Trade Liberalisation and its Impact on the Rice Sector of Sri Lanka

This paper examines the impact of trade intervention policies. The trade protection for the rice sector was estimated using both nominal and effective protection rates. These show positive protection to producers at the expense of consumers. Current analysis indicates that one rupee of resources is used to produce 56 cents worth of rice valued in foreign exchange. As trade is increasingly liberalised, protection will be eventually eliminated and rice farmers will be forced to produce rice at competitive prices. Consequently, the extent under rice is expected to decrease by 12 per cent and total production decreases by 16 per cent. Meanwhile demand for rice will increase as a result of the reduction in retail price. Overall welfare impacts reveal that it is a gain to the nation. However, the producers face welfare losses. Therefore concerted and simultaneous efforts are imperative to improve productivity growth and reduce the unit cost of production in order to improve the competitiveness of the rice sector so that it can compete with the rest of the world.


Introduction
The agriculture sector continues to be the main contributor to the economy of Sri Lanka and its share in GDP was 21.7 per cent in 1999.Out of this, rice, which is the major staple food crop, contributed 3.5 per cent of the GDP (Central Bank of Sri Lanka, 1999).The annual paddy production in Sri Lanka has been around 2.5 million Mt for the last 13 years (Table 1).The peak production was registered in 1999 when the level of output reached 2.868 million Mt.Rice cultivation employs 1.8 million farmers, of whom, over 67.3 per cent cultivate less than the 0.8 hectares (Department of Census and Statistics, 1982).Annual per capita consumption of rice is around 100 kg/year and production is falling behind the national requirement, consequently resulting in increased __________________________ *,** Economist and Director respectively, Socio Economic and Planning Centre, Department of Agriculture, Peradeniya.imports.Currently the paddy sector is given government support and protection through trade policy and price intervention to achieve selfsufficiency.Rice is imported to meet shortfalls in domestic production.In the past, rice was imported under license with the objective of protecting the domestic rice producers.At present rice is imported with an ad valorem tariff of 35 per cent.
However, recent developments in the area of trade liberalisation, and international trade regimes as reflected in GATT, SAFTA and other regional trade agreements, promote free trade.Eventually all tariff and non-tariff barriers will be removed and the country will enter a free trade era by 2008 (Udegedara, 1996).Therefore, it is hypothesised that liberalisation of rice trade would result in increasing competitive pressures on local rice producers ( Thenuwara, 1998).Hence, it is necessary to evaluate the impact of free trade on the rice sector and identify alternative strategies that would help to improve the competitiveness of the rice sector.
Given this background, this paper examines the present level of protection to the rice sector and the possible impact of its removal.More specifically, the paper assesses: i) The level of protection ii) Competitiveness of the rice sector iii) Impact of liberalisation on domestic prices, and iv) The social welfare impacts of trade liberalisation.

Methodology
The following methods were employed to evaluate the objectives mentioned above.

Degree of Protection
The protective measures were calculated using the Nominal Protection Rate (NPR) and the Effective Protection Rate (EPR).These indicators give an idea of how domestic production is protected ( Corden, 1971).The formula for NPR and EPR are as follows: Pd = Producer Prices Pb = Import Price aij = Quantity of traded inputs pdj = input price (domestic) pbj = Input price (import)

Competitiveness
Competitiveness of the rice sector can be measured by the competitiveness coefficient.This shows the resource use efficiency of paddy production in Sri Lanka.The competitiveness coefficient (CC) was calculated from domestic resource cost (DRC) as follows ( Tshakok, 1990): CC = 1/DRC where Where, A ij , k+1 to n refer Domestic resources A ij 1 to k refer to traded inputs V j refer shadow price P i b border price of output P j b border price of traded Input

Domestic Prices and Production Impacts
Price changes from domestic price (P d ) to world price (P w ) results in reductions in area cultivated and yield leading to reduction in This analysis shows the level of distribution of benefits and cost among producers, consumers, and society as a whole.The conceptual model shown in figure1 helps to illustrate the effect of an import tariff.Suppose domestic demand is D, domestic supply is S and the intersection of these two is well above the world price P w .Assume a tariff is imposed.Its main effect is to raise the domestic market price P d , above the world market price P w .This causes welfare gains to producers and losses to consumers.Removal of protection will result in domestic price declining to P w .causing a reversal of welfare gains and losses equal in magnitude and opposite in sign.Welfare impacts of the removal of tariff are summarised as follows (Tweeten, 1989).

Data and Data Sources
Data for this estimation were obtained from various sources 1 .The cost of cultivation studies of the Department of Agriculture were used to derive input data.All inputs were classified as non-tradable or tradable.In some cases, production inputs comprise both tradable and non tradable components When such inputs are used in production, conversion factors were used to separate the tradable and non tradable components.(Eg.Fertiliser application comprises 0.82 tradable and 0.18 non-tradable input costs).C.I.F prices were collected from the Hector Kobbekaduwa Agrarian Research and Training Institute (HARTI).Shadow prices, which reflect the true economic value, were gathered from the National Planning Department.The average conversion factor (0.785) was used to convert the value of the domestic resources into economic or efficiency prices.The demand and supply elasticity coefficients (-0.515 and 0.25 respectively) were extracted from the past studies (Samaratunge, 1984) in order to estimate welfare gains and losses.

