Pakistan is a major producer and exporter of cotton--the world's second largest exporter in 1985/86. Since 1984/85 cotton production has increased dramatically because of the rapid spread of a new high-yielding variety and improved plant protection practices. Pakistan can generally export cotton competitively at world prices, although subsidies were necessary to sustain exports when world prices declined sharply during 1986 and 1987. Estimated producer subsidy equivalents (PSE's) indicate that producers have been implicitly taxed by the Government's trade and output price policies, an effect that is only partially offset by input subsidies. Maintenance of low domestic cotton prices favors increased production and exports by the textile industry.