Political question of food prices
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Prices of locally-grown vegetables in Sri Lanka are much higher than in the UK.
After hearing that carrot prices in Sri Lanka spiralled to over Rs. 2,000 a kg a few weeks ago, one of our relatives in the UK sent us a scanned copy of her shopping bill. Let me show you the prices of a few food items from that bill, converted to Sri Lankan rupees using the Rupee-Pound exchange rate as
Rs. 395 per British Pound.
In the UK, one kg of rice costs
Rs. 205, while in Sri Lanka it is Rs.220 for the lowest category of rice. However, in the UK you don’t find lower quality rice, whereas in Sri Lanka the above price is for the lowest quality rice sold in bulk in the supermarkets. The higher-grade rice that comes in packets, costs higher prices around Rs. 400 – 600 which may not be affordable to the average Sri Lankan consumers.
Furthermore, as per the UK shopping bill, one kg of chicken drumsticks costs Rs. 1,576 in the UK, and Rs. 2,200 in Sri Lanka. One litre of sunflower oil bottle costs Rs. 850 in the UK, but Rs. 1,925 in Sri Lanka. Gold Label instant coffee bottle of 100 grams costs Rs. 928 in the UK, and Rs. 3,700 in Sri Lanka. The shopping bill also shows the purchases of potatoes, onion and carrot, of which one kg of each of these items at the price of Rs. 395, Rs. 255, and Rs. 255 respectively. The same food items in Sri Lanka cost Rs. 485,
Rs. 560 and Rs. 750.
The above price comparison shows that the prices of basic food items in Sri Lanka are now even higher than those of rich countries. When you compare the prices in relation to the income of the people, Sri Lanka’s situation is even more catastrophic now. Accordingly, average Sri Lankans are now trying to catch up the rich-country food prices with their earnings of a low-income country.
We know the comparison between the UK and Sri Lanka in terms of their per capita income differences: In the UK, per capita GDP is more than 10 times that of Sri Lanka. Being a rich country, the average individual incomes in the UK are much higher than those of Sri Lanka.
For example, the average monthly salary of a secondary school teacher is well above Rs. 1 million in the UK, while it can exceed Rs. 2 million at the senior levels. In Sri Lanka, average monthly salary of a secondary school teacher is about Rs. 45,000, while at senior level it may go up to about Rs. 80,000.
Politics of prices
Before the current economic crisis, basic food prices of Sri Lanka were already higher than those of our neighbouring countries in South Asia. We have also seen many explanations for the underlying causes of it and many policy initiatives with little success. Now, after the crisis, these basic food prices are comparable or higher than those of the rich countries.
The problem is essentially a political question too: At a time that we are approaching elections this year, it is an appropriate political question to seek answers: “How do our contesting leaders expect to address the higher food prices in the country?”
We should not forget that the market prices of our basic food items such as those of rice, coconuts, potatoes, chillies, onions, dhal, and of course, sugar and milk, were often quoted at the election campaigns in the past. Almost at every election, the people were promised “lower prices” for all that if they were elected to run the government.
Then, we remember what happened afterwards: They were elected to the office too, but the prices were constantly on the rise rapidly. There were attempts to offer lower prices by a few rupees or few cents. But at the end of the day they all ended as futile, compared to escalating prices. The decades of experience proved one thing: There was no answer to that question.
Middleman and
the value chain
During the crisis time, there has been a significant increase in the general price level in the country. It was reflected through the higher inflation rate, which was running at double-digit level sometimes reaching 70 per cent. Secondly, the sharp depreciation of the rupee value against the US dollar and other foreign currencies, multiplied the local prices of consumer goods and their inputs.
Apart from the crisis impact on prices, corrective policy measures, import controls and tax hikes also played their part in skyrocketing food prices. Corrective policy measures include the fuel and energy price adjustments to reflect their actual costs. Apart from that the local food prices are subject to both droughts and floods as well.
A typical diagnosis of the higher food prices in Sri Lanka attributes it to the “undue” cost escalation due to the “middlemen” in between the farmers and the consumers. Some may even argue that the middleman must be removed from the supply chain! It means that the consumer must connect directly with the farmer or vice versa, in order to accomplish the transaction.
In the value chain between the farmer and the consumer, there is a complex form of value escalation: Prices escalate along the value chain due to wholesale trade, retail trade, transport, distribution, storage, wastage, labour costs and profits while none of them cannot be attributed to the farmer’s cost. As some may argue, the farmers’ fair share is also exploited by the middlemen along the value chain, because they have the powers to do so by manipulating the markets.
Double-edged question
Here is the double-edged question: Food prices must go down because they are so high for the average consumer. But farmers continued to remain poor for generations, as we discussed in this column last week, so that agriculture must be a “rewarding” production sector for the farmers. The question is that how to meet the needs at both ends – lower price for consumers and higher price for producers.
Economic development is a process of changes, while part of the changes is in the domestic agriculture sector, as per experience from around the world. During this transformation, small-scale farm systems must shrink with land consolidation and the formation of large-scale farm holding systems.
Along with that, only a smaller share of “farmer entrepreneurs” would remain in the agriculture sector, cultivating large-scale farm plots. The farmers will have the capacity to modernise and mechanise agriculture, to introduce advanced technology and machinery, to engage in R&D activities, to compete strongly with imported foodstuff, and to bargain in the market on equal terms. The lack of bargaining power of the farmers is a typical feature of the “small-scale” land-holding system.
You may ask the question as to where the people leaving the rural agriculture sector would go. They would find better job opportunities in the expanding urban industry and service sectors. This points to the fact that the agriculture sector alone cannot be developed without urbanisation and non-agriculture development.
Yoke on the shoulder
However, the above transformation can be prevented basically by three types of factors, which ultimately hinder the country’s development process:
1. The first is the regulatory system that prevents land consolidation. Land-holding rights, land-fragmentation rights and land-use patterns are some of the crucial regulations in this regard.
2. The second is the wrong incentive systems that keep the rural farmers interlocked in their small land plots. Land distribution, housing programmes, and subsidy programmes are of this nature.
3. The third is the inadequate expansion in the urban-based non-agriculture sectors – that is industry and service sectors, which can absorb rural labour. This can also be accompanied by the absence of incentives for the urban sector.
Although it is hard to refute, my diagnosis may be politically incorrect. Nevertheless, it is the right time in the crisis to look at the whole episode from a different political and economic angle and through a holistic approach. The resulting change in agriculture can be termed as “productivity improvement” which is the key to explain lower food prices.
(The writer is Emeritus Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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