Cotton efficiency data envelopment analysis

The Lahore Journal of Economics 14 : 2 (Winter 2009): pp. 97-124

An Efficiency Analysis of Punjab’s Cotton-Wheat System M. Ishaq Javed * , Sultan Ali Adil ** , Sarfaraz Hassan *** , and Asghar Ali ****
Abstract This study examines the technical, allocative, and economic efficiencies of the cotton-wheat farming system in Punjab, Pakistan. It also investigates the determinants of theseefficiencies using a non-parametric data envelopment analysis (DEA) technique. Technical, allocative, and economic inefficiency scores are separately regressed on socioeconomic and farm-specific variables to identify the sources of inefficiency using a Tobit regression model. The mean technical, allocative, and economic efficiencies calculated for the system were 0.87, 0.44, and 0.37, respectively. Ourresults indicate that years of schooling and the number of contacts with extension agents have a negative impact on the inefficiency of cotton-wheat farming in Punjab. Keywords: Cotton, wheat, economic efficiency, data envelopment analysis. JEL Classification: C14, D61. I. Introduction Cotton and wheat are the most important crops grown in Pakistan. The current market share of cotton (among fibersused for apparel and furnishings) in the world is 56 percent (Ahmad 2008), and Pakistan is the fourth-largest cotton producing country in the world after the USA, China, and India. Cotton is Pakistan’s major export-earning crop and it also provides raw material to the local textile industry. Cotton accounts for 8.6 percent of the value-added in agriculture and 1.9 percent of Pakistan’s grossdomestic product (GDP). Under the World Trade Organization (WTO)’s
Agriculture Officer, Sangla Hill, District Nankana Sahib. Associate Professor, Department of Agricultural Economics, University of Agriculture, Faisalabad. *** Associate Professor and Chairman, Department of Environmental and Resource Economics, University of Agriculture, Faisalabad. **** PhD Scholar, Department of AgriculturalEconomics, University of Agriculture, Faisalabad.
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Mohammad Ishaq Javed, Sultan Ali Adil, Sarfaraz Hassan and Asghar Ali

post-quota scenario 1 , Pakistan has the potential to become a leading force in the worldwide cotton and textile market (Government of Pakistan 2007). Wheat is the country’s main staple food; 75-80 percent of households’ food budget is spent on wheat alone (Hassan2004). It is Pakistan’s largest grain crop, and contributes 14.4 percent to the value-added in agriculture and 3.0 percent to GDP (Government of Pakistan 2007). The recent food scarcity and rises in price have affected almost every country in the world, including Pakistan. The present food crisis is an eye opener for policymakers in Pakistan. Riots have erupted in several parts of the country due tothe scarcity of food and price hikes. In order to obtain self-sufficiency in food production and earn foreign exchange, policymakers need to formulate policies both for the short and long term. Possible ways to enhance agricultural production include expanding the cultivated area, increasing cropping intensity, technological changes, and improvements in production efficiency. The latter optionseems to be the most suitable in the short run. In order to model production increases in efficiency, it is useful to look at analyses of firm level efficiency. Farrell (1957) proposes that the efficiency of a firm has two components: (i) technical efficiency, and (ii) allocative efficiency. Technical efficiency is the ability of a firm to produce a maximal output from a given set of inputs or theability of a firm to produce a given level of output with the minimum quantity of inputs and available technology (Bukhsh 2006). Allocative efficiency is the ability of a firm to use inputs in optimal proportions, given the market prices of inputs and outputs. Economic efficiency is the multiplicative product of technical and allocative efficiency (Coelli, et al 1998). Eight types of farming...