Comparative Advantage of Major Crops Production in Punjab: An Application of Policy Analysis Matrix

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Abstract

This study uses data from 1999/2000 to 2004/05 to determine the relative efficiency of major crops (wheat, rice, sugarcane, and cotton) in Punjab (Pakistan) and their comparative advantage in international trade as measured by economic profitability and the domestic resource cost (DRC) ratio. An economic profitability analysis demonstrates that Punjab has a comparative advantage in the domestic production of wheat for self-sufficiency but not for export purposes. In basmati production, Punjab has a comparative advantage, and increasing Basmati production for export is a viable economic proposition. The nominal protection coefficient (NPC), effective protection coefficient (EPC), and DRC for Irri rice are more than 1: the given input-output relationship and export prices do not give Punjab a comparative advantage in production of Irri for export. Sugarcane growers did not receive economic prices (i.e. prices reflecting true opportunity costs) during 2001/02 and 2002/03 in an importing scenario, while in 2003/04, the NPC was 1.02, indicating positive support to sugarcane growers. The NPCs estimated under an exporting situation range from 1.33 to 1.99, indicating that the prices received by growers are higher than the export parity/economic prices. This is also an indication that sugarcane cultivation for exporting sugar is not feasible in terms of economic value. The NPCs for cotton under an importing scenario were less than 1 while under an exporting scenario were either close to or greater than 1, implying an expansion in cotton production as imports have been more expensive than domestic production.

Keywords: Crops, comparative advantage, domestic resource cost, policy analysis matrix (PAM), Pakistan.

JEL Classification: Q17, Q18.

(ProQuest: ... denotes formulae omitted.)

1. Introduction

1.1. Agriculture in the Pakistan Economy

The agriculture sector is still one of the largest sectors of Pakistan's economy ahead of manufacturing, and accounts for 23.1 percent of gross domestic product (GDP). It accounts for 42 percent of the total employed labor force, and is the largest source of foreign exchange earnings. It also contributes to growth by providing raw materials as well as being a market for industrial products. During the 1990s, agriculture grew at an annual average rate of 4.5 percent per annum. The agriculture growth for 2004/05 is estimated at 7.5 percent. Major crops account for 37 percent of agricultural value added, minor crops contribute 12.2 percent to overall agriculture, livestock (the largest contributor to overall agriculture value added) accounts for 46.8 percent, fisheries account for 1.3 percent, while forestry accounts for 2.5 percent of agricultural value added (Government of Pakistan, 2005a).

1.2. Production of Major Crops

Wheat, rice, cotton, and sugarcane account for 91 percent of value added in major crops. Thus, the four major crops (wheat, rice, cotton, and sugarcane), on average, contribute 31.7 percent to value added in agriculture overall.

Cotton: Cotton is Pakistan's main cash crop and contributes substantially to national income. Cotton production fluctuated between 8 million and 14.6 million bales during the decade ending 2004/05. Pakistan, a net exporter of cotton, has now become a net importer as increasing consumption has outpaced its production. It accounts for 10.5 percent of the value added in agriculture and about 2.4 percent of GDP. Punjab is the main cotton producer, accounting for 80 percent of the area under cotton and 76 percent of production. In addition to providing raw material to the local textile industry, surplus lint cotton is exported. In 2004/05, the production of cotton was 14.618 million bales from an area of 3.221 million ha.

Rice: Rice is an important food cash crop. It is also one of Pakistan's main export items. It accounts for 5.7 percent of value added in agriculture and 1. …