Abstract

Since the early 1970s, neoliberalism has dominated the world’s economic environment and, at the same time, global trade has become an essential characteristic of economic development. Pakistan started to implement free trade policies in the 1980s under the guidance of the IMF and the World Bank. The first Structural Adjustment Programme (SAP) was implemented in 1988 which required Pakistan to make some major changes to its economy. Essential elements of this SAP included privatization of public enterprises, reduction in non-tariff barriers and subsidies, reduction in government spending, liberalization of financial markets, and increased incentives for foreign firms. These policies have directly and indirectly impacted the livelihoods of rural communities that largely depend on smallholder agricultural activities. Under the SAPs, many of the social safety nets that were in place to protect the poor and the vulnerable were either reduced or removed to make way for market mechanisms, resulting in the undermining of the vulnerable population’s capacity to compete with the market forces and build resilience against seasonal shocks.

Making use of existing literature on Pakistan, this paper explores the impact of neoliberal trade policies, under the guidance of international organizations, on smallholder agriculture and sustainable rural development in Pakistan. The existing evidence from literature and the limited available data suggests that neoliberal policies have led to some adverse impacts on the smallholder farmers, have produced mixed results concerning the issue of overall poverty headcount, and have led to an increase in overall inequality in the country. The paper recommends that Pakistan should actively support the agricultural sector rather than employing a hands-off approach promoted by neoliberalism. Furthermore, the paper recommends that the country should focus on strengthening formal institutions before further embarking on the neoliberal path, establish a development policy that is not based entirely on trade liberalization, develop the rural non-farm economy, provide institutional support and incentives to smallholder farmers, and invest in better research to design sustainable policies.

Since the early 1970s, neoliberalism, characterized by free market policies, has dominated the world’s economic environment. Pakistan started to implement such policies in the 1980s under the guidance of the IMF and the World Bank. Ever since the independence in 1947, Pakistan has become a regular customer of IMF (see Appendix, IMF Programmes in Pakistan). The first Structural Adjustment Programme (SAP) was implemented in 1988 which required Pakistan to make some major changes to its economy. Essential elements of this SAP included privatization of public enterprises, reduction in non-tariff barriers and subsidies, reduction in government spending, liberalization of financial markets, and increased incentives for foreign firms. These policies have directly and indirectly impacted the livelihoods of rural communities that largely depend on smallholder agricultural activities.

The first part of the paper starts by giving an overview of neoliberalism and global trade. The section explores what constitutes neoliberalism and how it came to dominate the global trade. The second part gives an overview of the agriculture sector in Pakistan, including some key past agricultural reforms and policies, such as the Green Revolution. The third section gives a quick synopsis of the rural communities in Pakistan, including some key statistics on urban-rural divide.

The fourth part of the paper discusses Pakistan’s relationship with international organizations including the IMF, World Bank, and the WTO. It explores when Pakistan started to implement SAPs and what policies were pursued during the adjustment period. The next section talks about the impact of SAPs on the agriculture sector, focusing specifically on the smallholder farmers. The sixth section of the paper discusses the impact of neoliberal policies on sustainable rural development in Pakistan, including the impacts on poverty, economic inequality, and rural nonfarm economy. The final part of the paper gives an overall conclusion and some key recommendations. The paper concludes that neoliberalism has not led to the promised overall economic prosperity in the country over the last three decades. In fact, trade liberalization has led to some adverse impacts on the rural poor who are predominantly smallholder farmers. Furthermore, the post-adjustment period has seen an overall increase in inequality in Pakistan.

Concerning the issue of poverty, the paper finds that there is a conflict between the official poverty headcount numbers, especially during the post 2001 period, and those produced by independent research institutes who have employed different methods of measurement. The paper recommends that Pakistan should actively pursue a growth-oriented approach towards agricultural sector, focus on strengthening formal institutions before further embarking on the neoliberal path, establishing a developmental policy that is not necessarily based entirely on trade liberalization, supporting the rural non-farm economy where viable, providing institutional support and incentives to smallholder farmers, and investing in better research to drive appropriate policymaking.

The world today is more economically integrated than at any point in history. Markets around the world are interlinked in one way or another through bilateral and multilateral trade agreements. This was made possible through the establishment of global rules designed to promote the flow of goods and services between nations. Historically, there was no central authority to design and implement global trade rules until the establishment of GATT in 1947 and later the WTO in 1995. The establishment of WTO was a big step towards economic integration as most of the countries became members of this global organization and agreed upon mutual trade rules.

Neoliberalism is a form of political ideology or doctrine that is dominant in the contemporary global trading. The earliest influential proponents of liberalism were Ludwig von Mises and Friedrich Hayek. The Great Depression of the 1930s triggered a crucial discussion among economists to explain the roots and remedies of the business cycle. On the forefront of this economic debate were John Maynard Keynes and Friedrich Hayek. The confrontation between the two led to some of the most important developments in modern economic thinking. At the center of this debate was the role of government and individual liberties in the market. Keynes advocated government spending to boost the economy during recessions, and his main concern was to deal with the mass unemployment at the time. He advocated public spending to increase the aggregate demand in the economy. His central idea was that public spending would help reduce unemployment and increase consumer spending, which in turn would boost the economy.

Hayek, on the other hand, supported a free market where the government played a limited role and where most services, such as education and transportation, were privatized. He believed that markets are highly organic and, therefore, they should be allowed to function on their own. Focusing mostly on the Austrian theory of business cycles, Hayek believed in the efficiency of free markets driven by a price system. His main concern was that government attempts to boost economy by artificially pumping money into the markets would lead to uncontrolled inflation. Through his ideas, he established himself as a ‘libertarian’ and a free market ideologue (Wapshott, 2011).

Neoliberalism is based, to a large extent, on these early ideas of Friedrich Hayek which are in contrast with the Keynesian economic thinking. Keynesian economic practices dominated both fiscal and monetary policies in the aftermath of the World War II, while liberalism, aided by both economic and cultural aspects, was revived during the mid-1970s (Palley, 2005). While in many cases, the neoliberal doctrine has flourished as an established way of market functioning, it has also been implemented through repressive and coercive means. Although there are diverse characteristics of neoliberalism, the most recognizable include “strong private property rights, free markets, and free trade” (Harvey, 2005). In a neoliberal institutional framework, the role of the state is to ensure the proper functioning of markets by enforcing such conditions as secure private property laws. The state is expected to protect the integrity of the free markets by taking a step back and allowing the market forces to do their job. This means the promotion of deregulation where capital and labor are allowed to flow freely across borders. In the long run, it is assumed, the economies will attain a state of equilibrium with full employment. Neoliberals believe that the use of monetary and fiscal policy to influence the employment rates leads to inflation and undermines the efficient functioning of markets (Palley, 2005).

Another key feature of neoliberal doctrine is privatization. Many public sector companies are transferred over to private companies because it is believed that such a transfer would increase the efficiency of these companies and make them more competitive globally. Private investments in typically public-owned-services such as gas and electricity are encouraged. This reduces the state’s capacity to address some key issues such as unemployment, poverty, and income inequality. Neoliberals also imply that poor countries are unable to progress economically not because they lack opportunities or infrastructure, but because of misguided state intervention and inefficiencies (Saad-Filho, 2005). If these barriers to a liberalized market are removed by opening the country to international trade and finance, only then do the poor countries have a chance to join the ranks of the developed world. In the absence of state intervention, it is believed that the market forces will work to determine the relative prices that are not politically influenced. Therefore, neoliberalism is believed to promote neutral forces of markets that work just the same for everyone.

However, the perceived neutral nature of neoliberalism has come under scrutiny as it continues to reshape the lives of millions of people around the world. The structural adjustment programs and austerity measures designed to promote free markets have been increasingly criticized for their failure to bring about promised positive economic change. Since the establishment of international institutions, many structural adjustment programs have been implemented in developing countries with mixed results. Some developing countries are now skeptical about going to the IMF because they anticipate intransigent conditions that the country cannot or does not want to implement. Furthermore, many of the policies promoted for improving economic growth, both in industrialized as well as developing countries, are based on the ‘US model’ that is dominated by the policy prescriptions of the ‘Washington Consensus’ and the ‘post-Washington Consensus’.

