Impact of Trade Liberalization on Small Farmers – Sri Lanka's Experience
N.F.C. Ranaweera
ABSTRACT
Sri Lanka has experienced a significant impact to its agriculture sector since being a signatory to the Agreement on Agriculture (AoA). With the disbanding of a large number of non-tariff barriers and fixing tariff at 35% on agricultural commodities there was a surge of imports of "sensitive" agricultural crops to the country. This impacted negatively on the extent, production and incomes of farmers cultivating, as well as on rural employment – in areas where these crops are cultivated.
INTRODUCTION
In Sri Lanka agriculture, which is a way of life for a majority of the population, has seen its relative importance in the economy decrease over time, except in years 2000 and 2001 as reflected in the contribution to GDP and employment in agriculture. (Table 1).
Table 1: Share of Agriculture in GDP and Employment in Sri Lanka
Year
1990
1993
1994
1995
1996
1997
1998
1999
2000
2001 (a)
% GDP
23.20
20.90
20.50
20.00
17.61
17.04
16.56
16.57
19.40
19.40
% Employment
44.70
43.70
34.60
36.80
37.42
36.23
39.31
36.29
36.00
32.40
Source: Central Bank of Sri Lanka – Annual Reports (a) Provisional
Nevertheless, the sector continues to play an important role in the overall economy, with
75 per cent of the country's population classified as rural, and mainly agricultural in nature, primarily through the economic linkages generated in the rural economy.
The agricultural sector in Sri Lanka is vulnerable both socially and economically due to factors such as low level of commercialization, low productivity, weak market orientation, marginal uneconomic operational landholdings due to fragmentation, lack of infrastructure facilities, heavy dependence on rainfall, susceptibility to natural calamities, and dependence of a large percentage of the population on agriculture for their livelihood. It is

2 with this background that Sri Lanka entered the Uruguay Round (UR) with an underdeveloped agricultural sector, insufficient and low efficiency of resources use, to raise productivity and profitability in line with their food needs and production potential.
Sri Lanka’s economy “opened up” gradually in 1977, through liberalized imports of a large number of non-agricultural commodities. Agriculture however, was “guarded” through the liberalization phase and was a protected sector with modest levels of imports to bridge domestic production shortfalls.
The historical thrust in agricultural production in the food crop sector was towards “self sufficiency,” based on two related objectives. First, increased food production was important for food security particularly in view of the fragile production environment that Sri
Lanka has. Second, this was necessary to minimize foreign exchange outlays on food imports, as foreign exchange earnings depended largely on the export of plantation crops, namely tea, rubber and coconut that faced fragile and unstable world markets.
Experience with Implementing the Agreement on Agriculture in Sri Lanka -
Under the Uruguay Round
The Agreement on Agriculture (AoA) brought national agricultural policies under multilateral rules and disciplines, with the long-term objective of establishing "a fair and market-oriented agricultural trading system through substantial progressive reductions in agricultural support and protection.
1 The AoA includes specific binding commitments to improve market access and to reduce production and trade-distorting domestic support and export subsidies. In concrete terms, it aims at restricting the use of agricultural policy tools that have negative or distorting effects on world trade and includes export subsidies and border protection mechanisms, as these have a direct impact on trade.
This paper discusses the impact of applying tariffs to Sri Lanka's food crop sector. It highlights the negative impact both from a production and employment point of view due to the removal of non-tariff barriers (NTBs), and the resulting significant increases in imports of food commodities.
Objective and hypotheses of the study:
The general objective of the study is to determine what effect the removal of NTBs has had on the performance of the rural farming community in terms of their cost of production and net income generated from the selected food crops.
1 Adapted from Impact of the Uruguay Round Agreements of Relevance to the Agricultural
Sector: Winners and Losers , FAO 2001

