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PAKISTAN'S RICE POLICY
Implications and policy recommendations
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 4.5%.
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.