Commodity prices drive up rural income disparity

Post Source: Dawn economic and business review

By Nasir Jamal

RISING agricultural commodity prices are driving the biggest increase in the country’s rural incomes in decades. The size of the additional incomes transferred into the rural economy is estimated to be in the vicinity of Rs300 billion — or even more. Cotton prices have risen by 173, sugar by 133,rice by 40 and wheat by 65 per cent in three years from June 2008 to January 2011, writes Amjad Waheed, chief executive officer (CEO) of the NAFA Fullerton Asset Management Limited, in his analysis posted on the company’s website. “What the urban Pakistan calls inflation is income to the rural Pakistan,” he notes. The increase in the rural incomes is believed to be currently supporting the country’s industrial and services sectors. The surge in the commodity prices, according to economic experts, has put a lot of disposable cash in the hands of growers, spurring consumption. There is plenty of evidence to show that the growers are spending their cash on cars, motorcycles, tractors, electronic goods, weddings and so on.

But is the current spike in the commodity prices benefiting everyone living in the villages, particularly in Punjab and Sindh which together contribute more than 90 per cent to the country’s agricultural output and where more than two-thirds of the country’s population lives?

“Whereas a large chunk of this income has ended up with the agriculture elite, there are signs that some of it has trickled down to the small farmers as well,” according to Waheed. Others argue that the transfer of additional cash has widened income disparity in the rural society even if many small farmers have also benefited from the soaring crop prices because the “trickle-down” has been uneven and limited.

Leading economist Hafiz Pasha says that the medium to large farmers have gained significantly from the escalating commodity prices because they had “marketable surpluses”, and they are now buying cars and other consumer products. By implication he means that smaller farmers who do not have sufficient marketable surpluses have not benefited much from the higher prices.

Ashfaque Hasan Khan, dean and principal of the NUST Business School who served as a special finance secretary in Musharraf government, says the income disparity in the rural areas has widened as a result of the rising crop prices.

“Only 40 per cent of the rural population is engaged in the crop sector and a vast majority of them are small landholders. This means only a small portion of population in the rural areas has gained from the increasing crop prices,” he elaborates.

In Punjab, for example, less than half of the rural population is engaged in the crop sector. Some 90 per cent of it falls in the category of small farmers with landholdings up to 12.5 acres.

Many like AgriForum Pakistan Chairman Ibrahim Mughal contend that smaller farmers could not benefit from the soaring commodity prices not only because they did not marketable surplus but also because they had to pay a lot more for inputs like fertilizers, pesticides, diesel, and so on.

“An overwhelming majority of small farmers buys inputs on credit and, thus, is forced to pay a much higher price than those who pay cash for these inputs,” claims Mughal. “Even if they have cash their cost has gone up manifold, offsetting the gains of
higher crop prices.”

There are people who are of the view that smaller landholding have helped a more equitable distribution of additional incomes among the growers in Punjab compared to the farmers in Sindh where landholdings are very large.

Salman Shah, former finance minister, says the additional incomes generated by higher commodity prices have been distributed more evenly in Punjab compared to Sindh.

Opinion is divided over the gains accrued by landless rural labour from the rising commodity markets. At the same time, it is difficult to say in the absence of credible study or signs that the commodity price hike has helped reduce poverty in the rural areas.

Shah is of the opinion that the landless labour in the villages has also benefitted from the new economic prosperity being experienced in  rural areas and their wages have also gone up. But he says only a comprehensive study of the impact of commodity prices on the rural society could give answers to many questions.

Pasha is also of view that the wages have increased in the villages. However, the food prices have also spiraled upwards at the same time to offset the benefits of higher wages. “It, therefore, is difficult to say if the transfer of additional incomes has helped to reduce rural poverty or not in the absence of a proper scientific study,” he argues.

Many fear that the growing agricultural commodity prices may rob the farmers of the incentive to boost their productivity. Mughal says the rising prices and decreasing productivity is not good for the economy.

“Our productivity per acre has decreased significantly over the decades whereas India has successfully managed to substantially boost its crop output. The new wave of economic prosperity in the rural areas should not be allowed to take our focus off the need to boost productivity. That will be disastrous for the economy as well as people,” he warns.

While the soaring prices have brought a semblance of prosperity to the rural areas, it has added to woes of the urban population where poverty levels are rising and the quality of life suffering. The Consumer Price Index (CPI) has increased by 55 per cent over the last three years whereas salaries have not risen accordingly, according to Waheed.

“The urban population that relies on manufacturing growth and trading, or earns fixed salaries has generally experienced a deterioration in its standard of living, and is not happy about it. Large scale manufacturing growth has declined by about one per cent over the last three years whereas the wholesale trade has risen by a marginal four per cent,” he says, underlining the impact of rising price inflation on the urban consumers.

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