A CGE Analysis of Global Rice and Agriculture Trade Liberalisation: Welfare and Poverty Implications for Pakistan

Transcription

1 5 A CGE Analyss of Global Rce and Agrculture Trade Lberalsaton: Welfare and Poverty Implcatons for Pakstan Rzwana Sddqu Abstract The objectve of the research s to examne the macroeconomc, welfare and poverty mpacts of global full and partal lberalzaton of rce trade and agrculture trade n Pakstan. Smulatons are conducted n a CGE statc framework usng data from 2002 socal accountng matrx. The model assumes segregated labour market-agrculture and non agrculture. The paper ncorporates supply and demand sde factors affectng Pakstan s agrculture trade wth specal focus on rce trade. The results ndcate that trade lberalzaton of rce and agrculture trade lberalzaton beneft to all households especally to farm households n rural area. The welfare and poverty ndcators; equvalent varaton and FGT ndces, mprove for majorty of households. Pakstan as a whole s better off n each exercse as welfare mproves and poverty reduces by all measures. However ntensty of mpact dffers across fve experments. Last, long run analyss of rce trade lberalzaton s conducted assumng that land and captal are also moble wthn agrculture and non agrculture economes, respectvely. Global full lberalzaton of rce trade has more favorable effects n terms of welfare and poverty reducton n the long run. 1. Introducton 1 Rce s one of the leadng food crops n the world and an mportant staple food and cash crop n Pakstan. She produces two varetes of rce basmat and rr. Beng a net exporter of rce, Pakstan receves 15 percent of foregn exchange from exportng rce. In the past, usng guaranteed prce support for agrculture n general and for rce n partcular, the government had encouraged farmers to produce exportable surpluses, partcularly of basmat, where Pakstan had comparatve advantage and a vrtual monopoly (Noshab, 2005). These polces promoted commercal farmng at the expense of farm labour and small scale agrculture. However, Pakstan undertook sgnfcant lberalzaton measures n ts agrculture sector by reducng state nterventon and brngng prces closer to world market levels. But, due to slow lberalzaton of agrculture and rce sector n developed countres, the country has not been able to realze ts expected benefts. 2 Global lberalzaton of rce and agrculture sector s expected to affect welfare and poverty n Pakstan through varous channels, such as prces, employment, ncome, and consumpton etc. Recently a number of studes have analysed the mpact of agrculture trade lberalzaton on poverty (Robllard and Robnson, 2005, Hertel and Wnters, 2005, Cororaton et al, 2005, Cororaton, 2004) 3. But the mpact of rce and agrculture trade Research Economst, Pakstan Insttute of Development Economcs, Islamabad, Pakstan 1 I am grateful to Dr M. A. Razzaque and Prof. John Cockburn for ther valuable comments on the earler draft of the paper. 2 Favourable development n the domestc supply s only benefcal f they can be absorbed by the mportng countres. For nstance prce support measure appled n the Unted States and European communty resulted n an ncrease of wheat producton, whch the world market has been unable to absorb. 3 A recent, World Bank research study on agrcultural Trade Reform and the Doha Development Agenda ponts out to the expected gans from abolton of tarffs, subsdes and domestc support programs. Two-thrd of whch would come from agrcultural trade reform, because agrculture s so much more dstorted than other sectors. 1

2 lberalzaton on poverty and welfare n Pakstan s not explored yet. Therefore, the objectve of the present study s to explore the answer to the queston whether Pakstan would gan by the global agrculture trade lberalzaton n general and rce trade lberalzaton n partcular or not. The study uses both supply-sde (domestc) and demand sde reforms (global) 4. It also examnes whether the effects of global lberalsaton of the rce sector are dfferent from the effects of lberalsaton of all agrcultural commodtes to fnd ways n whch WTO mght contrbute to reduce poverty n Pakstan. The study conducts both short run and long run analyss of global full lberalzaton of rce trade on welfare and poverty. In ths context, CGE framework s more approprate as t can take nto account changes n domestc as well as n the world economy smultaneously. Therefore, ths study uses a CGE-framework calbrated to the most recent Socal Accountng Matrx (SAM) for Pakstan for the year (Dorosh et al, 2004). It conducts smulatons wth supply and demand sde shocks. Lastly, ths paper assesses the mpacts of global full lberalzaton of rce trade on household ncomes, welfare and poverty n the long run by assumng captal and land are moble across sectors. The study s organzed nto sx sectons. Secton 2 presents an overvew of Pakstan economy wth a focus on rce sector, and poverty stuaton. The secton 3 dscusses structure of CGE model and data base. Secton 4 and 5 dscuss results of the smulatons wth a focus on rce trade lberalzaton and agrculture trade lberalzaton, respectvely. Fnal secton concludes. 2. Rce Sector and the Pakstan Economy The agrculture sector n Pakstan has confronted an uneven growth concdng wth dfferent polces under dfferent regmes. The stagnaton n the 1950s was followed by a rapd growth n the 1960s due to a large scale publc nvestment n the rrgaton sector, the green revoluton, the ntroducton of hgh-yeldng varetes n wheat and rce etc that helped to ncrease agrcultural productvty and proftablty. The trend was reversed n the 1970s, manly because of clmatc factors and Pakstan s drve to promote the manufacturng sector. Ths perod observe a reducton n the share of agrculture n GDP, from 45percent n 1960 to 25.7percent n (Pakstan, varous ssues). In , t has declned further to 21.6 percent. Despte reducton n the share of agrculture n GDP, ts mportance cannot be dened as majorty of populaton lvng n the rural areas engaged n farmng actvtes. Its mportance can also be vewed from the fact that t makes the largest share of Pakstan s export earnngs ncludng processed exports. Its major exports from agrculture or agrculture based processed exports nclude mlled grans, fsh, frut, textle, and leather products, etc. Some of them are heavly protected such as fsh and frut. Wth very hgh protecton, exports of frut and vegetables have doubled between 1996 and (Noshab, 2005). 4 In the nternatonal rce market there are countres such as Chna, Inda, Myanmar, Pakstan, USA, and Vetnam who are the leadng net exporter of rce. On the other hand, countres such as Bangladesh, Indonesa, the Phlppnes and Japan are the net rce mportng countres. A large number of poor people n both the net rce-exportng and net rce-mportng developng countres depend heavly on rce, as a consumer and as a producer. 2

