ISSN: 1391 - 0531
Sunday June 08, 2008
Vol. 42 - No 54
Financial Times  

Get markets and prices right to deal with food shortages-economists

By Dilshani Samaraweera

Sri Lanka needs to get its markets and prices right to increase domestic production and reduce impacts of global food price increases, economists say. Putting money into agricultural input subsidies, like the fertiliser subsidy, and attempting to achieve food self sufficiency is seen as impractical and unprofitable.

Instead, the recommendation is to reduce government interference in pricing and to allow market forces to operate. The supply shortage has already pushed up prices of agricultural goods in local and international markets. The higher prices for agricultural goods, say the experts, would automatically motivate farmers and businesses to invest in agriculture.

“Farmers will respond to the higher prices. So the need is to minimise price and trade distortion,” said the country director of the Asian Development Bank (ADB), Richard Vokes, last week. Mr Vokes was speaking at a South Asian, regional conference in Colombo, organised by the Institute of Policy Studies and the South Asia Centre for Policy Studies.

As food prices are expected to continue upwards over the medium term, governments also need to evaluate domestic food security policies. However, attempting food self sufficiency is not seen as the best option for Sri Lanka. Picture shows farmers at work.

‘No’ to subsidies
Public funds spent on input subsidies should be re-directed into other areas that would help increase agricultural outputs.
“There is a need to reduce subsidies and to re-allocate funds to more productive areas, such as research and development, market information systems, agricultural extension service and road building. Farmers also need access to finance, whether to buy fertilizer or a tractor. Therefore, rural finance systems must be improved to facilitate financing for farmers,” said Mr Vokes. Giving more agricultural input subsidies will not help farmers, say economists.

“Subsidies are not good because they distort production and prices. It is also a high expense on the government and the benefits go to middlemen, not to poor farmers. With the increase in prices for agricultural products we have a chance to reduce subsidies,” said Professor of Economics at Sri Jayawardhanapura University, Upali Wickremasinghe.

Efficiency, not sufficiency
As food prices are expected to continue upwards over the medium term, governments also need to evaluate domestic food security policies. However, attempting food self sufficiency is not seen as the best option for Sri Lanka.

“By food security do we mean self sufficiency? No, because the cost would be too high,” said Mr Vokes. Local economists agree with this view.

“We (Sri Lanka) cannot be self sufficient in any food, including rice. A country like India can perhaps become self sufficient because they have very large land areas, with regional differences. But we cannot be food self sufficient because of limitations on land, water and capital. It would not be cost effective for us to become food self sufficient. But we can become ‘self reliant’, which is a different thing,” said Prof. Wickremasinghe.

“You can argue the case for self sufficiency, but in a country like Sri Lanka food self sufficiency can only be achieved through increased productivity of the agricultural sector, not by allocating more land area for it,” said the head of the Institute of Policy Studies, Saman Kelegama.

Keeping farmer families in agriculture for a country to become self sufficient, would also stop people from climbing out of poverty, because they will not be able to move into better paying jobs. “The rate of return on products like paddy and wheat is relatively low. So if you force people to remain in paddy cultivation, it would hold them down at low income levels,” said Mr Vokes.
As a net food importer Sri Lanka will have to pay more for imported foods as world market prices increase. However, the good news is, Sri Lanka is not expected to face a drastic shortage of the national staple, rice. “As a net food importer we are on the losing side because we will have to pay higher prices to import our food items. But we need not worry too much about availability of rice because we are almost at a level of self sufficiency in rice production. If at all, problems could come from people hoarding rice,” said Prof. Wickremasinghe.

Government’s role

Meanwhile the government is advised to get involved in ‘mitigation measures’ to protect the most vulnerable from the rising food prices. “You could have targeted social protection programmes, including self targeting food for work programmes - but there are difficulties in targeting. You could also look at reduction of tariffs on imports and reduction of taxes on staple foods,” said Mr Vokes.

But to make the best of a bad situation, the government is advised to provide a stable operating environment for farmers and businesses to invest in the local agricultural sector. This would allow both consumers and rural farming families to benefit.

“We need to take a good look at our food and agriculture policies and provide a stable environment for people to invest in agriculture. Otherwise, if the operating environment is unpredictable, investments that could come into agriculture may go somewhere else,” said Prof. Wickremasinghe.

