Percentage distribution o f rural employed persons by major sectors and provinces (1999-00)

Source: Labor force survey (1999-00), Government o f Pakistan

5.7 Overall, 15 percent o f people employed in agriculture were underemployed, accounting for 63 percent o f the total number o f underemployed persons (table 5.4). Nearly h a l f o f the people employed in construction were underemployed. Underemployment in service sectors (not including trade, restaurants and hotels) was 24 percent.

Table 5.4 Underemployment rates by Occupation (1999-00)

~

Source: Labor Force Survey (1999-00), Government o f Pakistan

36

5.8 educated members o f a household are more l ikely to take paid farm jobs, although marriage t i l t s this choice towards married men and away from married women. However, as the individual level o f schooling increases, heishe becomes less l ikely to work in paid farm employment and more l ike ly to work in non-farm jobs. Remittances in general tend to reduce participation in paid-farm jobs but have n o significant effect on non-farm employment.

Econometric analysis o f the 2001 Labor Force Survey data (Annex 5.1) suggests that the more

5.9 Foreign remittances (which are typically large relative to local wages) tend to reduce participation in non-farm employment. This finding i s consistent with Adams (1 998) report o n the use of foreign remittances by rural households. H e finds that foreign remittances tend to be invested in physical assets, suggesting that households that receive foreign remittances can increase labor productivity in own-farm or family enterprises.

Trends In Wages

5.10 percent per year f rom 1984 to 1994, indicating long t e r m tightening o f the labor market. Likewise, real wage rates of construction laborers increased by 1.1 percent over the same period. Mos t o f the increases in real wage rates took place in the 1980s, however. The trends in the 1990s, however, indicate l itt le gains in real wages. F rom 199 1-97, real wage rates o f casual agricultural laborers grew by an average o f 0.8 percent per year, while real wage rates o f regular agricultural workers fe l l by 2.4 percent per year. Likewise, real wage rates o f construction laborers grew by only 0.4 percent per year from 199 1-97 and for the 199 1-2002 as a whole, fe l l by 0.4 percent per year.

Real wage rates o f both regular and casual agricultural workers increased by an average o f 1 .O

5.1 1 slower but s t i l l positive per capita agricultural growth. As i s discussed in chapter 7, the structure o f land distribution and total agricultural earnings may partly explain why agricultural growth did not lead to increased or at least approximately constant real wages. The smaller rate o f decline o f real wages for construction laborers suggests that lack o f labor mobi l i ty between sectors and between rural and urban regions hinder integration o f non-agricultural and agricultural labor markets (table 5.5 and figure 5.1).

The decline in real wages in the agricultural sector in the 1990s coincides with a period o f

Table 5.5 Growth in Real Wage Rates in Pakistan, 1984-2002

Agricultural Construction

Regular Casual Carpenter Laborer 1 984-9 1 3.27 1.46 0.62 1.64 1991 -97 -2.39 0.84 -1.70 0.37

1984-97 0.95 0.99 -0.34 1.12 1991 -2002 n.a. n.a. -1.49 -0.44

Note: Real wages are calculated using the national Consumer Price Index.

Sources: Government o f Pakistan (various issues). Mon th l y Statistical Bul let in. Federal Bureau o f Statistics. Pakistan Economic Survey (2002-03).

37

2 ::: - 2 110 -

2 9 0 -

2

N

0 0 C5 7 0 -

50 -

Figure 5.1 Real Wages in Pakistan: 1984-2002 Employment Contracts I n Agricultural And Non-Agricultural Sectors

;

5.12 agricultural labor force; tenant farmers accounted for another 25 percent. The shares o f permanent and casual hired workers were only 2 and 0.8 percent, respectively. Casual labor i s usually employed only in periods o f peak labor demand for seasonal activities such as transplanting (paddy) and h a r ~ e s t i n g . ~ ~ Moreover, the use of casual labor has declined across farm size as wel l as different tenurial categories.

According to the 1990 Agricultural Census, family workers accounted for 72 percent o f the

5.13 casual, piece rate, unpaid family helpers and self-employed. Wage workers are the dominant type o f laborers (65 percent of rural non-farm employment in the 1999-2000 Labor Force Survey); sel f - employed and unpaid family labor account for only 33 percent o f rural non-farm employment.

In the rural non-farm sector, contractual arrangements take many forms: permanent, f ixed term,

5.14 The technology used i s generally highly labor-intensive (Sayeed and Ali, 1998). Only 7 percent o f these informal sector employees in 1999-2000 were female.

Most o f the employment i s in the informal sector (68 percent) and involves low-skil led jobs.

5.15 The other third o f the non-farm labor force i s employed by the formal sector (registered firms), under either a permanent or fixed-term contract basis43, All labor laws are applicable to permanent labor. Contract workers, o n the other hand, are recruited through a contractor for a specific t ime period, and are usually paid per amount o f time worked (monthly, weekly or daily) by the contractor. The contractor, in turn has entered into an informal arrangement with the employers for provision o f labor

42 Fafchamps and Quisumbing (1989) reported that 91 percent o f kha r i f (monsoon season) farmers and 89 percent o f rab i (winter season) farmers in the districts sampled did not use any h i red labor. H i r e d labor, employed main ly at harvest time, accounts for 21.5 percent and 23.6 percent o f total labor for kha r i f and rabi, respectively. 43 Sayeed and Ali (1998) found that 25 percent o f the total employees were permanent workers in the manufacturing sector. A large majori ty (68 percent was concentrated in the large scale manufacturing. The proportion o f contractual workers in large scale manufacturing as percent o f total manufacturing employment was 32 percent. This indicates that informal sector manly consists o f contractual and casual labor.

3 8

for a pre-determined lump sum.44 These workers are not eligible for any o f the employment benefits that permanent workers have.

Labor Mobility and Migration

5.16 spite o f heavy transactions costs involved that limit the capability o f poor households to migrate. According to H IES (1998-99), 30 percent o f current urban residents are migrants. Among them, 41 percent moved f rom other urban areas and 59 percent moved f rom rural areas. Migrant households are also found in rural areas, though to a lesser extent. Nearly 14 percent o f rural households are migrants. Rural to rural migration (8 1 percent o f rural migrants) far outnumber urban to rural migrants (1 9 percent o f migrants).

Considerable rural-urban migration has taken place in Pakistan in the past several decades, in

5.17 determinants o f m i g r a t i ~ n . ~ ’ 45 percent o f rural to urban migrant heads o f households migrated in order to find jobs and 9 percent for the purpose o f business. The majority o f these migrant workers are employed as l ow- or unshl led wage workers. Age, education, and employment status are major determining factors o f rural-urban migration (Akram, 2000). In particular, unpaid fami ly helpers are more l ikely to move from one rural area to another rural area, whereas, employers and employees move towards urban centers.

The available literature o n migration indicates that age and education are important

5.18 accounting for 9 percent o f total rural household incomes (HIES, 2001-02 data). Foreign remittances tend to be used for the accumulation o f land, and domestic remittances have a positive and significant effect on the accumulation o f agricultural capital (Adams, 1996).

In rura l areas o f Pakistan, domestic and foreign remittances are important source o f income,

5.19 in case o f extreme distress. They however have the opportunity to reallocate their labor towards other sources o f income, such as, non-farm activities, particularly i f they acquire education. According to Fafchamps and Quisumbing (1 998), one additional year o f schooling for an adult males raises household incomes by 4.5 percent. One-fifth o f this additional income was achieved by reallocating labor away f rom farming and toward non-farm work. Kurosaki and Khan (2003) found similar results for NWFP, Palustan. Wages and productivity in the non-farm sector rise at an increasing rate with education, whereas non-agricultural workers were found responsive only to primary education.

Since migration incurs some cost, poorer households may not be able to afford to migrate, even

Gender Issues

5.20 South Asia: 11 percent in 1999-00 (Table 5.6). Participation rates vary substantially by province f rom only 3 percent in Balochistan to 15 percent in Punjab. Including unpaid family labor, however, participation rates increase to 34 percent nationally, and are much more uni form across province, ranging from 3 1 percent in Balochistan to 41 percent in NWFP. Female labor force participation rates are generally lower for younger women, because o f household responsibilities and cultural and fami ly norms (Arif and Sheikh, 2002).Reported unemployment rates are very high in NWFP and Balochistan (3 1 and 44 percent, respectively).

Female labor force participation in Pakistan for activities outside the home i s the lowest in

44

45

See Sayeed and Ali (1998) and FES (1993).

See Adams (1996) and Qureshi and Arif (1999).

39

Table 5.6 Female Labor Force Participation and Unemployment in Pakistan, 1999-2000

Labor force Improved participation Unemployment Underemployment participation rate rate *

Pakistan 10.7 Punj ab 13.2 Sindh 6.0 N W F P 8.4 Balochistan 3 .O

34.3 14.0 6.9 32.7 10.9 8.5 34.4 11.0 2.6 40.9 31.2 6.5 3 1.4 44.2 3.1

Source; Labor Force Survey (1999-00) Notes: *According to the old methodology persons 10 years o f age and above reporting housekeeping and other

related activities are considered out o f labor force. However, as per improved methodology, they are identified as employed if they have spent time on one o f fourteen specified home-based agricultural and non-agricultural activities.

5.21 strong social and cultural values adopted by the household. Economic factors play a significant, though smaller role, Numerous studies have shown that women’s decisions to participate in the labor market are significantly determined by family structure, relationship with the head o f the households, fami ly size, educational attainment, household income and the market wage rate.46 Chaudhry and K h a n (1 987) observed a negative association o f income class and presence o f male earner, and positive effect o f educational attainment on the probability o f participating in income generating activities. Sultana, Nazli, and M a l i k (1994) get similar results when they divide total time into market production leisure and home production. These studies stress the need o f expanding the opportunities and access to educational and training institutions in addition to opening up more vacancies particularly for women.

In Pakistan, women’s decisions to participate in the labor force are greatly influenced by the

5.22 in agriculture. Major agricultural activities include land preparation, seed preparation, collecting farm yard manure, weeding and harvesting, as we l l as cleaning, drying, and storage o f grains. Rural women also usually take care o f household livestock -- collecting fodder, cleaning sheds and processing animal product^.^'.

According to the 1999-2000 Labor Force Survey, 87 percent o f working females were engaged

5.23 L imi ted access to health, education, vocational training and credit facilities constrain women’s opportunities for non-agricultural wage labor and especially white collar jobs. Community, social and personal services (6 percent o f total employment) and manufacturing (5 percent o f total employment) accounted for most o f the remaining employment. Out o f total working women, only 1 percent were employed as professionals and 0.27 percent worked in administrative and managerial positions. This lack o f opportunity for non-agricultural employment, together with the very l o w labor force participation rate, imply a considerable loss o f productivity for the Pakistan economy.

46

and Raza (1991); Kazi and Bilquees (1992); Sathar and Lloyds (1993); and Sathar and Desai (1996).

47 See Khan and Bilquees (1976); Ahmad, Asghar and Khan (1993); and Sarwar and Saleem (1993).

See Cox-Edwards (2004), Alderman and Chishti (1989); Kozal and Alderman (1990); Hamid (1991); Kaz i

40

Child Labor

5.24 Chi ld labor i s widespread in rural Pakistan.48 According to the 1999-2000 Labor Force Survey, 10.9 percent o f children age 10-14 participated in the labor force. Labor force participation was much higher for boys (18.3 percent) than for girls (2.8 percent). In rural areas, 21.7 percent o fboys age 10-14 were involved in the labor force, compared with only 2.7 percent o f girls (figure 5.2).

Figure 5.2 Child Labor in Pakistan, 1999-2000

25

.= 20 2 '0 f 15 0 0

al

+ E 10

B g 5

0

Boys

Total Rural Urban I Note: Data are for children ages 10-14. Source: Labor Force Survey, 1999-2000.

5.25 present a similar picture. An estimated 8.3 percent o f the 40 mi l l ion children 5-14 years o ld were working. More than 500 thousand o f these children were 5 to 9 years o ld (2.7 percent o f this age group). In rural areas, 10.3 percent o f children were working, including 3.4 percent o f children f rom 5- 9 years old. Most children that work in Pakistan do not attend school: only 28 percent o f the working children were enrolled in schools (equal to about 7 percent o f the total rural population age 5-14).

Data f rom the 1996 Federal Bureau o f StatisticsiILO-IPEC nation-wide survey o n chi ld labor

5 -26 Chi ld labor force participation rates varied substantially across province, however (figure 5.3). Participation rates for rural boys 5-14 ranged f rom 1.2 percent in Balochistan to 23.0 percent in NWFP. In rural NWFP, 9.4 percent o f boys aged 5-9 worked during the week previous to the survey; compared to a national rural average o f 3.7 percent o f boys.

5.27 worked in family enterprises. Many farm households prefer to use own fami ly labor, even at the cost o f their children's education (Box 5.1).

Among rural children across Pakistan, 74 percent o f those who participated in the labor force

48 Grootaert and Kanbur (1995) identify two extremes to define child labor. One in which al l non-educational, non-leisure time o f children i s counted as child labor, and the other which takes into account only the fill-time employment in economic activities o f the children.

41

Box 5.1: Child Labor in Rural Pakistan Contrary to conventional wisdom, chi ld labor i s not confined only to very poor households. Using household survey data for Pakistan and Ghana, Bhalotra and Heady (2001), show that the children o f landowners are less l ikely to be in school than the children o f poor-landless households. They compared the landless with three different categories o f farmers: marginal (with less than 0.4 hectares), small (0.4 to 1.2 hectares) and large (above 1.2 hectares). They found a positive and significant association between size of land and the l ikel ihood o f children working. This “paradox” arises because fa rm owners may feel it dif f icult to supervise the hired labor, especially in apcu l tu re , so they prefer to employ their own children, even at the cost of the children’s education. Yaqub (2002) confirms these findings by describing the tale o f two farmers. “Ghulam Ahmed i s a wealthy farmer w i t h 2.8 hectares in Karimo Habib H a j i village in the Charsadda district, some 60 kilometers f r o m Peshawar in Nor th West Frontier Province (NWFP). H e grows tobacco, wheat, maize and sugarcane. Tobacco harvesting, though, i s hard work and his children are vital in helping out. H i s elder sons stay at home and help him. H e says that it i s always good to have family members work o n the land. By doing so one can keep away f rom the hassle o f hiring workers each season, spending extra money and supervising them. In contrast, Ajab Khan f rom nearby Mandani village, i s a landless farm laborer and a father o f four. Being landless, he can forgo his children’s labor in favor o f school. H e says that education i s the only wealth that he can give to his children for better future”

Sources: Yaqub, Nadeem (2002). “Child Labor - Not Only a Problem of Poverty”, Development and Cooperation (No. 1, JanuaryiFebruary 2002, p. 28).

Bhalotra, Sonia and Christopher Heady (2001). “Child Farm Labor: The Wealth Paradox”. Social Protection Discussion Paper Series. No. 125. September

Figure 5.3 Child Labor Force* Participation Rates by Province, Pakistan 1999-2000

20

2 15 h

8 0 L 2 10 v

5

0

I

* Children o f age 5-14 years. Source: Federal Bureau o f Statistics / ILO-IPEC 1996 C h l d Labor Survey,

42

Bonded Labor

5.28 worker i s required to provide w o r k at very low wages or must w o r k fo r the employer in order to p a y back debts at very high interest rates. Bonded labor persists in Pakistan because o f poverty, lack o f education, and lack o f access t o alternative sources o f credit o n the part o f the bonded laborers, as w e l l as the absence o f pol i t ical will o f local govemment of f ic ia ls in the enforcement o f exist ing legislat ion banning the practice (See b o x 5.2).

Bonded labor i s labor that i s t ied t o an employer in an exploitative relat ionship under w h i c h the

Box 5.2 Bonded Labor in Pakistan Bonded labor exists in various sectors and industries; for example, agriculture, carpet weaving, br ick- kilns, stone quarrying, hotels and restaurants and construction. Debt bondage i s the worst f o rm o f bonded labor, in which workers are bound to employers by debts owed to them as we l l as through , Because o f the lack o f assets, extremely l o w incomes and lack o f funds the poor who are generally landless tenants or laborers dependent o n the landlord o r employer for credit. Due to l o w repayment capacity, many o f these households continue to suffer f rom mounting debt and continuing bondage in the fo rm o f free labor for the landlord or employer. Labor bondage continues over generations. When adults grow o ld or are disabled, their children become liable for the debt. Similarly, when husbands die, the wives must j o i n other families to repay these debts. In i t s worst form, the bonded laborers are not al lowed to work at other places without the permission o f the landlord/employer. In some cases, women and children must remain resident o n the farm as ‘collateral’ for good behavior.

Religion, ethnicity and caste play major roles in determining the burden o f bonded labor. Non-Musl ims belonging to lower caste are the worst o f f fol lowed by Muslims belonging to lower castekribe. According to a report carried out by Australian consultants for the Government o f Sindh and the Asian Development Bank under the Sindh Rural Development Project: “There are some 1.7 m i l l i on landless agricultural workers (haris) and sharecroppers in five districts o f Sindh Province (Thatta, Dadu, Badin, Mirpurkhas and Umerkot). Most o f these people are in debt bondage. Whi le bonded labor exists throughout Sindh, the majori ty o f those bonded in the north belong to the Muslim majority, whi le most o f the bonded agricultural laborers in southern Sindh belong to dalit (untouchable) and to tribal communities who have migrated f rom the drought-prone area o f Tharparkar desert. Poverty and starvation have forced these communities to accept the landlords’ cash advances, and to be available for work f rom dawn to dusk. Bonded laborers may be detained or guarded to stop them escaping and in these situations o f total ownership rape o f women i s not uncommon” [Agrodev (2000)].

Many o f the bonded laborers work for no wages. The cost o f the food and clothing that they are provided i s added to their accumulated debt along with interest. Thus their debt, in fact, increases on a dai ly basis. Most o f the indebted poor are forced to provide begar (unpaid labor services). Traf f ick ing in bonded laborers i s a common practice. These bonded laborers are sold by one landlord to another, usually fo r a price higher than the debt they had with their previous landlord thereby increasing the overall debt.

Escaping f rom bondage has serious reprisals, including threats and kidnapping. Despite the Bondea Labor System (Abolition) Act, 1992 and the serious penalties it prescribes the pol i t ical and financial strength o f the landlords, especially in Sindh allows them to continue using bonded laborers with impunity.

Sources: Nazli (2003) and Agrodev (2000).

43

5.29 Data o n bonded labor i s scarce. Extreme cases o f exploitation o f laborers are reported by humanitarian and non-government organizations. Statistical evidence i s diff icult to obtain because o f the lack o f accurate data on household debts and terms o f repayment and employment in national surveys. Moreover, there i s no standard operational definition o f what constitutes bonded labor. Using data f rom the 1990 Agricultural Census, Ercelawn and Nauman (2000) calculated that 722 thousand share cropper households in Punjab and Sindh were in bondage, in the sense that they owed provided unpaid labor (begar) to their landlords. Of these households, 197 thousand households also owed debts to their landlords and were thus counted as being under debt bondage (equivalent to 17 percent o f the 1.13 mi l l ion landless tenant farmers in the two provinces and 1.5 percent o f the 13.27 mi l l ion rural h o u ~ e h o l d s ~ ~ ) . Debt bondage, so defined, was concentrated in Southem Punjab and northem Sindh, with six districts of Hyderabad division (Sindh) accounting for around 55,000 debt bonded sharecropper households.

5.30 Estimates o f bonded labor in Punjab province using data from the Agricultural Census 2000 are similar to those for 1990 (Ercelawn and Sohnia Ali, 2003). About 7 mil l ion persons had been required to undertake some form o f forced labor, and 50 thousand sharecroppers were in debt bondage (compared to an estimated 58 thousand in Punjab in 1990), with Multan, D. G. Khan and Bahawalpur divisions in southem Punjab accounting for ha l f o f sharecroppers in bondage. Thus, sharecroppers in debt bondage represented about 9 percent o f total landless tenant farmers in Punj ab.

5.3 1 exploitative labor and credit arrangements since some o f the debts incurred may simply reflect n o m a 1 extension o f credit by landlords to sharecroppers at approximate market interest rates. Further work i s needed to quantify the extent o f the problem.

These estimates o f the number o f bonded laborer households l ikely overstate the extent o f

5.32 1 mi l l ion br ick kiln workers in Punjab were also under debt bondage. A 2002 survey o f 300 landless laborers (haris) in Sindh and 300 br ick kiln workers in Punjab conducted by the Federal Bureau o f Statistics found that 73 percent o f the br ick kiln worker households are indebted, with 88 percent o f these getting loans from the employers. Moreover, the majority o f the indebted households (nearly 83 percent) have inherited their debt; 11 percent o f the indebted households pay both in cash and with labor and 10 percent o f the indebted households repay with labor only. One-third o f br ick kiln workers reported employer threats and violence. Workers with debts to the employer are often required prohibited f rom taking other jobs until the debt was repaid.”

Bonded labor i s not confined only to agriculture. Ercelawn and Nauman (2000) estimated that

Government Labor Policies

5.33 British. This legislation recognized the worker’s right to form trade unions, but with only with highly restricted rights to strike. According to the constitution, labor i s a ‘concurrent subject’, which means that it i s the responsibility o f both the federal and the provincial governments. Labor legislation i s usually enacted at the federal level, but the responsibility for enforcing it belongs to the provinces.

Pakistan’s labor legislation i s based on an elaborate institutional framework inherited f rom the

5.34 Ac t 1934; the Shops and Establishment Ordinance 1968; the West Pakistan Industrial and Commercial

The legislative framework for worker’s protection exists under four categories: the Factories

49 The figure for the number o f landless tenant households i s calculated f r o m H I E S 2001-02 data. 50 Similar results were found in a rapid assessment survey by an NGO (PILER) o f over 100 br ick kilns around the urban and peri-urban areas o f the districts o f Hyderabad, Multan, Lahore, Rawalpindi, Peshawar and Haripur during October to December 2002.

44

Employment (Standing Orders) Ordinance 1968; and the Industrial Relations Ordinance 1969. These laws are, however, not applicable on the agricultural sector51.

5.35 reality, occupancy rights do not exist and al l the tenants are ‘tenants at will’ without any occupancy rights -- they can be evicted by the landlord at anytime. Even among the titled tenants, the land occupancy rights essentially belong to the male head o f household.

There are, however, various tenancy laws that are applicable only to the ‘t it le tenants’52, In

5.36 Pakistan has a federal minimum wage for unskilled workers. I t applies only to industrial and commercial establishments employing 50 or more workers and i s determined by the National Minimum Wage Commission and requires approval by the Parliament. The minimum wage for skilled workers, however, i s set by the provinces. Minimum wages practically apply only to workers in the formal sector and do not affect agricultural workers. Labor law, applicable nationally, but only to f i r m s with 10 or more workers, provides for a maximum work week o f 54 hours for seasonal factories and a maximum work week o f 48 hours for other industrial workers, as wel l as for rest periods during the workday. Some non-wage benefits include official government holidays, overtime pay, annual and sick leave, health and safety standards in the workplace, health care, workers’ children education, social security, employees o ld age benefits, and a workers welfare fund.

5.37 conditions in rural areas, but they do have a significant effect in the dynamics o f employment creation in urban areas and thus influence incentives for rural-urban migration and rural labor markets. Employment growth in urban areas has been slow, in part because o f an atmosphere o f mutual hosti l i ty and distrust that typify industrial relations. In particular, the unusually high degree o f discretion over conditions o f employment o f regular workers in specific establishments held by provincial authorities i s not conducive to cooperation between employers and workers. Replacing the discretion o f authorities o n the specific nature o f labor contracts by a few rules o n the most common aspects o f these contracts (minimum age, minimum wage, overtime pay) and the establishment o f procedures to help deal with possible disputes arising f rom voluntarily agreed contracts regarding more detailed aspects o f these contracts would help build trust in the industrial relation process, and encourage employers to create jobs and invest in human capital.

Labor regulations (that mainly apply only to urban areas) do not directly alter employment

5.38 wage labor i s often recruited indirectly through contractors and denied even basic labor rights relating to working hours, minimum wages and working conditions.

Wage labor in agriculture sector, however, i s not covered by any legal framework. Agricultural

5.39 there exists a law, “the Bonded Labor Abol i t ion A c t 1992” that prohibits the use o f bonded labor, the practice not only continues but i s even defended by landlords.53 The Government o f Pakistan adopted a National Policy and Plan o f Act ion for the Abol i t ion o f Bonded Labor and Rehabilitation o f Freed Bonded Laborers in 2001. The ILO Headquarters in Geneva has also developed a programme o n

Although Article 11 o f the Constitution o f Pakistan prohibits slavery and forced labor, and

51 Agriculture does not come under the classification o f industrial, commercial or services sector. therefore none of these laws are applied to this sector.

52 Those with legally recognized occupancy rights.

53 The situation o f bonded laborers in Sindh has deteriorated further, especially when the High Court o f Sindh dismissed 94 petitions for the release o f bonded laborers o n 9 January 2002. the court declares that these were disputes between landlords and haris over debts and should be settled under the Sindh Tenancy Act 1950. However, the Court made n o reference to the Bonded Labor Abolition Act 1992 which should take precedence in this matter and would require the loans to be null i f ied and the bonded laborers to be freed.

