Pakistan: Priorities for Agriculture and Rural Development

BACKGROUND

More than two-thirds of Pakistanis live in rural areas, of which about 68 percent are employed in agriculture (40 percent of total labor force). The agriculture sector accounts for about 22 percent of the national GDP and has enjoyed steady growth for almost three decades, substantially contributing to poverty reduction during the 1970s and 80s.

However, recent trend of agriculture incomes is far less encouraging and rural poverty was back to 38.9 percent by 2002, the same level where it was at the beginning of the 1990s. This has occurred despite generally favorable policies on prices and markets, and a relatively liberalized environment. While consecutive droughts have certainly played a detrimental role in the performance of the sector, it also faces significant structural constraints that hinder the sector’s contribution to economic growth and poverty reduction.

ISSUES & CHALLENGES

· Poorly functioning factor markets and constrained access to assets limit opportunities for rural growth and poverty reduction. More than 60 percent of poor rural households are not farm households, with no access to land or water. 38 percent of small landowning farmers are also poor. Incomes from non-farm activities, including agricultural products processing, trade, construction, and transport services already account for 63 percent of total rural incomes. Well-functioning factor markets to facilitate access to assets (land, capital, water) and linkages with non farm sector are crucial for the growth.

· Inequality and land concentration: The agriculture sector is characterized by strong inequality in the distribution of assets, particularly land and water. About 2 percent of the households control more than 45 percent of the land area. Large farmers have also captured the subsidies in water and agriculture, as well as the benefits of agricultural growth. Agriculture credit schemes have also mostly benefited large farmers who have capitalized the implicit subsidies through higher land prices and cheaper access to mechanization rather than labor.

· Agricultural growth is constrained: The capacity of the agriculture R&D system has declined sharply during the last decade, and both the adoption of Green Revolution technologies and the extension of irrigation have reached saturation levels. Technology for rain fed areas and livestock is needed while the past focus has been the irrigation sector. Livestock has been the fastest growing sub-sector, and now comprises almost half of the agricultural GDP. Another constraint comes from inefficient output markets and rent seeking in the supply chain systems, with value being captured by intermediaries. Liberalized markets and the new WTO regime could offer new opportunities for growth if the Government adopts an effective diversification strategy.

· Unsustainable water resources management: Irrigation is the single most critical component of water management in the country. However, it shows signs of inefficiency and degradation: i) low conveyance efficiency at 45 percent and deferred maintenance cause both considerable water losses (though much of that goes back into the aquifer) and deterioration of major infrastructure (barrages); ii) illegal pumping from canals and inaccessibility to water by the tail-enders result in unequal water distribution; iii) the lack of transparency of the actual water flow causes inter-provincial water allocation clashes and inefficient water management systems; iv) supply-driven system cannot accommodate farmers’ specific needs; v) cost recovery is low because of bureaucracy and lack of accountability by the service provider (Irrigation Department); vi) water logging, salinity, pollution, and land degradation are becoming significant; and vii) storage management and water scheduling should be improved for water shortages during the winter and oversupply during the summer necessitate

· Weak rural service delivery: Pakistan has taken major decisions to devolve authority to local governments to improve service delivery This means the roles of different tires of government has been better defined, and downward accountability strengthened. This is a dynamic process, and the country still faces implementation challenges. However, strengthening service delivery and enhanced citizen participation is critical for the development of the non-farm sector, the rural investment climate, and governance.

PRIORITY AREAS OF THE WORLD BANK’S SUPPORT

1. Fostering agricultural growth and competitiveness

· Policy and Institutional Reforms: Recent reforms on the liberalization of input markets and trade should be consolidated to take advantage of new opportunities offered by the WTO agreement. Agriculture and irrigation policies will need to focus on diversification into high value products, agro-processing, and better integration in supply chains. For the poor to benefit, increases in productivity should be reflected in lower food prices, higher employment and rural wages. At the same time the research and extension system need to be revised towards more demand-driven, participatory approaches based on public-private partnership.

· Irrigation Sector. Institutional reforms and investments need to proceed in parallel. At the primary level, long term solutions are needed for inter-provincial drainage problems and environmental flows to the Indus delta. At the same time, the safety of infrastructure (especially barrages) will need to be guaranteed. At the secondary level, the introduction of water entitlements and rights, greater participation of stakeholders, transfer of asset management to water users, development of accountable service delivery institutions, and improved water pricing and cost recovery policies are needed. At the tertiary level, a better integration between irrigation and agriculture would help the whole system to become more demand driven.

2. Promoting more equitable access to assets and natural resources management.

· Land: The high inequality in the existing land tenure structure calls for a comprehensive approach that is socioeconomic and politically feasible. On the one hand, it requires better land markets functions through: (i) improvements in the land administration system, including computerization of land records and reduction of transaction costs; (ii) land taxation policies to reduce incentives for speculative purposes; and (iii) market-based land purchase schemes to facilitate land access across size groups. On the other hand, better allocation of State-owned lands should be further pursued to address landlessness.

· Finance: Access to formal and informal credit by medium- and small-size farmers and non-farm enterprises should be expanded. For the poor, micro-credit programs that accept other forms of collateral besides land, matching grants for income generating activities, and savings-based schemes may be more appropriate to increase access to micro-finance services. An adequate regulatory framework also needs to be put in place for this.

· Natural resources. The degradation of land, water, forests and natural ecosystems is pervasive and mostly affects the poor. The situation in Sindh with respect to land use, salinity, degradation of the wetlands, and floods will need special attention, given the large externalities involved. Policies and public programs will need to address the incentive structure for sustainable use and mitigation measures.

3. Institutions for the poor and rural service delivery

· Participation and accountability: The importance to target the poor to share the benefit of growth and to address their immediate needs is widely recognized. The Government’s devolution initiative strengthened accountability and aimed to improve rural service delivery through capacity building for local governments and communities, and citizen participation.

• Livelihood opportunities. Social mobilization and increased capacity for collective action will enhance opportunities for livelihood and income generating activities and greater “voice” in dealing with the private sector and markets. Support for the basic infrastructure and social services delivery would help improving the rural investment climate, a vibrant private sector, employment and livelihood opportunities, and linkages between farm and non-farm sectors.