The development experience indicates a strong link between rural development and poverty reduction. In Pakistan agriculture is the major source of economic growth, employment and livelihood. The agricultural productivity is low and many factors are responsible for its low productivity. Majority of rural population is marginalized in terms of access to physical and social assets, and in terms of institutions and inequality. Rural poor lack access to instruments to mitigate and cope with shocks that affect their well being and ability to come out of poverty. Gender and rural/urban differences in human development and poverty are substantial. This paper examines the influence of public policies and past development efforts on rural development, poverty reduction and rural welfare outcomes. In Pakistan, misguided policies and institutional weaknesses stifled rural development and resulted in increase in rural poverty, inequality and vulnerability to shocks. The most important impediment to rural development is an overly restrictive policy regime: assets distribution, availability of credit and subsidies. Frequent changes in agricultural support policies resulted in inefficient use of resources and low agricultural productivity. Poverty in rural areas is also perpetuated because of weak research and development (R&D) base, lack of adequate infrastructure and agricultural markets, poor soil and water management practices. The declining financial resources added pressure on already weak infrastructure. In the 1990s, drought conditions led to acute livelihood problems and sharp rise in rural poverty. The paper emphasizes that there is considerable scope for policy interventions aimed at harnessing development potential and improving livelihood opportunities of million of people living in poverty and human deprivation. The last section of the paper provides concluding remarks.