Rice Market Liberalization and Household Welfare in Sri Lanka: A General Equilibrium Analysis

Abstract

Current trade policy pursued by the Sri Lankan government on rice can best be described as ad-hoc as it is characterized by protecting farmers during glut seasons and consumers during deficit seasons. This study examines the economy-wide impacts of various policy packages on rice and related markets, which consist of liberal as well as protectionist elements. A general equilibrium model developed for the Sri Lankan economy using the input-output table for 2000 was used for the analysis. The model consists of 5 sectors, 2 factors of production and households in 8 representative provinces. The key results of the analysis indicate that removal of the import tariff on rice along with removals of the import tariff on fertilizer and/or subsidy payments on other agricultural sectors could improve economic efficiency and household welfare across provinces. Contrary to the general belief that protectionism is pro-poor, an import ban on rice reduces household income and welfare even in agricultural provinces, including Uva and Sabaragamuwa. Further analysis indicates that broad-brush approaches may not yield expected outcomes, as the policy packages generate second best outcomes due to existence of other distortions in the economy. The key channel of transmission of trade shock to households appears to be through government transfer payments that are influenced by changes in government expenditures on subsidy payments.