A complete liberalization and withdrawal of state's role, particularly from the agriculture sector is not possible


By: Prof. Dr. Amanat A. Jalbani, Shehla Najib Sidiki, SZABIST
Nov 04 - 10, 2002


Privatization has received unambiguous acclaim in the developed world led by the USA and the Conservative government in the U.K. "The Thatcher Privatization Model" [Herald, 1981] has been widely hailed as a symbol of the successful privatization and liberalization all over the world.

One simple reason why a government privatizes or liberalizes today, is because the state has reached a stage where it is no longer able to provide most of the services and goods to the public as it used to be in the past. The days of abundant resources and excessive spending are over. Infact rising cost, shrinking revenues, and aid cutbacks have grown to a stage that warrants immediate attention on the part of local governments.

The main focus of privatization and liberalization in developed countries has been on the industrial sector. But the situation of developing countries including Pakistan is not the same as in the developed countries. For example, in developing countries including Pakistan, economic situation is not sound whereas in the developed countries, it is stable. Even the situation within developing countries is not homogeneous. For example, Thailand is different than Bangladesh from social and economic development point of view. Moreover, developing countries in general, have to meet all the preconditions like developing capital market, infrastructure, promoting market culture and economic stability, and then emphasizing on competition and capital extension prior to giving everything in the private hands.

The main objective is to examine and see that whether or not it is appropriate to privatize and liberalize Pakistan's economy, particularly the agricultural sector.


Looking at the agriculture sector in general, it seems that the agricultural policies in developed and developing nations are the tangle of contradictions. Throughout the world, governments have 'one foot on the accelerator and another foot on the brake' respectively and simultaneously encouraging and discouraging the increased farm production.

According to the World Bank Reports, despite the dominant position occupied by the agriculture sector in a traditional economy, many parts of the developing world have consistently failed to pay an adequate attention to the agricultural and rural development. This has often led to a stagnant agriculture sector that, in turn, has resulted in large shortfall of domestic food production and balance of payment crisis. In some parts, Governments refuse to pay farmers the true (market) value of their crops, but sell to farmers, fertilizers far less than they are worth. This actually benefits the influential class like landlords only.

The effects of low prices for farm output are not generally off set by the subsidies that many governments provide on credit and modern farm inputs. Typically, subsidies lead to rationing and shortages, and benefit larger and better off farmers more than the smaller and poorer farmers. The conflict of policies the combination of suppressing crop prices and subsidizing farm inputs results in a large waste of resources.

By lowering the farmer's price while subsidizing and controlling consumer prices, many governments of developing countries have had to rely on the imported food, dumped by the industrial countries as a result of their own farm policies. In severe cases when foreign exchange is scarce or domestic production is usually low, this policy has resulted in severe food shortages. As a consequence, many farmers have abandoned their farms to migrate to cities, many finding greater poverty there.

As far as the policies of the developed countries specially, U.S, Japan and E.C are concerned, they are very different. On the one hand they protect their farmers by offering higher prices that is about 200 to 300% more than the world market price and sell it through dumping. On the contrary, they do not only impose taxes on the cheap import agriculture food from the developing countries, but also some times close the borders with the excuse that the goods imported from developing countries are not hygienic or there is an involvement of child labor, etc. On the other hand they pressurize the funding agencies like IMF and the Bank to impose the conditionality on the developing countries, which are dependent on agriculture sector, to liberalize the economies for their so-called prosperity. This is as a result of pressure applied through the IMF & the Bank, and of the impression created by the successful privatization policies by the developed countries, mainly in the industrial sector.

In this connection, recently, the World Trade Organization's top official urged the developed countries to drop domestic agricultural subsidies, arguing that, this would lead to developing countries' earning at least three times more in exports than the international aid they currently receive.

Mike Moore, the WTO director-general, told the Press, in October 2002 in Nairobi that allowing developing countries to export agricultural goods to Western countries that currently subsidize their farmers was the quickest way to increase employment and reduce poverty [Kenyan daily "The Nation" October 2002].

"If we removed those agricultural subsidies, that would return maybe three to five times more than all the overseas development assistance put together. This would return eight times more than all the debt relief," Moore said. "So the (anti-globalization) protesters should be protesting about agricultural subsidies not just about debt relief." [World Trade Minister's meeting in Doha, Qatar in November 2002].


