Estimating Size & Operations of Public Sector and its Impact on Wheat Market in Pakistan

1

Outline

Introduction & Background

Recent Literature & Gaps

Methodology & Data

Qualitative Assessment

Quantitative Results

Tasks Ahead

Area & Production of Wheat (2010)

Name of Countries Production (tonnes)

Area Harvested (Ha)

%age Share in Production

China 115180303 24256086 17.7India 80710000 28520000 12.4America 60102600 19278200 9.23Russian 41507600 21639800 6.38France 38207000 5426000 5.87Germany 24106700 3297700 3.7Pakistan 23310800 9131600 3.58Canada 23166800 8268700 3.56Australia 22138000 13507000 3.4Turkey 19660000 8053670 3.02Ukraine 16851300 6284100 2.59Iran 15028800 7035020 2.31Argentina 14914500 4373440 2.29UK 14878000 1937000 2.29Kazakhstan 9638400 13138000 1.48Total of top 15 Countries 519400803 174146316 79.8Total of other 108 countries 131480199 42828367 20.2 World total 650881002 216974683 100

Source: Agriculture Marketing Information Service, Directorate of Agriculture, Punjab

Country-wise Yield (2010)

Source: Agriculture Marketing Information Service, Directorate of Agriculture, Punjab

S.No. Name of Countries Yield (Hg/Ha)

1 Netherlands 89092

2 Belgium 88272

3 Ireland 85990

4 New Zealand 81241

5 UK 76810

6 Germany 73102

7 France 70415

8 Denmark 66264

9 Namibia 65789

10 Saudi Arabia 65000

62 Pakistan 25528

Volatility in Annual Yield

Source: FAO STAT

19481952

19561960

19641968

19721976

19801984

19881992

19962000

20042008

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

Perc

enta

ge C

hang

e

Import of Wheat

Source: State Bank of Pakistan

19711975

19791983

19871991

19951999

20032007

20110

50010001500200025003000350040004500

0100002000030000400005000060000700008000090000100000

Wheat Imports (000) tons Wheat Imports (PKR Million)

000

Tons

PKR

Mill

ion

Some Recent LiteratureWheat-sector Distortions

Literature Issues Highlighted Policy Recommendation

Dorosh (2012): Pakistan Wheat Procurement Reforms

Setting procurement prices too high relative to domestic prices results in massive fiscal costs with no benefit to consumers and small farmers that do not sell wheat to government agencies

Need for strengthening monitoring and coordination across government agencies

Dorosh and Salam (2007)

The dispersion in NRAs among farm products need to be reduced

Bastin et al. (2008)

45%-50% of wheat that has been harvested is wasted,spoilt, smuggled, or never even enters the cash economy

The wheat economy must be liberalized and rationalized. If it is necessary to provide food for the poverty stricken the government should do so directly with food vouchers

Ali et al. (2011) Governmentpolicy has insignificant effect on wheat production though the sign of its coefficient is positive

Need to upgrade the entire supply chain

What has changed post-18th

Amendment?

Has the devolution helped

any aspects of Wheat-sector’s supply chain?

What explains the multiplicity of subsidies post-

2007/08?

What have been the economy-wide effects of targeted

and untargeted subsidies in Wheat

sector?

Some Gaps in the Literature

Situation Analysis

Existing Literature

Pre/post 18th Amendment Data

Political Economy Analysis

Qualitative

Focus Group Discussions

Key Informant Interviews

Stakeholder’s Analysis

Quantitative

Social Accounting Matrix 2007-08

Dynamic Computable

General Equilibrium Model

Methodology

18th Amendment and Reversal

Ministry of Food Security

ECC

Source: Salam (2012)

1. How much is government intervention worth? [Disbursements to TCP and Fertilizer Sector]

Subsidy to Trading Corporation of PakistanSubsidy to Fertilizer

ProducersPKR MillionYears

Wheat OperationsPKR Million

Import of Urea

PKR Million2008-09 20000 31662 320002009-10 25500 3937 23342010-11 12000 4200 9852011-12 217 44982 1622012-13 -- 26000 3400