3 Rce s the second largest staple food crop n Pakstan and a major export tem. It accounts for 5.7 percent of the total value added n agrculture and 1.3 percent of GDP n (Pakstan, 2005). Its area under cultvaton has ncreased by 23 percent; from 2035 thousand hectares n 1980 to 2503 thousand hectares n (Table 1). Producton has ncreased from 3126 thousand tonnes to 4991 thousand tonnes. Its share n value added of major crop has ncreased from 13.5 percent to 15.4 percent durng the past twenty years. Table 1 ndcates that per capta daly calore n take from rce has ncreased over tme. Its share n total calore ntake from cereals has ncreased from 7 percent n to 7.8 percent n Table 1: Area, Producton, Yeld, and Calore ntake of Rce Area Producton Value Added Yeld Share Year Share n major n total Kg/Hectare Hectare Tonnes Crop (percent) Exports Calore n take from * (7.0) ** (7.8) ** Source: Pakstan (Varous ssues). * Year , ** Fgures n parentheses are share of calores from rce n total calores n take from cereals on per capta per day bass (Khan and Quresh, 2002).@Authors calculaton based on per capta avalablty and calore n take of rce. Fgure 1 reveals varous uses of rce producton. It shows that despte rsng producton n recent years, export has declned. Ths has resulted n the rse of the domestc avalablty of rce. Despte ncrease n rce avalablty, prce of rce has ncreased durng the last fve years Fgure 1: Dstrbuton of Rce among Varous uses Ye a rs P roducto n Seed Expo rts Net Avalablty Fgure 2 reveals that very sharp declned n prces durng 1999 to 2001, but snce then t rose qute strongly. Ths may be due to reducton n government support measure. Another reason could be the ncrease n domestc demand whch s reflected n ncrease calore ntake from rce [Table 1]. 3

4 Fgure 2: Percentage change n Retal Prce of Rce Varaton Year Snce ndependence government polces have been swathe by drect and ndrect government nterventons comprsng product-specfc prce supports provded to wheat, cotton, sugarcane, and rce and nput subsdes on fertlzer, electrcty, seeds, pestcdes and credt. These polces generated a large dsparty between world and domestc prces. Pakstan has always followed a polcy nterventon n the prce mechansm to the pont of subvertng t. In the fftes, the most of the agrculture commodtes were subjected to compulsory procurement at substantally less than world prces. Table 2 ndcates that under prcng of agrculture commodtes has remaned a consstent polcy. Nomnal protecton coeffcent(npc) ndcates that domestc prce of major agrculture commodtes have been less than ffty percent of those of nternatonal prces,.e., 34, 39, 33, 41 percent for cotton, wheat, rce basmat and rr, respectvely 5, n the 1990s (Table 2). However, the ratos have rsen n late nnetes ndcatng reducton n government nterventon to rce, under prcng polcy. Table 2: Nomnal Protecton Coeffcent of Varous Crops (percent) Year Cotton Wheat Rce (basmat-385) Rce (Irr-6) Sugarcane Source: Chaudhry and Chaudhry (1997) Nomnal Protecton Rate (NPC) s the rato of procurement to the correspondng mport and export party prces. Some agrculture sectors were hghly protected tll 1980s. Snce then most of non-tarff barrers (NTBs) had been removed or replaced wth tarffs under structural adjustment program (SAP) recommended by World Bank targeted to remove mbalances, acheve effcency and growth. The tarffs on agrculture mports were also reduced from a maxmum of 65percent n 1995 to 25percent n (Noshab, 2005), quanttatve quotas, export lcensng scheme and exports subsdes have been almost elmnated, and the number of tems on negatve lsts has been reduced. Overall, domestc support measures to agrculture actvtes declne by 44percent durng to The value of NPC was close to unty n the begnnng of the 1970 but jumped to the lowest value for rce n and ncreases agan (Chaudhry and Kyan(1991)These values are not reported n the table to focus on recent estmates. 6 The dscusson n ths secton s based on (WTO, 2001, Pakstan, 2001, Pakstan 2004) 4

