A Policy Rule for the Liberalization of Agriculture in Sri Lanka

Economic liberalization enhances the productivity and efficiency of productive resources of a country to the extent that the economy has room to grow. In high growth and developed countries the contribution of agriculture to the per capita income has decreased with increasing per capita income in recent decades. In Sri Lanka, the productivity in the agriculture sector has been negative, while industry and services sectors have contributed positively. This paper argues that liberalization of agriculture by way of lower tariff barriers may not result in productive gains in the sector, but that may incur serious losses arising from political economy dimensions. The paper also shows that the continuing phenomenon of falling global commodity prices may result in endogenous generation of price competition in agriculture sector, that may replace any exogenous tariff reductions intended for ensuring price competition, provided non-tariff barriers are removed. Liberalization of industry and services sectors may also bring in pressure on agriculture sector by way of wage increases which force agriculture sector to become competitive. Thus, an optimal policy for the liberalization of agriculture is to remove all non-tariff barriers while maintaining tariff and para-tariff barriers at fixed levels to allow the evolution of endogenous price competition which may eliminate costs arising from political economy dimensions. (JEL F13, 013)

DOI: http://dx.doi.org/10.4038/ss.v33i1.1244

Staff Studies Volume 33 Numbers 1& 2 2003 p.1-13