At the end of 1980s, the key elements of neo-liberal policy were brought together and the subsequent agreement on these elements was termed as the Washington Consensus. The ten policy prescriptions of the Washington Consensus include maintenance of fiscal discipline, reordering of public expenditure priorities, tax reform, maintenance of positive real interest rates, maintenance of competitive exchange rates, trade liberalization, elimination of barriers to foreign direct investment, privatization of state-owned enterprises, deregulation of economy, and enforcement of property rights (Philips, 2017). International financial institutions (IFIs), the IMF and the World Bank, became the main channels through which these policies were disseminated to the rest of the developing world. Therefore, the IFIs are highly influenced by the policy reforms advocated by the Washington consensus and they have incorporated neoliberal ideas into their development thinking.

In the wake of the debate surrounding the effectiveness of neoliberalism, many developing countries are now critical of neoliberal policy reforms that have failed to deliver substantial enhancements in economic performance. They are also critical of harsh ‘conditionalities’ imposed by the IMF and the World Bank which have negative consequences on the poor and marginalized factions of the society. Over the last few decades, the IMF has provided financial assistance to many developing countries to help them deal with the economic crisis. However, such financial assistance programmes are not only designed to help the economically distressed countries, they are also aimed at adjusting the ‘macroeconomic fundamentals’ to secure repayments. The debtor countries are required to implement certain Structural Adjustment Programs (SAPs) that include

“cutbacks in public spending, currency devaluation, export promotion, opening up of both trade and capital accounts, privatization and tax reductions” (Colás, 2005).

The shortcomings and limitations of neoliberal reforms have encouraged many developing countries to consider alternative routes and economic policies. The emergence of Chinese development finance, for example, has allowed developing countries to seek funds without necessarily bearing the burden of conditionalities (Chin & Gallagher, 2019). Some scholars have accused international institutions of being hypocritical whereby they allow protectionist policies to thrive in developed countries while forcing medium and low-income countries to open up their markets to powerful foreign competitors.

Political backlash and public protests against IMF-backed SAPs and austerity measures have become a common occurrence. Overall, the international institutions are no longer fully trusted with the promotion of fair-trade practices and economic reforms. This is further evident from the proliferation of regional trade agreements that have become an alternative to the trade rules imposed by the WTO. The proponents of neoliberal policies have stressed the ‘long-term’ benefits of free trade, however, how long that will take is not clear. Pakistan, for example, has being under structural adjustment for more than three decades, and yet, the country is ready for another IMF bailout.

The impacts of neoliberal policies on national economies are manifold. This paper specifically looks at the impact of such policy reforms on agriculture and sustainable rural development in Pakistan. According to the 2018 UN Food and Agriculture Organization (FAO) report on the state of food security and nutrition in the world, the absolute number of undernourished people has reached nearly 821 million worldwide (Food and Agriculture Organization of the UN, 2018). The report also points out that the number of people facing chronic food deprivation has been increasing since 2014. Prevalence of undernourishment is especially high in South America and most regions of Africa. Food security in many developing countries has worsened because of numerous factors such as political instability, armed conflicts, climate related disasters, and slow economic growth (Food and Agriculture Organization of the UN, 2018). The FAO report highlights the importance of agriculture in the developing world and shows why food security is critical to sustainable rural development. Therefore, it is imperative that economic policies support agriculture.

Agriculture and sustainable rural development are closely intertwined as the livelihoods of the majority of the people living in the developing countries depend on small farms. According to the 2015 UNFAO report on the economic lives of smallholder farmers, there are about 475 million small-farm households in the developing world (Rapsomanikis, 2015). Although, these households are poor and have limited access to products and services, they produce a substantial amount of the total food in the world. Just like many developing countries, Pakistan also has a large population involved in agriculture.

Agriculture

Agriculture is one of the key activities that contributes significantly to the economy of Pakistan. According to the latest publication by the Ministry of National Food Security and Research Pakistan, “about 65% of the population is engaged in farming directly or indirectly through production, processing and distribution of major agricultural commodities. Agriculture contributes about 19.5% to our Gross Domestic Product (GDP), provides livelihood to about 65% people living in rural areas and employs about 42.3% of the total national labor force. The agriculture sector is the major contributor in the overall export earnings of Pakistan (Ministry of National Food Security & Research, 2019).” The agriculture sector is mostly located in rural areas where access to infrastructural facilities is limited. While agriculture used to be the main driver of economy in Pakistan for a long time, its significance has declined over the years (Zaidi, 1999). Many still refer to Pakistan as an agricultural economy; however, agriculture is no longer the leading driver of economic growth in the country. Nevertheless, it is still an important sector, especially in the rural areas where it is dominated by smallholder farmers. Agriculture sector not only contributes significantly to Pakistan’s GDP; it is also a major source of raw materials for manufacturing industry. It is estimated that as much as 50% of basic inputs to downstream industries are provided by the agricultural sector. Besides contributing to a country’s GDP, agricultural growth that improves productivity on small farms has been linked to reductions in poverty and hunger.

According to Agricultural Census 2010, 90% of farms in Pakistan are categorized as small farms (Agricultural Census Organization, 2010). These farms cultivate over 80% of the country’s agricultural land. There are an estimated 8.26 million farms in Pakistan which cover an area of 52.91 million acres. The average farm size in Pakistan is 6.4 acres. While large farms, those over 25 acres in size, are only 4% of the total farms in the country, they cover 35% of the overall farm area. Farms in Pakistan are either managed by the owners of the farm, tenants, or by the owner-cum-tenants (those who own some land, but also rent some land from others). An estimated 82% of the farmland is being managed by private owners, 11% by tenants, and 7% by owner-cum-tenants). Tenants operate farms under different terms and arrangements such as share cropping or leasing. In terms of cropping patterns, 42% of the total cropped area is occupied by wheat. Other major crops include cotton, rice, sugarcane, and maize (Agricultural Census Organization, 2010).

Overall, agriculture sector in Pakistan is large enough to raise the living standards of rural communities where it can serve as an engine of growth. This is especially true since most manufacturing and service sectors are concentrated in urban areas and the rural communities do not have viable alternatives to agriculture.

Past Agricultural Reforms and Policies

Much like many developing countries, Pakistan has focused on industrialization. The process of industrialization in Pakistan began in 1958, and the following 10 years till the end of 1968 are termed as the ‘Decade of Development’. During this time, the growth rates in large-scale manufacturing as well as agriculture witnessed an upward trend (Zaidi, 1999). However, the total share of agriculture in national economy had started to decline (see Appendix, Figure 1). During the 1940s, agriculture accounted for more than half of the GDP; however, it has decreased over the years along with the share of employment in agriculture (Zaidi, 1999). According to the 2019 statistics by the Ministry of National Food Security and Research Pakistan, agriculture now contributes to 19.5% of the GDP and employs about 42.3% of the national labor force. The shrinking contribution of agriculture to the overall economy continues, but this low contribution is also a result of the rise in both industrial as well as services sector. The total production of food crops has gone up over the last three decades (see Appendix, Figure 2).

Given the importance of agriculture in the early years, several land reforms and agricultural policies were implemented by the Pakistani government after the independence in 1947. Some of these policies had extensive repercussions on agriculture as well as other related sectors. For example, the Green Revolution during the mid-1960s was one of the major processes that transformed the agricultural sector in Pakistan. The technology package promoted by the Green Revolution, based on market approach, had some irreversible impacts that are still observable today. The package included the introduction of high yielding variety seeds, chemical fertilizers, tube-well irrigation, and pesticides (Zaidi, 1999). The implementation of these new technologies and the massive investments in the irrigation systems helped improve the agricultural output and productivity during the 1960s and 70s.

The most important constituent of Green Revolution was the increase in the number of tube-wells and canals. The installation of more tube-wells enabled many farmers to access sufficient water in a timely manner. However, these tube-wells were highly concentrated within a handful of rich and settled districts in the Punjab province. Pakistan has four provinces: Khyber Pakhtunkhwa, Punjab, Sindh, and Balochistan. Most of the agricultural activities are concentrated in the Punjab province. Therefore, Punjab, with an already established agrarian structure, was able to gain much of the benefits of the technology package. Other provinces were unable to realize the benefits either due to the geographical limitations, or simply because they were not seen as commercially viable. The result was increased disparities between the four provinces (Khan, 1981).