5 On the other hand, tarff peaks and tarff escalaton n the developed economes were very hgh. For nstance, n OECD countres they were hghest on the mports of frut, vegetables, cotton and staple foods such as cereals (ncludng rce). Sometmes they exceed 100percent (Noshab, 2005). These barrers made t dffcult for Pakstan to ncrease ts expected share of agrculture exports n those countres, as ts non-subsdsed exports remaned uncompettve wth the subsdsed products of mportng countres. The change n producton and prces has some mplcaton for poverty especally for rural populaton (70 percent of total populaton), who are heavly engaged n agrculture actvtes and consume more of agrculture goods. Rce beng a second staple food has low share n total consumpton. But the share of rce n household budget s found to be larger for rural households relatve to urban households; 1.5 and 1.2 percent n 2002, respectvely (Table 8). Dsaggregaton of household by rch and poor shows that the rce share n food expendture s larger for poor than rch households n the urban as well as n the rural areas, partcularly n Sndh rural (Table 7). Ths mples that reforms n the area of rce may affect poor households than the rch households. On average, per capta calore n take from rce has ncreased from 165 to 184 over 25 years. Its share n total calore n take s around 7 to 8 percent (Table 1). Table 3: Poverty Indcators for Pakstan (percent) FGT Indces Area * Head Count Pakstan Urban Rural Income Gap Pakstan Urban Rural Severty ndex Pakstan Urban Rural Growth n per capta ncome Pakstan Source: MCHD (1999). World Bank (2002), *For ncome gap rato, they use percentage n total. Table 3 reveals that one thrd of the populaton fall below the poverty threshold level, compared wth one-fourth of three decade ago.e., the number of poor has ncreased from 28.6 percent n to 35.7 percent n The other two ratos, poverty gap and severty ndex, also show that poverty has ncreased durng the 1990s (Table 3). Per capta ncome s an ndcator depctng average standard of lvng of the people n the country. In eghtes and early nnetes growth n per capta has declned from 1.6 percent n to -1 percent n Snce then t shows an ncreasng trend. Slower growth n the nnetes may be due to slower economc growth, declne n remttances nflow, and fast deprecaton exchange rate [Pakstan, ]. Ths pattern has reversed n recent years and resulted n sharp ncrease n per capta ncome. The rse n poverty n presence of hgh growth n per capta ncome leads to the concluson that ncome dstrbuton has worsened. Ths paper explores the mpact of global lberalzaton of rce on poverty and households ncome. 5

6 3. The Model Structure and the Database 3.1. Structure of Computable General Equlbrum Model for Pakstan The economy wde CGE model captures structural features of the Pakstan economy for the year It s structured n the tradton of trade-focused CGE models of developng countres. Its major buldng blocks are producton, factor markets, commodty markets, households, government, and the rest of the world. The detals of factors, sectors, and actors are gven n table 4. Households are categorsed nto nneteen groups two n urban and 17 n rural areas. Urban households are grouped nto two, poor and non poor. Rural households are categorzed by regon, Sndh, Punjab and Other Pakstan [whch ncludes two provnces NWFP and Balochstan]. In each regon, farm households are classfed by land holdngs-large, medum and small-, landless farmer and rural agrculture labourer. Rests of the households are grouped nto two categores; non farm non poor and non farm poor. Producton actvtes are aggregated nto agrculture (7), and non agrculture actvtes (13) wth ndustry (9) and servces (4). Table 4: Structure of the Socal Accountng Matrx I. Households: Rural 1. Large farm Sndh(50 Acres), 2.Large farm Punjab(50 Acres), 3. Large farm Other, Pakstan(50 Acres), 4. Medum farm Sndh( )Acres, 5. Medum farm Punjab( )Acres, 6. Medum farm Other Pakstan( )Acres, 7. Small farm Sndh(12.5) Acres, 8. Small farm Punjab (12.5) Acres, 9. Small farm Other Pakstan(12.5) Acres, 10. Landless farmer Sndh, 11. Landless farmer Punjab,12. Landless farmer Other Pakstan, 13. Rural agrculture Wage labourer Sndh, 14. Rural agrculture wage labourer Punjab, 15. Rural agrculture wage labourer Other Pakstan, 16. Rural non-farm non-poor, 17. Rural non-farm poor Urban: 18. Urban non-poor (Above poverty lne), 19. Urban poor (Below poverty lne) II. Enterprses, III. Government, IV. Rest of the World Insttutons Actvtes and Commodtes Agrculture: 1. Wheat, 2. Rce-Paddy, 3. Cotton, 4. Other Major Crop, 5. Hortculture, 6. Lvestock and, poultry, 7. Forestry, Industry: 8. Mnng, 9. Food, 10. Wheat, 11. RICE Manufactured, 12. Text 13. Leather, 14. Other Manufacturng, 15. Chemcals, 16. Energy, Servces: 17. Constructon, 18. Trade and Transport, 19. Housng, 20. Servces Factors of Producton I. Labor: L1 : Labour (own) engaged n large farm, L2 : Labour (Own)Engaged n small farm, L3 : Labour wage worker, L4: Labour unsklled, L5: Labour Sklled, II. Captal: Farm Captal, Non Farm Captal III. Land and Water Goods for domestc market and foregn markets are of dfferent qualtes and substtuton between them s defned through constant elastcty of transformaton (CET). The allocaton of outputs between domestc and foregn markets s determned by the relatve prces receved n domestc and foregn markets. Export demand s a functon of the rato of world export prce to domestc export prce (fob) and base year exprort demand. For domestc product markets, demand sde conssts of households consumpton, government consumpton, ntermedate nput demands and nvestment demand. The supples consst of domestc producton and mports. In each market, the rato between demands for products from these two sources depends on relatve prces, assumng that there are qualty dfferences between mports and domestc output (Armngton, 1969). CES technology s assumed between mports and domestc goods and Pakstan s assumed to be a prce-taker on the mport sde. 6

