Welfare Implications of High Wheat Prices on Heterogeneous Households in Pakistan

Abstract

Wheat being the dietary staple of Pakistan, accounts for more than half of the caloric intake of the population. Wheat occupies more than one third of the planted acreage, and contributes nearly 13.7 percent to the value added in the agriculture sector. Over the past three decades, the growth rate of wheat production has been phenomenal – roughly 5 percent per year. But since the quantum leap of Green Revolution in the 1960s, wheat yield growth has lagged behind increasing domestic requirement. Therefore, given its strategic significance, the Government of Pakistan was forced to rely on wheat imports, which worsens the current account position of the country, and increases the possibility of nutritional insecurity among the populace. Pakistan being an agrarian economy generates about 20 percent of its GDP from agriculture sector. Similarly, a large segment of its population is engaged in farm related activities in rural districts. Income disparity is also widespread. There is a large vulnerable segment of the population that spends approximately 60 percent of its disposable income on food, especially the consumption of wheat and wheat flour. The purpose of this research is to evaluate the impact of price variation of wheat on different segments of Pakistani society. The primary hypothesis to be validated is that an upward pressure on wheat and wheat flour prices leaves an adverse impact on food insecure segment of the population, which incidentally is quite large and resides in both, urban and rural regions. The price instability deteriorates their nutritional deficiency. In contrast to this there is another segment of the population which we categorize as wheat growers who generate marketable surpluses of wheat. This group may potentially benefit from price fluctuations that not only emanates from the income effect but also from the profit effect. As a consequence, it also affects their demand for consumer goods other than food, which, in turn, helps in indirectly mitigating the level of poverty in the society. A theoretical model has been developed in this study for three categories of households in Pakistan, namely the agriculture households who produce wheat well beyond their own needs; the non-agriculture households who purchase wheat from market; and the subsistence households who produce wheat for their own consumption and do not rely on wheat available in the market. The economic behavior of these heterogeneous households related to consumption, production, and labor-leisure choices is integrated in a theoretically coherent manner for meaningful empirical analyses.A three-step empirical approach has been followed where in the first step the study utilizes the Net Benefit Ratio (NBR) which is a non-parametric micro-simulation technique to determine the distributional proportion of heterogeneous households in the wheat and wheat flour markets of Pakistan. Following this, a full demand system (inclusive of leisure) as proposed by Deaton and Muellbauer (1980) is specified for three distinct classifications of households by means of a Linear Approximate of Almost Ideal Demand System (LA-AIDS). For estimation purpose, household level information from eight modules of the Household Integrated Economic Survey (HIES) has been collated to generate a pooled cross-sectional sample of yearly price-indices from 2000-01 to 2018-19 (which incidentally is the last available survey). The final step of the empirical work draws welfare implications of variations in prices of wheat and wheat flour by linking the demand estimates with nutritional intakes using conversion tables. The analysis related to NBR confirmed that a majority of households, roughly 85 percent in total, belonged to non-agriculture category who purchase wheat and wheat flour from market place. In contrast, a smaller proportion of approximately three percent belong to farmers-category. These agriculture households produce surplus wheat which is sold in the market. Lastly, 12 percent of households have been categorized as subsistence farmers, who cultivate wheat predominantly for their own self-consumption. The demand analysis of wheat and wheat flour based on the LA-AIDS model allowed us to segregate total price effect into substitution, income, and profit effect. Specifically, the results demonstrate that for non-agriculture households (essentially the urban consumers) the substitution effect has been unequivocally negative. Similarly, for a normal commodity like wheat and wheat flour, the expenditure effect has been negative also. This outcome is consistent with the standard framework whereby an upward movement in price leads to a decrease in the consumption of wheat and wheat flour. One of the major findings of our work relates to disaggregation of total price effect for agriculture households where an additional term – the profit effect has been observed. It captures the effect of high wheat prices that contribute to high farm-profits of agriculture households. As a result, even though there is a decline in consumption of wheat by wheat-surplus agricultural households, they tend to use excess profits to diversify food basket that, in turn, results in improvement in their caloric intake. An indirect spill-over effect of changes in prices of wheat has also been observed that has led to a demand surge for domestically produced goods. Contrary iv to this, the overall impact of wheat price increase on non-agricultural households and subsistence farmers has been mixed. This outcome where price effect cannot be determined unambiguously, requires careful interpretation and explanation for policy analysis. The outcome of thesis suggests that concerns with regard to economic and nutritional well-being are too serious to be ignored. Wheat being a staple food, it may not be advisable to ignore food security issues by allowing market forces alone to determine wheat price. As a policy prescription, the study recommends that, maintaining strategic food reserves through government intervention should remain a priority area as long as a large segment of the society remains food vulnerable and there are concerns with regard to intra- and inter-family nutritional security.