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‘Pakistan needs contract farming or effective cooperatives to boost productivity’

BR Research recently sat down with Dr David Spielman and Dr Stephen Davies, both of whom are Senior Research Fellows at the International Food Policy Research Institute (FPRI). IFPRI is a think-tank that provides policy solutions to reduce poverty, hunger, and malnutrition in developing countries. Following are some edited excerpts from our conversation which focused on issues facing Pakistan’s agriculture:

BR Research: Can we begin by unpacking the problem of low agricultural GDP growth in Pakistan?

David Spielman: In Pakistan, agricultural growth has come at the cost of resource degradation. Soil nutrients, efficient use of water, all of these things have suffered in the decades after the green revolutions of the 1960s and 1970s. That said, yields have increased per acre sine the 1960s. Now, as urban areas encroach on farmland, water becomes scarce and soil becomes less fertile, one has to find ways of increasing and sustaining agricultural productivity. It’s essential to food security of this country and the economy, because this is not just about wheat. There is cotton, dairy and livestock as well. There are many ways to approach this problem.

One is to increase the efficiency with which we use ground water. In our book for instance, there is a chapter on water and irrigation where we describe the potential and impact of Diamer-Bhasha dam, as well as the potential and impact of other water management strategies, such as better canal lining. And you get a pretty big bump in economic growth, not just by the Diamer-Bhasha dam, but also from a lot more basic investments, like canal lining, water efficiency, technology and the like.

Fertilizer use is another chapter we tackle. Again, it comes down to using soil nutrients more judiciously. Farmers in some parts of Pakistan tend to overuse urea, and underuse other fertilisers, so that it messes with the nitrogen-phosphate balances, whereas other nutrients like Zinc, Boron and Sulphur remain missing elements. A lot of this has to do with pricing and the subsidies granted to these industries for production.

As the cities expand, high-value agriculture has a chance to replace staples. However, unfortunately, we are not seeing the kind of diversification in the agricultural economy as we would expect, given the growth of cities and infrastructure here.

BRR: In terms of overall food security, is it better to subsidise the end product or the inputs? What does the empirical evidence suggest?

David Spielman: Our analysis shows that a lot of the subsidies really narrow the fiscal space of the government. I mean you are talking about gas for urea production, or wheat procurement, and irrigation. You are talking about massive amounts of public spending going into maintaining systems that are not as productive in economic terms as they are made out to be, especially for farmers and consumers. As a result, you are narrowing fiscal space. The government of Pakistan has a huge opportunity cost to procuring that much amount of wheat or diverting that much gas subsidies for two companies, or however many. And you have to think about what is foregone, e.g. school, health clinics, and agricultural R&D.

The big picture is that agriculture in Pakistan has been growing very slowly, largely, due to the intensification of input use, primarily fertilizer, for which you increasingly get diminishing returns. Pakistan is using more pesticides, more herbicides, more tractors, more water, but in an unsustainable manner.

What other countries have experienced is that input intensification is only one way to get more food and more agricultural production. It’s actually technical change that can help drive a much more efficient agriculture sector. There is a need to increase total factor productivity – the way in which you combine land, capital and technology, change those parameters or just shift the technological frontier. Another option is getting better crop varieties, via genetics and efficient use of new irrigation technologies. That’s how you get more out of less, while being sustainable.

BRR: What are some of the ways to use water efficiently? We know in Hunza, for instance, water flowing down from Ultra is diverted to different communities down the stream, but is diverted on day to day and time to time basis.

Stephen Davies: The traditional system is not bad, but some information flows could help divert water to where it is demanded more; the International Water Management Institute in Lahore, which is related to IFPRI, is looking at real-time information flows along secondary canals to see if they can move water at different times to places that need it more, or are short.

David Spielman: Yes, Hunza’s example is a great one; they do that in Gilgit as well. That is precisely the idea, that you have these community-based water management systems and each village has developed its own water diversion system. It serves as a social cohesion. But when you transfer that sort of thing down to Punjab, it is a completely different story. It is a lot more difficult to manage. But we do have water users’ associations, panchayats, and increasingly they may have a central role to play in how we manage scarce water.

BRR: Do you have any analysis of comparative subsidies? E.g. how much subsidy does India give, or other players in global wheat, cotton and rice markets, give? What kind of subsidies do they give out and how are the poor targeted in those subsidies? And if the cost of the production is high, and competing economy is giving high subsidies, how do you deal with that?

Stephen Davies: We have looked at India’s situation regarding fertilizer and what would happen if you took this subsidy off. It would make it more expensive, for sure. In India, one reason they can do these subsidies appears to be the technology industries. They get enough revenue that they can subsidise electricity and fertilizer.

David Spielman: In effect, they can’t afford to give such high subsidies, but in a democracy like India, you can’t afford to take off subsidy because of the vote bank and there is more focus on the short term. The challenge with subsidies is that in the short-term you gain a lot by tapping the rural vote bank and even in the short term, increasing production. Output of wheat or cotton increases and that is pretty easy to do for policymakers.

In the long run, if you talk about agriculture playing a role in poverty reduction and economic growth, you really have to think more carefully about what you do. If you depend on more subsidies, the less space you have to invest in long term solutions, like R&D. You would not have had the green revolution in Pakistan without significant investment in R&D. In Pakistan and other developing countries, these subsidies far exceed the money put into R&D.

BRR: Does the local level farmer understand subsidy better or the investment in R&D?

