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DIFFERENT STAGES OF DEVELOPMENT: SECTORAL PERSPECTIVE
Agricultural sector
This week
Look at three main sectors Agriculture Industry Services ( financial sector)
Different stages of development Reading page 39 Growing economy: change in proportion Look at share of main sectors in output
and employment Usual pattern : Agriculture Industry
Service Industrialization and post
industrialization
Industrialization
As incomes grow demand for food reaches its natural limit: industrial goods
New farm techniques and machinery: relatively less expensive
Less labor required Industrial sector starts to take over a
larger proportion in GDP
Post industrialization
As incomes further rise : People demand services
As compared to agriculture and industry, labor is relatively difficult to replace by machines
Employment and share of GDP of services increases
Most high income countries: post industrializing
Low income countries : industrializing
Agriculture: Main readings
Agricultural Development : Chapter 9, page 43
Agriculture pricing policy: Chapter 10, page 58
Introduction
Important features of UDC’s: Agriculture is the pre-dominant sector Agriculture development forms part of an
overall development plan Rate of economic growth is largely a
function of the rate of growth of agriculture (contributes nearly 50% of their GDP)
High gr rate at macro level has always been associated with a high gr rate in agricultural productivity
Importance of agricultural development
In 37 LIC’s, agriculture accounts for about 50% of their GDP Absorbs nearly 3/4th of their total labor force Contributes substantially to their exports
In Pakistan: Backbone of the economy 1949-50: 53% of GNP 2002-03: 24% (largest) Absorbs nearly 48.4% of employed labor force,
and 70% if indirect employment is taken into account
Largest source of export earnings (rice, raw cotton and cotton based products)
Industry is based on agri raw materials
Role of agricultural surplus in development Economic surplus: Excess of production
over consumption, utilisation for capital formation
Our main sector is agriculture How to increase surplus?
Adam Smiths Natural Order of Development In economic development, priority
should be given to agriculture to make it sustainable
Industrial development should succeed rather than precede agricultural development
U.S.A: agri growth provided ignition and was not sidelined, Japan, China
Poverty eradication
Historical Perspective
Agri assigned a low priority in the 1st Plan (1955 – 60): 11% of total investable funds with a 2.5%
gr target, compared to 28% for industry with a 12% gr target
Agri growth rates not met by the end of the plan period =< stagnant sector
Historical Perspective
2nd Plan (1960 – 65): Growth rate of 3.4% realized in agri ,other
crucial targets e.g exports. Agri assigned 24% of total funds compared to
26% to industry But priorities in industry were not right
3rd Plan: Target of 5% growth rate Allocation: 30% , subsidies on inputs Setbacks: ’65 war, suspension of US aid,
popular agitation + political uncertainties, failed land reforms
4th Plan (1970 – 75): Became redundant after the split up of the country Crop productivity either stagnated or started a
downward slide Reasons: seed deterioration, decline in water use
efficiency, low level of input use, water-logging and salinity
Land reforms 1977 – 87: partial recovery ; became almost
self-sufficient in wheat Unsustainable growth because of persistent
bad weather
7th Plan (1988 – 93): Inconsistent growth rates during the plan
period 1988-89: 6.9% gr rate 89-90: 3.03% 1991-92: 9.5% 92-93: -5.28% Average growth rate during the Plan: 3.8% Negative gr rates in 92-93 due to reverses
in the production of major crops Cotton, sugarcane, rice
8th Plan (1993 – 98): Wide fluctuations due to an natural/climatic
conditions Prime Ministers task force during Benazirs
government as well as Nawaz Sharifs government gave incentives
Agri policy geared towards productivity gains through efficient use of key inputs such as irrigation, seeds, fertilizers, plant protection etc.
Non-Plan period (1999 – 2001): Negative growth due to drought
Status quo?
Way forward? Explore the possibility of more land
reforms: skewed ownerships, wastage of land, lack of investment, feudalism
Explore the possibility of small farms: seed, water , fertilizer package
Improve the provision of physical inputs: irrigation(rice and irrigation),improved seeds, plant protection, mechanization
Improve the economic environment: minimum prices to growers for their produce, simplifying loan and credit schemes, storages
Promote Research and Education
More Land Reforms
Highly skewed land : retarding factor in agriculture
Land ownership structure has not changed despite land reforms of ’59 and ’72
Land reforms largely neutralized Land surrendered was largely barren Wastage of land Feudalism Lack of investment Additional land reforms do not seem
politically possible
Possibility of Small Farms
Urgent need to fully exploit the considerable yield potential of small farms
seed-water-fertilizer package Success of this program linked to freeing
of small farmers from the bondage of big landlords
Tremendous scope of expanding productivity
The Provision of Physical Inputs Water Shortage
Appear at critical times, which particularly affect productivity of rice and sugarcane
Nearly 45% of water resources wasted annually in transit
Water availability can be increased by increasing ground and surface water, and also through initiating on-farm water management programs
The Provision of Physical Inputs Fertilizer:
Key input: plays an important role in raising productivity
Usage can be increased by subsidizing fertilizer and by advancing credit to farmers
Provide expert advice on proper and effective use of fertilizers
The Provision of Physical Inputs Seeds:
research work to aim at evolving new HYV of seeds
Need more seed processing plants Plant Protection Measures:
Import, sale and dist of pesticides handed over to the private sector in 1980.
