Invisible Hand, Visible Hand & Bloody Hand: The Political Economy Of Rice Market In Sri Lanka

By N. S. Cooray –JULY 5, 2020

Prof. N. S. Cooray

Sri Lanka was self-sufficient in rice and was an exporter for a long time. The country is also known to have had more than a thousand traditional rice varieties with excellent health benefits. These trends got reversed, and she became a rice importer, particularly after British colonization. Since independence, successive governments have implemented various subsidy and guaranteed price schemes, price controls, and various other measures to achieve self-sufficiency in rice, improve farmers’ livelihood and provide staple food for millions of rice consumers at a reasonable price. Rice market is heavily politicised to the extent that almost all political parties of the country have promised in their election manifestos various subsidy policies for paddy farmers and rice consumers intending to get their votes. All this information is well documented and is not new. 

Recently, however, many articles have reappeared in different media because the Government decided to impose price control on rice. To help reduce the cost of living of consumers, the Consumer Affairs Authority introduced maximum retail prices for several rice verities effective from 10th April 2020. In responding to this initiative, large scale rice traders discontinued releasing stocks leading to colossal scarcity of the rice. To deal with the artificially created shortage, Chairman, Consumer Affairs Authority, and 50 officials undertook an inspection tour in Polonnaruwa, the largest cultivation area and the most prominent wholesale rice/paddy centre of the country.  After failing the CAA’s attempts, the Government later allowed the traders to sell rice at higher prices- revising the earlier enforced price controls. These incidences show the involvement of visible and bloody hand in the market. This article aims to analyse rice market situation of the country and provide a possible long-term solution to the problems that many of the concerned citizens of the country are contemplating.

The rice and paddy market in Sri Lanka

One of the ten economic principles says that the market is the right way of organising economic activities. Let’s take a close look at the rice market and see how the invisible hand works. The rice market involves government institutions; consumers; paddy farmers; private paddy and rice traders; and large, medium, and small-scale millers. The demand for rice is coming from civilian consumers, armed forces, and government institutions. The government purchases only about 6-8% of paddy while small and medium scale millers and cooperatives purchase about 10%. Three to four large scale millers buy the remaining lion share of paddy, providing a classic example for the oligopolistic market. It should be commended that only large-scale millers can purchase large quantities of paddy at harvesting time-this effort by the large millers requires billions of rupees of capital. The rice quality improvements, if any, is because of the massive investment in machines and equipment by those large-scale traders. About 1.8 million farmers are cultivating paddy using the land area of 870,000 hectares-34% of cultivable land area. About 98% of paddy production is locally consumed.  Paddy production is no longer a profitable business, and farmers have become massive debtors.

Government providing fertilizer ten times lower price than that of the world market can’t be continued while at the same time buying paddy at a higher guaranteed price than market price. The following figure furnishes recent data on demand, supply, and price of paddy and rice.

Why government intervention? 

There is another economic principle that says that the government can sometimes correct the market outcome induced by the invisible hand. We never know the rice market outcome (equilibrium price and quantity) as Sri Lanka does not have a free rice and paddy market. However, we know that the governments have distorted the free market and what see today are distorted prices and quantities (see figure). One day, the writer asked Professor L. R. Klein, a noble laureate in economics, why political leaders sometimes ignore policies that economists think are the best. The answer was political leaders dominated decision-making in the short run, thinking of the benefits until the next election.

In contrast, economists dominate policy decisions in the long term, because they consider the benefits beyond the short run. I believe the answer is correctly fitting to Sri Lanka. The governments commenced a guaranteed price for paddy and fertilizer subsidy to all varieties of fertiliser to enhance paddy production and achieve rice self-sufficiency. The governments also imposed price controls for various rice varieties, because high rice prices will increase inflation and hence the high cost of living, which affects the votes of millions of rice consumers. The governments, perhaps, have achieved intended goals by attaining self-sufficiency in rice by way of increasing paddy production and by supplying rice to consumers at a low price. However, Sri Lanka is at the 93rd position in rice productivity out of 119, while Nepal and Thailand are ranked 67th and 68th, respectively. The writer does not have clear empirical evidence to prove that political parties have come to power by receiving votes of millions of farmers and consumers who may have been persuaded by those government interventions.

The unintended negative consequence of invisible hand

The market price of paddy should be simply a summation of the cost of paddy production and a mark-up or profit margin of the farmers. Because of state interventions, both rice and paddy prices are distorted. And they do not provide an appropriate market signal to farmers and consumers of rice, generating unintended negative consequences to the society of which we do not have a comprehensive understanding.  In the absence of controlled price, paddy farmers may have received a higher price for their product, rice-based products may have been increased, beer producers could have bought enough rice for their beer production, saving foreign exchange for the country. There is no controlled price for traditional rice varieties, and therefore, one can see many new developments in that sector. 