7 Factors of producton can be categorzed nto three broad categores: labor, captal, and land. We have fve types of labour n the model, three types of labor engaged n agrculture actvtes and two n non agrculture actvtes. Land appears as a factor of producton only n the agrcultural sectors. Farm captal s moble whle non agrculture captal s sector specfc. In the factor markets, the demands are fulflled wth fxed supply quanttes. In labour market, each type of labour moves freely and wage rate adjusts to brng equlbrum n labour market. The land and captal markets are segmented by actvty,.e., land and captal (non farm) cannot move from one actvty to another. In each market, rent s flexble to assure that demand and supply are equal. Farm captal can move freely and returns to farm captal adjust to brng equlbrum. Avergae wage rate of agrculture labour and non agrculture labour s weghted average of three types of labour engaged n agrculture actvtes and two type of sklled and unsklled labour engaged n non agrculture actvtes, respectvely. The multlevel specfcaton of the producton process s shown graphcally n fgure 1 n appendx-i-a. The producton actvtes produce goods and earn ther ncome from sales of goods n domestc and foregn markets. The ncome s allocated to purchases of ntermedate nputs and payments to producton factors. The ncomes from factors of producton are dstrbuted among nsttutons n fxed shares. Households receve all labour ncome; the dstrbuton among the households depends on the ownershp of labour. They also receve a part of captal ncome from producton, transfer payments from the government, remttances from rest of the world and dvdends from frms. Households allocate ths ncome to pay taxes whch are fxed shares of ncomes, whereas, household savng vares to brng equlbrum between savng and nvestment. Household demand s specfed by lnear expendture system (LES)- maxmzng Stone-Geary utlty functon subject to household s budget constrant. The government collects taxes from producton, households, charges on land-water and used for consumpton (of fxed commodty quanttes), transfers to households (ndexed to the domestc prce level), and savngs. Government savngs s defned as the dfference between government revenues and expendtures. Enterprses ncome orgnates from captal and they allocate t to savngs and transfers to households. Total demand for nvestment and government consumpton n real terms are determned by deflatng wth ther respectve prce deflators. The three blocks, vz. savngs-nvestment, government, and the rest of the world, are assocated wth the macro constrants of the model. () In the savngs-nvestment block, the total purchase of nvestment goods s fnanced by savngs from the domestc nsttutons and the rest of the world. However, savngs are nvestment drven and adjust through flexble savng rates for households. Rest of the world s ncome ncludes ncome from sales of mports and ts outlay ncludes expendture on exports and remttance ncome to households. The dfference between the two measure s current account balance (CAB) or foregn captal nflow. To the extent that Pakstan s spendng exceeds ts earnngs, foregn savngs (the current account defct) s postve. Walras law holds for goods market; () 7

8 The fscal balance, wth government savngs equal to the dfference between government revenue and spendng; and () The external trade balance (n goods and non-factor servces), whch mplctly equates the supply and demand for foregn exchange. In tarff reducton exercse government ncome s also fxed wth lost tarff revenue replaced through an ncrease n tax rate on producton. The equatons wth varables defntons are gven n the appendx-i-b. 3.2 Poverty and Welfare Analyss The study nvestgates the mpact of global agrculture sector lberalzaton n general and rce lberalzaton n partcular on poverty usng mcro data of about 15 thousand households (Pakstan, 2002) and change n ncome and poverty lne from smulaton results 7. The natonal poverty lne Rs. 748 per capta per month - s used to estmate poverty n the rural and the urban area 8 n the base year through FGT ndces- head count, poverty gap and severty ndces 9 (Foster et al, 1984) as follows Pα = 1/n Σ{(Z-Y)/Z} α where n s total number of households, Z s poverty lne, y s household ncome. α =0 for head count rato, α =1 for poverty gap and α=2 measures severty of poverty. The basc prncple underlyng the analyss s to take the household sample as a reference populaton whch remans the same n post smulaton, but household ncome and prces vares. The change n ncome from smulaton results s njected nto household survey data (Pakstan, 2002) to get new vector of ncome. Prces are endogenously determned n the model. A new poverty lne s determned by deflatng t wth new CPIs for each type of households. FGT ndces are estmated wth new vectors of ncome and new poverty lne usng the DAD software (Duclos et al, 2001). Welfare s measured by equvalent varatons (EV) usng base year prce and consumpton for each type of household. 3.3 The Database The model s bult around aggregate verson of the 2002 SAM for Pakstan (Dorosh et al, 2004). For detals of sectors, factors and actors see table 4. The producton sector s aggregated nto twenty sectors from 34 sectors n SAM-2002, they buy prmary nputs from households and usng them n the producton process generates value added. In exchange of supplyng factor servces, households receve ncome as wages, returns to land and captal [moble farm captal and mmoble non agrculture captal]. 7 For detals see (Sddqu and Kemal, 2002, Sddqu, 2005) 8 As Dorosh et al (2004) estmate Poor households n urban and rural areas usng natonal poverty lne of Rs, 748 per month per capta 9 The poverty gap measures dstance between the average poor household ncome per capta and the poverty lne. Whereas severty ndex measures, whch s squared of poverty gap gves a measure of the dstrbuton of ncome among poor households (Roballard and Robnson, 2005). 8

