The impact of Sri Lanka’s trade and price policies on the structure of agriculture incentives
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By examining trade and price policies in relation to agriculture implemented by the Sri Lankan government during 2009-2011, this paper contributes to a better understanding of the implications and trade-offs of policy-induced changes to the incentives facing agriculture.
The results show that under the policies implemented producers of farm products that compete with imports gain at the expense of consumers, while export crop producers and taxpayers loose. The effective rate of protection, representing the trade regime’s overall income effect per unit of farm output, is positive and high for import-competing products such as rice, potatoes, and milk, meaning that Sri Lankan producers of those commodities receive artificially higher incomes from them. The trade regime’s overall income effect for exportable products is negative, implying that producers’ incomes are lower than they would be without the policy. For some exportable products, such as tea and rubber, the potentially lower income is offset by a generous fertilizer subsidy.
The findings also show that elevated prices can negatively affect the real incomes of lower- and middle-income households, especially in urban areas. Households that spend about 50 per cent of their incomes on food and pay 40 per cent or more on basic foods suffer a real income loss of 20 per cent. There is an implicit and large income transfer from consumers to the import-competing farm sector. In absolute terms, the removal of border protection results in smaller losses for the poor than for the non-poor, but relative to their income the poor suffer larger losses on the income side and larger gains on the consumption side. With respect to farm size, households with larger land holdings suffer the largest absolute and relative income loss.
Updated: 1 September 2024/Responsible Officer: Crawford Engagement/Page Contact: CAP Web Team