The experts are calling for a second green revolution in South Asian countries but this time with climate change impacts factored in.
“The first green revolution added to energy demands. This time we need to look at the kinds of technologies that minimises impacts. There is a need to encourage farmers to invest in improved technologies to increase productivity. There is also a need to invest in post-harvest technologies and to bring unused land under cultivation. Countries may also need to re-visit issues such as biotechnology and GM foods,” said Mr Vokes.


Trade experts advocate ‘pro-poor trade policies’ to reduce poverty
Signing trade agreements will do little good unless linked up to broader national strategies with a pro-poor focus, trade experts say.
“Just reducing tariffs and liberalising trade is not good enough. Such action will leave us nowhere in terms of poverty reduction. Policies should be formulated and implemented in the context of a national development strategy andnot in isolation,” said Ravi Ratnayake, Director of the Poverty and Development Division of the UNESCAP. He was speaking at an international conference organised last week by the Institute of Policy Studies (IPS) and the Friedrich Ebert Stiftung on ‘The Trade and Poverty Nexus in South Asia.’

Economists are now talking of ‘pro-poor’ trade policies and strategies instead of simply signing trade agreements. Countries are also advised to go into trade agreements armed with their own individual trade agendas, based on specific country requirements.
“I believe countries need to have their own trade policy agenda which I call a ‘strategic national trade policy.’ This should take into account national priorities, WTO (World Trade Organisation) processes, RTA (Regional Trade Agreements), BTAs (Bilateral Trade Agreements) and other trade development needs,” said Dr Ratnayake.

Pro-poor trade
Although Sri Lanka was one of the first countries in the South Asian region to liberalise trade, its usefulness is being questioned. Critics point out that although economic growth has increased, the country has not seen significant poverty reduction and instead, inequality has increased.

But the trade experts say this is still no reason to tear up those trade agreements.
They point out that for opportunities and benefits of trade liberalisation to reach more people, particularly the poor, policy adjustments are needed in other areas as well.

“Economists, such as Alan Winters and others, have shown that for trade liberalisation to play a role in poverty alleviation, there should be corresponding adjustment enhancing complementary policies, such as labour market flexibility, human capital development, effective, business friendly institutions, good governance, functioning credit markets and infrastructure development,” said Saman Kelegama, Head of the IPS.

Even import and export policies must be pro-poor, encouraging income and employment generation for the poor.
This also means mobilising resources into areas where the poor work, like into the agriculture sector, and into factors of production owned by poor people, like labour. Resources should also be channelled into areas where the majority poor live, like rural parts of the country and into what they consume, like food.

To convert trade agreements into export incomes, policy makers are advised to build supply side capacity. Getting access into foreign markets without the capacity to supply these markets, say the experts, is a pointless exercise.

“Why do we need market access if we can’t produce what the market wants?, We need to prepare the business sector to capture benefits of trade agreements ” said Dr Ratnayake. To make it easier for people to use trade agreements governments need to work on ‘trade facilitation’ measures. “Reducing trade transaction costs should be a priority to expand trade opportunities. But what I observe in many countries in the region, is that policy makers are pre-occupied with trade liberalisation, without giving due attention to supply side capacity development and trade facilitation,” he said. The experts are also talking of safety nets, instead of simply opening up markets and leaving vulnerable populations to sink or swim.

“As the poor are likely to face hardships more than the rich, due to import liberalisation, in particular in the short run, governments will have to put safety nets in place before embarking upon trade reforms,” he added.

Food first
With food prices set to increase further over the coming years, free trade is no longer seen as a solution to put food on the table.
“Rice prices shot up by 122% in 2008 alone. High food prices have led to high inflation and social unrest in some countries. The poor were the hardest hit from food-price inflation simply because the cost of food takes up almost all of their incomes,” said Dr Ratnayake.
“Countries need to re-think food security urgently. No longer will countries be able to depend on free trade for food requirements,” he said.

Instead, countries are told to return to domestic agriculture and to use trade liberalisation to increase gains - by facilitating technology transfers and by enabling easy access to agricultural inputs.

“We need to bring back marketing boards and extension services - but not the old inefficient models. We need to think in a new way and we need to learn from the old mistakes. We need research and development, skills development and we need to rebuild irrigation structures,” said Dr Ratnayake. But again, any trade reforms in agriculture need to incorporate interests of majority small farmers as well as other producers.


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