David Spielman: I think we have to give Pakistani farmers a bit of credit. If you look at wheat farmers in Pakistan, you’d think they are growing irrelevant varieties. Wheat farmers in Pakistan are in fact one of the fastest adopters of new technology. If their national research system identifies disease susceptibility in a current wheat variety, and releases one that is resistant to that disease, you can be sure that in 3 to 5 years, farmers will have dispensed with old varieties and adopted new varieties. Your farmers are some of the best in the world.

BRR: Sure. But given a choice between subsidies and higher spending on R&D, what do you think those farmers would choose?

Stephen Davies: We did some research on adoption of drip irrigation and using an economic experiment. We packaged different ways of paying for a drip system, with varying levels of technical support, costs and subsidies in a lot of different combinations, where many of them ended up with the same net cost. And the difference was that farmers preferred the subsidies. Turned out, you could have four options with the same net cost; the one with the subsidy was still picked most of the time. Now there may be a real finance implication, so this is not necessarily irrational.

Another thing about subsidies is that a lot of these go to the largest farmers. Disproportionately! In wheat procurement, most farmers are net buyers or just small net sellers of wheat actually. Their families are too big for the amount of wheat they grow to have any left to sell. So, two-thirds of the wheat that ends up in the system is from large land owners. They consume a lot more fertilizer, irrigation, etc. All of those input subsidies add up being given to a concentrated group of farmers. They should be the people who should be leading a transition to higher productivity growth and adoption of technology. But they are never going to do that as long as they have these subsidies. With some pressure, they would come up with alternatives or more efficient methods. And there is no agricultural income tax.

BRR: One of the pillars of CPEC is agriculture. The fear making rounds is that if China enters contract farming it may be good money for Pakistan but it may come at the cost of domestic food security.

David Spielman: Food security is not synonymous with self-sufficiency in food production. Pakistan does not have to grow everything it eats. There is the world market. Pakistan chooses to specialise in particular crops to improve its food security. One has to think about the economics of that. Does it work? Is it cheaper? Does it make sense?

As far as China goes, we have to look at their experience elsewhere. They have invested a lot of money in South East Asia, and Africa, aiming to increase food production to export back to China. But if you looked at all these projects and saw how many of them have succeeded in achieving that goal, especially in Africa, you would be pretty disappointed.

A lot of these projects have gone sour because they are getting marginal land, insufficient infrastructure, not enough port capacity, and problems like that, especially in Africa, which make it difficult to produce and export back to China.

Generally, there is probably scope for FDI in agriculture in Pakistan. There is a scope for technology transfer from China and that’s really what I think people should be looking towards. Contract farming, so long as it comes with modern technologies and management methods, could have incredible spillover effects for Pakistan. The Chinese have very productive agriculture in many parts and very rapid growth in their technical capacity.

For contract farming to work, you need a good transport infrastructure and also legal infrastructure to mandate those contracts. What happens if the contract is abrogated? You need to have a functioning soft infrastructure as well as hard infrastructure.

BRR: Technology seems to be the recurring theme in this conversation.

Stephen Davies: That’s because the proportion of small farms is growing dramatically, both as the proportion of land under cultivation and as the number of farms. It has gone dramatically up, and to get productivity increases from the increasing number of farms is going to be difficult. Pakistan will need something like contract farming or effective cooperatives. It will need the package of technology, market access and complementary financial products.

BRR: Let’s pivot towards the policy side. What are some of the legislative issues in the agriculture sector?

Stephen Davies: Well, for instance, let’s talk about the Seed Act of 1976; there has been an amendment to it in 2016. The Seed Act asked the provinces for feedback and relegated their responsibilities under article 144A. So, the Seed Act was passed. Once it was passed, the provinces realised they had given up a greater opportunity to do things on their own. Sindh was the first to realise this, then Punjab, and Baluchistan and the Khyber Pakhtunkhwa are just realizing.

However, capacity doesn’t exist at provincial level. Devolution sounded like a sweet promise but it hasn’t worked well in this sector so far, which is why we are trying to build the capacity of the provinces so they can take up their responsibilities in this area.

BRR: Can you run us through the key issues in Seeds Act, Plant Breeders Act and so forth?

David Spielman: The key issue here is how you encourage the growth of a private seed industry where the public sector plays an important role on the R&D side in creating crop varieties. And on the regulatory side, the issue is to make sure farmers get materials of good physical and genetic quality. The amended Seed Act goes some way to recognise the role of private sector, because in the previous version everything was public sector, from research to distribution. Given that 750 companies are involved in seed production and distribution, that’s catching up with the time, so it is good.

One of the big challenges is that the Seed Act gives more regulatory control over the private sector. The regulatory control apparatus in Pakistan is very weak. So, if you are extending more control over a system which does not have enough resources or capacity to do it, it cannot work. Many countries have backed away from this and they’ve said that ‘look you can’t regulate everything in this sector’. You can catch the companies that put bad product into the market, which might affect farmers’ productivity, yield, income, etcetera, but you can’t regulate everything. Overzealous regulators can stifle private sector investment. And that’s one of the problems they are facing. So, they are trying to figure out how to work within the confines of that.

The Plant Breeders Act in theory it also provides incentives from private sector investment to R&D. And that is important, not just for multinationals that have jumped into this market but also domestic companies that want to start developing their own products. This is meeting Pakistan’s obligations under WTO, and the TRIPS regime.

It is important, but whether it is enough to stimulate FDI from big-tech seed companies for example, remains to be seen. It goes back to that soft infrastructure, e.g. having a legal system that can figure out when a patent infringement has occurred and can impose penalties over those who infringe the patent. It’s not so easy.

Reporter. ‘Pakistan needs contract farming or effective cooperatives to boost productivity’. Business Recorder, January 13, 2017.

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