Hi,
Strange things happen when governments make policies without thinking through the second order consequences of their actions.
Sri Lanka’s battle with rising food prices is the result of one such policy launched in 2021.
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With that out of the way, let’s dig in.
Sri Lanka’s ban on Fertilizer
In April 2021, Sri Lanka’s government banned the import and use of chemical fertilizers, upending the livelihoods of farmers along with raising the price of food for the public.
The rationale given behind the decision was that the use of chemicals in agriculture was harming the health of Sri Lankans. A shift to organic farming would reduce rising health care costs and organic produce would fetch higher export prices.
However, it hid the true intention which was to save on fertilizer subsidies and import costs which amounted to ~$500 million each year and was rising.
The recurring expenditure on foreign fertilizers was adding pressure on an already strained balance of payments situation.
The result of the ban on fertilizers was quick and devastating.
Agricultural economists began predicting a significant drop in crop yields across the board. For tea, the country’s biggest export earner, the yield was estimated to fall by 35% resulting in a revenue loss of $425 million.
The yields would drop as nutrients necessary for growth provided by fertilizers were absent. Organic fertilizers which the government assumed would replace chemical fertilizers were simply not enough to go around. For tea plantations, the demand for organic compost was ~3 million tonnes and paddy cultivation would need another ~4 million tonnes. According to an estimate, the max the country could produce was 3 million tonnes annually.
The government’s lack of understanding of how farming works resulted in farmers falling back to subsistence farming, barely eking out a living.
The fall in crop production led to a reduction in supply and rising food prices.
Prices of rice and onions doubled, with sugar even touching record Rs. 200/kg. The rise in price does not compensate for losses in yield for farmers. Meaning a 50% fall in crops was not compensated by a 50% rise in prices. Plus, a chunk of the profits still went to the middlemen regardless of the losses to farmers.
The rise in prices also created an incentive to hoard the goods as they could fetch higher prices later, creating more shortages. Long self- sufficient in rice production, the country was forced to import $450 million worth of rice as domestic prices of rice surged.
To keep protesting farmers at bay the government is offering ~$350 million in subsidies and compensation.
Ultimately, the loss of export revenue from products such as tea far outweighed the cost of the imported fertilizer. Combined with outflows from imports of rice along with the cost of compensating farmers and creating soaring inflation for the public, the policy was a disaster.
Seven months after the policy was enacted it was reversed in November, but the effects of mismanagement lingered.
This couldn’t have come at a worse time for the Sri Lankan economy. The trifecta of pandemic induced loss of travel dollars, increasing crude oil prices and falling currency making imports more expensive have resulted in dwindling foreign reserves.
Analysts estimate Sri Lanka’s useable reserves in 2022 are ~$800 million, leaving the government scrambling to pay for essential imports of fuel, food, and medicines.
Self-sufficiency is a lofty goal, but countries are economically better off making goods in which it has a comparative advantage and trade with nations which can efficiently produce what the country needs. The focus on reducing imports misses the point that imports are critical for exports. And as exports rise, imports will also rise in sync. The world’s top two exporters are China and the USA. And the world’s top two importers are also the USA and China.
Governments across the world face tough policy questions. In the past, in Sri Lanka and in India fertilizer subsidies were doled out, as it was expensive for the average farmer to buy. Also, it’s a necessary ingredient without which yields would be low. Low yields could threaten food security. However, by subsidizing it the farmer does not bear the full cost of the pesticides so they use it liberally which might cause harm to consumers’ health. Once a subsidy is given it is difficult to stop or replace it, it stays on as a recurring expenditure straining public finances.
The government could have taken various steps to ensure better implementation such as getting agricultural economists and other experts on board, pushing farmers to go organic over a period of years, educating them on the benefits of organic farming, ensuring there is enough organic fertilizer to make up for chemical fertilizer to name a few. But by itself the policy was ill conceived and neglected farmers livelihood.
Interesting links
Since today’s edition focused on policy making, here are a few related articles and books that caught my attention.
In service of the Republic by Vijay Kelkar and Ajay Shah- This book explains the lens through which we need to understand policy making in India. Written in simple words and filled with examples, it takes the reader through what makes a good policy and most importantly how to spot a bad policy. Click here to view it.
For a deeper understanding on how the fertilizer ban affects Sri Lanka read this article.
My favourite public policy newsletter is Pranay Kotasthane’s writing in Anticipating the Unintended newsletter. They cover frameworks, key ideas and mental models that help us think about public policy in imaginative ways. You can read it here.
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