Agricultural Terms of Trade in Pakistan: Issues of Profitability and Standard of Living of the Farmers

Liberalisation policies have a major impact on the profitability, employment, and incomes in agriculture sector, as well as on living standards and the poverty levels in the rural areas. In the wake of the IMF structural adjustment programmes and the new emerging trade scenario, the Government of Pakistan, in addition to eliminating input subsidies, is also reluctant to increase support prices for various crops. This has initiated a debate. One view is that the Government must support agricultural prices and farmers must be protected from the decline in market prices of agricultural commodities. The contrasting view is that the subsidies have made the agriculture sector highly dependent on government support, and in order to survive in the WTO trade regime the sector must become highly competitive, efficient, and self-dependent. This paper computes relative price changes in the crop sector to explore whether profitability in this sector has improved or deteriorated. Another goal is to gauge the impact of price changes on the standard of living of the farmers. For this purpose, various terms of trade are calculated. The terms of trade for the crop sector are defined as the ratio of the index of prices received by the crop sector and the index of prices paid by the sector. The paper also probes how movements in international crop prices affect the profitability in the sector and the standard of living of the farmers. The empirical findings, based on the data from 1983-84 to 2002-03, show that the purchasing power and profitability of the farmers in the crop sector have not improved over the last twenty years.