Towards Sustainable Food Governance in Informal Dairy Markets: Evidence from Regulatory Surveillance and Digital Traceability in Pakistan

Technical Summary: Towards Sustainable Food Governance in Informal Dairy Markets

Problem Statement
Food safety in the informal dairy markets of developing countries, particularly Pakistan, remains a critical governance challenge characterized by fragmented supply chains, weak traceability, and significant information asymmetries. While existing literature has largely focused on the laboratory detection of contaminants (e.g., aflatoxins, antibiotics, and chemical adulterants like urea and formalin), there is a notable gap in understanding the regulatory mechanisms that shape compliance. In Pakistan's informal dairy sector, which accounts for approximately 70% of milk production, opportunistic behavior by supply chain actors (agents) often leads to adulteration and quality degradation. This behavior is driven by the inability of consumers and regulators (principals) to verify product quality, creating an environment where agency costs are high and accountability is low. The study posits that milk adulteration is not merely a technical failure but a symptom of underlying governance issues rooted in Principal-Agent dynamics.

Methodology
This research applies Principal-Agent Theory to frame milk adulteration as an agency problem arising from information asymmetry and weak monitoring. The study utilizes a massive administrative dataset from the Punjab Food Authority (PFA) covering the period from 2020 to 2025. The dataset includes:

• 69,306 retail milk samples tested in laboratories (covering the period 2021–2023).
• 1,207,263 inspections of milk transport vehicles/tankers (covering the period 2023–2025).
• Surveillance data from both province-wide operations and the specific metropolitan hub of Lahore.

The methodology involves a descriptive analysis of regulatory surveillance outcomes, including failure rates, milk discarded, and enforcement actions. It tracks the phased implementation of a digital milk traceability system, which began in 2023 in Lahore and expanded to other major cities (Multan, Rawalpindi, Faisalabad, Gujranwala) and eventually province-wide by 2025. The study correlates the expansion of this digital system and enhanced laboratory capacity with changes in compliance rates and adulteration incidents.

Key Results

1. High Non-Compliance Rates: Despite extensive surveillance, non-compliance remained significant in the early years of the study. In 2021, the failure rate for milk transport vehicles was 7.54%, rising to 14.48% in 2022. Retail milk samples showed an overall failure rate of 23.31% between 2021 and 2023.
2. Shift in Violation Types: The surveillance data indicates a shift in the nature of non-compliance. While toxic chemical adulteration remains a concern, quality-related violations (dilution, compositional defects, and substitution) are more prevalent than direct chemical contamination. This suggests that the primary risk has evolved toward nutritional integrity and economic fraud rather than just acute toxicity.
3. Impact of Digital Traceability: The introduction and expansion of the digital milk traceability system (starting in 2023) coincided with a marked improvement in compliance.
   • Vehicle failure rates dropped from 12.07% in 2023 to 3.82% in 2025.
   • The volume of milk discarded decreased significantly (from 1.1 million liters in 2023 to 635,480 liters in 2025) despite a massive increase in the number of vehicles inspected (from ~103k in 2023 to ~454k in 2025).
4. Enforcement Outcomes: The study confirms that while punitive enforcement (confiscation and destruction of non-compliant milk) is necessary, it alone is insufficient to eliminate agency problems. The combination of digital traceability, risk-based surveillance, and enhanced laboratory testing was associated with a substantial decline in adulteration.

Key Contributions

• Theoretical Application: The study applies Principal-Agent Theory to the context of food safety governance in a developing country, defining food safety non-conformance as an agency problem driven by information asymmetry. It moves beyond small-scale laboratory studies to analyze governance mechanisms.
• Empirical Scale: It offers one of the largest empirical analyses of food safety surveillance data in South Asia, utilizing over 1.2 million vehicle inspections and hundreds of thousands of retail samples, providing a macro-level view of regulatory effectiveness.
• Policy Evidence: The research provides evidence that shifting from reactive enforcement to evidence-based, preventive governance—integrating digital traceability and collaborative oversight—can reduce agency costs and improve compliance in fragmented informal markets.

Significance and Claims
The paper claims that sustainable food governance in informal dairy markets requires a fundamental shift from reactive enforcement to preventive, governance-based approaches. The author argues that traditional regulatory models relying solely on end-product testing and punitive sanctions are insufficient when information asymmetries are high and supply chains are fragmented.

The study asserts that digital traceability serves as a critical governance tool that reduces information asymmetry, enhances transparency, and strengthens accountability across the value chain. By enabling regulators to trace products back to their sources, digital systems reduce the incentives for opportunistic behavior. The paper concludes that while surveillance and enforcement are vital for detection, long-term sustainability depends on institutional reforms that align incentives, improve information flows, and foster collaborative governance among all supply chain actors. The findings suggest that developing countries must modernize their food systems by integrating digital technologies and risk-based regulation to address the structural drivers of non-compliance.