Agricultural pricing in developing countries : Pakistan 1960-1988
The theory of public finance can help to guide policy makers on the appropriate price and tax policies. In Chapter 1 we show how this theory can structure an analysis of the reform of taxes and prices. The appropriate pricing policies depend sensitively on the policy instruments available to the government and on the nature of relationships between economic agents. A central topic of this thesis is the examination of how standard pricing policy analysis and prescriptions need to be adapted for developing countries where agriculture plays a dominant role and where government control over transactions is far from complete. Since the nature of transactions plays a crucial role, in Chapter 2 we give a brief discussion of the diversity of agricultural organization and practices in Pakistan, and highlight some of the important topics in the economics of agriculture in developing countries. We stress the importance of decision making in the presence of uncertainty and the existence of market imperfections in understanding agriculture in LDCs. A characteristic of agriculture in developing countries is that households are both consumers and producers of foodgrains and that the pattern of marketed surplus varies across households. In Chapter 3 we show how cross-section data can be used to explain this variation in the marketed surplus for wheat. The need to allow for sample selection, influential observations and heteroskedasticity in analyses which use similar models and data is highlighted. The behaviour of marketed surplus is a crucial input into price and tax analysis. In Chapter 4 we use a 'double hurdle' model to explain the variation in fertilizer levels applied to wheat in Pakistan. We show that attitudes to uncertainty and how these vary with wealth, along with varying productivity levels and credit constraints, can help to explain this variation. The prevalence of distortions in developing countries is well documented. In Chapter 1 we show how the use of shadow prices in reform analysis can incorporate these distortions. Moreover, shadow prices have a number of further useful applications. Using input-output tables and data on revenue collections and price distortions we show, in Chapter 5, how one can calculate a set of shadow prices (accounting ratios) for Pakistan. These are then used to analyse how social profitability varies across industries and to comment on trade and industrialization policies. In Chapter 6 we present a model which is intended to allow normative analysis of the policy instruments which were available to the government in Pakistan in the mid 1970s for raising revenue. Together with the theory presented in Chapter 1 this is then used to identify welfare-improving reforms of pricing policy and also to focus on the issues that need to be addressed when formulating pricing policy. We argue that there were large efficiency gains to be had from higher prices for major agricultural commodities. We also argue that in the absence of more direct income-transfer mechanisms subsidised rations and low procurement prices for foodgrains may be desirable when one is concerned with income distribution. Chapter 7 provides a summary and some conclusions. Although our analysis uses data for the mid 1970s our results also carry lessons for policies beyond this period and we use them to comment on policies followed in the 1980s and to set out recommendations for future policies.