IMPLICATIONS OF TRADE LIBERALIZATION ON THE RICE SECTOR OF SRI LANKA

1. IMPLICATIONS OF TRADE LIBERALIZATION ON THE RICE SECTOR OF SRI LANKA A Microeconomic Perspective by Dr. Parakrama Samarathunga

2. Slide :1 Trend in Paddy production(Mt), Sown area(Ha) and Yield(Mt/Ha) . 3500 4.5 4 3000 3.5 2500 3 2000 2.5 2 1500 1.5 1000 1 500 0.5 0 0 1961 1971 1981 1991 2001 Year Paddy Production Sown area Yield

3. 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

4. Slide :3 - Rice has done well during the last 4 decades But, in a highly protected and regulated economy Quotas and Tariffs at the consumers’ end Guaranteed price and government procurement at producers’ end and Subsidies on fertilizer

5. Slide :4Question now is, How well can it survive under the current wave of Deregulation / Liberalization / Globalization Deregulation / Liberalization brings about, Totally free international trade Totally free international capital markets Better exchange of technology - Knowledge - Material - Capital assets

6. Slide :5 - Methodology Evaluating - Degree of protection on rice - Domestic resource costs and competitiveness - Classical welfare gains / losses

7. 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

8. 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

9. Slide :8COMPETITIVENESS 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

10. Slide :9 Price : Effect of an Import Tariff Gains to consumer = a+b+c+d Producer losses = a Losses to government = c Gain to nation = b+d D S Pd b c d P w a qp q1p q1p qp Quantity

11. 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

12. 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

13. Slide :12What happened after liberalization ? 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

14. Slide :13Why 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

15. 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 High Polonnaruwa 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

16. 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

17. Slide :16 - Average Domestic resource costs in high and low potential areas High potential areas 1994-98 1994-98 Yala Maha 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)

18. Slide :17 Production Functions and Yield Gaps Yield Research Station Yield / Technical Ceiling (Yield Gap 1) Farmers’ Potential Yield (Yield Gap 11) Farmers’ Actual Yield Inputs

19. 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

20. 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………..

21. 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.

22. 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.