45

bonded labor fo r Pakistan under their Special Act ion Programme to Combat Forced Labor. This programme i s t o be implemented to support the National Policy and Plan o f Act ion for Bonded Labor, The preparatory phase o f the ILO programme was initiated in July 2002.

VI. RURAL CREDIT MARKETS

6.1 productive uses i s l imited by the immobility or high transport costs o f the factors, themselves. In contrast, financial flows through credit markets face extremely l o w physical transactions costs, (though once invested, the capital goods themselves, such as tractors and storage facilities, may be less mobile). In rural Pakistan however, poor households are often credit-constrained. In formal markets, access to credit i s generally limited to landowners, since land i s the main form o f acceptable collateral for loans. Access to credit in informal markets, particularly supplier’s and consumer’s credit i s more widespread, yet approximately 40 percent o f rural households are credit constrained.

The extent to which markets for land, water and labor can allocate these factors to their most

Structure of Rural Credit Markets

6.2 Formal sector banking in Pakistan i s largely urban based. Advances to the rural sector accounted for only 3.5 per cent o f advances to the urban sector in 200 1-02. Similarly, rural deposits for the one year (1 999-00) for which comparable numbers are available are about 28 percent o f urban deposits (table 6.1). The data imply a ne t outflow o f financial funds f rom the rural formal financial sector o f Rs (2001-02) 128 b i l l ion in 1999-2000, though investments in rural non-farm activities may not be consistently shown in the rural advances figures.

Table 6.1 Formal Sector Banking (bn 2000-01 Rupees) ~~

Rural Urban Year Deposits Advances Deposits Advances 1996-97 24.18 482.86 1997-98 38.37 566.89 1998-99 46.52 582.66 1999-00 169.87 41 -92 614.22 645.93 2000-01 44.79 628.72 200 1-02 50.12 1426.13

Source: Economic Surveys o f Pakistan (2002-03); values deflated with GDP deflator.

6.3 The Zarai Taraqiati Bank Ltd. (ZTBL), (formerly the Agriculture Development Bank o f Pakistans4), commercial banks, the Federal Banks for Cooperatives (FBC’s) and other financial institutions are the major sources o f formal credit in Pakistan. Informal credit, (including loans in cash or kind) derives f rom friends and relatives, commission agents, input dealers, professional moneylenders and landlords. Survey data f rom 1995-96 (the most recent year for which such data are available) indicate that informal sector credit i s nearly three times as large as formal credit in rural Palustan, accounting for about 72 percent o f total rural credit (table 6.2). Assuming that formal credit s t i l l accounted for 28 percent o f total rural credit, lending by the ADBP/ZTBL (equal to nearly 60 percent o f formal rural credit disbursed), accounted for only about 15 percent o f total rural credit in 2001-02. Commercial banks accounted for only about 9 percent o f rural credit in 2001-02; but has increased rapidly since that time and exceeded ADBP/ZTBL lending in the third quarter o f 2003-04. Cooperatives and private banks, together, accounted for less than 3 percent o f total rural credit in 2001 02.

54 The Agricultural Development Bank o f Pakistan (ADBP) was renamed the Zarai Taraqiati Bank in 2002.

47

Table 6.2 Sources o f Credit in Pakistan, 2001-02 _ _ _ _ ~

Amount Type of credit (bn Rs) Share formal Share rural

Urban (formal) 1,492.4 96.6% n.a. Rural (formal) 52.4 3.4% 28.0%

ADBP/ZTBL 29.1 1.9% 15.5% Domestic Private Banks 0.6 .. , 0.3% Cooperatives 5.3 0.3% 2.8% Commercial Banks 17.5 1.1% 9.3%

Rural (informal)a 134.9 n.a 72.0%

Total (formal) 1,544.8 100.0% n.a.

Total (rural) 187.3 n.a. 100.0% a Calculated using the share o f informal credit in total rural credit (72%) in 1995-96. n.a. denotes not available. . . . denotes less than 0.1%. Source: Economic Survey o f Pakistan 2002-03 and Rural Credit Survey 1996.

6.4 Thus, the rural credit market in Pakistan continues to be dominated by informal sources o f lending. Borrowing f rom informal sources i s comparatively easy in terms o f access, procedures and collateral requirements. This translates into l o w transaction costs. Furthermore, unlike institutional credit, for which credit i s available i s for only l imi ted purposes, non-institutional credit i s available for a wide variety o f purposes including consumption, social ceremonies and other non- productive purposes

Historical Trends

6.5 by the government and as co-operative credit by the co-operative societies. In order to reduce the dependence on informal sources, two specialized institutions i.e. Agricultural Development Finance Corporation and Agricultural Bank were established in the 1950s. These were later merged to form the ADBP in 1961.

Prior to 1947, institutional credit in rural areas was mainly provided as taccavi (distress) loans

6.6 With the increasing use o f fertilizer, pesticides, improved seeds, and mechanization, credit requirements o f the agricultural sector have increased considerably over time. F r o m 1972 to 2001, institutional agricultural credit grew at an annual rate o f 15 percent. Formal ADBP loans, the major source o f formal credit, grew at over 17 per cent per annum during this period. Credit f rom commercial banks and cooperatives grew at 1 1 and 15 percent per year, respectively.

6.7 Growth o f formal sector credit has varied considerable over the last three decades, however, as a result o f major pol icy shi f ts. Formal agricultural lending quadrupled in real termss5 between 1978-79 (Rs 12.3 billion) and 1986-87 (Rs 51.7 billion), due mainly to a large expansion in govemment- supported, subsidized production lending by the commercial banks. At i t s height in 1986-87, subsidized credit through commercial banks was the major source o f rural formal sector lending (figure 6.1). Commercial bank loans declined dramatically thereafter, after the discontinuation o f this subsidized credit scheme, however, fall ing in real terms f rom 23.8 to 8.6 (2000-01) b i l l i on rupees between 1986-87 and 1988-89.

55 . . Billions o f 2000-01 rupees.

48

6.8 Window Operation initiated in 1997 streamlined the application, processing and disbursal o f loans, particularly for small farmers. Access to ADBP/ZTBL loans was also increased through a reduction in the minimum requirements o f land from 12.5 acres to 5.0 acres in 2000. Territorial restrictions on commercial bank lending operations were removed, as well.

Total formal sector then stagnated until reforms in ADBP policies in the late 1990s. The One

6.9 ADBP/ZTBL and Federal Banks for Cooperatives f rom the State Bank o f Pakistan, rural formal sector credit increased by 107 percent in real terms f rom 1996-97 to 2001-02. The agricultural credit t o agricultural GDP (at current factor cost) rose f rom 4.9 percent during the 1990s to 7 percent in 2001-02. (See Box 6.1. and figure 6.1)

A s a result o f these policy reforms, and in spite o f an end to subsidized credit to the

Box 6.1 Recent Reforms in Formal Sector Agricultural Lending in Pakistan ~~

Zarai Taraqiati Bank Ltd. (formerly Agricultural DeveloDment Bank of Pakistan)

One Window Operation. The ADBP initiated the One Window Operation in 1997, simplifylng procedures for loans, in order to make credit facilities more easily accessible to small farmers. Under this operation, undertaken in collaboration with the Provincial Governments, Revenue Officials and Postal Authorities, focal point officials provide clients with Agnculture Pass Books on the spot and note land records in the pass books. The ADBP/ZTBL focal point officials are responsible for sanctioning loans (up to a maximum o f Rs 50,000), which are disbursed the following day from the concerned bank branch. Micro-credit. The ADBP initiated a micro credit scheme in July 2000, which targeted drought-affected farmers. This scheme encouraged the rural poor to engage in profitable commercial activities. Under this scheme potential borrowers could obtain a maximum o f Rs. 25,000 against a personal guarantee and a viable security. The range o f activities for which loans could be given was expanded to include 136 loan able items and funding was extended for 18 months at 16 percent per annum. Land requirements. In order to enhance the access o f small farmers to formal credit, ADBP reduced the requirement o f minimum 12.5 acres o f land to 5 acres o f land. Moreover, in view o f small land holdings in NWFP the loan limit of Rs. 50,000 for production loan was increased to Rs. 100,000 against personal security. ADBP also simplified the loan appraisal as well as the application forms.

State Bank of Pakistan (SBP)

Credit for agro-processing and marketing. The agricultural credit scheme has been extended to encompass the complete value chain o f agnculture ranging from inputs, production, storage and marketing to transport, processing and distribution. End to subsidized credit for agricultural lending. In October 2000, the provision o f subsidized credit facilities to ADBP/ZTBL and FBC was ended. The minimum average rate on T-bills has been set as the pricing criteria for all new credit lines to the ADBP/ZTBL and other financial institutions have been encouraged to lend their funds to ADBP/ZTBL. Relaxation of territorial limits to commercial banks. Prior to the reforms, SBP assigned territorial boundaries to commercial banks for lending purposes. Repealing this ru le was undertaken to increase competition among banks and give farmers a wider choice in terms o f selecting the potential lender. Revolving credit facility. Revolving credit was introduced to allow farmers to obtain fresh credit even i f they have not been able to repay outstanding loans. Formerly, banks could not sanction revolving credit facility for more than three years, particularly not to those farmers who had been unable to repay prior debts. Banks would also not demand fresh documents at each renewal.

Source: Malik, Sohail J. 2003b. Rural Credit Markets in Pakistan: Institutions and Constraints. Background paper

49

Figure 6.1 Growth o f Institutional Agricultural Credit (mn 2000-01 Rps)

60,000

50,000

40,000

30,000

20,000

10,000

0

- ADBP - CooperativedFBC --+s-. Commercial Banks T o t a l (Rs. Million)

Source: M a l i k (1996) and Economic Surveys (various issues)

6.10 (for fertilizer, pesticides, seeds and other production needs). Average size o f the 376 thousand product loans was Rs 61 thousand. The average development loans was nearly twice as large (Rs 120 thousand), with the 10,200 loans for tractors averaging Rs 275 thousand per loan, and accounting for 9.6 percent o f total lending (table 6.3).

Near ly 80 percent o f total lending by the ADBP/ZTBL in 2002-03 was for production loans

Table 6.3 Zarai Taraqiati Bank Ltd. (ADBPa) Lending, 2002-03 Value Average

Number of Loans Loan Size of Loans (mn Rs) Value Share ('000 Rs)

Total Disbursement 427471 29,270 100.0% 68

Production loans Fertilizer Pesticides Seeds Other production loans

Development loans Tractors Tube wells Dairy farming Other development loans

376,307 23,111 79.0% 170,215 11,121 38.0% 59,460 4,596 15.7%

139,174 6,652 22.7% 7,458 742 2.5%

61 65 77 48 99

51,164 6,160 21 .O% 120 10,203 2,802 9.6% 275 5,602 970 3.3% 173

26,527 1,162 4.0% 44 8,832 1,225 4.2% 139

Micro-credit 1,965 44 0.1% 22 a A D B P was renamed as Zarai Taraqiati Bank Ltd. in 2002. Source; Zarai Taraqiati Bank Ltd., viww.adb.or& (March 2004).

50

6.1 1 Institutional credit i s unequally distributed across provinces: in 1999-00, nearly 74 percent of the institutional credit was disbursed in Punjab, which accounts for only 59 percent o f the total rural population. The province o f N W F P with 16 percent o f the rural population received only 5 percent o f the institutional credit. Balochistan, which accounts for 6 percent o f rural population and where agriculture i s the major source o f l ivelihood received only 1.5 percent o f total institutional credit56. Sindh i s the on ly province where the share o f credit i s approximately equal to i t s share o f total rural population. On a per hectare basis, however, Sindh has the highest average disbursement (Rs 3,978 / hectare), fo l lowed by Punjab with Rs 2,890, N W F P (Rs 1458 / hectare) and Balochistan (Rs 937 / hectare).

6.12 position o f farmers in the respective province and their ability to provide acceptable collateral, (2) variations in the distribution o f land, (3) the track record or repayments, (4) traditional reliance on non-institutional sources, and (5) concentration o f agricultural activities [SBP (2002)l.

The wide variation in lending across provinces i s mainly attributable to: (1) the financial

Repayment o f Loans

6.13 achieved in the 1980s and 1990s. In 2001-02, nearly 71 percent o f the current dues were reportedly recovered (table 6.5). Recovery rates of commercial banks (86 percent) were higher than those of the ADBPiZTBL (68 percent). Recovery rates o f past due loans are substantially less (36 percent in 2000- 01 and 28 percent in 2001-02).

Loan recovery rates in the formal banking system are low, though substantially higher than

6.14 According to the State Bank o f Pakistan (SBP, 2002), net agriculture credit (disbursements less recovery) declined by Rs 1.0 b i l l ion during 2001-02, but the outstanding amount o f credit increased from Rs 93.4 b i l l ion at end-June FYOl to Rs 101.5 b i l l ion in FY02, because o f accrued interest o n past- due loans. With l o w recovery rates o f current and past-due loans, the outstanding stock o f agricultural debt will continue to grow, and will “ultimately restrict the banks’ capacity to meet the increasing credit demand from the rural sector”.

6.15 Given i t s l o w deposit base, ADBP/ZTBL i s increasingly dependent o n subsidies f rom the State Bank o f Pakistan. The relatively better performance o f commercial banks i s due mainly to their lending being based on their own deposits and higher recovery rates o n current and past due loans.

Structure o f Interest Rates

6.16 L i ke other developing countries the informal credit market in Pakistan also exhibits a large degree o f heterogeneity. The structure and operations differ f rom region to region. Furthermore, cultural and religious values prohibit the public admission o f charging an explicit interest rate. M u c h of the zero interest rate lending i s explained by impl ic i t mark-ups (for purchases o f goods and services), other tied transactions and co-insurance. These tied credit transactions account for a very large share o f total rural credit: data f rom the last national Rural Credit Survey (1985), suggest that 90 percent of rural informal credit carried n o explicit interest; the interest rate o n other loans averaged 22 percent, and the overall interest rate (both zero-interest and loans with interest) was 2.2 percent (Malik, 1999).

6.17 those in the formal sector (table 6.4), though peak interest rates in informal credit markets can be extremely high. For example, Irfan et a1 (1999) reported interest charges o f moneylenders in Punjab

Average interest rates in the informal sector have varied between 7 and 1 1 percent higher than

56 The coverage o f commercial banks in Balochistan i s extremely low.

51

ranging f rom 4 8 to 120 percent per year.” Such very high interest rates are often tied to the marketing o f crop.

Table 6.4 Pakistan: Interest Rates in Rural Credit Markets by Source

Year Formal Credit lnterest Rate Informal Credit lnterest Rate

15.3

ADBP 7.2 Money Lenders 18.5 Commercial banks 8.9 Land Owners 10.3

Average 8.2 Average

1985 Average 12.2 (5.7) Average 21.9 (2.2) ADBP 12.3 (9.6) Money Lenders 33.4 (31 5) Commercial banks 12.3 (2.6) Land Owners 22.8 (1.4)

1996 ADBP 14 Average 25

2004 ADBP/ZTBL 14 Micro-credit 16

Averages are for a l l sources, weighted by volume o f credit. Figures in parentheses are average o f interest-free and regular loans.

Sources; 1973 Pakistan Rural Credit Survey; 1985 Pakistan Rural Credit Survey M a l i k (1999), I r f an et. al. (1999), Zarai Taraqiati Bank Ltd., www.adb.org.pk (March 2004).

6.18 however. I r fan et. al. (1999) found some evidence o f competition in the informal credit market, as indicated by the presence o f more than one lender in a village -- contrary to the earlier findings by Aleem (1990). The higher interest rates in the informal sector are due to the opportunity, administrative and risk costs, as well as the additional cost o f generating funds. Borrowing, especially f rom formal sources, i s the main source of funds for the informal lenders. Nearly one-third o f the total funds util ized in the informal credit transactions originate f rom formal credit sources, (70 percent o f the funds for agricultural processing units derive f rom institutional sources). On average, informal lenders pa id about 19 percent annual interest rate on their funds borrowed f rom institutional sources (5 percent greater than the ADBP/ZTBL rate o f 14 percent). Interest rates charged for inputs varied by product (35 percent for pesticides and 8 percent for seeds), with an average interest rate o f 25 percent.

Higher interest rates in the informal market do not necessarily reflect absence o f competition,

Formal Sector Credit and Mechanization

6.19 to 2002-03, the ADBP/ZTBL financed purchases o f 399 thousand tractors, an average o f 16,630 tractors per year. As shown in figure 6.2, the number o f tractors purchased with ADBP/ZTBL financing closely mirrored domestic production of tractors f rom 1986-87 to 1997-98, pointing to the link between availability o f ADBP/ZTBL credit and tractor sales.

The subsidy on formal sector credit has encouraged mechanization in Pakistan. F rom 1979-80

6.20 Since 1998-99, however, non-ADBP/ZTBL financing o f tractors has become nearly as important as a source o f credit as ADBP/ZTBL loans. Al though the average annual number o f

57 Similarly, Wor ld Bank (2002) reported rural informa1 sector interest rates ranging f r o m 80 to 150 percent.

52

ADBP/ZTBL tractor loans fell by 10 percent f rom the 1986-87 to 1997-98 period to the 1998-99 to 200 1-02 period, average annual production o f tractors increased by 67 percent, and domestic production o f tractors exceeded the number ADBPiZTBL financed tractor purchases by 85 percent.

Figure 6.2: ADBP/ZTBL Tractor Loans and Domestic Tractor Production, 1986-87 - 2002103

40

j i 0 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 86- 87- 88- 89- 90- 91- 92- 93- 94- 95- 96- 97- 98- 99- 00- 01- 02-

Tractor production --t Tractors - ADBP loans 1

Farmer Household Access to Credit

6.21 According to PRHS 200 1-02 data, nearly 80 percent o f cultivator households participate in the credit market. Access to institutional credit i s highly restricted, however. Few farmers in the sample fully cover their financial needs through formal credit, and those without land have almost n o access to formal sector credit.

6.22 only 2 percent o f non-landowners (table 6.5). Three-fourths o f formal sector credit goes to land- owners; owner cum tenants receive 24 percent o f formal sector credit. Less than 1 percent of formal credit goes to tenants (figure 6.3). In terms o f operated farm size, large farms and medium farms receive two-thirds o f total formal sector credit.58

Overall, 11 percent o f farmers had obtained formal sector loans, 14 percent o f land owners, but

’* Numerous earlier studies have also found that small farmers and poor households re ly predominantly on non- institutional sources for their credit needs, in spite o f policies and subsidies designed to enhance their access to institutional credit. See Punjab Economic Research Institute (1986); Appl ied Economics Research Center (1986); Scott and Redding (1988); Malik (1989, 1990, 1992 and 1999); and Qureshi and Shah (1992).

53

Table 6.5 Outstanding Loans By Tenure Categories (Formal and Informal) 1 Sample I Households with Informal 1 Formal 1 Both

~~ I Total Sample 1 1590 I 100 I 1239 (78) 1 100 1 1072 1 67 I 4 3 1 2.7 1 124 I 8 Source; PRHS 2001-02 data; Jacoby and Mansuri, (2004b).

Figure 6.3 Formal and Informal Credit by Tenure Categories, 2001-02

Formal Credit Informal Credit (Distribution across tenure categories) (Distribution across tenure categories)

Sharecropping Fixed rent Fixed rent

Sharecropping tenants Owners cum

tenants 22%

Owners 44%

Owners cum 75% tenants

27%

I Source: PRHS 2001-02 data; Jacoby and Mansuri, (2004b).

6.23 sector loans, including 72 percent o f land owners and 84 percent o f non-land non-landowners. Moreover, even landless farmers (sharecropping tenants and fixed rent tenants) have access to informal sector credit, and account for 29 percent o f the value o f informal sector lending. The average value o f informal sector loans to land owners (Rs 24,400) i s only 17 percent greater than the average informal sector borrowing by tenants (Rs 20,900). Total average borrowing by land-owners (including both borrowers and non-borrowers) i s Rs 29,500, 65 percent greater than total average borrowing by landless farmers (Rs 17,900). See table 6.6.

Informal sector credit i s much more widespread. 75 percent o f farmers had obtained informal

Table 6.6 Average Size of Loans to Farm Households, 2002-03 Formal Sector Informal Sector All Loans All Loans*

hhs (RS) hhs (RS) hhs (Rs) hhs mean(Rs) No. of mean No. of mean No. of mean No. of

Owners 128 81,595 609 20,043 641 35,336 871 26,005 Owners cum tenants 30 100,677 196 37,925 204 51,243 252 41,483 Share tenants 6 12,800 305 19,790 308 19,847 365 16,747 Fixed rent tenants 3 37,500 86 24,678 86 25,986 102 21,910

Total 167 81,759 1,196 23,242 1,239 33,456 1,590 26,070 Farmers with land 158 85,218 805 24,397 845 39,176 1,123 29,478 Landless farmers 9 21,033 391 20,865 394 21,187 467 17,875

"Includes both borrowers and non-borrowers. Al l other data i s for borrowing households only. Source; PRHS 2001-02 data; Jacoby and Mansuri, (2004b).

54

6.24 (9 versus 47 months). About two-thirds o f informal loans (mainly f rom relatives and friends or a neighbor) have n o specific payment date. Overall, relatives are the main source o f informal credit, accounting for 3 6 percent o f the total number o f informal loans (and having among the highest average loan size across the different credit sources). Other personal relations, “friends and neighbors”, are also an important informal credit source (1 5 percent).

The average duration of informal sector loans i s only about one-fifth that o f formal sector loans

6.25 mainly f rom traders, shopkeepers, and landlords of sharecropping tenants. Typically, these would take the form o f fertilizer or other inputs advanced at the beginning o f an agricultural season.

Almost 80 percent of informal loans are in cash. The remaining are in-kind loans coming

6.26 purpose. Other agricultural equipment and animals are used as collateral in 14 and 8 percent o f the loans, respectively. In more than a third o f the cases, collateral i s not in the form o f agricultural assets; residential or commercial property accounts for 10 per cent and personal guarantees f rom relatives friends and employers for 17 per cent. Thus, access to formal credit typically requires ownership o f visible assets, mainly land and farm equipment, or at least a strong personal connection with someone who probably owns such assets. By contrast, the vast majority o f informal loans (90 percent) require n o collateral.

All formal loans require collateral, with about a third o f loans using agricultural land for this

Access to Credit

6.27 o f households reported that they did not need credit or found credit to be too expensive. The remaining 38.1 percent o f cultivators were access rationed in the formal market, in the sense that they wanted formal sector credit at the terms offered, but were unable to obtain it. However, among the 11.3 percent of households that had formal sector loans, 23 percent (i.e. 2.6 percent o f the entire sample) faced credit limits on the size o f the loan at the given interest rate. Thus, a total o f 40.7 percent o f households were either access or quantity rationed (table 6.7 and figure 6.4).

Al though only 11.3 percent o f households had loans in the formal sector; another 50.6 percent

6.28 In general, access to credit in the informal sector was greater: 76 percent o f farmers had some type o f loan (consumption, production or other loan) f rom informal sector sources, and 18.1 percent o f farmers were able to borrow but chose not to. Only the remaining 6.2 percent were access rationed in the informal market. Another 11.7 percent o f households faced binding non-zero limits o n borrowing in the informal sector, so that a total o f 17.9 percent o f rural households were access or quantity rationed in the informal market (figure 6.5).

Micro-credit Programs and Savings Mobilization

6.29 micro-finance as part o f i t s poverty alleviation strategy. Micro-finance i s disbursed as small loans - through the ADBP/ZTBL, the Khushali Bank and the Pakistan Poverty Alleviation Fund (PPAF). In 2003, micro-finance credit by these three institutions equaled Rs. 1,442 mi l l ion (2.5 percent o f total institutional credit). Two-thirds o f this micro-credit was disbursed through the PPAF, and 3 1 percent through the Khushali Bank; ADBP/ZTBL lending accounting for only 3 percent o f the total (table 6.8). In all, 57 thousand micro-credit loans were advance, with an average loan size o f Rs 25.3 and 23.7 thousand per loan through the PPAF and Khushali Bank. The average loan size in 2003 through ZTBL was considerably larger (Rs 41.6 thousand), though this i s considerably less than their average loan size in 2002 (Rs 126.3 thousand for only 135 loans).

In recent years, the Government o f Pakistan has placed considerable emphasis o n developing

55

41 0

41

606 0

606

647 40.7%

186 0

186

98 0

98

284

Table 6.7 Credit Rationing in Rural Pakistan 2001 Access or

Total % o f Total Non- Access Quantity

'ormal Credit Sample Sample Borrowers Rationed Rationed

iorrowers Not Quantity Rationed Quantity Rationed

lon-borrowers Able to borrow Not able to borrow

'otal 'ercentage of Total

iformal Credit

lorrowers Not Quantity Rationed Quantity Rationed

Jon-borrowers Able to borrow Not able to borrow

-otal

180 139 41

1410 804 606

1590 100.0%

1205 1019

186

385 287 98

1590

1 1.3% 0 8.7% 0 2.6% 0

88.7% 1410 50.6% 804 38.1% 606

100.0% 1410 --- 88.7%

75.8% 0 64.1% 0 11.7% 0

24.2% 385 18.1% 287 6.2% 98

100.0% 385 --- 24.2%

0 0 0

606 0

606

606 38.1%

0 0 0

98 0

98

98 6.2% 'ercentage of Total 100.0% 17.9%1

iource; WB-PIDE 200 1 Rural Household Survey; Jacoby and Mansuri (2004a).