Like other developing countries, agriculture is the mainstay of Pakistan's economy. The progress and the prosperity of the country is strongly linked with the growth of agriculture sector. It is the agriculture sector alone which contributes 44 per cent in terms employment, directly or indirectly, while two third of the rural population solely depends on the outcomes of the agriculture which plays the lifeline role for the national economy.

It does not only provide the surplus for investment in the manufacturing sector but also meet the other expenditures of the government.

As far as the policies are concerned, it has been observed that in past, the surplus was extracted by government intervention through the government control over prices received by farmers for their crop. Typically, what it means is that farmers received lower prices than what they get without government intervention in the price determination, [Hamid et al, 1991].

Agricultural producers received interest free loans. Despite the very impressive expansion in agricultural credit, there is ample evidence to support the fact that the credit is not reaching to a vast majority of farmers, particularly small ones. [Mehmood and Walter, 1990]. In this regard another study [Knudsen and Nash, 1991] conforms that only 25 to 50% of loan funds were properly used in agricultural sector. However, there is a general complaint that these loans do not reach the small and deserving farmers because of the large-scale misuse of proxy loans, political loaning, family loaning and paper loaning. On the other hand, it is widely believed that the default rate of these loans in Pakistan is very high.

As far as the Government policies in general are concerned, it is widely believed that, in past, State has applied both subsidies and taxes-1 on agriculture. Subsidies have been utilized for the political purpose or availed by the elite class, whereas, the major portion of taxes charged from the poor.

The present position in Pakistan is different. State has withdrawn its intervention to a greater extent. One study [USAID in Pakistan, 1990's] suggests the return for the agriculture producers are minimal or some times negative. Same study further describes that the margin of profit for the agricultural producers in rice production is less than Rs. 5 per 40 k.g. Because the world market price of agriculture products by the developed countries are kept low especially through the dumping policies.

Now, let us suppose that we believe whatever alleged by the funding agencies that the states of developing countries have misused the resources so they should withdraw their intervention from their economy. Now in case of Pakistan, if the state is going to withdraw its intervention from the agriculture sector, say from minimal support price of rice only, what will be the situation. There will not only be a problem of the survival of the producers but the survival of major portion of rural population who directly and indirectly depend on agriculture.

Looking at inside and outside scenario of the agriculture sector, it could be said that, even if state has misused the resource in past, as alleged by the Bank and IMF, there is a need of state involvement.


Structural adjustment policies have been introduced in developing countries to reduce the wastage of resources and deficit on the balance of payments. This is a result of pressure applied by the IMF & the Bank, and of the impression created by the successful privatization policies by the developed countries, mainly in the industrial sector. An important conditionality of their policy measure is privatization and liberalization.

Keeping in mind the economic policies by the developing countries in general and the agricultural policies in particular, it seems that policy makers continue to comment on a particular historical echo, so they are not neutral. They hold that, in 1960's and 1970's, all the problems were supposed to be solved by the state's involvement. The early 1980's was the beginning of the world debt crisis, the collapse of growth rates in the developing world and so on. With regard to this period, statement regarding free market hold water. However, the same cannot be said about the 21st century. What seems to be true now is that people, who believe in the power of the market places while still seeing some role for the Government a kind of mixture. Past experience shows that the developed nations are even learning through their experiences and they are even not going to privatize in just one shot.

Looking at the agricultural policies of past in Pakistan, it seems that it needs the withdrawal of Government intervention. But, in certain cases, it needs the Government intervention as well. For example: in case of price instability in agriculture world markets (due to the climatic variation and due to the developed countries' agricultural policies) infrastructure development, regulatory frame work, research, environmental effects, food security, famines, absence of future markets, water shortages, switching over crops, and finally in generating the revenues.

What is needed in Pakistan, is a reconsideration of the state's proper role in the economy in general and the agriculture sector in particular. A solution to the problem requires not the complete withdrawal of Government's role.

If the Donor Agencies want to get rid of state, it could not be done, because its involvement is required in those activities, which are not amenable to market solution, that is, where there are significant externalities. For example: research, environmental effects, food security, water shortages, absence of future markets, infrastructure development etc. But a complete liberalization and withdrawal of state's role, particularly from the agriculture sector as prescribed by the IMF and the Bank is not possible and is not recommended here.