Impact of the Informal Economy on the Efficiency and Productivity of Pakistan’s Agricultural Sector

According to the Ministry of Finance, more than 40 percent of Pakistan’s GDP is attributed to the informal sector. Nearly 75 percent of Pakistan’s working-age population is employed in the informal sector, according to the Labour Force Survey (2020-2021). The widespread persistence of the informal sector has several manifestations in the country’s agricultural economy. This study analyses the impact of the informal economy on agricultural productivity in Pakistan by applying Stochastic Frontier and Principal Component Analysis models using the Pakistan Standards of Living Measurement (PSLM) farm-level data collected in 2014, 2016, and 2019. It is the first regionally and nationally representative study of the informal economy’s impact on agricultural indicators using the country’s largest dataset. These findings show, as prior literature has suggested, that farms utilizing formal economic relations, including better working employment contracts, more access to proper credit resources, and better irrigation systems, produce higher yields than farms that operate within informal structures. In addition, crop diversification and resource allocation were found to be significant in raising the efficiency of agriculture. But there is also a geographical dimension to productivity - some of the agro-climatic regions are lagging consistently implying a case for focused attention.