Trade liberalization of Sri Lankan agriculture and its impact on crop diversification program

"A crop diversification program was initiated in Sri Lanka in early 1970s to overcome the seasonal unemployment, low level of farm/off-farm income and idling of resources. This program had been supported with various price and non-price incentives. Some crops introduced under this program, which are considered the high performance crops (chili, onion, potato) thrived well and positively contributed to the objectives of the program. In 1996, the Sri Lankan government started an extensive program of agricultural trade liberalization under the Uruguay Round Trade Agreement. This paper contains an assessment of the impact of this policy change on high performance crops in terms of protection levels and welfare. It is well known that policies related to non-agricultural sector could incur indirect negative effect on the agricultural sector, and ongoing liberalization policies of these sectors are expected to provide an indirect incentive to the agriculture sector. Two indicators of protection (nominal and real) are developed to compare the changes in protection level before (quota) and after (tariff) the policy change. A static partial equilibrium model is used to evaluate and compare the welfare changes under quota and tariff policies. The analysis is further extended to simulate the production and welfare change without indirect effects. After the policy change, nominal rate of protection has been reduced by 30% to 50% and domestic production has been reduced by 16% to 53%. The reduction in production levels indicates the inefficiency of domestic production. Reduction in producer welfare is substantial and it is more than 50 % in each case. The potential price incentive that would be generated from further liberalization in the non-agricultural sector is not sufficient to increase the domestic production substantially. Therefore, enhancement of the elasticity of supply response and seeking productivity gains in production are recommended for the sustainability of the crop diversification program."