3
Sri Lanka's Food Crop Sector
Paddy - Sri Lanka’s main food crop is rice, and as the staple food in the diet of the population, special emphasis was given to it with significant investments on Research and
Development. Despite this, while there is seen a slight increase in area cropped, yields tend to have stagnated (Figure 1). In addition, the cost of production of paddy increased significantly in recent years affecting the profitability of production and incomes to farmers.
The trend lines for extent cultivation and yield are given in below:
Fig. 1 Trends in annual cultivated extent and annual average yield of
Rice in Sri Lanka
950
900
850
800
750
700
650
600
Extent '000ha
Average yield (MT/ha)
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
4.2
4
3.8
3.6
3.4
3.2
3
1995
1996
1997
1998
1999
2000
2001
Other field crops - The main Other Field Crops (OFC)s include chilies, onions, maize,
Soya bean, green gram and selected horticultural crops such as potatoes. Some of these have been the “sensitive” crops, both economically and politically, and often difficult policy decisions were required to safeguard the interest of local producers. (Table 2)
Table 2: Extents of Selected Other Field Crops (Ha)
Year Chilies B onion Potato Green gram
30,597
26,098
24,138
21,632
21,760
19,834
20,508
3,687
2,662
2,956
1,413
4,597
2,796
4,227
7,428
7,925
6,469
2,328
2,171
3,642
4,403
18,097
18,261
16,636
17,509
15,336
12,968
14,967
Source: Ministry of Agriculture and Livestock Development, Sri Lanka
Wheat and wheat flour – Although rice is the main staple food crop produced locally, wheat weighs very heavily in the local diet. Wheat is not locally produced but wholly imported, in large quantities (Table 3).

4
Table 3 - Imports of Wheat and Rice (‘000mt)
Year Rice Wheat
1993
1994
1995
1996
209
58
9
341
771
865
1057
913
1997
1998
306
168
789
880
1999 214 859
2000 15 841
Source: Department of Census and Statistics, Sri Lanka
A major side effect of the availability of relatively cheap wheat flour in the country has been a relative disincentive to rice cultivation. This has been evident on many occasions in the past, leading to revisions of policies in order to maintain some kind of price parity in favor of rice.
Agricultural Trade and Changes in the Rural Economy
Market access provisions of the AoA cover several areas: tariff and non-tariff barriers
(NTBs), tariff quotas, and special safeguards. On tariffs, one fundamental requirement is that non-tariff measures cannot be applied to regulate trade. Further, the protective effect of the NTBs has to be converted to their tariff equivalents, bind them for some base period, and then reduce the rates gradually over time.
On the first requirement, namely “tariff-only” border measures, Sri Lanka had already by
1994 gone through a process of autonomous economic liberalization, which removed most
NTBs to trade. As a result, it was not difficult to comply with this provision when the UR was implemented in 1995. At the UR, Sri Lanka decided to bind 2,128 tariff lines at 50% level. The government had also unilaterally, independent of WTO, committed itself to progressively reducing and harmonizing tariff towards a single rate over the medium term.
Agricultural exports fluctuated around US$600 million during 1985-92 and slumped to below US$400 million in 1994 and again surged up to exceed US$1 000 million in both
1997 and 1998. (Table 4)
Agricultural imports. Since food accounts for over 80% of the total agricultural imports, imports grew positively with slight fluctuations during 1990-94 with an annual average of
US$ 498 million. Imports increased from 1995 with an annual average of US$ 705 million during the period. As a result, the average annual imports during 1995-2001 period were
42% higher than the average annual imports during 1990-94 period.

