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Mon, 17 December 2018 05:20:34
Sri Lanka's food insecurity and a merciless autarky: fuss-budget
25 Oct, 2010 14:16:55
By Fuss-Budget
Oct 25, 2010 (LBO) - In an up market suburb of Sri Lanka capital Colombo an old lady dressed in faded clothes and her middle aged daughter is talking to a doctor. "'We cannot afford to eat rice for lunch anymore," she says. I now eat Maggi noodles'."
In January this year rice prices shot up to 100 rupees a kilo, much higher than the so-called food crisis levels seen in April 2008 during the height of the commodity bubble. During both events it was a relaxation of imports that saved the day. The second 'food insecurity' episode and permanently high food rice prices are self-created by state policy.

Commodities are bubbling again. Even without an import tax, grain prices will go up as long as the dollar weakens.

When the state blocks imports to discriminate in favour of land-owning farmers, the landless poor like the little old lady is reduced to eating instant noodles heated in warm water for lunch.

The old lady's incident occurred not last month but much earlier, when rice prices were even higher than now, and bread was cheaper.

In the past people used to eat bread for breakfast and may be dinner, but they had enough money left to eat rice and vegetables and maybe meat at least for lunch.

The old lady's plight captures several problems associated with Sri Lanka's vicious food autarky. It is the taxes she pays on the instant noodles that go to subsidize the rice farmer's fertilizer.

And she may not even be classified as 'urban' because she is living in a so called 'pradeshiya sabha' area bordering the capital.

High taxes work by depriving the poor or less well off. Rich people can overcome the tax.

Rural Poverty Deception

Politicians have twisted perceptions further claiming that most of the poor live in rural farming areas while cities have less poor. There may be more rich people in cities and poor may be proportionately less, but cities (which have high population density) and estate plantation areas have large numbers of poor.

According to census department data based on a 2006 survey, the Colombo district had two and a half times as many poor as the Polonnaruwa district, where only 50,000 poor people lived.

The largest number of poor people lived in the Central province (573,000) where most of the country's estates were located. Guess where the second largest number of poor people live? The Western province, with 471,000.

District-wise Ratnapura had the highest number of poor people at 292,000. Among provinces it was Sabaragamuwa with the third most number of poor at 467,000.

Salaried wage earners are the people most hurt by inflation and also high food prices. Estate workers - who among the poorest - are the ones hurt by high food prices, as well as by loss of purchasing power of wages through inflation. Little wonder then that estates have high levels of poverty.

So these are victims of Sri Lanka's food autarky. The food autarky is having domino effects. Now the problem has spread to poultry and eggs where there was no problem before. Coconut prices are also high (Nutty Prices) due to taxes.

It is already well known how import duty protection of maize sent the poultry industry into a crisis, driving up even fish prices.

How did this food insecurity and price volatility higher than the rest of the world occur? How was an old lady who used to eat rice reduced to eating Maggi noodles for lunch?

Recent Origins

This food autarky did not happen overnight. In living memory the 'import substitution' autarky and high import duties was largely a post-second world war phenomenon in this country.

The proximate cause for import substitution were foreign exchange shortages. Acute forex shortages started after a money printing central bank was created in 1950 with an exchange rate peg to the US dollar, dismantling an earlier currency board.

When the peg was defended the central bank ran short of 'foreign exchange' and pretty soon most trade was blocked and the economy was strangled in the 1970s.

'Saving foreign exchange' became a national mantra. Import substitution domestic industry scammers had field day targeting helpless consumers, especially the poor.

From 1978 however trade controls were reduced. Instead of stopping money printing however, the government continued to print and continuously depreciate the currency.

Potato Autarky

In the 1980s the food autarky was still going strong. Billions were poured into the Mahaweli scheme to create subsistence level agriculture projects. That itself may not be a big problem.

A bigger problem was that potatoes were also grown with import protection, restricting the rights of the poor to trade. With taxes on potatoes another avenue for cheaper carbohydrates was blocked.

The rice autarky had unexpected side effects. In fact ethnic Tamils who took up arms against the state pointed to so-called 'colonization schemes' as one of the causes for the discontent.

State involvement and protection of domestic agriculture however pre-dates the creation of the central bank or the efforts of Sri Lanka's major political parties, the United National Party to grow rice or potatoes and the Sri Lanka Freedom Party to restrict trade.

It was the British colonial rulers who first proposed a import tax on paddy to promote domestic agriculture.

And that was also caused by a balance of payments crisis and high inflation. Sri Lanka's first well-documented balance of payments crisis was triggered by British civil servants who came to run this country.

