Impact of Trade Liberalization on Poverty in Sri Lanka

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. An attempt was made in this study to look at the impact of trade liberalization on poverty and welfare of households, using a partial equilibrium analysis, with a special focus on the rice and potato sectors of Sri Lanka.

The results of the Study 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 of Ampara and Polonnaruwa. 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.

The study 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 complementary policies to minimize the adverse effects of trade liberalization in the short to medium term, particularly the effects on the poor.

Sanath Jayanetti, Ganga Tilakaratna, Priyanga Dunusighe, Ruwan
Jayatilaka
North-South Institute (NSI), Canada
http://www.nsi-ins.ca