Table 6.8 Major Micro-credit Programs in Pakistan, 2003

PPAF* Khusali Bank ZTBL** Total Number of Loans (thousands) 37.7 18.7 1 .I 57.5 Value of Loans (mn Rs) 951.4 443.0 47.7 1,442.0 Average Size (thousand Rs) 25.3 23.7 41.6 25.1

* Pakistan Poverty Alleviation Fund. ** Zarai Taraqiati Bank Ltd., formerly Agricultural Development Bank o f Pakistan.

56

Households with outstanding loans

(181) Farmers

Households Households with with b outstanding loans who face outstanding no quanitty restrictions loans (139) (1 80)

Households with no loans

Households that are NOT access rationed in the formal credit sector ad who do not

in the sample 1590

Figure 6.5 Credit Rationing in the Informal Market

’ face any quantity restrictions that are NOT access (804) rationed in the formal credit sector (804) Households that have formal

Households that are access Households with

no outstanding b rationed

Households that are not current borrowers but are not access rationed in the formal credit sector (287)

Households that are not current

not access rationed Farmers borrowers but are

restrictions (41)

Households that are access b

Specification I Specification 2 Specification 3

Households Households with with outstanding loans outstanding (1205) \ b

Households with outstanding loans who face no credit limits (1019)

Households that are Households with + access rationed

loans (335) no outstanding (98)

informal loans but face quantity restrictions (1 86)

Households that are b

57

6.30 trade and commerce, through a network o f development existing NGOs (Box 6.2). A recent evaluation o f the PPAF noted that i t s operation n o w covered 72 districts and a large percent o f the loan recipients (44%) were women.

Most o f the PPAF loans were given for livestock and for enterprise development and

Box 6.2 Pakistan Poverty Alleviation Fund (PPAF)

The Government o f Pakistan set up Pakistan Poverty Alleviation Fund (PPAF) in February 1997 in order to “enhance the access o f the poorer households and communities to socio-economic services”. PPAF was set up as a private, non-profit, limited company, with the aim o f reaching the poor and disadvantaged communities in both rural and urban areas through NGOs and the Community Based Organizations (CBOs). PPAF funds for income generation activities and improved community physical infrastructure are disbursed through i t s three main units 1) Credit and Enterprise Development Unit; 2) Community Physical Infrastructure Unit; and 3) Human and Institutional Development Unit.

Micro credit loans have increased from Rs. 35.6 mill ion to Rs. 2,814 mill ion between FY2000 and FY2003. The bulk o f the micro credit i s disbursed under the Credit and Enterprise Development Unit with disbursements in FY2003 o f Rs 1,314 million, 47 percent o f the total PPAF disbursement. This amount was equivalent to 4.8 percent o f the total institutional loans disbursed during that year. In 2003, the 119,196 borrowers received an average loan o f Rs. 8,816. Nearly 44 percent o f loans went to women. Most o f the loans (38%) were disbursed for livestock, followed by agriculture (32%), and enterprise development and commerce and trade (30%).

According to the PPAF Annual Report (2003), by the end o f FY2003, a total o f 218,702 individuals had availed o f Rs 2,8 14 mill ion in PPAF financing since the inception o f the program, in 72 districts through 37 partner organizations.

Gallup Pakistan (2003) evaluated the functioning o f PPAF through a survey o f 1700 borrower and non borrower households in 140 community organizations o f 17 districts in all four provinces o f Pakistan. This study found that borrowing households were better o f f than those that had not borrowed. O n the average their incomes and consumption had increased and there was an improvement in their personal and business assets, housing facilities and other amenitieshervices, and in their social status (especially for women borrowers). Borrowers were not able to obtain as much credit as they wanted, however. In the survey sample, the mean value o f loans received by the borrower group was Rs. 9,138, 53 percent o f their desired amount (Rs. 7,136). According to study, the mean return on investment for the loans was approximately 30% per annum.

6.3 1 done. Apart f rom questions related to the effectiveness o f targeting and coverage o f the programs, there remains a major concern regarding sustainability o f these programs. By setting ambitious overall targets and using the local contacts o f the NGOs, the programs have achieved an impressive growth to date (though the share in the total institutional disbursements i s s t i l l quite small - less than 5 percent). However, rural credit programs in Pakistan have historically had a poor record o f repayments. As long as large inputs o f donor and other funds are available for on- lending by these programs, and the possibility o f turning over loans exists, i t will be di f f icul t t o assess the actual default rates o n these loans.

No comprehensive study o f the overall impact o f these micro-credit schemes has yet been

58

6.32 In add i t ion to these micro-credit schemes, rural development projects implemented through the Aga K h a n Rural Support Programme (AKRSP) also include savings and credit programmes based o n a system o f collective savings and loans intermediated through vi l lage organizations (VOs) (Box 6.3). This system minimizes the transaction costs fo r borrowers. D u e t o peer group pressure, the transparent nature o f the credit operations, and group guarantees for loans, repayment rates for loans are nearly 100 percent. The employment and income impact, especially f o r t he poor, has been quite substantial. G iven the success o f the AKRSP, the Nat ional Rura l Support Programme (NRSP) was started in 1991 and since 1992 has had direct support f rom the Government o f Pakistan.

Box 6.3 Aga Khan Rural Support Programme (AKRSP)

The Aga K h a n Rural Support Programme (AKRSP) was initiated in 1982 for the purpose o f implementing a rural development programme in the Northern Areas o f Pakistan. The essential elements o f the AKRSP are the establishment o f effective Vi l lage Organizations (VOs). Each VO starts i t s operation with one grant-assisted productive physical infrastructure project. The women’s VOs focus o n various aspects o f raising women’s productivity and welfare. Examples o f the activities in which these organizations are engaged are: (i) introduction and dissemination o f improved varieties and cultivation techniques for crops; (ii) improved livestock husbandry practices; and (iii) new productivity-raising technology for apricot-drying tents, nut-cracking machines, and butter-chumers. AKRSP helps the village organizations to obtain access to institutional credit by acting as a loan guarantor through the promotion o f savings by members, wh ich serve bo th as a fo rm of loan collateral for credit and provide supportive marketing services for different products.

The savings and credit programme o f the AKRSP i s based o n a system o f collective savings and borrowings. Each member deposits hisiher savings with the Manager o f the village organization. The collective savings o f the Vil lage Organization are deposited in a single account held at a commercial bank. Credit facilities are extended in a similar manner. The village organization takes out a single collective loan and disburses sub-loans to members according to individual’s credit need. This system minimizes the transaction costs for borrowers in both savings and borrowings. D u e to the peer group pressure, the transparent nature o f the credit operations, and the group guarantees for loans, the repayment rates for loans are almost 100 percent. The employment and income impact, especially for the poor, has been quite substantial.

Based o n substantial positive results f rom group-based savings mobilizations and credit programmes by the AKRSP, a National Rural Support Programme (NRSP) was started in 1991 and expanded in 1992 with a grant from the Government o f Pakistan. NRSP i s bui lding a network o f grassroots organizations which plan and undertake their own development. I t uses a development strategy wh ich mobilizes communities and maximizes the use o f local resources, similar to that o f the A g a Khan Rural Support Programme (AKRSP) and the Orangi Pi lot Project (OPP). The evaluations o f the AKRSP and OPP show that the poor have been successfully helped by the credit and other related interventions in a financially sustainable manner. Nonetheless, poor households participating in the program sti l l lack enough credit and other financial resources to purchase their o w n land.

Source: Malik, Sohail J. 2003b. Rural Credit Markets in Pakistan: Institutions and Constraints. Background paper for Pakistan Rural Factor Markets Study.

59

Implications of Credit Constraints for Productivity and Incomes

6.33 reduces farm productivity (measured as gross value o f output per unit o f land). Controlling for various plot-level characteristics including p lo t size, land value, topography, irrigation and soil type, as wel l as crop mix,59 the value o f yields o f the 41 percent o f households who faced credit rationing in the formal sector was 9 percent lower than the value o f yields o f non-credit rationed households. Households who faced credit rationing in both the formal and informal sectors (approximately 17 percent o f a l l households) had a 23 percent reduction in value o f yields6'

Econometric analysis o f plot-level data suggests that lack o f access to credit significantly

6.34 This reduction in farm productivity for credit-constrained farmers i s l ikely due to lower input use (seed, fertilizer and tractor rentals), as wel l as fewer long-term investments in land or equipment. In addition to this effect on yields, lack o f access to credit may prevent some farmers from cultivating more land (through rental markets). The net effect on area cultivated i s zero, however, unless the land rented in would otherwise be fallow.

59 The regression includes dummy variables for the type o f crop cultivated (cotton, sugarcane, wheat and rice).

6o The figures cited are ordinary least squares estimates; correcting for endogeneity o f access to credit, the estimated effect o f rationing rises to 26 and 45 percent, respectively, though the latter f igure i s no t statistically significant. See Annex 1.

VII. IMPLICATIONS FOR INCOME DISTRIBUTION AND POVERTY REDUCTION

7.1 reduction depend not only on increases in agricultural and non-agricultural output, but o n who receives the additional income, as determined by ownership or access to factors o f production. Given the skewedness o f the distribution o f land and the predominance o f own-family labor in agriculture, the direct gains o f agricultural production accrue mainly to large (and to a lesser extent) small farmers. Gains to rural landless households depend on the extent t o wh ich the rural non-agricultural sector spurs employment and informal sector capital eamings.

The effects o f inefficiencies in factor markets o n income distribution and poverty

7.2 Empir ical analysis o f India, Chile and other countries suggest that these growth linkage effects, combined with reductions in the real price o f food, have led to significant reductions in rural poverty. Trends in growth and rural poverty in the 1970s and 1980s in Pakistan show similar patterns. However, rural poverty in Pakistan did not decline in the 1990s in spite o f high rates o f agricultural growth, calling into question the extent to which rural factor market reforms will lead to major reductions in rural poverty, particularly through the pathway o f agricultural growth. This chapter explores possible reasons for the lack o f correlation between agricultural growth and rural poverty reduction in the 1990s, examines the structure o f factor incomes o f rural households, and presenting simulation results o f the effects o f broad-based agricultural growth and specific factor market reforms on household incomes.

The Puzzle of Persistent Rural Poverty and High Agricultural Growth

7.3 Numerous studies have shown a link between agricultural productivity growth and poverty reduction (Ahluwalia 1978, Mel lor 1976 and 1978, Hazel1 and Ramasamy, 1991) through reductions in food prices and growth in employment. Moreover, econometric evidence suggests that agricultural growth i s more effective in reducing rural poverty than i s industrial growth, though this relationship may not ho ld when ownership o f land i s highly skewed (Ravallion and Datt, 2002, Timmer 1997 and Thirtle 2001; see B o x 1).

7.4 agricultural GDP growth was 3.9 percent per year during this period, (3.2 percent for crops). Rural poverty (headcount) declined steadily f i o m 49.3 percent in 1984-85 to 36.9 percent in 1990-91 to 33.4 percent in 1993-94. Similarly the poverty gap declined from 11.9 percent in 1984-85 to 7.8 percent in 1990-91 to 6.4 percent in 1993-94.

The experience o f Pakistan in the 1980s fits this general pattem. Average real

7.5 continued agricultural growth. Real agricultural GDP rose by 4.6 percent per annum, yet the percentage o f rural poor living below the poverty l ine remained essentially unchanged between 1990-91 (36.9 percent) and 1998-99 (35.9 percent), and even rose to 38.9 percent in 2001-02, a drought year .61

For the decade o f the 1990s overall, however, rural poverty rates stagnated in spite o f

61

regions of Pakistan, though problems of sample size and sample design prevent definit ive conclusions. Wor ld Bank (2002) reports rural poverty headcounts for 1998-99 that vary l i t t le between Punjab (34.7 percent) and Sindh (37.1 percent), but are higher in N W F P (46.5 percent).

Survey evidence suggests that incomes and the level o f poverty (headcount) vary substantially across

61

Basmati Wheat Wheat flour Rice Average

1970-74 1.04 1.02 1.09 1.05 1975-79 1.05 1.05 1 . I O 1.06 1980-84 0.87 0.95 1 . I 4 0.98 1985-89 0.86 0.95 1.08 0.96 1990-94 0.82 0.94 1.01 0.93 1995-99 0.91 0.99 1.04 0.98 2000-03 0.94 1.05 1.08 1.02

Figure 7.1 Real Prices o f Major Food Grains in Pakistan, 1970-2003

1.30 I 1

0 1.10 1.00 0.90

7 0.80

0

II

Q)

0.70 1

Note: The three commodity index consists o f an average o f wheat, wheat f lour and basmati r ice prices.

62 Datt and Ravall ion (1998) showed that a decline in the real price o f major food staples was a major factor in reductions in rural poverty in India in the 1970s and 1980s.

62

Total Poor Poor Poor HHs HHs (mns) HHs (percent) HHs (mns) % of total Rural Poor

Medium and Large Farmers 0.59 24.1% 0.14 2.3% of which farmers w/o irrig. 0.11 31.9% 0.04 0.6%

Small Farmers 3.83 38.3% 1.47 23.7% of which farmers wlo irrig. 1.06 32.0% 0.34 5.5%

Landless Farmers 1.33 60.5% 0.81 13.0% of which farmers w/o irrig. 0.17 49.9% 0.08 1.3%

Rural Agric Laborers 1.32 69.0% 0.91 14.7% Rural non-farm non-poor 3.33 0.0% 0.00 0.0% Rural non-farm poor 2.87 100.0% 2.87 46.3% Total Rural 13.27 46.7% 6.20 100.0%

7.8 sufficient to explain the l o w correlation between agricultural growth and rural poverty reduction in Pakistan in the 1990s. In addition, the skewed structure o f ownership and access to factors o f production in rural Pakistan, which are in part due to distortions in factor markets, may have also contributed to the disconnect between agricultural growth and poverty reduction in the 1990s. Moreover, these structural factors have important implications for future efforts to reduce rural poverty.

Slow actual overall agricultural growth and a r ise in the prices o f major staples may be

7.9 farm households (table 7.2). Rural non-farm households account for 46 percent o f the rural poor; agricultural laborer households comprise 15 percent o f the rural poor. Though there i s substantial poverty among small landowning farmers (38 percent are poor), this group accounts for only 24 percent o f total rural poor households. Landless tenant farmers (61 percent o f whom are poor) account for another 13 percent o f the rural poor. Farmers without irrigated land account for only 7 percent o f rural poor households.

According to HIES 2001-02 data, more than 60 percent o f rural poor households are not

of which farmers wlo irrig. 1.34 34.2% 0.46 7.4%( Source: HIES 2001-02.

7.10 economy and labor income for the poor (table 7.3 and figure 7.2). Crop income (own-farm) accounted for only 23 o f household income, and only 18 percent o f income for the poorest 20 percent o f households. Livestock accounted for 14 percent o f total rural household incomes, with l i t t le variation across expenditure quintiles. Thus, agricultural farm income was only 37 percent o f total rural incomes. Wages and salaries accounted for 26 percent o f total reported rural household income across al l rural households; for the poorest two quintiles, the labor income shares were 37 and 34 percent, respectively. Foreign remittances accounted for 6 percent o f incomes o f the top expenditure quintile, but only 0.5 percent o f incomes o f the poorest quintile.

HIES (2001-02) data on rural incomes also highlight the importance o f the rural non-farm

63

Average monthly income (Rs) Wages and Salaries

Table 7.3 Rural Household Income By Source and Expenditure Quintile (2001-02) I Total I Ql 1 Q2 I Q3 1 Q4 1 Q5

6031 4259 4967 5582 6269 8914 26.33 37.45 34.37 29.21 22.95 17.72

Crop Production Livestock Non-farm activities Property income Social Insurance Benefits including

22.94 17.11 18.30 21.61 25.95 26.65 13.53 12.34 12.35 13.74 13.93 14.29 13.49 15.30 14.20 13.44 13.34 12.44 9.14 6.26 7.08 7.64 9.07 12.55 1.44 0.72 0.99 1.45 1.78 1.75

Pension Gift Assistance Foreign Remittances Domestic Remittance Other Sources

Figure 7.2 Rural Household Income Sources by Quintile, Pakistan 2001-02

3.16 3.98 3.24 2.91 2.77 3.22 3.13 0.48 1.38 2.68 2.97 5.67 5.43 4.14 6.19 5.94 5.91 4.89

1.40 2.23 1.91 1.39 1.33 0.83

100% 90% 80%

E 70% y 60% 0

E Other income 0 Gifts, transfers, pensions 0 Wages & Salaries E Livestock 40%

30%

10% 0%

b f!

t5 20%

1 2 3 4 5

Expenditure Quintile

7.1 1 incomes in the HIES are substantially understated. Total annual private per capita consumption in the HIES data i s only Rs 11,400, 62 percent o f the national accounts figure (Rs 18,500), (figure 7.3). In order to obtain an estimate o f the level and structure o f household incomes that was more consistent with agricultural production and national accounts data, a social accounting matr ix ( S A M ) was constructed using data f rom these and other secondary sources (see Annex 3). The results suggest that farm incomes are even more highly skewed than indicated in the HIES or PRHS, and that the importance o f non-farm incomes in total rural household incomes i s generally understated in the household survey data.

Compared with the national accounts data, however, total household expenditures and

64

Figure 7.3 Pakistan: Per Capita Incomes and Expenditures 2001-02

35

30

25

& 20

L

e L

> 8 15 P 2 10

5

0 Rural Urban Total

PRHS Income

MNationalSAM Pnv. Cons.

HIES Expend.

MNational Accounts Pnv. Cons.

7.12 Production, national accounts, and MINFAL the estimates f rom the S A M indicate that returns to land account for 55 percent o f value added in crop production and 27 percent o f total agricultural income (including livestock, fishing and forestry). Returns to operated land o n medium and large farms alone account for 21 percent of total crop value added. Total returns to labor are 27 percent o f value added in the crop sector, but the share o f hired labor in the sector value added i s only 5 percent.

Based on data f rom the Agricultural Census, Agricultural Price Commission Cost o f

7.13 Given this large share of land incomes in agricultural value added and the skewed distribution o f land, medium and large land owners (those with 12.5 acres or more), who account for 10 percent o f agricultural households, receive an estimated 32 percent o f agricultural incomes

7.14 percent of total incomes for agricultural households (41 percent o f total population in Pakistan). Including rural non-agricultural households (3 1 percent o f national population), the share o f agricultural incomes in total rural incomes i s only 37 percent. Thus, incomes f rom rura l non- agricultural activities, including processing and trade o f agricultural products, small industry, construction and general trade and transport services account for 63 percent o f total rural incomes, and essentially a l l o f non-transfer incomes for about 40 percent o f the rural population (table 7.4).

However, agricultural incomes (including livestock) generally account for only 56

65

Table 7.4 Pakistan Rural Agricultural Incomes

PRHS PRHS SAM SAM Agric Inc Agric Inc Agric Inc Agric Inc Per Capita Share Per Capita Share ('000 Rs) (percent) ('000 Rs) (percent)

Medium and Large Farms Small Farms Landless Farmers Rural Agric Workers Rural Non-Farm Non-Poor Rural Non-Farm Poor

15.7 83.5 29.9 57.2 6.1 67.9 8.6 54.8 7.2 87.7 5.3 59.7 2.2 53.1 5.5 53.1 0.3 1.9 0.1 0.4 0.2 6.3 0.2 4.5

Total Rural 6.1 69.7 5.6 37.2

Source: Pakistan S A M 2001/02; Pakistan Rural Household Survey 200 1/02. Rural Agric Households 7.1 74.8 9.6 55.9

Agricultural Growth and Rural Income Distribution

7.15 The contribution o f agricultural growth to increased rural incomes i s not l imi ted to farm incomes, however. Increases in agricultural production generally involve increased demand for agricultural inputs, processing and marketing services. Also, as household incomes rise, consumer demand for both urban and rural products and services increases. T o the extent that the supply o f goods and services i s elastic, these increases in demand can spur increases in production and further increases in demand. (See box 7.1.)

7.16 These multiplier effects o f agricultural growth and productivity gains f rom factor market reforms can be estimated using a semi-input-output model, based o n the Pakistan S A M described above. The model assumes that output o f tradable goods (major crops, cattle products, most industrial products, i s inelastic, and does not expand due to increases in demand. For these products, increased demand results in increased net imports. For elastically supplied products, (minor crops, poultry, and services), increased demand i s assumed to induce increases in output.

7.17 Simulation results o f a 10 percent increase in the output o f a l l major crops (wheat, basmati and IRRI rice, cotton and sugar cane) suggest that the largest gains o f increased agricultural crop production accrue to large and medium land owners, whose incomes rise by 7.2 percent. Incomes of small farm owners and pure tenants also rise by about 4.6 percent. Due to multiplier effects, incomes o f non-farm rural household groups also rise by 3.4 percent, o n average. The poorest rural household groups (agricultural laborers and rural non-fann poor (29 percent o f the rural population) reap only 6.7 percent o f the total income gains, and their incomes rise by only 2.6-4.1 percent. M u c h o f the gains in incomes accrue to owners o f capital in both rural and urban areas.

7.18 dairy products) are more evenly spread out given the distribution o f ownership o f livestock. Overall incomes r i se by 4.5 percent, and small farmers and landless agricultural households (who also have significant livestock income) rise by 9.7 to 10.9 percent.

Gains f rom a 10 percent increase in large livestock production (mainly cattle, goats and

66

Box 7.1 Agricultural Growth and Rural Poverty

Tamil Nadu, India Despite concerns that the green revolution technology for rice (improved seeds, increased fert i l izer use and irrigation) would lead to increased income inequality, most rural household groups benefited from increased rice production in the 1970s and early 1980s, (Hazel1 and Ramasamy eds., 1991). Household surveys o f farmers indicated that, although the first adopters o f the rice technology tended to be larger farmers, by the early 1980s small farmers in villages with access to irrigation had also adopted the new technologies at the same rate as large farmers. Land distribution remained essentially unchanged, and agricultural wage earnings for agricultural laborers increased (though real agricultural wage rates did not increase).

Moreover, increased rice production led to substantial rural growth linkages, adding an additional 0.87 rupees o f value added for every 1 rupee of value added f rom additional rice production. One-half o f these mult ipl ier effects were due to increased demand for agricultural inputs, marketing and processing services; the remainder derived f rom increased consumer demands as household incomes rose.

Survey results showed that real incomes o f small paddy farmers and landless laborers rose by 90 and 125 percent, respectively, between 1973174 to 1983/84. Incomes o f non-agricultural households also rose by 55 percent, due in part to the growth linkage effects emanating f rom agricultural growth. Real income gains o f large paddy farmers were only 18 percent, due to increased costs o f fertilizer and labor. Notably, non-paddy farmers with no access to irrigated land saw real income gains o f only 17 percent.

Similarly, analysis of state-level data o n growth and poverty in India (Datt and Ravallion, 1998) shows that agricultural productivity growth f rom 1958-1994 played a major role in reducing poverty. During this period, agricultural output per acre o f net sown area grew by 2.91 percent per year, contributing to higher real wages for agtlcultural laborers (which grew by 2.84 percent per year) and a decline in the real price of food. (The price o f food relative to agricultural laborers’ consumer price index fel l by 0.15 percent per year from 1976-94, after having increased by 0.62 percent per year f rom 1958-75.) Higher farm yields for small producers also contributed directly to their incomes, both directly through increased value of output and indirectly through increased employment.

7.19 Thus, wh i le agricultural g rowth has substantial benefits for low income farmers, expansion in output (and processing) o f ma jor crops results in smaller gains to ru ra l non- fa rm households on average, in spite o f significant mu l t ip l ie r effects. These l inkage effects o f agriculture are not large enough to substantially raise incomes o f the ru ra l non-farm poor fo r t w o major reasons: 1) the size o f Pakistan’s agricultural sector relat ive t o total GDP and the ru ra l non- fa rm economy has decl ined over time, 2) Pakistan’s agricultural labor market i s segmented, with m u c h fa rm labor der iv ing from own-fami ly labor.

7.20 0.234 in 1970 t o 0.091 in 2000 (table 7.5). As a result, assuming an unchanged value-added multiplier, the direct effects o f a 10 percent gain in ma jo r crop product ion i s smaller: equivalent t o 2.3% o f GDP in 1970, but on ly 0.9% o f GDP in 2000. Likewise, the relat ively smaller size o f the in i t ia l shock and the larger share o f impact o f the mul t ip l ie r effects o n the rest o f the economy i s also smaller (4.6% o f GDP in 1970 compared with 1.5% o f GDP in 2000).

