Pak Economy: Can agriculture lead the way?

By Shahid Javed Burki 

PAKISTAN does not have a trade policy that could help the country take advantage of the dynamism of the global trading system. The result is that the trade deficit continues to grow bringing the balance of payments under great stress.

It does not have any kind of industrial policy. One consequence is that it has no presence in the international system of production. By comparison several Indian companies from both the public and private sectors have become global players.

Pakistan has not framed a comprehensive agriculture policy for years. For a country with its kind of endowments, it should be a major participant in the international agricultural system. Instead, it is a player; it is an importer of the products that should be produced at home. In fact, Pakistan does not have an economic strategy.

At this point, the new leaders are too consumed with the political difficulties they face — some of these are of their own making — to worry about economic policymaking. Neglected, the economy continues to slip. Prices continue to increase, the stock market continues to plummet, the trade deficit continues to increase, and the fiscal deficit has touched a level never seen before in the country’s history.

The people are suffering. Load-shedding has increased to the point where small shops and small enterprises that employ tens of thousands of people have shut down, adding to the level of unemployment. The incidence of poverty no doubt is increasing. Soon the economy will arrive at a point where any kind of rescue effort will be difficult and expensive.

However, today I will not deal with policies that could begin to address the problems the country faces. I will come to the subject at some later date when the policymakers may be inclined to take some advice. Today I will address one part of what could be a strategy for the long-term management of the economy. I will discuss what the country needs to do in the sector of agriculture, long neglected by the state but comprising that part of the economic system that could bring the economy back on track.

In thinking about using the sector to revive the economy and getting it moving again, I will refer to the recent experiences of two Latin American countries that have used in very different ways the opportunities that have become available to large agricultural systems in the developing world. There is much Islamabad could learn from the experiences of Argentina and Brazil.

There are some interesting differences between the agricultural sectors of these two countries. Brazil’s is much larger. It has 173m acres of land under cultivation, about twice as much as Argentina. It has less water available for irrigation than Argentina in spite of the Amazon, one of the world’s largest rivers, that flows in the country’s north. A large part of Brazil is a desert while Argentina receives more rain.

The agricultural systems are different but the differences don’t necessarily reflect their different endowments. Argentine agriculture is focused on grain production; Brazil’s on the production of high value-added crops. Both are large players in the international market but in different ways. Argentina is the world’s second biggest exporter of corn, after the United States; Brazil is the world’s second or third largest exporter of beef, soybeans, orange juice, chicken, sugar and coffee.

Pakistan has traditionally managed its agriculture in much the same way as does Argentina; it should change track and go the Brazilian way. Why?

Experts believe that the world is seeing a paradigm shift in the prices of commodity prices. The recent increases in the prices of grains, oilseeds, fibre and other agricultural products are not because of temporary developments that will go away. They are not because of adverse weather in some part of globe and that has produced these changes. These have happened because of the permanent shift in demand for agricultural products.

Many parts of the developing world have seen sharp increases in consumer demand that have brought about a permanent move in agriculture’s terms of trade with other sectors. From now on fewer agricultural products can buy the same amount of non-agricultural goods. This is what economists mean by shifts in terms of trade.

Such shifts always produce windfall income gains for those who produce the favoured products. Public policy has two ways of dealing with this situation. One is to tax the agricultural producers and use the state to provide subsidies and other benefits to the consumers of agricultural items. This is what Argentina is doing. It has imposed a heavy tax on agricultural exports which has the effect of lowering the domestic price. Since the political base of the government is in the urban areas, this policy makes political sense but is disastrous for the country’s agricultural sector and for exports since agriculture is the main source of trade for the country.

The other way is to pass on price increases to agricuural producers and let them enjoy the windfall. Experience shows that farmers are not big spenders. They will plough back the increases in their incomes into agriculture — into the various parts of the agricultural system. This will result in increasing the productivity of land and labour, making the country more competitive in the international market. This is the policy option favoured by the Brazilian government.

In fact, the Brazilians have gone two steps further. They have provided a very large increase in the amount of credit available to agricultural producers at subsidised prices — with the state picking up in the budget the difference in the market and subsidised price of credit. This system will increase further the productivity of agriculture. It is clear which way Pakistan should go. It should go the Brazilian way.

To make this approach Pakistan-specific, we need to adopt a number of policies and do so quickly so that the farming community can start to make its plans in time. The government should have international prices of traded agricultural commodities reflected in its procurement price. It should encourage the banking system to lend much more to the farming community, subsidising some parts of the capital that will get used for modernising agricultural practices.

It should enter into a partnership with the private sector to invest heavily in agricultural research. It should carefully study the water-pricing policy and charge farmers the real price of this precious commodity. And it should provide income support to the poor so that they can deal with price increases. Pakistan, in other words, needs a well thought-out farm policy.
Source: Dawn, 9/9/2008

Leave a Reply