The Provision of Physical Inputs Mechanization:
Helps overcome labor shortage at sowing and harvesting season, and also does the job more quickly
Need to locally manufacture tractors, threshers, harvestors, reapers etc. Research should be undertaken to evolve suitable machinery that is suited to local conditions.
Improving the Economic Environment
Improve price incentives, agricultural credit, marketing and storing facilities etc.
Essential to formulate a liberal credit policy
Build additional storage capacity,so that procurement plans are not adversely affected
Promote Research and Education Only 1/20th of 1% of GNP allocated for
research in agriculture Research characterized by duplication of
effort => wastage of resources Research conducted by PARC has resulted
in production gains in cotton, wheat, maize, oilseed etc., leading to yield gains ranging between 25% to 100%
Acute shortage of research personnel
Pricing policy
Govt’s intervene to stabilize prices of agricultural goods to ensure a reasonable price to the consumer and producers
Support Price? Procurement Price? Motivations: to safeguard the interests of
both producers and consumers and moderate the impact of excessive fluctuations in output.
Agricultural price policy: ‘a policy of the government whereby it acts to influence or determine the prices of agricultural outputs and inputs.’
Subsidized by government directly or indirectly
Importance and need
1. To remove uncertainty2. To increase agricultural production3. Keynesian arguments4. Lack of storage facilities5. Stabilize the tempo of economic
growth6. Income disparities7. To increase the standard of living
Objectives
1. Stabilization of prices2. Induce greater production3. Supply of food to urban consumers at
reasonable prices4. Generate public revenues
Price stabilization
Carried out through fixation of support prices below which market prices are not allowed to fall
Buffer stocks: Over and underproduction
Inducement for greater production Direct and positive correlation
between argi prices and production Provide incentive to growers to bring
more acreage under cultivation of a crop to expand production
Time series data
Reasonable food prices for urban consumers Relatively a more organized and vocal
pressure group Absolute necessity for the survival of a
political government
Generate Public revenues
Wide margin between procurement prices at which the government purchases the agricultural commodity, and the price at which they are exported
Augments efforts of resource mobilization
Agricultural output price policy in Pakistan ‘output price policy’ refers to the fixation
of procurement and support prices Food and cash crops included in the
policy account for nearly 2/3rd of the annual cropped acreage
Early period characterized by the unwillingness of the govt. to use the output policy to expand production.
Agricultural output price policy in Pakistan Resulted in frequent food shortages, esp.
of wheat Increase in price of wheat => rippling
effect, thus leading to an increase in the overall cost of living
Govt. concerned with stability of prices for urban consumers rather than expanding frontiers of food prod during the early years.
Agricultural output price policy in Pakistan Established a direct and +ve relation
between support prices and output Next four decades: govt. successfully
uses output price policy to increase the production of the 3 major crops of Pakistan
Price fixation process APComm responsible for reviewing and
recommending support/procurement prices
Recommendations forwarded to the Federal Ministry of Food, Agriculture and Cooperatives.
Final approval accorded by the federal cabinet after discussing the proposals.
Price Fixation Criteria
APComm takes into account the following:
Cost of Production Parity index between competing crops Import Parity Price Export Parity Price Buffer Stocks
Impact on Income Distribution Benefits big landlords at the expense of
small farmers Support price policy serves to widen the
gap in productivity between the large and small farmers
Further worsens income inequalities between the rural rich and the poor
Input price policy also favors big landlords => easier access to subsidized inputs such as seeds, fertilizer, machinery etc.
Input Price Policy Refers to government subsidies given on
agricultural inputs such as fertilizers, improved seeds, pesticides, tubewells, electricity and agricultural machinery.
Objectives? Superior to high output price policy, as
even small farmers can benefit from it
Input Price Policy Subsidization of technology ensures its
speedy adoption Drawbacks?
Cost of inputs is only a small part of the total cost of production
Low input price may lead to unwanted substitutions (e.g chem fertilizers instead of organic manure, wastage of water)
Input Price Policy Subsidy on inputs should only be
temporary Should not be continued indefinitely Objective: help farmers adopt new
technology and expand production and income
Input price policy in Pakistan
Explicit subsidy: covers the difference between the real cost and the subsidized rate at which the input is supplied to the cultivator (e.g fertilizer, pesticides)
Implicit subsidy: concealed in concessional prices charged by the govt. for the provision of certain inputs, such as water rate, credit, electricity
Input price policy in Pakistan Subsidies can also be classified from
the budgetary point of view: Current subsidies: financed from revenue
budget and are given on agri products used for consumption purposes, e.g wheat, sugar, edible oils etc
Development subsidies are financed from development budget and are given on agri products used for dev purposes, e.g. tubewells, fertilizers, pesticides.