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

2. Slide :1 Trend in Paddy production(Mt), Sown area(Ha) and Yield(Mt/Ha). 0 500 1000 1500 2000 2500 3000 3500 19611971198119912001 Year 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 Paddy ProductionSown areaYield

3. Slide :2 - Estimated future rice requirement and estimated domestic rice supply under two production scenarios YearRequirement atPRODUCTION SCENARIO 100 kg per capitaCurrentOptimistic 000’mt.Growth RateProjection 000’ mt. 2001 201615871881 2002 203615971961 2003 205716072041 2004 207716162121 2005209816262201 2006211816362201 2007213716462201 2008215616552201 2009217516652201 2010219516752201

4. Slide :3 - Rice has done well during the last 4 decades But, i n 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 :4 Question 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) YearNPREPR 19904433 19913822 19924125 19935039 19943344 19953336 19964329 19975236 19984522

9. 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

10. Slide :9 : Effect of an Import Tariff Pd P w qpqp q1 p qpqp a b c d DS Price Quantity Gains to consumer = a+b+c+d Producer losses = a Losses to government = c Gain to nation = b+d

11. Slide :10 - Consumers’ gains, Producers’ losses, Government’s losses and welfare gains (000Rupees ) YearConsumers’Producers’Governments’Welfare GainsLossesLossesGains 1990208580780886720123772 1991196127609458260126922 19922166928365014820118222 19932528327759012090163152 1994269314781063400187808 1995191987471940620144731 19962934905467226200212618 19973886648512222480281062 19983345758421613620236739 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. Wet ZoneDry ZoneIntermediate Zone YearLandProductionYield LandProductionYield LandProductionYield 000’ha000mt.Mt/ha.000’ha000mt.Mt/ha.000’ha000mt.Mt/ha. 19902435932.9643713953.7174538 3.4 19912365152.6740312753.7177600 3.5 19922125012.9241012973.7180540 3.4 19932174842.7344215363.9175549 3.4 19942165132.8753216203.5181551 3.4 19952034832.8952217483.8190578 3.4 19961914482.8740012813.9158333 3.1 19971934883.0737312954.0163456 3.3 19981714072.9750317283.9174557 3.4 19991995013.1150917664.0184591 3.4 2000nanananananananana 2001nanananananananana 2002nanananananananana Slide :12 What happened after liberalization ?

14. Slide :13 Why has this happened ?? Characteristics of rice production systems SystemYieldFarm sizeWater Cropping regimeinte. High potential4.2>1IR>120 Low potential3.0<1RF<100

15. Slide :14 Cost of production (Rs/ha) under different production Systems TotalTotal Gross Unit Unit costcost returnCostCost Incl.Excl. Incl.Excl.Rs/kg High Polonnaruwa4293428073652277.945.19 Anuradhapura4117429669600088.626.21 Low Kalutara34713224273505913.138.48 Matara**2654118945307328.736.23 ** 98 Yala COC/2001 Yala -SEPC/DOA

16. Slide :15 Cost of production (Rs/ha)under different production Systems TotalTotal Gross Unit Unit costcost returnCostCost Incl.Excl. Per/ acIncl.Excl. Rs/kg High Polonnaruwa4307227354633228.625.48 Anuradhapura4273629239687068.125.56 Low Kalutara37826234154095214.198.78 Matara**2926421021425238.836.34 **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 YalaMaha Anuradhapura0.951.08 Polonnaruwe0.971.02 Low Potential areas Kalutara1.60 (0.99)1.89 (1.10) Martara1.20 (0.86)1.31 (0.90)

18. 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

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 :19Final 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. §