IMPLICATIONS OF TRADE LIBERALIZATION ON THE RICE SECTOR OF SRI LANKA

A Microeconomic Perspective

Dr. Parakrama Samarathunga

by

Slide :1 Trend in Paddy production(Mt), Sown area(Ha) and Yield(Mt/Ha) .

0

500

1000

1500

2000

2500

3000

3500

1961

1971

1981

1991

2001

Year

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Paddy Production Sown area Yield

Slide :2 - Estimated future rice requirement and estimated domestic rice supply under two production scenarios

Year Requirement at PRODUCTION SCENARIO

100 kg per capita Current Optimistic

000’mt. Growth Rate Projection 000’ mt.

2001 2016 1587 1881

2002 2036 1597 1961

2003 2057 1607 2041

2004 2077 1616 2121

2005 2098 1626 2201

2006 2118 1636 2201

2007 2137 1646 2201

2008 2156 1655 2201

2009 2175 1665 2201

2010 2195 1675 2201

Slide :3 - Rice has done well during the last 4 decades

But,in a highly protected and regulated

economyQuotas and Tariffs at the consumers’ end

Guaranteed price and government procurement at producers’ end

andSubsidies on fertilizer

Slide :4 Question now is,

How well can it survive under the current wave ofDeregulation / Liberalization / Globalization

Deregulation / Liberalization brings about,

Totally free international trade

Totally free international capital markets

Better exchange of technology

- Knowledge

- Material

- Capital assets

Slide :5 - Methodology

Evaluating

- Degree of protection on rice

- Domestic resource costs and competitiveness

- Classical welfare gains / losses

Slide :6 Degree of protection on rice before liberalization

NPR = 100 (NPC -1)Producer Price

where NPC = ______________ Import Price

EPR = 100 (EPC -1)

Producer Price -Value of all traded inputs at domestic price

When EPC = _________________________________________________

Import price - Value of all traded inputs in import prices

Slide :7 - Nominal protection rate and effective protection rate (1990 to 1998)

Year NPR EPR

1990 44 33

1991 38 22

1992 41 25

1993 50 39

1994 33 44

1995 33 36

1996 43 29

1997 52 36

1998 45 22

CC = 1/DRC

Value of all domestic resources at shadow prices

where DRC=

Border price of the output- Value of all traded inputs at their border prices

Competitiveness coefficient - 1990-1998 - 0.56

Slide :8 COMPETITIVENESS

Slide :9

: Effect of an Import Tariff

Pd

P w

qp q1p q1p qp

a b c d

D S

Price

Quantity

Gains to consumer = a+b+c+d

Producer losses = a

Losses to government = c

Gain to nation = b+d

Slide :10 - Consumers’ gains, Producers’ losses, Government’s losses and welfare gains (000Rupees)

Year Consumers’ Producers’ Governments’ Welfare

Gains Losses Losses Gains

1990 208580 78088 6720 123772

1991 196127 60945 8260 126922

1992 216692 83650 14820 118222

1993 252832 77590 12090 163152

1994 269314 78106 3400 187808

1995 191987 47194 0620 144731

1996 293490 54672 26200 212618

1997 388664 85122 22480 281062

1998 334575 84216 13620 236739

Liberalization brings net economic gains to the society

Slide :11 A Plausible interpretation

By and large rice production is uneconomical in Sri Lanka except in high potential areas

Due to liberalization only a fraction of rice farmers will continue to grow rice mainly in the dry zone under irrigation

As a result rice land will be abandoned, and labour will be unemployed unless other industries could absorb them

Liberalization will result in a reduction in supply by about 16% Reduced price would result in an increase of demand and this,

along with the above reduction of domestic supply a deficit of about 25% will appear in the market

This creates additional imports giving rise to an adverse effect on trade balance

Wet Zone Dry Zone Intermediate Zone

Year Land Production Yield Land Production Yield Land Production Yield

000’ha 000mt. Mt/ha. 000’ha 000mt. Mt/ha. 000’ha 000mt. Mt/ha.