Over time, the share o f ma jor crops in total GDP in Pakistan has fal len dramatically, f r o m

67

Table 7.5 Implications of Changes in Economic Structure for Agricultural Multiplier Effects

1960 1970 1980 I990 2000 2002 Agriculture Share of GDP 0.458 0.389 0.306 0.246 0.240 0.232 Share of major crops in GDP 0.231 0.234 0.176 0.130 0.091 0.078

10% shock to agric (as YO of GDP) Value added multiplier % change in total GDP % change in non-agriculture

4.6% 3.9% 3.1% 2.5% 2.4% 2.3% 1.5 1.5 1.5 1.5 1.5 2.5

11.5% 9.7% 7.6% 6.1% 6.0% 8.1% 12.7% 9.5% 6.6% 4.9% 4.7% 7.6%

10% shock to major crops (as % of GDP) 2.3% 2.3% 1.8% 1.3% 0.9% 0.8% Value added multiplier 1.5 1.5 1.5 1.5 1.5 3.3 % change in total GDP 5.8% 5.8% 4.4% 3.2% 2.3% 2.7% Yo change in non-major crops 4.5% 4.6% 3.2% 2.2% 1.5% 2.8% Note: The value added multiplier i s defined as the additional change in value added generated divided by the value added o f the init ial production gain (shock). The 2002 value added mult ipl ier is derived f r o m SIO-model simulations; multipliers for a l l other years are assumed to be equal to 1.5 based o n Hazel1 and Roe11 (1983), Me l l o r (1992) and Me l lo r and Gavian (1999). Source: Dorosh, N iaz i and Naz l i (2004).

7.21 (the average agricultural multiplier impl ic i t in the S I 0 model), a 10 percent output increase in production o f major crops in 2002 results in only a 2.8 percent gain in output of other sectors, about 40percent less than the estimated change in non-major crops assuming a multiplier of 1.5 in 1970.

Moreover, even if the value added multiplier has increased substantially over time to 2.5,

7.22 The implication i s that growth linkage effects have a smaller impact on GDP growth and rural poverty reduction today than in 1970, (unless the gains in non-agricultural incomes go disproportionately to the rural non-farm poor). Agricultural growth s t i l l has positive impacts o n incomes o f the rural poor, but these effects are not as large, relative to the size o f the economy, as they were three decades ago. Even with agricultural growth o f 3.9 percent per year (the historical average f rom 1975 to 1990, a rapid period o f real agricultural GDP growth) and the higher growth multiplier o f 2.5, non-agricultural income growth in 2002 would be about 2.9 percent, implying a per capita growth rate o f less than 1 .O percent per year.

7.23 The second reason for the relatively small size o f the multiplier effects o n rural non-farm incomes i s that the simulations assume that unskilled labor markets are segmented into own-farm labor, agricultural wage labor and non-agricultural unskilled labor markets. Thus, in the simulations, most o f the gains in total agricultural labor incomes accrue to farm households (reflecting the average distribution o f agricultural labor incomes in the PRHS surveys). If this pattern s t i l l holds for marginal increases in agricultural output in the future, increased agricultural output will result in relatively l i tt le increase in demand for landless agricultural labor. The simulations also assume rural and urban markets for unskilled non-agricultural labor are

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integrated. Thus the gains in non-agricultural unskilled labor incomes are split across both urban and rural household^.^^

7.24 various household groups. If non-agricultural labor incomes are concentrated among only a segment o f rura l non-farm poor households, the percentage gains in income o f this segment o f households will be larger, (and the gains to other rural non-farm poor households correspondingly smaller).

Finally, i t should be noted that the simulations show the average gains in incomes for the

Factor M a r k e t Reforms

7.25 size o f impact o n overall productivity in the agricultural sector (table 7.6).

The impact o f factor market reforms on rural poverty depends in large measure on the

7.26 could lead to substantial benefits for share-croppers, but relatively small benefits for most o f the rural poor. Assuming that replacing share-cropping with fixed rent tenancy leads to an increase in productivity of the former share-croppers by 18 percent, (because o f increased labor effort, as suggested by the econometric analysis in chapter 3), would only increase average incomes o f small-farm renters (1 1 percent of the rural population) by 3.0 percent. Since the size o f this productivity shock is small relative to the rural economy, there are only minimal effects on average incomes o f other household groups, even accounting for linkage effects to the rural non- farm economy.

Improvements in productivity arising f rom a shift from share-cropping to fixed rents

Table 7.6 Simulated Distributional Impact o f Factor Market Reforms

Base Tenancy Credit Increased Water

Incomea Reform Reforms Productivity

Large Farmers-Sindh 19.1 0.2 5.3 15.4 Large Farmers-Punjab 64.1 0.2 5.0 10.7 Large Farmers-0th Pak 10.8 0.2 3.1 7.6 Med Farmers-Sindh 44.6 0.2 6.4 9.9 Med Farmers-Punj ab 146.0 0.3 5.6 8.4 Med Farmers-0th Pak 35.6 0.3 5.8 9.0 Sm Farmers-Sindh 57.6 0.4 3.9 6.1 Sm Farmers-Punjab 3 18.9 0.4 4.4 6.6 Sm Farmers-0th Pak 125.0 0.3 2.7 4.2 Sm Farm Renters-Sindh 43.7 4.0 4.0 6.2 Sm Farm Renters-Punjab 46.0 2.8 4.3 6.3 Sm Farm Renters-0th Pak 15.0 2.7 2.8 4.4 Agric Workers-Sindh 20.8 0.2 2.2 3.3 Agric Workers-Punjab 68.2 0.2 2.4 3.6 Agric Workers-0th Pak 9.5 0.1 1 .o 1.5 Non-farm Non-poor 400.8 0.3 2.3 3.4

63 PRHS data indicate that rural non-farm households have a l o t o f underemployed labor (per capita non- agricultural labor incomes are f ive times higher for rural non-farm non-poor households compared with rural non-farm poor households). Given that the marginal shares used to allocate labor incomes are the average shares f rom the SAM, the income gains to rural non-farm poor households may b e underestimated.

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~ ~~ ~~

Base Tenancy Credit Increased Water

Income" Reform Reforms Productivity Non-farm Poor 134.4 0.3 2.3 3.3 Urban Non-poor 1744.0 0.2 1.1 1.7

7.27 Easing credit constraints on small farms, assuming a 35 percent productivity gain o f formerly credit-constrained small farmers, has larger effects, raising small farm incomes on average by about 3.8 percent. Because o f positive linkage effects, the non-agricultural rural economy also expands and other households benefit, as well. Incomes o f most other poor rural household groups r i s e by about 2.3 percent.

7.28 percent) as a result o f provision o f water to tailenders in canal systems (through physical investments or establishment of water markets), incomes o f small farmers and tenants r i se by 5.8 percent, and incomes o f agricultural laborers and rural non-farm poor households rise by 3.1 and 3.3 percent, respectively.

Under optimistic assumptions regarding increases in national crop productivity (14

Implications for Growth and Poverty Reduction

7.29 Because o f data uncertainties and simplifying assumptions used, the above analysis o f the effects o f increases in agricultural output o n incomes in Pakistan agriculture illustrates only the broad order o f magnitude o f the effects. Moreover, these simulations show only the static results o f factor market changes, not dynamic effects o f improved incentives on private investments and market development. Nonetheless, the broad structure o f rural production, distribution o f land and other factors o f production, and structure o f household incomes are reflected in the analysis.

7.30 T w o broad conclusions emerge. First, the level and distribution o f the benefits o f improvements in factor market efficiency depend crucially o n the magnitude o f the induced productivity shock and the ownership o f the assets involved. In spite o f multiplier effects, reforms related to share-cropping are l ikely to have only small overall impacts on rural incomes in aggregate in the short run, though the benefits to tenants could be significant. Credit market reforms and improvements in water availability have potentially larger effects o n the overall rura l economy. Second, the linkage effects o f expansion in traditional crop agriculture, though important, may not be adequate to substantially raise incomes o f agricultural laborers and the rural non-farm poor who lack significant capital resources. Thus, in the absence o f a change in the structure o f rural incomes and employment or significant gains in the rural non-farm economy apart fi-om agricultural growth-induced linkage effects, targeted interventions to agricultural laborers and the rural non-farm poor will l ikely be needed to rapidly reduce the poverty o f these groups.

VIII. CONCLUSIONS AND POLICY IMPLICATIONS

8.1 Well-functioning factor markets can help maximize productivity by providing a mechanism to allocate al l factors o f production to their most productive use. Significant inefficiencies in factor markets in Pakistan, however, limit agricultural productivity and rural income growth, (especially lack o f water markets to allocate water to farmers and land without sufficient access to water, and underemployed labor). Experience in other countries suggests that the long-term gains in productivity f rom improvements in the functioning o f factor markets could be large, particularly given the inter-linkages across factor markets, resulting in significant potential gains for the rural poor.

8.2 Rural factors in Pakistan that are most rigid in supply (land, water) and involve the highest transport costs, have the thinnest markets, and face the greatest polit ical constraints to reforms. These contrasting characteristics to a large extent determine limits on factor market efficiency and feasibility o f pol icy changes (table 8.1).

Markets for land, water, labor and credit vary considerably in their performance, however.

Land

8.3 Land i s at the heart o f Pakistan agriculture and the rural economy. Arable land i s essentially f ixed in supply in the absence o f major new investments in irrigation and drainage. As a fixed factor in a relatively labor abundant agriculture, returns to land are estimated to be about ha l f o f incomes (value added) f rom crop agriculture. The unequal distribution o f land, therefore, i s a major reason behind the high income inequality in rural Pakistan. Moreover, in part because o f inefficiencies in land administration and land markets, land i s rarely bought and sold, helping to perpetuate the highly unequal distribution o f land, hamper labor mobi l i ty o f farmers who want to sell land, and reduce returns to family labor. The skewed land distribution and inefficiencies in land markets also reduce access to credit for non-landowning households, since land i s the major acceptable form o f collateral in formal credit markets (table 8.2).

8.4 Evidence on the impacts o f land market imperfections o n efficiency o f land use are mixed, however. Agricultural census data indicate that crop choice does not vary substantially by farm size. Similarly, there i s l i tt le variation in cropping pattem by tenure status. Nonetheless, survey data o n crop income per cultivated area in Punjab suggest that incomes per cultivated acre o f farms less than 5 acres in size are nearly double those o f farms 25 acres or more. More recent econometric evidence o f productivity by p lot that correct for some land quality characteristics, however, suggest relatively small negative economies o f scale in production, i.e. that a doubling o f operated area leads to a 10-13 percent reduction in productivity.

8.5 Three major attempts at redistributive land reform in Palustan have failed (most recently in 1977), and land reform has neither polit ical support, nor the backing o f Islamic religious authorities. Because o f these severe institutional constraints to traditional redistributive land reform, more feasible options to increase access to land by poor households involve a win-win approach. Land purchase schemes that include grant components for the poorest landless households are one example, though fiscal costs could limit the scale o f such programs. Pol icy measures to increase access to land also include increased access to credit to enable poor households to purchase land, land taxation to reduce incentives for holding land for speculative purposes, 64 and measures to improve the efficiency o f land sales and rental markets.

64 Increases in land taxes (and water charges) wou ld reduce incentives for holding o f land for speculative purposes, and encourage greater land sales.

E

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8.6 Administrative reforms in the enforcement o f existing norms and regulations, including enforcement o f contracts and the rights o f tenants, and lifting restrictions for rentals would also help improve the functioning o f land markets. Simplification o f complicated legal procedures that result in long delays in proceedings and a backlog o f cases would reduce land transactions costs. Poor households are at a particular disadvantage in cases brought before c iv i l courts, since they often cannot afford to pursue these cases. Possible steps include limits on the number o f appeals, procedural reforms, alternative conflict resolution mechanisms, and barring o f the jurisdiction o f c i v i l courts in land revenue matters. Improved dissemination o f information on land prices and transactions would also enhance efficiency o f land markets (box 8.1).

Box 8.1 Improving the Enforcement of Contracts in Land Administration in Pakistan

Enforcement o f land contracts remains a major problem in Pakistan. Complicated legal procedures result in long delays in proceedings and a backlog o f cases. The poor are often losers in this process since they have less resources.

Some possible remedial measures to improve the enforcement o f contracts in the Land Administration are as follows:

On-the-spot inspections to establish facts on the ground and summary methods o f disposal to avoid long protracted litigation. Adequate safeguards need to be maintained so that the process i s open and transparent. Reduction in the number o f tiers in which a case can be heard. For most revenue cases, the last court o f appeal should be the Deputy District Office (DDO) and not the Board o f Revenue (as i s the case presently). Barring the jurisdiction o f civil courts in revenue matters. Frequent intervention by the civ i l courts on the pretext o f enforcing legal procedures(and determining legal rights o f the contesting parties) works to the disadvantage o f the poor who lack resources to pursue these cases. Fixed time limits for each category o f land dispute and imposing a law on the postponement o f hearing by revenue courts on administrative grounds to help expedite the settlement o f dispute. Improvements in the poor quality o f land records and clarification o f ambiguous laws. Establishment of a system of open courts and grievance hearing days by senior officials to reduce the transaction costs o f obtaining legal redress.

AdaDted from S. Oureshi (2003).

8.7 security o f tenure. Without secure rights to their land, farmers not only have less incentives for investment, but also devote resources to defending their rights. Lack o f secure title also reduces access to land by landless households through rentals by increasing the risk o f landowners who might otherwise rent out more land. In addition, banks are reluctant to lend money using land as collateral because they do not trust the current recording system. Questions regarding the validity and enforceability o f titles also make it harder to buy and sell land. Computerization o f land records, as tested in a recent p i lo t project in Punjab, i s one option for establishing clearer land records and reducing fraudulent dealings by land administration Officials (box 8.2)

Improvements in land records could also enhance the efficiency o f land markets and increase

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Box 8.2 Examples o f Land R e f o r m and Land Titling Projects

Brazil: Participatory Negotiations and Market-Assisted L a n d Reform

The Northeast, accommodating one-half o f a l l Brazilian poor people and two-thirds o f a l l rural poor people, i s vulnerable to drought and has a relatively poor resource base. Addit ional constraints to improved investment and productivity in agriculture include ineffective financial systems and distorted land distribution. Studies have shown that family farms in Brazi l are more productive and labor intensive than large farms. The highly distorted land ownership pattem i s the result o f economic distortions, including subsidized agricultural credit, high inflation, and inappropriate tax provisions. Past approaches to land reform, based o n centralized government-administered expropriation and redistribution, have had l imited success. As a result, the government was interested in experimenting with faster, cheaper, and less conflictive approaches to land reform.

What's innovative? A market-based approach to land reform with negotiations made directly between willing buyers (poor beneficiaries) and willing sellers, with financing for purchases made available through a government fund.

PROJECT OBJECTIVES AND DESCRIPTION

The objective o f the Land Reform and Poverty Al leviat ion Project was to raise agricultural output and increase poor fami ly incomes by providing improved access to land and funds for complementary investment subprojects planned and implemented by community associations. The project experimented with a program o f market-assisted land reform in which beneficiaries are given access to financing for the purchase o f suitable lands. The purchases are negotiated between willing sellers and willing buyers. Five states were selected for participation in the pi lot project based o n the severity of the landlessness problem and conditions for successful implementation (that is, the immediate availability o f land in the market and the capacity o f the State agencies to implement the project). The project had f ive components:

A land purchase fund to finance land purchases. Community subprojects (small matching grants to communities for investment projects, technical assistance, and start-up). Institutional strengthening (technical assistance and training at the state level). Project administration, supervision, and monitoring. Impact evaluation and dissemination by the federal government.

Community associations consisting o f landless rural workers or rural workers owning land sufficient only for subsistence farming selected suitable land and negotiated i t s purchase w i th w i l l i ng sellers. Fol lowing negotiations, the associations consulted with the State Land Institute to confirm that the title was clean and that the negotiated purchase price was consistent with market conditions. Communities then presented their project to the State Technical Unit (STU), which veri f ied the el igibi l i ty (based o n agricultural skil ls) o f the beneficiaries. At this stage, beneficiaries were eligible for credit f rom the Land Purchase Fund with credit in i t ia l ly given for a 10-year period with a three- year grace period at the government long-term interest rate.

L a o PDR: Second L a n d Titling Project. The Laos Land Titling Project (LTP II), co-financed by AusAID, i s the second phase o f the long-term land titling program aiming at the development o f the land administration capacity to support economic development and poverty reduction goals. The project i s aligned to the government's National Growth and Poverty Eradication Strategy Program

Box 8.2. Cont'd.

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(NGPSEP), approved by the National Assembly in October 2003. The project responds to the findings o f the I-PRSP that highlighted the importance o f land policy and land management to provide the basis for poverty reduction and economic growth. The project will build upon the achievements and experiences o f the first Land Titling Project (LTP). LTP I1 will provide secure land tit les in peri- urban (mostly agricultural land) and urban areas, providing incentives for land holders to invest in land development and in sustainable agricultural practices and enabling greater access to credit for agriculture inputs and land improvement. The project w i l l help build govemment capacity to coordinate the development o f the national land policy and regulatory framework, and will support the formulation and adoption o f key land policies for land administration and management.

Punjab: Computerization o f land records project. In Punjab, land disputes are primarily due to fraudulent dealing because the records are not clear and patwars (land administration officials) often accept informal payments. Moreover, banks (which are currently capital rich), are reluctant to lend money using land as collateral because they do not t rus t the current land recording system. To address these problems, the govemment o f Punjab initiated a land records project as a pilot in one district (Kasur) in 1996/97, but because o f administrative problems, major project activities did not begin until 1988 when the Director o f Land Records o f the Board o f Revenue was put in charge. Progress has been slow, however: in a five year period from 1998 to 2003, land records had been computerized in only 601 o f the 641 revenue estates in the district. In August 2003, the pilot was transferred to the Kasur district government. In late 2003, the provincial government decided that a new model, and therefore a new pilot (in Lahore city), would be required to accelerate the process o f computerization of land records. Progress with the new model has been quite rapid, and as a result, the provincial govemment has decided to scale up the project to other districts.

Source; World Bank. 2004b. Implementing Reaching the Poor: A progress report on Rural Strategy Implementation for the World Bank Board o f Executive Directors; Hanid Mukhtar, World Bank Pakistan office.

Water

8.8 losses, and annual supply depends mainly o n weather (and long-term investments in water storage). Transactions costs, including the management costs involved in adjusting flows o f canal water, have l imi ted water trading and market transactions to local areas to date. Informal water markets for groundwater, however, have been shown to significantly increase agricultural productivity who lack access to their groundwater sources. Development o f water markets for surface irrigation (which are currently highly localized, with most transactions o n a barter basis), could similarly increase productivity o f canal water by allowing markets to help allocate water to i t s most productive use.

Although surface water, unlike land, i s transportable, there are often major conveyance

8.9 equity of water use in Pakistan agriculture, with or without the establishment o f water markets, however. First, in order to increase accountability for Operations and Maintenance, management of distributaries andor minors could be transferred to Farmer Organizations (FO’s), permitting assessment, collection and retention o f abiana (water charges) by the FO’s. Recent administrative reforms giving greater control to farmer organizations (Water Users’ Associations at the minor level and Water Course Associations at the water course level) in some parts o f Sindh have shown promise in reducing water theft by closing i l legal outlets and thereby increasing access to water for tail-end farmers. This suggests that increased local involvement in canal water management can improve the

Several institutional changes could bring about major improvements in the efficiency and

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equity o f water d i ~ t r i b u t i o n . ~ ~ In addition, improved local maintenance o f water channels by Farmers’ Organizations has contributed to increased efficiency o f water use.

8.10 crop choice, periodic measurements o f the actual rate o f water f low at various points in the water course could be made. Having accurate information o n water flows would enable farmers to make more informed decisions regarding crop choice and area irrigated. For example, given a shortage o f available water, a farmer might choose to maximize his overall revenues through reducing total area cultivated, so that crops grown o n the remaining area receive adequate water. 66 Open access to the written rules o f the water rotation for farmers would also improve transparency.

Second, to increase transparency and enable more informed decisions o n area irrigated and

8.1 1 Third, the current system i s supply-driven and mostly managed by provincial Departments o f Irrigation. Reforms in the institutional arrangements for allocation o f water could be made to create a more demand-driven system that would better respond to the needs o f the farmers. Options include a) a system o f Water Course Associations, Water Users’ Associations and Area Water Boards (AWB’s), as i s currently being implemented in four o f Pakistan’s 43 canal command areas , and b) professional canal management.

8.12 above: i) establishing legal tradable water rights at the national and provincial levels; ii) strengthening local institutions (such as Water Course Associations and Water Users ’ Associations, or professional canal management agencies) to enable them to serve as brokers in water markets, helping to match buyers and sellers o f water.

Development o f effective water markets would require two steps beyond those outlined

8.13 the init ial allocation o f rights already impl ic i t in the warabandi system o f water r ~ t a t i o n . ~ ’ These water rights would need to include an explicit formula for allocation o f water rights in years o f shortage, as wel l as address environmental issues (see box 8.3)

Legal establishment o f tradable water rights would formalize these water markets, defining

65 In the command area covered by the Left Bank Area Water Board in Sindh, where ta i l end farmers had not received water in three years, 48 i l legal direct outlets serving an area o f about 25 thousand hectares were closed in early 2004.

66 This principle may apply to Pakistan agriculture as a whole: higher agricultural incomes might b e achieved through a contraction in total irrigated area so that crops grown o n the remaining irrigated area received optimal amounts o f water.

67 Pakistani L a w treats a l l surface water as provincial property. Under the Pakistan Constitution, while the Federal government i s responsible for regulation and development o f inter-state rivers and r iver valleys, provincial governments are responsible for water supplies, irr igation and canals, drainage and embankments, water storage etc. Under the de facto interpretation o f these responsibilities, the power o f the provinces has emerged as pre-eminent and water has come to be perceived as a provincial subject. Establishment o f tradable water rights wou ld thus come under the purview o f the provinces, though federal legislation might be required, including amendment o f the Canal and Drainage A c t (1873) wh ich ties water allocations to specific plots and also ties land sales with water sales, and the L a n d Reforms A c t (1972) wh ich makes landowners responsible for water charges.

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Box 8.3 Impor tant issues regarding tradable water rights

1.

2.

3 .

4.

5.

6.

7.

Source

Method for initial allocation of water rights: historical water use (e.g. Mexico) or historical use combined with redistribution o f large historical shares (e.g. Chile) Prior o r proportional water rights: appropriative rights system that allocates water f i rst to those who have held the rights the longest period o f time (e.g. California) or shares over a variable flow or quantity o f water (e.g. Mexico and Chile) Consumptive use and return flows: tradable water rights are full diversion rights with no rights to return flows (Mexico and Chile) or limited transferability o f water rights maintaining third-party rights o f retum flows (California) Protection against negative indirect economic effects: negative indirect economic effects from water trading have been small or non-existent in California, Chile and Mexico Protection of the environment: laws prohibiting water transfers with unreasonable impacts on wildlife (California); quality o f discharge for non-agricultural uses must be specified in water rights (Mexico) Role of water user associations: in Chile, W A S own and manage the physical infrastructure, monitor allocation o f water, approve water transfers, provide a forum for conflict resolution; in Mexico, water rights are generally initially provided to WUA which then grant water rights to their members Infrastructure required for tradable water rights: In Chile, water i s usually only measured in the main channels; elsewhere, simple proportional division devices are used to divide the water in shares proportional to canal flow.

Rosegrant, Schleyer and Yadav, 1995. Rosegrant, Mark W., Renato Gazmuri Schleyer and Satya N. Yadav. 1995. “Water policy for efficient agricultural diversification: market-based approaches”. Food Policy, Vol. 20, No. 3, pp. 203-223.

8.14 water control above the water course level in the current Indus basin system, however. Because there i s essentially n o storage capacity within a water course (and l i t t le control o f water f l ow into the water course), individual farmers are technically not permitted to refuse to take their turns in the distribution system. Likewise, water control at the distributary and higher levels i s also greatly l imi ted by the absence o f storage capacity and adequate number o f control structures (gates) to regulate water levels.

Any system o f tradable water rights would need to account for the minimal degree o f

8.15 Thus, institutional mechanisms to enforce limits o n net water transactions or new investments in storage and control structures would be needed to insure adequate drainage (e.g. that farmer sales o f water rights did not lead to excessive water f lows downstream) and minimum water f l ow velocity in the canals (to avoid siltation). (box 8.4) Overcoming these physical constraints o f the canal system to permit trading beyond the boundaries o f a water course through investments in water storage capacity and control structures or coordination o f the volume o f water trades becomes progressively more diff icult and expensive as the level at which water transactions are permitted (i.e. water course, distributary, minor) increases.

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~~ ~

Box 8.4 Infrastructure Constraints for Development o f Water Markets in Pakistan

The physical layout (geography) o f the Indus River Basin canal system and existing infrastructure limit the degree o f water control and the scope for water markets outside a given water course (the tail end o f the irrigation delivery system). In this run ofthe river system, storage capacity i s only about 13 percent o f annual average water flow. (By comparison, storage capacity in the controlled storage system o f the Colorado River basin in the United States i s about five times annual average water flow.) Thus, there i s very limited capacity to control total annual water f low in the Indus River basin. Moreover, there are very few control structures (gates) to regulate water levels and water f low velocity must be maintained above a minimum rate to avoid siltation o f canals.

In the absence o f storage capacity and control structures, water trading i s largely limited to within a water course where the warabandi system o f water rotation i s in place. Because there i s essentially no storage capacity within the water course (and l i t t le control o f water f low into the water course), individual farmers are technically not permitted to refuse to take their turns in the distribution system. Informal trades and sales within water courses do occur, but these exchanges do not affect the total inflow of water or water use in the water course.

In contrast with the Indus River basin, the geography and infrastructure o f the river basins in countries wi th widespread markets enable far greater water control. In Mexico and the US. river basins with developed water markets are control storage systems. In Chile, there are numerous relatively small river basins with their own water markets, lessening the problems o f coordination and water control.

