by Sanath Jayanetti and Ganga Tilakaratna
Abstract
There is a consensus that rapid and sustainable economic growth is a precondition for poverty alleviation and a liberal trade regime is a precondition for sustainable economic growth. However, trade liberalization affects consumers and producers differently. While tariff reduction on imports may bring welfare gains to consumers, there would be many producers who are adversely affected by such trade policy reforms. Hence, our attempt in this policy brief is to look at the impact of trade liberalization on poverty and welfare of households, with a special focus on the rice (and potato) sector of Sri Lanka. Results from both an analytical model (for the rice sector) and a descriptive approach (rice and potato sectors) are discussed. The brief also analyzes various trade policy reforms taken place during the last decade and the extent and nature of poverty in Sri Lanka.
The results of the analytical model showed an overall welfare improvement to the country from tariff reduction on rice. Net welfare effect for all the income deciles is positive. However, the extent of gain for low-income deciles is higher compared to richer deciles. District level analysis showed welfare gains for all the districts except for two large-scale rice producing areas. Moreover, estate sector households had the highest positive welfare effect while the urban sector had the lowest (positive) effect. The rural sector showed a mixed effect depending on whether the households in the area/district, in general, are net producers or net consumers of rice. In the case of the descriptive approach it is shown that ad-hoc duty changes, in both rice and potato sectors, during the past decade have hurt both the consumers and producers.
This policy brief stresses the need to eliminate ad hoc trade policies and move towards a low uniform ad valorem tariff rate for rice and potato. Moreover, it highlights the importance of having both the compensatory and the complimentary policies to minimize the adverse effects of trade liberalization, particularly the effects on the poor.
