By Hema Senanayake –
On Monday of this week, President Maithripala Sirisena met with top level agriculturists and agricultural administrators of the country. It is a good sign that the president himself took a greater interest to emphasize the essential need of establishing a vibrant and viable non-plantation agricultural sector. I like it but there is a serious problem or an issue which has not been paid due attention. What is it?
Even if we assume that all technical issues in regard to productivity have been resolved, this important sector of the economy cannot thrive or cannot be made reasonably efficient and viable unless we make an important macroeconomic adjustment in regard to this sector. In fact the problem has reasonably been identified. But the required macroeconomic adjustment has not accurately been identified. It is about the prices or the marketing.
When farmers are about to harvest their crops, the crop could be big onion, potato, chilies or even something else, the prices in the market plunge. Farmers cannot sell their produce at a reasonable price. This has been a recurrent phenomenon year after year in recent times. This is a problem that needs to be resolved. How do we resolve this?
According to Dr. Harsha De Silva, other than the work of racketeer importers, there is a significant information asymmetry in this sector. This means that farmers are not getting true market information in regard to the demand. So what the farmers do is that all farmers begins to cultivate crops which had good prices in the previous season and as a result in the current season there would be more produce than the market demand. According to him, therefore the problem is not in the free market mechanism but in the information asymmetry. So, he promised during a TV program that the issue of information asymmetry would be tackled and resolved after the next government is established after the coming parliamentary election. Unfortunately, I am beginning to feel that this is a hypothetical solution for a hypothetical issue. The practical and true problem is a different one. Let me submit it.
The country has a goal in regard to agricultural produce. That goal is that we need to ensure self-sufficiency in producing certain agricultural products. For example we need to be self-sufficient in rice production or in chili production or in big onion production etc. If we want to be self-sufficient in producing crops identified by agricultural technocrats, then we need to produce them in abundance. You may please read the next point carefully. But abundance is something that free-market mechanism cannot ensure. I am not sure whether Dr. Harsha De Silva will agree on this point.
However, this does not mean that we need to ignore the market mechanism in regard to these crops. If we destroy or ignore the market mechanism again we will not achieve the goal of self-sufficiency while ensuring efficiency of the sector. Hence, let me explain my point through an example.
Let us assume that we want to produce big onion. Also, let us assume that the country’s big-onion demand is about 10,000 metric tons per season or per annum. As far as I know this is a crop that cannot be cultivated without imported seeds. This means that there is a technical difficulty for Sri Lankan onion growers in producing their own seeds to cultivate big-onion. Therefore big-onion seeds have to be imported. Therefore, the production of big-onion can be regulated if we can regulate the quantum of imported seeds or land area that cultivates onions. There are known administrative measures to regulate both. If this is done effectively, there will be no overproduction which would lead to reduce prices offered to farmers. In this case we do not need any adjustment to the market mechanism. But abundance comes with a little bit surplus production. This is where we need a macroeconomic adjustment.
If onion farmers had produced 12,000 metric tons, then there would be a surplus of 2,000 metric tons. If this surplus comes into the market the price would plunge. Hence the surplus needs to be prevented from coming into the market. Let us assume that the government absorbed the surplus and as a result market prices would prevail and farmers could sell their produce reasonably well. The purchase of surplus has nothing to do with the government buying big-onion under guaranteed price system. The purpose or the objective of purchasing the surplus is to maintain the viable market prices – and this is how that we can ensure self-sufficiency (abundance) in perishable food crops. The best example I found in regard to this kind of macroeconomic adjustment is from the United States.
When the United States wanted to be self-sufficient in wheat production, the U.S. government did the same thing. The government bought the surplus. The government stored the surpluses or found special uses for them. For example, surpluses generated in the United States have been shipped to developing countries as grants-in-aid. A few decades ago, under such a program Sri Lanka too got wheat flour from the U.S. under PL-480 agreement. And also it was rumored that they sometimes dumped the bought surplus in the sea.
After the objective of self-sufficiency was achieved in wheat production, the U.S. government made a variation on this program to reduce acreage put under wheat cultivation in order to limit the size of the surpluses. After 1973, the U.S. government stopped buying the surpluses. But still the U.S. agricultural sector is supported with various kind of macroeconomic adjustments. My point is that the purchase of surplus by the government is required in order to ensure abundance in any perishable food crop. Because, abundance is something that cannot be ensured under free-market mechanism even though the hypothetical question of information asymmetry is completely resolved.
Why I call the purchase of surplus by the government as a macroeconomic adjustment. It is not to complicate things but it is about defining the concept accurately and separating it from microeconomic adjustments which usually take the form of subsidies; but subsidies cannot resolve the question of ensuring abundance while stabilizing prices.
Now, you may apply this theory to all other crops on which we need to be self-sufficient. The macroeconomic adjustment that might be need for different crops can be vary, but such measures are required if we talk about self-sufficiency. Then only Sri Lanka will have a dynamic non-plantation agricultural sector.
Perhaps, certain free trade experts might advise the President that this kind of programs would violate WTO (World Trade Organization) rules, but that notion is wrong.