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Food imports grew positively on an average from roughly US$ 436 in 1990 to more than
US$ 640 by 1998 with an unusual drop in 1994. The foreign exchange expended for food imports rose sharply in 1995 and continued until 2001 with an annual average of US$ 1014 million. As a result, the average value of the food import bill during 1995-2001, at US$
1014 million, was 136% higher than in 1990-94 period.
Table 4: Food and Agricultural Trade, 1985-2001 (in million US$)
Year Agricultural Exports Food Imports
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001 (a) 932
662
635
442
376
672
876
1060
1088
947
1005
Exports Imports Net exports Imports Exports Net imports
745 494
524
588
477
409
659
768
781
723
661
693
654
251
138
47
-35
-33
13
108
279
365
286
312
278
436
452
498
408
350
556
641
781
1255
1242
1388
1235
119
116
137
77
75
133
148
191
118
86
152
128
317
336
361
331
275
423
493
590
1137
1156
1236
1107
Source: Central Bank of Sri Lanka – Annual Report (a) Provisional
Sri Lanka is a small food exporter compared to the other exporting countries. Food exports were more or less stagnant during most of the 1990-2001 period, with unusual drops in 1993, 1994 and 1999.
Impact of elimination of NTB's on the Rural Farming Sector in Sri Lanka
The agricultural economy in Sri Lanka is fragile, and from a consumers point of view dependent on both imported and locally produced food. In this environment, accelerated or increased imports affect the farming community and result in mixed signals to producers.
In this regard the removal of NTBs and the increased imports of these commodities impacted negatively on farmers. The elimination of all NTB’s and fixing "applied tariffs" at
35 percent on all agricultural commodities contributed not only to the surge in imports but also impacted negatively on crop area and production. (Figure 2, 3 and 4) The sudden increase in imports of potatoes, chillies and onions since 1996 could be partly attributed to the reduction in cultivated area and production in 1997-1999 for potatoes and 1997 and
1998 for Big Onions and chillies. Partial corrective measures such as commodity specific import tariffs since 1999 have helped pick up the production in 2000 and 2001

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Figure 2: Production and Imports of Potatoes (1994 – 2001)
Figure 3:
140000
120000
100000
80000
60000
40000
20000
0
1994 1995 1996 1997 1998 1999 2000 2001
Production and Imports of Big Onion (1988 – 2001)
Production
Imports
150000
100000
50000 6
0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Production
Imports
Figure 4: Production and Imports of Chillies (1988 – 2001)
50000
40000
30000
20000
Production
Imports
10000
0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
While the number of crop seasons for which data is available is too few to establish a statistically sound relationship between the different variables, the trends are critical for Sri
Lankan agriculture and require close monitoring to take important policy decisions.
The changes in performance were analyzed using two sample independent test to compare the mean value of cost of production, gross income and net income per hectare per year separately for two time period of 1990 to 1996 (before elimination of NTB) and
1997-2001 (after elimination of NTB).
This involved testing whether there was a statistically significant difference in the mean values of the variable considered for the study mentioned above for two time periods.

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Table 5. Cost of Production and Profitability of Potato, Chilli and Big Onion (1996 constant price in SRL Rs)
Year Potatoes Chilli Big-Onion
Cost per ha per year
Gross income per ha per year
Net income per ha per year
Cost per ha per year
Gross income per ha per year
Net income per ha per year
Cost per ha per year
Gross income per ha per year
Net income per ha per year
1990 698737 1115978 417241 698737 1115978 417241 698737 1115978 417241
1991 629604 1902459 1272855 629604 1902459 1272855 629604 1902459 1272855
1992 888279 1594997 706718 888279 1594997 706718 888279 1594997 706718
1993 373281 693716 320435 373281 693716 320435 373281 693716 320435
1994 634409 1186795 552386 634409 1186795 552386 634409 1186795 552386
1995 384076 591712 207636 384076 591712 207636 384076 591712 207636
1996 566824 717116 150293 566824 717116 150293 566824 717116 150293
1997 577873 649860 71987 577873 649860 71987 577873 649860 71987
1998 484983 639999 155016 484983 639999 155016 484983 639999 155016
1999 482721 570600 87879 482721 570600
2000 481035 549297 68262 481035 549297
87879
68262
482721 570600
481035 549297
87879
68262
2001 260477 494710 234233 260477 494710 234233 260477 494710 234233
The two sample independent t test results for the mean difference of selected three variables viz. cost of production, gross income and net income for potato, chilli and big onion are given in following table.
Table 6. Independent two sample t test results
Variable Mean difference T-statistics Significant level
Potato
Cost of production 139040
Gross income
Net income
Chilli
533788
394748
1.618
2.368
2.238
0.137
0.039
0.049
Cost of production
Gross income
Net income
Big-onion
Cost of production
Gross income
Net income
-15475
5567
21043
-4200
9949
14150
-0.7
0.16
1.225
-0.38
0.26
0.35
0.5
0.87
0.24
0.71
0.79
0.73
Results indicate that mean difference before and after elimination of NTBs for cost of production in constant price is not significant at 5 % probability level for all three crops.

