Speacial Reports/ WTO
Cotton has comparative advantage in WTO regime
By Sofia Anwar and Zakir Hussain
The importance of cotton can hardly be over
emphasized in the economy of Pakistan. Pakistan
is one of the ancient homes of cultivated
cotton, 4th largest producer of cotton , the 3rd
largest exporter of raw cotton and a leading
exporter of yarn in the world.
Pakistan is, by and large, a mono-crop economy
as cotton contributes nearly 10 per cent in the
agriculture GDP and a source of 60 per cent
foreign exchange earnings. The value addition
through cotton is 8.2 per cent in agriculture
and 2 per cent in the GDP.
Cotton is not only an export-earning crop but
also provides raw material to local textile
industry. A profound investment in the form of
over1000 ginning factories, over 400, textile
mills heavily depends upon cotton.
The area under cotton has increased from 2.836
million ha in 1991-92 to 2.989 million ha in
2003-04 showing a growth rate of 0.43 per cent
over the period. The production jumped from 1.1
million bales in the year 1947 to 12.8 million
bales in 1991-92. Since then cotton production
is swinging between 8 million bales to 11.2
million bales with an annual average of 9.5
The global Economic scenario is set for change
under the free trade regime. Pakistan has signed
the WTO and will enter in free trade era with
the dawn of year 2005. The WTO has set many
clauses under its various agreements like the
Agreement on Agriculture (AOA), the Trade
Related Intellectual Property Rights (TRIPS) and
Sanitary and Phyto Sanitary (SPS) etc.
Cotton along with its products is the biggest
foreign exchange earner for Pakistan and is more
likely to be affected through WTO regulations.
This requires a profound change in the economic
policies to maintain a stable share of raw
cotton and its product in world market in coming
In view of the importance of this silver fibre
in the economy of Pakistan, authors conducted a
study to estimate its competitiveness and
comparative advantage in both current and future
In the static analysis, the cost of production
(COP) data of cotton were collected from
Agricultural Prices Commission (APCom) for the
three year period from 2000-01 to 2002-03.
The average financial budget of cotton was
developed using the three year average of COP
data and market prices of seed cotton. The
social budget of cotton was developed using the
economic prices of cotton and inputs.
The economic or export parity price(EPP) of
cotton was estimated by taking the three year
average price of CIF North-Europe cotton as
Pakistan exports most of cotton to this region.
From the fertilizers the import parity price
(IPP) of DAP and Murate of Potash were
The IPP of urea was not estimated as urea was
not imported in the country in the bulk quantity
during the study period. The IPP of DAP and
Potash was prepared on the basis of f.o.b. price
(ex-USA) and by considering all handling,
transportation, marketing charges on the port on
the way to farmer's fields. In the calculation
of social parity prices, shadow exchange rate
(SER) was utilized instead of official exchange
rate (OER). The tradable inputs which are not
measured at import parity prices, all are
weighted by SER to express their opportunity
In the past, cotton production and marketing was
subjected to many public policy interventions.
The Cotton Export Corporation was phased out and
cotton economy was freed in the 1990's. With the
advent of trade liberalization, most of
interventions have declined.
The support price policy is notional and the
Trading Corporation of Pakistan (TCP) is kept as
third buyer in order to avoid price crash due to
cartelization of powerful syndicates especially
during the bumper crop. But the TCP works as a
The results of static analysis showed that
farmers are earning more profit at world price
of cotton than at domestic price of cotton. It
was concluded that cotton crop was under-priced
in the local market and farmers are in a
cost-price squeeze situation.
The farmers were paying almost the world prices
and no support or subsidy was provided to cotton
growers for inputs. The study showed that
Pakistan has comparative advantage in cotton
production and can well competes in open market.
The dynamic analysis was carried out to estimate
the competitiveness of cotton in the ensuing
free trade era. Here the cotton budget at
economic prices was estimated including risk
prices of cotton and fertilizers instead of
average world prices.
These risk prices were generated through normal
distribution of time series world prices of
cotton and other critical inputs over the past
fifteen years. The simulation results provided
the economic revenue and tradable cost for the
first year of free trade i.e. 2004-05. For the
further four years (up to 2008) projections were
made based on this first result, by adding in
the risk price as error term for each year.
The risk analysis at future risk price for five
years showed that Pakistan does have the
potential to compete in the free trade cotton
market. The existing comparative advantage in
cotton production will be maintained by the
country. Pakistan can further reap the benefits
of free trade by reducing the cost of production
or by increasing productivity per unit of
The quality of a lot of cotton is damaged in the
fields during the picking of produce. The
obsolete ginning machines deteriorate the
micronnair length of fibre. The quality of
cotton may be improved through "clean picking"
and "better ginning" practices.
Although restriction of import is contrary to
free trade, yet its import during bumper cotton
crop could crash prices received by farmers.
Thus import should be regulated by increasing
the LC margin by improving marketing efficiency
and qualifying the quality standards of produce
set by the WTO.
Courtesy: The Dawn
Pakissan.com; Advisory Point