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Bangladesh J. Agric. Econs XXIX, 1 &2 (2006) 19-27
POLICY INCENTIVES FOR COTTON
PRODUCTION IN PAKISTAN
Waqar Akhtar
M. Sharif
Nisar Ali Shah
ABSTRACT
The paper evaluates the effective incentives in terms of level of protection in cotton production
under different scenarios for the period 1990-91 to 2004-05 in Pakistan. Secondary data from different
official sources were used to derive the necessary indicators used in the analysis. NPC and NRP were
measured at official and shadow exchange rates. The objective of the paper is to examine the incentive
structure prevailing in cotton production of Pakistan through analysis of the level of protection. The
results indicate that on average cotton was neither protected nor disprotected substantially at the
prevailing exchange rates under an exportable scenario with the exception of few years, whereas
overall protection to cotton producers has been negative under exportable and importable scenarios with a
shadow exchange rate.
I. INTRODUCTION
Cotton is the main cash crop and contributes significantly to the national economy. Cotton
plays a key role as cash source of income of the local population and contributes about 2.8 percent of
GDP earnings. Moreover, our economy being agrarian is overwhelmingly dependent on nature. A
bad cotton crop simply means a big shortfall in total export earnings. Pakistan is a signatory of
Uruguay Round multilateral trade agreement and consequently became the member of WTO. Like
many developing countries with relatively abundant rural labour, Pakistan is undergoing structural
adjustment. At the heart of the adjustment in agriculture liberalizing specifically include eliminating
input and export subsidies and other trade restrictions which reducing level of government
interventions. In the context of globalization an analysis of protection in cotton production in
Pakistan could throw light on possible impact of domestic price, trade and exchange rate policies on
effective incentives and efficient resources allocation. Effective incentives for growers through level of
protection and resource use efficiency through resource cost ratios were measured by various studies
including Appleyard (1987). It is with this background in mind that the present study examines the
status of effective incentives of seed cotton production in Pakistan.
Price wedge between domestic agricultural prices received by farmers and their respective
international equivalent prices indicate broadly whether farmers gain or lose on account of this
difference. The recent trends of trade liberalization under the WTO umbrella have affected
Pakistan's term of trade and it seems that such global market forces are becoming major
determinants of pattern of agricultural production and trade in future. It is important to recognize that
beside rich natural resources and diverse agro-ecological zones,
The authors respectively are Assistant Scientific Officer, Chief Scientific Officer and Scientific Officer, Social
Sciences Institute, NARC, Park Road, Chak Shahzad, Islamabad, Pakistan.
20
Policy incentive for cotton production in Pakistan
the country is endowed with abundant manpower, huge irrigation and public agricu education and research
systems that give competitiveness to our farmers over competitors in international market (Khan,
2001). However, despite all these potentials agricultural productivity and exports remain low compared to
our competitors in internati markets. To integrate into the global economy, there is an urgent need to
improve effective incentives for cultivators and economic efficiency in production, marketing trade to
maintain competitive edge over our competitors and share of cotton and c products in international
markets.
From an economic point of view, the paradigm proposition is that free trade is beneficial than
protection. It is one of the widely accepted propositions in economic th The proposition is based on (a)
the static argument that trade barriers allow distortion optimal allocation of national and international
resources and thus reduce output and (b) dynamic argument that economic freedom stimulates
competition, thus ensuring environment beneficial to economic growth (Bale and Greenshields 1975).
In spite of s arguments in favour of free trade, protection still exists especially in the LDCs (Huda
Talukder, 2000).
In foreign trade agriculture again dominates, through exports of raw products such as and cotton
and semi-processed and processed products such as cotton yarn, cloth, carpets leather products. Of the
total export earnings, the share of cotton and its products were al 60 percent during the period under
review. There have been some structural changes o time, but the contribution of agro-based products
has more or less sustained its position.
