CHAPTER 1INTRODUCTION
1.1. BACKGROUND: AGRICULTURAL SECTOR AND CREDITCONSTRAINTS
The agricultural sector in Pakistan is considered as a cornerstone of the national economy.This sector contributes approximately 20.9 percent to the national gross domestic product(GDP) and generates employment for more than 45 percent of the country's total labor forcethat supports directly or indirectly about 67 percent of the population for their sustenance. Inaddition, this sector contributes about 65 percent in total export earnings and provides rawmaterials for major industries, such as, textile, sugar, and to several other medium and small-scale industries, which account for about 50 percent of total value of industrial production.Under these situations, any negative change in agricultural growth can have significantadverse effect throughout the population and national economy as well (GOP, 2016).Despite substantial contribution to the national economy, the agricultural sector inPakistan has remained largely underdeveloped in terms of infrastructure, marketing channels,research and development, and production for both the domestic and export market. Anyfurther improvement in the performance of the agricultural sector is conditioned by theadoption of modern equipment and production inputs such as hybrid seeds, biocides,fertilizers, etc. These technological adoptions require sufficient amount of capital, which isunfortunately unavailable to the farmers in Pakistan. Most farmers particularly smalllandholders in rural Pakistan are in desperate need of finance, they are even not in a positionto secure the key production inputs (e.g., biocide, fertilizer, hybrid seed, improved technology,plant protection etc.) from their own sources due to lack of funds. This financial situation ofthe farming community, over the last one decade in Pakistan has been pressured to switchfrom traditional agricultural-enterprise to micro-enterprises. Thus, to meet the requiredinvestment and to enhance the productivity levels, it is essential to have some externalfinancial source that could finance them at the time of need.
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1.2. EFFICIENCY AND FRONTIER DETERMINING FACTORS
In economic theories, growth and development extensively based on the existence or theformation of a set-up and favorable entrepreneurial environment to innovation, which isparticularly, based on the endogenous development capabilities of producer. Although theproducer-specific factors are considered to be important determinants of innovation activity,favorable environment and technological opportunities have significant positive effect on theproduction activities and innovation. Regarded so, innovation and technological opportunitiesor, diffusion of both these factors are important for growth of the farm enterprises and ruraleconomic development.Undoubtedly, combining the production functions leads to improvements in productivityand efficiency of the producer or firm. However, at a given moment of time, particularly indeveloping countries, when production environment are the same for each producer, differentlevels of productivity may exhibit due to technological differentials, innovation and efficiency.In the process of growth and business expansion, efficiency of production resources is anintegral part, through utilizing the scarce resources more productively and rationally. Withinthis framework, production levels of any producer indicate the estimation of how much aproducer rationally allocates the limited input resources. On the other side, the theories onproduction have mainly emphasized on some other related factors, such as productiveefficiency, mainly through increasing returns, experience from the past, and some otherrelated latent inputs (e.g., human capital, quality etc.).
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CHAPTER 2REVIEW OF LITERATURE
2.1. INTRODUCTION
Many studies and reports have been compiled on the relationships of agricultural credit,financial needs of the farming community and their effects on farm productivity in Pakistanand elsewhere in the developing countries. However, the literature on credit constraints of thefarm households particularly that studied the relationships of credit constraints with technicalefficiency is quite limited. Therefore, for clear understanding about the importance of credit,adverse effect of credit constraints and further to compare the results of present study with theexisting literature conducted on the related or somewhat related topics, this chaptersystematically reviewed the studies considering different aspects. In first part two questionswere identified for review: 1). Does access to credit has effect on the development ofagricultural sector? 2). Do credit constraints affect the farm productivity? 3) What determinescredit constraints of the farm households 4) what affects technical efficiency of farmhouseholds 5) Do credit constraints affect technical efficiency of farm households.Correspondingly, literature regarding some other specific theme of dissertation was searched.Following the steps involved in the systematic review, initial search was conducted usingrelevant keywords on searches engines (for instance, ScienceDirect, Google Scholars etc.).Based on the keywords, titles and abstracts of the studies were reviewed. The studiesconducted on somewhat relevant topics were further identified for full text reviews. However,irrelevant studies were excluded from the systematic review dataset. The selected studies werefurther analyzed for full text review and finally based on the questions and relevant themestudies were reviewed and included in the dissertation at hand. Figure 2.1 presentedsystematic review flow diagram.
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2.2. REVIEWS ON INSTITUTIONAL CREDIT AND DEVELOPMENTOF AGRICULTURAL SECTOR
In most of the developed and developing countries the significance of the institutionalcredit in the development of the agricultural sector is well acknowledged (Sogo-Temi and S.O. Olubiyo, 2004; Bashir and Mehmood, 2010; Bashir et al., 2010; Mehmood et al., 2012;Mehmood et al., 2013; Bashir et al., 2008, among others). The studies conducted by Bashir etal. (2009); Bashir et al. (2010); Bashir and Mehmood (2010); Iqbal et al. (2003) in Pakistannoted that agricultural credit in rural Pakistan is considered as one of the strategic resourcesfor enhancing the production to the high horizons that indirectly raises the living standards offarming community and plays significant role in the economic development of the country.Correspondingly, Iqbal and colleague further suggested that commercial banks and otherfinancial institutions be encouraged to expand agricultural credit and extend the network ofinstitutional credit to a large proportion of the farming community especially, the smallfarmers. Foltz (2004) conducted his experiment in Tunisia and investigated that creditprograms introduced by the Tunisian government greatly stimulated rural investment anddevelopment of the country.Additional evidence from other developing countries Olagunj (2007); Ahmed and Gill(2007) examined that in the face of excruciating poverty in the rural economy where thefarmers are the major players, credit is necessary formation for persified agricultureproduction and efficiency in agriculture resources-use. Olagunj (2007) further reported thatthose farmers faced credit constraints were under-utilizing pesticides, fertilizer, and otherplanting material for the production of sweet potato compared to their counterparts, whoproduced potato with adequate access to credit and further found to be resource efficient.Moreover, they have higher use intensities for hired labor and lesser for planting material.These indicate that potency of credit in optimal reallocation of farm resources for efficient use.The use of credit facilities would therefore translate to higher resources employment andcapacity utilization, increased output and income, and reduce poverty in the rural economy,especially among the farmers (Riaz et al., 2012).