Experiences of other rice-producing countries, including Japan, suggest that there are many rice-based products. Sri Lanka has a rich rice paddy/rice culture; however, she still has limited products. For example, beer manufacturers use only 0.25% of local rice as an alternative to malt in beer production, and this has been the practice for almost 40 years. The beer industry can help increase local farmers’ income and save foreign exchange by substituting domestic rice for imported malt. Japan and most significant global brewers use rice in beer production.

Currently, there are only a few large-scale paddy millers in Sri Lanka, indicating that the paddy market has oligopoly. They are dominating using their market power that occurred due to the market departure of medium and small-scale millers and traders. In some rice milling areas, 90% of the mills have been closed. Many paddy farmers outside major cultivation districts such as Polonnaruwa, Ampara, Hambantota, Anuradhapura, and Kurunegala have abandoned paddy cultivation. Those farmers and millers were compelled to leave the market because there is no conducive business environment in the presence of a controlled price. 

Because of government subsidy schemes, farmers mainly use imported chemical fertilizers. According to the Department of Census and Statistics, farmers who use only chemical fertilizer covers 65% of the cultivated area, while the use of both chemical and organic fertilizers covers 34 %. Many farmers do not use only organic fertilizers, which only accounts for 0.2% of the sown area. Sri Lanka spends a substantial amount of foreign exchange for import of fertilizers and making people sick due to the overuse of chemical fertilizer at the cost of taxpayers’ money. The natural composition of the soil may be eroding due to the excessive use of chemical fertilizer, creating many environmental damage and health hazards.  We have evidence that it is mainly the private sector that can provide enhanced quality rice, including organic and traditional varieties, without price controls by the government.

Lessons from Japan

The writer, who is now living in Niigata, the best rice producing region in Japan, has been observing with great pleasure how farmers engage in rice cultivation and how rice market is behaving in Japan. Japan Agricultural Cooperatives (also known as Nōkyō or JA Group) play a vital role in Japanese agriculture with its nation-wide networks. The government established the JA, and it grew into a powerful farm lobby. The JA deal with the supply of inputs for agricultural production to engage in packaging, transportation, marketing, and provide financial services for millions of farming members. Before 1995, the price of rice was determined by the government. However, currently, farmers are free to sell their products to anybody, enjoying the free market situation.  

Paddy production has gone up mainly because of the high yield and modernisation of the agricultural sector. The increase in production and reduction in rice consumption resulted in the price decline. The government, therefore, encouraged farmers to cultivate less land to maintain a stable price even though it was changed recently. Japan does not have any control over the price of rice, and it is determined by demand and supply. Demand for human rice consumption is going down as the Japanese are eating about half as much rice as they used in the 1960s. The annual per capita rice consumption reached an all-time high of 114 kg in 1962, and an all-time low of 52.2 kg in 2011—currently in Sri Lanka per capita consumption is approximately 107 kilograms per person. Declining and aging of the population; eating more vegetables, bread, pasta, meat, and dairy products are some of the reasons to fall rice consumption. The rice price of Japan is many times higher than that of the world market price. If the policymaker thinks from market-oriented policy perfective, Japan should import rice. However, the Japanese government since World War II have transferred massive subsidies to farmers and protected the local market by a high tariff partly because of the enormous vote based and food security.

Farmers in Japan supplement their incomes with off-farm income and product diversification. There are so many rice-based products in Japan. Instant rice is one such product that has increased drastically. In 2000, the production was only 78,507 tons, and it rose to 188,875 in 2017. If Sri Lanka produces instant rice or porridge, it can cater to the needs of people mainly living in cities, because it only requires simple heating before consumption, instead of a time-consuming rice cooker. Instant rice in Japan comes in convenient one-size servings and are sold either in retort pouches or plastic trays. Niigata Prefecture has about 100 sake breweries and is very famous for many different varieties of high-quality local liquors called sake. Breweries can maintain the best quality because of good rice and water in the region. Rice base liquor production has helped increase farmers’ income if farmers supply rice to Beer producers. The rice ball (onigiri in Japanese) is a top-rated rice-based product. It is easily made at home as part of a meal and almost every Japanese likes.  One can buy it everywhere from convenience stores to supermarkets.  It is interesting to note that rice grown for animal feed-rice for livestock cows has been going up, and, as a result, farmers are getting significant income for the rice.

Way forward

Considering the above facts, we need a paradigm shift in the rice market.  It is advisable that the government not engage in controlling rice price and leave it to be determined by the market forces-supply and demand. The market-determined price then gives appropriate signals for self-interested buyers and sellers to participate in the market effectively. In a free-market environment, the small and medium scale millers can re-enter the market, paving the way to demolish the existing oligopolistic nature of the paddy market.  Many of the unintended consequences mentioned above can also be eradicated partially or fully if price determination is left to the market. However, the COVID-19 has reminded us again that invisible or market-oriented open economic policies alone do not work for the country. There are many other variables to be considered in the wellbeing equation of citizens. And therefore, the government can facilitate market forces while regulating and/or monitoring when and where it is most needed.

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