Establishing water markets for surface water would require both changes in laws to establish water rights separate from ownership o f land, reliable measurement system (including water f low measurement devices/ personnel to measure/systems o f monitoring / farmers organizations - water users associations), and the capability o f controlling water flows.

Developing water markets above the water course level in Pakistan would require investments in storage (dams) and control structures (gates) so that water flows could be diverted in accordance with water transactions. Such investments at the minor leve l may be feasible, permitting water transactions within a minor. Establishing effective water control at distributary or higher levels, however, would require sizeable investments in storage and control structures.

8.16 As shown by the experience o f Chile, increasing the efficiency o f water use (in the Chilean case through the establishment o f water markets) can be an integral part o f pro-poor agricultural growth. Trade and exchange rate pol icy reform (including reductions in tariffs, removal o f non-tariff barriers, and liberalization o f foreign exchange markets), together with other macro-economic reforms, provided incentives for agricultural exports. Development o f high value agricultural products (fruits, vegetables, and wine) for export to Northern hemisphere (of f season) markets was facilitated by establishing security o f land titles (that encouraged investments in planting orchards, forestry, and irrigation) and water markets that helped to allocate available water to high value crops. Processing o f the agricultural exports was labor- intensive, increasing wages o f unskilled labor and contributing to reduced poverty. (box 8.5).

8.17 water markets may be smaller than in other countries, unless an institutional mechanism for insuring that adequate drainage and water f l ow levels can be devised. Nonetheless, benefits o f more efficient allocation o f water through institutional reforms, with or without water markets,

Given the infrastructure constraints in Pakistan, the potential gains f rom establishing

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could s t i l l be substantial, if they are combined with other measures to promote agricultural diversification, including strengthening security o f land titles, public investments in rural infrastructure (roads and electricity), private investments in processing and storage, and establishment o f market l i n k s to export markets.

Box 8.5 Factor Market Reforms and Agricultural Diversification in Chile

In Chile, the establishment o f tradable waters was linked to reforms in the land markets in 1975, under which land which had been collectivized in 1966 was re-privatized. Former landowners received 40 percent o f their original land along with the proportional right to water historically used on this land. The remaining 60 percent o f the land and the water rights were allocated to former works on the lands.

These reforms, along with a broad economic reform including trade and exchange rate liberalization, led to the creation o f water markets in the early 1980s, increased water use efficiency, and rapid crop diversification. Reforms in water markets resulted in increased scarcity value o f water, and a large increase in area planted to f ru i ts and vegetables, which require less water per gross value o f output than do field crops. Aggregate water use efficiency in agriculture increased by an estimated 22-26 percent between 1976 and 1992 (Frias, 1992; Munita, 1994).

Because o f the intensive use o f labor in processing o f f ru i ts and vegetables, particularly for the export market, agricultural diversification has led to substantial rural poverty reduction. Using data from 1990 to 1996, Lopez and Anriquez (2003) estimated that a 4.5 percent in agricultural output in Chile leads to a 8-1 1 percent decrease in the poverty headcount, mainly by raising real wages o f unskilled workers.

Source: Rosegrant, Schleyer and Yadav, 1995; pp. 208, 210. Frias, J.L. 1992. Evolucion Reciente de la Industria del Agua en Inglaterra. Francia y Chile, McKinsey and Company, Mexico.

Munita, J. 1994. Aumento de Eficiencia en e l Us0 del Agua por Incorporacion de Nuevas Tecnicas y Arrendamientos Temporales. Universidad de Chile, Santiago.

Lopez, Ramon and Gustavo Anriquez. 2003. Poverty and Agricultural Growth: Chile in the 1990s. Paper prepared for the Roles of agriculture International Conference, 20-22 October, 2003. Rome, Italy.

Labor

8.18 Unl ike the markets for land and water, rural labor markets are generally characterized by demand constraints, rather than supply constraints, as evidenced by substantial underemployment. There i s considerable labor mobil ity, in spite o f high transactions costs involved in j o b search and especially in migration. However, formal sector employment in rural areas i s minimal, and over 80 percent o f agricultural labor and most o f rural non-agricultural labor i s self-employed. Female participation in labor markets remains limited, though, and j o b skill levels for both male and female labor are generally low.

8.19 want to leave farming to sell or rent out their farm land. This would require greater security o f property rights, and facilitation o f land transactions that are presently stifled by .the absences o f a val id title, r isks o f court challenges, and high regulatory and transactions costs (for example, stamp duty plus registration fee plus capital tax amounted to 16% o f the average market price o f

A better functioning land market could promote labor mobil ity, helping farmers who

80

land in 1995).@ The case o f Poland suggests that removal o f impediments to land transactions can facilitate labor market mobil ity. (box 8.6).

Box 8.6 Factor Market Reforms and Labor Mobility in Poland

A major concern as Poland prepared to jo in the European Union was that a large part o f the country’s agricultural sector was uncompetitive with imports from other EU countries. Moreover, a decline in farm incomes could have especially severe impacts on the poor, given the predominance o f small farms and the high incidence o f poverty in rural areas in central and southern Poland.

Background studies o f land, labor and credit markets, combined with analysis o f rural household survey data showed low mobility out o f farming, however, particularly among small farmers (owning 2 hectares o f less). One reason for this lack o f mobility was that households were required to ho ld land in order to qualify for the highly subsidized agricultural pension scheme, which was more remunerative than the non-agriculture pension scheme. A second reason for the lack o f mobil ity out o f agriculture was a lack o f rural non-farm employment opportunities. Taxes on labor, regulations requiring high severance payments, social security tax for employers, and minimum wages made hiring o f workers expensive for rural non-farm employers.

These interactions o f labor and land market restrictions inhibited farm restructuring. Although farmers lobbied for more farm subsidies, l i t t le could be done on output markets in light o f trade and fiscal policy constraints linked to Poland’s impending accession to the EU. Reforms in factor markets offered an alternative mechanism for smoothing the economic transition.

Source: World Bank (2001).

8.20 Increasing the marketable sk i l l s o f rural labor, though effective and wide-spread vocational training programs would spur growth in the non-agricultural rural economy and rural incomes. Given the l o w participation rates o f women in the labor force, s lu l l s training for women i s especially important: one option for increasing women’s access to educational and training institutions i s to reserve more spaces for women.

8.21 Labor regulations (that mainly apply only to urban areas) do not directly alter employment conditions in rural areas, but they do have a significant effect in the dynamics o f employment creation in urban areas and thus influence incentives for rural-urban migration and rural labor markets. Employment growth in urban areas has been slow, in part because o f an atmosphere o f mutual hostility and distrust that typify industrial relations. In particular, the unusually high degree of discretion over conditions o f employment o f regular workers in specific establishments held by provincial authorities i s not conducive to cooperation between employers and workers. Replacing the discretion o f authorities o n the specific nature o f labor contracts by a few rules on the most common aspects o f these contracts (minimum age, minimum wage, overtime pay) and the establishment o f procedures to help deal with possible disputes arising f rom voluntarily agreed contracts regarding more detailed aspects o f these contracts would help build trust in the industrial relation process, and encourage employers to create jobs and invest in human capital.

68 Qureshi, 2003.

81

8.22 children, and to abolish bonded labor i s needed. Measures to assist households trapped in bonded labor arrangements, including legal protection, provision o f credit and debt cancellation programs should be urgently considered. Although these programs often face considerable opposition f rom powerful vested interests (box 8.7), such programs could have a major impact o n some o f the poorest rural households.

A concerted effort to enforce existing legislation regarding the rights o f women and

Box 8.7 Bonded Labor and Reforms in Nepal

[n Nepal, government policy reforms in 2000 aimed at raising agricultural wages and ending bonded labor (Kamaiya) encountered considerable opposition. In January 2000, the Local Self-Governance Act established a minimum wage for agncultural laborers o f Rs. 74, just over US$1 per 8-hour workday, Later that year, bonded-labor families filed a petition against their master, an ex- government minister, demanding minimum wages in compliance with the new regulation. These workers, were being paid the equivalent o f about Rs 14-16 a day in rice, far below the newly Zstablished minimum wage.

When the former minister refused, the bonded laborers attempted to register a complaint with the Chief District Officer. Thereafter followed strikes and protests by human rights activists and others in an effort to end the practice o f bonded labor, which culminated with a July 17, 2000 national government decree declaring the practice o f bonded labor to be illegal. An estimated 16,000 to 40,000 bonded laborers (mostly in western Nepal) were declared free o f their ancestral debts. The decree also mandated a prison sentence o f up to ten years for anyone violating the ban on bonded labor.

Many landlords strongly resisted these reforms, however. Thousands o f liberated Kamaiyas were driven out o f former homes, and their possessions confiscated by landlords. Many former Kamaiyas moved to refugee settlement camps in five districts in Western Nepal and have continued to press for the enforcement o f the minimum agricultural wage; 10 kuttus o f land for each displaced former bonded laborer family; identity cards for former bonded laborers; protection from police and former landlord harassment; food, health services, and education for people in the temporary settlements.

In response to the needs o f the former bonded labors, the International Labor Organization (ILO) began a $3.5 mill ion project, funded by the U.S. Department o f Labor, that provides vocational training, education, legal and counseling services, micro credit, and the establishment o f revolving savings and credit funds.

Sources: Sushma Joshi, “Bonded to Labor: The Contemporary Situation in Nepal”, South Asian Magazine for Action and Reflection (SAMAR) 16: FalUWinter, 2003, (ww~~~.samaniiiarazine.orq). www.us.ilo.orelarchivelilofocusl200 llwinter

Credit

8.23 n o transport costs, though considerable transactions costs for small farmers in rural formal credit markets. Nonetheless, formal credit has often been rationed, and access to credit i s a significant problem. Approximately 17 percent o f a l l rural households face credit rationing in both the formal and informal sectors, resulting in a 23 percent reduction in the value o f crop yields.

Credit markets are potentially the most flexible o f factor markets, involv ing essentially

8.24 rates for loans in the formal sector) could eliminate these policy-induced incentives toward

Removal o f subsidies o n credit (implicit in the continuing l o w repayment / high default

82

capital-intensive technologies that reduce labor demand. Efforts at promoting agricultural diversification should thus avoid subsidies on credit that would encourage capital-intensive technologies in production, processing and marketing. Instead, agricultural diversification, the development o f the rural non-farm sector and poverty reduction may be better achieved through public investments in electricity, transport and other infrastructure. Further work o n particular constraints to rural non-farm investment, employment and growth i s needed, however.

8.25 Production credit and micro-credit programs targeted to landless and small farmers that required other forms o f collateral (besides land) could also help promote rural employment and income generation. Rural credit f rom formal sources i s currently available for a narrow range o f agricultural production activities and does not serve the needs o f the non-farm sector. In particular, availability o f medium-term credit i s extremely limited. Adaptations to conventional lending products and delivery mechanisms, such as matching disbursement and repayment to agricultural production cycles, reducing costs through use o f appropriate modem technology, and risk management through portfolio diversification can help make micro-finance for agricultural more viable (box 8.8). Increased access to credit by small scale enterprises in rural areas, for example, would promote farm to non-farm linkages, develop the rural non-agricultural sector and increase labor demand. Targeted matching grants to poor households for income-generating activities are one option (box 8.9).

8.26 developing micro-finance as part of i t s poverty alleviation strategy. In 2003, Rs. 1,442 mi l l ion (2.5 % o f total institutional credit) was disbursed as small loans through the Pakistan Poverty Alleviation Fund (PPAF), Khushali Bank and the Zarai Taraqiati Bank L imi ted (ZTBL, formerly called ADBP). Comprehensive analysis o f existing micro-finance programs i s needed to assess the effectiveness and financial sustainability o f these programs. Promotion o f savings mobilization schemes and implementation o f an adequate regulatory framework for deposit-based institutions could help provide sustainable resources for micro-credit.

The Government o f Palustan in recent years has, in fact, placed considerable emphasis o n

83

Box 8.8 Micro-finance for Agriculture

Microfinance institutions (MFIs) have tended to avoid less densely populated or diversified rural areas, and financing o f seasonal or longer-term crop and livestock activities. Conventional micro credit relies heavi ly o n short-term loans with frequent, regular repayments, which does not fit we l l with seasonal crop production or livestock production (except for poultry). Adaptations to conventional financial products and delivery mechanisms can make micro-finance for apcu l tu re more viable:

Matching disbursement and repayment to agricultural production cycles. Flexibi l i ty in loan disbursement and repayment i s needed, with finance made available when farmers need it and repayments matching income from produce sales. PRODEM, a rural MFI in Bolivia, adopted a customized repayment scheme for small farmers, with dif fering repayment schedules even for members within a solidarity group to fit harvest calendars. Individual agricultural loans were also introduced, with collateral at a ratio o f 1.5:l to the loan amount. PRODEM further minimizes risk by restricting f inal loan payments to a maximum of 60 percent of the loan amount, and by limiting each office's portfol io in each economic sector to 30 percent. Agricultural lending now accounts for about one-fifth o f PRODEM's loan portfolio.

Flexibility in collateral requirements. Land may ho ld l i t t le value as collateral, as land-use rights may be di f f icul t to prove, clients may not o w n land, land markets may be weak, or cost o f registering land as collateral may be high. Financial service providers therefore need to be more flexible in terms o f the collateral required, even if the value of nomor tgage guarantees i s sometimes more significant as a repayment incentive than its real resale value. Personal guarantees, movable assets, and group guarantees can al l be adequate alternatives.

Using technology. Technological innovations can increase operational efficiency and lower costs o f operating in rural areas, while improving financial services available to rural clients. There has been a tendency to overestimate the short-term benefits and underestimate the up-front implementation costs. For example, in India, the Swayam Krishi Sangam's experiment combines smart cards with hand-held computers to streamline meetings between clients and borrowers in remote areas. However, this did not produce the dramatic time savings expected, and expansion o f the project has been put o n hold.

Flexible delivery mechanisms. Making use o f existing delivery outlets, rather than investing in expensive new branch networks, can significantly lower the cost o f providing financial services, and can also al low a wider range o f services to be provided. Options include: working with/through rural post offices, retail stores, rented offices in schools and hospitals, o r shared offices with other financial institutions. Mobi le staff can help reduce operating costs and improve access in more remote areas.

Risk management techniques. A principal factor discouraging MFI lending to small farmers i s the systemic risk inherent in much smallholder agriculture. Mos t MFIs that have successfully moved into agricultural lending have used a diversification strategy to reduce lending risk, both in their portfol io and at the household level. Portfolio diversification helps ensure that a loan portfol io be diversified across sectors and regions/communities, and that repayments do not fa l l due at the same time. This increases the stability o f the portfol io and reduces lending risk f rom weather events and from price fluctuations in certain crops. Confianza, a Peruvian MFI, wh ich developed f rom a purely agricultural portfolio, has n o w set a target percentage for agricultural lending o f 30 percent of i ts overall portfolio.

1 Source: World Bank. 2004. Agricultural Investment Sourcebook.

84

Box 8.9 Suggested guidelines for providing matching grants for income- generating activities

Target matching grant assistance to very poor communities or groups that are beyond the current reach o f micro-finance institutions. One way to make the grant amount large enough to be u s e h l to the poorest, but too small to be worthwhile for better o f f groups. IGAs financed must be cost-effective ways o f reducing poverty. This can be demonstrated by impact and cost-effectiveness indicators. The investment should not compete directly with private investment (existing or likely). Beneficiaries should always contribute at least partly in cash (no less than 5 YO o f the total project cost), which will demonstrate commitment and can serve toward the initial working capital to operate the activity. Over generous subsidies may create false positive demand (even where beneficiaries contribute in form o f labor or cash). This may jeopardize future maintenance o f the investment b y beneficiaries. Subsidies used without tied commitments for repayment, user fees, or maintenance, may create perverse incentives for greater rent-seeking by beneficiaries. Grants should be combined with training and support to establish local savings and credit associations to capture increased income flows and finance future economic activities (group or individual) on a sustainable basis. Subsidies based on percentage cost-sharing o f subprojects creates an unknown contingent liability for government. This can be avoided by basing these on per capita amounts, or f ixing a ceiling for government contributions with excess being met by beneficiaries.

Source World Bank, Agricultural Sourcebook, 2004a.

Implications for Rural Poverty Reduction

8.27 much of South Asia over the past four decades. Increased production o f rice and wheat6’ through adoption o f green revolution technology o f improved seeds, irrigation and fertilizer, directly raised incomes o f small farmers, led to reductions in the real price o f major food staples for consumers, and spurred employment and increases in real wages through demand for agricultural labor, as wel l as demand for labor in the rural non-agricultural economy.

Increased agricultural production has been a major force for reducing rural poverty over

8.28 Rural poverty in Pakistan did not decline in the 1990s, however, in spite o f agricultural growth. Overestimation o f true sectoral growth rates because o f abrupt changes in estimates o f livestock population i s part o f the explanation for this lack o f correlation between agricultural growth and poverty reduction. Stagnation in the real consumer prices o f rice and wheat (in contrast to declines in early decades) i s another major factor. T w o other major factors are the changing structure o f the Pakistan economy, in particular the declining share o f agriculture in total GDP (39 percent in 1970, but only 24 percent in 2000), and the persistent high degree o f concentration o f land (and land revenues) amongst medium and large farmers. As a result o f these structural characteristics, growth in agricultural incomes, though they lead to substantial multiplier effects on the rural non-farm economy, has a smaller impact on rural incomes (in terms

69 In Pakistan, increased yields o f cotton also contributed to rural income growth, particularly in the 1990s.

85

of the percentage increase in non-agricultural households’ incomes) than agricultural growth in Pakistan had in past decades.

8.29 non-agricultural rural households. However, landless agricultural laborers and non-agricultural rural poor households account for 61 percent o f the rural poor (and nearly 30 percent o f the rural population). Although agricultural growth can have a major impact on a sizeable segment o f the rural poor through combined direct and multiplier effects, i t i s unlikely to be sufficient to rapidly raise incomes o f this entire segment o f the rural population. Thus, in the absence o f a change in the structure o f rural incomes and employment or significant gains in the rural non-farm economy apart from agricultural growth-induced linkage effects, targeted interventions to agricultural laborers and the rural non-farm poor wi l l be needed.

Rural agricultural growth remains a major engine o f growth for both agricultural and

8.30 (World Bank, 2003b) recognizes this explicitly. In addition to advocating sustained and broad based economic growth emanating f rom the rural areas the strategy also emphasizes the simultaneous provision o f social and economic services and infrastructure for the poor, creating j ob opportunities and improving governance as essential elements.

The Poverty Reduction Strategy Paper (PRSP) o f Pakistan issued in December 2003

Conclusions

8.3 1 Significant structural changes have taken place in Pakistan’s economy over the past several decades that make factor market reforms critical to increasing agricultural productivity and raising incomes o f the rural poor. Rural population has steadily increased, gradually reducing average farm sizes in the face o f constraints on the overall supply o f arable land and water. The size o f the agricultural sector relative to the overall economy has steadily shrunk, as the output o f the rural non-farm economy has expanded. Rural poverty which declined steadily (as a percentage o f total rural population) in the 1980s and early 199Os, has increased marginally in recent years.

8.32 Even in the face o f increasingly severe constraints on land and water resources, however, agricultural growth can play a central role in increasing rural incomes and reducing poverty. Experience o f other countries suggests that factor market reforms, coupled with outward-oriented trade and exchange rate pol icy can lead to rapid agricultural growth and rural poverty reduction through diversification o f agricultural production into high-value products (e.g. f ru i t s and vegetables) with labor-intensive production and processing. Reforms in factor markets that promote the allocation o f scarce land and water resources to their most efficient uses, and increase returns to unskilled labor, are essential for replicating this success in Pakistan (see table 8.3).

8.33 sufficient to significantly raise incomes o f a large fraction o f the rural non-farm poor, even with i t s substantial multiplier effects o n the non-agricultural economy. Policies and programs to increase access to credit and enhance worker and entrepreneurial s k i l l s can directly support growth in the rural non-agricultural economy and further raise incomes o f the rural non-farm poor. Targeted interventions are also needed to reach the poorest households including micro- credit, enforcement o f laws o n bonded labor, and training in marketable sk i l ls . In these ways, rural factor market pol icy reforms have the potential to contribute to a rapid reduction in rural poverty through increases in both agricultural and non-agricultural productivity, as wel l as through direct interventions at the household level.

Because many rural poor households lack access to land, agricultural growth alone i s not

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88

Annex 1 : Credit Access and Agricultural Productivity’

A 1 . 1 . This annex examines the link between access to credit and gross farm productivity, as measured by per acre crop yields. W e are not interested here in the relationship between use o f credit per se and productivity. A farmer who does not take out a loan i s not necessarily credit rationed; he may simply not need credit, and consequently may be just as productive as a farmer who does take out a loan, The hypothesis that we are interested in testing i s whether the inabil ity to obtain credit (or enough credit) when desired reduces a farmer’s productivity vis a vis a farmer who obtains as much credit as he wants or one who does not want any credit in the f i rst place.

A l . 2 . use. Pakistani farmers typically borrow at the beginning o f the agricultural season to finance the three principal planting inputs: seed, fertilizer, and tractor rental. Access to credit can thus ensure that key inputs are available in sufficient quantity and in a timely fashion. Farm credit i s also used for long- term investments in land or equipment; the relatively long duration o f formal loans suggests that they are often used for such purposes. The resulting capital improvements would presumably also enhance agricultural productivity once they are put into place. W e do not explore the precise channel through which credit access impacts productivity at this stage, and it i s unclear whether productivity gains from long-term investment could ever be detected in data such as ours.

The ma in channel by which credit i s l ikely to influence farm productivity i s through input

A1 -3. each plot during the kharifand rabi seasons o f 2000-01, along with input use and expenditures. The advantage o f using plot-level data i s that one can control for a wealth o f p lot characteristics, such as topography, irrigation, and soil-type, that also influence productivity. Credit access, o f course, i s defined only at the level o f the household, and for this reason it i s important to correct the standard errors for any correlation o f the errors across plots within the same household.

Our unit of analysis here i s the plot. W e have information o n the value o f crop production o n

A l . 4 . 134 villages, which should capture variation in prices as wel l as in the structure o f factor and credit markets more generally. We also include a tractor ownership dummy in al l the regressions to al low for the possibility o f imperfections in the tractor rental market. In addition, we include some household level characteristics that may directly affect productivity such as the education level o f the household head and the number o f adult males in the household (table A1 -1).

In addition to p lo t characteristics, a l l the regressions include dummy variables for each o f the

A1.5. W e use four measures o f credit access: (1) the credit access dummy takes the value 1 if a household i s rationed (in either sense) in the formal market and 0 otherwise. (This corresponds to the 3‘d specification in table Al.2; (2) the credit access dummy takes the value 1 if a household i s rationed (in either sense) in the informal market, and 0 otherwise. (This corresponds to the 3rd specification in table A1.3; (3) the credit access dummy takes the value 1 if a household i s rationed in the formal market but i s not rationed in the informal market, and 0 otherwise. (This corresponds to the lSf specification in table Al.4; and (4) the credit access dummy takes the value 1 if a household i s rationed in both the formal and the informal markets, and 0 otherwise. (This corresponds to the 2nd specification in table Al.4). Table

This annex i s taken f r o m Jacoby and Mansuri (2004b), “Agricultural Credit and F a r m Performance: Evidence f rom Pakistan”.

89

Households with b outstanding

Al.5 presents the OLS regressions for log yields under these four specifications respectively.2

Households Households with with ’ outstanding loans who face outstanding no quantity restrictions loans (139) (1 80)

Table Al . l List of variables and descriptive statistics

List of variables and descriptive stafistcs Descvivtion Units of measurament Mean Stand. Deviation Min Max

land owned acres 6.09 14.91 dummy for land owners - 0.71 0.46 dummy for tractor owners - 0.08 0.27

highest level o f education o f adult males members years 5.69 4.98 number of adult males in the household persons 5.17 3.19 household size persons 8.74 4.68 distance from closest bank l=<lkm, 2= 1-2km; 4.10 1.25

number of animals owned (not including poultry) - 2.84 3.57

3=2-5km, 4=5-10km, 5=10-20km, 6=>20h

income from non agricultural stable employment 8.2 28.6 Thousands of Rupees

Figure Al.l Credit Rationinv in the Formal M a r k e t

250 1 1

53 21 26 42 6

393.2

~~

In taking logs, we drop cases with zero values. Even though we lose observations (about 4 percent) in this procedure we actually gain in precision o f the estimates. At the same time, selection bias does not appear to b e a problem, as otherwise equivalent specifications using a l l the data with the dependent variable defined as log(expenditures +I) give very similar results.

90

Figure A1.2 Credit Rationing in the Informal Market

Households with Households Households with outstanding loans who face with outstanding loans no credit limits (1019)

Households that are not current borrowers but are not access rationed in the forma[ credit sector (287)

Households that are not current

Farmers borrowers but are in the not access rationed sample 1590

Households that have informal loans but face

access rationed quantity restrictions (186)

Households that are access rationed (98)

Households with no outstanding loans

u Specification 3

Al.6. yields on their plots than their credit-rationed neighbors. The size o f the effect i s roughly the same when we look at the two markets separately. However, as we discuss above, households can substitute one source o f credit for another-although the two sources may not be perfect substitutes. The third and fourth specifications tackle this question.

