Implications and policy
By Khalid Mushtaq and P.J. Dawson
Mar 26 - Apr 01, 2001
In Pakistan, rice basmati and IRRI is the most important
foodgrain cash crop. Basmati has a lower yield and higher production costs than IRRI rice
but these are offset by higher prices. Using guaranteed price support for both varieties,
the government encourages farmers to produce exportable surpluses, particularly of basmati
where Pakistan has a comparative advantage and a virtual world monopoly. Policy
formulation requires an understanding of farmers' response to price. Our aim is to gain
insights into the effectiveness of Pakistan's rice policy.
Economic theory implies that the supply of a product is a function,
inter alia, of own and competing product prices (Colman and Young, 1989, pp.30-40) where
both supply and prices are endogenous. We use recent developments in time series
econometrics cointegration analysis (Harris, 1995) to identify statistically
the supply (acreage) response of basmati and IRRI rice in Pakistan. We model acreages of
basmati and IRRI rice, and their respective real prices using annual data for 1967-96. In
each of the two interrelated acreage response equations, acreage is a function of both
endogenous prices and exogenous irrigated area; and we impose the (statistically valid)
restriction that the two price elasticities in each equation sum to zero.
Price elasticities show the effect of a change in one price on each
acreage with all other variables remaining constant. Impulse responses (Lutkepohl, 1993,
pp.43-56) give a better picture of the relationships between the variables in the model
since they show their adjustment paths over time as all variables adjust back to long-run
equilibrium. In Figure 1, a shock in the basmati price of 19% increases the IRRI price by
about the same amount; in aggregate, these have little effect on acreages. In Figure 2, a
shock in the IRRI price of 8.8% has no initial effect on the basmati price, but as the
former falls, to 4.4% after 8-10 years, so too does the basmati price by 5.2%. Their
aggregate effect is that IRRI acreage increases by 3.4% while basmati acreage falls by
Thus rice acreage in Pakistan is responsive to changes in the IRRI
price and not to changes in the basmati price. The policy of supporting the basmati price
to increase exportable basmati surpluses is largely ineffective and should be
discontinued; in contrast, price support for IRRI rice is effective. A stimulus could be
provided to basmati producers by lowering the IRRI support price but this is limited
because it is generally set in line with world prices. IRRI acreage could be increased by
increasing the domestic IRRI support price to a level above the world price, but other
policies like import levies would be required to insulate the domestic market.
Our results also indicate that irrigated area, as a measure of
technology, is an important non-price factor which explains rice acreage response.
Specifically, a 1% increase in irrigated area increases basmati (IRRI) acreage by 0.8%
(1.2%) in the short run. Thus policy aims could be achieved by technological improvements
which may include increasing irrigation, introducing further HYVs, education and
extension, and infrastructural development.
Colman, D. and Young, T. (1989). Principles of Agricultural Economics.
Cambridge: Cambridge University Press.
Harris, R. Using Cointegration Analysis in Econometric Modelling.
Prentice Hall, Harvester Wheatsheaf, 1995.
Lutkepohl, H. Introduction to Multiple Time Series Analysis, New York: Springer-Verlag., 1993.
Khalid Mushtaq is a Scientific Officer at the Central Cotton
Research Institute Multan, Pakistan, and Phil Dawson is a Reader in the Department of
Agricultural Economics and Food Marketing, University of Newcastle upon Tyne, UK.