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However, a significant difference is indicated for mean difference of both gross and net income of potatoes between before and after elimination of NTBs. This implies that before elimination of NTBs, the mean gross and net income is significantly greater than that after elimination of NTBs. In contrast, there is no significant mean difference for both chilli and big onion between before and after elimination of NTBs.
Future Challenges
The challenges facing the agricultural sector are compounded with stagnating crop yields and rising cost of production. Moreover, a cumulative effect of lack of new technologies and inefficient resources management practices further contributed to stagnating yields, low productivity and decreasing farmer incomes.
Consequences for Food Security
On the whole, though difficult to quantify such effects with a great degree of accuracy, it can be concluded that increased imports of relatively cheaper food products, following the tariffication process has had an adverse impact on food production and consequently on food security in the short term.
The rice sector does not appear to be affected directly though being unclear due to the enormous amounts of wheat flour imported yearly and the shifting import and pricing policies to ensure food security of the urban and rural poor, while being vulnerable to lower prices of wheat flour.
There is clear evidence of negative effects on the extent cultivated and production of notably big onions, potatoes and chillies. Another negative effect is the risk of high dependence on imported food items. This became obvious in 1998 when India imposed a ban on onion exports, which raised local consumer prices of onions by over four times the normal price. This issue was further compounded with local production falling drastically as a result of low output price to previous year high imports and the extent cultivated bring reduced significantly, effecting negatively both the onion farmers and consumers.
The fluctuating protection scenarios experienced since 1996 has led to a certain degree of uncertainty among the producer-farmer community with attendant impacts on their incomes and livelihood. Furthermore, the availability of alternate crops to these farmers are few and uneconomic in the short term and the economic impacts of are these measures being quite significant.
Impact on Rural Employment
In general, trade specialization is said to generate positive effects on employment. This may be true in the export sector if market access improves as Sri Lanka specializes on

9 labour-intensive products. However, this is yet to be observed as no new markets for such crops have opened up in major developed countries.
On the other hand the "import liberalization" through tarrification has impacted negatively on employment, effecting directly over 10,000 farm families involved in the production and
50,000 workers indirectly associated in marketing and transport of these crops. This was observed in the two main potato growing districts of Badulla and Nuwara Eliya (Maharouf
1998). In addition a number of labourers working in the Chillie and Onion fields were affected, as well as those involved in the marketing process.
CONCLUSIONS
The liberalization of imports to Sri Lanka and the tarrification process impacted negatively on the food agricultural sector. This is now being reversed through the imposition of commodity specific taxes, which has helped partially reverse the process. One major lesson learned is that had lifting of NTB's and the tarrification process been not as abrupt as it was, the gradual impact of the decision would have been more acceptable.
REFERENCES
 Food and Agricultural Organization (2001) – "Impact of the Uruguay Round
Agreements of Relevance to the Agricultural Sector: Winners and Losers"
 Duncan Green, and Shishir Priyadarshi, South Center, (October 2001) "Proposal for a
"Development Box" in the WTO Agreement on Agriculture.
 Central Bank of Sri Lanka – Annual Reports
 Department of Census and Statistics of Sri Lanka – Annual Reports
 N.F.C. Ranaweera, (2000) - Experiences with the Implementation of the Uruguay
Round Agreement on Agriculture: - A Case Study of Sri Lanka.
 The Presidential Commission on Trade and Tariff (1998) Final Report
 A.R.M. Maharuf, (1998) Current Crisis in potato cultivation and its socio-economic implications, SEPC (unpublished paper)
N.F.C. Ranaweera, Ministry of Agriculture and Livestock, Battaramulla, Sri Lanka;
Telephone: 0094-1-872096; Fax: 0094-1-887437; minagr@slt.lk
; nimalr@hotmail.com
Paper submitted for oral presentation under Section 5 – Food Safety and Security