Effects of Farm Size on Economic Efficiency: The Case of Pakistan

Abstract

Many agricultural policy decisions in underdeveloped countries are affected by the belief that the price of increased equity is reduced growth. An important argument used frequently against land reforms, for example, is that large farms are more efficient than small farms. If true, land reforms cannot achieve the dual goals of equity and efficiency. The relative efficiency of large farms, however, may be an illusion if national policies have consistently favored these farms in such a way that their apparent relative efficiency is due to market imperfections in which specific public policies have played a crucial role (Berry and Cline, Griffin). It is evident that better information on the true relative efficiency of large farms would provide a better indication of how agrarian structures affect resource use and thereby of the likelihood of being able to achieve both growth and equity. This paper provides such information for Pakistan. The concept of efficiency has been interpreted in various ways. An operational concept of economic efficiency has been developed by Lau and Yotopoulos (1971, 1972) and Yotopoulos and Lau, to measure and compare performance of farm firms. Differences in economic efficiency among groups of farms (say large and small) may result from variations in technical efficiency (larger output with equal amounts of inputs) and price efficiency (higher profits). Profit maximization is implied if the value of marginal product of each variable input is equal to its price. Thus we can test relative economic efficiency of large versus small farms by comparing their actual profit functions. Although the question of relative economic efficiency of large farms is central to a discussion of land reform in underdeveloped countries, there is little empirical research due to lack of adequate disaggregated data. Some evidence for India has been presented by Yotopoulos and Lau (1973), indicating that small farms are more efficient than large farms. However, in studies by Sidhu for wheat in the Indian Punjab and by Khan and Maki for wheat and rice in Pakistan, there was no difference in efficiency by farm size. In this paper, the Lau-Yotopoulos model is used to derive values of technical and price efficiency parameters in order to identify and isolate possible differences between large and small farms. These estimates are based on farm-level data collected from a sample of 728 farms in the Punjab and Sind provinces of Pakistan. Because there are wide differences between these provinces in their agrarian structures, any conclusi ns drawn from the overall sample would be of dubious value. We, therefore, present estimation re ults for the provincial samples separately.