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# Chapter 1. Introduction

The availability of adequate rural credit is central to an improved economic climate for economic growth and poverty alleviation in Pakistan. In **1995,** 88 million of Pakistan's estimated 128 million people (69 percent) resided in rural areas. Of the 34 million employed Pakistanis, 24 million (71 percent) have rural jobs'. Women's employment opportunities are also greater in rural areas. Women constitute 6 percent of the total rural labor force compared to 2.4 percent of the urban work force. Rural employment does not simply mean agricultural employment. In fact, only 64 percent of rural employment is in agriculture; 12 percent is in services and the remaining 24 percent is distributed, more or less equally, in manufacturing, construction, and trade. The rural financial system must respond adequately to the demands of each of these components.

The most important objective for rural finance must continue to facilitate farmers' access to inputs and improved technology, and thereby accelerate agricultural productivity growth. Pakistan's past agricultural performance has been quite good. The sector has grown by more than 3 percent a year for the past thirty years. However, the country is now in a phase in which future growth will be sustained only by high productivity grwth. On this measure of performance, Pakistan's agricultural sector has lagged behind In terms of productvity measured by output per unit of a single crop, growth has been much lower than that in comparable countrie **s** uch as India and Egypt For example, in the past decade, wheat yields in the Indian Punjab increased 2.9 percent per annum, and yields in all developing conries were up 2.7 percent per annum. In Pakistan, by contrast, the increase was only 1.6 percent There is large yield variation among differen **t** ypes of farmers in Paklstan. For wheat and rice, the yield gap between "progressive" farmers and others is 30 percent and 50 percent, respectively. Furthermore, recent studies show that total factor productivity (which compares an index of all outputs with an index of all inputs) in Pakistan has stagnated or even declined in the post-Green Revolution period.

The factors that determine agriculture productivity growth include soil quality, availability of irrigation, prices for outpus, access to inputs, information on new technologies and markets, the incentive sucture embedded in the land tenure system, farmers' educational levels, and rural infrastructure. Agricultural credit has the crucial role of facilitating access to inputs, particularly those enibodied in new, high-yielding technologies. When credit is easily available, farmers switch quickly to new technologies and achieve rapid productivity growth. But a number of feaures may affect farmers' access to credit, such as small farm size and tenancy arrangements that result in poor collateral. When this happens, aggregate productvity growth is retarded because, as in Paktitan, poor access to credit results in a large yield gap between the "progressive" (typically medium-sized) farmers and the laggards (typically small owner cultivators and tenants). An ' The numbers given in this paragraph are taken from: Pakistan Economic Survey, 1994-95. Women's labor force participation data are based on the 1987-88 Rural Labor Force Survey. The rural employment breaakdown is taken from the 1992 Labor Force Survey.