CHAPTER 1

INTRODUCTION
1.1 An Introduction to Pakistan
The Islamic Republic of Pakistan is situated on the northwestern side of the Indian sub-continent. It is situated between the latitudes of 240 to 370 north and longitudes of 610 to 750 east, stretching over 1600 kilometers from north to south and 885 kilometers from east to west, with a total geographical area of 796 thousand square kilometers. The country has a subtropical and semi arid climate. The annual rainfall ranges from 125 mm in extreme southern plains to 500 to 900 mm in the sub- mountainous and northern plains. About 70 percent of the total rainfall occurs during summer and 30 percent in winter. The seasonal distribution of rainfall is strongly influenced by monsoon, which starts in July and ends in September. Winter rains occur during December to March (FAO, 2004). Pakistan is the sixth most populous country in the world. She has four provinces: Punjab, Sindh, NWFP and Balouchistan. In 2007, Pakistans total GDP was Rs. 8706.92 billion, 53 percent of which came from services, 20.9 percent from agriculture, 19 percent from manufacturing sector and 2.3 percent from construction sector. The major sources of foreign exchange earnings are cotton, leather, rice, synthetic textiles and sports goods. Cotton manufacturers contributed 61.5, leather 4.5, rice 6.6, synthetic textiles 3.0 and sports good 3.0 percent towards countrys total exports in 2006-07. Pakistans total population is 158.2 million. Working age population of the country is 105.37 million. The share of agriculture in employment is 43 percent. Literacy rate in Pakistan is 54 percent. Male literacy rate is 65 percent while female literacy rate is 42 percent. Total length of roads in Pakistan is 259 thousand kilometers, including 173 kilometers of high type roads and 86 thousand kilometers of low type roads (Government of Pakistan, 2007).

1.2 Overview of Agriculture in Pakistan

Like other developing countries agriculture in Pakistan is a dominant driving force for countrys growth. It provides directly/indirectly sustenance to 66 percent of countys population living in rural areas. It contributes 21 percent to national GDP and employs 43.4 percent of the total labour force. This sector provides raw material to the industrial sector and is an important market for industrial products (Government of Pakistan, 2007). It also contributes substantially to the foreign exchange earnings. The overall rate of economic growth of the country largely depends upon the performance of this sector. Whatever happens to agriculture is bound to affect the growth of the country. The past experience shows that periods of high/low agricultural growth have generally coincided with the periods of robust/poor performance of the national economy (Ali, 2000). The structure of Pakistans economy has under gone substantial changes during the last four decades. The contribution of agriculture to GDP has declined from 39 percent in 1969-70 to 21 percent in 2006-07- a decline of 18 percent in thirty eight years, yet the role of agriculture in terms of its contribution to GDP cannot be denied (Government of Pakistan, 2007). Pakistans total geographical area is 79.6 million hectares. Of this, 22 million hectares are used for crop production. About 19 million hectares are irrigated while remainder area is under dry farming (Government of Pakistan, 2006b). There are 6.6 million farms in the country. Eighty six percent farms are small having area less than 5 hectares and account for 44 percent of the total farm area. Only 5 percent farms have area over 10 hectares and occupy 37 percent of the total farm area of the country (Government of Pakistan, 2000). Pakistan has the largest single contiguous gravity flow irrigation system in the world with 3 storage reservoirs, 68 small dams, 19 diversion barrages and 45 canal commands with 12 link canals. The first controlled all-year irrigation began in 1859 with the completion of Upper Bari Doab Canal emanating from the Madhopur Headworks on the Ravi River. The Sakhar Barrage, completed in 1932, is considered as the first modern hydraulic structure on the Indus River (FAO, 2004).

