Abstract
This study provides a quantitative assessment of the likely economy-wide impacts of tariff cuts and productivity improvements in agriculture for Sri Lanka. A static, multisector, Computable General Equilibrium (CGE) model, using the Supply and Use Table (SUT) of 2010, was employed highlighting specified agricultural sub-sectors and their interactions with other production sectors in the economy. Constructing a CGE model entailed the development of a Social Accounting Matrix (SAM) to represent the Sri Lankan economy. The SUT, household income and expenditure survey, economic stat of the Department of Census and Statistics, and economic data library of the Central Bank of Sri Lanka were used to develop the SAM. The SAM was used to calibrate the CGE model. Coding and operationalization of the CGE model were executed using the PATH solver of the General Algebraic Modeling System software using a modified version of the standard CGE model. Production was specified as a Constant Elasticity of Substitution (CES) production function whereas consumption was specified as a Linear Expenditure System (LES). Using the HIES data, the LES was estimated using a seemingly unrelated regression model. The CGE model included a representative household, two factors of production <em>i.e.</em>, labor and capital, commodities, activities, the government, savings, and investment and trade. Productivity improvements in the selected agricultural subsectors lead to a significant positive response in the paddy, vegetables, coconut growing, and livestock sectors. However, productivity improvements in the specified agricultural sectors lead to a decline in demand for labor because of improved primary factor productivity and the decline of market prices. A cut in prevailing tariffs in agricultural industries shows negative impacts on households as a whole.
Highlights
The agricultural sector continues to play a very important role in the Sri Lankan economy even though its relative position in the economy has been declining with the growth of other sectors, revealing a structural change throughout economic development
From the data obtained from a variety of official sources, the Social Accounting Matrix (SAM) was developed for Sri Lanka
Productivity improvements in the selected agricultural sub-sectors lead to a significant positive response in the paddy, vegetables, coconut growing, and livestock sectors as well as in the other agricultural sectors, industry sector, and service sector
Summary
The agricultural sector continues to play a very important role in the Sri Lankan economy even though its relative position in the economy has been declining with the growth of other sectors, revealing a structural change throughout economic development. The agriculture sector accounts for 25.5 percent of total employment and 21.66 percent of total exports in 2018 and contributes nearly 25 percent of the growth of export earnings. The role of the agriculture sector remains important in food security, poverty reduction, employment generation, provision of raw materials to non-agricultural sectors, foreign exchange earnings, and overall sustainable development. The low agricultural share in Gross Domestic Product (GDP) of around 7 percent presently is notable implying the low-income received by farmers. 80 percent of the population resides in rural areas where the majority of them still depend directly or indirectly on agriculture for their livelihoods. Development in agriculture has been considered by successive governments as a means for poverty alleviation
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