Source: Federal Budgets, Ministry of Finance Year Books

2. How much is government intervention worth? [Disbursements to Utility Stores Corporation]

YearsRamzan Package

PKR MillionSales of AttaPKR Million

Other Food ItemsPKR Million

2008-09 1300 500 900

2009-10 1500 1200 200

2010-11 700 3000 500

2011-12 2000 -- --

2012-13 2000 -- --

Source: Federal Budgets, Ministry of Finance Year Books

3. How much is government intervention worth? [Disbursements to Pakistan Agricultural Storage and Services Corporation]

YearsWheat Operations

PKR MillionWheat Reserved Stock

PKR Million

Cost Differential for Sale of Wheat

PKR Million2008-09 286 -- --2009-10 599 -- 5982010-11 600 4000 --2011-12 4171 4000 --2012-13 1148 4000 --

Source: Federal Budgets, Ministry of Finance Year Books

4. How much is government intervention worth? [Disbursements for Tube-wells and Tractors]

Year

 Sindh, Punjab and

Khyber Pakhtunkhwa

PKR Millions

BalochistanPKR Millions

Benazir Tractor Scheme

PKR Millions

Green Tractors Scheme

PKR Millions

2008-09 2044 4994 -- 20002009-10 2157 5732 -- --2010-11 -- -- 2000 --2011-12 -- -- -- --2012-13 870 4000 2000 --

Source: Federal Budgets, Ministry of Finance Year Books

5. How much is government intervention worth? [Subsidy on Sale of Wheat]

YearsFATA

PKR MillionsGilgit Agency

PKR Millions

2008-09 195 6002009-10 216 6602010-11 233 6552011-12 255 7442012-13 270 775

Source: Federal Budgets, Ministry of Finance Year Books

6. How much is government intervention worth? [Crop Loans and Remission Grants]

YearsCrops Loan Insurance Flood Affected Areas AJK Earthquake affectees

ZTBL loans

2008-09 -- -- -- --2009-10 -- -- -- --2010-11 292 -- 53 4002011-12 500 3802 -- --2012-13 500 -- -- --

Source: Federal Budgets, Ministry of Finance Year Books

PKR Millions

7. How much is government intervention worth? [GST Subsidy and Loans Written-off]

PKR Millions

Years GST subsidy for

protected consumers Write-off Loans,

Flood Affected Millers & Traders2008-09 4302 --2009-10 5704 --2010-11 -- --2011-12 -- --2012-13 -- 256Source: Federal Budgets, Ministry of Finance Year Books

8. How much is government intervention worth? [Provincial Subsidies - I]

PKR Millions

Source: Provincial Budgets and White Papers

YearsPunjab Baluchistan

Wheat Agriculture Atta Tubewells2010 -- 2,500 -- --2011 -- 3,073 -- --2012 2,500 -- -- --2013 3,000 -- 300 3,000

9. How much is government intervention worth? [Provincial Subsidies - II]

PKR Millions

Source: Provincial Budgets and White Papers

Years Khyber Pakhtunkhwa Sindh

Wheat Wheat TransportationFood from

PunjabAgricultural

Subsidies

2010 -- -- -- --

2011 2500 2500 3,391 1,680

2012 2,000 -- -- 2,505

2013 2,500 -- -- 3,015

10. Total Government Intervention in Wheat Market

2009 2010 2011 2012 20130

10000

20000

30000

40000

50000

60000

70000

80000

PKR

Mill

ion

Note: Excludes support to urea or fertilizer sector in general

In FY 2012 total government intervention in wheat market was USD 754 million

Post-18th Amendment

How Government Intervention Promotes Rent-Seeking?

How Government Intervention Promotes Rent-Seeking?