1990 243 593 2.96 437 1395 3.7 174 538 3.4

1991 236 515 2.67 403 1275 3.7 177 600 3.5

1992 212 501 2.92 410 1297 3.7 180 540 3.4

1993 217 484 2.73 442 1536 3.9 175 549 3.4

1994 216 513 2.87 532 1620 3.5 181 551 3.4

1995 203 483 2.89 522 1748 3.8 190 578 3.4

1996 191 448 2.87 400 1281 3.9 158 333 3.1

1997 193 488 3.07 373 1295 4.0 163 456 3.3

1998 171 407 2.97 503 1728 3.9 174 557 3.4

1999 199 501 3.11 509 1766 4.0 184 591 3.4

2000 na na na na na na na na na

2001 na na na na na na na na na

2002 na na na na na na na na na

Slide :12 What happened after liberalization ?

Slide :13 Why has this happened ??

Characteristics of rice production systems

System Yield Farm size Water Cropping

regime inte.

High potential 4.2 >1 IR >120

Low potential 3.0 <1 RF <100

Slide :14 Cost of production (Rs/ha) under different production Systems

Total Total Gross Unit Unit

cost cost return Cost Cost

Incl. Excl. Incl. Excl.

Rs/kg Rs/kg

HighPolonnaruwa 42934 28073 65227 7.94 5.19

Anuradhapura 41174 29669 60008 8.62 6.21

Low

Kalutara 34713 22427 35059 13.13 8.48

Matara** 26541 18945 30732 8.73 6.23

** 98 Yala

COC/2001 Yala -SEPC/DOA

Slide :15 Cost of production (Rs/ha)under different production Systems

Total Total Gross Unit Unit

cost cost return Cost Cost

Incl. Excl. Per/ ac Incl. Excl.

Rs/kg Rs/kg

High

Polonnaruwa 43072 27354 63322 8.62 5.48

Anuradhapura 42736 29239 68706 8.12 5.56

Low

Kalutara 37826 23415 40952 14.19 8.78

Matara** 29264 21021 42523 8.83 6.34

**1998/99 Maha

COC/2001/02 Maha -SEPC/DOA

Slide :16 - Average Domestic resource costs in high and low potential areas

High potential areas 1994-98 1994-98 YalaMaha

Anuradhapura 0.95 1.08

Polonnaruwe 0.97 1.02

Low Potential areas

Kalutara 1.60 (0.99) 1.89 (1.10)

Martara 1.20 (0.86) 1.31 (0.90)

Slide :17 Production Functions and Yield Gaps

Research Station Yield / Technical Ceiling

Farmers’ Potential Yield

Farmers’ Actual Yield

(Yield Gap 1)

(Yield Gap 11)

Yield

Inputs

Slide :18 What are the possible solutions

Reducing cost of production by narrowing down yield gaps

_ There is a backlog of research findings so far undelivered to the farmers

Thus short run solution is to strengthen extension

_ Providing infrastructural and institutional facilities to bridge yield gap two in the medium

run_Shifting the research station yield and thereby the farmers’ potential yield through development and /or adoption of constantly changing technology

Slide :19 Final Conclusions

Use of economic indicators at national aggregate level can be misleading and may results in inappropriate policy decisions.

Rice production will remain widespread contrary to some forecasts.

Because rice remains, rice research and extension should also remain but with a new strategy.

Sri Lankan “Rice Sector” should be treated as heterogeneous in economic analyses and policy making

Continued………..

• Cont………….

A pervasive analysis should be done on varying agronomic and economic sustainability of rice production in different areas or zones

Available data show that rice production is not unprofitable even in the wet zone, if family labour is valued more appropriately.

This “Profitability” on crop basis is positive but it may not be high enough to generate a family income under the present degree of land fragmentation.

Therefor fragmentation of rice lands should be discouraged and avenues should be opened for consolidation by rationalizing the land market.

In the short run reducing the gap between potential and actual yield levels should be done through a strong extension/ institutional campaign.

• Cont………….

Technological research directed at producer groups should be continued, but within economic limits as the long run solution to the low productivity. It may be profitable to import new technology than generating locally.

Are we going to use rice subsidies as a means of reducing income disparities and poverty ?

It may be appropriate to develop a time bound rice master plan taking all the above aspects in to consideration and strictly adhere to it to ensure sustainability of rice production in Sri Lanka.