The long term investment decision : a case study of the rubber smallholders of Sri Lanka

Abstract

Millions of smallholder farmers in many of the less developed coiontries engage in the cultivation of perennial cash crops. The productivity of such crops declines with age necessitating periodic asset renewal. Since planting and replanting is a long term investment, planning and policy formulation requires an understanding of the decision-making process of smallholder farmers. This study examines the case of the rubber smallholders of Sri Lanka and attempts to draw out the important theoretical and policy implications of their behaviour. The historical development of cash cropping and the establishment of the rubber smallholding sector is analysed in some detail and the major phases of this process are described. It is shown that the decision-making environment and the decision problem it self that farmers face has changed substantially in different periods. In particular, attention is drawn to the differences between new planting and replanting. The latter problem is substantially more complex than the former. Using a conventional approach of investment theory, a model of asset replacement appropriate to the decision problem facing a rubber smallholder is developed. The model is extended to the case where uncertainty is explicitly included. The implications of changes in such parameters as long and short run price expectations, different types of technological change, subsidies and taxes, etc. for the optimal replacement time and the optimal replacement crop are discussed. On the basis of a f i e l d survey carried out among a sample of rubber smallholders in 1975, the model i s tested with empirical data. Results suggest that there is a significant difference in the decision-making patterns of the better - off farmers, who mainly use hired labour, and the poorer farmers who use family labour. The former group can be broadly considered to maximise (expected) profits as predicted by conventional investment theory. The existence of a replanting subsidy allows the poorer farmers to meet most of the unavoidable cash costs of replanting; for them the investment decision then reduces to one of 'labour investment' now, in expectation of future cash incomes, rather than primarily a choice between present and future cash incomes. Under the present set of circumstances the farmers in the two groups often come to the same decisions, but the underlying decision-making processes are different. However, the role of the replanting subsidy is crucial. Future changes in circumstances may lead to quite different decisions. Show more