Another effect of the Green Revolution was the increased inequalities between the small farmers and the large farmers. The modern technology and machinery promoted by the Green Revolution was only affordable by the large farmers. The introduction of tractors and tube-wells, for example, enabled large farmers to further increase their agricultural output, while small farmers were left with the use of traditional tools. Given the commercial benefits of large farms, credit was easily made available to large farmers, particularly those close to urban markets, to enable them to buy tractors and install tube wells (Chaudhry & Hussain, 1986). There was clear bias towards the development of large farms, particularly in the Punjab region where the agricultural infrastructure was already comparatively better than the other three provinces. Several researchers have noted the adverse impacts of Green Revolution on small farmers and have pointed out that it has contributed to regional and income disparities. For example, Dilawar Ali Khan and Nigar Ahmad have pointed out that the impact of green revolution has been biased in favor of the large land owners leading to a widening of income between rural and urban economies. Falcon has remarked that the green revolution might generate unprecedented income inequalities among rural classes. Khan (1983) has noted that, while the use of improved seeds and technology may benefit all farmers, small farmers have limited access to inputs, such as financial credit and irrigation facilities, which limits their productivity and output levels.

Alavi (1976) has argued that the Green Revolution was “an elite farmer strategy because it rested on the economic power of large landowners who were its principal beneficiaries.” Only a minority of the rural farmers, most of whom were already well-off, were able to realize the benefits of the new agricultural policies which had a more capitalist and market-oriented approach. As noted by Akmal Hussain, “the new technology made it possible to accelerate agricultural growth substantially through an ‘elite-farmer strategy’ which concentrated the new inputs on large farms. Now the crucial determinant in yield differences became not the labor input per acre in which small farms had an advantage, but the application of the seed-water-fertilizer package over which the large farmers with their greater financial power had superior access. Thus, the technocrats felt that the Green Revolution had made it possible to accelerate agricultural growth without having to bring about any real change in the rural power structure (Hussain, 1984).”

Given the undesired social and political effects of the Green Revolution, several attempts were made at land reforms during the 1970s. Some of these land reforms were directed towards putting a ceiling on landholdings and change the tenancy regulations (Zaidi, 1999). However, these reforms did not make substantial differences to the existing landowning structure in the country. This was mainly because the large landowners had a lot of influence in the government and its institutions and, therefore, were able to sway the policies in their favor. But, regardless, of the failure of land reforms, many large farmers had now adopted a more capitalist approach to agriculture.

According to the 2017 statistics by the World Bank, 63.5% of the total population in Pakistan resides in the rural areas (The World Bank, 2017). Although the percentage has declined over the years, the country still has a very high number of rural communities scattered across all four provinces. There is a persistent urban-rural gap across Pakistan. The incidence of poverty is much higher in rural areas than in urban areas. According to a World Bank report on the state of water supply, sanitation, and poverty in Pakistan, “the poverty headcount rate in rural Pakistan is twice that in urban areas (36 percent versus 18 percent), and the gap has remained virtually unchanged since 2001/02 (The World Bank, 2018)”.

The same report points out that 80% of the poor live in rural areas with limited access to basic services such as health and education. The incidence of poverty varies across all four provinces with Balochistan being the poorest and Punjab being the least poor. By all measures, rural areas are highly disadvantaged when it comes to service delivery and, hence, are highly likely to have unhealthy human development outcomes. Employment prospects are limited, forcing many rural communities to either take on really low paying jobs or migrate to urban areas. Naturally, the rural communities are highly vulnerable to several different shocks including those originating from the markets. The policy implications, therefore, can be severe on these communities.

The liberalization of trade policy in Pakistan began during the late 1970s when the government started to liberalize imports by reducing the number of banned goods. Other restrictions, such as most non-tariff barriers were also removed and the process for importing commodities was rationalized. Despite these steps, the World Bank still considered Pakistan’s trade policy as ‘restrictive’ and noted the many import restrictions that were still in place. The government then moved to remove explicit import quotas on non-capital imports and further removed restrictions on banned goods. Previously, all imports that were not specifically permitted were banned, but now such items that were not specifically banned could be imported. Another important step towards import liberalization was the near complete elimination of licensing ceilings for permitted goods. In order to boost exports, the government took certain measures such as offering concessionary credit for exports, increasing export tax rebates, and setting up import facilities for exporters. However, the most important step was the introduction of a flexible exchange rate by delinking the Pakistani currency from the dollar. Despite all these efforts by the government to liberalize the economy, the World Bank, in their 1988 trade policy review, noted that “the trade regime still seems to be biased in favor of import substituting production. Domestic markets were insulated from foreign competition through non-tariff barriers and high tariffs (The World Bank, 1988).”

While trade liberalization was already underway during the 1980s, the implementation of the first major Structural Adjustment Programme (SAP) in 1988 was going to further change the trade regime of Pakistan. The key components of the agreement with the IMF included, the continued removal of non-tariff barriers, replacing non-tariff barriers with tariffs, further reducing the number of banned commodities, reducing the maximum tariff, encouraging higher valued exports by replacing the uniform income tax rebate system with a graduated one, and allowing private sector to get more involved in the export of rice and cotton (The World Bank, 1989). The implementation of a ‘liberal’ foreign trade policy under the guidance of the World Bank and the IMF, therefore, meant that Pakistan was moving towards fewer and fewer controls, especially in terms of imports.

The purpose of the SAPs was to stabilize the macroeconomic situation of the country by helping with the balance of payments and improving the overall economic efficiency. The loans came with certain conditionalities that targeted key macroeconomic instruments. Research shows that, since the implementation of SAPs in Pakistan in 1988, poverty, inequality, and unemployment have increased. The 1990s, particularly, witnessed a sharp increase in poverty, and this rising trend continued until 2001. The official government estimates (see Appendix, Table 1) of poverty between 2001 and 2011 show a remarkable decline in the poverty headcount (from 34.5% in 2001-2 to 12.4% in 2010-11). However, a number of independent studies, such as the one done by Whitney et al. (2016), using different methodologies, cutoffs, and welfare measures (see Appendix, Table 1.1) than those employed by the Pakistani government have actually shown an increase in the overall poverty incidence. For example, the study conducted by Whitney et al. has shown an overall increase in poverty from 33.9% in 2001-2 to 41.4% in 2010-11.

Starting from 1998-9, the Pakistani government began to estimate the official poverty lines using the Food Energy Intake (FEI) method applied to the Household Integrated Economic Survey (HIES) for that year. Subsequent poverty lines were derived by “scaling the previous year’s line by the inflation rate as determined by the consumer price index (CPI)” (Whitney, Nazli, & Mahrt, 2016). These resulting poverty estimates were problematic for a number of reasons. Firstly, they showed a remarkable and consistent decline in poverty levels which are in direct contrast with trends derived from other measures of welfare that are not solely based on basic income or caloric intake. This unidimensional way of estimating poverty ignored other key welfare measures such as health, access to clean water, electricity, housing, living standard, employment opportunities, and education.

Not accounting for such factors led to underestimation of the true poverty level in Pakistan. Therefore, the contrast between the official poverty estimates and those derived from other welfare measures is important in estimating the true extent of poverty. Secondly, the official model did not account for non-food expenditures such as education and health. Other non-food expenditures such as utilities, rent, and transportation were also missing from the measurement. The official poverty estimates, therefore, failed to represent the true cost of living and living standards. Thirdly, a uniform national poverty line failed to account for possible regional differences in consumption patterns and prices. The amount of income needed to afford basic needs in one place may differ from the amount of income needed to afford the same basic needs in another place. Finally, inflating a fixed poverty line over time ignored the “substitution effects in consumption that may occur from variation in relative prices of essential commodities over time” (Whitney, Nazli, & Mahrt, 2016). If the prices of some goods rise, households are likely to substitute to other cheaper products. This again leads to underestimation of poverty because the households might still be consuming sufficient calories, but the price and the quality of the food might have changed. Re-estimating the poverty line each year rather than inflating it helps to fix this problem.