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CHAPTER 3: AN OVERVIEW OF AGRICULTURE SECTOR OF PAKISTAN..........35
3.1 Introduction.... 35
3.2 Challenges faced by agriculture sector....... 36
3.2.1 Raising population...... 36
3.2.2 Climate change............ 36
3.2.3 Global GAP....... 37
3.3 Constraints faced by agriculture sector....... 37
CHAPTER 4: FINANCIAL SECTORS OF PAKISTAN........... 41
4.1 Introduction............ 41
4.2 Objectives of rural financial system in Pakistan.......... 43
4.3 Types of financial sources in Pakistan........ 43
CHAPTER 5: IDENTIFICATION OF CREDIT CONSTRAINTS.... 50
5.1 Introduction.... 50
5.2 Non-price rationing.......... 51
5.3 Methods to recognize credit constrained.... 53
5.4 Recognition of credit constrained in earlier studies...... 54
5.5 Theoretical framework-I........... 56
CHAPTER 9EFFECTS OF CREDIT CONSTRAINTS ON TECHNICALEFFICIENCY OF FARM HOUSEHOLDS
9.1. NEXUS BETWEEN CREDIT CONSTRAINTS AND TECHNICALEFFICIENCY
Prior to the analysis in this sub-section, I illustrate the relationship of credit constraintswith technical efficiency and designed a theoretical framework (II) to clearly explain theeffects of credit constraints on technical efficiency of the farm households. In this particularsituation, farm household cannot increase expenditure on production inputs due tomultidimensional effect of credit constraints on technical efficiency that resulting in lowproduction and less profit.The concept of credit constraints and technical efficiency of households is backed up thetheory of neoclassical growth. The neoclassical growth theory clarifies economic growth in along run by considering at population growth, capital accumulation, technological progressand productivity. This theory analyses the exogenous growth by accumulation of physicalcapital that are specifically associated with a flow of technical advancement (Solow, 1957;Swan, 1956). Growth in this theory is considered as exogenous process that could be achievedthrough technical adoptions or invocation (Solow, 1960). The pioneering work of Solow(1956) argued that those countries differ in terms of productivity levels always tend toconverge towards the same level of growth and productivity. Neoclassical growth theoryfurther explains that capital is an immobile or fixed factor that can be accumulated throughinvestment process, on the other side, technology is completely mobile or endogenous asmentioned by Temple 2003; Keller 2004.
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CONCLUSION
Credit is an important input in a rapidly growing and technological environment. Creditconsidered as one of the strategic sources that pushes the crop production at maximumachievable levels. Credit consequently raises the living standard of farming community bothin developed and developing countries. In fact, the economies of most of the developingcountries rely on the agricultural sector, which contributes substantially in their national grossdomestic income. Correspondingly, major part of the farm community in Pakistan aresubsistence and small landholders, who are not in a position to use high productiontechnologies, hybrid seeds, sufficient fertilizers and improved farm implements due to thelack of finances available to them. Credit constraints are one of the main reasons for low peracre agriculture productivity in Pakistan. Therefore, the matter of increasing agriculturalproductivity and self-sufficiency in food is largely dependent on the availability of improvedaccess to finance in the respective areas of farmers.From the above facts, evidence from the reviewed studies, and the study at hand, it isquite clear that credit constraints are main hurdle in enhancing efficiency, agriculturalproduction and effective utilization of farm resources. Farmers not only requires capital assetsin the form of production inputs but also require liquid capital to pay for harvesting, laborcharges or hiring of skillful labor and other similar farm operations to enhance theproductivity levels. The study at hand, therefore, empirically examined the effects of creditconstraints on technical efficiency of farm households in Punjab, Pakistan. In the existingstudies, the main problem was how to identify the credit constrained households. Thisdissertation approach is built from previous credit constraints based works in different ways.Firstly, I designed a theoretical model that allowed me for more clear identification of creditconstrained households considering its multiple manifestations in order to avoid theoverlapping on supply or demand side credit constraints. Secondly, I collected data usingdirect elicitation method that systematically identified the credit rationing status of the farmhouseholds. The data were collected form 519 farm households in the Punjab, province ofPakistan, Based on a theoretical model, I identified 351 farm households as credit constrained,while 167 farm households as credit non-constrained. Then, applying the Probit model theestimation results suggest that credit constraints of the farm households in rural Punjab areaffected by the educational level of the households’ head, dependency ratio, farm size, farmcapital, and households’ expenditures followed by district Gujrat.
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References (abbreviated)