Relative Price Changes and Industrialization in Pakistan: 1951-1964

The terms of trade between the agricultural and industrial sectors in developing countries have received considerable attention in the general literature on economic development. The terms of trade are important determinants of the distribution of income between the two sectors, as well as the capacity for saving (particularly in the manufacturing sector) and incentives to produce and sell (particularly in the agricultural sector). In Pakistan, the terms of trade of the agricultural sector are alleged to have been depressed to benefit the growth of industrial sector. Considerable opposition to increased taxation of the agricul¬tural sector has been based on the assertion that that sector is already “taxed” for the benefit of the industrial sector through the terms of trade. Current official interpretation [11] of the “saving strategy” that the country followed in the 1950’s indicates that the terms of trade were important in transferring income from the low-saving sector (agriculture) to the high-saving sector (manufac¬turing). As yet, however, there had been no empirical study of the facts of the Pakistan experience.