The importance of cotton can hardly be over emphasized in the economy of Pakistan. Pakistan is one of the ancient homes of cultivated cotton, 4th largest producer of cotton , the 3rd largest exporter of raw cotton and a leading exporter of yarn in the world.

Pakistan is, by and large, a mono-crop economy as cotton contributes nearly 10 per cent in the agriculture GDP and a source of 60 per cent foreign exchange earnings. The value addition through cotton is 8.2 per cent in agriculture and 2 per cent in the GDP.

Cotton is not only an export-earning crop but also provides raw material to local textile industry. A profound investment in the form of over1000 ginning factories, over 400, textile mills heavily depends upon cotton.

The area under cotton has increased from 2.836 million ha in 1991-92 to 2.989 million ha in 2003-04 showing a growth rate of 0.43 per cent over the period. The production jumped from 1.1 million bales in the year 1947 to 12.8 million bales in 1991-92. Since then cotton production is swinging between 8 million bales to 11.2 million bales with an annual average of 9.5 million bales.

The global Economic scenario is set for change under the free trade regime. Pakistan has signed the WTO and will enter in free trade era with the dawn of year 2005. The WTO has set many clauses under its various agreements like the Agreement on Agriculture (AOA), the Trade Related Intellectual Property Rights (TRIPS) and Sanitary and Phyto Sanitary (SPS) etc.

Cotton along with its products is the biggest foreign exchange earner for Pakistan and is more likely to be affected through WTO regulations. This requires a profound change in the economic policies to maintain a stable share of raw cotton and its product in world market in coming scenario.

In view of the importance of this silver fibre in the economy of Pakistan, authors conducted a study to estimate its competitiveness and comparative advantage in both current and future scenario.

In the static analysis, the cost of production (COP) data of cotton were collected from Agricultural Prices Commission (APCom) for the three year period from 2000-01 to 2002-03.

The average financial budget of cotton was developed using the three year average of COP data and market prices of seed cotton. The social budget of cotton was developed using the economic prices of cotton and inputs.

The economic or export parity price(EPP) of cotton was estimated by taking the three year average price of CIF North-Europe cotton as Pakistan exports most of cotton to this region. From the fertilizers the import parity price (IPP) of DAP and Murate of Potash were estimated.

The IPP of urea was not estimated as urea was not imported in the country in the bulk quantity during the study period. The IPP of DAP and Potash was prepared on the basis of f.o.b. price (ex-USA) and by considering all handling, transportation, marketing charges on the port on the way to farmer's fields. In the calculation of social parity prices, shadow exchange rate (SER) was utilized instead of official exchange rate (OER). The tradable inputs which are not measured at import parity prices, all are weighted by SER to express their opportunity cost.

In the past, cotton production and marketing was subjected to many public policy interventions. The Cotton Export Corporation was phased out and cotton economy was freed in the 1990's. With the advent of trade liberalization, most of interventions have declined.

The support price policy is notional and the Trading Corporation of Pakistan (TCP) is kept as third buyer in order to avoid price crash due to cartelization of powerful syndicates especially during the bumper crop. But the TCP works as a sleeping buyer.

The results of static analysis showed that farmers are earning more profit at world price of cotton than at domestic price of cotton. It was concluded that cotton crop was under-priced in the local market and farmers are in a cost-price squeeze situation.

The farmers were paying almost the world prices and no support or subsidy was provided to cotton growers for inputs. The study showed that Pakistan has comparative advantage in cotton production and can well competes in open market.

The dynamic analysis was carried out to estimate the competitiveness of cotton in the ensuing free trade era. Here the cotton budget at economic prices was estimated including risk prices of cotton and fertilizers instead of average world prices.

These risk prices were generated through normal distribution of time series world prices of cotton and other critical inputs over the past fifteen years. The simulation results provided the economic revenue and tradable cost for the first year of free trade i.e. 2004-05. For the further four years (up to 2008) projections were made based on this first result, by adding in the risk price as error term for each year.

The risk analysis at future risk price for five years showed that Pakistan does have the potential to compete in the free trade cotton market. The existing comparative advantage in cotton production will be maintained by the country. Pakistan can further reap the benefits of free trade by reducing the cost of production or by increasing productivity per unit of resources.

The quality of a lot of cotton is damaged in the fields during the picking of produce. The obsolete ginning machines deteriorate the micronnair length of fibre. The quality of cotton may be improved through "clean picking" and "better ginning" practices.

Although restriction of import is contrary to free trade, yet its import during bumper cotton crop could crash prices received by farmers. Thus import should be regulated by increasing the LC margin by improving marketing efficiency and qualifying the quality standards of produce set by the WTO.