The regression results indicate that rationed households realize significantly lower

A1.7. households who can obtain al l the credit they need from informal sources. Interestingly, the productivity effect disappears entirely. This suggests that the impact o f formal sector rationing i s dampened considerably in rural Pakistan because o f a vibrant informal market which absorbs much o f the residual demand from the formal market-recall that 75% o f those rationed in the formal market are able to obtain al l the credit they want in the informal market. We turn finally to the remaining 25% o f households who are unable to get adequate access to credit in either market. These households constitute some 10 percent o f farm households. We find that these households realize yield losses o f 23 percent on their plots as compared to their non-rationed neighbors.

In specification 3, we examine the impact o f rationing in the formal market for

A1.8. One issue that we have ignored, so far , i s the endogeneity o f credit access. W e know from our analysis in the previous section that access to credit, especially formal credit, is strongly dependent on land ownership. Access to credit may also be affected by unmeasured factors that influence agricultural productivity and input use directly, such as the ability o f the farmer or the fertility o f the land. The presence o f such unobservables wil l render the OLS estimates in table A l . 5 biased. Moreover, under any reasonable model o f credit rationing, an unobservable that raises land productivity (such as farmer ability or soi l fertility) should also improve access to credit-so the OLS estimates o f the credit access coefficients are l ikely to be biased upwards. We attempt to correct for this, by using an I V strategy.

91

Table A1.2 Probit On Access T o Formal Credit Explanato y Variables (I) (2) (3)

L o g L a n d Owned'

Tractor Owner

I

Highest Level o f Education

Number o f Adults

Household Size

Distance F r o m B a n k

Dummy for Stable Income

L o g o f Durable Assets

Observations 1574 1574 1574 Absolute value o f z statistics in parentheses * significant at 10%; ** significant at 5% ; *** significant at 1%

'log(acres o f land owned + .01) 'log(non ag income+l)

Dependent variable: (1) 1 if some formal credit, 0 if no formal credit;(2) 1 i f not access rationed, 0 if access rationed; (3) if neither access nor quantity rationed , 0 if rationed access or quantity rationed.

All specifications contain regional dummies. The dummy for Balochistan i s dropped

0.19 0.14 0.12 (0.023)***(0.013)***(0.013)**

0.41 0.52 0.38 (0.148)*** (0.17)*** (0.15)**

lLog o f Livestock Value -0.03 -0.001 -0.00 (0.012)** (0.009) (0.009)

(0.01 1)* (0.008)***(0.008)** 0.02 0.03 0.02

-0.01 -0.03 -0.02 (0.022) (0.18) (0.017)

0.01 0.012 0.011 (0.014) (0.02) (0.02) 0.056 -0.04 -0.08

(0.041) (0.031) (0.03)**

-0.35 -0.043 -0.00 (0.1 14)*** -0.084 -0.005

0.18 0.01 0.02 (.007)** (.005) (.005)

92

L o g L a n d Owned'

Tractor Owner

L o g o f Livestock Value

Highest Level o f Education

Number o f Adults

Household Size

Distance F r o m Bank

Dummy for Stable Income

L o g o f Durable Assets

Table A1.3 Probit On Access T o Informal Credit Explanatory Variables (1) ' (2) (3)

Observations 1574 1574 ~~

Absolute value o f z statistics in parentheses * significant at 10%; ** significant at 5% ; *** significant at 1%

-.26 (0.0 14)"

-.27 (0.138)*

-.01

-.02

-.02

-.oo

.04 (0.034)

(0.009)**

(0.009)***

(0.019)

(0.012)

-.13 (0.085)***

.003 (.006)***

.o 1

-.02 (0.214)

-.04 (0.0 16)***

.oo

-.03 (0.03)

.oo

.06 (0.049) -0.09

(0.131) 0.03

(.008)***

(0.020)

(0 .o 12)

(0 .o 1 8)

.02 (0 .O 14)

-.23

-.02

.01

-.03

.01

-.02 (0.03 5)

-.03

0.02 (.006)***

1574

(0.15)

(0 .o 1 O)* *

(0.009)

(0.019)

(0.01)

(0.09 0)

o f land owned + .01)

regional dummies. T h e dummy for Balochistan i s dropped ependent variable: (1) 1 i f some informal credit, 0 i f no informal credit;(2) 1 if not access rationed in the informal

(3) 1 if neither access nor quantity rationed in the informal market , 0 if rationed accesi

93

Log o f Livestock Value

Highest Level o f Education

Number o f Adults

Household Size

Distance From Bank

Stable Income

Log o f Durable Assets

Table A1.4 Probit On Access T o Formal and Informal Credit Explanatory Variables (1) (2)

Log Land Owned' -.09 -.06

Observations 1574 1574 Absolute value o f z statistics in parentheses * significant at 10%; ** significant at 5% ; *** significant at 1%

'log(acres o f land owned + . O l ) 'log(non ag income+ 1)

Balochistan i s dropped Dependent variable: (1) 1 if rationed in formal but not in informal, 0 otherwise;(2) 1 i f rationed in formal and in informal, 0 otherwise.

All specifications contain regional dummies. The dummy for 3

Tractor Owner (0.0 13)*** (0.0 17)"""

-.40 -.11

I (0.1 6 1)* * (0.2 1 7) -0.01 .03

(0.0009) (0.013)** -.14 -.02

(0.008)* (0.01 1) 0.02 0.01

(0.018) (0.024) -0.01 0.01

(0.012) (0.016) 0.05" 0.07

(0.032) (0.042)

-0.06 0.12 (0.083) (0.109)

0.00 -0.0 1 (.005) (-007)

94

Table A1.5 Credit Access and Farm Productivity

Rationed in Rationed in Rationed in Rationed

Credit Access

Tractor ownership Education o f head

N o . o f adult males

L o g o f p lo t area

L o g value per acre

Plot outside village Flat topography

Perennial canal

Non-perennial canal Good groundwater Brackish groundwater

V.brackish groundwater Sandy soil Maira soil Chikni soil Cotton area

Sugarcane area Wheat area Rice area No . Observations

- 0.09 ** (0.04) 0.07

0.01** (0.006) 0.02"" (0.006) -0.12*** (0.02) 0.13*** (0.03) -0.04 0.10* (0.0 5 8) 0.16** (0.077) 0.12 -0.05 0.18"" (0.092) -0.10 -0.05 0.03 0.01 0.49** (0.197) 0.26 -0.22 -0.1 1 2030 (40%) r?

(0.05) 0.07

0.01"" (0.006) 0.02"" (0.006) -0.12" * * 0.13*** (0.03) -0.04 0.11* (0.05 8) 0.17** (0.077) 0.12 -0.05 0.19** (0.091) -0.11 -0.05 0.03 0.01 0.49"" (0.197)

(0.02)

0.28 -0.20 -0.09 2030( 18%)

.J I .57

(0.038) 0.07 0.01** (0.006) 0.02** (0.006) -0.12* * * (0.02) 0.12*** (0.03) -0.04 0.11" (0.059) 0.17** (0.076) 0.12 -0.05 0.19** (0.092) -0.11 -0.05 0.03 0.01 0.48** (0.198) 0.28 -0.21 -0.10 20 3 0 (3 0%)

(0.074) 0.07 0.01* (0.006) 0.01** (0.006) -0.12* ** (0.02) 0.13*** (0.03) -0.04 0.11* (0.058) 0.15* (0.07 8) 0.10 -0.05 0.19** (0.091) -0.10 -0.05 0.04 0.01 0.50** (0.197) 0.27 -0.2 1 -0.10 2030( 10%)

Adj. R2 .56 .57 r'otes: Standard errors, adjusted for clustering by household, are in parentheses (". **, and *** denote

significance at the 0.1, 0.05, and 0.01 levels, respectively). Al l regressions include vil lage f ixed effects.

Al.9. The results are reported in table A I .6. We report the results for the two specifications o f main interest. The first and the fourth. Our instrument set includes a number o f variables that capture household wealth (such as land holdings, the proportion o f owned land for which the household has a legal title, the value of livestock, and the household's annual expenditures) and demographics (whether the household has a female head and whether the head was born in the village). In principal, if credit markets function well, household wealth should have n o impact on productivity. So one can reasonably argue that to the extent that wealth matters it i s due to imperfections in the credit market. If such imperfections exist, however, household wealth may also reflect unobserved differences in skill or ability that also impact productivity. T o control for this, we include the household head's level of education in al l o f our specifications. It i s certainly unl ikely that any unobserved abil ity that i s reflected in household wealth should not be captured in the household's observed level o f education. As our results in section 4 have already indicated, we are better able to identify the determinants o f

95

access to credit in the formal market. Thus our IV strategy also works better when we look at rationing in the formal market. The F test for excluded instruments i s 26 in the f i r s t case, but only 5 in the second. In both cases, however our IV estimates have the right s i g n and are much larger. Standard errors also increase in both cases-as expected. However, the yield loss for households who are rationed i s n o w 26 percent and significant at the 95% level.

A1 , l o . Whi le we do not explore the precise channel through which access to credit raises productivity in this paper. One such channel may be that it facilitates long-term investments in land and equipment. Given the ‘time-to-build’ for some o f these investments, however, it may be di f f icul t t o detect the long-run productivity effects o f current credit access status in our data even if they are important. Nevertheless, to give this hypothesis a ‘fair’ test, we re-run the l og y ie ld regression dropping a l l variables that are potentially investments or might be influenced by past investments; in particular, the canal and tube wel l irrigation variables, the tractor ownership dummy, and the l o g per acre value o f land. This specification allows the credit access variable to pick up the full y ie ld impact of any recently completed agricultural investment. The resulting coefficient on credit access i s somewhat larger (-.lo in the 1’‘ specification and -.24 in the second) and the SE i s smaller in both cases, This increases the yield loss to 11 percent for farmers rationed in the formal market, and to 26 percent for those rationed in both markets. Whi le this suggests a credit-investment-productivity channel, i t i s by n o means conclusive. A more complete analysis would require data o n past investments along with a credit history to account for the time lag between the taking o n o f debt and the completion o f the intended project.

A1 .l 1 . Finally, given the positive relationship between credit access and land ownership, i t i s possible that access to credit also affects the amount o f land that households can operate-particularly if land leasing markets are functioning reasonably well. Specifically, i t i s possible that bigger landowners have more cash on hand to finance production inputs, and therefore can operate more land, Figure Al.3 presents results for a bivariate regression (by province) o f land operated on land owned. Indeed, the results are quite suggestive o f a strong positive relationship between owned and operated holding^.^ Thus, it i s l ikely that in addition to any impact o f credit access o n per acre land productivity, i t may also influence the scale o f farming, which ultimately affects household wealth.

This positive relationship between operated and owned area also holds up strongly in a linear regression with village f ixed effects.

Credi t Access

Tractor ownership Education o f head

No. o f adult males

Log o f plot area

Log value per acre

Plot outside village Flat topography

Perennial canal

Non-perennial canal Good groundwater Brackish groundwater

V.brackish groundwater Sandy soil Maira soil Chikni soil Cotton area

Sugarcane area

Wheat area

Rice area No. Observations

- 0.26 ** (0.126)

0.05 0.01** (0.004) 0.02""" (0.005)

-0.12* * * 0.12"* (0.03) -0.03

0.12** (0.047) 0.16*

(0.085) 0.09 -0.05 0.16"

(0.0 8 5) -0.08 -0.05 0.02 0.02

0.5 1 *** (0.167) 0.26*

(0.139) -0.2 1 * (0.122) -0.09

(0.02)

1961 (40%)

96

Table A1.6 Credit Access and Farm Productivity (TV Estimates)

IVEstimates Rationed in Rationed in

Formal Both Yield (a) Yield (')

-0.45 (0.479)

0.06 0.01"" (0.004) 0.01** (0.005)

- O . l l * * * (0.02)

0.11""" (0.03) -0.04

0.14** (0.047) 0.16*

(0,091) 0.09

0.15* -0.05

(0 .o 8 9) -0.08 -0.06 0.04 0.02

0.52*** (0.167) 0.29** (0.141) -0.18

-0.05 1961 (10%)

gtes: Standard errors are in parentheses (*, **, and *** denote significance at the 0.1, 0.05, and 0.01 levels, respectively). Al l regressions include vil lage f ixed effects. a) Sig. test o f excluded IVs in f i rs t stage credit access equation: F( 6, 1885) = 26.19 b) Sig. test o f excluded IVs in f i rs t stage credit access equation: F( 6, 1885) = 5.2

97 Fipure A1.3 Operated vs. Owned Area by Province

Operated vs. Own

I I I I I I

0 50 100 150 200 acres owned

I

-.-.-.- Punjab ----. Sind _._. . NWFP - Balochistan

98

Annex 2: Determinants o f Farm Revenue Income in Pakistan4 Revenue Functions for Pakistani Farm Households

A2.1. agricultural operations i.e. livestock and farming activities; that is, the focus i s o n the net returns to household farm-related assets, which include human and physical capital associated with the farm operations. Household income as defined here i s farm-related income and excludes labor income f rom off- farm employment as well as pensions and transfers. For landowners, returns may be generated f rom their own cultivation o f their land, and from income derived f rom renting or in the form o f share-cropping arrangements. For tenant households (both cash leasing and sharecropping), income i s generated by their share in the farm operation, which yields returns to their on-farm labor and capital (off-farm income and remittances are excluded). For “landless” farm-operating households, income corresponds to that generated with o w n cattle and poultry production o n common-property and owned non-cultivated land; and that generated by leasing out all o f their agricultural land.

The emphasis o f this analysis i s on the abil ity o f households to generate net income f rom

A2.2. N e t farm-related household income i s defined as gross farm revenues less the cost o f purchased inputs. To analyze the determinants o f net household income, we make use o f the restricted revenue function. Algebraically, the gross revenue from agricultural production activity can be represented as using two inputs: a short-term f ixed input, z , and a variable input, x :

The restricted revenue function i s defined as gross revenues less purchased (variable) inputs, x :

R(p; z ) = R(p; x, z ) - wx (2)

Assuming that the household selects the variable inputs to maximize short-term net revenue, one can estimate the relationship between observed net revenues and levels o f prices and f ixed inputs. In the case o f Pakistan, net revenue derives f rom many crops, and we assume that farmers choose an optimal combination o f outputs. Crops include f ie ld crops (cotton, sugar, wheat and rice), other crops (including other cash crops, h i t s ) , and livestock (which includes poultry and dairy revenues). Quasi-fixed inputs consist o f land, canal water, non-land capital, education, o w n labor, and agricultural credit.6 To calculate net revenues, we subtract f rom gross revenues the variable input costs associated with hired labor, seeds, fertilizers (organic and chemical), pesticides, purchased tube-well water, and machinery and equipment rental; and addsubtract the revenue/cost o f land leasing arrangements.

This annex i s taken f r o m Gustavo Anriquez and Albert0 ValdCs (2004), “Determinants o f F a r m Revenue in Pakistan”, Background Paper for the Pakistan Rura l Factor Markets Study. An interesting property o f the restricted revenue function(2) i s that i t i s n o longer a function o f the variable

input. Partially differentiating with respect t o x we obtain: at?(p; x , z) I ax = dR(p ;x , z) I ax - w = 0 . If the marginal retums of the variable input, dR(p; x, z ) / ax, are higher than the cost o f acquiring it, then the farmer wil l employ more o f that input, until the retums o n the last unit employed equalize the cost o f using it, w. As per a regular revenue function, k ( p ; z ) i s positively homogenous o f degree 1, continuous, increasing and convex in output prices p and i s continuous, increasing and concave in f ixed inputs z.

A more thorough discussion o n the possible endogeneity o f quasi-fixed inputs i s given in Appendix D.

99

A2.3. because canal water i s t ied to land holdings and the market for water i s limited. Normally, farms are endowed with one canal turn per week per acre o f land in a rotational system, called warabandi, with turns usually lasting 20 minutes. These water endowments depend o n land holdings, not crop area, and are independent of any other demand consideration, such as the type o f crop under cultivation, terrain seepage, or seasonality. Farmers make some adjustments by trading their canal turns to adjust for peak crop demand, but these trades usually occur between neighboring plots. Sales o f canal tu rns are uncommon, and in any case not necessarily legal, a fact which may lead to some underreporting. table A2.1 reports canal water usage and market transactions in the different districts o f rura l Pakistan. Except for the districts o f Badin, N. Shah and M.P. Khas, there are very few market transactions o f canal water.

I t i s important to note that for Pakistan canal water can be considered a quasi-fixed input,

A2.4. agricultural season. Because o f the abundance o f share-cropping and land rental agreements we purposely differentiate land owned from land operated. The land operated includes owned land, as wel l as land operated through a fixed rental or sharecropping agreement. ’ The cost o f usage o f not- owned operated land i s discounted for the households. That i s for f ixed rental arrangements we subtract the cost o f renting land. Whi le for tenant sharecroppers we account only their agreed upon share o f the value o f output (revenues); in other words we are impl ic i t ly discounting their cost o f use o f land. The returns to household assets include revenues generated by the household’s operated land use, irrespective o f the land’s ownership. The returns to land specifically are distributed between the owner and the operator, who could be the same agent. Revenues and input costs and usage are calculated at the operated farm level. For landlords with tenants operated land excludes that which i s leased-out, but we include the revenues from those lease agreements that i s fixed rent paid in cash or in hnd, and the corresponding net value o f output f rom their share-cropping contracts .

Land operated, once the farm i s in operation, i s a fixed input in the short term, i.e. the

Table A2.1 Canal Water Usage and Transactions by District

District Faisalabad Attock Hafizabad Vehari Muzafar Garh Bahawalpur B adin N S h a h M.P.Khas Larkana Dir Mardan Total

Source: PlDE 2001

I

Endowed 525 0

24 37 16 16

3 82 65 73 143 0

391 204

,verage Hours Given or Received

6.30 0

0.11 0.03 0.04 1.10 19.31 1.78 0.00 8.00

0 2.00 5.19

Y Farm) Sold or Purchased

1.99 0

0.03 1.75 0.02 0.04 9.45

25.56 4.57

0 0

0.00 5.52

Surveyed Farms with Canal Water

56 0

21 52 21 54 80 44 46 6 ’ 0 36

416

The degree o f involvement o f the landlord in a sharecropping operation varies tkom an absentee landlord to a landlord that wil l make a l l the decisions regarding the agricultural operation treating the sharecropper almost l ike a wage laborer pa id in kind.

100

Land Ownership

A2.5. Agricultural land distribution i s notably unequal in rural Pakistan. In the case o f east and south Asia, the average Gini for operational holdings o f agricultural land ranges between 0.52 and 0.56. Pakistan has Gini coefficients similar to the highest regional average, this honor belonging to Latin America. Table A2.2 shows the disparity between the mean and the median of farm sizes (owned and operational), reflecting the skewness o f the distribution. In the case o f owned land, for example, the mean i s 10.17 acres in contrast to the median o f 3 acres. Not surprisingly, the GINI i s high (0.82). Table A2.2 also shows that land leasing mitigates the inequality in land ownership, lowering the relative disparity between the mean and the median, the coefficient o f variability and the GINI index for operational land holdings.

Mean Median Coefficient of Variability GINI 10.17 3 4.62 0.824

Table A2.2. The distribution of farm size and land ownership (Acres).

1 Leased(0ut) Land 1 1.93 3.71 I 4.40 I 0.894 1

A2.6. the short term include household head education, the household size (a determinant o f own fami ly labor allocation) and capital stock. Agricultural credit (formal and informal) may be thought o f as a quasi-fixed input, fixed within a given year, although adjustable over a longer term. Treating credit as a separate fixed input serves to measure the marginal effect o n profitabil ity o f the distribution o f financial funds across farms.

Other important determinants o f household revenue that can be treated as fixed inputs in

The restricted revenue function we proceed to estimate may transparently be described by:

R(p; A, X , E, K , W , D; L) = p a F(A, X , E, K , W , D ) - C(purchased inputs) + r (L - A) .

Where F( .) i s the production value from the farming operation - income f rom farming directly. A i s land uti l ized in the farm operation, r i s the rental rate per acre, L i s total land owned, and r(L - A) i s earnings from leasing out or costs f rom leasing in land used in the farm operation. C(.) represents the costs of a l l purchased variable inputs. The quasi-fixed inputs that determine farm value are: X, which i s family labor; E i s education, K capital, W i s water, and D i s credit. Costs o f purchased inputs and productivity could vary by district, and dummy variables are included in the estimation to account for such differences.

A2.7. The reader should note what income sources are excluded in this measure o f income f rom farming: off-farm wage and non-farm enterprise income and income f rom pensions, government transfers and remittances. This would affect the interpretation o f the results, specifically the effects o n farm income due to changes in household labor (reported here in terms o f elasticities). The estimated marginal effect o f household labor, X, o n farm income should reflect, in equilibrium, the opportunity costs o f working o f f the farm, which includes income money earnings net o f transactions costs (likely non-trivial). This i s in contrast to the land operated input in farm production, the (money component) opportunity cost o f which i s included explicit ly in the expression above; and thus the marginal effect o f operated land o n farm income should be, in equilibrium, equal to zero. I f the elasticity o f farm income with respect to land i s not equal to zero,

101

this would suggest that there i s a sub-optimal use o f the land input, which would be due to some constraints not incorporated in the analysis.

A2.8. The estimated coefficients for operated land, A, should lead to marginal value dR dF

product equaling the rental rate, - = 13, + pAxX +etc. = ~ - r = 0, if there are no dA dA

constraints o n land trades, the elasticity o f net revenues with respect to the operational size of the farm should be equal to zero. In the case o f land owned, L, the marginal effect on

revenues should be equal to the land rental rate - = pL + pLxX +etc. = r > 0 ; and, i f there

are no non-rental benefits or costs to land ownership not accounted for in the revenue function and without constraints on land trades, the elasticity should be equal to the rental

dR L rL income relative to total net revenues - - = - 2 0, positive but less than 1. There is,

dL R R however, a possibility o f a negative elasticity with respect to land owned if the owner perceives other benefits to owning more land, not included in the revenue variable, and there are constraints on renting out land. Such additional benefits might arise from expected land appreciation, land being a means o f wealth accumulation (savings), easier credit terms, and non-pecuniary returns to social status. But constraints on land trades would be necessary for the farmer not to rent out an additional acre o f land at the rental rate. Such forgone income could be explained by the perceived risk o f expropriation o f land, and search costs o f finding trustworthy renters.

dR dL

ECONOMETRIC SPECIFICATION

A2.9. specification. This flexible functional form does not impose any restriction on the underlying technology in terms o f elasticity o f substitution, and, in principle, a l l theoretical properties can be tested.8 The underlying restricted revenue function can be approximated linearly:

To estimate the restricted revenue function, we choose a generalized quadratic

where indexes i a n d j refer to output prices p= { 1. f ie ld crops, 2. livestock, and 3. other crops} and indexes k, 1 refer to quasi fixed inputs Z={ 1. Capital, 2. Education, 3. Household Size, 4. Land, 5 . Water, and 6. Credit}. To reduce the number o f estimated parameters, we use the property o f linear homogeneity in prices o f the function and divide by the price o f other crops:

* This functional f o rm also has the advantage that i t does no t make logarithmic transformations that cannot be applied to variables with zeros like in our data set.

102

wherepl i s the price o f other crops, and cl and j 2 are price o f field crops divided by price o f other crops and price o f livestock divided by price o f other crops, respe~ t i ve l y .~ District dummies capture region-specific differences between farms, such as land fertility and other unobservable farm characteristics correlated with district in which the household lives. Additionally, we include type-of-tenancy dummies (i.e. owner operated, sharecropping tenant operated, etc.) to test for tenancy specific differences in revenues. The results are presented in terms o f elasticities.

As an example, consider the elasticity o f the revenue function with respect to education:

n

where the bar over the variable indicates sample means, and the f i j and Sij are the regression estimated coefficients o f equation (4). If instead o f sample means we use group means o f the variable, we can approximate the elasticities for the different farm g r o ~ p s . ' ~

MAIN FINDINGS

A2.10. The detailed results o f estimating equation (4) are presented in table A2.3. In general, the results are satisfactory, with a reasonable fit (R2 = 66%)." The elasticities of the revenue function with respect to the quasi-fixed inputs are reported in table A2.4. Below the results are discussed in terms o f individual factors o f production.

HUMAN CAPITAL

A2.11. Using the entire sample, we find that the input with the highest elasticity i s human capital (education), with a value o f 0.8. l2 This estimate implies that if the education level o f the household head were to r i s e by 10% then overall net revenues would r i se by about 8%. Using the average education level of 6.43 years, another year o f education would represent an increase o f approximately 16% in the education level, which would translate into a 13% increase in net

W e assume that price variabil ity i s the result o f exogenous conditions (such as distance to markets) and not correlated with farm characteristics or product quality. lo Furthermore, to test if the elasticity i s significantly different f r o m zero, we divide the elasticity by i t s standard error, which i s equal to the square root of:

k=l i=O j t i

\ i=O i=O k=l

All the first order and second order theoretical curvature properties o f a revenue function are met. Hampering the precision o f the estimates o f returns to education, and for that matter the rel iabi l i ty o f the

education figures in Table 1, i s the unsatisfactory level o f response to the question o f education level o f the head of the household in the survey. W e opted to use average education leve l at the district level for these missing values, which allows u s to use these observations, but reduces the rel iabi l i ty o f the results.