9 Table 5: Structure of Employment by Sectors Pakstan (percent) Sectors Labor Land Land/ Captal/ Skll/ Large Small Farm Farm Agrculture Unsklled Sklled Captal Value Added Labour Labour Unsklled Wheat Rce-Paddy Cotton Other Major Crop Hortculture Lvestock and poultry Forestry Agrculture Rce-Mlled Textle Leather Industry Total Servces Total Note: Rce Paddy and rce mlled are from agrculture and manufacturng sectors respectvely. Source: Authors calculaton from SAM-2002(Dorosh et al, 2004 ) Table 5 reveals that around 40 percent of large farm and 37 percent of small farm labour s engaged n producton of three major crops, wheat-major staple food n Pakstan, rcesecond major staple food and cash crop, cotton-a cash crop. Table 5 also ndcates that large farm and small labour are largely engaged n producton actvtes, whereas agrculture wage labour s largely engaged n lvestock actvtes. Land-labour rato s hghest for the paddy sector compared to all other agrculture sectors; 5.6 percent [Table 5]. The rce-mlled sector s relatvely more captal ntensve among non-agrculture sector [Table 5]. Large Farm Table 6: Structure of Cost of Producton (percent) Small Farm Wage Worker Un skll Skll Land Captal Total Value Added Total Intermedate Output Wheat Rce -Paddy Cotton Other Major Crop Hortculture Lvestock and poultry Forestry Agrculture Mnng Food Wheat Rce-Mlled Textle Leather Other manufacturng Chemcals Energy Industry Constructon trade and transport Housng Servces Total Servces Total Source: Authors calculatons. 9

10 Table 6 reveals that crop sector accounts for 7.8 percent of total value added, where land alone accounts for most of the total value added. The largest share n paddy producton s of land, about 82 percent. The remander of value added s accounted manly for labour and farm captal. Agrcultural non-crop sectors contrbute 66 percent to agrculture output and 23 percent to total output (Table 6). In rce-mlled sector, the contrbuton of captal to gross value added of rce s 78.7 percent, whereas rest s accounted for both type of labor- sklled and unsklled [Table 6]. Among other sectors, labor wage contrbuton [sklled and unsklled] to gross value added n agro based export orented sector Textle and Leather s relatvely larger compared to mport competng sectors such as Other manufacturng, Chemcals, and Energy (Table 6). Exports and mports are very hgh for ndustral sector, 78.6 percent and 91.6 percent, respectvely. Exports and mports from agrculture sector are less than 4 percent. However, majorty of exports from manufacturng sectors are agro-based such as mlled rce, textle, leather etc. Rce export accounts for 34 percent of total producton of rce, whch consttutes 4.1 percent of total exports [Table 7]. Table 7: Trade Structure of Pakstan, (percent) Sectors Exports Share n Imports Share n Import Total Sector Total Composte Tarff Exports Output Imports Good Supply Wheat Rce-Paddy Cotton-NT Other Major Crop Hortculture Lvestock and poultry Forestry Agrculture Wheat RICEM Textle Leather Other Manufacturng Sectors Industry Servces Total Source: Author s Calculatons On average tarff rate was very low on ndustry and very hgh on agrculture; 4.7 percent and 11.8 percent, respectvely, n Table 7 reveals that tarff s non exstent on all crop sectors ncludng rce manufacturng. Only two agrculture sectors are protected through tarff; mports of Hortculture and Lvestock goods. The average tarff rate was 4.7 percent n Table 8 provdes dsaggregated nformaton on ncome dstrbuton across soco-economc households group by source. Agrcultural factor ncomes account for only 23 percent of total factor ncomes n Pakstan. In the rural areas 50 percent of land ncome goes to large 10