The figures that the Pakistani government produced for the period from 2001 to 2011 were severely criticized for their limitations and drawbacks. Given the shortcomings of the old methodology for measuring poverty, the government of Pakistan revised the national poverty estimation in 2016. The new methodology added the cost of basic needs to the food energy intake method. The revised estimates also addressed the regional price gaps. The result was a substantial increase in poverty estimates as the government declared a third of Pakistanis as poor. This, in a way, confirmed the results produced by unofficial and independent researchers.

According to the 2017-2018 Global Multidimensional Poverty Index by Oxford Poverty and Human Development Initiative, the incidence of poverty is 38.3% in Pakistan (see Appendix, Table 3). The study has considered 10 different indicators that include nutrition, child mortality, years of schooling, school attendance, cooking fuel, sanitation, drinking water, electricity, housing, and assets. The indicators are grouped together into three broad categories: health, education, and living standards. This again confirms that the real incidence of poverty in Pakistan is much higher than government estimations.

Along with an increase in overall poverty levels, high inflation and low growth have become persistent (Zaidi, 1999). Despite the negative impacts of such programmes, the successive governments in Pakistan kept going back to these International Financial Institutions (IFIs) because it is far easier to borrow than to deal with the critical deficiencies in the economy. The reasons for the failure of the SAPs to stimulate sustained and equitable economic growth are manifold, including the government’s low allocation of funds to essential development indicators such as health and education and its continued insistence on security spending.

History of Pakistan is full of political instability, dictatorships, and wars with India over the disputed territory of Kashmir. While the IFIs are to be blamed for continuing to push such policies that have proved to be destructive, the priorities and the politics of the host country must also be considered while making an impartial assessment. Furthermore, it is not only these IFIs that have pushed for liberal trade policies in Pakistan, but the governments have also made efforts to liberalize the economy independent of the World Bank, WTO, and the IMF. Sometimes such liberalization has been selective, for example in case of Regional Trade Agreements (RTAs) between Pakistan and China where the two countries have established preferential trade agreements. These kinds of trade agreements promote a specific type of free trade between signatory countries.

Before the implementation of SAPs in the 1980s and the WTO Agreement on Agriculture (AoA) in 1995, successive governments in Pakistan intervened to ensure food security for urban consumers as well as keep prices stable for agriculture producers (Social Policy and Development Center, 2006). The governments kept the prices of agricultural products low by “setting export quotas and through export taxation and the overvaluation of the exchange rate (Social Policy and Development Center, 2006)”. However, with liberalization of agricultural trade under the guidance of international organizations, government intervention was reduced significantly along with the reduction in tariff and non-tariff protection. The implementation of liberalization policies had a direct impact on agriculture sector which provides employment for the majority of rural communities in Pakistan. It is also closely connected to food security and social welfare.

Pakistan was compliant with the WTO commitments as well as the SAPs, however, trade figures have shown that Pakistan was the net loser in terms of trade gains from trade liberalization policies (Mahmood, Sheikh, & Akmal, 2010). Data shows that Pakistan has consistently recorded negative balance of trade (see Appendix, Figure 4) since the early 1990s. Pakistan was not only the net loser in terms of trade, but also in terms of socio-economic development and food security.

There is substantial literature that has explored the impacts of trade liberalization on the agriculture sector in general and on the rural agricultural communities in particular. While there is limited literature specifically on Pakistan, some other countries in Africa, Latin America, and Asia have been studied extensively. Various researchers have examined the assurances of a liberalized trade regime and how the perceived gains have not been realized. For example, in his paper ‘the limited promise of agricultural trade liberalization’, Timothy Wise concludes that, “the promise of agricultural trade liberalization is overstated, while the costs to small-scale farmers in developing countries are often very high (Wise, 2008).”

He further notes that “rich countries are the main beneficiaries of agricultural trade liberalization, gaining markets in both the global North and South. Only a limited number of developing countries – for example, Argentina and Brazil – can compete effectively in global markets. Most developing countries are left out of the export boom but suffer the negative effects of rising imports, as they reduce their own tariffs and farm supports (Wise, 2008).” While liberalization of trade under the WTO regime promises a win-win situation, the impact of such policies varies across developing countries. Agriculture might be more important to certain developing countries than others, and some might be in the process of transitioning out of an agricultural based economy. The impact on the agricultural sector, therefore, also varies across developing countries. However, increased poverty, and oftentimes inequality, stemming from a liberal trade regime seems to be a common occurrence in some developing countries including Pakistan. Petia Topalova, for example, has studied the impact of trade liberalization on poverty and inequality in Indian districts. She has concluded that “trade liberalization led to an increase in poverty rate and poverty gap in the rural districts where industries more exposed to liberalization were concentrated (Topalova, 2007).” Another study on the impact of trade reforms on poverty in developing countries by Winters et al. has concluded that, while trade liberalization is likely to alleviate poverty in the long-run and on average, “the poor may be less well placed in the short run to protect themselves against adverse effects and take advantage of favorable opportunities (Winters, McCulloch, & McKay, 2004).”

However, there is insufficient literature on the impacts of trade liberalization on small farmers in Pakistan. Some studies have looked at how the production of certain crops, such as wheat, cotton, rice, and maize, were impacted by a liberal trade regime, but the impacts on small farmers have not been well documented. Nevertheless, some key lessons can be drawn from studies done in other developing countries that are economically like Pakistan and have a large portion of the population involved in agriculture sector. Making use of the limited literature specifically on Pakistan, direct and indirect impacts on the small farmers can be inferred. The policies under investigation do not necessarily target the small farmers directly, but there are a lot of spillover effects that need to be considered.

Before embarking on the journey towards a liberal trade regime in the 1980s, Pakistan had employed the import substitution strategy. This strategy was characterized by “quantitative restrictions or prohibitive tariffs for various commodities, strict and complex procedures for import of manufactured goods, overvalued exchange rates, and frequently import prohibition or quite high tariffs to make imports uneconomic (Akhtar, 1999).” While the import substitution strategy protected the domestic sectors including agriculture, it was blamed for increased inefficiencies. Farmers received less than international prices for many crops such as wheat and rice. Although they were protected from foreign competition, agricultural productivity remained low, and a considerable number of resources were diverted away from agriculture to support industrialization (Akhtar, 1999). Then Pakistan started to liberalize its economy in the 1980s, mostly driven by the policy prescriptions recommended by the World Bank and the IMF.

The implementation of SAPs in 1988 and the Uruguay Round in the 1990s greatly influenced Pakistan’s position in the international markets. Later, when WTO was formed in 1995, Pakistan became a member of this newly established international organization concerned with the rules of trade between nations. Evidence shows that Pakistan was already in the process of opening its economy well before joining the WTO.

A liberalized economy meant that Pakistan now had greater access to world markets. It also meant the flooding of cheap foreign goods into Pakistani market. Being a developing country, Pakistan did not have well developed domestic markets and the necessary infrastructure in place to compete with the challenges presented by an open economy. Although, Pakistan had a comparative advantage in agriculture relative to more developed countries, liberalization required abolishing of certain subsidies and tariffs, including those on agriculture. The small farmers did not have the necessary tools and knowledge to compete with the commodities coming from more developed countries. More importantly, the benefits of a liberal trade regime were mostly captured by the capitalist large farmers who could invest in machinery and other necessary technology to improve productivity. The results were like those during the Green Revolution where most of the incentives for mechanized farming were captured by a very small portion of large farmers. Some studies have shown that trade liberalization policies have increased the overall export of certain agricultural products. For example, cotton lint is an important agricultural product in Pakistan which is exported to many countries. The export of cotton lint is impacted by both domestic as well as international policies. Research shows that the exports of cotton lint have gone up with the adoption of trade liberalization (Anwar, Shaukat, & Hussain, 2010).

There are concerns regarding food security in Pakistan, especially as the gap between production and consumption grows (Pirzada, 2009). Pakistan has a high population density which is expected to grow in the future. If the present trends continue, access to sufficient food could become a concern, especially in the rural areas where a majority of population depends on agriculture both for family consumption as well as to gain access to products and services from the markets. There will be an increased pressure on the small farmers to produce more given the limited resources that they have. This could lead to depletion of certain natural resources, mainly in the mountain regions where the rural communities are dependent on such resources. In the absence of social safety nets, as is the case in Pakistan, small farmers are at higher risk of being affected by market forces such as changes in prices, fluctuations in demand, increased competition, and the availability of substitute products. Trade liberalization has made it harder for these small farmers to compete in the markets and the returns that they get do not seem to be sufficient to make substantial improvements to their livelihoods.