Ceylon's BOP Crisis

When the British took over Sri Lanka (Ceylon) from the Dutch the island's currency was the silver Rix dollar and fanams. The Rix-dollar was so strong that it traded at a price above the silver specie value.

According to Anthony Bertolacci (A view of the agricultural, commercial and financial interests of Ceylon, 1817) a member of the first set of British civil servants to run this country, the new government started printing paper bills.

"The silver coin was gradually disappearing" he wrote, unknowingly but vividly describing a monetary phenomenon known as Gresham's Law, which describes how bad money (debased) drives good money out of circulation.

"In the year 1809, the new silver coin, which was 10 percent worse in alloy than the coin of 1802, 3, 4 and 5 had replaced it," he wrote.

The exchange rate with Indian money - the Madras Star Pagoda - had fallen to 63 Ceylon fanams from 60 in the process.

Even then with just two million people one of Sri Lanka's largest imports was rice. A top export was high value arecanut.

By 1814 the exchange rate had fallen to 80 fanams per Star Pagoda. But the self-denial that it was a paper fiat monetary phenomenon was total.

"An opinion has been entertained, that the disordered and alarming state of the exchange rate might have originated from a superabundance of paper money in circulation," Bertolacci wrote.

"But I am not inclined to adopt this opinion…"

Supply Side

Refusing to admit that inflation and balance of payments crises are created by money printing is normal. To find 'supply side' solutions to inflation instead of stopping printing is also normal.

A recent LBO story (Rate Targeting) said the central bank was looking to supply side interventions to contain inflation. It is not only the Central Bank of Sri Lanka that looked for 'supply side interventions'. So did Bertolacci two centuries ago.

With bills coming into circulation inflation was rife. Staples such as rice are the first to be hit from money printing.

Rice which was selling for 1 fanam and quarter a measure (a measures is slightly less than a kilo) had risen to two fanams, wrote Bertolacci.

"The same sort of cloth that was then sold for six rix-dollars the piece, will now fetch ten," he added.

From 1805 to 1812 Bertolacci says the Ceylon currency has depreciated 80 percent, and is a "source of great distress and misery there to every class of society; and it well deserve the attention of His Majesty's Government, to remedy so great an evil."

Droughts - which are common even now - had aggravated the problem. But when a drought hit with a balance of payments crisis, it was a disaster of the greatest proportions.

Of course it was the poor who paid the biggest price with malnutrition.

"It was indeed deplorable at that time to see the numerous Children of the Ceylonese families reduced and emaciated for want of food…," lamented Bertolacci.

The monthly wages of a common servant had been 10 rix dollars and no change has taken place, he said. Wage earners as usual paid the price for government greed and currency depreciation.

Local Production

Under British rule the population was rising rapidly due to vaccination especially for small pox. At that time Bertolacci estimated the population at around two million. Before vaccination small pox had spread like wildfire from time to time depopulating vast areas.

Because small pox outbreaks came from India, when the coastal regions were immunized it helped the Kandyan region as well.

Sri Lanka at the time exported arecanut and the main imports were cloth and rice from Malabar, Coromendel and Bengal.

In 1806, Sri Lanka had exported goods to the value of 2.7 million rix dollars, imported 2.2 million dollars worth rice and 861,381 dollars worth cloth.

Bertolacci suggested imposing a 'moderate duty upon importation," of rice and to help build capital among farmers to cultivate more land.

Nothing much has changed. Now the population of the country is not two million but 20 million. And the duties are far from moderate. Alternative carbohydrates like wheat and potatoes are also blocked with high taxes.

Rice Only Fascism

Marginal rice farmers, whose inefficiency had pushed yields down is now a burden to the poor. The autarky had also spread to maize in recent years. With Sri Lanka's population ten times as it was when the British came, domestic production is already higher.

But now there is a 'rice only' policy in place, where people are forced to eat the grain in a Nazi-type social engineering exercise and propaganda and not just through 'a moderate tax'. People are also cornered through taxes on close substitutes.

The 'rice only' artists are pushing a policy just like the 'Sinhala only' proponents did decades ago. Such tendencies like the anti-Jewish 'Aryan' or 'master race' superiority complexes dehumanize people and take away their liberties.

The mercilessly vicious fascist desires of the 'rice only' artists were starkly exposed when they proposed forcing sick patients in state hospitals (Sick Proposal) to eat rice only.

Sri Lanka's current rulers should take note of this trend carefully, because the country need not go down this path, which has failed time and time again both in Sri Lanka and elsewhere. It is also fundamentally fascist in nature.

Not surprisingly, in the 20th century, a country most noted for such policies was pre-war Germany.

