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.

While policy makers, media, and the international community focus their attention on Pakistan’s ongoing security challenges, the potential of the rural economy, and particularly the agricultural sector, to improve Pakistanis’ well-being is being neglected. Agriculture is crucial to Pakistan’s economy. Almost half of the country’s labor force works in the agricultural sector, which produces food and inputs for industry (such as cotton for textiles) and accounts for over a third of Pakistan’s total export earnings. Equally important are nonfarm economic activities in rural areas, such as retail sales in small village shops, transportation services, and education and health services in local schools and clinics. Rural nonfarm activities account for between 40 and 57 percent of total rural household income. Their large share of income means that the agricultural sector and the rural nonfarm economy have vital roles to play in promoting growth and reducing poverty in Pakistan.

Historically, agriculture has been crucial to Pakistan's economic growth and development and remains so even today. The sector employs almost half of the country's labor force, supplies key inputs to the country's manufacturing sector, generates a significant share of export earnings, and nourishes a rapidly growing population. Further, beyond agriculture is the wider rural economy, including nonfarm economic activities such as small enterprises, transport services, village retail shops, local schools, and clinics, all of which account for an estimated 40 to 57 percent of total rural household income. Given the importance of these rural activities, the slow growth of agriculture in recent years—averaging just 2.8 percent during the period 2010-2014—should be a source of concern for Pakistan. Can the country's agricultural sector and rural economy once again play a significant role in growth and development? Can it contribute to poverty reduction? Agriculture and the Rural Economy in Pakistan: Issues, Outlooks, and Policy Priorities seeks to answer these questions by examining the performance of both agriculture and the rural economy. The authors identify several measures that can promote agricultural productivity growth as well as wider economic and social development. These include increasing the efficiency of water use in the Indus river basin irrigation system, especially in the face of climate change; reforming policies and regulations that govern markets for agricultural inputs and commodities; and improving the provision of rural public services for health, education, women's empowerment, and community development. The analyses and conclusions in Agriculture and the Rural Economy in Pakistan will be of use to policy makers, development specialists, and others concerned with Pakistan's development. Contributors: Madiha Afzal, Nuzhat Ahmad, Faryal Ahmed, Mubarik Ali, Shujat Ali, Elena Briones Alonso, Hira Channa, Stephen Davies, Paul Dorosh, Gisselle Gajate Garrido, Arthur Gueneau, Madeeha Hameed, Brian Holtemeyer, Huma Khan, Katrina Kosec, Mehrab Malek, Sohail J. Malik, Shuaib Malik, Amina Mehmood, Dawit Mekonnen, Hina Nazli, Sara Rafi, Muhammad Ahsan Rana, Abdul Wajid Rana, Danielle Resnick, Khalid Riaz, Abdul Salam, Emily Schmidt, Asma Shahzad, David J. Spielman, James Thurlow, Ahmad Waqas, Edward Whitney, Fatima Zaidi.

"Future prospects for the agricultural sector in Pakistan depend on its ability to increase output and income of producers." Agriculture remains the backbone of the Pakistani economy, employing more than half the labor force and accounting for 70 per cent of export revenues. However, agriculture faces two sets of constraints in Pakistan: resource constraints and policy distortions. This volume deals with the major resource and policy constraints currently facing Pakistani agriculture. Government involvement in Pakistan's agricultural sector has been excessive and often inappropriate, and agricultural reforms are a key part of the adjustment program underway in Pakistan. Some of the principal goals of the program are to ensure a sound and sustainable macroeconomic framework with sustainable internal and external balances, to liberalize trade, privatize government-owned enterprises, deregulate and eliminate public sector monopolies, and to reform the financial sector. The agricultural sector can contribute to the Pakistani economy and to the adjustment program. Agriculture has the potential to make a larger contribution to total revenue and plays an important role in external balances. A favorable climate gives Pakistan a strong comparative advantage in horticulture, as indicated by the rapid growth of the subsector in the absence of policy interventions.