• Case-I: Farmer needs to sell to PASSCO– Farmer goes to revenue officer to obtain certificate of land

authetication– The certificate is then submitted to PASSCO for obtaining the

bardana bags– After filling farmer comes back to PASSCO for finally selling the

output– PASSCO can reject if specifications not met

• Case-II: Farmer avoids above mentioned hassle and sells to middle man– Middle man gains by buying at low and selling at a higher

government-set price– The impact of subsidy ultimately doesn’t reach the grassroots farmer

• Issue-I: Targeted Vs. Untargeted Subsidies

• Issue-II: Subsidies Vs. Second Best (e.g. Vouchers)

• Issue-III: Tax financing Vs. foreign borrowing to finance subsidy

How we Modeled Intervention?[Simulation: Economy-wide Impact of Subsidies]

• Social Accounting Matrix 2007-08– Pre-18th Amendment economic structure

• Simulation Design– Between 2009 and 2012

• 11 percent annual average increase in subsidy stock

How we Modeled Intervention?[Data and Simulation Design]

• Model Specifications– Intertemporal model: Dissou and Didic (2011), Ahmed et al. (2012)– Households and firms which are both classified under constrained and

non-constrained categories– Labour supply is inelastic and mobile across industries– Representative firm is assumed to exist in each industry– Composite output marketed domestically and abroad (exports)

• Dynamic Features– For each period all markets are assumed to clear

• Wages and prices clear factor and goods markets• Foreign Borrowing at global interest rate

– Results: First Period (1st Year), Mid-Term (20 Years), End-Period (40 Years)

How we Modeled Intervention?[Dynamic Computable General Equilibrium Model]

• Elasticities and related parameters– Substitution elasticity of CES households function (0.7%)– Substitution elasticity of first and second level CES production function (0.5 and 0.4%

respectively)– Rate of depreciation (12%)– Output elasticity of public capital (0.3)– Share of public investment in total investment (28%), population growth rate (1.8%)– World real interest rate (6%)– Share of constrained households in

• Consumption (57%)• Labour income (71%)• Income taxes (9.5%)• Government transfers (10%).

How we Modeled Intervention?[Dynamic Computable General Equilibrium Model]

Macro-level Results – Percentage Change

Variables First Period Mid-Term End-PeriodReal GDP 1.26 1.05 1.06Wage rate 2.46 2.40 2.40Price of capital good 1.15 1.10 1.10Household consumption 0.95 1.09 1.09 Myopic 2.69 2.20 2.20 Forward looking 0.28 0.61 0.62Total Investment 0.37 0.12 0.14 Public 0.79 -0.04 -0.09 Private 0.23 0.18 0.22 Myopic 1.53 1.09 1.09 Forward 0.09 0.07 0.12Total capital stock 0.06 0.12 0.12 Public 0.13 -0.04 -0.04 Private 0.03 0.17 0.17 Myopic 0.25 1.08 1.09 Forward 0.01 0.07 0.08Total exports -2.37 -2.49 -2.47Total imports 1.99 1.70 1.69Income of myopic households 2.69 2.20 2.20 Labour income 2.46 2.40 2.40 Capital income 2.72 1.05 1.04Government revenue 4.22 3.57 3.52

Sectoral Results – I (Percentage Change)

