The coconut industry in Sri Lanka : an analysis of government intervention measures

Abstract

The coconut industry occupies an important position in the economy of Sri Lanka. In addition to being a staple food item, it is the biggest land user, the third highest foreign exchange earner and an important source of government tax revenue. Since independence the government has intervened substantially in the industry, through price subsidies and trade policies such as export bans, restrictions and duties. The apparent objectives of government intervention have been to boost coconut production and productivity, protect domestic consumers, reduce price risk in production and collect government revenue. The purpose of the present study is to analyse the economic effects of these intervention policies and to evaluate alternative policies which may have more efficiently achieved the apparent objectives of the government. The analysis is preceded by a description of the Sri Lankan coconut industry and of the policies that have directly affected the industry since independence in 1948. The pure theory of trade demonstrates conclusively that, under certain assumptions, any type of interference in the free-flow of goods and services tends to reduce potential economic welfare. However, the apparent opportunities available for Sri Lanka to improve its terms of trade in desiccated coconut and edible copra through restricting exports justify some government taxation of the export of these products. Indeed if raising revenue for and providing consumer subsidies is sufficiently expensive administratively, it may well be that one could justify economically export duties beyond what would be the optimal tax level if government revenue could be raised costlessly. This is because such duties not only assist domestic consumers but also raise government revenue. There may also be some economic justification for expanding extension service and public sector investment on coconut research, especially to suit the needs of small farmers, so as to boost coconut production and productivity, In addition, to reduce the risk of export prices falling at times to very low levels, 'pot holing' assistance rather than a price stabilization scheme may be the most efficient instrument. A more precise policy analysis would be desirable, but will only be possible once more comprehensive industry data are collected. Show more