11 land holders comprse of less than 4.2 percent populaton. Small land holders, wth 22 percent of populaton receve 42 percent of land ncome. Urban rch households-twenty percent of the total-receve 50.7 percent of total ncome. Rural households receve larger share of factor ncome of captal, land whereas urban households receve larger share of non factor ncome [dvdends, government transfers, and remttances][table 8]. All agrculture labour ncome accrues to rural households. Urban households receve 54 percent and 100 percent wage ncome of unsklled and sklled labor, respectvely. All dvdends go to urban rch households. Table 8: Sources of Households Recepts, Rce Consumpton and Poverty(percent) Households Income Share Populaton Share Large Farm Small Farm Wage Unsklled Sklled Land Captal Dvdends Government Transfers Row Share of Rce n Food Expendture Head Count Poverty Gap Severty Large farm Sndh Large farm Punjab Large farm Other Pakstan Med farm Sndh Med farm Punjab Med farm Other Pakstan Small farm Sndh Small farm Punjab Small farm Other Pakstan Landless farmer Sndh Landless farmer Punjab Landless farmer Other Pakstan Rural ag laborer Sndh Rural ag laborer Punjab Rural ag laborer Other Pakstan Rural non-farm non-poor Rural non-farm poor Rural (Total) Urban non-poor Urban poor Urban Total Pakstan Source: All are Author s calculatons except ncome share and populaton share whch have been taken from Dorosh et al (2004) Unequal resource allocaton between rural and urban areas s evdent from ther consumpton pattern, whch has ncreased over tme. Seventy one percent of total populaton of Pakstan lve n rural area and 30 percent populaton lve n urban area. Ther consumpton account for 49 percent and 51 percent of total households demand, respectvely, n These shares were 52 percent and 48 percent n 1990 (Sddqu, 2005). Households and ntermedate consumpton together account for over 79.9 percent of total aggregate demand, of whch household consumpton accounts for 37.7 percent [Table 9]. Rural households consume more of agrculture goods, whereas urban households consume relatvely more servces. Rce share n household budget s larger for the rural households than the urban households. However, t s relatvely low as wheat s man staple food n Pakstan (Table 9). 11

12 Sectors Table 9: Composton of Demand by Sectors at market prces(percent) Rural Urban Total Household Consumpton Intermedate GOVT ROW CAP Composte Demand Agrculture RICE Mlled Industry Servces total Servces Grand Total Share n total demand Source: Authors calculatons The Pakstan Integrated Household Survey (PIHS, )(Pakstan, 2002) s used to estmate FGT ndces of poverty n the base year. The headcount, gap, and severty ndces are presented n table 8. It ndcates that other than poor non-farm households the hghest ncdence of poverty s among agrcultural labourer Sndh households, who spend relatvely larger on rce consumpton. Poverty ncdence s least n Punjab and hgh n all the three categores defned by the sze of cultvated land n other parts of Pakstan (NWFP and Balochstan). The same pattern s found for gap and severty ndces. Landless farmer households are poorer n Punjab than n Sndh and other parts of Pakstan. Rural agrculture wage labour n Sndh are poorer compared to n Punjab and other Pakstan. A comparson across the households shows that other than poor households[100 percent poor], the ncdence of poverty s hghest among the rural agrculture wage labourer Sndh, where about 80 percent of the populaton s below the poverty threshold level. 4. Results The changes n the world economy affect demand and supply sdes factors of global trade. Reducton n control over agrcultural trade n the world market ncreases world-export market potental to absorb exports. Elmnaton of supply-sde restrctons nfluences country s economy through shftng resources from neffcent sectors to effcent sectors. Both have strong mplcatons for poverty and dstrbuton ssues. The man objectve of ths research s to see how changes n the world economy affect market condtons Pakstan faces. It develops lnks between Pakstan s economy and rest of the world. For ths purpose, fve experments n the GTAP model have been carred out, whch are desgned to capture the mpact of rce and agrculture trade lberalzaton n the world economy, whch are: 1. FLIBRG 100 percent removal of tarff and domestc support measures on rce n all countres. 2. FLIBRD 100 percent removal of tarff and domestc support measures on rce only n developed countres. 3. PLIBRG 50 percent removal of tarff and domestc support measures on rce n all countres. 4. FLIBAG 100 percent removal of tarff and domestc support measures on all agrcultural commodtes n all countres. 12

13 5. PLIBAG 50 percent removal of tarff and domestc support measures on all agrcultural commodtes n all countres. These smulatons brng about changes n world mport prces, world export prces and export demand facng Pakstan (Appendx II-GTAP results). These changes are fed nto the Pakstan economy through CGE model along wth country specfc changes n tarff and domestc support measure (f any). In the frst three smulatons, there s no change n domestc polces as rce faces no restrctons n the base year. However, n fourth and ffth smulatons, along wth the changes n world export prce, world mport prce and export demand, tarff-cuts are ntroduced on all agrcultural mports wth tax adjustment to compensate loss n government revenue. Lastly, smulaton 1 s rerun to explore the mpact of global full lberalzaton of rce trade on welfare and poverty n the long run. The analyss s carred out by assumng that captal and land are also moble factors of producton. In the frst three smulatons, though changes n world mport prce, world export prce and export demand quanttatvely dffer but drecton of change remans the same. When the mpact of these shocks (FLIBRG, FLIBRD, PLIBRG) are fed nto Pakstan economy, through world mport and export prces and export demand, a lttle varaton n the mpact s found. Therefore results of frst smulaton are dscussed n detal n secton 4.1. The results of smulaton 2 and 3 are dscussed brefly wth reference to the results of smulaton 1. Smlarly, the results of smulaton 4-global full lberalzaton of trade n agrculture [FLIBAG] are dscussed n detal n 4.2. The results of smulaton 5-partal lberalzaton of agrculture trade[plibag] are dscussed wth reference to the results of smulaton 4 n the followng secton. Lastly, the results of smulaton 6 [long run effects of full lberalzaton of rce trade lberalzaton n global market] are dscussed wth reference to short run effects [smulaton 1]. 4.1 Rce Trade Lberalzaton Smulaton 1. Full Lberalzaton of Rce Trade n all Countres [FLIBRG] The reducton n tarff and domestc support measures on rce n all countres brng changes n relatve terms of trade and export demand facng Pakstan. The world export prces rse more than world mport prces n all agrculture and servces sectors (Appendx II), whch are relatvely less open compared to ndustry. Wth the excepton of rcemlled, the change n world export prce and world mport prce s less than one percent n all sectors. World mport prce of rce ncreases by 7.9 percent, world export demand for rce by 74 percent and world export prce of rce by 1.3 percent (Appendx II). Pakstan beng a net exporter of rce s expected to be benefted wth the ncrease demand for rce and ts export prce n the world economy. Macro Effects The changes n the world economy affect terms of trade n the country. On average, mport and export prce ndces n Pakstan ncreases by 0.01 percent and 2.7 percent 13