Given the promises of a liberalized economy, many small farmers in Pakistan have made a shift towards cash crops. This shift from subsistence crops to cash crops presents several serious problems for the small farmers. Firstly, the income that they receive from selling cash crops is not sufficient, given the high agricultural inputs. The inputs enable the farmers to produce more, but the extra income is offset by the cost of those inputs. Evidence shows that the production costs for some important food crops in Pakistan, such as wheat and rice, have increased during the liberalization period (Sharif, Javed, Abbas, Hassan, & Salam, 2009). In the Punjab province, wheat production has gone up because of the extra inputs. However, it is mostly the large farmers who have the resources to invest in extra capital and machinery. Despite putting in additional labor and all available resources, small farmers are still net losers.

The price that the small farmers get from the markets is also low as they usually must go through a middleman. Small farmers do not have market connections or the knowledge to cut off the middlemen and deliver their agricultural production directly to the retailers and consumers. In cases where the farmers try to directly sell their production, they get very cheap prices. It is argued that trade liberalization will increase domestic food prices and thus provide an incentive for farmers to increase production (Sharif, Javed, Abbas, Hassan, & Salam, 2009). However, the increase in prices presents the small farmers with a serious dilemma; on the one hand they do not get a good price for their agricultural products, and on the other, they must pay a higher price for other commodities.

Secondly, agricultural policies that focus only on supporting cash crops could threaten the food security and livelihoods of small farmers, especially in the absence of insurance and sufficient credit. For smallholder farmers, agriculture is the key safeguard against food shortages, and cash cropping could require compromising on food their requirements. A major portion of the smallholders’ agricultural production is for subsistence. Shifting to cash cropping could increase the risk of losing their food supply for some key reasons. Firstly, cash cropping might require farmers to grow crops with which they have little to no experience. This could increase the probability of crop failure since they would be dealing with an uncertain enterprise. Most smallholders do not have extra land to experiment with cash crops without giving up their production for subsistence. Secondly, cash crop markets are often volatile. Some years the smallholders might make enough income to cover their food requirements and other essentials, other years they might not earn enough to even buy sufficient food. Smallholders, and farmers in general, rely on their agricultural income to cover their annual expenses. Therefore, sudden price changes could disrupt the farmers’ food supply for a longer period. Finally, the prices of essential food items may rise. Shifting to cash crops may force smallholders to buy expensive food items, or shift to low quality cheap substitutes, that they previously used to grow for themselves.

The cost of risk-taking for many smallholders could be high. Therefore, it is rational for them to prioritize food security over opportunities to increase their overall income (Shelley, 2008). While cash cropping can lead to increase in income which can further lead to improved food security, it requires risk-taking and investment. For farmers who can afford to take risks and who have extra land to experiment with, the returns can be high.

Currently, there is little to no insurance against loss of crops in Pakistan. When a disaster hits or the market conditions are not favorable, smallholders are at the risk of not only losing their crops but also their investments in inputs. Recovering from external shocks can take months and sometimes years. Furthermore, depending on the agro-ecological zones and cropping system, cash cropping could lead to depletion of soil nutrients. In the absence of sustainable land management practices, cash cropping could worsen land degradation and lead to lower crop yields.

Thirdly, the local market structure is skewed towards large farmers (Pirzada, 2009). The produce of small farmers is disregarded as low quality because of lack of branding and marketing. Even if the wholesalers know that they can sell the product of small farmers at a high price, they offer small farmers a low price. Large farmers have the influence and the bargaining power to get a better price while small farmers have no option but to take the price given to them. Oftentimes, small farmers in Pakistan can be seen on the roads trying to sell their crops. They do not have the resources to set up a shop, so they go out, sometimes in sweltering heat, to sell their agricultural products. Crops that cannot be sold are at risk of going bad as the small farmers do not have storage facilities.

On the imports side, trade liberalization has allowed international producers to flood the local markets with cheap products. Many agricultural products, including pears, apples, grapes, and garlic, have made their way into Pakistan from China. The result is a decline in local production of these products as well as a decline in returns from these products. For example, “horticultural commodities like apple are produced by the resource poor farmers especially from Balochistan. As a result, the local apple and pears are disappearing from the market to a great extent over last five years, to the utter disadvantage of those small farming communities (Pirzada, 2009).”

Trade liberalization promises market access to other countries. This presents great business opportunities to many farmers. However, market access also comes with certain conditions and standards. For example, mangoes, one of the top fruit exports of Pakistan, were banned by the UK in 2013. The reason for the ban was the ‘presence of fruit flies’ in the shipments (Zaheer, 2013).

Pakistan does not have the necessary standards and procedures in place for the export of some agricultural products to certain countries. This greatly endangers exports which are allowed by the Pakistani authorities but are not accepted by the importing country. The benefits of trade liberalization, therefore, are mostly captured by the developed countries with proper infrastructure and procedures in place. Looking at the aggregate numbers, such as the overall increase in the value of exports from 7.56 billion USD (constant 2010 US$) in 1990 to 21.3 billion USD in 2017 (World Bank), it might seem that Pakistan has benefited from trade liberalization, but close scrutiny reveals that the benefits have been very unequal. Proponents of liberal policies might have been aware of the negative impacts on small farmers. But the rationale behind pushing for such policies was to ‘weed out’ inefficient producers (Henriques & Patel, 2003).

However, this rationale does not hold as evidence suggests that small farmers are more efficient in terms of overall farm output per land unit. The empirical research shows an inverse relationship between farm size and production per unit of land. The evidence suggests that there is “a common tendency for larger farms to yield lower gross and net returns per hectare of land per year than smaller farms”.

This is particularly true in places where there is an abundance of labor and scarcity of land, as is the case in Pakistan. The diseconomies of scale arise from the fact that labor-related transaction costs for small farms are much lower than for large farms. Once the production of the family farm exceeds its scope and capacity, diseconomies of scale may arise. Where agricultural technology is not well developed, small farms may have an advantage over large farms since small farms use labor more efficiently. Nonetheless, as an economy develops and the use of advanced agricultural technology increases, the advantage shifts to large farms. The decline of farm sizes in most developing countries, however, shows that the economic development has not tipped the scales from small to large farms.

The government’s tendency towards achieving economic growth at the price of increasing inequality has led to adoption of policies that support large scale capitalist farmers. This has been the experience of many developing countries that have adopted some kind of liberal market policies. For example, trade liberalization in Mexico has had an adverse impact on rural economies. The agricultural provisions within NAFTA have deep implications on the farming communities who could not compete with the well-equipped and technologically advanced farmers from the US. Mexico’s experience with liberalization has “unequivocally hurt the poorest people in the country: those who work on the land in rural areas (Henriques & Patel, 2003).” Pakistan had a similar experience where the overall agricultural trade has improved, but at the cost of growing inequality between small rural farmers and large capitalist farmers. Landownership and agriculture in Pakistan are predominantly feudal and large-scale farms are controlled by a privileged few. Therefore, it is highly unlikely that agricultural subsidies and support would mechanically translate into benefits for the marginalized and poor farmers.

One of the key reasons for investing in smallholder agriculture is poverty reduction. For millions of smallholders in Pakistan, their small piece of land is the only source of income for their whole families. Investing in smallholder agriculture can help raise the living standards of smallholders and reduce income inequality in the country. However, the reasons for investing in smallholder agriculture are not limited to reducing poverty and income inequality. Rather it has broader implications for national as well as global development. Climate change is already threatening to undermine the global food systems and large-scale industrial farms are responsible for generating 10% of global greenhouse gasses. The industrial model of farming has led to continuous deforestation, large-scale monoculture, heavy use of chemical fertilizers, degradation of soil, and an unhealthy global food system. Smallholders are being severely affected by climate change and there are concerns about mass hunger and migration resulting from an impending food crisis. However, despite tremendous challenges, smallholders are increasingly becoming the pioneers in climate-smart agriculture through efficient use of natural resources such as water, increased biodiversity through agroforestry and intercropping, use of locally suitable practices to grow crops, use of natural and non-fossil-fuel based fertilizers, and effective soil management techniques.