WheatOther Crops

Agri Processin

g Cotton LivestockManufact

uring Energy TextileConstructi

on T&CPrivate

ServicesPublic

ServicesGross Output

First period 23.37 2.10 2.12 -1.43 0.37 -0.18 0.04 -0.36 -0.04 0.60 -0.49 -0.37Short run 23.80 2.40 2.41 -2.74 0.78 -0.01 0.23 -0.57 0.01 0.81 -0.55 -0.32Long run 23.81 2.40 2.41 -2.73 0.79 -0.01 0.24 -0.57 0.00 0.81 -0.54 -0.36InvestmentFirst period 3.15 -7.27 -0.30 0.90 -1.12 2.42 -0.93 -0.54Short run 1.23 -2.63 -0.06 0.40 -0.48 1.05 -0.35 -0.14Long run 1.26 -2.63 -0.03 0.42 -0.46 1.08 -0.30 -0.07ExportFirst period -0.60 3.20 -2.08 -1.05 -2.93 -3.44 -2.92 -3.55 -3.88 -3.84Short run 0.26 4.34 -4.15 1.40 -2.24 -2.95 -3.26 -2.87 -3.82 -3.62Long run 0.27 4.35 -4.15 1.42 -2.23 -2.92 -3.25 -2.85 -3.80 -3.61Imports

First period -40.87 5.06 0.95 -0.26 1.80 2.92 3.85 3.60 3.39 3.18Short run -40.96 4.73 0.31 -0.16 0.17 2.49 3.70 3.60 3.19 3.08Long run -40.96 4.73 0.30 -0.15 0.16 2.48 3.69 3.59 3.19 3.05Domestic Demand

First period 23.37 2.19 2.07 -1.17 0.37 -0.05 0.14 0.29 -0.04 0.90 -0.31 -0.37Short run 23.80 2.47 2.30 -2.18 0.78 0.10 0.32 0.11 0.01 1.07 -0.38 -0.32Long run 23.81 2.47 2.31 -2.17 0.79 0.10 0.33 0.11 0.00 1.08 -0.37 -0.36

Sectoral Results-II (Percentage Change)

WheatOther Crops

Agri Processin

g Cotton LivestockManufact

uring Energy TextileConstructi

on T&CPrivate

ServicesPublic

Services

Price of gross output

First period 0.33 -0.93 -2.44 -0.53 -0.27 0.25 0.29 0.82 1.14 0.14 0.64

Short run -0.05 -1.34 -1.91 -1.53 -0.53 0.09 0.36 0.17 0.92 0.08 0.56

Long run -0.05 -1.34 -1.91 -1.54 -0.54 0.08 0.36 0.16 0.91 0.07 0.54

Price of domestic good

First period -30.77 1.86 -0.55 0.62 0.71 1.47 1.84 1.64 1.62 2.07 1.67 1.62

Short run -30.94 1.47 -0.98 1.37 -0.30 1.19 1.67 1.73 0.97 1.83 1.61 1.54

Long run -30.94 1.46 -0.99 1.37 -0.31 1.18 1.66 1.72 0.97 1.82 1.61 1.52

Price of composite good

First period -25.07 1.82 -0.53 0.54 0.71 1.16 1.56 1.63 1.62 2.07 1.48 1.43

Short run -25.21 1.43 -0.95 1.20 -0.30 0.94 1.42 1.72 0.97 1.83 1.43 1.36

Long run -25.22 1.42 -0.96 1.20 -0.31 0.93 1.41 1.72 0.97 1.82 1.42 1.34

Shadow price of capitalFirst period 1.85 -0.46 1.08 1.35 0.90 1.68 0.94 1.03

Short run 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10

Long run 1.10 1.10 1.10 1.10 1.10 1.10 1.11 1.11

Major Gainers and Losers[In Output terms]

• Gainers– Wheat – Agriculture processing– Livestock– Transport

• Losers– Cotton– Textile– Large Scale

Manufacturing– Construction– Private Services

Major Gainers and Losers[In Price terms]

• Gainers– Wheat – Agriculture processing

• Losers– Cotton– Other Crops– Livestock– Textile– Large Scale Manufacturing– Energy– Construction– Transport– Private Services– Public Services

Major Gainers and Losers[In Export terms]

• Gainers– Agriculture processing

• Losers– Cotton– Livestock– Textile– Large Scale

Manufacturing– Energy– Transport– Private services– Public services

• Province-specific inquiry

• Political economy of subsidies Vs. other forms of transfers

• Introduce a reference simulation

• Detailed welfare losses

Way Forward

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