ISLAMABAD: Pakistan’s agricultural output per worker has been stagnant for three decades, lagging all other countries, and it has expanded at an annual rate of less than 0.7 per cent, while the South Asia average has been four times the rate, a World Bank report says.

The sector’s sluggish productivity performance can be linked to distortions — created in part by state interventions — that have led to concentration of resources on four major crops (cotton, sugarcane, wheat and rice), increasing the advantage of big landowners and banks (insiders) at the expense of small farmers, consumers and future generations (outsiders), and contributed to environmentally unsustainable practices, the report said.

Titled, “From Swimming in Sand to High and Sustainable Growth”, the report says Pakistan’s agriculture sector is both heavily subsidised and regulated. While the policy concerns that originally inspired public interventions in the sector are important, the policy design and de facto implementation of those policies have benefited large landowners (insiders) at the expense of small farmers (outsiders).

Citing an example, the report said the government has a wheat procurement system whereby it procures a proportion of the total crop output at a fixed procurement price (or support price). But this programme introduces an allocative distortion that reduces productivity, resulting in a structural oversupply of wheat (as support prices have been above import parity) that benefits large farmers (and banks), crowds out credit to the private sector (as wheat procurement is financed with bank loans that could be directed to private sector financing), at the expense of consumers and taxpayers, and generates fiscal costs for the government.

World Bank finds agriculture sector ‘heavily subsidised and regulated’

Similarly, sugarcane, a water-intensive crop, benefits disproportionally from the under-pricing of water, and other subsidy inputs (such as fertilisers, credit for equipment or machinery), but requires minimum support prices to make its cultivation financially viable.

As with wheat, the certainty of a guaranteed price has increased production and created a surplus in the domestic market that then requires export subsidies to become competitive on international markets.

Over time, regressive input subsidies and support price regimes have incentivised the use of under-priced water, affecting future generations, prevented diversification toward higher-value crops, distorted public resources away from investments in support of technological change (R&D, extension), and benefited the land-owning elites.

These elites have in turn resisted the implementation of reforms to liberalise agricultural markets, reform water-pricing and increase agricultural taxations.

Crop district-level analysis of total factor productivity (TFP) reveals a generalised contraction in agriculture TFP in the country, accentuated since the turn of the century. Aggregating the crop district level results at the national level shows that TFP declined at an annual average rate of -1.2 per cent. Also, TFP has fallen in nine of the 26 years with data and has dropped consecutively in the past five years under analysis.

Most of the TFP decline can be attributed to the decline in the rate of technical change.

Pakistan’s water insecurity is driven by poor water management and governance in the irrigation sector. In its current form, the irrigation tariff cannot be used as an instrument to induce crop changes or increase in water use efficiency, nor does it support adequate cost-recovery for operations and maintenance of the irrigation infrastructure.

This heavily subsidised canal water encourages water-intensive crops, such as sugarcane and rice, at the expense of less water-intensive crops and, fundamentally, at the expense of future generations. Proper water pricing would lead to better allocation of this scarce resource. The development of a regulatory framework for the use of ground water would also help avoid over-exploitation.

Published in Dawn, February 13th, 2023