Smallholders know what sustainable agricultural practices work. Supporting these sustainable practices through modern science and technology, rather than replacing them in favor of industrial farming, can help reduce greenhouse gas emissions. However, if the current situation persists, it could lead to mass migration of smallholders from rural areas which can have severe implications for national as well as global political stability.

Given the number of smallholders in Pakistan and the percentage of population that is associated with agriculture in one way or another, policies supporting small farms and the agriculture sector can have a significant impact on the overall national development as well as food security. If national policies can help smallholders go beyond growing crops for subsistence and help them escape the poverty traps, then they can start investing in health, education, infrastructure building, and assets which will ultimately help to achieve other social goals.

Sustainable rural development has become an important part of the whole development debate. It constitutes a number of key elements including the creation of employment opportunities, poverty reduction, improving well-being and capabilities, developing livelihood adaptation strategies, and ensuring resource base sustainability (Scoones, 1998). The overall policy framework, combined with a range of institutional and organizational factors, has a huge impact on sustainable livelihood outcomes. In many rural communities, sustainable development is closely related with agriculture. However, this is not always the case, especially in communities where agriculture is either not feasible or expensive due to geographical and other factors.

The rural non-farm economy has become an important source of income in such communities. Sustainable rural development, therefore, means employing developmental strategies that would support rural agriculture and improve the rural non-farm economy in order to realize the key elements of sustainable rural development. Such strategies should lead to increased resilience of the rural communities to internal and external shocks, reduced poverty, and increased employment opportunities so that these communities can improve their welfare.

Poverty and Income Inequality

As noted earlier, 63.5% of population in Pakistan resides in the rural areas. Incidence of poverty is widespread among rural communities compared to urban communities. Naturally, macroeconomic policies have a high impact on poverty reduction strategies. While some researchers have stressed the negative impacts of trade liberalization on rural communities, others have pointed out that those negative impacts might not be as substantial. For example, the Social Policy and Development Center’s Annual Review 2006 has rigorously analyzed the empirical impact of trade liberalization on growth, poverty and inequality in Pakistan. The report concludes that,

Others have pointed out that trade liberalization doesn’t seem to have a robust link with long-term growth and poverty reduction. For example, Tilat Anwar in his paper ‘Impact of Globalization and Liberalization on Growth, Employment and Poverty: A Case Study of Pakistan’ has pointed out that poverty has actually increased during the structural adjustment and liberalization period (Anwar T. , 2002). He further points out that both urban and rural poverty were declining prior to the adjustment period between 1970s and 1980s. The financial assistance received from the World Bank and the IMF during the 1980s and 1990s period was to implement stabilization measures or structural adjustments. In order to realize the stabilization measures, expenditure reducing policies were pursued which led to a decrease in the aggregate demand. Such policies included “wage restraint, freezing employment, reduction in development expenditure, cut in subsidies and cut in expenditure on social services mainly on education and health (Anwar T. , 2002).” Liberalization policies on the other hand have sought to increase the GDP by removing structural stringencies in the incentive system. Both structural adjustments and liberalization measures not only had immediate adverse impacts on employment and poverty, but they also failed to produce the long-term anticipated results.

In order to realize the goals, set out by the international organizations, Pakistani government had to carry out several reforms. But these reforms were not designed to protect the most vulnerable, they were designed to ensure the repayment of loans taken from IFIs. During the 1990s, privatization gained momentum, wage and employment restrictions were put in place in the public sector, development expenditure was decreased, subsidies were reduced, and sales taxes and utility charges were increased. All of these factors combined had an adverse impact on the real income of the most vulnerable groups (Anwar T. , 2002). Some researchers have pointed out that other factors such as corruption, poor governance, increased military spending, and weather-related disasters also contributed to an increase in poverty in the 1990s, but these factors were there even before the liberalization period when the country was experiencing rapid economic growth and reduction in the incidence of poverty. The World Bank in 1995, however, reported an increase in the number of people who escaped the poverty line during the 1990s. The report claimed that “the incidence of consumption poverty declined by 12 percent in six years in Pakistan (World Bank, 1995)”.

These results have been disputed by a number of authors because of its use of incomparable household surveys (Anwar T. , 2002). Furthermore, different authors have used different methods to measure poverty trends in Pakistan. The World Bank has been criticized for producing misleading results by intentionally using such poverty lines and price deflators that showed a decreasing trend in poverty. A few other studies carried out by researchers have produced contradictory results to those by the World Bank (Kemal, 2003).

Research has shown that the anticipated economic growth and the favorable outcomes promised by the structural adjustment reforms have not materialized. In the years following the adjustment reforms, economic growth slowed down, public expenditure on basic services declined, employment grew only slightly, and wages declined (Amjad & Kemal, 1997). Of course, there were a number of other factors at play here. For example, some researchers have pointed out increased overseas migration and decreased remittances as being one of the major factors that undermined poverty reduction efforts (Amjad & Kemal, 1997). Previously, many overseas Pakistanis were sending remittances to their families in Pakistan, however, in 1980s and 1990s, they began to pull their families out of Pakistan, leading to a decrease in overall remittances.

Income inequality is yet another important development indicator that has been impacted by the structural adjustments and trade liberalization policies. While globalization and technological progress are attributed for the contemporary economic growth, they are also widely criticized for their adverse distributional effects. Increasing inequality across most countries has posed a major challenge to the policymakers who have championed the liberal market-oriented reforms over the last few decades (Jaumotte, Lall, & Papageorgiou, 2013). The increasing income inequality, however, is not only a problem in the developing world, but also across many developed nations. However, it is also important to look at different aspects of globalization that have contributed to income inequality. For example, some studies have concluded that “trade liberalization and export growth are found to be associated with lower income inequality, while increased financial openness is associated with higher inequality (Jaumotte, Lall, & Papageorgiou, 2013)”.

Prior to the structural adjustment period, income inequality in Pakistan was moderate. However, after the implementation of structural adjustments, income inequality has increased both in rural as well as urban areas (Kemal, 2003). The overall household income distribution has also worsened, especially in the rural areas. The 2016 UNDP report on inequality in Pakistan has pointed out that the Gini coefficient for Pakistan has gone up from 0.35 in 1987/88 to 0.41 in 2013/14 (United Nations Development Programme Pakistan, 2016). Income share of the lowest 20% of the population has gone down while that of the highest 20% has gone up (see Appendix, Table 2 and Table 2.1). These results suggest that the fruits of trade liberalization were unevenly distributed. It is important to note that the nominal incomes of the population have increased, but they are more or less offset by the corresponding rise in inflation. The divide between the rich and the poor has increased as the riches from trade liberalization were mostly captured by the well-equipped and well-prepared individuals and firms. The increasing amount of national budget dedicated to debt servicing has left the government with little resources to deal with the problem of poverty. Meeting revenue targets to satisfy IMF conditionalities has prompted the Pakistani government to cut funding for public sector development on a number of occasions. Limited available data suggests that important nutrition indicators, such as maternal anemia and childhood malnutrition, have not improved during the liberalization period (Bhutta, Maternal health and malnutrition in Pakistan: a situational analysis, 2001). Additionally, unemployment and financial difficulties have led to an increase in the number of suicides in Pakistan (Bhutta, Structural adjustments and their impact on health and society: a perspective from Pakistan, 2001).

Despite being one of the frequent recipients of IMF and World Bank loans, Pakistan has been unable to realize sustainable rural development. The implementation of structural adjustment programs does not seem to have substantial impact on poverty reduction and equitable income distribution. The idea was that there will be a trickle-down effect whereby those at the bottom would also benefit from the gains at the top. However, this does not seem to be the case in Pakistan and much of the developing countries that have implemented some kind of liberal market reforms. However, the growing criticism of IFIs has prompted them to mitigate the negative impacts of structural reforms by endorsing the need for redirecting public expenditure towards poverty reduction programs. The World Bank has become a big investor in social services including health and education. But despite paying more attention to increased criticism and the adverse impacts of trade liberalization on poverty, the IFIs have continued to push neoliberal economic policies.