"Like the military and political rearmament and mobilization of our people, there must also be an economic one, and this must be effected in the same tempo, with the same determination, and, if need be, with the same ruthlessness as well," wrote Hitler in a secret memo on autarky in 1936.

"In future the interests of individual gentlemen can no longer be allowed to play any part in these matters.

"There is only one interest and that is the interest of the nation, and only one single view, which is that Germany must be brought politically and economically into a state of self-sufficiency."

Hitler pushed food prices up, and also wanted to synthesize raw materials. He was in fact voted into power by farmers because he promised higher food prices, after the great depression lowered prices.

But Germany ended up importing more raw materials because of deficit spending. Despite having a gold standard Hitler's economy minister Hjalmar Schacht (a former central bank governor) effectively printed money for deficit spending through a mechanism called the 'Mefo bill'.

Though spending caused employment to go up in Germany, it also created inflation and price controls were brought in. The so-called 'military Keynesianism' was transitory and proved to be unsustainable. It created more chaos eventually.

Corn Laws

Attempts to keep farm prices up had been promoted earlier by mercantilist economists even in free countries. The struggle for free trade in Britain is also rooted to agricultural protection.

That Bertolacci in Ceylon proposed rice import duties should not be a surprise. It was in 1815 that Britain brought in the infamous 'corn laws' (Importation Act 1815) to protect farmers and landowners.

But for several decades the British poor managed despite the corn laws because there were cheap potatoes, which Sri Lanka's poor do not have now.

In 1846 amid the Irish potato blight which hit potato supplies, Britain's Prime Minister Robert Peel set the wheels in motion to repeal the corn laws. He was forced to resign.

But the corn laws were repealed shortly after.

While US farmers for example get subsidies they also produce some of the cheapest food in the world. But farmers in Sri Lanka get production subsidies and produce some of the most expensive food in the world. They get benefits from both sides.

High food prices makes people poor especially factory workers and lowers their living standards.

Richard Cobden, of the British 'Anti-Corn law League' who favored free trade, immortalized this phenomenon when he related what a worker had told him.

"When provisions are high, the people have so much to pay for them that they have little or nothing left to buy clothes with; and when they have little to buy clothes with, there are few clothes sold;...

"But when, as now, the working man has the said 25s. left in his pocket, he buys more clothing with it (ay, and other articles of comfort too), and that increases the demand for them…"

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13. Mitrapala Waduthanthri Nov 11
Agriculture and food policy seem to be driven by the interests of rice miller(s) and their political benefactors, not based on sound economics. Given that 2/3 of labour force is engaged in some form of agriculture, agricultural labour (popularly misnamed as farmers) is an important constituency, though they lack much political clout as a voting block, unlike organized industrial labour.

To please this constituency politicians of successive generations have pampered them with many concessions. Govt spends Rs 65 Billion a year on fertilizer subsidies (to put this perspective, the projected expenditure for eduction in 2010 is below Rs 25 billion) and provide them with free water and various tariff concessions on implements and seeds. What's not realized by general public, politicians know this but wouldn't speak about it, rice self-sufficiency is achieved at a huge cost to rest of the economy. So cost of rice production is seriously under estimated. So long as there is cheap fertiliser, free water and guaranteed price, farmers wouldn't shift away from rice cultivation and the economy will continue to suffer due to misallocation of resources.

12. thalapathpitiye hemananda Nov 08
Alloxan a chemical that induces pancreatic diabetes in rats is used to whiten the bread. This was approved by US FDA as the concentration of different subunits of GLUT molecules that transport glucose in reats and human are different However Alloxan can can cause renal and liver toxicity.
11. fuss Nov 04
Dear Thalapathpitiye Hemananda
This columnist has read your comments and the debate with confused readers with interest. Thank you for putting me in the same company as Rohan Samarajiva and Harsha de Silva.

However this columnist must disagree about your report card on this RF. If RF is RW he is no libertarian to justify any special accolades. RW is just a ruler who is living off the people - no better than any other post independence ruler.

There is not much to choose between UNP and SLFP policy making. Both have taken away our liberties, destroyed rule of law, in addition to engaging in ethno-religious rabble rousing, and destroyed valuable forest to grow low value, water intensive crops - which is actually a minor transgression compared to the rest of the activities.

It seems Sri Lankans can be taken for a ride very easily by anyone who can tell a good story. Educated people who could have countered these ideas were scared into silence by others who attacked them not with facts but by mindless verbal thuggery.

While UNP was growing rice in the Mahaweli and allowed the 1983 riot countries like Dubai had progressed so much and Sri Lanka's currency had weakened so much that Sri Lankans were working as housemaids there. So much for UNP policy.

