Web of Life

The agricultural sector provides employment for approximately 2.4 million people, about 35 percent of the country’s total workforce, according to the 2003 Central Bank Annual Report. At the same time, agriculture contributes only 14.7 percent of the total value of goods and services produced by the country (GDP). To look at this in another way, the average productivity, measured by the value added generated for the economy by the 2.4 million people in agriculture amounts to Rs 10,131 per month. The average productivity of the 4.5 million non-agricultural workers engaged in the rest of the economy generates Rs 23,237 in value added per month – 129 percent higher.

What does this mean in practical terms? Quite simply, if the productivity in a sector is low, the people working in that sector will earn low incomes. According to the Department of Census and Statistics, in 2002 the average daily earnings in agriculture were Rs. 128.72 while in manufacturing they were Rs. 273.27 and construction Rs. 259.63. Non-agricultural incomes were 112 percent higher than agricultural incomes. It is worth noting that the relative difference between non-agricultural to agricultural earnings doubled after 1992, when the differential was only 56 percent.

One of the major causes of the low productivity and declining relative incomes in agriculture has been the significant increases in land fragmentation. In 1982 there were 1.8 million parcels of agricultural land less than 20 acres. By 2002 this number had increased to 3.3 million. According to the Department of Census and Statistics, about 45 percent of these small parcels produce mainly for home consumption while the remaining 55 percent produce for the market. If this trend towards greater fragmentation continues and land parcel sizes continue to decline, we can expect to see less and less agricultural produce coming into the markets, putting greater upward pressure on local prices and greater reliance on imports.

With such a large share of the population engaged in agriculture, a sector characterized by low productivity and low earnings, any effective strategy to reduce poverty will have to address the fundamental problems facing the sector.

Everyone agrees that solving the problems facing agriculture should be one of the country’s highest priorities. The politicians from all parties agree. And while many of them may know little about the economics of agriculture, they can all count. The large numbers of potential voters engaged in agriculture, struggling to make ends meet, provides an irresistible attraction for politicians who make promises offering quick fixes for these problems.

But rarely is there any coherent vision of what structural changes will be required to increase productivity and raise incomes near the levels earned in the rest of the economy. The UPFA government’s vision document begins it section on agriculture by stating "The key economic objective of the Government is to assist our agriculture sector to attain self-sufficiency in food production and food security." They go on to say that existing smallholder activities "provide an ideal ownership structure for growth with equity." This document then goes on to propose the sorts of quick fix solutions favoured by so many politicians.

Attaining self-sufficiency and food security mean little and would do nothing about addressing the fundamental problems facing farmers. Unfortunately no one in government offers any reasonable economic argument why self-sufficiency in food is a desirable goal for the country. It amounts to little more than a political slogan. There is little doubt that if all of the country’s resources were devoted primarily to food production that self-sufficiency could be reached. But at what cost?

If we could somehow take the 4.5 million workers in the non-agricultural sector and move them all into agriculture, at the same level of productivity currently achieved in the sector, total GDP would drop by nearly 46 percent. Per capita GDP would fall from $947 to $513 and Sri Lanka could move backwards into the ranks of least developed countries. Of course in reality, given the limited amounts of available fertile land, it would be impossible to maintain even the current low levels of agricultural productivity if more people were shifted into agriculture. The comparison may sound far fetched, but this was precisely the approach avidly pursued by Pol Pot and the Khmer Rouges in Cambodia in 1975-79, with disastrous results.

The Central Bank’s 2003 Annual Report offers a more sensible vision: "The policy on agriculture in any economy should aim at developing a viable and sustainable agricultural sector capable of competing successfully with competitor countries, while sustaining the farmers engaged in agriculture." This correctly focuses on the need to improve farmers’ economic conditions and the critical importance of increasing productivity.

Productivity in any activity depends upon employing the available resources in the most efficient ways possible, producing the greatest value of outputs at the least cost. The same is true for agriculture. Unfortunately, there are a number of factors that stop this from happening, leaving resources to be used in highly unproductive ways. Several of these can be summarized very briefly here.

There are a number of reasons why farmers are restricted in their ability to produce the highest value of agricultural produce possible. These are typically driven by political motivations that ignore economic realities. This can be seen in the UPFA government’s policy, as stated by the Minister of Agriculture several months ago: "When we took over the Ministry of Agriculture there were 870,000 hectares of land under paddy cultivation. As long as we are in this ministry we will not let this extent of land under paddy be reduced in any way. Next we will be taking all possible steps to bring in new land and expand the area under paddy cultivation." (Business Today, June 2004) There seems to no questioning whether this makes any economic sense at all. This approach is enforced in part by laws and regulations that make it illegal to shift from paddy to other crops that might be more profitable. There has also been a strong institutional bias in government promoting paddy production including government paddy purchases and subsidies of the types of fertilizer most commonly used in paddy production.

There are other impediments that limit farmers’ ability to increase the value of the crops they produce. One is the failure to deliver effective extension services to farmers. This makes it more difficult for farmers to introduce new crops or to adopt more productive planting techniques. While paddy may well be the most profitable crop in some areas of the country, it is equally clear that there are areas where more profitable crops could be grown.

Land and labour are the two most important inputs used in agricultural production. Here too politically driven restrictions work to keep sectoral productivity low. The Department of Census and Statistics finding of a significant increase in the fragmentation of agricultural land holdings means that more and more people are trying to make a living farming ever smaller plots. This is partly a result of the lack of clear land titles for an estimated 1.2 million farmers – a substantial share of the total of 2.4 million people employed in agriculture. While it was agreed during the previous government to grant clear titles to these farmers, political conflict prevented getting this done.

Another major reason why rural land is often not employed productively is the poor state of infrastructure, particularly roads. If farmers in remote areas cannot get their produce to the main population sectors profitably, it greatly restricts the value of their labours and reduces their options.

While it may not be a politically popular position, it should be recognised that the agricultural sector cannot provide adequate incomes to as many as 2.4 million people. As the economies in virtually all countries grow and develop, there is a substantial reduction in the number of people in agriculture. Farm sizes increase and more productive techniques are adopted. But for this transition to take place there has to be adequate employment opportunities elsewhere. Sooner or later this process will take place in Sri Lanka as well, if the country is to succeed economically.

There is overwhelming evidence from many countries that shows that agriculture performs best when farmers have the support and freedom to make well founded production decisions. It is inevitably a mistake for the government to impose its judgments on farmers concerning production decisions. However, the government does have several important roles to play. Perhaps their most critical responsibility in this regard is to invest heavily and substantially to improve the country’s road system in rural areas. The government should also eliminate many of its restrictive laws and regulations that distort agricultural production decisions. Finally, there is also an important role to provide resources to assist farmers in gaining access to extension services and improved seed varieties.