Government's Role in Pakistan Agriculture: Major Reforms are Needed

June 1995
The proper role of Pakistan's government in the agriculture sector should be to encourage the development of a smoothly functioning market, through institutional and regulatory reform that facilitates market efficiency and private sector activities. Where market failure is not an issue and government inefficiency is evident, government's role should be drastically reduced.
Government involvement in Pakistan's agriculture sector has benefited farmers little, contends Faruqee. He recommends reform of agricultural policies and institutions.
For one thing, government policy has severely distorted agricultural incentives --- directly, through agricultural pricing policy, and indirectly until recently, through exchange rate policy. Although negative effects of the government's exchange rate policy have been eliminated, the indirect effects from giving certain industries heavier trade protection linger. Input markets have been distorted by subsidies. Those distortions dissipate most of the benefits directed at farmers.
The government's role as an institution-builder also needs reform. Public institutions have proliferated in almost every area of agriculture, with little benefit to the sector. The institutions in research and extension are particularly weak.
In addition, public enterprises have dominated marketing and distribution ? crowding out private sector efforts --- although the rationale for a government presence there is not clear.
Moreover, the underpricing of electricity and water has entailed hidden expenditures that make the continued provision of those essential inputs financially unsustainable.
Basic reform is essential, says Faruqee. The proper role of Pakistan's government should be to encourage the development of a smoothly functioning market, through institutional and regulatory reform that facilitates market efficiency and private sector activities. Where market failure is not an issue and government inefficiency is evident, government's role should be drastically reduced.
Government spending should focus on public goods and market failures, not on activities better suited to the private sector. However, the government should continue to play an active role in reducing poverty and protecting the environment.
This paper --- a product of the Agriculture Operations Division, South Asia Country Department I --- is part of a larger effort in the department to analyze the major issues facing Pakistan's agriculture sector and to suggest a strategy to improve its performance.