Most of what we are doing is indeed western. JR became President after being elected as prime minister. Hitler did virtually the same thing by passing the so-called 'Enabling Act (Ermächtigungsgesetz) which gave him and the state powers to pass laws by gazette without debate.

The tools that were mis-used to destroy our rights and oppress us - complex, multiple import duties, duties by gazette, nationalization etc - are western. Sri Lanka had free trade under ancient kings. Exchange controls are western. Central Banking is western. Fascist undermining of rule of law is western. Constitutions are western. So is fascist undermining of constitutions to perpetuate arbitrary rule. Taxation of the type we now know for general government expenditure is largely Western. Much of Sri Lanka's own 'taxation' was directed at infrastructure under ancient kings. The welfare state by monetary debasement is western.

Having said that it is not to say that the same thing could not happen or has not happened in the East. This columnist fails to see the relevance of geography that is alluded to. Whether it is west, north, east or south, rulers will try to take away the freedoms of the subjects unless they look out. Geography will not really matter. Western Europeans however constrained their rulers more effectively than others, through institutions of rule of law and liberty. Geography is relevant to that extent perhaps. In some ways the US went further, but in some ways not. North America constrained their rulers more than South America. South America is still a mess. That is also geography.

Broadly speaking traditional rulers were generally not fascist. The same applies to Sri Lanka's ancient kings. King Elara for example has been referred to as a just king even by those who defeated him.

Though Roman Dutch law is the basis of our legal system now, there is an account of an interview by a Dutch Governor Falk in 1769 with Kandyan priests about Kandyan law and the laws under which a King acts. The king in fact seems to have had less arbitrary powers than under the 1978 constitution. Also nationalization - another western-leftist process - seems to have been illegal, because the king was prohibited from confiscating the assets of a 'guiltless' person. Traditional rulers in fact did operate under a constitution of sorts.

There seems to have been a system of appeal against injustice and regional chiefs (disapathi) had limited powers of punishment which did not extend to capital punishment.

It is the tools of western governance that were used against the population after independence. Both the police which protect the people and the Gestapo which protects the rulers are also western.

We need a freedom struggle, not a geographical one but something based on the recognition that people are equal regardless of geography, birth, race etc and have right to economic and other freedoms which can only be protected through just rule of law. Such a change cannot come from a change of leaders or administration, it can only come from a change in the structure of the state ruling system.

10. Even more confused Nov 04
This tettralemma (chathuskotika) would have made sense if we are still living in 1st Century AD.

It seems some people are still fixated on ideologies from the stone age to find solutions to 21st century problems ...

9. TheConfused Nov 04
To Thalapathpitiye Hemananda,
Very encouraging and commendable, but I am still confused. Which Nagarjuna? There had been four famous Nagarjunas who had lived in India from 1st century AD to 8th century AD, according to Rev Professor Moratuwe Sasanarathana, who served as Professor of Philosophy at the Vidyalankara University.
8. thalapathpitiye hemananda Nov 03
I do not argue on based on western dialectical logic but on tettralemma (chathuskotika) logic developed by Nagarjuna. So confused is a apt term. I have put all these people together because they never believed LTTE can be defeated and was against war. They never thought prisoner SF would be defeated by close to 2 million votes.

An they never believed earlier rice cultivation was profitable. Their leader RF wanted to fill paddy lands and build factories. Unless they denounce their belief systems their predictions and analysis will be wrong. Even their science is inductive which can be error prone from the western didactic logic. I came to the conclusion that this author belongs to the same group from the content of his article

7. TheConfused Oct 30
To Thalapathpitiye Hemananda,
I cannot understand your logic.How could Rohan Samarajeewa and Harsha de Silva come into the picture? Is it because they are critical of some of the current policies, they all fall in the same category? By extending the same logic, you also could be branded as a member of some group and dismissed not on account of the soundness or otherwise of your argument, but because of being a member of a common group. This is not intellectual inquiry and probing.
6. thalapathpitye hemananda Oct 29
Another article by one of the economic hitman who joins the team of Rohan Samarajeewa and Harsha De Silva. One factually incorrect item from one of the comments is that kekulu rice is more nutricious. Parboiled rice has more nutrition and low glycaemic index. The degree of milling also determines the nutrition.
5. fuss-budget Oct 27
Mr Wijewardene,
Thank you. It is very true. There is an extensive discussion about rice cultivation and the British efforts to increase production. He particularly mentions rising production in Baticaloa - even now eastern farmers get the best yields. Bertolacci says one of problems with rice is that it is very water intensive and is more vulnerable to drought than other types of crops.