103

VARIABLE CO-EFFICIENT

revenues. In terms o f present value, using a 10% discount rate, the benefit o f an additional year o f education wou ld result in an increase in wealth that i s 130% o f yearly revenues. M o r e realistically, for younger generations, for which the opportunity cost o f one more year o f schooling i s the foregone returns associated with family labor, this elasticity suggests notably high potential rates o f returns in farming, perhaps even higher if they migrate to off-farm employment.

STANDARD ERR OR

104

VARIABLE Land Owned Land Operated Land Operated x Land Operated

CO-EFFICIENT STANDARD ERROR

-6.980 4.664 0.71 9 7.936 0.003 0.039

105

Table A2.4 Elasticities of household farm revenue with respect to Quasi-fixed factors

Capital

Education

Own Labor

Land (Owned) Land (Operated)

Water

Credit (informal)

Total Sample

0.267""" (0.104)

0.814""" (0.23 6) 0.320

(0.206)

(0.131) 0.325"" (0.135) 0.082"" (0.03 6)

(0.080)

-0.214

-0.014

Landless Workers

0.220""" (0.0 89) 0.873" (0.458)

1.200""" (0.43 0) -0.247 (0.158)

N/A

N/A -0.018"" (0.008)

Small Farms

PO - 4 Acres) 0.133"" (0.05 5) 0.242

(0.225) 0.716""" (0.23 3)

(0.046) 0.052

(0 .O 5 2) 0,071"" (0.033)

-0.070

-0.036" (0.021)

Medium Farms

p4 -20 Acres) 0.345""" (0.1 39)

1.1 24"" * (0.331) 0.047

(0.271)

(0.076) 0.373""' (0.134) 0.077"" (0.03 6)

(0.165)

-0.123

-0.042

Large Farms

f>20 Acres) 0.268" (0.151)

0.845" * * (0.250) 0.204

(0.313)

(0.432) 1.135""" (0.420) 0.110

(0.2 1 9) 0.204

(0.139)

-0.632

Note: Standard errors in parenthesis. * Implies significant at the 10% level, ** implies significant at the 5% level, and *** implies significance at the 1% level.

A2.12. But it i s notable that the elasticity with respect to education i s much smaller for small farms (0.2), and greatest for medium sized farms (1.1). This suggests an important and positive interaction between human capital and operational scale. Constraints to enlarging farm size would be a bottleneck to improving farm-generated incomes via improvements in educational levels, which in turn would tend to reduce the demand by small farm households for education o f their children. A factor that might counteract the negative effect o f scale i s the opportunity to make use o f higher education levels in the generation o f off-farm wages and income from non-farm enterprises. Supporting this possibility i s the much higher elasticity (0.873 in table A2.4) o f revenue with respect to education that i s estimated for household with no operational land (some o f which are landless).

FARM OPERATION SIZE

A2.13, The elasticity o f operated farm size i s increasing with farm size. Because net revenues account for the cost o f the use o f land (and so the expected elasticity with respect to land in an efficiently working land market should be zero) the results suggest a greater deviation f rom the efficient allocation o f land in the case o f larger farms. The elasticity o f revenues with respect t o operational size for small farm i s 0.05, while medium farms have an elasticity o f 0.37 and large farms o f 1.13. In a well-functioning market, a pr ior i one would expect that increasing the farmer's and sharecropper's operational land by one acre (by leasing in, no t getting an acre free) would increase income by i t s marginal value product and decrease income by i t s rental rate. It would not affect income directly attributable to farming - because the marginal product o f land should equal

106

the rental rate. Therefore, the measured elasticity should be zero, and that i s what the elasticity estimate suggests for small farmers. This i s gratifying result, implying that, on average, small farmers are rationally allocating land, given the levels o f other variable inputs.

A2.14. By contrast, the positive and higher elasticities for medium and larger farms suggest that for those farms the marginal benefits f rom scale expansion are higher than the observed marginal cost (the rental rate), and those farms should expand. This raises the question o f what might explain this apparent maladjustment o f land use in medium and larger farms, in contrast to the case o f smaller farms. In a well-functioning land market, the net revenue elasticity with respect to land should be zero for a l l farm sizes, although this does not imply that rental rates should be the same across farm sizes. If the elasticities are not zero, hypothetically if small farmers are side by side with larger farmers, the higher elasticity for larger farmers would imply an incentive for larger farms to expand, bidding up rental rates and inducing a movement o f land use f rom the small to the larger operations.

A2.15. For areas where small and larger farmers are not side by side, the differences in elasticities by farm size could also be due to differences in output mix (and different marginal revenue curves with respect to land) and in the efficiency in the functioning o f land markets. If small farmers are concentrated in areas where their smaller size i s more appropriate for the most profitable product mix for those areas (likely associated with higher per-acre valued crops, for example horticulture, being produced closer to towns), land transfers would be between small farmers and not between small and larger operations outside those areas. Land markets might be better developed in those areas where small farmers concentrate. Finally, rental rates might differ between smaller and larger operations, but this should not be reflected in different elasticities, if markets were functioning to set rental rates to equilibrate across farms the marginal value product o f land. In fact, average observed land rental rates per acre for small farms (1 5,400 rupees) are 2.2 times as great as rental rates for medium farms (4,800 r~pees ) . ' ~ Why might this be so? The concentration o f small farms in areas producing high-valued (per-acre) products would explain the differences in rental rates, but not the positive elasticities for larger farmers. Consistent both with large rental rate difference and with non-zero revenue-land elasticities i s the hypothesis that land owners set rental rates for larger operations below those for smaller farmers, and below the larger renter's short-run marginal product. This would require a rationing o f total land rented out at that lower rate. Land owners might ration land in this way in a similar manner as employers offer so-called efficiency wages, extracting renter loyalty and more efficient land and water use, and reducing supervision costs. Efficiency rental rates would also tend to induce a larger pool o f potential renters f rom which to select, including tenants with more working capital.

A2.16. In summary, there are two hypothesis (not necessarily exclusive) for these results regarding operation size: the first i s that small farmers are geographically concentrated in areas with higher-valued products and well-functioning land markets; and the second i s that landlords ration land to medium and large tenants.

LAND OWNERSHIP

A2.17. The marginal effect o f owned land on household net revenues deriving f rom farm production and land rental (positive for land owners, negative for renters) appears to be negative although not statistically significant. This result, which might appear surprising at f i r s t given that the marginal value product o f owned land ought to equal the rental rate, suggests that owning land (in contrast to the land input in farm production) has a value that i s not fully accounted by the

l3 For large farms (more than 20 acres) there are very few observations o n rental rates.

107

agricultural or rental income it generates. That i s if land has a use beyond i t s employment as crop production input (say as an instrument for access to credit and markets, as a store o f wealth, as a speculative investment, and as a source o f social power), then agricultural revenues would not fully account the returns to land. Landowners would perceive a marginal utility associated with an additional owned acre that i s greater than the marginal revenues it generates in cultivation or in the rental market. And owners would have the incentive to expand ownership size beyond the optimal point based only on yearly agricultural and rental income.

A2.18. But the possibility o f renting out land should, in a perfectly working market, offer constant returns to scale in terms o f net revenue generation. Logically, therefore, some constraints o n land rental (in terms o f the optimization o f the farm revenues we are measuring) must exist for the farmer simply not to rent out an additional acre at the rental rate. As in the case o f the results for operational size above, these results for scale o f ownership suggest some imperfections in the land rental market. The owner might not rent out due to a perceived risk o f expropriation o f land, and/or to the search costs o f finding trustworthy renters. For medium and large farms, the estimates suggest that tenants would be willing to pay more than the observed rental rate, while land owners would be willing to accept less. Other benefits and costs are involved in the land market that are not reflected by the observed rental rate.14

FAMILY SIZE

A2.19. Bo th using al l observations, and in the case o f the specific estimates for medium and large farms, the effect o n household revenue o f family size i s not statistically different f rom zero. To the extent that family size i s a proxy for family labor employed in the farm operation, this result suggests that own labor i s employed up to the point where marginal gross revenue i s zero. But the reader should note that the absence o f data o n the quantities o f fami ly labor effectively employed in the farm operation i s a major weakness. (Quantities o f h i red labor are also unavailable. but the cost o f hired labor i s subtracted to obtain net household revenues). If a l l relevant inputs are accounted for in the net revenue measure, and if fami ly size i s a good proxy for family labor employed in production, then the result suggests a near-zero opportunity cost o f family labor in medium and large farms; but in the case o f small farms the revenue elasticity with respect to fami ly size i s relatively much higher and significantly different f rom zero, suggesting a non-zero, positive opportunity cost o f family labor. More likely, however, for medium and large farms, fami ly size i s weakly correlated with family labor actually employed in production; that i s for smaller farms, family size i s a better indicator o f household agricultural labor actually applied than for larger farms. An increase in the number o f fami ly members for larger farms i s perhaps directed to leisure or to non-farm-production work (either non-farm-production work or of f - farm work, the revenues fi-om which are excluded f rom the net revenue mea~ure ) . ' ~

l4 Note that neither the elasticity o f revenues with respect t o owned land nor the elasticity with respect t o operational land are measuring the marginal products o f l and in cultivation, as wou ld be obtained f r o m a production function. Using net revenues at the level o f individual plot, another study by the W o r l d Bank (2002) based o n a preliminary version o f the same data set, found decreasing returns with respect t o farm operational size. '' Furthermore, in the case o f these Pakistani data, fami ly size i s posit ively correlated with wealth and wealth with farm size. The dependency ratio (family dependents relative to fami ly workers) wil l l i ke l y increase with family size. T o the extent that fami ly size i s posit ively correlated with b o t h children and aged grandparents (and other relatives), there would be a lower correlation between fami ly size and the fami ly labor input effectively employed o n the farm.

108

A2.20. By contrast, in the case o f smal l farms and landless households, the estimates o f the household i n c o m e elasticity with respect to o f f a m i l y size labor are pos i t ive and significant. T h e ef fect o f family labor i s part icular ly high for the landless group. I t i s highly l i k e l y that such fami l ies have less oppor tun i ty o f emp loy ing non- fam i l y labor and less i ncome to afford leisure. For the small farmer the pos i t ive elasticity i s also l i k e l y related t o the discrete nature o f labor al locat ion associated with m i n i m a l requirements o f family labor t o even maintain production and with an absence o f a market for sma l l amounts o f o f f - f a rm labor.16

SURFACE WATER

A2.21, Turning to the water input, the revenue elasticity with respect to surface water i s increasing with farm size, although the estimates are significant only for small and medium sized farms. There i s n o out-of-pocket expense to the use o f surface water, and farmers are endowed with a given number o f canal turns per week, which depends on farm size. Therefore the positive and significant elasticities for small and medium size farms can be directly interpreted as reflecting the marginal value o f relaxing the constraint to canal water use. This result supports the idea that larger farms face less constraint to water use; and it could be socially efficient to induce transactions that result in water transfers from larger farms to smaller. More developed water markets would facilitate such transactions.

A2.22. Our analysis provides an idea to the marginal returns to assets, but it i s only a snapshot in time, Ali and Byerlee (2000) analyze the productivity o f assets through time with a long time series data from the Punjab region. They find that there has been a measurable deterioration both in water and land resources. Organic matter has been decreasing at 2.3% annual rate, at the same time that sodicity o f the land has also been increasing. The quality o f water has also been in the decline with increasing carbonate residuals in tube wel l water. These observations explain their alarming estimation o f a negative growth o f the productivity o f water. Further evidence i s provided by Wor ld Bank (1997), that estimates that salinity causes a 25% reduction in the yield o f major crops, and as much as 40 to 60% in Sindh. Furthermore, water logging i s an increasing hindrance to agricultural growth in the Indus basin. This study also highlights a deteriorating infrastructure, increasing canal seepage (decrease in delivery efficiency and results many times in increased water logging), and reduction in storage capacity due to sedimentation.

A2.23. What the Ali and Byerlee study suggests i s that the marginal physical product o f water could be l o w and perhaps declining over time. This declining trend could lower the growth rate of the sector, although this could be partially compensated by increasing other factors or improvements in crop varieties. But the returns to these other improvements i s lower. Under the current circumstances, o f deteriorating infrastructure and quality o f the resource, the social costs o f inefficiencies in the use o f surface water are high. The question is, to what extent does the absence o f a working water market and the mismanagement o f the irrigation system exacerbate - or even contribute to create - these inefficiencies?

A2.24. The deterioration in the “resource” factors can be partially reversed, but this requires public and private investments, and institutional changes. F rom the perspective o f the farmer, the creation o f a surface water market, which would make the allocation o f the resource more efficient and less constraining, would also create incentives for on-farm investments. Investments such as

l6 The small farm household’s immobi l i ty for part-time employment off-farm could b e influenced by lack o f transport and communication faci l i ty t o find and travel to part-t ime jobs beyond their immediate neighbors.

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conservation measures, precision land leveling, zero-tillage, bed furrowing, and improved irrigation techniques, could al l improve water efficiency.

A2.25. Groundwater markets, on the other hand, which are thought to be monopolized by the large landowners with access to the water tables and the capital to fund tube wells, are also subject t o static and inter-temporal inefficiencies. The static inefficiency i s generated by the monopoly power o f these colorful ly labeled “waterlords”. However, Jacoby e t al. (200 1) estimate that the social losses of these monopolies are rather low.” The inter-temporal inefficiencies are due to the open access nature o f the groundwater resource. Tube well owners only consider their private costs in their decision o f extracting groundwater; this decision, however, does not incorporate negative externalities, such as lowering the water table and thus raising the cost o f extraction to a l l water users. The increase in the use o f tube-wells wil l likely contribute to further over-extraction, defined in terms o f social costs. This i s a problem that private agents are unlikely to resolve individually, but requires coordination, which in many countries i s provided by a government agency to enforce conditions for the expansion o f tube wel l extraction. These institutional issues are discussed in the chapter o n water.

CREDIT

A2.26. In Pakistan, previous authors have noted that small farmers have l imi ted access to institutional credit, relying on non-institutional sources; larger operations are more favored by formal credit lenders (Malik, 2003b). Farmers who are poorer and small re ly pr imari ly o n informal credit markets. As shown in table A2.4, the elasticity with respect to informal credit i s insignificantly different f rom zero for the entire sample and negative (and statistically significant) for small farms. The cost o f credit i s not explicit ly accounted for in the net revenue measure, but to the extent that informal credit costs are reflected in purchased input costs, the l o w elasticity o f informal credit to recipients implies less significant constraints to credit use. At the margin, farmers o n average have adjusted informal credit use such that the addition to gross revenues f i o m an increase in informal credit i s offset by the addition to variable costs o f purchased inputs; and thus an increase in informal credit would produce litt le in terms o f additional net revenues, and one would expect an elasticity o f zero. In the case o f small farmers, the negative and statistically significant elasticity may imply over-borrowing, with negative impacts o n production value, which i s diff icult to justify. Or more l ikely the result implies an endogeneity in the credit variable, where ceteris paribus less productive farmers have less access to formal credit and substitute informal credit. The direction o f causality may run f i o m production revenues to borrowing in informal markets.

A2.27. In table A2.5 we compare this base result using informal credit to estimates using both formal credit alone and the sum o f formal and informal credit. One should note f i r s t that the estimated elasticities for the other inputs, using the alternative indicators o f credit use, are not statistically different f rom the base case estimates, which indicates some robustness in the estimated elasticities. The elasticity with respect to formal credit i s no t statistically significant, but using the total credit available yields a positive and statistically significant elasticity (0.059). I t i s wor th noting that formal credit i s a larger source o f funding o f agricultural borrowing. The insignificance o f the two estimated elasticities (for the entire sample) o f both informal credit alone (negative) and

” Note, however, that Meinzen-Dick (1 996) concludes that her analysis o f farm-level survey data implies that, “water markets do improve the productivi ty o f agriculture, particularly for small and medium farmers, but policies that expand tube we l l ownership are l ike ly to provide greater welfare gains than those wh ich encourage groundwater sales f r o m tube wells owned by a few farmers,” (p.2).

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formal credit alone (positive), and the positive and statistically significant estimate using the sum o f two sources, suggests that the two credit types are substitutes.

A2.28. I t should be emphasized, however, that these results reflect an average for farmers o f a l l sizes, and smaller farmers receive a small share o f formal credit. Small farmers apparently enjoy o n average litt le gain to a marginal increase in informal credit, but informal credit i s usually more expensive; so this evidence does not contradict the possibility that small farmers might benefit f rom greater access to formal credit, which i s usually offered at lower interest rates.

Table A2.5 Return on Credit (Elasticities)

Capital

Education

Own Labor

Land (Owned) Land (Operated)

Water

Credit

Base Case I n form a1 Credit

0.267""" (0.104)

0.814""" (0.23 6) 0.320

(0.206)

(0.131) 0.325"" (0.135) 0.082"" (0.03 6)

(0.080)

-0.214"

-0.014

Formal Credit

0.198" (0.105)

0.831 *** (0.224) 0.271

(0.192)

(0.149) 0.334"" (0.140)

0.091""" (0.0 3 6) 0.031

(0.046)

-0.290"

Informal andor Formal Credit

0.207"" (0.105)

0.777""" (0.2 1 9) 0.247

(0.195)

(0.148) 0.340"" (0.139)

0.095""" (0.037) 0.059"" (0.026)

-0.282"

Note: Standard errors in parenthesis. * Implies significant at the 10% level, ** implies significant at the 5% level, and *** implies significance at the 1% level.

None o f the elasticities are different f rom their base case values at the 10% significance level.

A2.29. Khandker and Faruqee (2000) show that the returns to lending from the Agricultural Development Bank o f Pakistan ADBP (which accounts for 55% o f formal lending in rural areas) i s much higher for smaller farms than for larger farms, but nonetheless lending i s highly biased towards larger farms. Furthermore, the recovery rate o f loans i s higher for small farmers than for larger ones. This suggests that the ADBP as o f 1995 (when the survey used by the authors was implemented) could have been more efficient in i t s targeting o f loans. Private financial institutions, on the other hand, are reluctant to participate in rural financial markets. Although they accrue 30% o f their deposits f rom rural areas, they only allocate 5% o f their lending portfolio to rural areas.18

Khandker and Faruqee (2002) 18

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OTHER RESULTS

A2.30. Contrary to what was expected, there are few statistically significant interactions between output prices and factor returns. Perhaps the only strong interaction we find i s between the relative prices o f output and education. An increase in the prices o f f ie ld crops and livestock, relative to the price o f other crops, would increase the elasticity o f net revenues with respect to education. A deeper interpretation of this result in a cross-section analysis i s problematic, because it depends on the mix o f “other crops,’’ and also could be a result o f the distribution o f prices across regions. In whatever case, this i s a noteworthy deserving more attention in future research. W e also find that the elasticity with respect to capital increases with the price o f f ie ld crops and decreases with the price o f other crops. To the extent that present policies offer protection to field crops relative to other crops, farmers have an increased incentive to invest, most l ike ly in the protected activities. Field crops are usually more intensive in the use o f physical capital.

THE EFFECTS OF TENANCY TYPE

A2.3 1. The coefficients o n the dummy variables representing different tenancy types are a l l positive, implying greater revenues due to access to agricultural land compared to those without operational farmland (some landless). W e find, that, controlling for farm size, education and the other variables, landlords who are also tenants leasing in, and f ixed rental tenants earn more revenues than sharecropping tenants, who eam only slightly more (6,365 rupees) than those without operational farmland.’g For a small farmer, controlling for a l l other variables in the revenue function, simply being a fixed-rent tenant raises per-acre revenues by 35,000 rupees (75% o f an average small farm’s total farm income, or 49% o f the household’s total income).

A2.32. But the di f ference between fix-renter i n c o m e and share-cropper i ncome varies with family and farm sizes, and with water use. T h e negat ive coeff ic ients on the interact ion variables share-cropper/household-size and share-cropper/operation-size suggest that the di f ference in revenue between f i x e d renters (or owner-operators) and share-croppers increases with fami l ies and farm size. Thus for smal ler farms the advantage o f the non- sharecropper w o u l d b e smaller; the advantage o f fix rents increases with farm size. (The reader should no te that the p-values o f the t w o in teract ion coeff ic ients are 0.15 for family size and 0.12 fo r farm size, h igher than the standard s igni f icance levels o f 5% and lo%.) T h e point estimates o f the coeff ic ients associated with sharecropping also suggest that there c o u l d b e suf f ic ient ly sma l l share-cropper family a n d f a r m sizes that the share-cropper i ncome would equal o r even exceed owner-operator or f i x e d renter income.

A2.33. Does this imply that share-cropping i s an ine f f i c i en t contract compared t o f i x e d rental? Possible inef f ic iencies associated with share-cropping arise due to the sub-opt imal p rov i s ion o f h idden or non-contract ib le inputs (not subject to m o n i t o r i n g by the landlord). T h e incent ive to under-provide var iable inputs arises because the share-cropper only earns a fraction o f the marg ina l va lue product o f the operation. W h e r e monitoring o f input use by landowners i s effective, one w o u l d not expect under-provis ion. In our study possible “hidden” inputs (non-monitorable) are own family labor (measured by f a m i l y size) and

l9 The effect on revenues o f being a sharecropper (relative to those without operational farmland) i s calculated using the average values o f small farms for household size, operational farm size and hours o f water use, and i s 299.6 + (8.51)*(-27.77) + (2)*(-31.73) + (56)*(0.51) = 13.3 (although not highly statistically significant). To get the value in Rupees we multiply by the price o f “other crops” yielding 13.3* 480 = 6,365 RP *

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surface water use. We find that this type o f inefficiency exists in the provision o f surface water as indicated by the positive coefficient on the interaction o f sharecropper dummy with water. Since the marginal returns o f canal water are greater for sharecropper tenants, this implies that in reality there i s an effective under-provision o f this input. The marginal product o f an additional unit of surface water is, ceteris paribus, greater for the sharecropper than for other tenancy types. Increases in farm size and the number o f family members employed in the farm operation may also increase monitoring costs per farm, giving incentive to have small operations for sharecropping. (But this may be off-set by increasing the monitoring costs o f having more operational un i ts to monitor.)

A2.34. Land leasing arrangements as they prevail in Pakistan apparently do not provide land tenancy security or a mechanism to foment longer-term investments by the tenant. Present land leasing arrangements do not provide incentives to undertake on-farm investments attached to the land. Such investments might be in soil-improvement, land leveling, fixed structures and orchards, and water-saving projects. These are projects that provide longer-term benefits but over which the tenant (sharecropper or fixed rent) has no ownership rights. This i s an area where Pakistan could examine altemative rental systems, as for example operate in Europe, where land rentals are common.

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Appendix 3: Distributional Impacts of Agricultural -- Growth and Factor Market Reforms’”

A3.1. improving the allocation o f land, water, labor and capital across agricultural activities. This increased agricultural output, in hun, increases demand for inputs into agricultural production, as we l l as demand for processing o f agricultural products (e.g. wheat milling or cotton ginning and spinning). In addition, as household incomes increase, f inal demand for both agricultural and non-agricultural goods and services increases. T o the extent that domestic supply i s elastic, the increased demand can spur growth in production and incomes throughout the economy. H o w these gains in income are distributed across households i s determined largely, however, by the ownership and access to factors o f production.

Rural factor market reforms have the potential to raise agricultural productivity through

A3.2. This appendix presents an analysis o f the impacts o f agricultural growth and selected factor market reforms on agricultural and non-agricultural growth, and household incomes in Pakistan using a fixed-price multiplier framework. The data base for the analysis i s a 2001-02 social accounting matrix ( S A M ) , a consistent set o f accounts o f the economic flows between production activities, earnings o f factors o f production, incomes o f various types o f households, and demand for goods and services.

THE 2001-02 PAKISTAN S A M

A3.3. The 2001-02 Pakistan S A M includes 34 activities, each producing a single commodity, except for irrigated wheat and non-irrigated wheat, both o f which produce a single commodity (wheat), (Box A3.1). For the twelve agricultural activities, returns to land and own-family labor are disaggregated by region (Punjab, Sindh, and Other Pakistan) and by size o f farm (small (O- 12.5 acre), medium (12.5-50 acre) and large (50 acre plus) farms (defined according to operated area, not land ownership). Out o f the 27 factors o f production that are specified, 23 involve only agricultural production: 8 types o f agricultural labor, 12 types o f land, and 3 other factors: water, livestock capital and other agricultural capital.

A3.4. objective o f constructing the S A M : to better understand the relationship between agricultural performance and rural income growth in the context o f imperfect rural factor markets. Fifteen o f the nineteen household categories are rural agricultural households, split according to amount o f land cultivated (large farm, small farm, landless) and region (Sindh, Punjab and Other Pakistan). Non-farm households, both rural and urban, are split into poor and non-poor according to their 2000-01 per capita household expenditures, with poor households defined as those with a per capita expenditure o f less than 748 rupeeslmonth per capita. By this definition, 23.5 percent o f the rural population (1 9.8 percent o f total population) are classified as non-farm rural poor households21 and 22.7 percent o f urban households (15.3 percent o f total national population) are poor.

This detailed treatment o f rural factors and agriculture in the S A M reflects the primary

2o This annex i s based on multiplier analysis by Paul Dorosh using a Social Accounting Matr ix for Pakistan, documented in Dorosh, Niazi and Nazl i (2004), “A Social Accounting Matr ix for Pakistan 2001-02: Methodology and Results”, background paper for the Pakistan Rural Factor Markets study. 21 Non-farm rural households are d e f i e d as rural households for which the main occupation o f the head o f household i s not crop or livestock farming.