Protection of Rice Sector
It is important in the first instance to determine the degree of protection the Sri Lankan rice farmers are enjoying.On the output side, the Nominal Protection Rate (NPR) measures the trade protection on output, while the Effective Protection Rate (EPR) measures protection on both output and input (Table 2).The NPR for rice averages 42 per cent for the entire 1990 to 1998 period.This indicates that on average the barriers to rice imports held the domestic price at 42 per cent above the import price and this is a positive protection to producers at the expense of consumers who have to pay a higher domestic price.EPR for paddy was 32 per cent for the period 1990 to 1998.This shows that the producers are being protected and they receive returns 32 per cent greater than what they would have received under free market conditions.__________________________ 1.
The data are not presented here due to spaces limitations.Those who need the original data should contact the authors.

Competitiveness of Rice Sector
There is a fear that removal of trade barriers will offer the rest of the world greater market access to the domestic rice market.Under this situation, the volume of imports or exports will be determined by the price competitiveness of the rice producing countries.This is measured by the competitiveness coefficient, which indicates the efficiency of resource use in production.The competitiveness Coefficient (CC = 1/DRC) was estimated at the country average level and the value was 0.56 during the period 1990 to 1998.This coefficient indicates that one Rupee worth of resources are used to produce 56 cents worth of rice valued in foreign exchange and it indicates a comparative disadvantage.
However, this coefficient was estimated at the national aggregate level and it does not imply that rice production is unsuitable for Sri Lanka, as comparative advantage may exist in some regions with high production potentials.
A word of caution in interpreting the data is necessary.While earlier studies, notably the World Bank (1995), have arrived at similar conclusions, it has also been pointed out that the use of simple annual averages in computing NPC, EPC and DRC may bias the estimates and lead to incorrect policy decisions (Shilpi, 1996).However, to the extent that the Sri Lankan nonplantation agriculture sector receives subsidies on non-tradables, such as on irrigation, research and extension, the actual level of protection would be greater than indicated by NPR calculations.
Since Sri Lanka has a weak comparative advantage in producing rice, this will allow free imports and adversely affect the domestic rice producer.This concept also applies to export where Sri Lanka will not be able to capture the foreign markets.Therefore, this low competitiveness coefficient shows that Sri Lanka's rice sector is still characterised by high cost of production and low yields.
While searching for means to cultivate rice at a lesser cost, an increase in productivity is necessary to reduce unit cost of production.Hence research is needed to improve the efficiency of resource use in rice production and thereby improve the competitiveness.

Impact on Domestic Prices
Once the free trade policy is implemented, trade barriers will be eliminated and this will push domestic prices in rice producing countries to move closer to international prices (Chand, 1998).It is assumed here that the international price of rice will remain at current levels after liberalisation.Consequently, the domestic price of rice would come down and stabilise around the world price.The expected price of rice decreases as shown in table 3 and accordingly, anticipated price per kg of rice is around Rs. 17.84 whereas the price under trade distortion is Rs.24.00At the same time, a price increase in agricultural inputs such as fertiliser can be expected following liberalisation as they are currently subsidised by the government.However this component was assumed to be negligible due to the low budget share of urea, the type of fertiliser currently subsidised.

Impact on Rice Production and Consumption
Removal of tariff barriers is expected to decrease rice price.As a result the area cultivated, yield and production will be affected.The analysis (Table 4) shows that the reduction in area cultivated is 100128 ha, which is around 12 per cent of the total cultivated extent.Similarly, the changes in yield in response to the price changes is shown in table 5.However, it is assumed that technology used for the cultivation activities for rice crop would be constant and will remain unaffected by the price changes following the removal of trade distortions.In response to the price changes, supply change may occur due to changes in either area and With the decrease in supply and the concurrent increase in demand, a sudden increase in the import bill can be expected.This increase in the import bill would have an adverse effect on the trade balance.
Consumers will enjoy positive gains from the reduction in retail prices.The total rice consumption will increase due to lower prices and definitely improve consumer welfare.However, as a result of decreased output and output price, the producer revenue will decrease.Therefore it is imperative that the government actively gets involved in securing the opportunities opened by liberalisation to the rural population in order to iron out the adverse effects in employment.Promoting the adoption of technology, improvement of national and international technical and commercial information flow, developing efficient land and capital markets, and the development of technologies with higher productive potentials and comparative advantage may be the major activities that demand the government's attention along with trade liberalisation.
With appropriate foreign or local technology in production as well as in processing, the farmers can be provided better income and an atmosphere can be created for more employment opportunities in this sector.However, market intelligence and information, particularly in relation to foreign markets, should be made available.Moreover, reduced local production will result in unemployment in the rural sector and this is one area where the government has to intensify its activities.
Since the majority of farmers in the rice sector are small farmers, they do not have an opportunity to achieve economies of scale, which can be used as an alternative strategy to avoid the negative impact of the trade liberalisation on the producers.This can be achieved by integrating small farmers into systems.The organisational system can be developed as farmers' cooperatives, farmer companies or contract farming.Further, it is time to review the present tenurial legislation in order to find an alternative solution to fragmentation of agricultural land.
classical welfare analysis, which is used to measure the cost of trade policy interventions and impact of trade liberalisation.
Figure 1: Effect of an import tariff.D S Price

Table 3 :
Anticipated output price due to trade liberalisation