When structural adjustment programs were implemented during the 1980s and 1990s, Pakistan was lacking the capacity and institutional structures to implement such reforms. Yet, the IFIs continued to push the neoliberal agenda which led to some negative outcomes, such as increased inequality and poverty, particularly for the poor urban and rural communities. It has been more than 30 years since Pakistan started to implement neoliberal policies, yet the country is nowhere close to joining the ranks of the developed world. However, interestingly enough, Pakistan has shown improvements in terms of Human Development, as measured by the Human Development Index, since 1990s (see Appendix, Figure 3). The current HDI puts Pakistan in the medium human development category and is ranked 150 out of 189 countries. The HDI, however, only considers three factors; life expectancy, average years of schooling, and increases in gross national income per capita (UNDP, 2018). Other crucial factors such as income inequality and poverty were not included in the measurement.

The Rural Non-Farm Economy

While the share of the agriculture sector in the overall economy of Pakistan has declined over the years, the share of labor associated with agriculture has not declined by the same proportion (Malik, 2008). Therefore, the declining share of agriculture coupled with the increase in population has contributed to an increase in surplus labor and unemployment. The unemployment rate in Pakistan increased from 3.1% in 1987 to 5.9% 2017 (Pakistan Bureau of Statistics). The structural transformation, therefore, seems to have failed to produce new employment opportunities for laborers who might have been displaced by the rising capitalist farming. The result of the transformation, however, is an increase in non-farm activities and migration. The rural non-farm economy (RNFE) has become an important component of the rural economy and the development community is paying more and more attention to this sector. It has close linkages to many other activities including marketing, banking, processing, and transportation.

A vibrant non-farm economy can help reduce poverty, improve agricultural productivity, ensure food security, and enhance employment opportunities. But despite the potential benefits of a growing non-farm sector, this essential component of rural development has not received adequate attention in Pakistan. Previously, most rural development was equated with agricultural development, however, research has shown that, farmers, particularly smallholder farmers, are increasingly relying on non-farm activities. This is particularly true in places where there is a growth in the agricultural productivity which then contributes towards poverty reduction by stimulating rural nonfarm economy. For example, the growth of RNFE stemming from the growth of agricultural productivity has played a critical role in reducing rural poverty in China.

A number of factors have contributed to the growth of the non-farm sector including the process of globalization. While the expansion of domestic markets and increased international trade through the process of trade liberalization has opened up new opportunities for rural goods and services, it has also presented the rural communities with new challenges. Reduction in direct government control and relaxing of regulations on foreign investment and imports have led to an increase in foreign direct investment in many developing countries. The result is the penetration of large exporters and supermarket chains in the rural economies where they modify the structure and scale of rural supply chains. While these investors bring in new infrastructure and employment opportunities for some, they also “expose others to new threats by opening up the RNFE to competition from cheap manufactured imports and by imposing quantity requirements and quality standards that risk excluding undercapitalized rural enterprises on which the rural poor often depend (Haggblade, Hazell, & Reardon, 2007)”.

RNFE becomes more important in cases where the share of agriculture in the national economy is decreasing. In Pakistan, there is an increased transfer of labor and capital into manufacturing and services sector. However, these two sectors cannot absorb all of the surplus labor from agriculture. In such a context, the role of RNFE becomes crucial to increase employment opportunities and reduce poverty. Two points are critical when it comes to rural communities in Pakistan; first point is that over half of the rural poor are non-farm households (17% non-farm self-employed and 35% non-farm other in 2004-05), and the second is that, compared to farm households, the incidence of poverty is higher in non-farm households (Malik, 2008).

These points demonstrate the importance of a growing non-farm economy in rural development in Pakistan. It is also worth noting that farm households are also increasingly participating in non-farm activities. Informal economy is large in Pakistan and according to the estimates by the Labor Force Survey 2008-09, more than 73.3% of non-farm employment is in the informal sector (International Labor Organization, 2013). Small and medium enterprises (SMEs) and the informal sector dominate the non-farm economy in rural areas where people set up small businesses and engage in trade. These rural enterprises are usually ill-equipped and operate on a small scale to make any significant difference to the rural economy. Furthermore, they are not well-developed to compete with the forces of globalization that bring in new products and services. While services and trade are the major activities performed by rural enterprises, manufacturing sector is almost non-existent. Most manufacturing is done in big cities or close to them.

The absence of essential services, technology, infrastructure, and capital means that these enterprises are seriously disadvantaged and are not prepared to compete in a liberalized trading regime. RNFE cannot thrive without the government taking a central role and shaping the rural economy instead of leaving it up to the forces of markets. The market forces are highly distorted and favor only a handful of already financially and politically privileged individuals and firms.

Pakistan has gone through several economic adjustments over the last three decades. The first Structural Adjustment Programme was agreed between the IMF and government of Pakistan in 1988. Ever since, the international organizations, including the World Bank and WTO, have pushed Pakistan to implement ‘neoliberal’ trade policies in exchange for financial aid packages. Liberalization policies have stressed the welfare benefits of free trade and have argued that free trade helps countries to realize economic gains through their comparative advantage, increased competition, innovation, and stable markets and prices. However, throughout the developing world, such policies have produced mixed results.

This paper has demonstrated, through existing literature, some key points about the impact of neoliberalism on agriculture sector and rural development in Pakistan. Firstly, agriculture is a key economic activity in Pakistan which provides employment to a majority of rural poor, contributes to a significant portion of the GDP, has key linkages to other sectors such as manufacturing, and is a major source of foreign exchange earnings. Measures such as the removal of non-tariff barriers to trade and agricultural subsidies have had an adverse impact on smallholder farmers who do not possess market knowledge or the necessary technological tools to compete with capitalist farming that have become prevalent in Pakistan.

The benefits of trade liberalization seem to have been very unevenly distributed. Secondly, the neoliberal policies seem to have produced mixed results when it comes to the issue of rural poverty. While the official figures show a significant reduction in poverty, especially during the period from 2001 to 2011, further investigation has revealed that those numbers do not truly represent the poverty situation and that poverty in Pakistan has increased during the last three decades.

Thirdly, empirical evidence has shown that inequality has increased during the post-structural adjustment programme period and the consistent gap between rural and urban inequality has widened.

Although, Pakistan’s experience with trade liberalization does not seem to be a favorable one, it would certainly be unreasonable to conclude that trade liberalization cannot have a positive impact on poverty reduction through economic growth. However, this is neither an automated process nor a guaranteed outcome. In the absence of certain preconditions and complimentary macroeconomic policies, the promises of trade liberalization cannot be realized. The problem is not that international organizations promote liberal trade, but the real issue is that these organizations force such policies on developing countries that are not prepared for a liberalized trade regime. By forcing developing countries to either be a part of an international trade regime or risk being isolated, international organizations have immense power to influence foreign trade policies of nations. The policy recommendations, therefore, are,

Firstly, while it is important that policy interventions should ultimately aim for market-led development, Pakistan is still a developing country. This means that Pakistan is in its early stages of development and does not have a strong domestic economy which can take on international competition without sufficient governmental support and intervention. The ‘hands-off’ approach promoted by neoliberalism tends to ignore the presence of market as well as institutional failures. Such failures are not only detrimental to the most vulnerable factions of the society but they also hinder the achievement of the most efficient market outcomes through distorted policies. Currently, the government of Pakistan is in no position to steer the direction of global policy and is subservient to the international trading regime.

Given the size of its economy, weak institutions, and poor governance, the government of Pakistan is forced into accepting harsh conditionalities put forward by the IMF and other global institutions. Pakistan must push hard to achieve policy space which would allow the country to employ targeted policy interventions to correct the underlying domestic market failures and to further the development of the agriculture sector. Likewise, the government should focus on growth-oriented investment in agriculture rather than subsistence-oriented direct support which is being promoted through food aid by some local as well as international organizations. The growth-oriented approach would help reduce poverty and inequality, and increase efficiency. Provisions should be made within the WTO framework to allow developing countries to implement temporary tariff protections in cases of import surges or unstable prices.