Incentives in agricultural sector can be distorted by either sector-specific or econo wide policies. In
the sector-specific policies give rise to price distortion include comm and taxation. Focusing entirely
on agricultural policy ignores important linkages that e between countrywide policies and agricultural
incentives structure. Economy wide police such as trade and commercial policy that favours others
sectors, can be highly distort leading to withdrawal of resources from agriculture in favour of
protected sectors of economy (Faruqee, 1995).
The support or procurement prices for cotton are set, in theory, by consultation that to into account
many factors including domestic and world demand and supply, costs productions, competing crops,
and interest rate considerations. The program is designed combat price falls immediately following
harvest, which could force farmers with limit storage to sell at depressed prices. Agricultural producers
have faced large disincentives. Comparing the mid 1980s with the historical pattern (1960-87) showed
declines disprotection for cotton, however, steep rates of disprotection remained for cotton and wh in the
early 1990s (Faruqee, 1995).
II. METHODOLOGY OF THE STUDY
Source of Data
Let us consider the effect of policy distortions on recent seed cotton output prices. For the present study
data are drawn from secondary published sources. The main sources of data are support price policies
for seed cotton of the Agricultural Prices Commission. Domestic market prices are compared with
world reference (import/export parity) for analysis of effective incentives. Domestic market prices are
used to evaluate the incentives because they
The Bangladesh Journal of Agricultural Economics
23
Effective Incentives for Cotton Production in Pakistan
The estimates in Table 2 show that growers of cotton in Pakistan have been neither disprotected nor
protected substantially through trade and pricing policies at the official exchange rate under an export
scenario. The average nominal rate of protection for cotton was found to be on -2 percent in Pakistan at
the official exchange rate under the exportable scenario. It is -26 percent under importable scenario
indicating the importance to the domestic textile industry of a strong domestic cotton sector. Table 2
indicates that out of 15 years NRP for seed cotton was negative in 7 years while it was positive for 6 years.
In 199293 and 2004-05 the structure of protection was neutral as the estimated NRP was 0 for these
years under exportable scenario whereas for all years under importable scenario NRP for seed cotton was
negative. In 2001-02 the seed cotton appeared a highly protected and the rate of protection was 20 percent
under exportable scenario but in the same year seed cotton was disprotected to the tune of 22 percent
under the importable scenario, suggesting a total 42 percent difference in the export and import parity
prices due to such factors as transportation costs and quality differences.
Table 2. Nominal Protection for Cotton in Pakistan (official exchange rate).
NPC
NRP (%)
NPC
NRP
Period
(%)
Exportable Scenario
Importable Scenario
1990-91
0.69
-31
0.55
-45
1991-92
0.82
-18
0.66
-34
1992-93
1.00
0
0.78
-22
1993-94
0.94
-6
0.64
-36
1994-95
1.10
10
0.75
-25
1995-96
0.86
-14
0.76
-24
1996-97
0.90
-10
0.73
-27
1997-98
1.01
1
0.79
-21
1998-99
1.19
19
0.89
-11
1999-00
0.87
-13
0.65
-35
2000-01
0.92
-8
0.76
-24
2001-02
1.20
20
0.78
-22
2002-03
1.12
12
0.74
-26
2003-04
1.02
2
0.83
-17
2004-05
1.00
0
0.75
-25
Average
0.98
-2
0.74
-26
NPC= Nominal Protection Coefficient, NRP= Nominal Rate of Protection
Table 3 indicates that with shadow exchange rate the average NRP was about -10 percent under the
exportable scenario, which implies that overvaluation of the Pakistan currency created a disprotection
effect on cotton production. Table 3 also indicates that out of 15 years for which protection rate were
estimated the NRP was negative in 12 years, while it was positive only for 3 years under the
exportable scenario. Results showed that under the importable scenario the cotton producers were
negatively protected by large price gaps as compare to the exportable scenario. The level of
disprotection was particularly high in the early 1990's.
The Bangladesh Journal of Agricultural Economics
25
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