Sri Lankans imported rice because it was more fruitful to get income by selling expensive arecanut or other high value spices. Why waste labour and land on low value crops when the same could be used for high value crops.

This trade deficit seems to have been chronic and has continued from the days of the Dutch. If the trade deficit continued without a depreciation of the exchange (that is to say there was no printing of new money) it must have been financed in other ways.

One may suspect that the 'exports' were under-reported. This is quite possible since exports were heavily taxed and arecanut export taxes were a key source of revenue for the government. So there must have been smuggling. The British revenue cutters could not stop smuggling between France and England so they could hardly expect to stop smuggling across the Palk Straits.

Of course imports of capital could also have been a source of the trade deficit. The US was built with capital from European planters. So that planters must have brought their capital. However the disappearance of the specie monetary base must have been due to payment of civil service salaries through bills.

I think in 1827 or so the Sterling replaced the rupee.

Eventually when the planters exported tea and if they also remitted the profits home we could have had a trade surplus. Of course if they spent it all here we would have continued to have a trade deficit.

4. fuss-budget Oct 27
Dear Mithra,
Thank you for your comments. The facts on rice may dramatic but very unfortunately true.

By mid January 'samba rice' had risen as much as 112 according an old report. More to the point red raw rice for example was not available even in the 'black market for 75 rupees or so at the time. The consumer authority started raiding shops that were selling rice above 60 or 70 rupees.

Shops in fact took labels off rice bags.

That is when imports came in. In fact a long grained imported rice called 'basmati' was sold to 69.50 rupees a kilo after paying freight and other costs.

The story that there is a a cartel manipulating rice prices is a story which has holes in it. Manipulation if any is possible because of state controls. The plain fact is there are massive taxes on rice, which causes supply shortages. That the government has imposed taxes not only on rice but close substitutes to keep price up shows that cartels simply do not work. If cartels could keep rice prices up why the state intervention? This is like the story about the OPEC. OPEC seems to draw strength only when US monetary policy is blowing credit bubbles. When policy is tight or credit implodes OPEC becomes as helpless as a little babe.

At the same time there are also allegations that cartels push down prices. But a cartel that holds stocks will hardly push down prices, because of capital losses when it does. Rice millers went bust when bread was sold below market price at Rs3.50 with a state subsidy. So where is the cartel?

So the power of the so-called cartel simply comes from import taxes. Which cartel is pushing up coconut prices now?

3. Mithra Oct 26
Excellent article, though the facts on rice prices seems little too dramatic.

Rice was available at around or below Rs65.- . (If the old lady was eating Basmathi which was of course over Rs100.) During the last 5 to six months rice prices had come down - Red rice (which has most nutritional value) is available around 50.-

The price of rice was manipulated by the Rice cartel - just like the vegetables. (Nuwaraeliya market gets it's vegetables grown around Nuwaraeliya through Dambulla Market.)

This may be the reason that price control on rice worked during the last two years

2. W.A Wijewardena Oct 25
An excellent historical analysis.
In the early years of the British period, there was a chronic shortage of the trade account, passed down from the Dutch era.

Economic Historian Ameer Ali in article titled 'Rice and Irrigation in the 19th Century' and published in The Ceylon Historical Journal (October, 1978), has reported that during 1806-09, rice imports had accounted for 50% of imports and 66% of exports; during 1810-13, these figures had shot up to 55% and 90% respectively. Hence, the fledgling colonial government had faced a massive BOP problem which had to be financed by the physical import of specie (coins) by the new British planters, according to NU Jayawardena.

So during 1806-50, Ameer Ali reports that rice imports had remained more or less at the same level, but the British rulers managed to raise exports so that the share fell to 20% and 21% respectively, during 1843-50.

During the first half of the 19th century, the British rulers had tried to increase the domestic production of rice,first by draining Muthurajawela in 1802 and then restoring the Giant Tank around the same time. But both had to be abandoned due to a lack of labour and funds.Hence, only small irrigation works were restored. But, after 1850, money had been increasingly allocated for the restoration of the large tanks on selective basis to increase the area under irrigation. To supplement rice with subsidiary grains like memeri and kurakkan, more areas were brought under chena cultivation. Accordingly, Ameer Ali says in 1833, for every 2 acres of paddy, there was 1 acre of chena cultivation.

But still, the staple food problem could not be solved and the country had to depend on the imported rice from India of which the trade had been completely handled by a trading community called chettiars.

So, history repeats itself, first as a tragedy and then as a comedy!

1. saman Oct 25
What is the level of malnutrition here?