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BOX A3.1: STRUCTURE OF THE 2001-02 PAKISTAN S A M

Activities (34)

Agriculture (12): Wheat irrigated*, Wheat non-irrigated*, Rice-IRRI*, Rice-basmati*, Cotton*, Sugarcane*, Other major crops, Fruits and vegetables, Livestock-cattle/dairy*, Poultry, Forestry, Fishing Industry (16): Mining*, Vegetable oils*, Wheat milling*, Rice milling-IFW*, Rice milling-basmati*, Sugar*, Other food, Cotton lint/yam*, Textiles*, Leather*, W o o d products, Chemicals*, Cementhricks, Petroleum refining*, Other manufacturing*, Energy* Services (6): Construction, Commerce, Transport, Housing, Private Services, Public services

Commodities (33) Same as activities with Wheat irrigated and Wheat non-irrigated aggregated as one commodity (Wheat).

Factors (27) Labor (10): Own-farm (Large farm, M e d i u m farm Sindh, M e d i u m farm Punjab, M e d i u m fa rm Other Pakistan, Smal l farm Sindh, Small farm Punjab, Small farm Other Pakistan), Agricultural wage, Non- agricultural unskilled, skil led Land (12): Large farm (Sindh, Punjab, Other Pakistan), Irrigated medium farm (Sindh, Punjab, Other Pakistan), Irr igated small farm (Sindh, Punjab, Other Pakistan), Non-irrigated small farm (Sindh, Punjab, Other Pakistan) Other factors (5): Water, Capital livestock, Capital other-agriculture, Capital formal, Capital informal

A3.5. Table (97 sectors), 2001 -02 National Accounts (value added for 15 sectors), 200 1-02 Pakistan Integrated Household Survey (consumption disaggregation), the 200 1 Pakistan Rural Household Survey (household income disaggregation), and the 200 1-02 Pakistan Economic Survey (sector/commodity data o n production, prices, trade).22

Data used in construction o f the S A M derive mainly f rom the 1990-91 Input-Output

A3.6. Household incomes and expenditures relative to those o f other household groups fol low similar patterns as in the P R H S and HIES surveys, though absolute levels o f household incomes and expenditures are substantially higher given the apparent substantial under-reporting o f expenditures (particularly on services) and informal sector incomes in the surveys.

A3.7. On average, household incomes in the S A M are 2.1 t imes greater than household expenditures in the HIES Survey, and rural household incomes in the S A M are 1.7 t imes greater than rural household incomes in the PRHS survey (table A3.1). These rat ios v a r y by household group, however. T h e S A M calculations suggest that expenditures o f large and m e d i u m farmers are seriously understated in the HIES -by a factor o f 3.8, on average. Compared to total incomes in the PRHS survey results, however, factor incomes o f m e d i u m and large farmers in the S A M are only 2.8 t imes higher. N o t e that m u c h of the di f ference in incomes i s due t o estimated re tums to cul t ivated land. F o r only t w o household groups, r u r a l non - fa rm p o o r and rural agr icul tural labor in Sindh, are the S A M household incomes less than household expenditures in the HIES.23

~~

22 See Dorosh, N iaz i and N a z l i (2004), “A Social Accounting M a t r i x for Pakistan, 2001-02: Methodology and Results” for details o f the construction o f the S A M . 23 Note that, because of a lack of reliable data, the S A M does n o t contain household transfers received f r o m other households. Including transfer income would l ike ly bring the S A M household per capita income

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A3.8. Pakistan, but 60 percent o f total factor incomes for agricultural households (77 percent for agricultural households in Sindh), (table A3.2). 91 percent o f agricultural incomes derive f rom land, water, own-farm labor, or livestock, so that without access to land or livestock; earnings from hired labor and (non-livestock) agricultural capital account for only 9 percent o f agricultural incomes.

Agricultural factor incomes account for only 23 percent o f total factor incomes in

A3.9. large farm owners (table A3.3). Agricultural labor accounts for 32 percent o f incomes for agricultural wage laborer households, but only 9 percent o f incomes o f tenants and 4 percent o f incomes o f small fanners. Overall, agricultural incomes account for an average o f 56 percent o f estimated incomes o f agricultural households in the S A M , compared with 75 percent in the PRHS (table A3.4). As described above, the higher figures in the S A M arises mainly because o f allocation o f income from non-agricultural labor and informal capital to rural households.

Land accounts for more than 30 percent o f household incomes, only for medium and

estimates for these groups to approximately the same level as the HIES household per capita expenditure estimates.

e;

3

" " 9 1

? I I 00

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Agric Agric Total Non-Agr Non-Agr Total Land Capital Labor Agric Capital Labor Other Incom

Table A3.2 Pakistan: factor income shares by household type, 2001/02

Rur Rur Rur Rur AgHHs AgHHs AgHHs AgHHs

All Rural Other All HHs HHs Sindh Punjab Pak Pakistan

Labor 0.522 0.298 0.248 0.240 0.190 0.232 Land 0.08 1 0.144 0.242 0.220 0.190 0.2 18

Large Fa rm Owners (50+ acres) M e d i u m F a r m Owners (12.5-50) Small Fa rm Owners (42.5 acres) Pure Tenants Agricultural Laborers Rura l non-farm non-poor Rura l non-farm poor Urban non-poor Urban poor Rural Subtotal

Urban subtotal Rural non-agric households

Water 0.003 0.005 0.014 0.009 ----- 0.008 Capital 0.394 0.553 0.497 . 0.531 0.620 0.542

Capital 0.115 0.205 0.408 0.249 0.379 0.302 Tota l 1 .ooo 1 .ooo 1 .ooo 1 .ooo 1.000 1 .ooo

Of wh ich L ivestk &Ag

0.15 0.10 0.05 1.00 0.27 0.16 0.05 1.00 0.23 0.16 0.06 1.00 0.15 0.20 0.06 1.00 0.27 0.14 0.06 1.00 0.50 0.43 0.07 1.00 0.59 0.30 0.07 1.00 0.11 0.45 0.44 1.00 0.18 0.76 0.06 1.00 0.33 0.24 0.06 1.00 0.23 0.16 0.06 1.00 0.11 0.48 0.41 1.00

Own-Farm&Agric / Total Inc 0.23 1 0.41 1 0.766 0.560 0.652 0.615 Own Farm / Agr i c Income 0.906 0.906 0.890 0.896 0.949 0.905

Source: Pakistan S A M 2001102.

Table A3.3 Disaggregated Factor Income Shares by Household Group, Pakistan 2001/02

0.34 0.36 0.00 0.31 0.21 0.00 0.18 0.32 0.04 0.16 0.35 0.09 0.00 0.21 0.32 0.00 0.00 0.00 0.00 0.05 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.13 0.20 0.04 0.21 0.29 0.06 0.00 0.00 0.00

0.70 0.52 0.55 0.60 0.53 0.00 0.05 0.00 0.00 0.37 0.56 0.00

Ip.11 Pakistan 0.06 0.09 0.02 0.17 0.21 0.37 0.25 1.04 Source: Pakistan S A M 2001/02.

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Table A3.4 Pakistan Rural Agricultural Incomes

PRHS PRHS SAM SAM Agric Inc Agric Inc Agric Inc Agric Inc

Per Capita Share Per Capita Share (‘000 Rs) (percent) (‘000 Rs) (percent)

Medium and Large Farms Small Farms Landless Farmers Rural Agric Workers Rural Non-Farm Non-Poor Rural Non-Farm Poor

15.7 83.5 29.9 57.2 6.1 67.9 8.6 54.8 7.2 87.7 5.3 59.7 2.2 53.1 5.5 53.1 0.3 I .9 0.1 0.4 0.2 6.3 0.2 4.5

Total Rural 6.1 69.7 5.6 37.2 Rural Agric Households 7.1 74.8 9.6 55.9 Source: Pakistan S A M 2001/02; Pakistan Rural Household Survey 2001102.

Modeling Framework

A3.10. This analysis of growth linkages in Pakistan uses a variant o f the fixed-price, linear input- output (IO) model, the semi-input-output (SIO)

A3.11. The most basic input-output models use f ixed coefficients to simulate inter-industry production and consumption linkages, assuming fixed prices and perfectly elastic supply in al l sectors. Given the assumption o f perfectly elastic supply, any increase in demand leads only to higher output, with n o change in price.

A3.12. Total supply in each sector (Z) i s modeled as the sum o f inter-industry input demand (AZ) and final demand (F), where final demand includes consumption by households ( p Y) and exogenous sources o f demand such as exports (E). Income (Y) i s related to production through a fixed value added share (v) in gross commodity output (Z).

Z = A Z + F = AZ + pY +E = AZ + pVZ + E

(1)

A3.13. In their unconstrained versions, these models assume supply to be perfectly elastic in al l sectors. Presumed excess capacity in al l sectors o f the economy implies no investment constraint to increases in output. Instead, total output and incomes are determined purely by the level o f exogenous demand (E) and a set o f behavioral parameters ((3

(2) z = (I - c y E

24 This presentation of the S I 0 model closely fol lows Dorosh and Haggblade (2003), “Growth Linkages, Price Effects and Income Distr ibution in Sub-Saharan Africa”. Journal o f Af r ican Economies, 12(2).

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A3.14. Perfectly elastic supply is, o f course, an unrealistic assumption in most developing countries, especially for agriculture, where land, labor, rainfall and technology frequently limit output. Industrial output i s also often constrained by lack o f capital. By ignoring supply constraints altogether, the unconstrained input-output (IO) models typically exaggerate the size o f the inter-sectoral linkages. Comparisons f rom three different rural economies suggest that classic, unconstrained input-output models overstate agricultural growth multipliers by a factor o f two to ten (Haggblade, Hammer and Hazell, 1991).

A3.15. T o better simulate real-world supply rigidities, semi-input-output (SIO) models disaggregate sectors into those which are either supply-constrained (Z,) or perfectly elastic in supply (Z,) (Bel l and Hazell, 1980). In supply-constrained sectors (Z,), f i r m s operate at full capacity, and output cannot increase without additional capital investment or introduction o f new, more productive technology. As indicated in equations (3) and (4), the S I 0 model permits output responses only in those sectors with excess capacity (Z,). Perfect substitutability between domestic and importdexports in the supply constrained sectors (Zl) guarantees that prices are fixed for al l tradeable goods. Thus, for these models to produce a reasonable approximation o f reality, the supply constrained sectors must correspond to tradeable goods with fixed domestic supply at the given fixed price, and the perfectly elastic sectors must correspond to non-tradeable goods. In supply-constrained sectors (Zl), increases in domestic demand merely reduces net exports (E& which then become endogenous to the system.

A3.16. Investment in additional productive capacity or the introduction o f new technology wil l trigger expansion in the production o f tradeable goods (Z1) such as agricultural cereals, export crops and manufactures. Therefore, the key shocks init iating growth are those that release production constraints in these tradeable sectors. N e w investment in productive equipment - induced by government policies or incentives - will increase productive capacity o f tradeable goods. Public investment in transportation infi-astructure or irrigation facilities opens up new regions to external markets. Public investments in apcu l tu ra l research generate new technology that improve productivity o f cereals and other tradeable agricultural products. Equation 4 provides the means of quantifying how much impact these investment shocks will trigger, in the in i t ia l sector as wel l as throughout the economy.

A3.17. The specification of which sectors are considered elastic in supply i s crucial to these S I 0 multiplier estimates. In this Pakistan analysis, the major agricultural traded commodities (wheat, IRRI rice, basmati rice, cotton, and sugar cane) are treated as inelastically supplied in both their raw and processed forms. Livestock (cattle and other large animals) i s also modeled as inelastic in supply, though poultry i s assumed to be constrained by demand. Mos t industrial sectors (mining, vegetable oils, leather, chemicals, petroleum refining, other manufacturing and energy) are modeled as inelastic in supply; services are modeled as elastic in supply. (See box A3.1).

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A3.18. Parameters for the model are in general, are derived directly f rom the S A M . However, consumption parameters were adjusted to reflect marginal household budget shares and savings rates different f r o m the average shares and savings rates reflected in the SAM.*’

SIMULATION 1: OUTPUT SHOCKS TO CROP AND LIVESTOCK AGRICULTURE

The f i rst set o f simulations model a 10 percent increase in output o f tradable crops, together with a 10 percent increase in processing o f these activities.26 as shown in appendix table A3.5, a simultaneous 10 percent increase in wheat, basmati and irri rice, cotton and sugar cane production and processing, increases incomes o f large and medium farmers by 7.2 percent, and incomes o f small owners and tenants by 4.6 percent. Incomes o f agricultural workers r i se by only 2.9 percent, however, as much o f the gain in labor incomes accrue to farm owners and tenants. Growth linkage effects o n non-agricultural output result in a 3.3 percent increase in incomes o f the non-farm rura l poor and a similar increase in the incomes o f the non-farm rural non-poor and the urban poor.

A 10 percent increase in the output o f large livestock has an even greater effect, raising overall incomes by 4.5 percent (compared to 3.1 percent for a corresponding increase in output o f the major crops). Due to the distribution o f livestock assets, the gains for small farmers and landless agricultural households are especially large: 9.7 to 10.9 percent. Combining 10 percent increases in major crops and livestock, raises national incomes by an average o f 7.6 percent, with gains to the rural non-farm poor (8.2 percent) approximately h a l f the size o f gains to farm households and agricultural laborers (13.8 to 14.7 percent). Thus, linkage effects o f agricultural growth o n rural non-agricultural incomes are significant, though agricultural growth linkages alone are not sufficient to rapidly raise rural non-agricultural household incomes.

25 Specifically, marginal savings rates o f households were raised by 0.10, and marginal budget shares o f manufactured goods, transport and private services were changed by 0.10, -0.5 and -0.5, respectively. 26 Since both the agricultural production and processing activities o f these crops are modeled as inelastic in supply, it i s necessary to exogenously increase bo th activities in the simulation.

122

SIMULATION 2: SHIFT FROM SHARE-CROPPING TO FIXED RENTS

In theory, productivity o f share-croppers i s expected to be lower than o f owners or those with fixed-rent tenants, because for some inputs (such as own-labor), share-croppers pay the full (implicit) cost, but reap only a part (generally one-half) o f the benefits in terms o f value o f output. Using data f r o m hies 2001/02, jacoby and mansuri (2004a) find n o significant difference between productivity o f share-croppers and owners for cultivation o f major crops. However, share-croppers who are not supervised (those who meet with their landlords fewer than ten times in a season to discuss a given plot) are found to be 18 percent less productive than land-owners or share-croppers who are supervised.

Simulation 2 models the effects o f a 22 percent (=l/( 1-. 18)) increase in productivity for major crops as a result o f a hypothetical shift f rom share-cropped to either fixed rent or owned land. Given that 18.8 percent o f land in Pakistan i s share-cropped (table A3.6), and o f this, an estimated 35 percent o f tenants are not supervised (based on prhs 2001/02 data), the effect o n total production of major crops i s only 1.4 percent2’ in the simulation, a l l the marginal increase in returns to land are allocated to share-croppers?* according to their shares o f total share-cropped land in the hies 2001/02.29 Note that 39 and 27 percent o f share-cropped area i s farmed by pure tenants in sindh and Punjab, respectively (table A3.7).

Results are given in table A3.8.30 though the gains o n a national level are small, the impacts on tenants are significant. Incomes o f tenants in sindh r i s e by 4.0 percent; incomes o f tenants in Punjab rise by 2.8 and 2.7 percent, respectively. However, even with a significant (and l ikely over-optimistic) value-added multiplier o f 2.5, the init ial shock i s small relative to the size o f the Pakistan economy, and the multiplier income gains are spread widely across household groups, so incomes o f non-farm groups rise by only 0.3 percent at most.

27 (Productivity effect on unsupervised share-cropped land) * (unsupervisedtotal share-cropped land) * (share-cropped land / total land) = 0.22 * 0.35 * 0.188 = 1.4%. 28 In the case o f a shift from share-cropping to fixed rents, th is implicitly assumes that the fixed rent in rupee terms i s set on the basis o f the value o f production less purchased inputs for the land when i t was share- cropped. Thus, the simulation models an upper-bound on the direct benefits to former share-croppers o f the productivity increase. 29 In the model simulations, this value added i s paid directly to households, bypassing the factor accounts. 30 Note that in this simulation (and the ones that follow), we model a production shock instead of a simple value added shock, under the assumption that the productivity gain requires an increase in key inputs l i ke labor and fertilizer.

123

Table A3.6 share o f household group area cultivated by tenure status, 2001/02

Source: Authors’ calculations from HIES 2001/02 data.

Table A3.7 share of area cultivated by tenure status and household group, 2001/02

Source: authors’ calculations from hies 2001/02 data.

124

Table A3.8 simulation results: percentage change in household incomes

r- Increased

Source: Model Simulations.

SIMULATION 3: REMOVAL OF CREDIT CONSTRAINTS

Using PRHS 2001/02 data, Mansuri and Jacoby (2004b) show that farmers that are credit- rationed have lower productivity in crop production than do non-rationed farmers. Simulation 2 models a relaxation o f the credit constraint for small farmers in Pakistan by increasing their crop output according the econometric estimates o f the productivity effects.

Using the simplifying assumption that only small farmers are credit constrained, the magnitude o f the productivity gain on total output o f major crops i s calculated using the estimated share o f small farms that are credit rationed. In estimate 1, the 1 1.1 percent o f farmers that are constrained in both formal and informal credit markets have 23 percent lower yields, suggesting that total output o f a l l small farmers would rise by 3.3 percent in the absence o f credit constraints. Similar, using the alternate estimate o f a 26 percent decline in yields for farmers who are constrained in formal credit markets (45.7 percent o f small farmers), output o f small farmers would rise by 16.0 percent (table A3.9).

This 16 percent increase in small farm output (split across small farmers according to their shares in area o f each crop as reflected in the S A M ) results in moderate gains in average total incomes for small farmers: 3-4 percent for small farm owners and pure tenants in Sindh and Punjab.

125

Credit Constraint Formal and Formal Informal Only

(1) Share o f farm households that are credit rationed (2) Number o f small owner and owner cum tenant farms as % o f total farms (3) Number o f pure tenant farms as % o f total farms (4) Number o f small farms (all types) as % o f total farms, (2)+(3)

0.1 0.41 66.6% 66.6% 23.1% 23.1% 89.8% 89.8% 11.1% 45.7% -0.23 -0.26

(7) Output gain f rom relaxing credit constraint, [ 1/(1+(6)] - 1 29.9% 35.1% (8) Percentage gain in output o f small farmers f rom relaxing credit constraint, (5 1 * (7) 3.3% 16.0% (9) Share o f small farmers in total land value added (major crops) 53.8% 53.8% (10) % increase in total value added (major crops) 1.8% 8.6%

(5) Percentage o f small farms that are credit rationed, (1)/(4) (6) Impact o f credit rationing on productivity (regression results)

The increase in small farm output results in a bigger percentage gain in incomes from large farmers than small farmers in large part because land rents received account for a large share o f income o f large and (especially) medium farmers (table A3.10). For example, returns to land on small farms (mainly land rents) account for 23 percent o f income for medium land-owners in Sindh, whi le returns to land on small farms account for only 12 percent o f incomes o f owners (and owner cum tenants) o f small farms.

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Small Farmer Punjab Small Farmer OthPak Landless Farmer Sindh Landless Farmer Punjab Landless Farmer OthPak

Table A3.10 Distribution o f Estimated Returns to Small Farm Irrigated Land (Major Crops), 2001/02

41,746 34.8% 13.1% 9,676 8.1% 7.7% 4,099 3.4% 9.4% 4,774 4.0% 10.4% 1,365 1.1% 9.1%

All Farmers 119,902 100.0% 12.9%

Large Farmers Medium Farmers Small Farmers Landless Farmers

7,004 5.8% 7.5% 44,134 36.8% 19.5% 58,525 48.8% 11.7% 10,238 8.5% 9.8%

All Farmers 119,9021 100.0% 12.9%

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Table A3.11: Crop Yields by Location Along Canals (tondhectare) Ratio

Head Tail Head: Tail Wheat 2.4 1.7 1.4 IRFU Rice 2.9 1.9 1.5 Basmati Rice 2.2 1.7 1.3 Sugar Cane 54.7 29 1.9

SIMULATION 4: IMPROVED DISTRIBUTION OF WATER

Excess use o f water by farmers at the head o f canals, and water supply shortages in the canal i t s e l f result in lower productivity for farmers at the tail end o f canals. Simulation 3 models the effects on productivity and incomes o f easing the water constraint by providing more water to farm plots at the tail end o f canals. This gain in supply o f water to tail end farmers could be achieved through better water distribution or increased availability o f water achieved through measures such as canal lining. In the simulation, this increase in water at the ta i l end i s assumed to have no effect o n productivity o f farmers at the head end, however.

Detailed data on the share o f land affected by water shortages at the ta i l end o f canals i s unavailable, but limited survey evidence (University o f Faisalabad 2003 survey, Z. Hussain, 2003) suggests that approximately 27 percent o f farmers are located at the tail end o f canal systems. In the simulation, productivity o f crop production at the tail end i s increased by 30 to 90 percent, based o n the productivity differentials between head and tail farms reported in Table 4.6.31 Ta i l end land i s assumed to be distributed by farm size in the same proportions as the average distribution in each region (Sindh, Punjab, Other Pakistan).

As shown in table A3.7, large farmers enjoy the largest percentage increase in incomes as a result o f this productivity gain, with incomes o f large and medium farmers in Sindh rising by 15.0 and 9.9 percent, respectively. Incomes o f large and medium farmers in Punjab rise by 10.7 and 8.4 percent, respectively. Small farm owners and pure tenants in these two provinces benefit as well, as their incomes rise by 6.1 to 6.6 percent.

However, in spite o f the significant (and perhaps over-optimistic) gains in output modeled here, incomes o f agricultural workers in the two provinces rise by only 3 -3-3.6 percent and incomes of the non-farm rural poor rise by only 3.3 percent. Thus, in spite o f a 14 percent increase in the value o f production o f major crops and large GDP multipliers, the gains to the poorest rural household groups (agricultural workers and non-farm rural poor) are relatively small.

31 Cotton production o f tail end farmers i s increased by 50 percent (the arithmetic average o f the productivity differentials in Appendix Table 3.10).

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Table A3.12: Simulation Results: Household Incomes

I I I I I I

3.541 I 34851 0.331 2.31 I lTota'

Shares of total income gains (percent)

a In b i l l i on rupees. Source: Model simulations

129

Conclusions

Because o f data uncertainties and simplifying assumptions used, the above analysis o f the effects of increases in agricultural output o n incomes in Pakistan agriculture illustrates only the broad order o f magnitude o f the effects. Moreover, these simulations show only the static results of factor market changes, not dynamic effects o f improved incentives o n private investments and market development. Nonetheless, the broad structure o f rural production, distribution o f land and other factors o f production, and structure o f household incomes are reflected in the analysis.

T w o broad conclusions emerge. First, the level and distribution o f the benefits o f removal of factor market distortions depend crucially o n the magnitude o f the induced productivity shock and the ownership of the assets involved. In spite o f multiplier effects, reforms related to share- cropping are l ike ly to have only small overall impacts on rural incomes in aggregate in the short run, though the benefits to tenants could be significant. Credit market reforms and improvements in water availability have potentially larger effects on the overall rural economy. Second, the linkage effects o f expansion in traditional crop agriculture, though important, may not be adequate to substantially raise incomes o f agricultural laborers and the rural non-farm poor who lack significant capital resources. Thus, in the absence o f a change in the structure o f rural incomes and employment or significant gains in the rural non-farm economy apart f rom agricultural growth- induced linkage effects, targeted interventions to agricultural laborers and the rural non-farm poor wil l l ikely be needed to rapidly reduce the poverty o f these groups.

130

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BACKGROUND PAPERS FOR THE PAKISTAN RURAL FACTOR MARKET STUDY

Ahmad, Munir. 2003, Agricultural Product Markets in Palustan.

Altaf, Zafar. 2004. Livestock Sector Development: Constraints and Opportunities.

Anriquez, Gustavo and Albert0 Valdes. 2004. An Analysis o f the Determinants o f Farm Revenue in Pakistan.

Dorosh, Paul, Muhammad Khan Niaz i and Hina Nazli. 2004. A Social Accounting Matr ix for Palustan, 200 1-02: Methodology and Results.

Cox-Edwards, Alejandra. 2004. Labor Markets in Rural Pakistan.

Hussain, Zakir. 2003. Rural Water Markets in Pakistan: Institutions and Constraints.

Jacoby, Hanan G. and Ghazala Mansuri. 2004. The (In)-Efficiency o f Share-Tenancy Revisited: Evidence f rom Pakistan.

Kemal, A.R. 2003. Agricultural Growth and Rural Poverty in Pakistan: A Regional Analysis.

Malik, Sohail. 2003. Rural Credit Markets in Pakistan: Institutions and Constraints.

Malik, Sohail. 2004. A Note on Sources of Income and Poverty Dynamics in Rural Pakistan.

Nazli, Hina. 2003. Rural Labor Markets in Pakistan: Institution and Constraints.

Qureshi, Safraz. 2003. Pakistan Rural Factor Markets Study: Rural Land Markets in Pakistan: Institutions and Constraints.