Secondly, the government of Pakistan should focus on strengthening formal agricultural institutions, such as the Ministry of National Food Security & Research, and putting appropriate international trade policies and procedures in place before furthering embarking on the neoliberal path. The formal institutions play a critical role in the development and implementation of agricultural policies as well as in safeguarding land rights and promoting equity. It is too early for the agricultural sector in Pakistan to be exposed to extraordinary international competition without building effective organizations and capabilities first. The government should focus on developing and re-enforcing the following key areas,

In Pakistan, public insurance against crop losses by smallholders is almost non-existent. In the face of tough competition from large farmers, smallholders do not have sufficient safeguards, particularly concerning food security. Smallholders should not be exposed to such unprecedented competition without building a defense mechanism first. Climate change has further revealed the vulnerabilities and dangers faced by smallholders. Introduction of weather index insurance, especially in the rural parts of Pakistan, would help mitigate some of the effects of climate change and give the smallholders further incentives to ensure their crop survival.

Microfinancing in Pakistan is very limited which puts smallholders on a back foot and keeps them from investing in tools and technology that could contribute towards improvements in agricultural productivity. Lack of insurance and microfinancing means that smallholders are unable to take certain risks and make investments. Given the potential contribution that the smallholders can make towards reducing the effects of climate change stemming from the agriculture sector, growth-oriented financial support can help smallholders implement and develop climate-smart agriculture. Promoting access to finance together with reducing risk through insurance would encourage smallholders to invest in capital and adopt improved agricultural practices.

Secure land rights are yet another area that requires serious government attention. Land rights should be strengthened to avoid land grabs by the ‘land mafia’ and to avoid forceful conversion of arable land to non-agrarian commercial purposes. As a part of the domestic vision, a national land use policy should be formulated in order to save arable land from being uncontrollably converted for commercial uses, especially by the rich and politically motivated individuals, groups, and organizations. Furthermore, land inequality remains a critical issue in Pakistan where only a small portion of farmers hold large farms in all four provinces.

Following the structural adjustment reforms in the 1980s, Pakistan started to withdraw most agricultural subsidies under the guidance of the IMF and the World Bank. The removal of subsidies has had an adverse impact on the smallholders who now had to grapple with high input prices. Recently, in their latest agreement with the IMF, the government of Pakistan has further committed to removing agricultural subsidies. This will further hurt the cause of the smallholders. Pakistan should increase agricultural subsidies on fertilizers, seeds, and pesticides in order to offset the impact of price hikes resulting from the depreciation of the Pakistani rupee. High input prices are often one of the major causes of low agricultural productivity and insufficient farm income.

Treating the agriculture sector of a developed economy and a developing economy as equal or comparable is a fallacy. But that’s what neoliberalism has done over the years. Developing economies like Pakistan lack international quality and environmental standards that are essential in order to produce products appropriate for international markets. Despite having a comparative advantage in agriculture, Pakistan has persistently failed to produce high-value agricultural exports. Many Pakistani agricultural products are unable to compete internationally, especially in the developed economies, because they fail to meet international quality standards under the Sanitary and Phytosanitary (SPS) agreement by the WTO. For example, Pakistan is the 4th largest producer of mangoes in the world. However, due to the lack of modern technology, proper storage facilities, poor grading and packaging, and bad fruit harvesting, Pakistan is unable to utilize the full potential of its mangoes in the international markets. Upgrading the current sanitary conditions and installing new testing and inspection facilities in Pakistan would cost the country millions of dollars. However, if the government starts investing in the upgrading process now then it would be able to achieve its target in a few years.

Thirdly, it is essential to realize that agriculture alone cannot resolve the poverty issue in Pakistan. In order to reduce the pressure of population on the agriculture sector, the government should focus on boosting the rural non-farm economy where feasible. This will help absorb the surplus labor as well as achieve the gradual mechanization of agriculture in the long run. Surplus farm labor should be encouraged to work in the manufacturing sector where feasible. Rural non-farm economy is particularly important for those who do not own land and are forced to migrate to urban centers for employment opportunities. The current urban centers in Pakistan such as Karachi, Rawalpindi, and Lahore, are already getting overcrowded and are struggling to accommodate the urban poor population. In the current situation, getting more people into cities will only add to the preexisting issues that the cities are battling with. It is important to acknowledge that the RNFE is stronger and contributes more to rural development when it is a pull from a vibrant agriculture sector rather than being pushed on desperate former agricultural workers who now have no other choice than to seek non-farm jobs.

The government should implement a two-pronged approach that involves supporting agriculture in places where it is an economically viable option and helping communities kick-start the rural non-farm economy by supporting village enterprises and investing in public works programmes where agriculture is not a viable option due to geography, lack of sufficient water or other reasons. The rural non-farm economy and agricultural activities can mutually reinforce each other leading to favorable outcomes for the rural households.

Fourthly, Pakistan must not fall to the hegemony of neoliberal model and should focus on establishing a domestic-oriented developmental policy, not necessarily based on trade liberalization, that focuses on other drivers of development including education, health, employment, and housing. Using a combination of both Import Substitution Industrialization (ISI) and export-oriented industrialization policies, Pakistan should improve its comparative advantage. A mixture of targeted protection and open trade, constantly adjusting to its needs and capabilities, would be best way for Pakistan. Clearly, the quest for a largely neoliberal model has not worked well for achieving sustainable development in the country.

Pakistan must reassess its domestic priorities as well by decreasing obsessive military spending, increasing taxes on the rich, and focusing on increasing the welfare of the most vulnerable and marginalized communities. Where possible, Pakistan should consider a structural shift, rather than structural adjustment, in order to produce high-value exports. The agricultural sector has key linkages to manufacturing which can provide long-term growth to the economy. Following a more strategic approach based on a domestic vision rather than pursuing an unconditional integration into the global economy should be prioritized.

Specifically, with regards to the agriculture sector there needs to be more investment in establishing an integrated approach that focuses on creating more institutional support and incentives for smallholder farmers. Such a holistic approach would not only benefit smallholder farmers but also large farmers. Incentives should involve rewarding farmers who improve their production to a certain set standard and guaranteeing a fair price for basic grains in case the prices of farm products fall too low. This would help tackle price as well as income volatilities. Such guaranteed minimum prices have been successfully implemented and continue to be implemented in Brazil, India, and China. US implemented such farm programs for decades in the past.

Results-based incentives should be established by paying individuals or communities for environmental services such as carbon sequestration or biodiversity protection. The payments can be cross-financed through contributions from beneficiaries of environmental services or selected industries. Incentives should also be extended to stimulate domestic, and possibly foreign, private investment into agricultural production through public-private partnerships. Policies should include co-financing of critical infrastructure, community co-ownership initiatives, tax incentives, financial concessions, and capacity-building programmes.

Most importantly, before signing any bilateral or multilateral trading agreement, concerns of smallholders should be considered and integrated into the agreement. Although very challenging, but giving smallholders a voice in the formulation of national policies would encourage them to invest in agricultural productivity. One way to do this would be to encourage and support farmers’ associations and village level organizations. Improved collaboration between smallholders, local governmental organizations, and researchers would also help formulate better policies.

Finally, there is a dearth of research on the impact of neoliberalism on agriculture sector, specifically, smallholder agriculture in Pakistan. This lack of research means that there is not enough data to drive pertinent policymaking concerning rural development. Emphasis should be placed on investing in better research that can drive desirable policies that do not ignore the most vulnerable factions of the society. Public agricultural research funding to federal, provincial, and higher education agencies should be increased. Research at government agencies is particularly poor because of low salary levels, poorly trained staff, and limited promotion opportunities. There are a number of agricultural universities in Pakistan that conduct agricultural research; however, the quality of research is usually not up to standards because of lack of proper support, funding, and technology. Foreign donations as well as private sector funding should be pursued in order to improve the quality of research.

This paper has attempted to specifically look at the impact of neoliberalism on the agriculture sector and sustainable rural development in Pakistan to present a case for investing in smallholder agriculture. Pakistan has been under structural transformation for decades and is a regular customer to IMF. But despite all attempts to implement neoliberal trade policies, Pakistan still remains trapped in the ‘developing economies’ zone. This paper has argued that, despite the minimum government intervention promoted by the international institutions, Pakistan needs to actively promote agricultural policies, along with industrial and services sector policies, by supporting smallholders in order to reduce poverty and inequality, mitigate the impacts of climate change, achieve broader national developmental goals, and ensure political stability in the country. Despite limitations, such as lack of sufficient research and data, the findings of this paper are insightful and would add value to the topic.

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