# Policies Affecting Input Markets

Government policy is also creating constraints in input markets. Timely availability of fertilizer is essential, but phosphate, now being imported by the public sector, is rarely delivered on time, and usually in insufficient quantities, with a resulting imbalance between nitrogen and phosphate use. While the recommended ratio is close to 1: 1 for most crops, Pakistan's ratio is at best 3: 1. Despite the fact that the import of phosphate is late year after year, the government seems unable to respond to the problem.

Fertilizer policy is imposing large hidden costs on farmers, including search costs for scarce supplies, uncertainty about availability leading to panic buying, and depressed yields through lack of availability at the required time. These costs mean that any benefit to farmers from lower prices is being dissipated.

The benefit of a liberalized input market is evident from the extraordinary growth in pesticide use after the subsidy was ended and entry to the market was liberalized. Indeed, widespread pesticide use is widely held to explain the dramatic growth in cotton yields in the 1980s.

Fertilizer pricing policy also has harmful intersectoral effects. Natural gas prices for state run fertilizer corporations in Pakistan are held belc;.v prices for other users, with the objective of reducing the price paid by farmers for fertilizer. The problem is that this natural gas pricing policy reduces the availability of gas for use in industry. In an energy-deficient country, this is an expensive way to offset agricultural pricing policies.

Use of improved seed has been held back by problems of availability, accessibility, and quality. On-farm research has estimated that use of old varieties of seed could be depressing yields by 15 percent. As in fertilizer, goverrment policy is causing distortions. Private seed firms have to compete with a large public sector producer which prices uneconomically and runs losses. Private seed development is also held back by non-existence of breeders' rights and lack of trademark protection. Enforcement of laws regarding seed quality is lax. Little work is now being done to develop seeds for fodder crops and high value food crops.

Factor markets have also been distorted by govermment policy. Apart from tractors (see Box 3), the cost of agricultural mechanization has been further lowered by the access of large farmers to subsidized credit. Research from Pakistan and elsewhere has shown that mechanization has far greater labor-displacing than output enhancing effects. While some mechanization was inevitable, policy induced lowering of tractor prices led to premature tractonization and labor displacement.

# Agricultural Credit

Research generally finds that higher credit use is correlated with higher input use, and possibly higher output. Credit is also important in alleviating poverty, particularly in financing small-scale projects in the rural non-farm sector. Export horticulture, a likely source of future growth, requires substantial investment, both short-term and long-term, which the present financial system is incapable of meeting. Land mortgages are usually not sufficient to cover loan requirements, and the specialized nature of horticulture equipment lowers its value as security in the event of default.

Figure 1 shows the formal agricultural credit disbursed since 1981 by the major lenders to the sector.

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