In Pakistan agricultural output is dominated by crop and livestock production. Share of crops and livestock in total value added in agriculture is 48 and 50 percent respectively. There are two principal crop seasons in the country namely Kharif and Rabi. Kharif begins in April and ends in October-December where as Rabi season starts in October-December and ends in April-May. Rice, sugarcane, cotton, maize, mong and mash are Kharif crops while wheat, gram, tobacco, rapeseed, barley and mustard are Rabi crops (Government of Pakistan, 2007). Cotton, wheat and rice are the most important crops grown in Pakistan. The performance of these three crops is very crucial for the overall performance of national economy. The share of these three crops in total value added in agriculture is 29 percent (Government of Pakistan, 2007). Cotton is a natural fiber and is used primarily as a raw material for textiles. The current market share of cotton is 56 percent in all fibers. Pakistan is the fourth largest cotton producing country in the world after USA, China and India. Cotton is Pakistans major export earning crop. Cotton accounts for 8.6 percent of the value added in agriculture and 1.9 percent in GDP. Share of cotton manufacturers in countrys total export was 58.4 percent during 2005-06 (Government of Pakistan, 2006). During 2006-07, cotton was sown on an area of 3075 thousand hectares. Production of cotton for the year 2006-07 was estimated at 13.0 million bales. Under the WTO postquota scenario, Pakistan has the potential for becoming leading force in the worldwide cotton and textile market (Government of Pakistan, 2007). Wheat is the main staple food of the people of Pakistan. It is the largest grain crop of the country. It contributes 14.4 percent to the value added in agriculture and 3.0 percent to GDP. During 2006-07, wheat was sown on an area of 8494 thousand hectares. During the same year 23.5 million tones of wheat was produced .Rice is a high value cash crop of the country and has emerged as a major export commodity, contributing 6.9 percent to the total foreign exchange earnings. It accounts for 5.7 percent of the total value added in agriculture and 1.2 percent in GDP. Size of the crop was estimated at 5.4 million tons in 2006-07(Government of Pakistan, 2007).

Livestock sector contributes 49.6 percent to the value added in agriculture, which is higher than the combined contribution of major and minor crops. Livestock plays very crucial role in the rural economy of Pakistan. as 30-35 million rural population of the country are engaged for their livelihood. Average household holdings are 2-3 cattle/buffalo, 3-4 sheep/goats and 10-12 poultry per family which contribute 35 to 40 percent of their income. Within the livestock products, milk is the single largest and the most important commodity. Pakistan is the fifth largest milk producing country in the world. Gross milk production in the county is 38.69 billion liters. Value of milk produced in the county is higher than the value of two major crops, that is, wheat and cotton. Buffaloes and cows are the main source of milk. Share of buffaloes, cows and goats in the total milk production is 64.7, 34.5 and 0.8 percent, respectively (Government of Pakistan, 2007).

1.3 Overview of Agriculture in Punjab

Punjab is the most populated and the second largest province of Pakistan. The word Punjab literally translates from the Persian words Punj, meaning five and Aab meaning water. Thus Punjab can be translated as five water and hence land of five rivers. Punjab is located at the northwestern edge of the geological Indian plate in South Asia. Neighboring areas of the province are Sindh to the east, Balouchistan and NWFP to the west, Kashmir to the north and Indian Punjab and Rajasthan to the east. Total land area of the province is 20.63 million hectares, which is about 26 percent of the total area of Pakistan. Before partition Punjab was called the breadbasket of the Indian subcontinent. After partition divided parts of Punjab (Indian Punjab and Pakistani Punjab) are still performing the same function for India and Pakistan respectively. Punjab is the main producer of agricultural commodities in Pakistan. Total cultivated area of Punjab is 12.51 million hectares, which is 57 percent of the total cultivated area of Pakistan. The Indus River and its tributaries traverse Punjab from north to south. Cotton, wheat, rice and sugarcane are the four major crops of the province. Share of Punjab in the production of cotton, wheat, rice, sugarcane and milk is 78, 80, 59, 65 and 60, percent respectively (Government of Pakistan, 2006b). Total number of farms