14 respectvely [Table 10]. Imports ncrease by 1.47 and export declne by 0.8 percent. The changes n export and mport prces along wth the demand and supply of mports and export travel through the economy and brng changes n domestc prces. Wth the ncrease n domestc prce and mport prce, CPI ncreases by 2.9 percent. However, mports are relatvely cheaper now. Consumers shfts from local goods to mported good. Wth the ncrease n mports demand, demand for domestcally produced good declne by 0.02 percent. Resultantly, output declne by 0.09 percent. Though output declne but demand for composte goods ncreases by 0.21 percent fulflled by mport [Table 10]. The results reveal that global lberalzaton of rce trade generate favorable aggregate results. The changes n structure of trade and structure of producton lead to change n demand for factors of producton. These changes translate nto the change n prce of mmoble factors of producton. Moble factors [farm captal and labor] reallocate and return to farm captal and wage rate adjusts to brng equlbrum n ther respectve markets. On average real wage rate of labour employed n the agrculture sectors of economy ncrease more than wage rate of labour employed n the non agrculture sectors of economy, 2.6 percent and 0.4 percent respectvely. On the other hand returns to agrculture land ncreases sgnfcantly, whereas returns to captal n non agrculture sectors of the economy declne but margnally [Table 10]. Table10: Macroeconomc Effects of Trade Lberalzaton (Percentage varaton over base year) Household Consumpton Real Smulaton 1 Smulaton 2 Smulaton 3 Smulaton 4 Smulaton 5 Smulaton 6 Short Run Long Run Rural Urban Pakstan(Total) Total Absorpton Household Income Real Rural Urban Pakstan (Total) Demand and Supply Effects Imports Composte Demand Domestc Sale Exports Out Put Domestc Prce Prce of Exports Prce of Imports Returns to Factor of Producton Real Wage Rate Agrculture Agrculture large Farm(own) Agrculture Small Farm (Own) Agrculture (Wage) Non Agrculture Unsklled Sklled Returns to Non Agrculture Captal Index Returns to composte agrculture captal Index [Land and Farm Captal] GDP Deflator CPI Agrculture Industry Servce

15 These changes n factoral ncome result n larger gans to rural households than the urban households. Because rural households receve all ncome from land and labour engaged n agrculture actvtes, where returns ncreases wth hgher percentage relatve to labour and captal employed n non agrculture actvtes. Aggregate consumpton of rural households ncreases four tmes the ncrease n consumpton of urban households; 1.1 percent and 0.3 percent, respectvely (Table 10). The ncrease consumpton has led to an ncrease n domestc absorpton by 0.5 percent wth nvestment and publc consumpton fxed at the base level. Income of rural households ncreases more than the ncome of urban households (Table 10). Over all results ndcate that global full lberalzaton of rce trade beneft more to the rural households than the urban households n Pakstan. Prces rse n all sectors of the economy due to ncrease n world export and world mport prces facng Pakstan, whch have lead to change n the structure of trade as well as structure of producton. At the sector level, export prce ndces of agrculture, ndustry and servces ncrease but the largest ncrease s n the ndustral sector whch ncludes lberalzed sector, rce-mlled. Wth an ncrease n world export demand of rce-mlled by 74 percent, world export prce ncrease by 1.3 percent. Producer ncrease fnd t more benefcal to produce exportable surplus. They ncrease producton of rce-paddy and rcemlled by 6.2 and 8.3 percent. Demand for labour and captal ncrease n ths sector. Labour demand n rce-paddy and rce-mlled ncrease by 37.1 percent and 43.9 percent, respectvely [Table 11]. Wages ncrease leadng to hgher value added prce. Domestc export prce of rce mlled ncreases by 36.3 percent. Increase producton of rce-mlled s drected to world market and exports of rce-mlled ncrease by 23.9 percent. Whle, ncrease producton of rce paddy-a non- traded sector- s absorbed n domestc economy. Domestc sale of t ncreases by 6.2 percent. Table 11: Smulaton 1. Effects on Prces and Quanttes (Percentage Varaton over Base Values) Sectors Smulaton 1 Imports Composte Demand Domestc sale Exports Output Labour Demand Value Added Prce Producer Prce Import Prce Consumer Prce Export Prce Agrculture(Total) Wheat Rce -Paddy Cotton Other Major Crop Hortculture Lvestock and poultry Forestry Industry(Total) Mnng Food Wheat-Mlled Rce-Mlled Textle Leather Other manufacturng Chemcals Energy Servces(Total) Constructon Trade and transport Housng Servces ALL

