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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.