in the province is 3.86 million with an average of 2.9 hectare (Government of Pakistan, 2000). There are 26 thousand villages in the province (Government of Pakistan, 2006a). The majority of the population of the province lives in rural areas and is engaged in agriculture directly/ indirectly for their sustenance. Total irrigated area of the province is 14.48 million hectares, out of which 3.65 million hectares are canal irrigated, 2.72 million hectares are tube well irrigated, 7.71 million hectares are canal-tube well irrigated and 0.2 million hectares are tanks irrigated (Government of Pakistan, 2006b). Punjab is located in the temperate zone within the monsoon belt. Annual rainfall in the province varies from 150 mm in the south regions, 620 mm in the central region and 1150 mm in the northern region (Mustfa and Khan, 2005). There are five farming systems in Punjab. These include cotton-wheat, ricewheat, mixed crops, pulses-wheat and maize/wheat-oilseed. Agricultural area under cotton-wheat, rice-wheat, mixed crops, pulses-wheat, maize/wheat-oilseed farming systems is 5.5, 2.8, 4.1, 1.9 and 1.2 million hectares, respectively. Punjab covers 77, 66, 65, 84 and 100 percent of the total agricultural area of cotton-wheat, rice-wheat, mixed crops, pulses-wheat and maize/wheat-oilseed farming systems of the country, respectively (FAO, 2004 and Government of Pakistan, 2005).

1.4 Need for the Study

The development of food ranks highest in the global world order. Access to food is a basic human need and a fundamental human right, its denial leads to ill health and even death (Hassan, 2004). In Pakistan almost 24 percent of the population is living below poverty line. The extent of poverty is still more serious in rural Pakistan. Twenty eight percent of the rural population is living blow poverty line (Government of Pakistan, 2006). At the time of independence in 1947, total population of Pakistan was 32.5 million which has reached 158.2 million in 2007. In 60 years, population of the country has increased by 125 million at the rate of 2.7 percent per anum. The pace of agricultural

productivity is not enough to meet the increasing dietary demand of the country. Faster growth of population is squeezing land and water availability on per capita basis. In 1970/71, per capita land availability was 0.25 ha which has reduced to 0.15 ha in 2002/03 (FAO, 2004). Per capita availability of surface water was 5300 cubic meter in 1951 which has reduced to 1200 cubic meter in 2000. Despite the fact that Pakistan has the longest surface irrigation network, yet the per capita surface water availability is falling drastically over time (Hassan, 2004). The performance of agriculture sector in Pakistan has been satisfactory for the previous four decades. It grew at the rate of about 3.7 percent per annum during the period from 1959-60 to 2001-02 (World Bank, 2007). Despite of the fact that agriculture has been growing at a reasonable rate, yet it has not been able to produce sufficient food to meet the demand of ever increasing population of the country. Pakistan has to import food items worth billions of dollar each year. During 2006-07, food items including wheat, edible oil (palm oil and soybean oil), tea, milk and milk products and pulses valuing $ 2.3 billion were imported (Government of Pakistan, 2007). Total population of Pakistan is 158.2 million, which is expected to reach 180 million by the year 2015 (Ahmad, 2005). Therefore, a higher and sustained agricultural growth rate is imperative to ensure food security and rapid economic development. Possible ways to enhance agricultural growth include expansion in cultivated area, increase in cropping intensity, technological change and improvement in production efficiency. Pakistans total cultivated area is 22.05 million hectares (Government of Pakistan, 2007). Cultivated area in Pakistan has increased from 14.99 million hectares in 1949/50 to 22.05 million hectares in 2006/07 (Government of Pakistan, 1950 & 2007). The cultivated area has increased by about 48.6 percent over this period. The cultivable wasteland in Pakistan is about 9 million hectares, which is 11.3 percent of the total geographical area of the country (Iqbal and Ahmad, 2005). This land seems to offer a good possibility of crop production if is brought under cultivation in future through enhancing water resources. Development of water resources is a long-term process and requires heavy investment. Therefore, this option is not suitable in a short duration of time.