16 Except rce-mlled, exports from all sectors of economy declne. Resultantly, exports from agrculture and servces declne sgnfcantly, by 2.9 percent and 2 percent, respectvely. Exports from ndustry declne margnally, 0.4 percent, due to sgnfcant ncrease n exports of rce-mlled. On the other hand, relatve mport prce of all commodtes show neglgble change, postve or negatve leadng to an ncrease n mport prce ndex by 0.01 percent wth the changes n mport prce ndces of agrculture and ndustry by [-0.02 and 0.01] percent, respectvely, and no change n mport prce of servces. Consumers shft ther demand from domestcally produced goods to mported goods. Imports of all commodtes ncrease, whch lead to sgnfcant ncrease n mports of agrculture and servces by 5 and 4 percent, respectvely and moderate ncrease n mports of ndustry of 1.2 percent. Wth a very large share of mports of ndustry, total mports record an ncrease of 1.5 percent. From the results, t can also be concluded that global full lberalzaton of rce trade makes nward lookng sectors agrculture and servces more open [Table 11]. In response to structural changes n the economy, factors of producton reallocate. On average, labor move towards rce-mlled and rce-paddy sectors from all other sectors of the economy (Table 11). The demand for labor n rce-paddy and rce-mlled sectors ncrease more than declne n labor demand n other agrculture sectors and non agrculture sectors. Wage rate for all type of labour and returns to land ncreases sgnfcantly [Table 10]. Whereas, n agrculture sector of the economy, wage rate and returns to captal n crease by less than one percent. Rce mlled beng a domestc sector wth no fnal consumpton s totally absorbed by ntermedate demand. Domestc consumpton of rce-mlled declne wth the ncrease n prce but producton ncreases and surplus s drected to foregn market to fulfll ther export demand. Welfare and Poverty Effects The major concerns n the study are measurng the effect of shocks on welfare and poverty. These effects can be tackled through change n factor remuneraton and change n consumer prces. Table 12 ndcates that nomnal ncome as well as consumer prce ndex of all households rse n the rural and the urban area. However, some varaton can be observed across households group ndcatng dfferences n ther sources of ncome and consumpton pattern. Rural household nomnal ncome rses more than ncome of the urban household, 4.4 percent and 3.4 percent, respectvely [Table 12]. Among rural households, the largest ncrease s n ncome of the large farm households Sndh, who receve relatvely larger share from large farm labour compared to other sources,.e., 6.9 percent of large farm ncome. The smallest ncrease s n the ncome of non farm poor households, 3.4 percent [Table 12]. Table 6 ndcates that rce s land ntensve sector, land contrbute 82 percent of value added of rce-paddy, whch s largest across the crops. The returns to land ncreases by 3.5 percent n real term [Table 10], whch also beneft to land owners. In the urban area, ncome of poor households who receve relatvely larger share of unsklled labour compared to other sources ncreases more than the ncome of rch households,. The wage rate of unsklled labour rses more than the wage rate of sklled labour, 0.5 percent and 0.2 percent, respectvely, whch beneft more to urban 16

17 poor. Although results suggest that every household gan n terms of ncome but ncome dstrbuton has worsened n the rural area and mproves n the urban area. Table 12: Income, CPI and Welfare: Varaton over Base Year (Percent) Smulaton 1 Smulaton 2 Smulaton 3 Smulaton 4 Smulaton 5 Households Household Income Equvalent Varaton Consumer Prce Household Income Equvalent Varaton Consumer Prce Household Income Equvalent Varaton Consumer Prce Household Income Equvalent Varaton Consumer Prce Household Income Equvalent Varaton Consumer Prce Large farm Sndh Large farm Punjab Large farm Other Pakstan Medum farm Sndh Medum farm Punjab Medum farm Other Pakstan Small farm Sndh Small farm Punjab Small farm Other Pakstan Landless farmer Sndh Landless farmer Punjab Landless farmer Other Pakstan Rural agrculture laborer Sndh Rural agrculture laborer Punjab Rural agrculture laborer Other Pakstan Rural non-farm non-poor Rural non-farm poor Total Rural Urban Non poor Urban poor Total urban Pakstan Consumer prce of rce-paddy and rce-mlled ncreases by 29.1 percent and 13.5 percent respectvely, CPI rses more for the households who spend more on rce n both the rural and the urban area. Rce has larger share n food expendture of rural households n Sndh n each category of household large, medum and small farm, landless farmers, and agrculture labourer relatve to households n other regons, Punjab and other Pakstan. On the other hand, non farm poor n the rural area and poor households n the urban area spend relatvely more on rce [Table 8]. CPIs rse more for these households [Table 12]. Overall rural households consume more rce than urban households. Thus CPI ncreases more for the rural households than the urban households, 3.2 percent and 3 percent, respectvely. These changes n ncome and consumer prces have welfare mplcatons. Increase n ncome of all households s more than to off set the mpact of ncrease consumer ndces. Resultantly, all households are better-off after global full lberalzaton of rce. In the 17