The national average cropping intensity of the country was 137 percent in 1990. It has increased to 142 percent in 2000. Average cropping intensity in Punjab has also increased overtime. It was 124 in 1980, 141 percent in 1990 and 154 percent in 2000 (Government of Pakistan, 1980, 1990 and 2000). Cropping intensity in irrigated area of Punjab is even more and may touch the figure of 200 percent. Irrigation system in Pakistan was originally designed to fulfill water requirement for 75 percent cropping intensity, which has now exceeded 142 percent (Iqbal and Ahmad, 2005). Therefore, scope of further increase in agricultural production through increase in cropping intensity is very slim. Another way to increase agricultural growth is through development and adoption of new technology but this is a long-term process and requires huge funding. Technological progress depends upon how rapidly a technology spreads within a country. Majority of the farmers in Pakistan are illiterate, conservative and traditional. These factors hinder pace of diffusion and adoption of new technology at farm level. Therefore, this option is also not feasible in short term and the country has to depend more heavily on enhancement of production efficiency for increasing agricultural output. The study in hand was designed to carry out the efficiency analysis of different farming systems in Punjab. Cotton-wheat and rice-wheat systems in Punjab were selected for the study. Total agricultural area under these two systems is 8.3 million hectares, which accounts for 54 percent of the total agricultural area of the province. Share of these two systems in Punjabs total area under cotton, rice, basmati rice and wheat is 90, 71, 90 and 60 percent, respectively (FAO, 2004 and Government of Pakistan, 2006b). Efficiency of a firm is its actual productivity relative to its maximal productivity (Farrell, 1957). Efficiency has two components: technical efficiency and allocative efficiency. Technical efficiency is the ability of a firm to obtain maximal output from a given set of resources and available technology or it is the ability of a firm to produce given level of output with minimum quantity of inputs with the available technology. Allocative efficiency is the ability of a firm to use the inputs in optimal proportions, given the market prices of inputs and outputs (Coelli et al. 1998). A technically efficient

firm is one that produces the maximum output from a given set of resources or produces given level of output with minimum quantity of inputs. An allocatively efficient firm is one that applies the optimal amount of inputs to produce the optimal mix of outputs, given the prices it faces. Multiplicative product of technical and allocative efficiency is called economic efficiency. A firm both technically and allocatively efficient is said to be an economically efficient firm. The main objectives of this study are to estimate technical, allocative and economic efficiency and to identify various factors responsible for the existence of technical, allocative and economic inefficiency in cotton-wheat and rice-wheat farming systems in Punjab, Pakistan. This will enable better understanding of the nature of technical, allocative and economic efficiency of farms and will assess the possibilities for productivity gains by improving the efficiency of different farming systems in Punjab, Pakistan. Findings of the study will help planners and policy makers to devise the policies that will enhance agricultural productivity and efficiency in Punjab in particular and in Pakistan in general.

1.5 Objectives
To estimate technical, allocative and economic efficiency of farms in cotton-wheat and rice-wheat systems in Punjab. To estimate the impact of socio-economic and farm specific factors on technical, allocative and economic inefficiency of farms. To suggest policy measures to improve the technical, allocative and economic efficiency of farms.

1.6 Organization of the Study

The remaining study has been divided into four chapters. Chapter 2 is devoted to review of literature. Section 2.1 describes concept of efficiency and different approaches to measure efficiency while Section 2.2 reviews efficiency studies in agriculture. Chapter 3 describes sampling procedure and empirical models. Chapter 4 is devoted to the results and discussions of the study. Section 4.1 elaborates the efficiency estimates of the sample

farms. Section 4.2 describes the relationship between efficiency estimates and farm size. Section 4.3 sheds light on the sources of inefficiencies. Based on the results and discussion, Chapter 5 winds up this study by drawing conclusions and suggestions. Literature cited and appendices are given at the end.